Sophie Argiriou - Gildan Activewear, Inc. Rhodri J. Harries - Gildan Activewear, Inc. Glenn J. Chamandy - Gildan Activewear, Inc..

Kate McShane - Citigroup Global Markets, Inc. Kenric Tyghe - Raymond James Ltd. Sabahat Khan - RBC Capital Markets Mark Petrie - CIBC World Markets, Inc. Martin Landry - GMP Securities LP Vishal Shreedhar - National Bank Financial, Inc. Tal Woolley - Eight Capital Stephen MacLeod - BMO Capital Markets (Canada) Jim Duffy - Stifel, Nicolaus & Co., Inc.

Keith Edward Howlett - Desjardins Securities, Inc. Andrew S. Burns - D. A. Davidson & Co. Brian Morrison - TD Securities, Inc..

Welcome to the Q2 2017 Gildan Activewear Earnings Conference Call. My name is Nicole, and I'll be your operator for today's call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. Please note that this conference is being recorded. I would now like to turn the call over to Sophie Argiriou.

You may begin..

Thank you, Nicole. Good morning to all and thank you for joining us. Earlier this morning, we issued our second quarter press release announcing our earnings results. We also issued our interim shareholder report containing management's discussion and analysis, and consolidated financial statements.

These documents will be filed with the Canadian Securities and Regulatory Authorities and the U.S. Securities Commission, and are available on our website at www.gildan.com.

On the call today, I am joined by Glenn Chamandy, our President and Chief Executive Officer; and Rhodri Harries, Gildan's Executive Vice President and Chief Financial and Administrative Officer. The conference call will begin with Rhod taking through results for the quarter and our business outlook for the year, after which a Q&A session will follow.

Before we start, let me remind you that certain statements included in this conference call may constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.

Such forward-looking statements involve unknown and known risks, uncertainties, and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We refer you to the company's filings with the U.S.

Securities and Exchange Commission and Canadian Securities Regulatory Authorities that may affect the company's future results. And with that, Rhod, I will turn the call over to you..

Thank you, Sophie. Good morning, everyone, and thank you for joining the call. We were pleased to report this morning another strong quarter of EPS growth and strong free cash flow.

More importantly, we are well on track to meet our objectives for the year and expect to come in at the high end of our earnings guidance range, and above our initial free cash flow target, both of which we communicated to you in February.

We reported adjusted EPS of $0.49, up 20% over last year on sales of $715 million in the quarter or 4% higher than the prior year, with stronger operating margins up 200 basis points.

We generated record free cash flow for the quarter of just over $162 million, which reflected our strong growth in earnings, our continuing focus on managing working capital and lower CapEx. To-date, we have generated $200 million in free cash flow and expect to generate over $425 million for the full-year.

Turning to our segmented results, sales in Printwear for the quarter totaled $480 million, up approximately 2% over last year, reflecting the contribution from the acquisition of Alstyle and our more recent American Apparel acquisition, which together added incremental sales of approximately $29 million in the second quarter.

In addition, we continue to benefit from strong momentum in growth areas in Printwear with further penetration in Fashion Basics, which continue to deliver double digit growth and from solid sales performance in international markets, particularly strong POS in Asia and Europe.

We also benefited from higher net selling prices reflecting price increases put in place earlier this year, as we responded to the rise in raw material prices. These positive factors were offset in part by unfavorable foreign currency exchange and lower unit sales volumes of fleece, which will come in later this year.

Printwear operating income of approximately $122 million in the quarter increased 10% while operating margins increased by 190 basis points over the same period last year, driven by the net benefit from net selling prices in manufacturing and raw material costs, partly offset by unfavorable foreign exchange and SG&A expenses, which reflected the impact of acquisitions.

In the Branded Apparel segment, sales in the quarter totaled approximately $235 million, up 8% from $218 million last year. The Peds acquisition contributed approximately $17 million, and sales of Gildan branded men's underwear were up, driven by POS growth in excess of 30%, significantly outpacing flattish overall market growth in this category.

During the quarter, we were particularly pleased as we gained better in store placement for Gildan men's underwear, which we expect will drive further market share gains in the back half of the year.

Based on the latest data points from MPD, unit market share for Gildan branded men's underwear for the month of May was 11.7%, up 288 basis points year-over-year.

Stronger placement within stores and our growing market share penetration in this category is a reflection of our attractive value proposition, which is resonating with consumers and driving strong sell through for our customers.

While this is a very strong story for us, the growth in underwear was largely offset during the quarter by weakness in the sock category, in particular, lower global lifestyle and Gold Toe branded sock sales impacted by continuous softness at department stores and national chains.

Operating income in Branded Apparel in the quarter was approximately $26 million, up 52% from a year ago. Branded Apparel operating margins increased by 320 basis points over last year reaching 11% for the quarter.

The operating margin improvement was driven by the favorable impact from manufacturing cost savings and raw material costs, as well as SG&A leverage partly offset by mix. With respect to Gildan's free cash flow performance, we generated $162 million of free cash in the quarter, more than $30 million higher than the prior year.

This strong free cash flow generation reflected our earnings performance, working capital improvements, including tighter inventory management as well as lower CapEx.

On CapEx, during the second quarter, we spent $18 million primarily in the same areas where we have been spending since the start of this year, in textile capacity projects and garment dyeing and distribution investments, with our spending coming in lower than anticipated as we continue to leverage capacity we picked up from the Alstyle acquisition.

Turning to other investments, while we have wound down most of our spending in yarn with the completion of the ramp up of the Mocksville facility at the end of last year, shortly after the quarter in July, we completed the acquisition of Swift yarn-spinning for $13 million. The company was already one of our U.S.

yarn suppliers producing combed and carded ring spun yarn in two facilities in Columbus, Georgia. This acquisition, which is expected to provide strong returns, will help support growth of our Fashion Basics brands like Anvil, American Apparel, and Comfort Colors as requirements for high-end yarn continue to increase. Moving to capital return.

During the second quarter, we continue to progress on our planned share repurchase program for the year. We bought back another 2.5 million common shares under our NCIB program at a total cost of $68 million, bringing our year-to-date repurchases to 68 million common shares.

We ended the quarter of net debt of $658 million or 1.1 times adjusted EBITDA at the low end of our target leverage range. Now, let me give you a quick update on our progress integrating the American Apparel acquisition. We are pleased with how this brand is ramping up in Printwear.

And from a consumer perspective, we are making good progress on the e-commerce front. We have built up resources to support marketing and e-commerce efforts for the brand and we are gearing up for our targeted re-launch of the American Apparel direct-to-consumer e-commerce site.

This will occur in the next two weeks and we will be offering a wide assortment of products to end consumers. Overall, there is significant work going on related to this acquisition, and we continue to be excited about the North American and the international opportunity for this brand over the next few years.

Turning to the outlook for the rest of the year. Given the company's strong performance in the first half of the year, we feel well-positioned to achieve the high end of our guidance range of adjusted EPS of $1.60 to $1.70, sales growth in the high single digit range as we initially projected at the start of the year.

In the second half of the year, we will anniversary the Alstyle and Peds acquisitions. And consistent with our original guidance, we expect to see headwinds from higher raw material costs impacting our numbers.

As with earnings, we expect adjusted EBITDA for the year to come in at the high-end of our original guidance range of $555 million to $585 million. We've also adjusted our expectations for capital expenditures and now feel that we will come in around the $100 million level, down from $125 million, which we initially estimated.

Free cash flow is now expected to be in excess of $425 million, up from our previous guidance. So, in summary, we are pleased with the company's financial performance in the first half of 2017, which puts us well on track to meet the targets we set out at the beginning of the year.

More importantly, we continue to feel good about our long-term growth prospects and the way our strategy is unfolding. Our competitive positioning is strong. Our large-scale, low-cost manufacturing remains the backbone of our business where we've been investing heavily over the last two decades, expanding capacity and enhancing our capabilities.

This infrastructure is allowing us to offer a strong value proposition to our customers and to end users who benefit from high value, quality products at attractive prices.

With our strong brand portfolio, which we have built both organically and through acquisitions, completed at attractive valuations, we're well-positioned to continue to further penetrate the fast-growing fashion and performance basics segments in Printwear and increase our position in international markets.

In Branded Apparel, the addressable opportunity is large. And while Gildan has become the leading men's sock brand in the U.S. and the third-largest men's underwear brand, there is still a long runway ahead.

In this business, we remain focused on driving market share penetration, spanning our placement with a richer mix of products and expanding our operating margins each year. On a consolidated level, free cash flow generation is getting stronger, and our balance sheet remains one of the strongest in the industry.

This will allow us to continue to pursue acquisitions that can add value and accelerate our organic strategy while at the same time returning capital to shareholders through dividends and share buybacks. We remain committed to driving growth and strong returns on invested capital and delivering long-term value to our shareholders.

With that, I will now turn the call back over to Sophie..

Thank you, Rhod. That concludes our formal remarks. Before moving to the Q&A session, I ask that you limit the number of questions to two in order to give everyone the opportunity to ask their questions. We'll circle back for a second round of questions if time permits. I will now ask our operator to begin the question-and-answer session.

Nicole?.

Thank you. We will now begin the question-and-answer session. And our first question comes from Kate McShane from Citi Research. Your line is open..

Good morning. Thank you for taking my question. I was wondering if you could help us understand how the raw material environment is changing.

And what the ASP response will be, both in the short term and the long term, as a result?.

Well, I guess the answer to your questions is that in our business basically we manage our raw material costs, and as we see raw material prices going up, we've taken appropriate price increases to support the future price of raw material.

So, right now, we think we're in good balance between our price increases and our raw material as we go forward into the balance of this year..

Okay. Thank you.

And then, my second question, I just wondered if you could comment at all about the acquisition environment, if you're seeing any kind of change in that dynamic or the competitive dynamic for acquisitions?.

Yeah, we're continually looking for acquisitions. Obviously, it's been stated and we've acquired quite a few companies over last couple of years. But right now we're focusing obviously on integrating American Apparel, which is our newest acquisition, which we acquired in February. And that will be our focus for the balance of this year.

But at the same time, looking in this environment, with all the instability in the market, obviously, it creates opportunity for potentially other acquisitions, which hopefully we can continue our momentum and acquire companies that can continue to add value.

Our acquisition criteria is either product, brands, distribution channels, I mean, we set forth to investors. And I think we've been pretty consistent with our discipline in looking at acquisitions..

Thank you..

And our next question comes from Kenric Tyghe from Raymond James. Your line is open..

Thank you. Good morning. Glenn, underwear performance is clearly the highlight on the quarter. Could you just remind us how much of that was shelf space versus new program driven? And perhaps also give a little bit of context with respect to which channels the gains were most pronounced in in the quarter, just given the overall market dynamics..

Okay. Well, first of all, yes, I think we – look, we did very well in our underwear and pretty consistent, sum up with last quarter. As we set product last year, in 2016, that drove market share gains, which we see today.

And the good news is, as we continue to get more shelf space, which we set in May, beginning of June, we'll see continued growth in share and POS as we go through the balance of the year and into 2018. So I think we have a good momentum with our placement.

We're expanding our distribution, we're expanding our product within the category, and we've got good momentum..

And then just a follow up there, just by way of the – by channel there, sort of where your gains were most pronounced?.

Mostly in mass, I would say, is primarily where our gains in underwear, which also represents the lion's share of all the volume in the market..

Sure, thank you.

And then just secondly, switching gears to fleece, how much of the fleece performance in the quarter is timing-related and you'd expect to recoup that? And could you just speak to fleece performance more generally in the quarter?.

Well, fleece sale generally has performed well. Over the last two seasons though, I mean fleece has been relatively tough. So what's happened is we anticipated based on – because what we do typically is we have programs to purchase fleece before the season really occurs.

So, typically, our customers will buy fleece in the June quarter and the second quarter and the third quarter and really the height of the season is in Q4. So our customers – we anticipate it because we obviously forecast with our customers, how we see fleece in the year – pre-year.

And then, so basically, our pre-books this year were less than they were last year and we'll see that come in as the actual season occurs in Q4. So, the answer is, it's strictly timing. Our POS as a percent is actually up doing quite well. So this is just really a timing issue into Q4..

Great. Thanks very much..

And our next question comes from Sabahat Khan from RBC Capital. Your line is open..

Thanks. So you called out strength at POS in the underwear category and maybe some weakness in the national and department stores.

Can we maybe talk about – is there a difference between performance at mass versus the national or the department store chains or is it more of a category thing? Maybe the socks aren't performing well?.

Well, socks for us didn't perform well overall, I would say. I mean, it was slightly down. The lion's share of – our disappointment I would say in socks, was the department specialty through our GLB and Gold Toe. We did have a little bit of negative sock comps as we reset our floor.

When you go into one of our largest customers, you'll see that we made a big improvement on our sock quality. We've done two things. We've taken our product out of the bags, we've improved the quality of our sock and leveraging our ring spun capacity. So when you look at our Gildan sock today is now primarily ring spun.

And it's going to sold at a little higher price points. So we had a little bit of a timing I think setback in terms of as we reset the floor, but basically, we're very optimistic that we'll continue our momentum as we go forward. We had a slight – the market was down in general in socks too at the same time.

So we had a slight decrease in market share, but we would expect that to improve as we go forward in the back half of the year..

All right. Thanks.

And then on the underwear POS that you mentioned earlier, is that kind of in line with your expectations? And I guess how is shipping tracking relative to the ship or the sell through?.

Well, it's definitely in line with our expectations. We're pretty excited with our performance. And like I said earlier, as we reset our floor and gain shelf space and placement in the month of May, we'll see continued market share gains and POS gains on a year-over-year basis as we get into the second half of the year and into 2018..

All right. Thank you..

And our next question comes from Mark Petrie from CIBC. Your line is open..

Hey. Good morning.

Wanted to just follow up on your comments on American Apparel, and hoping you can just update us on your current thinking as it relates to sort of relaunching that brand? You mentioned the direct-to-consumer e-commerce platform in the next two weeks, but maybe just how should we think about that brand as it relates to potentially in stores?.

Okay. Just to recap what's I think for American Apparel, and I think maybe even to look at the strategy of the company as we go forward. I mean, we've purchased this asset for $88 million, and really what we bought is a brand. We didn't buy any of the manufacturing capacity.

We had virtually $10 million of inventory we purchased, but what we've done is we've basically integrated and purchased this brand, and from a standing start basically geared up our manufacturing. We created all the tech packs, to patterns, set forth in being able to really drive the brand.

And I think it's an important point because one would say is this an acquisition or is this organic sale, because at the end of the day the way we approached American Apparel was almost like we licensed the product. We started from nothing, and we basically – we just happened to buy the asset instead of licensing the asset.

And then we have to really from a ground zero start to build the production, which we've done successfully. My first focus was to really get back into an inventory position and continue to sell product to the distribution market, which we've done.

It's still being rolled out as we speak because obviously it was a big task to gear up all the production in different styles. And then secondly what we've done is we are launching a direct-to-consumer.

And we have about 100 styles of product that are going to the distribution market, which are typical screen-printed type products, t-shirts and so forth. But in our direct-to-consumer products, you'll see that we'll have a wide range of the consumer appealing products like denim jeans and things that American Apparel had historically sold.

So not only do we gear up the product to basically support our screen-print channel, but we also, at the same time, are giving up to support retail ready product and leveraging really the success of our supply chain to service the consumer as well. We also at the same time have built a complete distribution capacity to service direct-to-consumer.

Like I said in my last call, one of our focuses are to build our direct-to-consumer distribution capacities at the same time, so we can service these consumers which is now ready to go. So we're planning to launch the site and the sales in the site in the next couple of weeks. And our next step is really to evaluate the retail opportunity.

We've already done a lot of work on it. We're looking at opportunities. I mean, what's important for us is to make sure the brand is relevant with consumers as well as our wholesale customers. And probably you'll also see and we're going to reenergize the brand.

One of the – part of the acquisition is we looked at the talent that they had and we really picked a very limited amount of talent, but we picked up the cream of the crop in the advertising and the marketing side of it, which are going to help us, which are still in LA because we want to keep the DNA of the brand in LA.

And they're going to help us to drive the look and the feel, at the same time drive the consumer re-energization from the branding perspective. And you'll see we'll be putting some money together on the brand side to reenergize the brand with the consumer. So, as we go forward, we're going to continue to focus on our distribution.

We're going to focus on our direct-to-consumer; we're going to expand internationally. All these things will happen in 2018, so we're really excited about the opportunity. We think this could be quite big as we go forward. I mean, we don't want to say how big, but I think I would say that optimistically, we're very positive in American Apparel.

And one thing I'd like to just say I guess from the company's perspective is that we're re-shaping the way we allocate our capital. Historically, the company's built capacity and used price as a weapon to basically drive market share. Right now, we're in a position where we basically built capacity.

We have a lot of capacity coming on between Alstyle and Rio Nance VI. And now the only difference is we're being very tactical of how we fill that capacity up. So this is a good example of an acquisition that basically will allow us to use our capacity, but also to allow us to increase margins, basically, relative to historical levels.

So this is going to be something I think that will continue to drive future earnings growth as we go. And you see that a little bit in our margin expansion as we go forward. We're going to continue to expand on margins as we look and leverage these acquisitions. And American Apparel, which is one that I explained.

But Alstyle was also another one where we just basically bought a manufacturing asset that would have cost us $150 million to build, and we picked up $76 million in working capital and inventory. And we did that for $110 million.

And we also picked up some revenue, but the revenue was only valued as because we can add value by lowering the cost structure of that revenue basically and allowing us to increase the margins of that product and leverage the infrastructure that we picked up.

And we did the same thing with Peds where we purchased shelf space in Peds, but the reality is that if you look at our SG&A in Branded on a year-over-year basis, we actually are reducing our SG&A basically. And we think there's going to be another reduction even in 2018 as we finalize the year-over-year integration of Peds.

And we also are taking even some of that Peds business and convert into Gildan brand where appropriate. So, we're managing our capacity build and our capital allocation effectively. And even with Comfort Colors, to make the point is Comfort Colors was a company that we actually sold all the basic t-shirts to.

When we bought Comfort Colors, all we did is we already had the business, we just basically took that business and built a garment dyeing facility in Honduras and expanded the margins on the product that we're already producing to them. So, all of these things really are relatively important because we're buying assets.

We're purchasing them at very low cost. They're generating very high returns. As you'll see, margin expansion as we go forward. And we also are buying these assets at very little risk.

So, in all, I would say that you know, we're very diligent on making sure that we continue to focus on capital allocation, growing our top line, and making sure that we're expanding the bottom line as we go forward into the future..

Okay. Thanks. Really appreciate that color. I guess one follow-up. In terms of the American Apparel product, the manufacturing of it, how much of it is being manufactured in your own facilities and how much of it is through third party? I assume a select part of that direct-to-consumer business is manufactured third party..

Yeah. So, some of the third party will be the direct-to-consumer. All of the core Printwear business is being manufactured in our facilities..

Okay. Thanks. And then, sorry, just on the Printwear business, could you just comment broadly about the health of the Printwear channel? And then I know the Fashion Basics category is growing, or you mentioned that it's been growing nicely.

How about the Basics part of the business?.

Well, the Basics you know are flattish, I would say, this year, but the Fashion Basics are very strong. And the one thing I think maybe to point out on the Fashion Basics side is that we're tackling the Fashion Basics with four brands basically right now. We got a Fashion Basics brand in Gildan, which is really the OPP price leader.

We have Anvil, which has been growing at really, really, really strong. We got Comfort Colors, which is the high end of our Fashion Basics. And we got now American Apparel.

But one thing I think is part of our capital allocation, again, just going back to it, is that the Fashion Basics has really been supported by our major investments we put into ring spun yarns. I mean, of the $400 million that we spent in our yarn allocation, 50% of that was really focused on building our ring spun capacity.

And then most recently with the purchase of Swift. And Swift, we're going to use really to take it to the next level because in the Fashion segment there's not just core yarns, but there's also viscose and rayon and all kinds of other things that we're going to be bringing to market basically that will continue to drive that segment.

So, we're continuing to invest. We are very tactical to grow sales. And we're also investing in our brand strategy to make sure that we fulfill the opportunity and demand in the market. And we have a much lower share in Fashion than we do obviously in the Basics side.

And we think that we're going to really have a good runway on developing sales in that segment..

That's helpful. Thank you very much..

And our next question comes from Martin Landry from GMP Securities. Your line is open..

Hi. Good morning. You had a very good boost in your operating profit margin in the Branded Apparel. You do talk about manufacturing savings, raw material, but you don't specify price increases. And if I do recall, in the last quarter, you did mention that you took some price increases in Branded Apparel.

I'm just wondering how much of a contributor that was to your margin expansion..

Yeah, Martin. If you look at the way our margins unfolded for the quarter, and the way they really are unfolding for the full-year in Branded, we saw a little bit of benefit from pricing increase in the second quarter.

But what we've seen through the first half is the benefit of manufacturing cost savings, the benefit of raw material prices coming through, but also SG&A leverage, right. I think that's very important because we're really starting to scale up and we see the benefit on SG&A. So, with a little bit of price.

And then as we go through the year, I think we've given guidance that we expect to see growth in operating margins in Branded on a full-year basis. And we continue to expect to see that as we effectively balance out probably gross margin through the year, but I'll both see that SG&A leverage really coming through.

So I think we're pleased with the progress on margins in Branded..

Good. Thank you. And then maybe, if you can talk a little bit about your pipeline of programs that you're bidding on for 2018, Glenn. Does the – any color on pricing, volume, outlook and amount of programs you're looking at now would be helpful..

Well, I would say that look at the – I can't really discuss our strategy obviously for 2018.

But what I can say is that as we set the floor and the new products in the second half of 2017, just like last year basically, we're going to see a momentum in our sales pickup, and that will carry obviously through the first half of 2018 and then any new additional shelf space to wins will come in the second half of 2018 and continue our momentum, so that's a good way to look at it.

But, look, we're working really diligently to make sure that we're expanding our brand and our strategy and focusing on making sure that we're relevant to our customers. So we're excited about our positioning and we're excited about our share gains, and we're looking forward to 2018..

Okay. Thank you very much..

Thank you..

And our next question comes from Vishal Shreedhar from National Bank. Your line is open..

Hi. Thanks for taking my question. Was hoping to get an update on the CapEx, a little bit lower, which is nice. In prior calls, I believe management indicated that the $125 million range was a good proxy for future years.

Just wondering if you can update us there?.

Well, look, that's somewhat a little bit of a timing thing I think in terms of how the money's being spent. The main thrust of our capital is obviously Rio Nance VI, but we also spent some money this year on our ex-Anvil facility to expand that as well. So, overall, we're leveraging Alstyle basically, which has been a big asset to us.

We purchased that facility – the Alstyle facility is larger than any one of our Gildan plants we have in Honduras. So we're going to continue to manage our capital allocation basically, obviously, but the capacity that we have installed is definitely to support the billion-dollar-plus sales that we have.

So I mean we have all the capacity, we just happened to obtain it with a lesser-cost structure than we anticipated, partly, but also, let's say, the difference this year was a little bit of timing. So we're still focusing on all the projects and we're still bringing on the capacity as planned..

Okay.

So it's not really a change in management's view on how to allocate the capital?.

No. And when we look at, like for example, the yarn acquisition. We basically bought $13 million, and if you just take that allocation, we might've had some projects also in yarn spinning that we needed to. Because there is obviously we need to keep increasing our ring spun commitment basically, so we purchased instead of buildings.

The cost of the purchase was also a lot less expensive than building. So, again, just managing our capital structure basically and yielding the best return for our shareholders. But I think you just look at that in light of also the capital as well..

Okay. The license accounts and lifestyle – global lifestyle brands, Gildan used to talk a bit more about that, call it a couple years ago. Wondering if that's still a focus for you guys to get those kinds of programs. Haven't heard too much about it so maybe – lately, so maybe you can update us..

Well, look, it's a part of our business that's growing nicely. Obviously, it's limited to really strategic partners.

And the only thing with that business where we had a little bit shortfall and some of it this year, is not necessarily – there's a disconnect a little bit from the actual POS relative because, obviously, we sell product to those customers who store the product and resell it to their customers.

So partly this quarter, we had probably an inventory balancing at their end really that could affected sales, but overall, I think we're pretty excited and we've good momentum in that category..

So, you're going to continue – should we expect Gildan to continue to build – license new brands?.

Yeah. We're going to build with the existing customers that we have, I would say. We're not looking really to expand our customer base. It's less is more for us and we have very few customers that I think that could be strategic partners to us as we go forward..

Okay. And in the past you commented that FX was negative call it a year, a bit ago. FX seems to have reversed, just wondering if there's any updates there..

No, I mean, if you look at the FX, we had a little bit of headwind from FX in the quarter. Obviously, some of our international currencies are strengthening, but as we go through the year, we'll probably see a little bit of benefit from it. But it still, when you look big picture, FX was quite a headwind to us last year.

And I would say it's just a bit of a headwind to us this year as we move through the year..

Okay.

And they'll turn to benefit as we go towards the end of the year and potentially next year?.

Well, let's see how it plays out, but yes..

Okay.

And you don't have FX hedging in place, right?.

No, I mean, look, we've got – with our foreign currency, we do the things that you might naturally expect to do near term in order to manage our overall international business. But for the most part, we're managing that in the markets with pricing as we manage the overall business..

It's all short term though..

Okay. Thanks a lot, guys..

And our next question comes from Tal Woolley from Eight Capital. Your line is open..

Hi. Good morning..

Good morning..

Just wanted to ask about your organic growth outlook in the second half. A lot of the industry players seem to agree that they expect that, overall, the industry should perform a lot better in the second half certainly than it has in the first. I guess, can you talk about – I think you guys are in that camp too as well.

Could you just talk about what are some of the factors you see driving that sort of improved optimism for the second half?.

Well, you're going to get really the – our organic sales in the second half will be driven from fleece and Printwear, obviously, which is a big factor. And the gain in the underwear space and shipments in the second half, I mean those would be the two main drivers, I would say, of our growth.

We've also got a very cautious outlook on the market, I would say. We're not projecting robust sales, so that if that happens, I mean that would be maybe potentially upside to our forecast in the second half. But we still got the same view that we had in the beginning year where we have a lack luster type of environment in both divisions..

Okay. And then, one other question I wanted ask about too is just, given your plans for building the American Apparel brand, there is sort of a unique competitor out there that's emerged, Los Angeles Apparel.

Any concerns about the impact that may have as that building sort of grows – that business grows and emerges, what impact it might have on the American Apparel brand going forward?.

Well, look, I don't want to talk about our competitor, but good luck to him. But at the end of the day, I think that we're well positioned. We have a significant investment and capital able to support our brand. We're the low cost manufacturer. We invested $215 million in yarn spinning to support this segment.

We think we've obtained the best talent in the market from a marketing perspective to keep the brand alive and resonating with consumers. We have an effective sourcing and supply chain. So, you know what, at the end of the day, we're very excited. We have a lot of demand for it. We already are – got a lot of commitment to expand the brand into 2018.

We've put in all the infrastructure and investments to go direct to the consumer. So, look, I mean at the end of the day, we will do very well with this brand. This will hopefully be one of the best acquisitions the company has ever made in terms of return on investments. So we're very excited about it..

Okay. Thanks very much..

Thank you..

And our next question comes from Stephen McLeod from BMO Capital Markets. Your line is open, sir..

Thank you. Good morning..

Good morning..

Just a follow up on the Branded business, specifically on underwear, obviously, some good market share gains in the quarter. And one of the things you cited was broader distribution on products.

I'm wondering if you can talk a little bit about some of the new products that you've been offering into the market?.

Okay. Well, what we've done is, look, we're spanning, obviously, our product in different channels, e-commerce channels as well as our mass channels, number one. Secondly, we're expanding our product into different categories. Our newest, I think the product is the stretch underwear, which is more of a performance stretch.

It's been very well received with consumers, and we're looking at ways to leverage that in the future as we go forward..

Okay. That's great.

And would the stretch product have a higher price point?.

Yes..

Yes. Okay. Okay. That's great. Thank you. And then just turning....

And then also we actually have two different products. We have one that's in poly and also one that's in cotton, which are supported in different packaging and so forth..

Okay.

Those are all mass?.

Yeah..

Yeah. Okay. And then just turning to socks, I mean it sounded like a bit of a challenging quarter in Q2, but you cited some confidence in the back half of the year.

And I'm just curious what some of the drivers are? And what gives you confidence in improved performance? Like are you seeing better traffic or is it just an improvement based on shelf space or something like that?.

Well, I think – look, the big area where we've had a little bit of a miss was in our GLB and our Gold Toe. Our GLB I think is just timing, because of its – as – because that's not POS-driven like I said in an earlier question. So that will come back. And the Gold Toe, we've seen already better sell through in the Gold Toe so far in the month of July.

So, we think that's sort of we have a good plateau in terms of where we're going, because obviously we've lost – we haven't lost market share. Our market share is slightly equal to what it was, but the overall consumer base or retail base that's buying that has stabilized now. So, therefore, we think that those sales should stabilize.

And in the mass, we reset our floor basically. So we had a disconnect with old product going out and new product coming in. But our new product basically is positioned we think really well. We're leveraging our ring spun capabilities. We have gone to an open pack, much better quality sock, softer and a little bit higher price point.

So all those things combined we think we're very comfortably positioned for the back half of the year..

Okay. That's great. Thank you very much..

Thank you..

And our next question comes from Jim Duffy from Stifel. Your line is open..

Thanks. Good morning. Most of my questions have been answered. Maybe one direction I'll go with the second quarter, the contribution of the acquired businesses was lower than I had expected.

That may be very well be an analyst error, but can you talk about particularly for American Apparel, how you expect the shape of the revenue contribution over the back half of the year?.

Yeah. I mean if you look at the way that American Apparel is rolling through effectively, we had said for the full-year we thought that $50 million to $75 million is effective – would be the contribution for the full-year. And then it's been building, right? It builds every quarter.

So in the first quarter about $8 million contribution, the second quarter about a $10 million contribution. And then that will grow from there in the third quarter and the fourth quarter continuing to almost double each quarter.

So it will just build as we've been filling the pipeline, as we get our e-commerce business off the ground, and then all of that will contribute to the $50 million to $75 million. And our run rate at the end of the year, obviously, we'd expect to be quite strong..

Okay.

And then, Rhod, on the CapEx, moderated guidance for CapEx, is that simply a timing issue or is there some reallocation of budget? What are the thoughts there?.

As we said in our remarks, right, as we've gone through the year, we've been really leveraging the Alstyle acquisition. We've done some things in a different way as Glenn mentioned with respect to the acquisition of Swift, which comes not in the CapEx line.

So, really, we're doing all the things that we said we were going to do in order to make sure that we have the capacity and the capabilities in place on a go-forward basis..

Very good. Good luck..

Thank you..

And our next question comes from Keith Howlett from Desjardins Securities. Your line is open..

Yes.

You spoke about the American Apparel online strategy, but I'm wondering if you could speak more broadly about your percentage of Branded sales online and your strategy and efforts there on the online side?.

Well, what we said is that our e-commerce business is roughly about 5% of our revenues of Branded. We're continuing to, obviously, drive that as well. We just launched a new Gold Toe website and a Gildan website.

And we're building that business both from internal supported – we're looking at pure play and obviously our omni-channel customers and our Gildan Direct. So we basically are continuing to drive as best as possible.

But the one thing that I think is important to do – to maybe look at is that with the investments we're making with American Apparel are really probably going to lever future opportunities for us, even on our own e-commerce, because we're putting in a different level of commitment and through American Apparel, through the distribution side of it, as well as the marketing and everything else.

So we're focusing on all different energies, but that's going to be really I think the catalyst to somewhat support the future e-commerce in the company. So we're making quite a significant investment this year in our SG&A to make sure that we continue the momentum and capture the opportunity..

And then just in respect of the textiles that are going into your products, what sort of is the proportion of cotton versus synthetic and how quickly is the shift between – over to manmade fabrics occurring?.

Well, it's probably 80/20 maybe is a good number to use. Polyester is not as relevant in the print market as it is in retail, because it's not as easy to screen-print as a cotton t-shirt. And most of the products – or 100% of all the product we sell through Printwear gets screen-printed. So it's definitely changing though.

I mean people are finding techniques and ways to use digital printing et cetera but it's still an 80/20 spread..

Thank you..

Our next question comes from Andrew Burns from D. A. Davidson. Your line is open..

Good morning and congrats on a solid first half performance. Wanted to ask a high level question about your ring spun yarn investments as you continue to invest on this front.

Now that you have significant capacity in place, how do you think consumers are responding to this point of differentiation for your product? Is there opportunity to further highlight that differentiation via marketing? And is there room to further optimize the product mix and pricing structure of those products? Thanks..

Well, the answer is yes. I mean, look, we – two years ago, we never made any ring spun at all, right? So, today, we're one of the largest producers of ring spun in this hemisphere, right. So we've gone from zero to being very large in this category.

And Gildan is somewhat of a category leader, I mean, so we're changing the market dynamics by making these capital investments. And I think that's an important part because if you're not investing capital, you're not able to keep up with the change. So we're the only company that's investing heavily in manufacturing.

And as we make these manufacturing investments, we're leveraging them to grow our topline, but really to gain market share in all the categories in which we sell. So that's one great thing about our positioning is that our competitors aren't investing capital and haven't got the same cost positioning and capabilities that we do.

So we think that we're well positioned. We still have more investments to make. I mean, the reason why we bought Swift is because we were at capacity and in fact we needed more capacity based on where our sales are going.

Because the Fashion Basics, some of the products that we're bringing into our retail basically are continuing to consume ring spun yarn. And so, it's a great position to be in because everybody else will be on catch-up mode as we're continuing to drive share..

Thanks and good luck..

Our next question comes from Brian Morrison from TD Securities. Your line is open..

Hi, good morning. I just wanted to follow up on the Printwear top line. So it looks like you're down about 4% organically this quarter. And then if I ex-out acquisitions, the second half it actually looks a little bit positive. So I'm just trying to get a better handle on the organic weakness.

Was this all fleece and FX? And then it's just those two that are going to turn in the second half to organic growth?.

The answer to that is yes..

Okay.

No – and no further strengthening in Fashion Basics or it's going to continue as is?.

Well, the Fashion Basics, look, they're growing really strong off a smaller base, and we've got flattish-type business in our Basics. So I think that's where we're positioned.

But, look, going back to what I said earlier, I mean we've – we're putting all of our energy really on driving all these brands that we have now in Printwear, which is now American Apparel, Alstyle, Comfort Colors. So we're continuing to leverage these brands, but also at the same time, you're going to see margin expansion too.

So part of our strategy is, is to make sure that we're maximizing our top line, but we're also maximizing our bottom line. So we're very comfortable in our positioning as we go into the back half of this year, but even more excited about how we move into 2018..

And that margin expansion is simply a higher percentage of Fashion Basics.

Correct?.

It's a higher percentage of Fashion Basics, it's – and if you look at where our business is growing now, it's American – it's all American Apparel, it's in Alstyle and Comfort Colors – I mean these are all – and our fashion – our Gildan Fashion Basics. I mean these are all margining our products for us basically as we go forward..

Yes. Just one housekeeping item.

With the acquisition of Swift, how much of your yarn needs are being satisfied internally now and are there more opportunities or interests on this front to access high-end yarn?.

Well, look, we've internalized a big portion of our – of our overall yarn, we've only internalized probably about 70% maybe – 65% to 70%, so we're still buying quite a bit of yarn on the outside market.

As far as our investment strategy though, we're investing ring spun heavily because those yarns aren't available in the outside market at competitive prices or available at all.

So, give you an example, like one of the fastest-selling styles we have in our Anvil and our American Apparel brand are basically a viscose, which is a tri-blend, which are poly-cotton, cotton-rayon basically.

So these types of things are typically imported from Asia or the few domestic guys that make them, cost structure's so high that you can't – we couldn't compete. So we're making the investments that are going to continue to drive the earnings profile to the company, but really drive sales where we think that we can.

So everything we have is – I think is pretty well thought out in terms of how we're going to maximize all of our yarns and all of our sales as we go forward. And we'll continue to invest as we see fit, and continue to drive sales..

Thanks, Glenn..

And our last question comes from Keith Howlett from Desjardins Securities. Your line is open..

Yes. I wonder if you could just speak to what you've heard on the free trade negotiations between Mexico, U.S., and Canada, and how it might affect the apparel business..

Well, what I'm going to tell you is, look, we haven't heard a lot because we hear what you hear. But I think that the one point maybe in reference to free trade and NAFTA with Mexico is that the trade balance is pro-U.S. on textiles in that category. So, the U.S.

doesn't have any issues in terms of textiles, obviously, because they're selling more goods and services to Mexico than Mexico is shipping back into the United States. So we don't know what will happen, but we're diagnostic, to be honest with you with our supply chain. We feel very comfortable with our positioning..

And if I just one last question on the performance category in the Printwear business.

Is it still a growth category and how do you feel you're positioned in it?.

Well, we're positioned very well. Like this year, we rolled out quite a few new products. We have a polyester tech fleece that's been well-received. We've expanded in our T-shirts and our polos.

So, look, we're expanding our polyester portfolio quite rapidly, with the caveat saying that, look, in Printwear there's also – everything gets screen-printed like I said earlier, so it's not growing at the same rate as it is in retail because everything in lifestyle retail has actually gone to polyester.

But we think that's going to change, because technology's changing. And so the big part of our investment strategy in Rio Nance VI is really to develop and continue to develop performance-type quality products and actually take it to the next level.

So we are continuing to make all of our investments in higher-end, value-add type products that will give us higher returns in the future and continue to drive top line sales..

Thank you..

Thank you..

We have no further questions at this time. I would like to turn the call back over to Sophia Argiriou..

Thank you, Nicole. This concludes our call. Again, thank you for joining us this morning, and we look forward to speaking to you soon. Have a great day..

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect..