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

Heather Balsky - Bank of America Merill Lynch Mark Petrie - CIBC World Markets, Inc. Kenric Tyghe - Raymond James Ltd. Sabahat Khan - RBC Dominion Securities, Inc. Martin Landry - GMP Securities LP Vishal Shreedhar - National Bank Financial, Inc. Andrew S. Burns - D.A. Davidson & Co. James Vincent Duffy - Stifel, Nicolaus & Co., Inc.

Westcott Rochette - Evercore Group LLC Keith Howlett - Desjardins Securities, Inc. Stephen MacLeod - BMO Capital Markets (Canada).

Welcome to the Q4 2017 Gildan Activewear Earnings Conference Call. My name is Colette, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Sophie Argiriou, Vice President of Investor Communications. You may begin..

Thank you, Colette. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued our press release announcing our earnings results for the fourth quarter and full year of 2017, as well as our business outlook for 2018.

Gildan's management discussion and analysis and consolidated financial statements will be filed with the Canadian Securities Regulatory Authorities and with the U.S. Securities and Exchange Commission on February 23.

Today, I'm joined by Glenn Chamandy, our President and Chief Executive Officer; and Rhodri Harries, our Executive Vice President and Chief Financial and Administrative Officer.

We will begin with Rhod taking you through our fourth quarter and full year performance and our business outlook which will be followed by a question-and-answer session during which Glenn and Rhod will respond to your questions.

We would like to remind everyone 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, I'll turn the call over to Rhod..

Thanks, Sophie. Good morning, everyone, and thank you for joining the call. This morning, we reported our fourth quarter results, and we are pleased with a strong finish to the year. We achieved the top-end of our adjusted EPS guidance for 2017. We generated more than $0.5 billion in free cash flow, exceeding the prior year's record level.

We announced our sixth consecutive annual increase to our dividend, and we renewed our NCIB program to repurchase another 5% of the company's outstanding shares. We also provided you with our targets for 2018, announcing at the same time that we have implemented an organizational consolidation of our sales, marketing and distribution activities.

This will allow us to better leverage our go-to-market capabilities, and drive operational efficiencies across the front end of our business. We'll cover this later, but first, let me take you through some details on our fourth quarter results. Starting with earnings.

We reported adjusted EPS of $0.31 for the quarter, $0.01 down from $0.32 in the fourth quarter of last year. As we expected, the slight decline was due to the $0.04 per share impact of the non-recurrence of the tax recovery we saw in the fourth quarter of last year.

Excluding this impact, adjusted EPS reflected the strong sales growth in the quarter, which more than offset the impact of higher raw material and other input costs and negative $0.03 impact from manufacturing and inefficiencies related to production shutdowns taken in the quarter, as we managed through some disruption in Honduras, following the election there and higher SG&A expenses.

Moving to consolidated sales, sales for the fourth quarter were up 11% or 8% on an organic basis after adjusting for the $17 million sales contribution from American Apparel. Organic growth was driven by the strong performance in our Printwear business.

We generated gross margin of 27.1% in the quarter, up 40 basis points from the same period last year even after absorbing manufacturing inefficiencies related to the production shutdowns in the quarter, which negatively impacted gross margin by 95 basis points.

The increasing gross margin was driven by a richer product mix in Printwear, and higher net selling prices. These positive factors more than offset anticipated higher raw material costs and negative mix in Branded Apparel.

As we move to operating margin, we saw that the gross margin improvement was offset by higher SG&A expenses due primarily to the American Apparel acquisition, lower fixed cost absorption in Branded Apparel and increases in distribution and e-commerce expenses.

Consequently, adjusted operating margin was 11.2% in the quarter compared to 11.9% in the fourth quarter of 2016. Turning to our segmented results, we generated Printwear sales of $416 million in the quarter, up 28% from $326 million in the fourth quarter of 2016.

The increase was driven by strong organic volume growth combined with sales contribution from American Apparel, higher net selling prices and favorable product mix.

Excluding the sales impact from American Apparel, Printwear sales in the quarter grew 23% organically, reflecting double-digit growth in fashion basics and strong fleece shipments in the quarter. Sales growth in international markets was also up double digits.

Printwear operating income in the quarter was $82.8 million, up 21% compared to the fourth quarter of the prior year. Printwear operating margin was 19.9%, down 110 basis points over the same quarter last year.

The decline was due to headwinds from higher raw material costs, inefficiencies from the production shutdowns in the quarter, and higher SG&A expenses.

These factors more than offset the benefit of positive mix impacts from the growth of higher-priced fashion basics and strong fleece shipments, as well as price increases implemented at the beginning of 2017.

The increase in SG&A expenses related mainly to American Apparel and increased investments in distribution and a further development of our e-commerce infrastructure. In the Branded Apparel segment, sales in the quarter totaled $238 million, down 9% over the same period last year.

Our underwear business was strong in the quarter with sales of Gildan branded underwear up 35%. Based on the latest data from NPD, unit market share for Gildan branded men's underwear for the quarter was up 160 basis points year over year. We continue to be excited about our prospects in underwear.

You may have noticed earlier this month we announced the launch of the complete product offering for Gildan branded men's underwear on Amazon, which now includes a much wider assortment of styles than previously sold on Amazon.

In addition, activewear sales in our craft business continue to be strong and sales of the global lifestyle brands were up as well in the quarter. Where we continue to see weakness was in the sock business at mass, department stores and national chains and sports specialty.

Our business was down here more significantly than we expected due to a number of factors including a clear shift in focus of some of our mass customers to their own private label programs. I'll speak about this later. But while it impacted us in the quarter, we're evolving to this change in the business and we see opportunities.

Operating margin in Branded Apparel was 7.1% compared to 9.1% in the same quarter last year. The margin decline reflected unfavorable mix impacts, higher raw material costs, and SG&A deleverage from the decline in sales.

Turning to our strong cash flow performance, we performed better than expected in the quarter with free cash flow of $166 million, bringing our total free cash flow for the year to $519 million, up 30% over last year and another record level for the company.

The increase was driven by higher earnings, strong working capital management and lower capital expenditures compared to the prior year. Capital expenditures of approximately $95 million for 2017 were in line with the company's guidance and reflected investments for textile capacity, yarn spinning, distribution and garment dyeing expansion.

Turning to return of capital, during the fourth quarter, we repurchased 1.7 million common shares under our share repurchase program at a total cost of $52 million. Overall, in 2017, we bought back 11.5 million common shares or 5% of our share base at the start of the program in February at a total cost of $329 million.

Through share repurchases and dividends, in 2017, we've returned $413 million to our shareholders. Net debt at the end of 2017 amounted to $577 million and the company's leverage ratio was one times net debt to adjusted EBITDA, in line with our targets.

So 2017 finished well, underlining the strength of our overall business model with our great manufacturing base, strong focus on the imprintable market, and our ability to leverage this positioning at retail. Sales for the full year were up 6.4%, adjusted EPS was up 14% and we generated record free cash flow of over $0.5 billion.

Now, before I turn to the outlook for 2018, let me elaborate further on the organizational realignment we implemented at the beginning of this year to continue to strengthen our business model and to take advantage of opportunities we see across our business to drive sales and increase profitability.

Under the realignment, we consolidated our Printwear and Branded Apparel businesses into one marketing, merchandising, sales and distribution organization under the leadership of Mike Hoffman, previously President of Printwear. This consolidated structure will allow us to take advantage of the various dynamics affecting the marketplace.

We're seeing retail brands making their way into Printwear, while products in Printwear become more accessible to consumers through online vendors. The growth of e-commerce is affecting channels of distribution both on the retail side and also on the printwear side.

And as I mentioned earlier, there was renewed emphasis by retailers on private label programs. So, as the market evolves, we are evolving with it to grow and drive earnings. We believe our new structure positions us to better leverage a common platform across all of our brands and distribution channels.

While we are making investments in areas that will enhance our capabilities including distribution and e-commerce initiatives, a more streamlined and linear front-end organization will allow us to better capitalize on the market opportunities for our brands and drive operational efficiencies and cost savings across the organization.

In light of this new organizational structure, we expect to report under one reportable business segment going forward to reflect how we are running the business in a consolidated and optimized manner.

That said, we will continue to provide enterprise-wide disclosures of net sales by major product group and geographic area although quarterly now rather than annually to give you the necessary information to assess our progress.

Under this new reporting approach, we expect to provide the new quarterly revenue product breakdown under activewear and innerwear product categories, or innerwear will include sales in the sock and underwear categories. Turning to the outlook for 2018, you can see it as we evolve we continue to expect strong earnings growth.

For 2018, we are projecting adjusted diluted EPS in the range of $1.80 to $1.90, which at the midpoint of the guidance range represents growth of approximately 7.5% over 2017 on projected organic net sales growth in the low to mid single digit range.

Adjusted EBITDA for 2018 is expected to be in the range of $595 million to $620 million, and we're expecting to generate strong free cash flow of approximately $400 million. Projected sales growth for 2018 is expected to be driven by volume growth of imprintables in North America and double-digit volume growth in international markets.

In North America, we're projecting continued growth momentum for our fashion basics brands including American Apparel, Anvil, Comfort Colors and our new product line under the Gildan Hammer brand. Some of you may have seen the launch of this line at the Imprinted Sportswear Show in Los Angeles this January.

We're very pleased with the customer response we have seen so far for this heavier ring-spun line of shirts.

In addition, American Apparel sales are expected to double in 2018 to reach $100 million less than two years after acquiring the brand, having ramped up production within our own manufacturing operations and having re-launched the brand to U.S. consumers through our e-commerce platform.

In 2018, we plan on continuing to take the brand further by expanding the brand internationally including a Printwear in direct-to-consumer launch in the European market by the end of the first quarter of 2018 and growing placement on online marketplaces globally.

Total projected sales growth in 2018 is also expected to reflect the positive impact of product mix, favorable foreign exchange and higher net selling prices reflecting the price increases implemented in December to offset in part rising raw material and input costs.

These positive factors are expected to be partly offset by a projected decline in unit sales of socks primarily at mass retailers as these customers shift more emphasis toward their own private label brands.

As I mentioned earlier, the market is evolving and as retailers adjust their strategies to respond to changing market dynamics, we are seeing the impact on our sock franchise. However, at the same time, this creates opportunities for us and we are taking advantage to improve profitability in this area of our business.

We will see the benefits from our new organizational structure allowing us to take SG&A out while still supporting our customers. We're adjusting and leveraging our flexible manufacturing capacity, increasing in-sourcing of higher value products, and ultimately generating better returns on this business.

Turning to EPS, growth in adjusted diluted EPS for 2018 is expected to be driven by the benefits of higher sales, anticipated cost reductions in connection with the company's organizational consolidation and the impact of share repurchases during 2017, partly offset by projected high raw material and other input costs and expenses related to distribution and e-commerce initiatives, as we continue to enhance our direct-to-consumer capabilities.

With respect to our tax rate, we're not anticipating any significant change arising from U.S. Tax Reform, mainly because the majority of our earnings relates to our imprintable business which is not a U.S. based business, but rather a global business managed out of Barbados.

Furthermore, the benefit of the reduction of the corporate tax rate from 35% to 21% on our U.S. based businesses offsets any negative effect of certain provisions introduced under Tax Reform. To reflect the change in the U.S.

statutory federal corporate income tax rate effective in 2018, the company reported a small income tax recovery of $1.6 million in Q4 which was excluded from adjusted EPS. So for 2018, our effective income tax rate is projected to be approximately 4%, essentially in line with our effective income tax rate in 2017.

Finally, let me give you some color on the sales and earnings growth profile for the year. We expect adjusted EPS growth in the first quarter of 2018 to be down compared to a strong first quarter last year, which was a record for the company.

You may recall in Q1 2017, we were benefiting from price increases ahead of the flow-through of higher raw material costs.

Further sales in the first quarter of this year are also projected to be down slightly versus last year as a result of constraints in product availability resulting from the production downtime taken in the fourth quarter and early this quarter due to the election in Honduras.

While these constraints should be resolved by the end of the quarter, our inventory in certain product categories is tighter than we would like. On operating margin, we see a slightly higher operating margin in 2018 versus 2017.

Adjusted operating margin is expected to be down in the first half in particular in the first quarter due to higher raw material and other input costs and the flow-through of the remaining manufacturing inefficiencies from the production interruptions.

However, we're projecting solid margin expansion for the second half of the year as the benefit of higher net selling prices, more favorable product mix, and lower SG&A expenses more than offset higher raw material and other input costs. On SG&A, expenses are expected to remain relatively flat year-over-year in total.

SG&A expenses are expected be higher in the first half of 2018 and lower in the second half, reflecting projected improvement as we move through the year. In the first half, we expect to be reinvesting cost reductions in e-commerce and distribution activities.

However, as we move through the year, we expect SG&A as a percentage of sales in the third and fourth quarters of 2018 to improve in the range of 100 basis points to 200 basis points on a year-over-year basis as the anticipated cost reductions stemming from the company's organizational consolidation are expected to have a larger impact in the second half of the year.

And just to finish on guidance, capital expenditures for 2018 are projected to be approximately $125 million, primarily for the new Rio Nance 6 facility, as well as for investments in distribution and in expanding sewing capacity to align to increases in textile capacity.

Finally, we're projecting to generate strong free cash flow of $400 million in 2018. The lower year-over-year level is due to projected higher capital expenditures and higher inventory levels, as we support 2018 sales and ensure we have good availability at year-end to move into what we expect will be another strong year in 2019.

In closing, I would like to remind you that next week, on March 1, we will be holding our Investor Day in New York. Glenn and I along with other members of our senior management team look forward to further highlighting our strategy and plans for driving our business going forward.

We remain excited about our future growth prospects and the plans we are implementing to better position us to take advantage of these opportunities and drive value for our shareholders over the long-term.

We're evolving with the marketplace, taking steps to streamline our infrastructure and align our operations to operate more efficiently and capitalize on cost reduction opportunities while making investments in areas that will enhance our capabilities including distribution in e-commerce to drive short and long-term sales growth and profitability.

Thank you. And I will now turn the call back over to Sophie..

Thank you, Rhod. That concludes our formal remarks. Before we move 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 a question and we'll circle back for a second round, if time permits. I will now turn the call over to the operator for the question-and-answer session..

Thank you. We will now begin the question-and-answer session. And our first question comes from Heather Balsky from Bank of America. Please go ahead..

Hi. Good morning. Can you talk a little bit more about how massive increased focus on private label as informing your Branded Apparel strategy and do you see rest of more private label in activewear and even underwear? Thanks..

Hi. It's Glenn.

So we had trouble hearing you, but your question is what – where do we see private label in retail, is it moving in different categories, I would say that the answer is, is that Walmart actually issued a press release recently just about their whole brand strategy and pretty clearly outlined that the brands in terms of where they're driving, I think their own internal brands are not just in the innerwear area, but are also in the active area as well.

So I think the strategy of the growth growing private label amongst, I think, mass retailers is definitely on the move and growing in all categories..

I'm sorry, the other part of my question was how that informs your strategy going forward and what (20:36) apparel?.

Well, look, for as far as we're concerned, we really have very limited activewear current volume today. So I mean really it's been very difficult for us to actually drive our brand strategy in activewear.

I think truthfully is, is that there is an opportunity for us if we engage in retailer private label and some of those categories where we think it will fit our criteria that our programs that are large scale, have good returns and meet our manufacturing capabilities. I mean there's definitely an opportunity to gain further sales as we go forward.

It's a lot easier to sell private label that is to sell brands. I can tell you that. I mean it's selling your brand strategy is a much more difficult process versus our retailers are driving their strategy. It's a much easier entry point for us if we choose to do it.

But it's all a function of our capacity and our returns on investments which would make our decisions of how we're going to drive that area of opportunity..

Great. Thank you very much..

Our next question comes from Mark Petrie from CIBC. Please go ahead..

Sorry. Good morning. I just wanted to ask about the consolidation of the segments.

And Glenn, maybe get your perspectives on why doing that now and specifically how does this impact your distribution infrastructure and potentially impact your capital plans or the efficiency of your distribution network?.

Okay. Well, this is sort of something that's been developing, I guess, for some time.

And what's happened is that we really look at the universe – the whole world is converging, right? I mean basically, my view is, is that at one day if your – it depends on your income you would either shop in a mass or dollar store or if you're affluent you shop with a department store and today everybody buys online, right? So online is driving the world.

So that's one of the advantage point. But what's happened is that there's been a convergence of our historical Printwear business with our retail business because of two things. One is that a lot of our products today are actually ending up online. So if you go on Amazon, for example, you'll see Comfort Colors.

I mean Comfort Colors is – The Wall Street Journal listed Comfort Colors as one of the six best T-shirts in the United States and we don't even sell to consumers today, because they're buying it from online retailers. So our products, there's just no boundaries of entry, everything is one marketplace today.

So that's one part of the universe that I think has led us to this decision. Secondly, as we've invested heavily in our investment strategy into fashion segment, particularly with American Apparel, we've driven that strategy through our Printwear division, and built a very strong consumer readiness in terms of our e-commerce strategy.

And we have really invested heavily this year in terms of all the back office, the distribution, et cetera. So at the end of the day, we're running with two business models almost trying to do the same functionality.

So by aligning these units and having a better go-to-market strategy, we now basically can say, look, let's take all of our brands basically and making sure what's the placement for these brands and where do you want to put them? What's online? What retailers go to what brands? Really focus on consolidating the efforts that we had in our branded group and e-commerce with our Printwear group, develop a better cohesive e-commerce strategy, which we've done very well for American Apparel.

Now, we're looking to actually expand it and put a second facility up in the East Coast to support all of our branded products.

The Gold Toes and all the other Gildan items that we've been selling online, that we really haven't been able to service, to be honest with you, effectively because a lot of the products were in the Printwear DCs, and truthfully as the branded volume was really more related to innerwear, right? So that's going to help us really from a distribution strategy.

And then we have a whole IT platform basically of consolidation, which is going to allow us to simplify our investments and our time to drive our IT strategy. And we're going to consolidate back office functionalities that will allow us to reduce SG&A and overhead.

And probably one other area where, I think, we really haven't taken full advantage, to be honest with you, is supporting our international brands and not just the ones that we sell from Printwear but also looking at the ones that are really more geared to the consumer market from our branded group.

So overall, we think that this is the right thing for us to do as a company. We're going to be leaner and meaner and we're going to be more focused and we're going to take costs out of the system and we think we're going to also drive more top-line sales.

And it's also going to look at opportunities for us to continue driving the other parts of our business which is obviously our GOP (26:10) business but at the same time, if there is an opportunity for us and we're a manufacturing company and we're still committed 100% to driving our brand strategy, we're doing very well, our underwear is doing very good.

But at the same token, we've been fighting and we've always had those big opportunities, those big hits in retail are hard to come by because, look, we've been fighting on a brand strategy.

But truthfully is, is that the gloves are off somewhat from a private level opportunity and some of those opportunities will be easier to come to fruition through private label than they would versus, say, from our brand strategy.

So we're going to combine this with building relationships with our brands and focusing on selective private label in areas where we really haven't been able to penetrate mainly in the active probably area, I think, is probably the opportunity. And when it comes to socks, I mean I just want to get that on the table.

Look, socks is a business which we've developed. But as we look at going into 2018, we're going to have a reduction in our sock business and primarily because there's been a shift to private label but truthfully is that business is going to be non-impactful to the organization whatsoever. I mean, it's a marginal business to us right now.

And in socks, we do a lot of outsourcing of product especially in the value area of our Gold Toe and Under Armour products which we're in-sourcing today. So we're going to continue to run our manufacturing of our socks very effectively through 2018 as we reduce our dependence on some of this private label which is really marginal business to us.

And socks in general, some of the ones at mass because of the price points are marginal because you also have to put a lot of SG&A to distribute these products.

So in a way it's actually benefiting us by losing some of this business because we're going to in-source – increase our margins in some of the products that we're producing that we're selling at the higher end of the spectrum and at the same time allow us to significantly lose and consolidate our SG&A basically especially in the distribution side and be more effective as we go forward..

Okay, thanks. And then just following up on that last point I guess related to the private label and sort of how you think about the portfolio there.

Is it fair to say that if you were to consider doing private label fulfillment going forward, it would be more on the premium side or the effectively the fashion basics?.

No. In fact, if you look at the mass retailers I think that their strategy has been very clear, it has all opening price. So it's actually – the products have to fit our sweet spot. I mean that's part of the big opportunity.

To be perfectly honest with you, it's basic T-shirts, basic sweatshirts, it's things that we ride in our wheelhouse, right? So I think that we've been pushing hard to try and drive our brand strategy there but at the end of the day, look, we haven't been successful on developing our brand because I guess in the retailers' mind, this is something that they've been incubating for a while, right? So that's actually the bigger opportunities because this is really in our sweet spot..

Okay. Thanks. I'll pass it..

Our next question comes from Kenric Tyghe from Raymond James. Please go ahead..

Thank you. Good morning. Glenn, just a quick circle back on socks. As part of the issue here that there is – it is a – it's broader than perhaps you'd anticipated sort of mass into department and beyond.

I mean certainly, we saw the private label reset at Walmart, I think, went through some time in the third quarter, some of the challenges with respect to 2018 and the business the fact that this has just got a longer tail on it perhaps and is impacting more of your retail partners than you expected? And could you also speak to – this was retailer playing a game of margin sort of volume over margin because historically private label was not, you are a better margin participant or contributor than they were able to generate on their private label programs.

So I'm just trying to better understand the dynamics, breadth and margin..

Well, I mean there's a lot of articles again around the retailer strategy if you read them, I mean they're driving a private label strategy of somewhat to fight other factors in the market, online, e-commerce type businesses. So I think that that's the strategy that retailers are going with.

So I would put margin aside because I think it's more of a product strategy than it maybe a margin story, right? So this is discipline that they're putting in within their organizations and they're rolling out first the opening price point is really where they're focusing on driving more private label.

So in the case of socks, we marginalized ourselves in socks and socks have not been a great returning business for us at that level. When you look at a sock that sells for $5, $6 a dozen, I can tell you don't make a lot of money on them in terms of the whole overall SG&A associates.

So making less socks and moving upstream is probably the way we're looking at the business as we go forward. But in other areas where we see opportunity and turning to the active side, I mean that's really in our sweet spot because there you're selling at a much – even the basic products were sold at a much higher price point.

So, that's an area where we really see an opportunity if – as we go forward.

So – and the thing is, look at, we're also managing our capacity too where we're outsourcing a lot of socks, why do we need to buy socks from third-party contractors at a premium versus in-sourcing these products at our own facilities and controlling our own destiny, right? So we'd rather give up a little bit of that, and basically drive our own strategy internally and control our own destiny at the same time..

Great. Thank you.

And if I could just switch gears to the Honduran election quickly, how much of the drag in quarter was sort of preemptive security type measures that you and the team took, given what was happening versus other factors that perhaps we should think about that created the drag?.

There weren't really security issues, it was more a demonstration like they blocked the bridge, people couldn't get to work, there was traffic.

I think it was more downtime because people couldn't get to work versus really a risk of security, because when the OAS opposition have demonstrations on the street basically, it was just basically having a strike day, you know what I mean and so people didn't go to work and we lost work time which reflected in a negative impact on our earnings..

Yeah, Kenric, I called it out in my remarks, right? We have the $0.03 impact that we took into our EPS in the fourth quarter. As Glenn said, a lot of it was on the cost side. Obviously, we had downtime and that has constrained availability as we roll into the first quarter, and we call that out as an impact on our sales.

So, we have cost, we have some sales impact. Ultimately, we'll catch that up though. And we'll have a little bit of residual cost flowing through in the first quarter as well..

Great. Just want to confirm the basis. Thanks. I'll pass the line..

Thank you..

Our next question comes from Sabahat Khan from RBC Capital Markets. Please go ahead..

Thanks.

Just wanted a little bit more clarity on when you talk about socks and the branded segment, is there any potential to maybe deemphasize any of the other categories or are you still pursuing a full branded strategy like underwear, T-shirts, any of that product?.

No, we're still pursuing our strategy. I mean we just listed our products on Amazon, our full underwear line. If you look and go online with Amazon, we have a very good placement. Our sales are very strong. Our underwear business is up over 35% last quarter. Our market share continues to grow. So look, we're comfortable with our positioning.

We're committed to continue driving our brand strategy.

In fact, by merging and our realignment now we can really look at how we're going to continue to sell the other brands that we think are very strong that could be sold to consumers like our Comfort Colors brand, for example, which The Wall Street Journal chose as the number one best T-shirt in the United States, right? So the thing is that we're focused on a go-to-market strategy, we have a whole portfolio of brands as a company and we will combine that selectively with an opportunity if we see at mass with the private label particularly in the active area.

But we're still committed to driving our strategy and we think that we're well positioned. And at the same time, we're a company that never stands still. We're always ahead of the curve. We've always made the right investments.

I mean the one thing I think that maybe is overshadowing a little bit of negative sock sales that were not marginal to our business is the performance we had in our Printwear business. Our Printwear business has got strong organic growth. That organic growth is – it didn't happen by itself.

That organic growth happened because I said on the previous call last time is that the company is constantly investing for the future and that's really the key with, I think, with Gildan is that we're also anticipating where the future will be and what with the investments we made in terms of developing our fashion basic business, starting off with our Comfort Colors acquisition, our Anvil realignment, building up our Alstyle to give us the distribution capabilities in the West Coast, our American Apparel acquisition we made this year and even the launch of our new Hammer tee, which is going to blow the market away.

All these things are driving sales for the company and reinvigorating our Printwear business with strong organic growth, not just in the U.S. but international markets. And we have a whole brand of portfolio that they can continue driving not just this segment, but all of our segments.

So, this strategy for us is just another way for us to continue developing the business.

Our focus is on alignments and our focus is on building distribution capabilities for e-commerce to support not just our North American markets but also our international markets as well so that we can keep driving a global presence of all of our brands and then one go-to-market strategy that'd be more effective and give better return to our shareholders..

Thanks. And then as we think about increased emphasis on private label, is there any other categories you're considering besides socks and then just maybe a continuation of that? How should we think about the margin profile of that branded business? I mean you have the additional private label but then you've also taken out some costs.

Where do you kind of expect margins to trend overall?.

Well, we had a pretty big increase this year in operating margin just because of the way that we've taken cost out of the system. I think that's the first thing you have to understand.

So, we think that, look, we're in a position and we're going to look at our business holistically, we're going to leverage all of our distribution capabilities to better serve our overall business and we're definitely looking forward to margin expansion as a company. We're not happy with the results we had in branded.

I mean the margins were not based on our expectations. You can see where we've and what we've been able to deliver in Printwear. Our overall business should be margining similar to what our Printwear business. We said that all along.

So ultimately, whatever we will sell to our retail partners as we go forward in the future, our objective is to continue developing stronger operating margins as a company and we'll do that by running more effectively, more efficiently and more focused..

Thank you..

Our next question comes from Martin Landry from GMP Securities. Please go ahead..

Hi. Good morning. First question, just wanted to understand a little bit better the private label strategy because it seems to me that you've been trying to exit some of the private label programs for the last two years to three years. And now, if I hear you correctly you want to go back into private label program.

Just want to understand how different will the business you're going to enter now and it will be versus what the business you've been exiting for the last two years to three years?.

Well, what we've exited in the last couple of years was strictly socks. So we had a pretty large private label sock business and that business has shrunk over the years. And obviously, it's an area where we felt that we couldn't get economic returns. And as we developed our business, we've lost some of that private label, but we also grew other areas.

We're growing our underwear business. We're growing our GLB partnership with our customers that allowed us to sell premium socks. We internalized a lot of our production from our Gold Toe. We purchased Peds, which is a premium product.

So that's really what we've been able to do is we're able to divest ourselves to somewhat a private label that didn't make marginal sense for us to operate and it's particularly in socks.

So really when we look at private label in general, I would say that regardless of whatever category it is, look, we have a manufacturing capacity, we're still expanding our capacity. We're bringing on Rio Nance 6, we're growing actually internally in Honduras and some of our other factories as well. We're going through some expansion plans.

We're bringing on our Mexico facility.

So look, our objective is just to if we have capacity available, we will fill this capacity providing that we can get big programs that are large in scale, very low SKUs, that will give us good returns on our investments, good margins and also allow us to deal with our partners on a brand and private label strategy so that we have a win-win scenario.

So we're open to creating shareholder value and driving top-line sales. And this could be even an opportunity bigger than what we had before because really there is no boundaries to enter now. I mean it's just a question of what we want to take and what fits our profile..

Okay.

And on your reorganization, just wondering how much savings you expect to get or to extract out of that realignment?.

Well, I think Rhod said that the savings were going to be – Rhod?.

Yeah.

So what I said in my remarks, Martin, was that we will definitely see savings, right? And you'll see it more pronounced in the back half than the front half because in the front half, we're reinvesting, right? We're reinvesting in e-commerce, we're reinvesting in distribution and so when you look at our overall SG&A profile, you'll really see it accelerate in the second half.

I said we're going to be down probably 100 basis points to 200 basis points and then that will roll through into 2019, right? So you will see a significant impact but upfront where we've got all of this investment that's going on.

We did some in the fourth quarter as we talked about – continue that in the first half and then you'll really see that benefit in the back half and through to the 2019..

So 100 basis points to 200 basis points that would be strictly from the realignment of your organizational structure?.

Correct..

Correct..

Okay..

And that will be for 2018. There could be additional in 2019 but that's specifically for 2018..

Okay.

And just one last one for me, your EPS guidance, does it include any stock buyback?.

The high end of the range..

Okay.

So almost 5%?.

Well, we've announced a 5% buyback and we've done 5% in the last couple of years, so..

Okay. Okay. Thank you..

Thank you..

Our next question comes from Vishal Shreedhar from National Bank. Please go ahead..

Hi. Thanks for taking my questions.

Just on the guidance, the EPS in particular the $1.80 to $1.90, you mentioned the buybacks but I was wondering what were the other significant drivers for the difference between the two numbers?.

So if you look at the overall guidance, so what we're expecting if we look at EPS for the year and Glenn talked about the strong outlook for our imprintables business, fashion basics, international, our underwear business, I mean all of those businesses are driving the top-line as we move through 2018.

On the costs side, obviously, we have some of those manufacturing inefficiencies coming through. We talked about that will be more prevalent in the first part of the year, but we'll also see cotton, right, obviously take a view on where cotton will be for the year.

So when you look at effectively our overall range, it's been driven by those factors, our SG&A and what we're doing from a consolidation and cost reduction perspective, I think we really well zeroed in on that part of our business and we'll be driving it and you'll really see it coming through.

So the upside $1.90 to the downside of the $1.80 is just the different assumptions on what we see ultimately on really what will be a strong, strong year on the imprintables side; on the Printwear side and then obviously we'll see where the cost structure comes out from a fiber perspective as we finish up the year..

Okay. Thanks for that color.

And just more of a strategic question here, when you look at the disruption that you called out on the, I guess, the former branded side where retailers are looking at brands in a different way and you talk about how consumers are changing the way they're looking at apparel and not necessarily navigating the channels the way they used to.

How does that impact the Printwear business? So for example, this traditional wholesaler dynamic, where you sell to them, can that be disintermediated or are there other comments that you may provide to your investors, which say, this is how Printwear is changing. Your color, appreciate it..

Well, the thing is, is that was growing the actual Printwear business, that's why POS is actually strong, because our traditional distributors have increased their reach to different end-users, you have a lot of people, resellers buying from distributors and selling them online.

You have companies like Vistaprint, for example, which you can call up, take a snapshot of your daughter for her birthday basically, send it in and three days later, you got 14 T-shirts for your daughter's birthday ready to go, so which never happened before.

So e-commerce indirectly is driving the Printwear market and allowing it to expand and increasing the horizons that the distribution of the – of our customers basically. So which obviously, we're a beneficiary of. So that's really what is a big driver in our area.

Probably one of the other things that we didn't mention is that one of the areas where, if you look at the Printwear market, I mean a large portion of sales in Printwear go to corporate promotional products which is basically we usually we say about 40% of the channel.

Tax reform is definitely helping, I guess, the promotional product side because corporations have much more money to spend this year. So I think that that's – which would (46:19) also given a big boost to POS in the Printwear area as well. So we have a lot of great things happening.

I think, in driving POS I mean we've had – I mean having this type of organic sales, we're having strong organic sales next year. So these are things that are driving the market and we think we can – we're well-positioned to take advantage of it..

Okay. And just a quick one here.

Would it be accurate to say in 2018 that the growth that we're seeing is predominantly coming from the former Printwear side and branded is negative?.

Well, branded is negative, yes.

Any answer (46:54)?.

Yeah, that's right.

Vishal, I mean if you look at the growth that is coming from the Printwear side, if you look at the former branded side, obviously, we're very excited about the things we're seeing on underwear and different parts of the business, but the sock business is down, right? If you look at 2017, you look at our sock business, it is down year over year about $70 million.

So that's driving negative growth in what would have been the branded business, and then obviously a strong growth is coming through in all of the other categories..

Okay.

And does your guidance in branded reflect pressure from the retailers as you maybe have to bid for new programs or existing programs at more competitive levels?.

No, I mean, I think our margins are expanding in branded. We basically – our business is strong in all the other areas, right? So I mean our underwear business is going to be up quite a bit the next year.

So we're very comfortable with the rest of our business, it's really basic socks in mass that were not marginal that overall to our overall earnings anyway so.

And that's really what's leading to the consolidation of our SG&A because we did a lot less distribution in SG&A to support that business really, to be honest with you, which is actually going to give us a big windfall in terms of our cost structure as we go forward..

Thanks, guys..

Our next question comes from Andrew Burns from D.A. Davidson. Please go ahead..

Good morning.

Understanding that we might have to wait until the Analyst Day for more details, but I wanted to get a sense of your vision for what a multi-branded e-commerce strategy looks like? How much you need to invest, the timeline for optimizing the strategy? And sort of how it interacts with both consumers as well as direct-to-screen printers? Thanks..

Hey, well, we've made the investments and that's one of the things that's happening right now is that during Q4 and during the first couple quarters of this year, we're actually putting in a lot of investment dollars for e-commerce in terms of capabilities, skill-set and distribution capability. So that's already in play right now.

And what we're doing is we're putting up a separate group basically that's supporting that e-commerce and we're going to run separate distribution centers that have the capability of shipping obviously the requirements that e-commerce requires, because – just to give you an idea, when you ship a sock to a retailer, you're shipping a bunch in a bag, let's say, call it like, three packs in an entry.

When you ship to e-commerce, you got to ship onesies and twosies at every single thing you do. So it's a little bit more complex and it's the same thing with apparel. When you're shipping apparel to an e-commerce like we are with our American Apparel, you got to basically ship one garment at a time and prep it and so forth.

So that distribution capabilities is now being in place.

We were third-partying a lot of it very ineffectively during the last couple of years and by making these investments now we'll have the ability to service better and drive more synergies and sales through our own distribution as well as drive it through the expertise we've been developing in the back office to support it..

Great. Thanks. And shifting gears, I was hoping you could spend a little more time on the balance of pricing and input costs and general inflation. It sounds like you have some initiatives in place.

Wasn't sure if that was enough to fully offset the inflation in raw materials over the course of the year or whether there is a lag or how to think about it that balance of the growth period? (50:50).

Yeah. So if you look at what we see from a price, from an inflation perspective, I mean full year we're projecting that our operating margins will be up as we probably finish the year, right? So that's the way you need to think about it.

From a gross margin perspective in the front-end of the year, we're seeing the impact of higher input costs, higher cotton costs, higher manufacturing costs. And then as you go to the back end of the year, that basically, I would say, we were able to push through that pressure.

From an SG&A perspective, we see SG&A up in the front – sort of in the first part of the year. As we said, we're reinvesting and then we obviously see all of those benefits coming through.

So when you look at it in total, we've got gross margin that's pretty balanced really when you get to the end of the year year-on-year and you see SG&A down and then you see operating margins up. So that's what really the way to think about the progression of our margins through the year.

With that input cost pressure more pronounced in the front half and then obviously we get back in balance as we move into the back half of the year..

Thanks and good luck..

Thank you..

Our next question comes from Jim Duffy from Stifel. Please go ahead..

Thank you. Good morning.

The strength that you saw in the fourth quarter in Printwear, is any of that a pull forward? Did you see distributor stock up ahead of anticipated pricing action or channel inventories in balance at this point as you enter 2018?.

The channel inventories are down 10% year-over-year at the end of Q4. So I mean basically that's all demand in the channel..

Great.

And then, Glenn, given the channel shift that you're seeing, have you explored opportunities to be a private label provider for some of the winning online players like Amazon?.

Look, we have a private label strategy, still our first focus is obviously to continue driving our brand strategy. If we provide any type of private label on a go-forward basis, it would be strictly for large volume, low SKU, partnership type scenarios that we can use our capacity. And so there's, we set a criteria for it.

So we're diagnostic of really of who it is. But I mean, it's got to be large scale volume really for us to probably justify running through our manufacturing..

And then just last one, if I may, tuck it (53:31) in, these shifts that you're seeing, they don't leave you off balance with any sort of channel or I'm sorry, manufacturing capacity that you would have to absorb, is that correct?.

No, we're running full out. In fact, we're short on capacity, right? I mean, we lost a little downtime at the end of last year. So our inventories are very tight. And we're going to the season tight at this time of the year, our business is very strong. So on the contrary, we've got pedal to the metal now.

We're making – we're flat out on every single part of our business right now in terms of manufacturing including socks..

Very good. Thank you, guys. See you next week..

Thank you..

Our next question comes from Omar Saad from Evercore. Please go ahead..

Hi, guys. Thank you very much. This is Westcott on for Omar. One question about your e-commerce business, as you kind of think about direct-to-consumer, how big that business can be and how you balance? I think you mentioned leveraging some other online platforms, Amazon, Zalando, Tmall.

How you balance building your own e-commerce versus leveraging some of those existing platforms. You might talk about it next week, but any broad color there would be great. Thank you..

Well, I think that one doesn't preclude from the other, right? So I mean, the beauty is that the surface, all those different channels within e-commerce really the key aspect is distribution, which is really what we're setting up right now.

So once you have the distribution capabilities in place to service, pick to the piece type product, small quantities really to service the omni-channel or direct to the consumer channel, really, we'll be in a position to decide where we want each product, each brand, some will be sold on both areas, some will be just sold through our direct-to-consumer.

But basically, we have the flexibility and building the infrastructure is the key. And that's what we're investing and now we're building that infrastructure not just for the U.S. but also for international markets as well. So American Apparel next year, I mean we started this year.

I mean it's on a small base but that thing is going to be up 500% next year. It's going to be big. So for us I mean we're making the right decisions and the question is what other products can we run through our channels basically and continue driving sales..

Great. Thank you very much. Appreciate it. See you next week..

Colette? Operator?.

Yeah. So next question comes from Keith Howlett from Desjardins Securities. Please go ahead..

Yes.

I have a question on marketing spend year-over-year 2018 versus 2017 as you readjust your emphasis in the branded area?.

Well, we're still going to continue investing in our brand. The bulk of our SG&A, our marketing spend might be slightly down but bulk of our savings are coming out from infrastructure, distribution and realignment..

And some of that marketing spend, Keith, may be redirected right from what we – the way we spent it before to more e-commerce, more online, more social media, all of those things. So it's a shift also in the way that we spend..

And in terms of the potential of activewear private label, does that create any issue with your global lifestyle brand business?.

No. I mean it's – not at all. The answer is no. And that business is doing quite well right now as well..

And then just on some of the brands within Branded as Doris and Peds, I'm just wondering if you can speak to if the issues are sort of broad-based or it's exclusive to certain of the brands and certain of the channels?.

No. All of our brands are doing well. I mean we're planning – Peds is going to be up slightly this year. I mean in general, our brands are doing pretty good. I mean Gold Toe, over the last couple of years, has had a little bit of a challenge in the department stores and specialty stores but we see that's stabilizing as we go forward into next year.

Under Armour brand is doing very well. So our brands are doing pretty good. I mean really if you look at branded this year, we have growth in most areas, but obviously we lost $70 million worth of private labels towards sock business which is primarily in our mass market basically.

So that's offsetting all that good news really, to be honest with you, and that's the way to look at it..

And just finally on your Gold Toe business, the dress socks are mostly outsourced manufacturing.

Is there some potential to move those to your own facility?.

There is if we choose to do it, but we have enough socks that we can in-source or have in-sourced that will fill the capacity up of the traditional type socks that we make today that are more knit socks, for example. And that's including Gold Toe, because Gold Toe also makes a lot of knit socks too, I mean as well.

So – but we basically have moved enough product from our in-sourcing to fill the capacity and run at full efficiency..

Thank you..

Our next question comes from Stephen MacLeod from BMO Capital Markets. Please go ahead..

Thank you. Good morning. I just had a question on the expected consolidation. Just strategically do you see – you've built a staple of brands on the Printwear side through acquisitions.

And do you see the opportunity for channel blend and marketing and cross-selling, is that kind of one of the key drivers for those consolidation?.

Well, that is the driver for the consolidation is just to make sure that we have a cohesive brand alignment basically and go-to-market strategy, really that's going to be the answer. So we have a variety of brands.

I mean the thing maybe a little bit of a branded that a lot of the brands were brand specific, I mean Peds or Gold Toe, I mean are really more of a sock brand. But if you look what we have in Printwear like Comfort Colors basically it's in a – it could be our lifestyle brand, our Anvil brand, our American Apparel brand.

These are brands that have much more opportunity in terms of leveraging the sales environment for them. So I think that that's really what we're trying to do is we just want to make sure that we're effective in how we go to market, where we want to place these brands, which channel distribution.

And then we'll basically – we think that we will be more effective in driving sales and managing these brands holistically with one group driving the strategy..

Okay. That's great. And then I noticed in your guidance there is no change to the tax rate. Historically, the branded business was being headquartered in the U.S.

I mean is there opportunity to move the tax rate lower? Do you expect to roll branded into the Barbados headquarters?.

Well, as we bring everything together, right, Mike runs his business out of Barbados. So we're basically putting it all under Mike's responsibility. He leads the overall business and so we'll take advantage of that as we do the consolidation..

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

And our next question comes from Sabahat Khan from RBC Capital Markets. Please go ahead..

Thanks. Just a quick follow-up on the CapEx. You have it going up a little bit next year.

Can you just maybe update us on when Rio Nance 6 is supposed to kick in and then are there plans still to open up that additional hub in Costa Rica?.

Well, Rio Nance 6 is going to start in Q2 of this year and be ramped up accordingly and it's progressing very well and maybe just to point out for Rio Nance 6, again, it's probably one of the more strategic investments we've made in textiles. It's going to be the largest fashion factory in the hemisphere.

I mean the capacity of Rio Nance 6 will probably be greater than the whole hemisphere in terms of the type of product that it's going to make. So it's going to be something quite unique and I think it's going to be very important for us to continue driving where we see the market opportunity in the segments which is driving the market.

So we're very excited about Rio Nance 6. We're also expanding Rio Nance 1, Rio Nance 5, Rio Nance 2, we're putting incremental equipment in these plants because we've – that's what we do. We look at ways to expand our existing footprint to lower our cost, and we have a lot of room still to expand Mexico.

So right now, we're not planning to push forward into Costa Rica, and we're also expanding our facility in Bangladesh to support our Asian business. We went through one big expansion last year, and we're about to start another big expansion in Bangladesh as we see great sales in our international especially in Asia, Japan, Australia.

So, I think that overall, we're still adding capacity. I mean, I think one thing we are doing other than Rio Nance 6, the capacity that we will be adding will definitely be at the low cost curve.

So we're going to have incremental capacity in all of our facilities which will allow us to reduce our costs and minimize our CapEx really and get better returns on our capital..

Thank you..

I will now turn the call back to Sophie Argiriou for closing comments..

Thank you. Again, I thank all of you for joining us this morning. This concludes our call and we look forward to seeing you in New York. Thank you and have a great day..

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