Welcome to the Q4 2018 Gildan Activewear Earnings Conference Call. My name is John, 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. [Operator Instructions]. Please note the conference is being recorded.

And now, I’ll turn the call over to Sophie Argiriou..

Thank you, John. Good morning and thank you for joining us. This morning we issued a press release announcing our earnings results for the fourth quarter and full year of 2018.

The Company’s management's discussion and analysis and consolidated financial statements are expected to be filed with the Canadian Securities and regulatory authorities and the U.S. Securities Commission tomorrow, Friday, the 22nd of February and will be available on our website.

With me on the call today, we have Glenn Chamandy, our President and Chief Executive Officer; and Rhod Harries, our Executive Vice President and Chief Financial and Administrative Officer. Shortly, Rhod will be providing commentary on our results and our business outlook for 2019, after which a Q&A session will follow.

Today's conference call includes certain statements that 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..

Good morning, and thanks for joining the call. We’re pleased with the results we announced today. We delivered a strong Q4 with double-digit revenue in EPS growth and very strong free cash flow. We generated sales growth of 40%, adjusted EPS growth of 39% over last year and more than $250 million in free cash flow in the quarter.

For the full year total sales grew by 5.7%, adjusted EPS of a $1.86 was up 8.1% and free cash flow for 2018 totaled $429 million. During the year, we were pleased to return more than $460 million to our shareholders in the form of dividends and share buybacks.

And today, we also announced another 20% increase in our dividend, the seventh annual increase on a consecutive basis. And we renewed our share repurchase program to buyback another 5% of our outstanding stock. So overall, a strong performance in 2018 despite unanticipated headwinds; be a weather impacts or other disruptions to our supply chain.

We were able to navigate through these challenges while driving strong revenue growth, absorbing unanticipated cost pressures and delivering on our objectives.

We were able to execute on our initiatives related to our organizational realignment to better leverage our go-to-market strategy and drive increase operational efficiencies across the organization.

We drove strong SG&A leverage in the year beating our target despite investments in enhancing our distribution and e-commerce capabilities during the first half of 2018. In the fourth quarter alone, SG&A expenses as a percentage of sales were down 300 basis points, translating to a 100 basis point improvement for the full year versus 2017.

And in the fourth quarter, we also started to take actions on the manufacturing side which I’ll cover later in my remark. Finally, before moving to the details for the quarter, I just want to quickly highlight performance against the key metric which we follow closely inside Gildan. Return on net assets or as we call it RONA.

This is a metric that our management team uses as its North Star [ph] which help, guide our business decisions, how we use capital and how we operate to create long-term value. And we’re seeing our focus payoff and our results underscore the progress we're making overtime. Our RONA continues on an upward trajectory.

In 2018 we generated RONA of 15.6%, which was up 70 basis points from 14.9% in 2017 and up a 150 basis points from two years ago continuing to position us well to deliver strong shareholder value over the long-term. Now, let me take you through the details of our results for the fourth quarter and then on to our outlook for 2019.

We generate sales of $743 million in the fourth quarter, up 13.6% over last year driven by strong performance in activewear where sales in the quarter totaled $569 million and we’re up 22% over the prior year quarter. The strong performance in activewear came from volume growth, a richer product mix and higher net selling prices.

We saw higher activewear volumes in all markets both within imprintables products and products sold within the retail channel into our global lifestyle brand customers. Sales in the retail channel included private label activewear. A strong momentum we've seen internationally continued into the fourth quarter with activewear volumes are close to 30%.

Our sales in the hosiery and underwear category as expected were down about $50 million for the quarter mainly due to lower Gildan branded sock sales and lower replenishment level of Gildan branded underwear in the mass channel.

Partly offsetting these impacts was the rollout of one of our new private-label underwear programs which shift in the fourth quarter as well as continued strong growth of e-commerce sales of Gildan branded underwear. More broadly for e-commerce, our sales in the quarter were up strong double-digits.

Moving on to margins, overall, our operating margin performance for the quarter was strong with operating margins of 13.5%, up 230 basis points from the fourth quarter last year.

Although gross margin of 26.3% in the quarter came in lower than we expected and was down 80 basis points compared to last year, a pressure on gross margin was more than offset by the stronger leverage we gained in SG&A.

The decrease in gross margin over last year was due to expected higher raw material and other input cost, activewear growth ramp-up costs and the flow-through of supply chain disruption cost we saw early earlier in the year. These impacts offset the benefit of higher net selling price and product mix.

Although product mix was strong in the quarter adding about 140 basis points to gross margin over last year. It came in about 100 basis points lighter than we expected.

SG&A expenses were down 300 basis points to 12.9% as a percentage of sales from last year’s levels as anticipated cost reductions from our organizational consolidation came in better than planned.

For the second half of 2018, SG&A expenses as a percentage of sales reflected a 220 basis point improvement, well above the 100 to 200 basis points that we were targeting and guided to for the second half of the year. Overall, we were extremely pleased with the progress we made in 2018 on our organization realignment.

During 2018, we combine two separate business divisions into one front end of organization and we streamline various administrative marketing and merchandising functions. We’ve reconfigured our warehouse distribution network.

We open two new distribution centers and we consolidated a number of smaller warehouses, some of which we were acquired as part of tax [ph] business acquisitions. And we also made significant progress with common IT platforms across our distribution system, so, strong progress overall which we plan to continue to build on in 2019.

So summing up our earnings performance, we delivered adjusted diluted EPS of $0.43 for the fourth quarter in line with our guidance and up 39% over last year, driven by the increase in adjusted operating income and the benefit of a lower share account offset in part by higher financial and income tax expenses.

Moving to free cash flow; as I said at the beginning of my remarks, Q4 was a strong quarter for cash generation. Free cash flow totaled $252 million, up $87 million from last year due to higher earnings, more favorable working capital changes and slightly lower capital expenditures for the quarter compared Q4 last year.

This brought our total free cash flow for the full year at $429 million beating our latest guidance of free cash flow of $400 million to $425 million. Total capital expenditures for the fourth quarter were $26 million and a $125 million for the full year in line with guidance.

The expenditures were for textile capacity, sewing expansion, distribution and IT investments. Under our share repurchase program we brought back approximately 665,000 shares in the fourth quarter.

For the full year we repurchase a total of approximately 12.6 million shares for a total cost of $308 million, and our board just approved the renewal of the share repurchase program, buyback another 5% of our current share base.

At the end of the year, our net debt stood at $622 million or one-time adjusted EBITDA for 2018 in line with our target leverage framework.

Turning to our outlook for 2019, we're initiating guidance of adjusted diluted EPS in the range of $2 to $2.10 compared to $1.86 in 2018, which is the midpoint of our guidance represents adjusted diluted EPS growth of 10% over 2018.

Our earnings guidance assumes the benefit of sales growth in the mid single-digit range, cost benefits for supply chain initiatives, SG&A leverage and the impact of share repurchases.

We expect to generate higher sales by driving increased unit sales in our growth areas including fashion basics, international markets, global lifestyle brands and with our new private-label programs particularly in underwear.

Offsetting some of the benefit of these factors are projected lower activewear basics and sock sales and a negative impact from foreign exchange.

Adjusted EBITDA for 2019 is expected to be about $630 million and we’re projecting to generate free cash flow in the range of $350 million to $400 million after projected capital expenditures of approximately $125 million for the year.

We estimate the restructuring and acquisition-related charges will be approximately $20 million in 2019 related to supply chain initiates. And finally, our tax rate in 2019 is expected to be approximately 4%.

As we discussed in our last call, raw material costs are expected to be higher compared to last year, meaningfully higher in the first half and slightly higher in the second half. Adding to this increase will be the impact of inflationary pressure on other input expenses including labor, dyes and chemical, energy and transportation cost.

Despite these costs pressure we are targeting to maintain gross margin in 2019 in line with the prior level. We have various leverage to maintain our gross margin including projected higher net selling prices and anticipated more favorable product mix.

In addition, we expect to generate cost reductions from our initiatives to drive increased efficiency from our manufacturing operations, which we expect to have a larger impact on our cost of good sold as we move to the latter part of the year.

Specifically during the fourth quarter in 2018, we began implementing supply chain initiatives to streamline some of our textile and sock production capacity in an effort to drive increased operational efficiency across our manufacturing base.

We consolidated the textile production at the AKH facility in Honduras which was the facility that came as part of the Anvil acquisition in 2012. This facility was in a different location outside of our large Rio Nance complex where all of our textile and sock product in Honduras is located.

You may recall, we were producing much of our fashion basics performance products in AKH.

With the ramp up of our new Rio Nance 6 facility which began production towards the end of the second quarter in 2018 and which is set up for fashion basics production we felt we could enhance efficiency levels by integrating the production from AKH into this facility.

In addition during the fourth quarter we consolidated the majority of our sock production in Honduras into one facility, the Rio Nance 4 facility where we are focusing on high value added high return product. Rio Nance 3 which was another sock facility is now largely focusing on our garment dyeing operations.

Overall these initiatives are expected to generate increased efficiency in manufacturing and resulting cost reductions which are expect to start flowing through in the latter part of 2019 and continue to benefit gross margins in 2020.

While, moving fast on manufacturing we’re not finished with SG&A improvements and we plan to make further progress in 2019% as a percentage of sales over 2018 levels.

Reportedly, after offsetting significant first half raw material pressures we expect our full year operating margin in 2019 to be slightly higher compared to 2018 and to be well-positioned for further improvement as we move into 2020.

Now let me provide some color on our expected quarterly performance in 2019, so you can see how we expect to deliver during the year. We are projecting adjusted diluted EPS in the first half of the year to be down compared to the first half of 2018, while strong growth in adjusted EPS is expected from the second half of the year.

For the first quarter of 2019, we expect adjusted EPS in the range of $0.24 to $0.26, down from $0.34 in the first quarter of 2018, largely because we’re projecting sales in the first quarter to be down in the mid to high single-digit range, combined with significant headwind from higher raw material and other input cost compared to the first quarter of 2018.

We expect lower imprintable sales in the first quarter of 2019 as we do not anticipate the same level of distributor restocking that occurred in the first quarter of 2018. In advance, the price increased which was implemented late in the first quarter of last year.

We’re also projecting overall sales in the hosiery and underwear category to be down in the first quarter of 2019.

The expected decline relates to the non-recurrence of Gildan sock sales in mass which was shift in the first quarter of last year and unanticipated lower Galdin mens underwear sales ahead of the plan rollout of our new private-label mens underwear program in the mass channel, which is expected to shift during the second and third quarters of 2019.

As these impact in sales normalized we expect to return the sales growth in the second quarter and the remaining quarters of the year and overall deliver our full year sales guidance of mid single-digit growth.

One more factor weighing on sales in 2019, the impact of foreign exchange which is currently expected to be more meaningful in the first half of 2019.

So to wrap up, we are pleased with the performance we delivered in 2018 and our outlook for 2019 call for another year of delivering results fully in line with our long-term targets of mid single-digit sales growth and high single-digit to low double digit EPS growth with strong returns on invested capital.

Further, we are excited about our competitive positioning and plans, and we will be holding our 2019 Investor Conference in Honduras this year in November where the Gildan management team will discuss how we are capitalizing on faster growth areas of imprintables particularly fashion basics and international markets taking advantage of retail opportunities, private-label offerings, gain share and how we're growing with our global lifestyle brand partners.

We’ll also show you how we're leveraging Rio Nance 6. Discuss how we are driving manufacturing efficiencies across our global manufacturing system, as well as our future capacity expansion plan. Finally, we will provide updates on our SG&A initiatives and how this positions us well to service our markets on a go forward basis.

We’ll get this specific data out to you as soon as possible and we look forward to seeing everyone at our facilities later in the year. That ends my remarks and thank you. 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 get everyone the opportunity to ask a question. Then as time permit, we’ll circle back for a second round of questions. I’ll now turn the call over to the operator to start the Q&A session.

John?.

Thank you. We’ll now begin the question and answer session. [Operator Instructions] And our first question is from Heather Balsky from Bank of America Merrill Lynch..

Hi. Thank you. Good morning.

I was hoping you could first clarify the product mix in terms of gross margin this quarter, what happened? And I guess why have been more positive outlook into next year? And then, second question, just your visibility around the private-label underwear rollout next year or this year I guess, how much visibility do you have around orders going into 2Q and 3Q? Thanks..

Okay. Regarding the mix, as you look at, we’re -- our core business is on plan. I mean, we exceed our sales little bit, but we also sold off a lot of inventory that is not go forward like Gildan sock that use to be mass. We sold lot of those products. We gone ahead of the Mossy Oak brand license that we had.

So, mainly the culprit of that is products that were not going forward that we’ve moved into the channel really. And as far as the as the underwear, I mean, right now we’re projecting, we have a good projection of growth in underwear for next year.

We see our underwear growth being pretty significantly up based on the two new private label program, underwear programs with the team [ph] and we’re preparing to shift those programs in the beginning of Q1. It should start shipping in Q4 and the new big one will be start shipping in inside the floor and warehouses in Q2..

Great. Thanks you..

Our next question is from Sabahat Khan from RBC Capital Markets..

Thanks. Just in terms of the follow-up on the private label.

Are you able to comment on how much private label sales are built into kind of your 2019 guide? And how you think that program maybe ramps up in terms of – do you really need to get to scale with some of these customers for it to be really kind of accretive to you? Or how you see the playing out over the course of the year and how big it is this year?.

Well, look, we said in our last call that we’re expanding our space in mass because it is private label program.

One of the reasons where I think we have this program is because we’re capable of producing scale, really we just – we dealt with our manufacturing volume of our Gildan brand and put in private label, some of the products are really been a feature. So, we’re geared up to be able to and running at full speed to build to support this.

But we don’t any issues and we’re expecting to have pretty significant increased in underwear sales in 2019..

All right. Thanks. And then just in terms of the ramp up of American Apparel.

Can you maybe provide an update on what the outlook for this year is and where the growth areas for that brand might be?.

We have a look at – we’re excited, I mean, it’s one of the big contributors to driving our fashion basics business in all of our markets, in the U.S. as well as international. We’ve roll the brands – brand out international in every single market. We’ve expanded the distribution.

We’re in Europe, Japan, Australia, moving into China, so we’ve got really good distribution and we’re supporting that also from a direct-to-consumers perspective where we're selling the brand over 225 countries. So it's a main driver of our e-commerce growth and we think we're going to continue to see continued growth.

We're just getting going, because one of the things that I think as far as we're concerned is that, there was a big delay from the time that we bought the brand and really got into market and built the distribution. And we're seeing continued U.S. growth and accelerated U.S.

growth as we go forward and we're really achieve our objectives of accelerating the 100 million that we set forth. So we're very excited about it and we continue to see the growth of the brand..

Sorry, the 100 million you referring to that was run rate that exiting last year?.

Yes. This 2018..

Yes. Okay. Thank you..

Our next question is from Vishal Shreedhar from National Bank..

Hi. Thanks for taking my questions. Just on the global lifestyle brand.

So, did I hear correctly that you've exited Mossy Oak?.

Well, Mossy Oak was not a global lifestyle brand. Mossy Oak was a license that we had for the mass market. So primarily it was sold in dollar chain and in mass Wal-Mart so forth, so we existed that brand..

Right, right. Okay. It’s the license brand.

So, and in the India in the materials, you indicated growth in the global lifestyle brands, that's correct in 2019?.

Yes..

Okay.

So how should investor think about the pending losses or potential losses in the former branded segment versus the private label business which is gaining traction? Is that a net gain in 2019 or do you think there could be more losses perhaps Gold Toe or something like that?.

No, no. We’re -- our sales are growing and at the end of the day, we’re offsetting losses whether in underwear business is going. I mean, our sock business is projected to be a little bit down next year. But that's primarily because of the discontinued of some of these low end mass market programs.

We have a net-net, you're going to see growth because underwear is going to be steadily growing. We’re growing and our GOB [ph] business which is really providing active products; T-shirts, sweatshirts, socks, the global lifestyle brands. So we have growth everywhere. I mean we're well-positioned.

I mean, our fashion basics continue to grow where I think we're well-positioned which is driving top line sales from better mix, American Apparel, Comfort Color and all of our brands are really doing well.

International growth is really a 30% of growth in international markets driven by our brand strategy and still a long way to go in all these markets. We're going to continue to leverage our large private label programs. We're just getting going.

If you look at – if you walk into any of these retailers today the amount of private label that is being enhanced in their stores is continuing to grow. So that's a phenomenon that we think this still big opportunity for us and we're going to continue to drive it. We have new programs for this year in private label that will be a benefit to our sales.

So, as far as our legacy business which is our Gildan brand and our Gold Toe, our Under Armour, these businesses are still growing outside of what we lost in underwear at Gildan, I mean, we’re actually doing very well in the e-commerce today. And our Gildan brand even in retail is still a significant brand.

We have retail dollars probably closest to the $400 million in revenue. So it's still relatively big.

And we're continuing to see a big of sales in e-commerce and one of the things we did this year is really with alignment and we said in 2018 we invested in the first half of the year significantly a distribution in e-commerce expense and that's paying off for us basically to support sales and these other activities.

So, we feel we're very comfortable and we have a very good platform of growing in all these segments that we'll continue to drive our mid single-digit growth as we go forward into the future..

Okay. Thanks for that color. And on -- in terms of the -- just shifting gears here. In terms of the acquisition strategy in the past Gildan would acquire Peds or Gold Toe or – I’m talking about the long term here.

Is acquisition strategy the same or should investors think differently now given the shift to private label?.

No. I think look at -- we're not giving up on our brand strategy. We're basically taking advantage of the opportunity of the shift in the retail market into private label. So, we think the brick and mortar is going to continue to drive private label.

And if you walk into the amount of mass big retailers you'll see that the floors have completely changed. So we don't want to fight city hall. We want to take advantage of that and really take and enhance our sales opportunity because it fits our criteria where it's large scale big volume type programs.

But we're continuing to look at driving our other brands as well. So we’re not giving up on that. And as far as the acquisition strategy, look, our acquisition strategy is a priority of our use of cash. And right now we've sort of focusing on our business realignment and getting our housing order before we really want to do another acquisition.

But all the acquisitions that we've made so far in the last two years be it Comfort Colors, American Apparel, I mean these acquisitions were strategic really to growing our fashion basics business which is really the driving part of our sales today. So, we're not going to stop looking at ways, so we can continue to drive our sales.

We think there's other things out there that we can acquire that would make sense to bold-on type acquisitions, but it just a question of timing.

And we have a lot of momentum right now to be able to drive top line sales basically as much more creative obviously do it organically at the same time allowing to get our housing order and we have a lot of manufacturing efficiencies that we see going forward.

I mean, we think that we're going to protect that all of these new manufacturing efficiencies 150 to 200 basis margin improvement that will flow through the end of this year going into next year.

We still got more on SG&A leverage that we're going to have which is we’ve seen SG&A leverage in the back half of this year, but into 2019 we’ll have more and we’ll more SG&A leverage in 2020 and our objective is to get our SG&A probably close or down to the 12% as a percentage of sales.

So, all of these things I think is where we're going today and we'll not lose sight of acquisitions. We're not planning really for as being 2019 phenomena. But as we go through 2019 I think we'll be in a position to relook at our acquisition criteria as we move into 2020 and that's still our first use of cash as we go forward..

Thank you..

Our next question is from Kenric Tyghe from Raymond James..

Thank you and good morning.

Could you speak to the acreage facility closure, specifically to the timing, and also just the relative manufacturing efficiencies of the move to Rio Nance 6? And then just a follow-up to the first question on Rio Nance 6, can you tell us where you are in the ramp up and what your 2019 exit is expected to be at that facility -- extra capacity of that facility, sorry?.

Okay. So look at the Rio Nance 6 facility just going back to the Rhod’s comments, we bought that plant [Indiscernible] The annual acquisition in 2012 and what we always told investors that our manufacturing strength is really in our textile. So that plant really never had a cost structure relative to anything close to what we do it Rio Nance.

Although we did a capacity we always kept it going and as we made the transition into some performance and fashion we utilize the plant, but there's a huge synergy for us obviously to move the plant into our park.

And that's one of the reasons why we're going to get a bigger lift and we think in terms of cost structure as we as we close it down and move it. So, it was always in our back of our mind because it sort of was an orphan child in another park.

And so, we think that that's going to benefit us and allow us to have better access and better opportunities developing more products and that also is a little bit further away for us to from our management team at the same time. So all of those things combined and make sense for us. And Rio Nance 6 is ramping up quickly.

It's almost 50% ramped up as we speak today and it will be probably in the 80% ramped up in November when everybody comes to visit that facility. It's very impressive. It's our largest facility and is performing very well and we're very excited to show up in November..

Great. Thanks, Glenn.

And then, if I just switch gears to pricing given the input cost pressures; does your guide include further pricing in there, and if so is that pricing fully baked into your guidance at the midpoint?.

Well, we've taken a price increase that I think is already better than guidance and price will be representing about 2% of our -- from a revenue perspective will be priced and then obviously that's what's baked in which will be offset by other factors.

But we definitely -- I think we've covered what we feel is the input cost with the price increasing. First quarter obviously, we'll have a lot higher cost in the first quarter. We’re on the second quarter but net net for the full year I think we cover the price and costs are to be somewhat in balance we think through the year..

Great. Thanks, Glenn. I'll leave it there..

Our next question is from Mark Petrie from CIBC..

Yes. Good morning.

Actually just wanted to follow-up on that with specific -- specifically around the imprintables business; and wonder if you can just talk about the volume growth that you saw in Q4? And then what your assumptions are for 2019? And I guess any color you can provide specifically on basics and fashion basics would be helpful?.

Look, I mean, we're planning for mid single-digit growth rates, so I think that's a fair statement. And that's could be a combination with a little high double digit growth in international markets and good growth in our North American markets. That's how you maybe need to look at it. And look at fashion basics, what's driving our market today.

I mean we are taking that market share and we think our market share last year went up probably around 10 basis points, so we’re doing quite well in the fashion side and we still have a lot of runway left to go.

But the basics before putting down the category is down, I mean, there's definitely been a shift to towards the fashion side which is obviously giving us a better mix, higher pricing and it's more lucrative to us, so we're okay with that.

But overall I would say that the mid single digits and a double digit growth for international markets is really a forecast for the Premier..

Okay.

And so, where do you estimate your market share is today in fashion basics and then in basic?.

I really don't want to say it, but because it's not public information, but look, we're driving our share pretty good and I think that we've got all the tools in place between the product lines that we've installed in our Gildan brand, our American Apparel, Comfort Colors, so we've got a lot of product that is out there in the marketplace and we're doing very well.

And if you look at our yarn-spinning for example and put this in perspective, we never made up, half of our yarn-spinning initiative that we made back in then we’ve asset of 400 million, large chunk of that is all built into ring-spinning yarn which is all new and that capacity is completely sold out and we’re buying another 50% today through for the vendors.

So we exceeded our expectations in terms of how much we would actually sell this category. So it's going very well for us..

Mark, the one thing I would add is that from a fashion basic perspective, I mean, we are big. The one thing you should understand right, we’re the biggest player in North America. So we’re not going to give you our market share but we are big and we're growing fast..

Okay.

And market share is stable and basics more or less?.

In basic T-shirts it's probably trending a little down. We're planning little down next year, but in fleece for example we're doing very well up here, very strong in fleece. But in the basic core dum dum T-shirts I would say we're trading a little bit down as people traded up to the fashion basics..

Yes. Okay. Thanks..

In unit volume, right..

Yes. Understood. And then I wanted to just ask about the free cash flow guidance. And Rod, maybe you could just give a bit more detail in terms of your assumptions there? Just given it's going to be down from 2018.

Is that just a matter of no divestitures or what's driving that really?.

No. Look, our free cash flow is going to be strong, right. And we have strong free cash flow. Last year we expect strong free cash flow this year.

I think one of the things that we're really doing as we move through the year is obviously we're taking care of 2019 and we've got a strong outlook, but we're also making sure that we're going to be in a very good inventory position as we finish the year and as we move into 2020.

So what you're seeing really in free cash flow is strong base free cash flow coming from the business, CapEx about the same as we said last year. And then, we're building inventory as we move to the end of the year. So overall, we feel very good about our free cash flow..

Okay. Thanks.

And then sorry I just want to squeeze in one more which is beyond the two private label under our contracts that you've already secured and you talked about what does the landscape look like in terms of additional contracts and how competitive is sort of the process to be bidding for those deals?.

You know, it sounds like anything else, the whole world is competitive, right. So, I mean it was always your position to be the global low cost manufacturer and we should get a competitive advantage, right. So that's where we're position. But I think that it still takes time to get these programs and that was [Indiscernible].

It's a matter of working, looking for the opportunities to building, having the right relationship. So we're continuing to grow. We have new programs that will be attending this year that will support obviously our growth this year but also will support growth into next year as well.

So, we're going to continue to drive and obtain as many programs we had and we share that, we take all these moving pieces together, the mid single digit growth is a very real listing strategy for us and which was right, low double digit EPS growth I mean over the next couple of years.

If you take the continued basic -- continued penetration of our fashion basics, our expansion of our international, our private label that as well as lifting our GOP brands and relationships, our e-commerce through growth with the brand portfolio we have, and all these things work together.

So, there's not one big order or one big thing that's going to happen. Is just we have so many road drivers in the company that we feel very comfortable delivering mid single digit growth and low double digit EPS growth over the years to come..

Okay. Thanks for that..

Our next question is from Omar Saad from Evercore..

Hi. Thank you for taking my question. I wanted to see if you could give a little bit more color around the 1Q sales guidance.

Help us understand the dynamic there? I think last year there was a price increase that called some costs and pull forward, but it's hard to tease out in the reporting what the impact is? And maybe if you give us an idea what the kind of 1Q underlying sales trajectory is if you didn't have that dynamic underneath?.

Yes, Omar, so if you look at the first quarter, I mean, we've said, it's down mid to high single digit and we call that the fact that we do see lower restocking in printwear in the first quarter, right. So if you look last year in 2018, we had a late quarter price increase and that drove a lot of restocking in the first quarter last year.

This year we don't see that, right? And that impact if you were actually trying and get your arms around it’s probably about 50 million. Okay? Then, if you go into underwear and hosiery and you look at that category, we talked about what's going on in socks at mass.

And you look at the change over of the underwear program that's probably another let's say 15 million on top of that. Okay? And then FX we know also is going to be a little bit of a headwind 5 million.

So in fact if we add all that up, but then that's all offset also by our growth drivers, right, so you can't forget that our growth in fashion basics, our growth the GOP International is also offsetting some of that. So I think, you can get a sort of an idea of what's effectively impacting us in the first quarter.

But again, as we move out of the first quarter and then we'll back to normal and sort of normalized level of sales and we see that then flowing through the rest of the year to deliver that to mid single digit growth overall..

That's really helpful. And Glenn, would you mind sharing your kind of view on where we are in the kind of transition and that mix shift is being going on from more of the basics to the higher end more premium activewear, imprintables.

How long do you think this transition has been going on in the marketplace and then where do we're ending our way if so to speak? Thanks..

Well, it's looking at anything else people are looking for value in products. But I don't basics are going to go away because at the end of the day there's still the giveaway T-shirt, there's still the price point is important.

Basic T-shirt sell for a $1.80, $1.70 and you got fashion products are signed for the $3 and $4 range, so there's still going to be a definitely a continued demand for basics.

The end user still pays $20, $25 per T-shirts, so when you look at the cost associated and users as the people of that resell the product print and goes to retail stores et cetera, obviously as far as big incremental cost to the end user, let's say, samples of fashion, that's probably what's driving the opportunity.\\ But look at, we're diagnostics to be broadly honest with you.

We think that they’ll continue driving of fashion is giving us a better much higher pricing. It's actually a benefit to the organization. And we see the continued growth of this.

It's hard to say how big it will get, but it's irrelevant I think to us because we'll continue to position ourselves if you’ll take advantage of it and we're always – we got a big pipeline of innovation right now in our organization and looking to make sure that we continue and upgrading our products to support any changes in the market.

That's the strength of being a very integrated low cost manufacturer. We can adapt to the way the market's changing and take advantage of it as our share are return to our shareholders..

Thank you that's helpful..

Our next question is from Stephen MacLeod from BMO Capital Markets..

Thank you. Good morning. I just wanted to follow up on some of the commentary around gross margin.

Just Rhod, in your prepared remarks, did I understand correctly that you said gross margin came in about 100 basis points less than -- lower than expected?.

Yes. I mean, our gross margin – sorry, if you look at our gross margin for the quarter, right, we were down 80 basis points for Q4. Effectively, if you look at what was going on. Our mix came in a little bit lower than anticipated. Now our mix was strong. You have to understand that.

Our mix was up 140 basis points in the quarter, but it came in a little bit lower than we were expecting. Effectively, 1000 basis points, and Glen explained that earlier, right as to what was going on with some of the – in the hosiery sides, some of the products that we're moving out and also some closeouts.

So, not as strong as we were expecting but still very strong and we continue to see mix as we move through 2018 as being a driver of gross margin..

Okay. No, that's helpful. Thank you for clarifying that. And then just as you look to 2019, I mean, obviously it sounds as though you might see gross margin moving around through the year.

Could you talk a little bit about your confidence level into gross margin as you get into the back half of the year just with some of the things that are on the table? As most of that most improvement coming in from some of the manufacturing initiatives that you put into place?.

Yes. If you look at our confidence around gross margin overall that it's flat gross margin for the year. But effectively what you're going to see is it's going to build as we move to the back half of the year, right. So as effectively we get deeper into 2019 we'll see the benefit of price that Glenn talked about. Mix will be positive.

From a fiber perspective we've called it out. Its all you need to do is go and look at where fiber prices were effectively in 2018 and then you can see that impact in Q1 of this year in Q2. But then obviously as we move later in the year effectively that headwind really diminishes. We called out.

And then from a manufacturing cost perspective we've got effectively various things that are rolling through that are impacting us in the first quarter. But all of this work that we're doing with AKH, the consolidation work in the sock side, all of the efficiency that we're driving as we bring up Rio Nance 6, all of that then drives.

I would say a significant improvement in manufacturing costs particularly as we get in the back half, particularly as we move into Q4 and then really as we set up for 2020. So overall from a gross margin perspective it's a story that will evolve as we move through the year and we feel that we're going to be in a very strong place to finish 2019..

Okay. That's helpful. And then just one more if I could. Just on the private label rollout that is expected to come in Q2 and Q3.

Can you just talk a little bit about, I know you talked directly about on the last call, but just around the margin profile on a like-for-like basis when you swap out branded for private label? And then if that program rollout will be supported with marketing and is that something that is also contributed to by the retailer?.

Look, we – our margins are -- objective is to get those good margins period regardless of what product we're selling. I mean obviously that's our responsibility to create shareholder value.

But we you like we support all of our products and what Rhod alluded to before is we’re focus is making sure we're getting a good return on our RONA basically and that's one of the reasons why we're also focusing heavily on even our SG&A. So we're not really responsible for marketing and advertising despite little programs.

So, we're not going to spend again some. We are spending heavily against our own brand strategy like American Apparel and supporting our own brands, Gold Toe and so forth. But anything to this private label basically is supported by the retailers themselves..

Okay. That's helpful. Thank you, Glenn..

Our next question is from Martin Landry from GMP Securities..

Hi. Good morning.

I may have missed it, but I was wondering does your guidance include additional product wins at retail this year?.

Well, there maybe some more coming in, but we basically feel very comfortable with our mid single-digit growth number and like even in retail regardless of it's a private label or brand it really does. The cycle is quite long in order to obtain programs. So we have a lot of visibility way.

We see a program we have a couple of things that working on that could come in late in the year. But basically I think we’ve sort of laid our slate out in terms of the programs that we know we're going to have for this year..

Okay. And can you talk about e-commerce.

What are your expectations for e-commerce growth in 2019? What proportion of sales will e-commerce represent for 2019?.

Well, e-commerce is growing and it grew significantly in 2018. We're approaching basically about $100 million in sales and we think it's going to continue to grow..

And would that be that growth year of the year?.

Well, look, I really don’t want to say, but look, we’re -- we've invested heavily in supporting that. We're seeing good penetration. Our Gildan brand underwear is doing very very well in e-commerce today even though we’re not currently in brick and mortar. It continues to be one of the top selling brands today and some of our e-commerce sites.

Our American Apparel continues to grow. We're leveraging all of our brands today as we go forward into e-commerce. So we're -- I think we're got an infrastructure built for to sales, so it's going to continue to grow. I mean, we're looking for a good growth year.

Obviously, its still relatively on a small base, but at the end of the day it's embedded in our mid single digit growth in terms of what we're giving guidance to the market. So, I think that situation we have..

I think you can assume that the e-commerce is obviously double digit, right, strong double digit. So we had very strong growth in 2018. And as Glenn said, embedded in our overall mid single digit, but it's growing fast..

Okay. Okay. Thank you..

Our next question is from Brian Morrison from TD Securities..

Yes. Good morning. Rhod, maybe could you've touched upon a lot of things this morning, but in terms of the second half growth I think you're looking for EPS of about 20%. Maybe you could just summarize those key drivers? I think you have higher commodity costs. You've got the ongoing operational consolidation benefits, the insourcing of socks.

I think you said, P&L, our private label margins are a little bit better than the replacement of those in branded.

Can you maybe just summarize that? And are any other the key drivers that drive that growth in the second half?.

Look, I think you covered a lot of them, Brian, right. So, if you look at the second half we have the – obviously, we have the sales growth. We’ve called out effectively.

We've got all of these manufacturing improvements that we've talked about are driving through the system and we've got to talk about the fiber obviously and what happened in the second half. If you'll look at pricing there, obviously there year-over-year impact is much more minimal than what we're seeing in the first half.

From an SG&A perspective, we continue to drive SG&A initiatives through the organization. So we're leveraging SG&A and we're also driving improvements in SG&A. So, those are all of the fundamental drivers that are rolling through.

We spent a little bit of time on the call talking about private label and effectively the rollouts of our underwear programs and very definitely they're supporting us as we move into the back half. So all these areas, Brian, really are allowing us to deliver in H2 and again sets us up very well as we move out of the end of 2019..

And does that include an active share buyback in there as well?.

As we always do, right. When we effectively give you guidance for the full year in the upper end of the guidance range we always assume that we'll do share buyback..

Okay. And then one follow-up question, Glenn. A lot of talk on private label obviously. Maybe just talk about who your competition is, not necessarily by name, but maybe geographically? And then your key advantages I presume is cost structure, available capacity, geographic location.

What puts you in that beneficial position that you think you're going to continue to grow in that front?.

Well, most of the private label historically has been more on smaller items in the stores. So there’s really never been a large scale volume replenishment type program in private label and underwear because nobody has been able to really deliver that capacity, the cost structure, so forth and so forth.

So, I think that that's where we're really uniquely positioned a little bit.

Typically private label has been driven more on fashion items, seasonal products, things have been supported really by anywhere in the world that are in and out type scenarios, but really we’re the one of few people I think that will support big programs in private label and the types of products that we made which is your basic features with this private because of our cost position..

Thanks guys..

Our next question is from Jim Duffy from Stifel..

Thank you. Good morning. Hope you're all doing well. Can you guys please speak in more detail on the opportunities from the supply chain actions? Glenn, you mentioned 150 to 200 basis points margin opportunity.

What are the foundational elements of that improvement? It's simply reduction in overhead or are you expecting to get per unit throughput efficiencies?.

Per unit throughput efficiency and this is how we start with the two announcements we made obviously in the AKH in our socks. But what Rhod alluded to before is his own view restructuring is to be about $20 million and a lot of that will be other supply chain items which will help us to drive some of those synergies.

So we have a plan laid out right now that will drive our margins to 150 basis points. So lot of that will happen as we go into Q4, but really start driving over our 2020 opportunity hasn't flowed through our cost of goods sold and so forth..

So it sounds like you'll see maybe some of it in Q4, but maybe get that full benefit in 2020?.

Yes..

And then Rhod, are there any working capital opportunities with the supply chain actions?.

But I think from a working capital perspective we're always looking to optimize working capital, Jim, very definitely as that we manage our system. I think that was I call about earlier. As we as we move through the year, inventory is one of the things that we are focused on making sure we have good availability. We've got good support.

And we're really effectively building inventory to support our growth rates, right, and to support as we move into 2020. So you could be assured from a working capital perspective that we're always looking to optimize. We're always looking to drive efficiencies across the spectrum of our opportunities. And that's just ongoing, Jim.

And that's all baked into our forecast and our free cash flow outlook..

Great. Thank you..

Our next question is from Derek Dley from Canaccord Genuity..

Hi. This is Alex on the line here for Derek. Just a quick question on your international business, so the growth again internationally was strong during the quarter.

Just wonder if you could talk about what markets performed particularly well in Q4 and looking ahead in 2019 what markets are you particularly excited about?.

What we said, [Indiscernible] because we continue to growing all of our markets. Our largest market is Europe really which is the most mature. Obviously that continue grow. We continue to add products. We just launch our American Apparel in Europe last year – late last year. And our fastest growing market obviously is China.

And that's where we're really seeing the highest and fastest growth. I mean China is our third largest market today outside of Europe, so it's the U.S., China, as well U.S. Europe and then China basically so its outstrip which traditionally which was Canada. So we're continuing to see really good growth.

And we're also looking as if and I think one of the things that we're really focused on now too is how we're going to continue to support that international growth in the next big wave of manufacturing capacity for us is actually to look at how we're going to continue to leverage the opportunity in some of these markets .So that's really a real growth opportunity for us and we're just in the beginning stages really when you look at the obviously the demographics of the people and the opportunities that we have in these marketplaces..

Okay. Perfect. Thank you..

Thank you..

Our next question is from Keith Howlett from Desjardins..

I guess, wondering on your manufacturing network.

If we look forward to November when Rio Nance is up at about 80%, what sort of dollar value of capacity would you have still to utilize?.

Well, all together after we close AKH and not just we want Rio Nance 6. We did a major expansion in Rio Nance 5. We expanded Rio Nance 1 and we’re in the phase of actually doing some work in the Dominican Republic as well. So we're expanding in our existing facilities which obviously gives us the best cost reduction and best return on capital.

So overall today we probably have about additional $500 million of potential revenue on a go forward basis..

As of today..

Yes..

And then just in terms of Rio Nance 3 are you still presiding with insourcing Gold Toe sock production?.

We will source a lot over making today and our go forward sock manufacturing when you come you’ll see all high-end, high value products basically, so its Gold Toe, Under Armour, GOB sock, .basically things that are slow but premier, better quality products and that allow us to get very returns on capital. So, that’s really our focus in sock.

So we’ve refocus a large portion of the Rio Nance 3 facility to drive our garment dyeing processes, Comfort Colors has been very successful and you’ll be very impress when you come see how well and what we’ve done with this facility, but its turning good return basically and giving us very high margins supporting our garment dyeing processes for Comfort Colors print..

Thank you..

And our final question is from Sabahat Khan from RBC Capital Markets..

Thanks.

Just a quick follow-up, on the sock commentary from earlier, are you just saying that the decrease there is the annualization of some of the deals that since from last year? or is there something new in that the delisting side on sock?.

Yes. We’re existing one small program we had in the dollar chain, basically which is another one of our low margin sock programs. Basically, look, we need to sell products that give us good returns. And anything in the company’s, so we’re just not focusing on sales of just – we’ll really taken this part of this whole realignment.

We’ve taken a hard look at what products make sense to us. In sock when you look at some of these low volume, low price sock, I mean, the cost associated with the distribution, expense and et cetera, et cetera, just didn’t make sense.

So its part of whole realignment, maximizing our distribution, maximizing our manufacturing assets we have, we basically are going to exit anything that doesn’t make sense to us, which we’ve done in the large part of – a lot of other private label socks that we had they were going to mass.

So, we’ve – I think we’ve got to the point where sock will probably down next year around 40 million bucks, I’d say for example, all together and that’s probably – after that you probably see that its really will go forward, products that really will make sense for us from a rolled down margin and return on capital perspective..

Okay. Thanks you..

And we have no further questions at this time. And I’ll turn the call back over to Sophie Argiriou for final remarks..

Again, I'd like to thank everyone for joining us this morning. This concludes our call and we look forward to speaking to you soon. Have a great day..

Thank you, ladies and gentlemen. That concludes today's conference. Thank you for your participation. You may now disconnect..