Ladies and gentlemen, thank you for standing by and welcome to the Q4 2019 Gildan Activewear Earnings Conference Call. At this time, all participant lines are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to Sophie Argiriou. Please go ahead..

Thank you, Michelle. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued a press release announcing our results for the fourth quarter and the full year of 2019.

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, February 21, 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 momentary on the results for the quarter and also for our business outlook for 2020.

And as Michelle mentioned, afterwards, we’ll hold a Q&A session. 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 impact the company’s future results. And with that, I’ll turn the call over to Rhod..

Thank you, Sophie, and good morning, everyone. Fourth quarter net sales and adjusted EPS unfolded largely in line with the expectations we set at the end of October, with full year results for 2019 winding up with the most recent guidance we provided.

As we finish the year, we were pleased with the overall progress we made on our Back to Basics strategy during 2019. Staying focused on the execution of several optimization initiatives, to simplify our product portfolio, and remove complexity in manufacturing and distribution operations.

These actions are strengthening our competitive position as we drive to deliver growth and our gross margin and SG&A targets. If you recall, few years ago, we embarked on our Back to Basics plan to simplify our business and optimize operation, by removing complexities that have built up in our business over the years from various acquisitions.

We started to execute on our plans early in 2018, when we realigned our organizational structure and consolidated our business segments into one front-end sales and marketing organization; streamlining administrative, marketing and merchandizing functions; and consolidating certain warehouse distribution activities.

During 2019, we made further progress moving on various optimization and capacity expansion projects, including consolidating textile, hosiery and socks operations; while at the same time, ramping up our Rio Nance 6 textile facility in Honduras.

Thinking longer term, we also acquired land in Bangladesh during 2019 to support plans to significantly expand our capabilities there, which we believe will better position us to execute on growth opportunities going forward.

At the end of the fourth quarter, we decided to move forward with another initiative under our Back to Basics strategy to significantly reduce our imprintables product line, by exiting our ship-to-the-piece business, and discontinuing overlapping and less productive SKUs between brands, which we communicated we were considering when we reported third quarter results and discussed at our investor conference last November.

The ship-to-the-piece business is a much more fragmented smaller volume business, which does not fit with our high-volume large-scale imprintables franchise.

So on to this product line rationalization initiative, we recorded GAAP charges of $55 million in the fourth quarter, consisting of inventory write-down of approximately $48 million and a net $7 million reversal of gross profit in connection with the sales return allowance, which reduce sales by $19 million and cost of sales by $12 million in the quarter.

The sales return allowance relates to anticipated product returns associated with some of the SKUs we’re discontinuing and which we expect to take back from distributors in 2020. Now, let me take you through further details of our results in the fourth quarter.

Reported sales totaled $659 million, down 11% over the prior year quarter, due to a 15% decrease in activewear, where we generated $484 million of sales; while sales in the hosiery and underwear category of $175 million, were up slightly in the quarter.

The next sales decline was mainly volume driven and included the negative impact of the unprojected sales return allowance.

Before accounting for the sales allowance, total net sales generated in the fourth quarter amounted to approximately $678 million, essentially in line with our expectations, as the positive impact on sales of lower than anticipated levels of distributor inventory destocking of imprintables during the quarter was offset by the negative impact of weaker market demand in retail.

The decrease in activewear sales during the quarter was volume driven and a reflection of POS softness of imprintable activewear products, which we saw in the third quarter and which continued through the fourth quarter, combined with the distributor inventory destocking.

Imprintable activewear volume declines were partly offset by activewear sales volume increases within the retail channel and slightly higher shipments in international markets.

Sales in the hosiery and underwear category were up approximately $2 million in the quarter as strong double-digit sales volume growth of underwear, which also drove more favorable product mix was largely offset by lower socks sales.

Although demand from our men’s underwear in the total measured market as reported by NPD Retail Tracking service was down for the quarter, the strength of our underwear sales was driven by market-share gains mainly to our new private label men’s underwear program with our largest mass retail customer.

This program rolled out earlier this year and gained additional shelf space during the fourth quarter, as the mass retail customers started to further expand the program and adjust [doorsteps] [ph] to better positioned as private brand.

Finally, sales in hosiery were down in the fourth quarter, due primarily to the exit of socks programs in mass, compounded by lower year-over-year industry demand in this category according to NPD data.

Moving on to margins, excluding the $55 million charge related to our Back to Basics strategy, adjusted gross margin in the fourth quarter was 25.6%, down 70 basis points compared to 26.3% last year.

The decrease resulted primarily from higher royalty expenses related to sales volume requirements for licensed brand sales, which came in lower than planned and this expense negatively impacted adjusted gross margin by 50 basis points for the quarter. For 2020, our license agreement reflects lower volume thresholds.

In addition to higher royalty expenses, we also saw some pressure from higher manufacturing costs related to input cost.

Offsetting some of the gross margin pressure were cost savings stemming from manufacturing optimization initiatives, in which we will continue to see benefits roll through in 2020, as well as positive underwear product mix related to higher value underwear sales.

Our SG&A expenses for the fourth quarter was $76.5 million, down 17% from last year and as a percentage of sales, SG&A expenses were 11.6%, 80 basis points better than the prior year quarter. The improvement reflected lower compensation expenses as well as cost benefits resulting from our ongoing focus on SG&A rationalization.

Given our combined gross margin and SG&A performance, adjusted operating margin in the fourth quarter came in at 14.1%, up 60 basis points from 13.5% last year. Adjusted net earnings for the December quarter totaled $83.4 million or $0.41 per share and was down as we projected.

From adjusted net earnings of $88.9 million or $0.43 per share last year, a 4.7% decline in adjusted EPS was mainly due to lower sales in the quarter and a decrease in adjusted gross margin, offset in part by lower SG&A expenses. Turning to free cash flow.

For the quarter, we generated $241 million bringing full year free cash flow to $227 million in line with the guidance range of $200 million to $250 million we provided in October.

We spend approximately $21 million on CapEx in the quarter, bringing total capital investments for the year to approximately $140 million with the majority of the spending related to manufacturing capacity expansion projects.

We’ve repurchased approximately 4.7 million common shares in the fourth quarter for approximately $129 million, bringing our share repurchases under our buyback program in 2019 at 8.2 million shares at an overall cost of $257 million.

And lastly, our net debt on December 29, totaled $862 million, bringing our net debt to adjusted EBITDA leverage ratio to 1.6 times well within our year-end target leverage range of 1 to 2 times. This brings me to our guidance for 2020, which we initiated today.

We are projecting GAAP diluted EPS for $1.72 to $1.80, and adjusted diluted EPS of $1.85 to $1.95, and projected sales growth for the full year between 2% to 4%. Adjusted EBITDA is projected to be in the range of $580 million to $600 million.

We expect free cash flow of $325 million to $375 million and capital expenditures of approximately $125 million for the year, primarily focused on continued investments in manufacturing capacity expansion. Our income tax rate for the year is projected to be approximately 5%.

Overall projected sales in 2020 reflect expected growth across our 3 key focus areas of imprintables, retail brands, and private brands.

We’re projecting sales increases in both activewear, and the hosiery and underwear category driven by projected volume growth and favorable product mix, offset in part by anticipated unfavorable foreign exchange impact.

We expect growth in the hosiery and underwear sales category to be driven by projected double-digit growth in underwear sales due to retail shelf space gains. On the sock side, we’re expecting sales to be relatively flat year-over-year as new higher value program win this year offset our exit of less profitable program.

Our guidance assumes stable global macro environment. At this time, we have not reflected in our guidance, any material impact related to the coronavirus outbreak in China. Our imprintables business in China currently represents a small portion of our overall – our total overall sales.

Further, from a supply chain perspective, while we do source some hosiery from China and are working on contingency plans, given our inventory levels at this time. We do not currently foresee any material impact on supply, although we will continue to monitor as a situation evolve. That covers our 2020 sales guidance.

Adjusted diluted EPS for 2020 reflects our sales growth assumptions, projected lower raw material costs over last year, expected cost benefits from our optimization initiatives and the benefit of share buybacks from during 2020.

Also, GAAP EPS and adjusted EPS guidance reflects the benefit of the non-recurrence of the $24 million trade receivables impairment charge, which impacted the first quarter in 2019.

Offsetting these positive factors on earnings as the impact of inflation, which continues to effect various manufacturing input costs as well as the projected increase in SG&A expenses.

Taking all this into account, we are calling for gross margin expansion together with continued disciplined SG&A performance to deliver operating margin improvement in 2020 over 2019.

With respect to estimated restructuring acquisition-related costs in 2020, we are estimating charges about $30 million representing the remaining charges related to the manufacturing and distribution optimization initiatives, previously announced primarily in connection with our Back to Basics strategy aimed at simplifying our business and driving cost improvements across the organization.

Our guidance for 2020 implies an increase in EPS for the first quarter as we comp to $24 million trade accounts receivable impairment charge.

Excluding the positive year-over-year variance for the non-recurrence of this charge, we expect GAAP EPS and adjusted EPS in the first quarter of 2020 to be down compared to the first quarter of 2019, mainly due to a projected sales decline in the high-single-digit to low-single-digit range, with SG&A expenses remaining relatively flat compared to the first quarter of 2019.

Although, we’ve seen recent improvement in POS in the North American imprintables channel, we are not assuming a full recovery in POS until later in the year, and our projecting POS in the first quarter of 2020 to be down compared to the first quarter of last year.

In addition, we expect the level of restocking in the first quarter of the year to be lower compared to the first quarter of 2019.

We’re also projecting more sales in the hosiery and underwear category in the first quarter of 2020 mainly due to the impact from the exit for mass sock program and the impact of having the initial roll-out of a new private brand sock program in the first quarter of 2019.

The sales impact from the exit of the mass sock program is expected to be largely offset over the course of 2020 by new sock program wins shipping later in the year. So in closing, although 2019 presented challenges, we did not allow this to distract us from our plans to fundamentally strengthen our business model.

Over the last 2 years, we’ve simplified and strengthened our operations by executing on optimization initiatives related to manufacturing in the frontend of our business, including sales, marketing and distribution activities.

We also continue to make strategic decisions, investments with respect to capacity expansion both in Central America and Bangladesh, which will position us well for the future.

Our progress on all these fronts, not only gives us confidence and delivering our 2020 targets, the longer-term we feel good about achieving our profitability targets and our prospects for driving growth in imprintables, aiding further penetration with our retail brands, particularly as they gravitate online and growing as a trusted supplier of private brands to very well positioned large major customers.

With that, I’ll turn the call back over to Sophie..

Thank you, Rhod. That concludes our formal remarks and we’ll be starting the Q&A session. Please limit the number of questions to 2, so we can address as many callers as possible. And we’ll circle back for second round of questions if time permits. I’ll now turn the call over back to the operator for the question-and-answer session. Michelle, go ahead..

[Operator Instructions] Please stand by while we compile the Q&A roster. Our first question comes from Paul Lejuez of Citi. Your line is open..

Hey, thank you guys. I think when you first saw weakness in 2019, you wondered if it was more of a macro issue. Perhaps you were kind of a cannery in the coal mine of something bigger going on.

I’m curious now from where you sit, how much you feel there is something happening from a macro-perspective, hurting business versus something specific to your company or the industry in general? Thanks..

Well, look, it is hard for us to tell to be perfectly honest with you. The area which is more susceptible to macro changes is the corporate promotional products category. So what we’ve seen so far in Q4 was pretty consistent with Q3.

We have seen – and what I said in our last call is that typically when this occurs, it’s usually a fall back in spending and never lasts usually more than 2, 3, 4 quarters. So we basically have seen an improvement towards the end of Q4. And we are seeing improvements as we go through Q1 and POS is starting to come back.

It’s still negative, but it’s coming back..

Thank you..

Our next question comes from Heather Balsky of Bank of America. Your line is open..

Hi, thank you for taking my questions. First question is just piggyback off of Paul. Can you just talk a little bit more about the improvement you’re seeing in POS? I think you were telling it was down high-single-digits in the third quarter.

So just where is it now? And then, with regards to your gross margin guidance for the full year, can you help us just think through the cadence and when the different initiatives you have in place starts to flow through? Thanks..

Okay, well, as far as POS and I think maybe I’m looking at our projection as we go forward into next year, our POS was really down in one category, which is the basic category, in which drove – because our fashion basics are doing well, our fleece is doing well, Comfort Colors is doing well, American Apparel is doing well.

And in the basic segment, we have really 2 different product categories. And what we’re seeing today is that the heavier weight category, which is really used more in the corporate promotional products segment, that’s still down. But the lighter weight products in that area or the mid-weight products are actually improving or projecting to come up.

So overall, that’s why we’re encouraged with our POS outcome. It’s really was driven by our heavier weight basic category and it’s still down and dragging down slowly our POS. But we’ve seen an improvement and we’re optimistic as we move through 2020. We’re projecting for the full year to have positive growth.

It’s going to be a little bit negative in the first half and recovering, but a net positive for the full year with all these [NIMs and all the communications] [ph]..

Okay. I’ll take the gross margin question, the cadence. So if we look at gross margin for the year, we are forecasting expansion. That expansion is going to be driven by mix. It’s going to be driven by lower fiber costs. It’s going to be driven by our manufacturing cost initiatives. We will see inflation coming through.

Very definitely we see that in labor. We see it in – and in the materials. We see it in energy, in certain types of energy. And we see it also in other inputs into our process. We also will see the impact of – we were projecting the negative impact of currency also on our margins for the full year.

That’s probably about $0.05, I would say, overall, from a currency perspective. And if we look at the cadence of the improvement in gross margin as it unfolds throughout 2020, we expect improvements every quarter, right.

As we move from Q1 to Q2, Q3, Q4, we expect to see that improvement effectively flowing through and effectively expansion in each of the quarters of the year..

Thank you..

Our next question comes from Vishal Shreedhar of National Bank. Your line is open..

Hi, thanks for taking my questions.

Can you give me more color on this royalty expense and how it should impact 2020?.

Well, the royalty expense, so basically was – our contractual royalty agreements with our licensed partner has reduced royalties as we move forward in 2020. So it will be no impact as we move forward in 2020. But basically the minimums that we had in 2019 weren’t met. So we had a higher royalty expense relative to what our projection was.

And so, that affected 2019, but as we move into 2020, we have a lower threshold, so we don’t expect to have any minimum expected margin..

So [and that and I’ll follow-up] [ph], Vishal, we have lower hosiery sales in the fourth quarter than we were projecting. Overall, we call that out. It was still a weakness in the category, broadly across the markets. And as a result, effectively our sales came in lower than we anticipated. We fell below those thresholds.

So we’re much better positioned as we move into 2020..

Okay. I understand. And just back to the printwear market, is it correct to assume that inventories are, it’s actually in balance after the destocking. And is it a possible or likely scenario. So what’s more likely to happen in 2020? Restocking events or another potential destocking event? Maybe you can give some color on that..

Look, I think we’re pretty comfortable with the inventory of the channel. Like we said, what drove a lot of the excess inventory was excessive – the price increases over the last couple of years. That will flush itself out.

I mean, that’s one of the reasons why in Q1, the comping of the sales, basically, because we have price increases at the end of 2018 that were carried into Q1 of 2019. So we think we’re in pretty good position. Like I said, our POS has started to come back. We’re projecting for the full year a positive POS in the printwear category..

Thank you..

Our next question comes from Sabahat Khan of RBC Capital Markets. Your line is open..

All right, thanks.

Just a question on the $55 million, the adjustment during Q4, can you maybe walk me through kind of the logistics of what happened there? Just trying to understand why the distributors might have sent their product back before – instead of selling it and why you maybe wrote down the inventory rather than just kind of pushing it out into the channel.

Just want to understand the kind of the process there..

Okay, well, maybe just start off by the whole strategy of our Back to Basics. I think which is a good starting point then over the last 5 years, we’ve created a lot of complexity in our lines through the acquisitions.

And what ended up happening is we ended up with fragmented SKUs, products with small volumes and duplicate sales amongst all the brands we have. So our objective was to consolidate that and to be more productive and effective.

So two sides of that was, one, lot of these products were ship-to-the-piece, which we’re eliminating, and we’re going to leverage our distributors to do that going forward, which will be a reduction of SG&A.

Ultimately, by having less product space between our line we feel that we’re going to increase our manufacturing efficiency, reduce complexity and increase margins. Ultimately, for us we’ll have a better working capital, in terms of availability in the company.

And ultimately, what we’re going to do is increase our RONA and have a better return for our shareholders. I mean, that’s ultimately the plan for this activity. As we look at these SKUs, I mean, there is no easy way of dealing with it, but we’ve always taken what I think is the leadership position in the market.

And one of things maybe we should just take a step back and look at what the benefit, ultimately, to this to our customers is, because if you look at our distribution channel and our customers, I mean, relative, let’s say, for example, to online sellers, the cost of selling online, let’s say, for example, to retailers to consumers is almost $5 a unit, because of the amount of complexity that evolvements applying consumers, for example.

Our industry sales and re-sales product for $2 to $3, right, so we look at how we’re moving forward, the industry has seen a large increase in both SKU and brands. Our customers are facing new challenges, let’s say, for example, from they need just to carry 30,000 SKUs 10 years ago to hundreds of thousands of SKUs today, so what end up happening was.

They basically have space restrictions, current labor and labor shortages today, which everybody in the industry. And overall costs complexity is growing.

So as we look to this, I think the leadership position, we can do this slowly with the high-end, bring 3 years to get these things with pipeline, and sort to say, fix the problem today, take you through this back and we’ll deal with the – just reselling at this product to get amount of channels and ultimately what was happening is, we think is – we are going to benefit our customers by, however, cost reduction sooner than later.

They have less cost of receiving, shipping, put away, but we let’s face to support our brands and our sales to have better turns on Gildan products sooner than later. They have higher margins per square foot and all of our brands within the distribution centers. And overall, we’ll improve better than customer experience.

So we couldn’t do this over a long time and proportionate, and but the end of the day, the best way to deal is to solve, I think our customers problem noted by making them more effective, but also for us to start manufacturing and put this behind us.

And – the one thing you have to understand is, when you’re dealing with products in the market, if all of a sudden [if you don’t tell us size] [ph] large, then how do you service that, you’d be out of stock, for example, and you got to start making size products, make sure, you’re going to start.

So there is no preferred way sort to say, how long will take together, best way is that sort of just I look it, let’s just, take this goes back, move on and then improved our efficiency and with the liquidation and merchandise, which is factored into our charge of $55 million. And so that’s really, I guess, we have to look at it.

So and then that, we’re going to become more effective, more productive higher margins, better returns for us. But also, we’re going to pass it onto our customers, and our customers are going to improve their experience and make sure the Gildan is take some leader position in the industry.

And make sure that they’re driving profitable with all of our brands..

So I’d also just like to clarify the charges, and just to be curious clearing everybody, right. For the charge in the $55 million charge, $48 million of that relates to inventory provisions for our finished goods, $7 million relates to gross profit that effectively backing out related to the $19 million sales allowance.

Those goods will pay back in 2020, but we actually book the sales allowance, the impact into our 2019 numbers. We called out, if the charge could be as much as $45 million, when we talked about already in Q3.

Its’ higher, it’s the $55 million to get we have more SKUs that effectively we are focusing than we originally thought, and also the impact of that sales allowance. I think effectively we’ve got a very well contained in the charge. And really obviously support the fundamentals of what’s occurring..

Okay, thanks. And then just on the cash flow side.

The CapEx for the 2020 guide came in a little bit below what we are at least expecting? I guess, from your perspective, is this kind of CapEx you’re planning on spending in 2020? Or have you may be pushed out kind of the build out of Bangladesh is how’re thinking about the CapEx spend looking forward?.

Because – what we’ve done is, look, we’re by consolidating Mexico, we’re avoiding CapEx, because for repurposing that equipment into our existing facilities in Central America to increase our capacity to support what we said an excess $500 million, so that’s all in place.

And in Bangladesh basically the big part of our capital expenditure will come next year. This year we’re doing building, infrastructure, the majority of the equipment will start falling in early 2021..

And just a quick follow-up on the earlier answer.

You’re able to share the magnitude of the SKU count reductions are in percent or numbers at all?.

one is we’re going to had when a little bit like we said in October about $25 million in sales for the – large sales of the SKUs, I mean, put that in context. We also feel that with the SKUs, we will remain and we should support the path of our sales going forward. So that’s why we entered into $25 million.

The magnitude of the SKU reduction is in the 40%, 45% range of our overall SKUs number..

Thank you..

Our next question comes from Luke Hannon of Canaccord. Your line is open..

Thanks. Most of my questions have been answered already. But I did want to follow-up on something that was in the press release where you talked about the sales impact from the exit of the mass sock programs going to be offset by some new program wins over the remainder of the year.

So I’m just curious, is that wins that you would have in the past or shipping within this year is that win that you expect to receive in 2020?.

Those are new orders that will be set in the May period..

Okay.

And – is there any way that you could provide cadence with – what are the timing will be and whether it’s more front half weighted versus back half?.

Well, so what we’re saying is that, the last program, you see the effect of that you want, but the new programs that are coming in basically like May, June. And therefore, net-net of all of our sock business is projected to be flat with better mix in products..

Okay. Thanks..

Our next question comes from Mark Petrie of CIBC. Your line is open..

Hey, good morning. So I just wanted to clarify, I know, you’ve touched on this a couple of times, but I just wanted to clarify what you expect in terms of the impact your revenue as a result of this SKU reduction, obviously, there is a headwind? I think, you just quantify the $25 million. But I’m not sure, I understood to that exactly.

So could you just walk through the puts and takes there, please?.

So you got right, Mark. So the headwind that we see really as we move out of this SKUs, obviously, I’m going to talk about the reduction in the number of SKUs. What’s happening is that effectively will be shifting, right, from certain SKUs to other SKUs, because there is a lot of overlapping SKUs.

So the actual real headwind that we see from this initiative in 2020 was effectively characterize that is about $25 million, right. So that what we’re losing in 2020 as a result of the initiative, because the majority of the sales will continue, right. It’s just effectively moves over to more productive distributor SKU.

So we’re not – we don’t see, I would say, bigger broader impacts beyond that, even though, we are taking out of meaningful amount of our SKUs in the imprintable side, obviously, drive all of this productivity and improvement going forward..

Okay.

So have you seen sort of the substitution that you would have expected from your customers over the last couple of months that kind of give you confidence in that $25 million number? Or what’s the reasonable range of outcome in terms of the revenue impact?.

Well, I mean, I think at the end of day that the revenue impact is, we feel it’s going to be about $25 million. At the end of the day, because of our focus on these – we’ve been working on this plan for some time. So we’re basically seeing that the current POS is trending positive. So we’re very encouraged with our overall POS trend I said earlier.

We’re still projecting POS to be negative in the first half, it’s actually doing little better than we projected. But net-net POS will be positive in the full year, so based on all the puts and takes, the $25 million headwind, I mean, that’s a sort of all factored into our plan for 2020..

Okay. Thanks. And then I just wanted to ask with retail channel, you called out sort of the slower POS trend in Q4. I wondered, if you could just give a little bit more comments in terms of category, and sort of private brands versus brands.

And then any change in terms of how retailers are looking at inventory levels today versus a year ago?.

Well, I think that the big stuff is both in socks and underwear, both categories were relatively down for the full year of 2019.

We – obviously, we’ve seen our sock business in 2019 with the combination of negative POS, underperformance of our license business and the discontinuing in some of the private label program, which is really resulted and those are some of the reasons, why we lost short a little bit in Q4.

On the flip side, underwear business is doing capacity is growing significantly retain more shelf space in 2020, our large mass retailer who set their floor, which has been very successful and they’re planning to balance of their stores sometime in Q2.

So we’re very optimistic, but our underwear going forward and we’ve got a stable sock business as we move into 2020. So we feel very good of our position. Our online business is also doing very well. We have a huge growth in the Q4 on online. All of our brands are doing very well in online and we’re encouraged with that as well.

So all the pieces together are, I think are there. We’re really focused. Our Back to Basics strategy is moving in all fronts supporting with our retail and I think, our initiatives are very comfortable as we move into 2020..

Okay.

And then any change in how the retailers are approaching inventory levels?.

No. I think, the inventories of retailer are pretty confident, and then we haven’t seen any change. 3 years ago, we had big changes in the inventory levels. But I mean, basically, we’ve already consistent our last 24 months..

Okay. Thanks. And then one other I want to clarify is the input cost tailwinds through the course of 2020.

Rhod, you mentioned that margins will sequentially improve through the year, but with that tailwind remain relatively steady through the year? Or is it going to ebb and flow?.

We’re seeing inflation, right. As we, obviously, continue to move into 2020, and that inflation we see on the labor side, we see it on the energy side, we see it on materials.

So I mean, we’re assuming the inflation will exist and effectively will have to, obviously, offset that headwind as we move through the year and it’s basically foresee in every quarter..

And then, like, as we go forward, I mean, the benefit of consolidation of our manufacturing, which we set the Mexico into our Central American operations we said that’s going to allow us to improved margins by 50 basis points. That basically process is still undergoing, and our Mexican facilities will be closed in the first quarter.

So it will be winding down, but it will be fully closed in the first quarter. So a lot of that effect will come towards the end of the year and towards margin expansion as we move into 2021..

Okay. I appreciate all the comments. Thanks a lot..

Our next question comes from Stephen MacLeod of BMO Capital Markets. Your line is open..

Thank you. Good morning. Most of my questions have been answered. I just wanted to follow-up on 2 things.

The first is with respect to the imprintables market, Glenn, you talked about POS still being negative and you expect negative POS to persist to the first half of the year? Can you just talk a little bit about what your visibility as for the back half to get to an outlook for net-net positive POS for the year?.

Well, first of all, it’s negative so far through this point in time this year, which is really the smallest part of the year, right. So we’ve seen in the trailing 4 weeks basically, obviously, a pretty good improvement in our POS, so we’re very encouraged about it, to be perfectly honest with you.

The area – there is only one area that we still have made with you, as you’re trading as down a little bit, which is a heavyweight basic future. So all the other categories are actually doing really well, I mean, fashion T-shirt business doing well, fleece is still very positive, Comfort Colors is doing extremely well, AA is doing very well.

So everything is performing where we believe. And in the basic segment last year, we were negative in all of our categories. Today, the mid-weight category is actually trading positive. And the only area that we’re actually down is heavyweight on that.

That’s somewhat could be trend in ways of products that’s not necessarily fashion versus basic just had into the heavier weight shirt that we sell. And a lot of that goes to corporate promotional products segment basically. So we think that, it’s turning and we’re cautiously optimistic and we feel things that turnout.

But we can’t tell, where are we going, I mean, we’re going to trend and as we put in place. And SKU reduction, we’re really focused on making sure that our service levels are improving, so all-in-all, we should be in that..

Okay. That’s helpful. Thank you. And then on the gross margin, you stated – you said with your expectation are sort of your long-term goal if getting, achieving your 30% gross margin target.

Is it – are you still expecting to sort of hit that run rate as you exit 2021?.

Yes. That’s still our focus, Stephen..

Okay. That’s great.

And maybe similarly on the SG&A as a percentage of sales?.

Yeah, so our target for the SG&A is 12%. I mean, if you look at last year 2019, we had driven down pretty closely to that. We will see some increase in our SG&A this year effectively. But again, our SG&A performance we think has been and we’ll continue to be very strong and we’re very comfortable with that target..

And then in terms of the timing of that target is that similar timeline with the gross margin?.

Correct..

Okay. That’s helpful. Thank you very much..

Thank you..

Our next question comes from Chris Lee of Desjardins. Your line is open..

Hi, good morning, everyone. First question, just going back to the coronavirus, I appreciate the fact that you guys have limited sourcing exposure to China, and China is not a bigger market overall. I guess, my question is, Glenn, do you expect or are you starting to see some impact on some of the end user demand in the U.S. side.

I’m thinking maybe perhaps the tourist industry or anything that has a potential impact from the virus?.

What I think that there are two things, in terms of the impact, answer that is no. Secondly, it looks both ways is that typically people who are travel abroad – may not be travelling abroad, and go to the local theme park and stay it home and go to the beach in Florida and buy T-shirts, right.

So I think that all the puts and takes in terms of consumers buying souvenir-type products, I mean, I’m not really concerned.

I think the one thing that we maybe need to look at, and if you look at some of the reporting of other people in the industry is that business supply disruption, particularly because 40% of growth is probably comes from China that – I think, we’re well positioned actually in our manufacturing in Central America, particularly in our private brand strategy to support customers that may not want to travel to parts of the world to support their growth initiatives, I mean, this is a big factor, because people in their back of their mind is where they’re thinking, is it gone, is it not gone, what’s the story.

So with all the puts and takes, I think, we’re factoring that into our opportunities at this point. But I think that that’s something that we also in our back of our minds could be benefiting for us in the long-term. So it’s hard to say, because this thing either can be brought to control, and then maybe a little bit of effect.

But our guidance is based on what we see today and what the environment is as we see it..

Okay. That’s helpful. And maybe a couple of quick ones for Rhod. With respect to your guidance – yes, guidance.

How much share buyback is there any just reflected in your EPS guidance?.

Yeah. We’ve got that in the high-end of the guidance, Chris, right. So effectively if you look at our track record and share buyback is being very good over the last 4, 5 years. We are very happy to announce that 5% new program this year, and effectively we expect that done forward in a year.

So obviously, we’ll see exactly what the environment looks like as we move through the year. But the way to think about it is in the high end..

All right. Okay. And then just, your CapEx intensity was 4% to 5% for this year.

Is that sustainable over the next 2 to 3 years as you build out your capacity in Bangladesh?.

Yes. Our focus is running at 4% to 5% and we outlined debt we spoken November at the investor conference and we really see that’s our run rate over the next few years..

All right. Great. Best of luck for the year. Thank you..

Thank you..

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

Hey, good morning, Rhod. Can I just go back to the operating leverage for 2020, I’m trying to reconcile the guidance in the operational efficiency drivers for 2020? And what I mean is, when I look at the $1.66 starting point and then add back heritage to the impact of the buyback, your 3% top-line growth next year.

I just don’t see too much factored into operational efficiencies. I think, as noted driver of growth. So when I look at the FX and inflation headwind and then heritage to tailwind? What are the key drivers of this 80 basis points of leverage forecast for this year, I think, a good portion of it’s going to be 50 basis points from [Ofta] [ph].

And then did you see 2021, you will achieve the 30% target for the whole year or is that you’ll achieve it during the year? And what really kicks you in to get you the 30% for 2021?.

Look, I think if you look at achieving the 30% of target, obviously, we feel very good about that. We’re focused on it, because we got all of the fundamental drivers, right, that we’re working our way on them. When we said that we will achieve that, that’s exit run rate for 2021. So, all of these strategies are playing out over time.

If you look effectively, very definitely we see our manufacturing cost initiatives, all our overall Back to Basic strategy, really driving increase towards that target. Right, we have called it out previously that effectively the overall impact of that strategy is probably around 200 basis points.

And we very definitely see all of that coming through, right, as we move towards, through this year and also into 2021. So that’s a very definitely a driver. We see mix, and obviously, we’ll drive the overall – the top-line will drive the bottom line as well.

So, I would say, all of the elements are in place in order to allow us to get to that target that we’re going after. It takes some time. Obviously, we got to finish the movement of Mexico. We got to effectively drive the various initiatives.

We got inflation that we got to deal with, right? As we move through this year and we’ll see what it looks like for 2021. But I think we feel very good about effectively all of the elements coming together to drive that..

And maybe I’ll just add one more point to that, is that, our SKU rationalization, in terms of the impact on our manufacturing has not been felt at this point in time. So that’s another area of improve gross margin as we reduce complexity in manufacturing.

I said before that the Mexican operation closure, most of that will be only hitting us in Q4, but it really would impact 2021. And the other area of opportunity for us too is that our Bangladeshi expansion. What we said to investors is that, we’re supporting a lot of our international growth through Central America.

So as we leverage Bangladesh, that will also be another opportunity for us to expand margins as we push more products in Bangladesh into those markets which will be better conducive from duties and so forth in some of the markets we’re selling.

So all these things that we’re doing are continuing, driving further improvements on our gross margins as we go forward, so it’s a constant theme, right? We’re committed to making sure that we achieve our goal and we’re putting the things in place and making the hard decisions to make sure that we achieve those by the end of 2021, moving into 2022..

Okay. Just a quick follow-up, have there been any inefficiencies with your transition of your manufacturing operations? And just to confirm, you’re going to get to a 30% gross margin with a low-single-digit growth rate..

That’s right..

And sorry, any follow-up on, have there been any inefficiencies with the manufacturing transitions?.

No, there hasn’t been any – no, no, inefficiencies. We’ve consolidated our hosiery operation. We’re in a process of – still ramping up Rio Nance 6. And we feel very comfortable with our position in manufacturing.

There is still like, anything else at this company’s focus has been manufacturing optimization from day 1, right? So as we’re the global low cost manufacturer, so we just don’t sell our royalty and sit back. We’re constantly making sure that we’re driving for performance. And we feel very comfortable when we just had our investor trip in Honduras.

And where people can see the expansion plans. We expanded Rio Nance 5. We expanded Rio Nance 1. We’re expanding Rio Nance 2 as we speak. We are consolidating all that Mexican equipment. So these are things that are really in our sweet spot.

And all they do is give us leverage and lower costs, so it’s not rocket science for us, so we’re very comfortable and we haven’t missed a beat. And the one thing that I think is relevant though is there is inflation, like labor inflation is very relevant everywhere, transportation cost, dyes, chemicals. So there is a lot of inflation too.

So I mean, don’t underestimate the inflation. So the good news for us is that, as we continue driving these initiatives, then we’re going to be able to offset inflation and bring higher margins to and better return to our shareholders..

I appreciate the color, Glenn..

Thank you..

Our next question comes from Jim Duffy at Stifel. Your line is open..

Thank you. Good morning, guys. Glenn. I wanted to dig in some on your comments around the imprintables business and POS.

How much of the imprintable businesses at heavy-weight category that’s under pressure? And if you exclude that, what type of growth rates are you seeing from the balance of the imprintables business?.

We’re seeing good growth rates everywhere else [that before gallon zero] [ph] our fashion business is that strong. Our fleece is very strong still, Comfort Colors, AA, I mean, all these are very strong for us. Last year, the big impact was both on the basic segment really.

There are 3 different shirts we have in that segment, 2 mid-weights and 1 heavyweight. We have seen the 2 mid-weight shirts really bounce back actually from POS perspective. And the only area that’s really down now is our heavy-weight category. So the POS has actually improved and we’ll see what happens as we go forward.

And that could be somewhat also, just to wait change in the industry, because fashion shirts are all lighter weight shirts. They’re 4 ounce shirts, versus our heavy categories, 6 ounce shirts. So it might be just more of a category thing than a product thing. But we’ll see how it goes, but the trend is good.

We are certainly ahead of what we anticipated as we projected for this year. Net-net, we’re going to have positive POS for the full year and we feel comfortable in that position..

Understood, I’m trying to understand how big is that heavy-weight category for you however..

That’s probably around, overall, around 50% of our business in T-shirts [indiscernible]..

Okay. Thanks. That’s helpful. And then, you have the double-digit growth you’re looking forward to in underwear.

Can you talk about the revenue mix between underwear and socks within that hosiery and underwear category?.

Well, basically, our socks business will be flat for next year. And all the increase in that category is coming from good strong growth in underwear, where we’re seeing – we’re hoping to see further underwear growth next year..

How big is the underwear though, Glenn, like of the…?.

We don’t break that out. But if you look at the category, as we ended up 2019, socks will be flat and all the growth in that category next year will be underwear..

Okay.

And then, last one for me, can you talk about inventory targets assumed for year-end and the cash flow, and how that should progress across the year?.

Yeah, if you look at from an overall perspective from an inventory standpoint, I mean, the one – if you look at our inventory level, effectively, we’ve been building them really over the last quarter, and we can continue to build them really, especially at the time of the year, where we build inventory, right, as we get ready for the season.

Effectively, if you look though, I mean, effectively, we’ll build this quarter. We will effectively build a little bit into the second quarter. And then I think you’ll see it probably – the way to think about it is probably flat through the remainder of the year, effectively.

I mean, we want to make sure that we have good availability of goods to support that POS growth that will improve as we go through the back half of the year.

So effectively, if – I would say, you will see a – you’ve seen a build, and effectively we’re at that level, be up a little bit in the second quarter, but then flat as we go through the remainder of the year..

Thank you..

There are no further questions. I’d like turn the call back over to Sophie Argiriou for any closing remarks..

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

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day..