T.C. Robillard - Chief Investor Relations Officer Richard A. Noll - Chairman & Chief Executive Officer Gerald W. Evans Jr. - Chief Operating Officer and CEO-Elect Richard D. Moss - Chief Financial Officer.

Eric Tracy - Brean Capital LLC Pallavi Bakshi - Credit Suisse Securities (USA) LLC (Broker) Susan K. Anderson - FBR Capital Markets & Co. Jay Sole - Morgan Stanley & Co. LLC Omar Saad - Evercore ISI Ike Boruchow - Wells Fargo Securities LLC Anna Andreeva - Oppenheimer & Co., Inc. (Broker) Simeon A. Siegel - Nomura Securities International, Inc.

Jim Duffy - Stifel, Nicolaus & Co., Inc. Michael Binetti - UBS Securities LLC.

Good day, ladies and gentlemen. And welcome to the HanesBrands Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference is being recorded.

I would now like to hand the floor over to T.C. Robillard, Chief Investor Relations Officer. Please go ahead..

Good day, everyone, and welcome to the HanesBrands' quarterly investor conference call and webcast. We're pleased to be here today to provide an update on our progress after the second quarter of 2016. Hopefully, everyone has had a chance to review the news release we issued earlier today.

The news release, updated FAQ document and the replay of this call can be found in the Investors section of our Hanes.com website. On the call today, we may make forward-looking statements, either in our prepared remarks or in the associated question-and-answer session.

These statements are based on current expectations or beliefs and are subject to certain risks and uncertainties that may cause actual results to differ materially. These risks are detailed in our various filings with the SEC and may be found on our website as well as in our news releases.

The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made. Unless otherwise noted, today's references to our consolidated financial results as well as our 2016 guidance exclude all one-time charges and expenses.

Additional information, including a reconciliation of these and other non-GAAP performance measures to GAAP, can be found in today's press release. With me on the call today are Rich Noll, our Executive Chairman and outgoing CEO; Gerald Evans, our CEO-Elect; and Rick Moss, our Chief Financial Officer.

For today's call, Rich, Gerald and Rick will provide some brief remarks, and then we will open it up to your questions. I will now turn the call over to Rich..

Thank you, T.C. This is my 40th and last earnings call. It has been quite a ride. I'd like to take this opportunity to reflect back a little, but also to frame our future.

Over the last 10 years, we've had three distinct phases, the first to transform our supply chain and cost structure to make us competitive globally; the second, to drive Innovate-to-Elevate to expand our operating margins; and the third, grafting both of these strategies onto acquisitions.

Over that time, we've built a strong business model that creates value by nurturing world-class brands, delivering innovation to a broad base of consumers, driving volume through our highly efficient global supply chain and effectively deploying our cash flow. The results have been great for all stakeholders.

Over this decade, we have increased revenue from $4 billion to nearly $7 billion, allowing us to expand our employment base from 50,000 to 70,000 people. We've completed eight acquisitions, mainly internationally, with international sales now close to a third of the business, but we paid attention to more than just expanding the business.

We have won numerous awards for our community support, our environmental efforts and have also been recognized as a great place to work. All of this superb effort can be seen in our financial results.

We increased operating profit from $400 million to over a $1 billion, growing earnings per share from $0.37 to over $2, a 20% compound annual growth rate for the decade and generated more than $4 billion in cash flow from operations. What's even more exciting is our future, as these proven strategies have significant scale and are repeatable.

At our current profit run rate, we should be able to generate the next $4 billion of cash flow in less than half the time, which positions us extremely well to continue to annually generate solid double-digit shareholder returns.

And when you combine this with our experienced management team and the breadth of talent within our organization, that's why I truly believe that for HanesBrands, the best is yet to come.

Before I go, let me add that the last 10 years has been an amazing journey, and one that I am deeply proud to have taken with all of you and all of the HanesBrands employees around the world. I have the pleasure of working with this management team for the past decade, and in the case of Gerald, over 25 years.

Under Gerald's leadership, we created a low-cost global supply chain, strengthened our world-class brands with Innovate-to-Elevate and seamlessly integrated several acquisitions. The company is in great hands and I look forward to seeing the next phase unfold as Gerald and the organization take the business to new heights.

And with that, I am pleased to turn things over to our CEO-Elect, who will talk about delivering on our fourth consecutive year of double-digit EPS growth.

Gerald?.

Thanks, Rich. On behalf of all the employees at HanesBrands, we greatly appreciate your leadership over the past decade, and we look forward to continuing to drive our strategies and deliver superior returns to our shareholders.

On a personal note, I have thoroughly enjoyed our working relationship over the past 25 years, and I wish you nothing but the best.

Coming into the year, we knew we were facing a tough comparison in the second quarter due to X-Temp and Champion pipes that drove last year's mid single digit growth in basics and 42% growth in Champion in the sports specialty and department store channels. And we plan for it.

Year-to-date, our results are right where we expected them to be in terms of sales, operating profit, earnings per share and cash flow from operations.

More importantly, we reiterated our guidance for the full year, which at their midpoint calls for 8% growth in revenue, 11% growth in operating profit, 16% growth in EPS and $800 million in cash flow from operations.

As we look to the back half of the year, we believe we are very well-positioned to achieve our guidance as our key initiatives are unfolding as expected. While there are many initiatives driving our confidence and delivering on the second half, let me highlight four specific examples.

First, our inventory reduction actions are complete and delivering their intended results. Adjusting for the addition of Champion Europe, our inventory declined from the first quarter's level, which in turn helped drive the strong cash flow performance in the quarter.

We expect our inventory, excluding Champion Europe and Pacific Brands, to continue to decline through the second half of the year and we're firmly on track to achieve our cash flow guidance. Second, the initiative that I laid out at the beginning of the year to drive volume growth in our core Innerwear business is gaining traction.

For the quarter, we grew market share in men's underwear, women's panties and socks. Moreover, our focus on the core initiative positions us well for the second half. We have targeted promotions in place for both back-to-school and holiday. We're also set to begin advertising behind our new innovation, Fresh IQ.

Fresh IQ is an odor control technology that mechanically attacks bacteria. This is a great innovation that we believe has the potential to impact the overall apparel category. In fact, we've seen some of our highest advertising testing ever with this new product. And the reception by our retailers has been strong.

The benefits of Fresh IQ span both Innerwear and Activewear and it's now in the market with men's underwear, socks and certain Champion products. Third, the integrations of Hanes Europe and Knights Apparel are tracking to plan, which puts us on schedule to deliver $40 million in synergies this year.

And the fourth example driving our confidence in delivering on the second half is that we closed our two most recent acquisitions, Champion Europe and Pacific Brands. Touching briefly on these acquisitions, we are extremely excited about the addition of these great businesses.

Not only do they provide us with strong management teams, but they also provide a nice balance between mid to high single-digit revenue growth and margin expansion opportunity through synergies. Both management teams have already been to our headquarters and we are well underway in developing our detailed integration plans.

So, in summary, we are confident in our outlook for the second half. Our results year-to-date are right in line with our plan and our key initiatives for the second half are unfolding as expected.

Looking beyond this year, our goal is to continue to drive our successful set of strategies and leverage our strong business model which we believe positions us to deliver on average mid single digit revenue growth and double digit earnings per share growth for many years to come. I'll now turn the call over to Rick..

Thanks, Gerald. While our second quarter results declined over last year, our Q2 plan called for a decline due to the tough comparisons in basics and Champion as well as quarterly timing shifts in shipments. Year-to-date, our results are right in line with our expectations for sales, operating profit, earnings per share and cash flow.

We reiterated our guidance for the full year and this was driven by three factors. One, the challenges in the overall retail environment were already reflected in our guidance when it was initially set back in February. Two, our year-to-date results were in line with our plan.

And three, we're confident in our ability to deliver on this second half as our sales initiatives have traction and are ramping, our acquisitions are generating synergies and our inventory reduction actions are working. Now, let me speak to our performance during the quarter.

Beginning with our Innerwear segment, the sequential sales growth in the quarter was right in line with historical trends. Intra-quarter, the sales performance mirrored the broader retail environment with a soft April and May giving way to stronger June. In fact, our Innerwear sales were up 10% in the month of June with strength continuing into July.

Margins in the quarter were strong with segment operating margins of 24.2%. Turning to Activewear, the sales decline was driven by our Hanes Activewear business as our U.S. Champion business was flat when compared to last year.

Looking at Champion by channel, we saw mid single digit revenue growth in mass and mid-teens growth in the college bookstore channel.

This was offset by declines in the sporting goods, mid-tier and department store channels, which were impacted by bankruptcies and a tough comparison as we had a significant concentration of shipments in last year's second quarter.

With respect to profitability, Activewear's operating margins held above 15% as SG&A controls help to partially offset the volume decline. Switching to international, sales in the quarter increased by 2% driven by strength in Europe and Asia. Operating profit increased 14%, while operating margins expanded 90 basis points.

Hanes Europe delivered another solid quarter, with sales up 1% driven by hosiery in France and bras in Spain, while operating margins improved 350 basis points to nearly 9%.

We expect continued strong performance in our international business in the second half due to Hanes Europe synergies, momentum in Asia, as well as the addition of Champion Europe and Pacific Brands.

Looking at our overall results for the quarter, the decline in both our gross and operating margins was due almost exclusively to the roughly $12 million in expected costs associated with our inventory-related actions.

Absent these costs, our margins would have been up slightly over the last year despite the expected decline in sales as we benefited from acquisition synergies, and SG&A leverage.

Interest and other expense excluding the one-time costs associated with our refinancing actions increased nearly $8 million due to increased debt balances, $6 million of which or a $0.01 per share in the quarter was due to our decision to prefund our recent acquisitions.

Given the current interest rate environment, the need to fund recent acquisitions and higher rate notes that were callable, we proactively took the opportunity during the quarter to optimize our capital structure. We lowered our overall interest rate, and increased the amount of fixed rate debt on our balance sheet.

Roughly, two-thirds of our debt is now fixed, and we have a blended interest rate of approximately 3.6%. The tax rate was roughly 6% in the quarter. For the first half, our tax rate was roughly 8% which is in line with our full year guidance of a high single digit tax rate. Earnings per share in the quarter was $0.51.

If you recall from last quarter, I highlighted that the decline in our accounts payable balance was a precursor to the expected improvements in both our inventory and our cash flow. And that's exactly what we saw during the second quarter.

Our inventory excluding the $51 million from Champion Europe declined from the first quarter's level and this, along with improvements in accounts payable, helped drive a $156 million in cash flow from operations, a record for any second quarter in our history. Now, turning to our guidance.

We reiterated our full year outlook, which at their midpoints implies 8% growth in revenue, 11% growth in operating profit, 16% growth in EPS and $800 million in cash flow from operations.

We made small adjustments to our full year estimates for CapEx and acquisition and integration charges now that we have closed the acquisitions and have begun our detailed integration plans.

Looking at the integration of both Champion Europe and Pacific Brands, we're confident that the total charges for both acquisitions combined should be substantially below earlier acquisitions as we become more efficient at integration, we're able to leverage our prior foundational investments and these integrations are less complex.

We estimate the total cost to acquire and integrate both of these acquisitions to be less than a $100 million. Of which, a little more than $50 million are expected to be recognized this year. With respect to these two acquisitions, we gave you their expected full year contributions in late May.

So now, let me give you the specific guidance for the quarters because it's very different due to the timing of when we closed Pac Brands and their seasonality. About $200 million or approximately 55% of the sales from Champion Europe and Pacific Brands are expected to be in the fourth quarter.

For total HBI, that means third quarter sales should be slightly greater than the fourth quarter as the impact from these acquisitions temper some of our normal sales cadence.

However, from a profit perspective, virtually the entire $0.04 EPS increase from late May shows up in the fourth quarter, leaving the total company's EPS for Q3 between $0.57 – $0.55 and $0.57 and for Q4 between $0.57 and $0.61.

So, in closing, our overall results are tracking to plan, our inventory actions are working, our integrations are on schedule, our core sales initiatives are getting traction and we launched our new innovation, Fresh IQ. All of this gives us confidence in our ability to deliver on our guidance for the year.

And with that, I'll turn the call back over to T.C..

Thanks, Rick. That concludes our prepared remarks. We will now begin taking your questions and we'll continue as time allows. Since there may be a number of you who would like to ask a question, I'll ask that you limit yourself to one question and a single follow-up and then reenter the queue to ask any additional questions.

I will now turn the call back over to the operator to begin the question-and-answer session.

Operator?.

Thank you. Our first question comes from the line of Eric Tracy from Brean Capital..

Hi. Good afternoon, everyone. Hey, first, Rich. All the best on a new – we've seen a lot together over the last 10 years. So, appreciates all the insights and again wish you the best and, Gerald, congrats on the new role..

Thank you very much..

Thanks, Eric..

So, Rich, I guess, for you as you pass the baton on to Gerald here, maybe provide a little bit bigger picture perspective on what you see, not only the model as it transforms to the world in which you're operating, obviously had some challenges around the revenue line here the last year.

What gives you confidence not only in the back half guidance to re-accelerate, but kind of longer-term that the brand at the core is still not only relevant but very strong?.

Yeah. And I'm going to say things that you've heard me say over the last decade. We are in great categories because people use our products every single day of their lives. They've been using them for centuries and they're going to use them centuries from now.

And as long as we do a couple of things, I think it's the secret to success and that is we need to make sure our cost structure is competitive globally. We need to give innovation that we can give to a broad audience, which means we need to nurture strong brands.

And if we can do that successfully, we generate a lot of cash and then we can deploy that cash, whatever the environment, to create a lot of value. Right now, it makes a lot of sense to graft those strategies on the acquisitions. That's been working for well over a decade and it's going to continue to work many decades into the future.

And that's what gives me confidence about the staying power of this company. I've said this before, I said it in 2009, in March, when everything looks like it was – the world was going to end, we've been in business for over 100 years and will be in business 100 years from now.

In terms of the specifics, Gerald, I'll turn it over to you to talk about the strategies and what you might change going forward..

Yeah. When I look at the strategies, look, we got a model, as Rich just touched on, it's really working well. We're generating strong on average sort of mid-single digit growth in the revenue line and double digit EPS. So, there's an awful lot to like about that, that strategy going forward.

Where we do see opportunity, it's certainly we have a consumer who's increasingly engaging with our brands to learn about our brands and also buy our brands online and we're consistently going to put more and more effort against – going where that consumer is going both people and resources, and we're seeing good results and we're going to work at that even harder.

But we have started in a great place, and we're going to build upon what we've built over the last 10 years. I think the second part of your question was about our confidence in guidance for the balance of the year.

And let me just say that as we look at that, we see that first and foremost our first half results were right in line with our expectations.

And second, our low end already assumed a challenging consumer environment as that's played out through the years, and then the third is certainly, we had a number of key initiatives in mind and they are unfolding exactly as we expected them to unfold as we execute them.

Our – as we focus on our core initiatives, we saw some initial share gains in Q2, and now we've got promotions in place behind our core basics for back-to-school and holiday and that with our Fresh IQ initiative, our innovation coming as well, we feel great about the momentum we're carrying into the second half of the year there.

As you heard Rick say, our inventory reduction actions are working. The inventory is coming down, and we've got those actions behind us and we're looking forward to more cash flow in the months – in the quarters ahead. Our Hanes Europe and Knights Apparel integrations continue to do extremely well, and we're on target to deliver those synergies.

And then finally, we closed on Champion Europe and Pacific Brands that gives us both sales and revenue and profit momentum in the second half. So things are going exactly as we planned, and we feel very comfortable in reaffirming our guidance for the year..

And then as you – just to follow up on that in terms of the inventory, it did sequentially improve. But maybe a little bit more elevated than what we've thought maybe it's according to your plan.

But as we think that moving through the year, what should the cadence of that look like? I'm assuming decelerates pretty meaningful to drive that free cash in the back half.

But we know there has been concerns about the restructuring charges around the acquisition, how that perhaps translates to operating cash flow, maybe just Rick or Gerald or Richard, whoever wants to chime in on that kind of dynamic and how we should view that cadence playing out in the back half?.

Sure. Well, I'll just point out that we were – cash flow from operations, we were $100 million favorable to last year at that same time on a year-to-date basis. So, we're in good shape on that front. Let me talk about inventory for just a second.

A couple of ways to look at, as you pointed out, Eric, the inventory levels, absent Champion Europe, were actually down from Q2 to Q1, that's unusual. Normally, we build inventory for back-to-school. I think this shows that our management – inventory management processes are working. Another way to look at it though is to look at the build.

The build is about $70 million less in the first half of this year than it was last year. So, we're doing a lot to manage this inventory, and it's showing up in our cash flow.

We talked about XA (22:46) charges, they're going to be significantly lower this year than they were last year, and that's obviously going to be a positive driver for cash flow from operations as well. So, I look at all the factors, including improved profitability, let's not forget that in terms of driving cash flow as well.

Look at all of the key drivers of cash flow, they're all working just as we had expected them to. So I'm feeling really good about that $800 million..

Thank you. And our next question comes from the line of Christian Buss from Credit Suisse..

Hi, this is Pallavi on the line for Christian. Can you speak a little bit about kind of the rollout of this new Fresh IQ product, what we can see in terms of merchandising and any expectations for kind of being able to gain shelf space with your retail partners? Thanks..

Sure. Fresh IQ is an odor control technology that mechanically attacks bacteria. What – it is a technology we're rolling out right now. It began to roll out in this quarter – in the third quarter and we'll continue to do so through the balance of the year.

It's really one of our – we've gotten some of the strongest response from consumers we've seen in some time from a purchase intent standpoint, and it will roll out across our men's basics, underwear and socks as well as a number of our Champion items. It's going to be available across all of our men's underwear and socks.

So, it's really rolling across both our core as well as our innovation platforms such as X-Temp or ComfortBlend. It's very similar to what we did a decade ago or so with our Tagless tee.

The retailers are very excited about this and you'll see both some shelf expansion but you'll also see significant promotion activity behind it as we roll late into the third quarter and into the holiday period and we'll also begin our media support in the fall as well..

All right. Thank you..

Thank you. And our next question comes from the line of Susan Anderson from FBR Capital Markets..

Hi. Thanks for taking my question. First, I want to say congrats, Rich, on your retirement. You've done an amazing job over the past 10 years and you'll definitely be missed. And then congrats, Gerald, on the new role..

Thank you..

Thanks, Susan, I really appreciate it..

Thanks. I hopped on a bit late.

I don't know if you can go over maybe just kind of your thoughts around the back half in terms of the Innerwear and Activewear categories and how you see the core businesses, excluding the acquisitions, growing in the back half?.

Yeah. Let me start with the Innerwear category, what I would say is right now, in the first half of the year, it's really performing as we expected.

It was up nicely in Q1, up over one percentage point in Q1, and we expected it to be down in shipments in Q2 as we overlap the pretty substantial space gains that we experienced in our basics business in X-Temp last year.

As we look to the balance of the year and we execute our initiatives behind our focus on the core initiative, as well as we're seeing sequentially improving trends in our bra business, we feel good that we'll have very positive momentum along with now our new innovation in Fresh IQ in the Innerwear business as we look to the second half.

As I turn to the Activewear business, we were down in Q2, but again, as expected after coming off of a strong first quarter where we're up 2.8% in the first quarter. In the Q2, Hanes Activewear was the key driver of our decline for the quarters. We had some space adjustments with some of our key customers.

In Champion, we did bear the brunt of overlapping big pipes in Q2 of last year, as well as we did have some headwinds from bankruptcies, and the sports specialty. But they were – Champion overall was flat, because we saw mid single digit results in our mass business and double digit growth within our college bookstore business.

And our Champion POS and sports specialty in spite of the challenges with bankruptcies was actually up quite a bit in the quarter, up on a double digit basis. So overall, we expect Activewear to return to growth as we put the Hanes Activewear adjustments to Q2 behind us and we continue to see momentum in the business going forward.

What I do say – would say too is on a global basis the Champion brand had a solid quarter and grew nicely in the quarter with particular strength in Japan. And as we look at Champion on a global basis in the second half, we expect that growth to continue to accelerate.

And then, the addition of Champion Europe will just further accelerate growth on top of that..

Great, that's helpful. And then on the women's side, it sounds like the panties did well. Maybe if you could touch on a little bit the bra business and how you expect that to play out in the back half. Definitely, it seems like the presentation looks very cleaned up and with your new brand assortment, much cleaner in the stores.

And then maybe if you could touch on too how the traditional bras are performing versus more active or comfort type bras?.

Sure, I'll be happy to. The bra business actually did show positive growth within the quarters. We overlapped our brand consolidation business. It was up mid single digits within the quarter. So, we see a positive trend in that business.

As we look to the balance of the year, and we continue to see the power of our brand consolidation, we do believe there will be positive trend in the second half of that business as well.

We see growth in two places, certainly in our – some of our key brands, such as Bali, we see solid growth, but also as you alluded to very much we're seeing growth in that ComfortFlex Fit model, which is the blending of the active and the casual.

The athleisure, if you will, the bras coming together and the Hanes business in particular is doing very well in that segment..

Thank you. And our next question comes from the line of Jay Sole from Morgan Stanley..

Great, thank you. My question is on cotton. The price of cotton has jumped a little bit in the last couple of months.

Can you talk about why you think that is and what your outlook for cotton is and how might that impact cost of goods sold going forward?.

Well, cotton always is a little bit volatile, and it will trade within a range. We don't necessarily believe that the pricing which we see on cotton today is something that's going to be around forever, but this is the beauty of our dollar cost averaging approach to hedging cotton.

We're hedged out through – essentially through the middle of next year on a P&L basis at the prices that were mid $60-ish type range. So, we're feeling pretty good about that and we'll see where it goes. Again, it's hard to predict..

Okay. And then the same question is on the increase in the pre-tax acquisition integration charges of $20 million.

Can you just explain how the Champion Europe and Pacific Brands deals closing sooner drive higher purchase accounting adjustments?.

Well, it really wasn't the timing of it. It's – would generally happen as we – once we actually acquire the company, we're able to get inside their books a little bit more and we then able to – are able to do the very complex purchase accounting processes that we have to go through under GAAP.

And those are sometimes from the outside a little hard to adjust or to assess. After we got in, we found that they were about roughly $20 million higher than we originally thought. I would point out though, Jay, they're – it's all non-cash. This is all just accounting stuff. So, not cash at all.

So, while it was up $20 million, it was non – all non-cash items..

Thank you. And our next question comes from the line of Omar Saad from Evercore ISI..

Thanks. Good afternoon. Rich and Gerald, congratulations to you both. I have a couple quick questions. The first one, I wanted to see, Rich or Gerald, what some of the channel shifts going on in the category and apparel generally, but I don't think Innerwear and some of the basic categories you compete in are immune to it.

And a lot of traffic is moving online. And the basket sizes, given your price points, maybe doesn't fit quite as well, given shipping costs and things like that.

Can you dive in on where you stand with Amazon and hanes.com and walmart.com and target.com and some of the key e-commerce channels and how you're thinking about positioning of your business out a few years and your brand out a few years if this kind of consumer behavior shift continues or even accelerate in the basics and Innerwear category? I would love your thoughts on that..

Yeah. We certainly have seen a shift in the consumers' mind to learn and engage with brands from a learning standpoint, as well as buying increasingly online and our categories have seen some of those same shifts whether they were basics or certainly the Activewear business or the Intimates business for that matter.

And we've been pretty clear for a while that we're going to invest the resources, both people and dollars to make sure that we get full advantage of that. Within the U.S., for example, we saw again a mid-teens growth in our online business during the quarter.

And in Europe, we also see a number of those markets are highly developed from an online standpoint, we're organizing equally strongly to go after that business and drive those businesses as well. And as we've stated before, our shares online, we have leading shares.

They are not as fully developed as they are in the bricks and mortar and we'll continue to work to drive those and we're going to do that really by working across all the elements of that online channel, which would include working with our bricks and mortar very closely and helping drive their businesses and they understand that our learning and our brands are an important avenue to leave people to their site.

Certainly, we're going to continue to develop our own sites, not only as a selling location, but as a communication location of our brand positionings and what our brands have to offer.

And then certainly from the standpoint of working with the major pure plays, we've got a significant amount of effort against that and we're seeing very strong results as we look at that. Overall, in the U.S., our business is now 8% online and is continuing to grow and we've got a lot of focus on that going forward..

And on the shipping issue, the shipping cost issue and basket sizes, I'm just wondering how you think about or if you are seeing that having an effect on the e-commerce business..

We don't really see.

We see similar economics from the standpoint of – for us, of shipping our online customers relative to our wholesale customers from the standpoint of the online, the emergence of free freight at certain levels and things like that has certainly generated even more and more sales of even basics online as the bar for consumers to get to some level of free postage has gotten lower and lower..

All right..

I would just add some of our best developed categories were the early ones, such as Intimates that reached that bar earlier..

Got you, got you. And then one quick follow-up, guys, on Fresh IQ. If I look back to some of your big, successful innovations in the past, the things that really stand out, it's so simple that – and it's so obvious to the customer why this is a better product, whether it's Tagless tee or ComfortSoft waistband or X-Temp.

Maybe dive in a little bit more on Fresh IQ? Is it that kind of innovation where it's going to be really obvious to the consumer why this is a better product? And does that innovation flow through in terms of higher price points? Or is it just a differentiated product at a similar price point?.

Well, I think it does flow through our consumer research, so that it's very simple for the consumer to understand. It's a concern that many consumers have and this is a prevention or elimination of that concern. It is – in certain cases, it's a modest premium.

In others, it's no premium to the current core business and our purchase intent measures indicate that the consumer clearly understands it and desires it..

Thank you. And our next question comes from the line of Ike Boruchow from Wells Fargo..

Hi, good afternoon and congrats, Rich and Gerald. Thanks for taking my question. I guess, this question is for Rick, I think.

Just back to the inventory and the margins, I guess should we expect any more inventory management costs that might linger into the back half of this fiscal year? Just trying to understand if or when we should expect gross margins to potentially flatten out or even expand again.

And then to that point, just what should inventory dollar growth inclusive of the new acquisition deals look like as we move through Q3 and Q4?.

Well, let me talk about the first part of your question, we don't expect any more costs to flow through the $20 million that we referred to at the beginning of the year as being in the first half did flow through. We're done with our projects. This is in our inventory management projects.

As a result, you should see at the end of Q3, you should see ex-acquisitions, Pacific Brands and Champion, you should see inventory actually go down in real terms. And so – and then continue down in the fourth quarter as well. So we kind of crossed the bridge, if you will, in terms of inventory, in terms of absolute dollars.

So what effect does that have on the back half in terms of margins? If you look at the impact in Q2 of the $12 million that I referred to, that was an 80 basis point hit to the margins and the margins were down a little less than that. So we would actually have been up in margins in Q2. Those – the same would have been true in Q1 as well.

So we're looking – we've always said that we looked for gross margins in the first half to be down as a result of the inventory cost, but to be up in the back half of the year as those go away and the traditional drivers of margin expansion kick in, manufacturing efficiencies, synergies, et cetera, et cetera..

Got it. Thanks so much..

Thank you. And our next question comes from the line of Anna Andreeva from Oppenheimer..

Great. Thanks so much. Good afternoon, guys, and thanks for taking our question. A follow-up on the gross margin question. Just any variability in how we should model the back half, 3Q versus 4Q. I think you have the easier compare in the third quarter.

And then secondly, just to follow up on the Hanes Activewear, which I think you said was a drag in the second quarter, you mentioned some paint adjustments at some of your customers. Maybe additional color on that and remind us about the size of Hanes Activewear business. Thanks..

Well, first, let me talk about the gross margins in the back half. There are a couple of things that you should remember that we've always told you. Activewear is strong. This quarter is the third quarter and that tends to mix our margins down a little bit.

Obviously, the margins in Activewear tend to be a little lower, so be careful as you're looking at those two quarters.

The other thing that you're going to need to keep in mind in terms of operating margins for the – well, before it's – yeah, operating margins for the back half is – again, the operating margins that we're getting from our new acquisitions, Pac Brands and Champion Europe will be about – will have about a 100 basis point impact on our margins for the back half on an operating profit margin basis.

So, 50 basis points for the full year, about a 100 basis points, if you do the math on the guidance, that's what it will tell you. So we – there will be a couple of things that will but then with the (39:22) base business should show nice improvement in both gross margin and operating margin in the back half of the year..

And on the Hanes Activewear question, let me just answer that. From the standpoint of Hanes Activewear, it's a fairly small piece of our total Activewear business. It's a basic fleece and T-shirt business sold in the mass channel. We see fluctuations in the space as retailers have it from time to time.

We had expected this adjustment and it just happened to come in the second half and as we had planned and is an offset year-on-year, it's behind us. And as we look to the balance of the year, that business will regain its footing as well and should show nice performance for the balance of the year..

Okay. Thanks, guys. Best of luck..

Thank you. And our next question comes from the line of Simeon Siegel from Nomura Securities..

Thanks. Hey, guys, good afternoon. Rich and Gerald, congrats to both of you on the changes..

Thank you..

Thank you..

Just a quick follow-up on Ike's question. I think, Rick, I think you gave the $51 million of Champion Europe for inventory. Do you know what you expect the Pacific Brands to add to the inventory balance for this year in 3Q and year end? And then just what are your thoughts on Champion U.S.

going forward? Sorry, if I missed it, but did you guys say what you expect the total change in Activewear this year to be just in light of the challenges and the puts and takes? Thanks..

As far as Pac Brands' impact on inventories for the balance of the year, we're still assessing that and we – as we're – as we just acquired them and we're still going through the purchase accounting process for them. So, let us get passed that and we'll give you a better feel for it..

From the standpoint of the Champion U.S.

business, yeah, as we discussed in the half the – or in the quarter the business was flat as we had the headwinds or the pipes from last year and some bankruptcies in the sports specialty business, they were offset by a return to growth in the mass business, as well as a strong performance out of our college bookstore business.

As we look to the back half of the year, we expect to see sequentially improving business within Champion U.S. as it returns to growth again as we overcome some of the headwinds out of the sports specialty bankruptcies with strength out of our mass and college bookstore businesses..

Great. Thanks a lot, guys. Best of luck for the rest of the year..

Thank you. And our next question comes from the line of Jim Duffy from Stifel. Jim, your line is open.

Could you check your mute button, please?.

Thanks. Good afternoon..

Hi, Jim..

Couple questions from me.

Can you talk some more about the timing of shipment shifts, which you referenced? Was that a pull-forward into 1Q or a push into 3Q? And what categories was that for?.

No, what I spoke about was in Innerwear, there was a – the pipes that we had last year were very high as we expanded a lot of space within our X-Temp basics business. As we overlap this year, we didn't have that same lift of pipes. Our POS continued to be strong in the quarter in our basics business.

And that, in fact, for the first six months of the year has been favorable all year in the basics business, so we are seeing strong growth there. We anticipate that like so much of our business that if you see POS strength eventually the shipments balance out with that.

And as we look now to the back half of our year, we have our various initiatives coming online with our basics business, as well as the launch of our Fresh IQ that you will see the shipments ramp as well..

2Q a year ago, I recall you had, I believe, it was inventory destocking issues with a large retailer.

But yet, you are referencing that as a difficult compare?.

No, in fact....

Do I have that wrong?.

You have that wrong. That was in Q3 of last year..

Okay. And then, Rick, question for you.

With respect to businesses acquired during 2016, what do you expect inventory balances to be at year end?.

Well, Jim, as I just said that – you may not have heard it on the previous question, we're still going through the purchase accounting process with Pac Brands and so that can have an impact on what's the actual inventory number ends up being. So I'd rather hold off on giving you that just now..

Thank you. And our final question for today comes from the line of Michael Binetti from UBS..

Hey, guys. Rick and – I'm sorry, Rich and Gerald, congrats again on the changes..

Thank you, Michael..

Thanks, Michael..

Let me ask on inventory, seeing as it will be nine months after you guys first mentioned the inventory actions before. In our seats, we see the inventory dollars start to come down due to the lead times in the business. So you took some action early in the year, closed down some factories. And that gets the back half inventory dollars lower.

But now that we are past that, as you start looking ahead to the next nine months and into 2017, given everything that's going on with retail right now, do you bring the factories back up to capacity? Or can you tell us how you are thinking about the longer-term outlook from a production standpoint today?.

Yeah, Michael. This is Gerald. What I would say is as we look at, yes, you began to see the inventories come down as a function of the time we took out earlier. We're also now reaching our peak periods in the shipments for back-to-school and into holiday that further draws down that inventory.

So, our factories are up now and they're manufacturing in a normalized rate too now as the inventories come down to balance out the production going forward, and you'll continue to see inventories fall through the balance of the year..

Even at capacity in the factories, you will still see the inventories come down? Okay, that's interesting..

Yeah, yeah..

And then just because there is so much volatility in the compares as we look ahead to the – thanks for the detail on fourth quarter, guys.

But as we look ahead to the fourth quarter, can you help us think about the ramp there? There has just been a lot of wholesalers in the last two weeks have pointed to very cautious comments out of some of the discrete wholesale channels.

You guys have some pretty volatile compares in the fourth quarter and then you did have some – we didn't think you would have as much weather volatility last year, but you guys pointed out we do have some categories that have a lot of sweatshirts and fleece and those kinds of things.

Can you tell us maybe some of the building blocks to get to what you have baked into the fourth quarter this year against those compares?.

Well, what I would remind you is that in the fourth quarter, we assumed that – at the low-end of our guidance that we continue to have the impact of the extremely warm weather we had last year. So there was no improvement upon that.

We also had a number of initiatives in place behind our core basics business, our focus on the core initiatives that are going to ramp during the second half of the year, including our Fresh IQ, and then certainly, we've closed on our Champion and Pacific Brands acquisitions. It also gave us further year-on-year improvements.

So we've got a number of initiatives working our way and if the weather were to improve, then we move even further toward the higher end of our guidance. So I think we are well-positioned in that case. I would remind you as compared to many of the businesses that speak to you about bookings, our businesses overall are 85% replenishment.

So ours is very much based on POSs derived from purchases and while they are very much dependent on pre-bookings and perhaps the conservatism of buyers and their concerns about the prior year.

We have assumed that lower end of the guidance from the standpoint of the weather, but we are positioned such that if the higher end comes, we've got the inventory in place and our replenishment model allows us to pursue that growth going forward..

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to HanesBrands' management for any additional comments..

We'd like to thank everyone for attending our call today. And we look forward to speaking with you soon. Have a great night..

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a good day..