T.C. Robillard - Hanesbrands, Inc. Gerald W. Evans Jr. - Hanesbrands, Inc. Richard D. Moss - Hanesbrands, Inc..

Christian Roland Buss - Credit Suisse Securities (USA) LLC (Broker) Eric Tracy - Brean Capital LLC Omar Saad - Evercore ISI Susan K. Anderson - FBR Capital Markets & Co. Jay Sole - Morgan Stanley & Co. LLC Ike Boruchow - Wells Fargo Securities LLC Michael Binetti - UBS Securities LLC Anna Andreeva - Oppenheimer & Co., Inc. (Broker) Simeon A.

Siegel - Nomura Securities International, Inc. John Kernan - Cowen & Co. LLC David J. Glick - The Buckingham Research Group, Inc. Steven L. Marotta - C.L. King & Associates, Inc. Carla M. Casella - JPMorgan Securities LLC.

Good day, ladies and gentlemen, and welcome to the Hanesbrands third quarter 2016 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to hand the floor over to T.C. Robillard, Chief Investment 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 third quarter of 2016. Hopefully everyone has had a chance to review the news release we issued earlier today.

The new 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, represent continuing operations and 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 Gerald Evans, our Chief Executive Officer and Rick Moss, our Chief Financial Officer.

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

Thank you, T.C. We're having a great year. Our sales initiatives have re-accelerated organic growth in several of our core business lines. Our acquisitions, both past and present, are performing extremely well. Our inventory level is declining and cash flow from operations is already $300 million ahead of last year.

Overall, our business is tracking to our plan and we remain confident in our ability to deliver our full year guidance. Our business model is as strong as ever and continues to create significant value for our shareholders. The real power of our model comes from its diversification.

We have a variety of different levers that allow us to consistently grow both revenue and earnings per share, while at the same time, generate significant amounts of cash flow. It's not just one strategy or one facet of our business. It's a number of them working together that drive strong, consistent results.

This was evident, once again, in our third quarter as three different levers combined to drive an 11% increase in revenue, a 12% increase in earnings per share and a record level of cash flow from operations. The first lever contributing to our strong results was our focus-on-the-core initiative.

If you recall at the beginning of the year, we highlighted various sales initiatives to drive second half growth in parts of our core. And these initiatives delivered as we saw accelerated organic growth across several of our business lines.

For the quarter, our basics revenue increased 9% organically driven by a 20% growth in men's underwear as we gained market share and begin to flow in shipments of our new odor control innovation FreshIQ.

Year-to-date, our basics business is up 2% organically and we expect momentum to continue through the fourth quarter as our holiday promotions are in place and we begin to advertise behind FreshIQ.

Global Champion for the quarter delivered low single digit organic revenue growth driven by low double-digit growth in the mass channel and strong double-digit organic growth in Japan. And in terms of our U.S. online business, sales across all channels increased 17% in the quarter.

The second lever of our business model that drove strong third quarter results was our acquisition strategy. We continued to generate significant synergies from our prior acquisitions including Hanes Europe, Knights Apparel and Maidenform, which continues to create synergies even three years after closing.

For the full year, we remain on track to achieve our target of $40 million in acquisition synergies. We also benefited from the addition of Champion Europe and Pacific Brands. Both businesses drove revenue and operating profit results that exceeded our plan, further reinforcing our excitement about these acquisitions.

These are great businesses, with great brands and very strong management teams that are already creating value for our shareholders. We remain on schedule with the integration planning and we're confident in our ability to deliver over $125 million in combined annual operating profit within three years.

And the third lever of our business model that drove strong results in the quarter was our cash generation strategy. When we exited the fourth quarter last year, the weather-driven slowdown created an inventory overhang that temporarily impacted our cash flow.

While there have been some skeptics, we communicated a specific strategy to reduce inventory and generate record-levels of cash flow, and that's exactly what we've done. Inventory in the quarter excluding recent acquisitions declined significantly from the second quarter's level, which in turn helped drive $337 million in cash flow from operations.

And as we expected, our acquisition and integration expenses continued to decline, all of which keeps us firmly on track to deliver our cash flow guidance for the year.

So in summary, we had a great quarter, and this combined with our full year outlook represents further proof that our business model is as strong as ever and continues to create significant long-term returns for our shareholders.

Looking forward, we believe we are extremely well positioned to deliver on average mid-single-digit revenue growth and double-digit EPS growth for many years to come. With that, I'll turn the call over to Rick..

Thanks, Gerald. We delivered strong operating results for the quarter. Our sales initiatives reaccelerated organic growth across multiple business lines. Our inventory reduction actions generated record levels of cash flow from operations. Our acquisitions, both past and present, posted better than expected profit results.

And our acquisition and integration related expenses continued to decline. Now let me walk you through the specifics for the quarter. Sales increased 11% over last year, and like many diversified global companies, we had various puts and takes across our multiple business lines.

Acquisitions contributed nicely as Champion Europe, Pacific Brands and the acquired Champion license in Japan added approximately $180 million of revenue in the quarter. We delivered strong organic growth in several business lines, including basics, Champion at mass, Gear for Sports, Champion Japan and online.

This growth was offset by a decline in Champion in the sports specialty channel as well as a decline in our U.S. direct-to-consumer business where we're proactively transitioning to a growth model by exiting our legacy catalog business and removing noncore offerings.

Looking at our two largest segments, Innerwear sales increased 2% organically in the quarter. Our basics business was up 9% over last year, including a 20% increase in men's underwear.

This strong organic growth was driven by our various focus-on-the-core sales initiatives, including increased marketing and promotion as well as the launch of FreshIQ, the first innovation in our core in over a decade. Year-to-date, our basics business is up 2% with the growth evenly balanced across all product categories.

This is partially offset by the expected decline in intimates as we anniversaried the large pipe of Hanes Bras in last year's third quarter. Turning to our Activewear segment, sales declined 2% in the quarter. Our Champion business at mass increased by over 10% organically as our refreshed product offering continues to resonate with consumers.

Gear for Sports, which is our college bookstore business, also delivered organic growth in the quarter, up mid-single digits over last year. This growth was more than offset by declines in Champion in the sports specialty channel due to the bankruptcies of certain sporting goods retailers in the U.S.

While we're disappointed with the results in this channel, we believe the headwind is temporary. More importantly, we expect this channel to return to growth in 2017 as our POS trends remain positive at key accounts. We've secured new space, and we lapped the impact from the bankruptcies.

Switching to margins, now that our inventory-related actions are behind us, as expected, our gross margins returned to growth in the quarter, increasing 60 basis points over last year, while operating margins decreased 40 basis points due to the short-term dilution from recent acquisitions.

Adjusting for these acquisitions, operating margins increased 30 basis points over last year, driven by synergies from Hanes Europe, Knights Apparel and Maidenform. Interest and other expense increased roughly $13 million over last year as a result of the higher debt balances associated with the acquisitions of Champion Europe and Pac Brands.

The tax rate in the quarter was roughly 6%, bringing our year-to-date tax rate to 7%, which is in line with our full-year expectation of a high single digit rate. Earnings per share of $0.56 increased 12% over last year and came in at the midpoint of our guidance range.

Turning to inventory and cash flow, inventory in the quarter, excluding approximately $173 million from recent acquisitions, declined by roughly $124 million from second quarter's level, as our actions to reduce inventory continued to deliver results.

This in turn helped generate $337 million in cash flow from operations, a record for any quarter in our history. Year-to-date cash flow from operations is roughly $300 million higher than last year, which puts us right on track to deliver on our cash flow guidance for the full year.

Touching briefly on guidance, while still within our initial range, we've narrowed our full-year outlook. This reflects the expected retailer caution heading into the holiday season. If holiday is, in fact, more robust, then that would represent upside to our guidance.

At the midpoint, our guidance now implies approximately 8% growth in revenue, roughly 10% growth in operating profit, approximately 15% growth in EPS and $775 million in cash flow from operations.

In terms of acquisition and integration related charges, our guidance of approximately $180 million remains unchanged and represents a decline of nearly $90 million from last year.

Looking to next year, despite the addition of nearly $1 billion in acquisitions this year, we expect these charges to take another significant step down in 2017 as we benefit from integration efficiencies and leverage our prior foundational investments. So in closing, let me end right where Gerald began. We're having a great year.

Our sales initiatives have re-accelerated organic growth in several of our core business lines. Our acquisitions, both past and present, are performing extremely well. Our inventory level is declining and cash flow from operations is already $300 million ahead of last year.

Overall, our business is tracking to our plan and we remain confident in our ability to deliver on our full year guidance. 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 will 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 Christian Buss from Credit Suisse..

Hi, I was wondering if you could talk a little bit about the trends that you're seeing in the core mass channel in the U.S.

How do you feel about inventories in the channel? And how has your growth thinking been changing over the course of the year? What are your expectations as you look towards the end of the year and 2017?.

Yes. Hi, Christian, this is Gerald. Let me take that question. First of all I want to say that the year is really unfolding as we expected. We had a great Q3.

We've put a number of sales initiatives in early in the year and they've begun to take hold and really helped drive that strong result in the quarter, up 11% in total revenue growth and up 12% in EPS. Those sales initiatives resulted in driving very strong basics results for us in the quarter, up 9%, up 2% year to date.

And we see that momentum only continuing to build in the basics business as we have a number of events planned for the fourth quarter behind our key launches like our FreshIQ and for the holiday period. We've also seen a pretty strong improvement in our Activewear business sequentially from quarter to quarter.

And when you back out the impact of sporting goods bankruptcies, you see very strong, actually a 1% increase in Activewear for the quarter and really strong performance out of our Champion at mass business, as well as positive improvement in our Hanes Activewear business.

And also our online growth showed very positive growth, up 17%, which is actually an accelerated rate over where we've been year-to-date. When we look at specific channels, certainly we had a very strong back-to-school period, as indicated by our Q3 results and continued our share gains in core areas like underwear and socks.

So from the mass channel perspective, we feel that it's performing very well for us. We came out of the back-to-school period with our inventories in line.

So we feel that with the momentum we're carrying into Q4, as well as our inventories in line and the basics initiatives we have that we've got a good strong performance that will carry into Q4 in mass as well..

Great, thank you very much.

Could you talk a little bit about the acquisitions you made this year? What have you learned as you've gotten deeper into understanding those businesses? Where have the surprise areas been for you?.

Well, I think for both Champion Europe and Pacific Brands, we've been very pleased with the strengths of the businesses themselves and certainly the management that came with those businesses. You may recall that both of these acquisitions very effectively balance cost synergies, as well as growth opportunities.

And we see that our expectations for both are in line. And certainly we've seen actually in Q3 we saw a little better performance out of both than we had anticipated. And as we look to the fourth quarter, their business skews a little more heavily to the fourth quarter. So you'll see even a little more impact out of them in the fourth quarter..

Thank you. And our next question comes from the line of Eric Tracy from Brean..

Hey, guys, thanks and congrats on delivering in a difficult environment. If I could follow up on just what's going on within the Innerwear category, obviously delivered here with the FreshIQ platform.

Gerald, maybe just speak to kind of the dynamic between selling into mass, traditional brick-and-mortar versus kind of the evolution of the third-party online. It looks like you guys are transitioning some of the segmenting next year, so maybe just talk about that dynamic and how you guys are positioned to kind of capitalize on that..

Sure. Certainly, the power of our sales initiative showed across all channels when you look at the Innerwear business across basics. With that kind of lift, certainly it touched every channel. We do continue to see a shift of apparel sales in general, online and our categories are shifting with them.

As we've discussed before, we hold the number one share position in our core categories online. We saw very solid growth, really at about 2x the rate of total apparel growth was our growth trend within the quarter. It is what caused us to take some of our actions within our DTC business.

That's a relatively small business for us and that business really contains the U.S. outlet stores, as well as our own websites and legacy catalog business.

So, frankly, we're taking the step there, as well, to exit that catalog business which has been masking the double-digit growth within our websites and position that business along with our other segments to grow as apparel shifts online. So, that's a strategic decision we've made to drive growth as well.

So we feel good about the direction of Innerwear and we feel good about the momentum we carry into Q4..

And then if I could just touch on cash flow, the build year-to-date here should hopefully put to bed some of those concerns around last year's 4Q depressed level, and really is a working cap inventory.

But how do you get us sort of comfortable that that continues? I'm assuming the assumption for next year's free cash is at the same level if not higher, but truly kind of these working cap adjustments sort of behind us..

Yes. Sure. Let me take that. If you look at our guidance, it implies that the fourth quarter is going to generate about $550 million to $600 million of cash flow from operations. Remember that our fourth quarter is normally a disproportionately large percentage of our annual cash flow because of the way the business runs.

But let me break that down for you, kind of give you a sense of where that $550 million to $600 million is coming from. About $250 million of it is coming from net income and other non-cash items like depreciation and amortization. If you take our guidance for the fourth quarter, you'll get to those kinds of numbers.

The balance of it, about $300 million to $350 million, will come primarily from working capital. The bulk of it from continued inventory reductions, as we continue to drive our inventory reduction plans, as well as the normal AR reductions that we always see in Q4. So that will be the majority of it.

We get a little pickup from accounts payable and a little here and there as well. So very confident, though, that we're going to get to the numbers that we've been talking about..

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

Thanks. Good afternoon, guys. A quick cleanup question. I saw the acquisition contribution guidance change a little bit. I assume that's the GTM sportswear deal, that there was some press around in September. I just want to confirm that.

And does that – since you kept this topline the same, does that imply that the organic number maybe is a little bit lower than you had previously thought?.

Well, let me first say, as Gerald said a little earlier, the acquisitions, Pac Brands and Champion Europe are doing better than we expected and that's really constituting the bulk of the difference in our expectations for acquisitions in the year.

In terms of GTM, as you'll see in our 10-Q, we did a couple of very small tuck-in acquisitions towards the end of the quarter that'll have really a minimal contribution in terms of revenue; really, none in terms of profit.

These are really more longer-term, strategic types of things; one that helps us expand our sports apparel business into the high school channel; the other represents the acquisition of some stores in Italy and the geography that we're not currently in.

And so these are complementary to what we've been doing to our current business and so we see them as fairly short term, but not nearly as big of an impact on us as the Champion Europe and Pac Brands businesses..

Got you. That's really helpful, Rick, thanks. And then quick question on the – follow-up on the Basics business, the Innerwear business, the Basics piece versus the Intimates piece.

The Basics number was really quite strong and I think that's a bigger piece, so I'm just trying to kind of triangulate what we're talking about with Intimates and how we got comfortable that it's really just a shift in the compare to last year when you shipped in all those products, and there's not something else going on in the category?.

Sure. And certainly from the Basics standpoint, there were a number of initiatives that drove that kind of lift.

You're right, that's a great lift on the business and we think with all the initiatives we've got behind FreshIQ going into the fourth quarter and advertising starting next week that that'll be a great momentum builder that'll carry forward. In the case of Intimates, for Q3 it was down as we anniversaried the large pipe of our Hanes bra business.

You may recall that this pipe contributed to a 9% growth in intimates in last year's Q3, so fairly big lift last year. We feel good about the brand positioning with Hanes and so forth, and the Hanes business continues to capture share.

I think from the standpoint of trying to ferret the noise out there a little bit, if you take out that noise and you look back two years, we were actually up a little over two points over a two-year ago period when we didn't have the noise of the pipe in it..

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

Hi. Good evening. Good job on the quarter. I was wondering if you could give a little bit more color on just the replenishment trends you're seeing out there at the department stores. We've been hearing a lot about them taking down inventory and just wondering if that's been impacting you guys.

And then, also, if you could maybe comment on the mass channel?.

Yes, from the standpoint of inventories, we came out of Q2 with our inventories in line and, as we went into back-to-school, our builds went in as expected. And we finished with our inventories in line. So we haven't really been experiencing across any of the channels any major pull downs in inventory.

As we've said all year, we felt our inventories were in line, and our customers were replenishment business, so they generally reorder what we sell. And so we're in pretty good shape from an inventory standpoint..

Great. That's good to hear.

And then in terms of the bankruptcies, was the impact a little bit worse than you guys had thought this quarter? And I guess when do you guys think that will taper off?.

It was about as expected in the quarter. We'll start to see the number drop next quarter, and then we lap it in Q1 of next year..

Got it..

I think we'll all be happy to have that behind us..

Got it.

And then maybe if you could just talk about for fourth quarter the puts and takes on gross margin and SG&A just for our model, how we should be thinking about that?.

Sure. In terms of – if you do the math on the guidance at the center point of our guidance, it would imply an operating margin improvement of about 150 basis points. Most of that's going to come from gross margin as that continues to increase, as we've said it would in the second half of the year.

But it will be a combination of the same sorts of things, Susan, that we've been seeing driving gross margin improvement for the last several years. It's cost savings in our manufacturing facilities, it's synergies, it's strong management of our overhead costs, Innovate-to-Elevate, all of those things will continue to contribute in Q4..

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

Great. Thank you. My question's on inventory. You mentioned doing a great job driving inventory reductions.

Did you end the quarter on an organic basis where you thought? Can you just give us an idea of where you are on those plans and maybe where you expect to be organically versus last year at the end of fourth quarter?.

Sure. So we ended Q3 down about 70 million units versus last year. The dollar amount is we were up about $15 million organically year-over-year. The inventory mix was a little richer than maybe we had expected. But it was within our range of expectations for the quarter. So really no surprises, per se.

In terms of where we expect to be, I would say, you should expect us to be down year-over-year by the end of the fourth quarter $100 million to $150 million on inventory..

Okay, great. And then if I can ask about the guidance, it sounds like the small adjustment you made to the guidance was – sounded like based on an outlook for 4Q, based on the retail environment that's out there right now. And it's really not about something that happened in 3Q.

Is that fair to say or was there some aspect of 3Q that made you want to shift the guidance? And if there was, what was it?.

No, I would say the shift in guidance was really pretty modest. A question was asked earlier about the revenue from acquisitions. That will be a little higher than maybe we originally thought, but we're still talking about organic growth in the quarter of 2% to 4%. So it's still really pretty much in line with what we thought..

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

Hi. Thanks for taking my question. Congrats on a nice quarter. Gerald and Rick, just curious if you could talk a little bit about the marketing approach around FreshIQ. Now that the channel is filled, sounds like we should see some investment around demand creation there.

So I guess what's your thought process around where you want to spend those dollars? And in the past, when you've launched a new platform, how does that trajectory work? Meaning initial sell-in takes place and people are walking into stores, but then marketing comes in behind it.

Have you historically seen an uptick in POS when that takes place or is it more steady than that?.

Yes. This is Gerald. Let me just take that. So we've been flowing FreshIQ in for, really, through the third quarter, and as we now enter the fourth quarter, it's all in position and we will do a big launch behind it. We'll do a combination of TV and digital advertising. In fact, some of the digital efforts started two weeks ago.

We'll turn the TV on next week, and along with that we'll do a number of off-shelf displays that'll encourage trial and bonus packs and those kind of things to get the consumer to give it a try. This is a big launch for us. It goes across our core underwear and socks as well.

We really haven't done a launch like that since tagless tee over 10 years ago and this really reaches a broad base of consumers.

As we turn on the TV and we encourage that trial, this is a product that's built on one of the biggest concerns of the consumer, and so as you offer them that odor elimination option, it creates a real reason for trial that we're going to back up with great advertising and promotion packs. We get the trial and we tend to see the repeat.

And, of course, we're now launching it in one of the highest traffic periods of the year. So we would expect it to ramp up and get trial and repeat over the next few quarters..

Got it. And then just doing some store work, it seems like there's not a big pricing premium on that product right now.

Is that something that you could look at in the future once you see how demand trends go, or is this not supposed to be a higher AUR product, and it's just supposed to drive replenishment?.

It is across the core business as well as our trade-up styles and it's a modest increase at this point..

Thank you and our next question comes from the line of Michael Binetti from UBS..

Hey, guys. Congrats on a nice quarter. Just a quick question on the model here. So you mentioned the Champ in sport specialty retail returning to growth in 2017 despite the bankruptcies this year.

Would you mind just reminding us how much revenue you will have recorded in 2016 related to those bankruptcies just so we can think about? It sounds like you're returning to positive even while wrapping around booking some revenue from those retailers in 2016..

The TSA business historically was about $35-ish million a year. We didn't really get much this year because it was in the very early stages of the year as they were – just before they went into bankruptcy. So there really wasn't much this year..

Okay.

And then would you mind just elaborating, maybe give us a little thought on what gives you confidence on returning to organic revenue growth, or at least flat here, just given some of the commentary we've heard around the channel here lately?.

Organic growth within....

I guess just the way that you guys recorded on the top line organic growth in your biggest channel..

Well from the standpoint of the momentum we're building through our initiatives, we've seen that strong positive result of our sales initiatives with our Basics business. And we think that momentum will continue to drive forward and carry Innerwear into Q4.

From the standpoint of our Activewear business, what we see is the momentum has stepped up from Q2 to Q3.

And we think there'll be additional sequential improvement as we look to Q4, driven by the improving trends within Hanes Activewear and our Champion at mass business, as well as further improvement in our Champion business in sporting goods as the headwinds of the bankruptcy are smaller in the fourth quarter..

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

Great. Thanks. Good afternoon, guys. And let me add my congrats as well. I guess two quick questions.

With acquisitions coming in ahead of plan here in the back half, should we think about contribution from the new businesses next year above that $800 million range you guys originally outlined and any initial color or how should we think about the synergies for 2017? And also just coming into this year, I think we talked about margin expansion being more SG&A driven.

As we approach 2017, do you think we should expect a more balanced approach between gross margin and SG&A? Thanks..

Well, I don't really want to comment much on 2017. We're still in the process of putting our plans together. And we'll obviously be giving guidance on 2017 on our next call. We are very pleased with the trends that we have seen in generating synergies from our acquisitions.

Every one of our acquisitions is running ahead of plan in terms of the synergies that we're seeing. So we think our integration efforts are being very successful. And we expect to be able to continue to drive those. I think a lot of the drivers of margin improvement in the past couple of years will continue on.

We've said that we don't really see those as having finite terms. So we'll continue to generate cost savings for our manufacturing facilities. We'll continue to generate synergies. I-to-E will continue to generate gross profit improvement. So all of those drivers will continue on into the future.

So we'll be giving you a little more color on that as we get to the 2017 guidance on the next call..

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

Thanks. Good afternoon, guys. Sorry if I missed it, but can you elaborate on the growth-oriented brand strategy you mentioned with regards to DTC? And then just can you talk to, just given the moving pieces within Activewear and Champion, can you talk to where you expect those margins to go? Thanks..

Sure. Let me start with the DTC question. DTC is really a U.S.-based business. It's relatively small for us. It includes our outlet stores, it includes our legacy catalog business, and it includes our own websites that we operate.

What we've chosen to do is proactively shift it to a growth strategy by exiting the legacy catalog business that's been in decline for some period of time, and it's really masking the double-digit growth we're seeing out of our websites, as it follows the trend of so many online in showing growth.

And so we've taken that step to transition out of that catalog business. It creates a short-term headwind, but it allows us to position ourself for long-term growth.

Do you want to take the margin question, Rick?.

On Activeware..

Yeah..

Yeah. As the volume recovers from the bankruptcies, you'll begin to see the margins return to a more appropriate mix for that business, where the richer-margin products have a much larger share of the sales for that segment..

Great. Thanks, guys..

Thank you. And our next question comes from the line of John Kernan from Cowen and Co..

Good afternoon, guys. Thanks for taking my question..

Hey, John..

Can you just help us understand what we should expect from the Innerwear and Activewear segments in terms of total revenue growth for the fourth quarter and in terms of what's embedded in your guidance?.

Sure. I think you should expect in the fourth quarter – you should expect to see, as we said – factoring out the acquisitions numbers that we gave you – about 2% to 4% top line organic growth in the quarter. That we expect to continue to see Innerwear contribute to that growth, and we expect to see Activewear actually return to growth in the quarter.

So those will be the two big drivers. International we expect to continue to do very well. Our Asia business has been very successful even outside of the acquisition that we did in Japan. So all that momentum that Gerald talked about earlier is really what we think will be driving us through the fourth quarter..

Okay. And then just to revisit the Activewear margins, I think you've got a pretty difficult comparison year-over-year in terms of profitability in Activewear.

Can you help us understand how Activewear margins should flow in the fourth quarter, given you're still cycling some of the bankruptcies?.

Yeah, the bankruptcies though will be less of an issue in Q4. So I think you'll see the margins in Activewear normalize in Q4..

Okay. And just one more question. Congrats on the progress on the cash flow. Can you just confirm that cash is going to be domestic based cash? I think at the end of last year your cash balance was almost entirely international.

Does all that cash flow flow through to domestic business?.

You know, I don't want to get into the exact geography of the cash. I will tell you this, we don't consider any of our cash to be trapped on a long-term basis. Some of the cash is in some countries where it takes a little longer to get it out because of the way the bureaucracy in a country works. But we don't consider any of our cash to be trapped.

With our global supply chain, with our acquisition activities, we try to position the cash where we need it, when we need it. We haven't had a problem yet..

Thank you and our next question comes from the line of David Glick from Buckingham..

Thank you. Just a clarification on that long-term algorithm you gave on revenues and EPS of mid single-digits on the top line on double-digit EPS.

That mid single-digit is a combination of organic growth and acquisitions, correct?.

Correct, yeah..

Okay. Thank you. And just to follow up on FreshIQ, I've been looking at some of your wholesale partner websites and the only website I really see FreshIQ on is Hanes.com.

I mean, is that something that you launched that we should see more of a presence in terms of showing the product online at your retail partners?.

Yeah, it's really, David, beginning to step up now from the standpoint of featuring so that the product flowed in over the quarter at retail and we began the advertising activity and the digital activity as we move to next week and I'm sure the product will be listed there as well..

Thank you and our next question is a follow-up from the line of Jay Sole from Morgan Stanley..

Great. Thank you. Just had one more I wanted to follow up. It sounds like the progress on the deals, both the current ones and the ones from a few years ago are progressing as planned.

Have you thought about – maybe what you can share with us about how you might consider the timing of a future deal? Are the progress that you're making integrating these different companies happening faster? Does that accelerate the time line? What can you share with us about that?.

Well, first we are deep in the efforts to refine and finish our integration strategies on Pacific Brands and Champion Europe and we will make sure that we get those right, and we are able to deliver the synergies both growth and cost synergies. And we'll never put anything in front of that.

That said, acquisitions are an important part of our value creation strategy and will continue to be so in the future. And we're always out talking to people, and when the time's right, we'll announce one..

Thank you. And our next question comes from the line of Steve Marotta from C.L. King & Associates..

Good evening. Thank you for taking my question. I just have one question. Gerald, you talked about the step up in organic growth in the fourth quarter.

And considering the challenges in general bookings that we're hearing for the first half of 2017, can you comment a little bit on the orders that you have in hand and what you would expect from an organic growth standpoint, at least in the first half of the year from what you have some visibility on? Thank you..

Well, we're really not projecting into 2017 at this point. We'll be providing guidance for that as we come to our next call, but what I would say at this point in time is that the vast majority of our business is also replenishable, so that shelf space will be in place and we'll see that as the consumers return.

We do see good momentum building in our Activewear business as we overlap the bankruptcies and so forth, and we are beginning to gain space in that Champion business, in sporting goods which gives us optimism there..

Okay, thank you..

Thank you. And our next question comes from the line of Carla Casella from JPMorgan..

Hi. Sorry, one quick question to follow.

Most of my questions have been answered, but can you just give us a little more color on the cadence in the quarter in terms of the traffic what you're hearing from retailers?.

In the third quarter?.

Yeah..

Yeah, what we saw sort of as we worked through back-to-school, is back-to-school built to an early peak in August before dropping back a bit and returned a bit in September then softened again. So it's sort of what we've seen all along. It's sort of good periods followed by weak periods. Some retailers had one week that was better than another.

And overall, we saw that, as we've seen for a while that back-to-school has extended itself so it really runs now from July all the way through September..

Okay.

And then one question on when you're talking about direct-to-consumer, when you're selling to an online or when you talk about online business, are you including sales to like an Amazon or an online-only customer as well or is that just your own online?.

When we talk to the direct-to-consumer as to where we're winding down our catalog and our direct-to-consumer division that is our websites only.

When we talk about our online sales that are growing at 17%, and now 8% of our sales, that includes all sales online which includes our sites, it includes our sales to pure plays, as well as our sales to brick and mortar websites..

Thank you and our next question comes from the line of Michael Binetti from UBS..

Hi, guys. Thanks for taking me on a quick follow-up. Rick, I meant to ask you before, would you mind helping us elaborate on your comments on the charges coming down next year.

I know it's early but since it's been such a big topic and you guys have tried really hard to help us offline, is there any way you could get us some kind of a sense of the broad-brush strokes that you're trying to target for next year, as far as where those charges come down to so we can think about it?.

Yeah, well, I'm not quite ready to give you an exact number yet. We'll do that when we give guidance for next year on the next call. But what we have been saying is that we do expect to see a substantial drop next year. It's going to be driven, really, by three things. We're getting more and more efficient at these integrations.

We're just getting better at it. The more that we do, the better we get. The second thing is we're doing a great job of leveraging the things that we learn from one acquisition into the next. So we're able to leverage those foundational investments and, again, the things that we learn from one deal to the next.

And then the ones that we've most recently acquired, Pac Brands and Champion Europe, are really going to be less complex, we think, in terms of integration versus some of the ones that have done earlier in our process. So I think you'll see a nice drop in XA (44:49) charges next year and then beyond that..

Thanks a lot..

Thank you and we have time for one more question. Our final question for today is a follow up from the line of Eric Tracy of Brean..

Hey, guys. Thanks. I just wanted to follow up, as well, on the question as it relates to mid single-digits revenue growth. Again, I know you're not going to guide to next year's revenues, but there's no change to the acquisition contribution from Champion Europe or Pacific Brands meaning that that should still wrap around to the next year.

And assuming any level of organic growth, just by the math, would imply a higher than that mid single-digit rev growth for next year. So I just wanted to make sure there wasn't any change. I know you're not speaking to 2017..

Yeah, thank you, Eric. I appreciate the clarification, or the opportunity to clarify that. When we talked about that mid single-digit number, we're talking about that as a long term number.

That's been the long term CAGR for the last five to ten years, we look at that, but obviously next year the revenue from Pac Brands and Champion Europe will be substantial and will be a big push for the top line..

Perfect. Thanks..

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

We would 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 now disconnect. Everyone have a great day..