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

Christian Roland Buss - Credit Suisse Securities (USA) LLC Susan K. Anderson - FBR Capital Markets & Co. Steven L. Marotta - C.L. King & Associates, Inc. Andrew S. Burns - D. A. Davidson & Co. Michael Binetti - UBS Securities LLC Jim Duffy - Stifel, Nicolaus & Co., Inc. Anna Andreeva - Oppenheimer & Co., Inc. Jay Sole - Morgan Stanley & Co.

LLC Simeon Avram Siegel - Nomura Securities Omar Saad - Evercore ISI Nancy Hilliker - Wells Fargo Securities LLC Bill Schultz - Goldman Sachs & Co. John Kernan - Cowen & Co. LLC Carla Casella - JPMorgan Securities LLC.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Hanesbrands Conference Call. At this time, all participants are in listen-only mode. Later, we'll 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 conference over to T.C. Robillard, Chief Investment Relations Officer. Please go ahead, sir..

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 first quarter of 2017. 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 2017 guidance, represent continuing operations and exclude all acquisition and integration related charges.

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'll now turn the call over to Gerald..

Thank you, T.C. Hanesbrands delivered strong results for the first quarter. Revenue increased 13% compared to last year. Earnings per share increased 12%. Cash flow from operations improved by more than $260 million, and we returned over $350 million to shareholders through dividends and buybacks. Overall, our results were right in line with our plan.

Recall that when we set our guidance for the year, we took a more conservative view than most with respect to the impact from the various headwinds within the U.S. retail market, including door closings and tighter inventory management.

And the year is unfolding just as we expected, giving us confidence in our ability to deliver on our full-year guidance. Over the years, we've talked in detail about the various ways in our multi-faceted business model can drive strong shareholder returns.

And today, we announced Project Booster, which is an initiative designed to further optimize our business model and extract additional returns for our shareholders.

Putting Booster in context, if you look back over the past decade, we've refined and strengthened our business model by implementing various strategies based on the underlying premise of Sell More, Spend Less and Generate Cash.

These strategies include the globalization of our supply chain, our revenue and margin enhancing Innovate-to-Elevate strategy, and the implementation of a disciplined acquisition and capital allocation strategy.

These strategies have been extremely successful, driving strong financial results and creating a powerful, global, commercial and supply chain footprint. That said, you should really think of the past decade as the construction phase, where we built the engine of our business model.

Now it's time to fine tune the model to extract its full revenue and cash flow potential. And this is exactly what Project Booster is designed to do. With Booster, we plan to leverage our global scale and rebalance our operations to remove approximately $150 million of annual cost from our business.

We expect to annually reinvest roughly $50 million of these savings as well as reallocate resources to deliver more consistent organic growth of 1% to 2%. And we plan to drive improvements in working capital, which when combined with the net cost savings is expected to generate an incremental $300 million of annual cash flow from operations.

We launched the project late in the first quarter, and we expect to deliver its full benefits by the end of 2019. Touching briefly on the growth investments and cost-saving initiatives within Project Booster. In terms of our growth investments, we plan to further accelerate development of our omni-channel capabilities, including online in the U.S.

as well as our retail and online operations in our international markets. We're planning to increase our investment in our global portfolio of leading brands, including brand building and marketing support. And we plan to further invest in the expansion of our Champion brand globally.

With respect to our cost reduction efforts, these will be driven by two initiatives. The first is to reduce overhead, including head count to better match resources with opportunities as well as to reflect trends on a market-by-market basis.

The second initiative is to further lower cost with our supply chain, which will come on top of the expected synergies from our current acquisitions.

Some examples include generating procurement and product development efficiencies, leveraging global fabric platforms, redesigning our distribution network to more efficiently ship online orders and further optimizing our global textile and selling operations. So, in summary, we had a strong first quarter.

The year is unfolding just as we expected, and we feel good about our outlook for the full year.

Looking forward over the next several years, as we realize synergies from our prior acquisitions and unlock our potential through Project Booster, we believe we're very well positioned to deliver more consistent levels of organic growth, higher levels of sustainable profitability and over $1 billion of annual cash flow from operations.

With that, I'll turn the call over to Rick..

Thanks, Gerald. Given my recent decision to retire by the end of the year, let me reflect on the past few years as a way to help frame the company's future as we launch Project Booster. Over the past five years, the implementation of our Sell More, Spend Less, Generate Cash strategy and all its variations has significantly transformed our business.

Over this time, we've added approximately $1.6 billion of revenue. We've expanded our global footprint with nearly a third of our sales now coming from our international businesses. We've more than doubled our operating profit, while expanding margins by over 500 basis points.

We've completed $2.3 billion of acquisitions, and we've returned roughly $1.5 billion to shareholders through dividends and buybacks. The evolution of our business model has clearly driven strong results over the past five years.

With Project Booster, we're entering the next phase of our evolution, which is where we fully leverage our large global footprint and unlock the full revenue and cash flow potential of our business model. And we believe this positions us for continued growth over the next five years.

In terms of the impact and cadence from Booster; the project, which began late in the first quarter, is expected to be neutral to operating profit and cash flow in 2017. We incurred approximately $7 million of cost in the first quarter or about $0.02 a share primarily from head count-related actions.

We expect an equivalent level of expense in Q2, which is factored into our current guidance. The Booster-related costs are reflected in our adjusted results. So, to be clear, these costs are not part of our acquisition and integration-related charges.

The savings from these actions, which are expected to fully offset the first half costs, should flow through in the third and fourth quarters.

Looking forward, gross cost savings, working capital improvements as well as growth-related investments in Project Booster are expected to build over the next two years reaching on an annual basis $100 million of net cost savings and $300 million of incremental cash flow from operations by the end of 2019.

I want to emphasize that the benefits from Booster are on top of our annual $30 million to $40 million of supply chain efficiency gains and on top of the remaining synergies from our prior acquisitions.

And as Gerald noted, when you combine the remaining synergies from our existing acquisitions, with the expected benefits from Project Booster, we are very well positioned to exit 2019 at a run rate of more than $1 billion a year in cash flow from operations. Now let me walk you through some of the specifics for the quarter.

We're off to a strong start to the year as our results were in line with our expectations and our guidance. Sales increased 13% over last year, driven by roughly $210 million of acquisition contributions.

With respect to organic sales, was 4% decline versus last year, was in line with our expectations and showed sequential improvement from the fourth quarter.

Organic growth in Activewear, Online, Asia and the Americas was offset by expected declines in Innerwear as well as our new Other segment, which consists of our businesses that are being managed for cash. Touching briefly on organic sales.

There were a number of encouraging signs within the quarter that reinforced our confidence for continued sequential improvement as the year progresses. Online sales in the U.S. across all channels grew at a double-digit rate. Our largest business, men's underwear, grew low single-digits as order patterns normalized with a large mass retailer.

Our Activewear segment returned to organic growth, while our Asia business continue to grow at double-digit rates. And as we look through the second half, simply wrapping our higher growth acquisitions and last year's exit from our legacy catalog business is expected to add over 150 basis points to organic growth. Looking at our segments.

Activewear sales increased 3% over last year, driven by low single-digit organic growth and a modest contribution from last year's acquisition of GTM. Champion sales in the U.S. were up double-digits, as we continued to benefit from our refreshed product offering and increased space within the mass channel.

This more than offset the decline in our Hanes Activewear business. Operating margin of 10.2% was essentially flat relative to last year. Switching to our International segment. Sales growth was driven by the contributions from last year's acquisitions, while organic sales on a constant currency basis were essentially flat in the quarter.

Operating margin of 10.6% increased 170 basis points over last year driven primarily by synergies from Hanes Europe. Turning to our Innerwear segment. Sales decreased roughly 6% over last year in line with our expectations. Operating margin of 20.3% was essentially flat versus last year.

In basics, the strength in our men's underwear business was more than offset by declines in other product categories due to challenging traffic and cautious inventory management by retailers. With respect to intimates, the entire year-over-year decline was driven by a single retailer who began its planned door closings during the quarter.

We felt good about our outlook for the second half as our shelf space is stabilizing, and we're seeing traction with our new Maidenform offerings, which are being rolled out across multiple channels throughout the year.

Looking at our overall results, gross margin improved 230 basis points over last year to 40.2%, driven by acquisition-related mix as well as efficiency gains within our supply chain. Operating margin of 11.6% declined 50 basis points over last year, due entirely to the roughly $7 million of costs related to Project Booster.

Core operating margins increased 40 basis points in the quarter, driven primarily by $5 million of acquisition synergies. The tax rate was 6% in the quarter, in line with our full year guidance, while EPS of $0.29 was at the high-end of our guidance range despite the $0.02 per share impact from Booster-related expenses.

With respect to balance sheet and cash flow highlights. Core inventory declined 8%, while cash flow from operations improved $262 million over last year. About half of the cash flow improvement was timing related, while the other half was from structural improvements to working capital.

We also invested approximately $300 million during the quarter to repurchase nearly 15 million shares. Turning to guidance, we reiterated our full year outlook while also providing second quarter guidance. So I'll point you to the press release and our FAQ document for any specifics. That said, let me touch on a couple of items regarding Q2.

First, with respect to sales, our guidance includes approximately $200 million from acquisition contributions, which implies an organic sales decline of roughly 2%, continuing our improving trend to return to organic sales growth in the second half.

And second, our guidance includes approximately $8 million of Booster-related expense or about $0.02 a share, which will fall primarily in SG&A. So, in summary, we're off to a strong start for the year as our results were right in line with our expectations.

We grew revenue 13%, we grew earnings per share 12%, we delivered strong improvements in cash flow, and we returned over $350 million to shareholders. And with that, I'll turn the call back over to Gerald..

Thanks, Rick. As you can see, we had a strong first quarter. The year is unfolding as we expected, and we feel good about our outlook for the second quarter and the balance of the year. We saw sequential improvement in organic growth in the first quarter.

We're forecasting continued sequential improvement in the second quarter, and we expect to return to organic growth in the second half. Looking beyond this year, we're very excited about our prospects for continued growth as Project Booster leverages the scale of our global footprint to deliver our full revenue and cash flow potential.

With Booster, we are investing for growth behind our leading brands, our omni-channel initiatives and the global expansion of Champion. We're driving cost out of our business and we're improving all areas of working capital management to deliver higher levels of sustainable cash flow.

So, as we look forward over the next several years, we believe we're very well positioned for continued revenue, profit and cash flow growth. And with that, I'll turn the call back over to T. C..

Thanks, Gerald. 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..

Yeah. So, thank you very much. Very intrigued to hear about Project Booster.

Could you help us understand what the building blocks are to get to that $300 million of operating cash flow improvement? Where are the real big moving pieces beyond the cost saving side of the equation?.

Well, as we said, about $100 million of the Project Booster number will come from cost savings. Those cost savings will be both SG&A related, but mostly cost to sales related as we continue to leverage our supply chain.

And then $200 million of the $300 million cash flow improvement from Project Booster will then come from working capital improvements, and that's going to come across the board. It'll come through continuing to drive improving inventory turns. It'll come through – and also as well in improving our accounts payable and accounts receivable management.

So, there are lot of elements to it. It's really not one thing, but a whole organizational effort..

Thanks.

And could I ask about your expectations for return to organic growth in the back half of the year? What are you seeing at point-of-sale to give you comfort in that trajectory?.

What I would say, first of all, Q1 was the quarter that we expected to see the greatest impact from door closings, and that's playing out as expected and it's now behind us. And we expect improvement to continue into Q2 and growth returning in the second half. And we really see that from three things.

And the first one is that we're seeing positive signs within our key businesses. Our Activewear segment returned organic growth. We're seeing double-digit growth in our Online sales. Our Asia business continues to grow at double-digit rates and our Latin America business has showed growth in the quarter as well.

Now within Innerwear, while it was down, our men's underwear grew at low single-digit rates and our intimate space outside of door closures stabilized and positioned us for growth. We did see POS to improve through the quarter and build as we moved into the April period. And so, we see that as a positive as well.

As we look to the second half, we pick up the additional benefit to organic growth that our back-to-school business is weighting more heavily to Q3. So that's a tailwind for us as we go toward Q3 in the second half.

And then finally, as Rick noted in his comments, as we turn to the second half, we pick up about 150 basis points of improvement in organic growth by overlapping last year's catalog exit and overlapping the acquisitions of Pacific Brands and Champion Europe.

So, with the closings behind us, we're seeing signs of positives trends in our core business as well. And the tailwinds we pick up in the second half, we feel good about our guidance and the trend of our business to move to growth in the second half..

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

Hi. Good evening. Congrats on a good quarter in a really tough environment..

Thanks, Susan..

And Rick, let me just extend my congratulations, but we'll definitely miss you here, but good luck with everything in the future..

Thank you, Susan..

I was wondering if maybe you could give a little bit more color on the women's innerwear. So, was it still negative even excluding the door closings? And then also maybe just some color on the weaker areas there.

And then I think you mentioned, the new Maidenform offerings, have those begun to roll out yet, or is that mainly second half? And then also if you could talk about any other space gains in Innerwear, Activewear for the second half? Thanks..

Sure. Specific to Innerwear in total, Innerwear was the category that was down in the first quarter. And as much as my prior comments, we expected Q1 to be the most challenged because it was where the door closings where. And frankly, Innerwear was the business that was most affected by door closings as it has the broadest distribution.

In spite of that, we saw a number of positives. The men's underwear business did grow nicely in the quarter, low single-digits rate. And we actually, across our basics business, we gained share in the quarter as well.

Certainly, our FreshIQ is a innovation is driving momentum across those businesses, and we anticipate further introductions of ComfortBlend in the next few weeks with a new fabric platform. Specific to the intimates business, all of the Q1 decline was tied to a single retailer who is closing doors.

So, outside of those closings, we've actually seen our intimate space stabilized and we feel now that we're well positioned as we look to the second half there to drive growth in our intimates business as well.

And certainly, we are seeing traction in some of those new Maidenform innovations, and that's an important driver of second half growth as well as we flow out those new initiatives in Maidenform.

So, when you see that, and you add it to the movement of the back-to-school weighting more heavily to the third quarter, as we've seen for some time, our retailers are moving their purchases closer to the event, we think things are building nicely to give us some momentum to return to positive growth in Innerwear in the second half..

Great. That sounds really positive.

And then, are you guys expecting any other space gains in the second half in either Innerwear or Activewear in the U.S.?.

No, I think from a space standpoint in Innerwear, things are pretty stable at this point in time. And that's a very positive statement as we come out of door closings to be able to say that we've stabilized the space and we're not going to build up on that space and drive growth forward.

On the Activewear side, we are seeing some space expansion in certain channels as well look to the second half, so we do have some expansion there..

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

Good evening, everyone. Gerald, you've mentioned a couple of times that you expect organic growth to reaccelerate in the second half.

Just to put a finer point on it, do you expect that in Q3 as well as Q4?.

We do expect it to ramp in Q3. It benefits from the certainly, among other things, the carry-on of the back-to-school orders that were last year in Q2. So that's an important driver of that.

I also want to point you to the fact that we overlap our exit of our catalog business on the broader basis that would affect our organic growth in the first half of the year. And then finally, our acquisitions go into that organic base in the back half of the year. And those two acquisitions grow at a mid single-digit rate.

So there's a lot of fuel to that that you'll see ramp as it goes in the third quarter. We do expect growth driven by those initiatives also into the fourth quarter. But I would add, we've been cautious in how we planned inventory management by our retailers.

And we're not anticipating the traditional holiday builds that we were accustomed to in the past. We think that the retailers will be more cautious in their inventory management in the fourth quarter..

But even with that caution, organic growth in the third and fourth quarter would be expected?.

Yes..

Okay. And then my follow-up question is, as it relates to the omni-channel domestically, and you mentioned that there will be some initiatives and investments there in the coming years.

Is that your direct-to-consumer, or is this in support of your wholesale dotcom customers?.

It's all of those things. From the standpoint of our investment, it's investment in people to better service the various accounts, which includes our wholesale brick-and-mortar customers who are developing their online capabilities very quickly. It's servicing the pure plays that are emerging and also driving our own sites.

It's also from the standpoint of investing our media more effectively to engage the consumer where they're engaging with our brands and as increasingly in the digital world. And then finally on an international basis, we have a number of businesses that now have strong omni-channel businesses that are a combination of online businesses and stores.

And we certainly intend to keep ramping those as they proven to be very strong growth models in the international markets..

Thank you. And our next question comes from the line of Andrew Burns from D.A. Davidson..

Thanks. Good evening. You did call out the timing of shipments for the back-to-school season from 2Q to 3Q. I was wondering if you could quantify that..

I would say, it's probably in the 20 million to 30 million range. It's hard to say at this point, Andrew. We'll give a much better feel for it as we go through the quarter, but that's a general range for you..

Great. Thanks. And I was hoping you could spend a little more time on the $50 million in incremental brand investments, specifically on Champion. What are the top priorities for investments, or largest opportunities you see for the global platform going forward? Thanks..

Specifically, to Champion, Andrew, we spent the last several years reassembling the Champion brand and building a global footprint and the final piece of that fell in place with the acquisition of Champion Europe.

So with that in place, and given our extensive global product line, we see an opportunity now to engage on multiple levels from the standpoint of brand building with advertising, but also continuing to ramp our store development in Europe and build our distribution in our brick-and-mortar retailers here as well.

So, we see an opportunity to invest in all elements of the marketing mix and drive that business forward..

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

Hey, guys. Thanks for taking my question. I just want to go back, follow-up on a prior question about the $300 million of cash flow generation. Rick, you mentioned working capital improvement, but maybe give a little more detail, I guess, we've always looked at as you guys running a fairly tight ship on working capital anyway.

So, may be just a little help with how you're thinking about where the inventory improvement in turns comes from in the accounts receivable and payables please?.

Sure. I'd be glad to, Mike. So, let's take inventory first. When we began our acquisitions a few years ago, we actually saw our turns begin to decline as we begin to integrate new businesses into our organization. As we've now become better at that, and we've kind of bottomed out kind of that two turns type of a range.

What we now see is that we are able to continue to integrate but do so and we returned our turns to a more normal level. So, I would expect to see about a 10th of a turn a year in improvement in turns from that two turns base on average. So that's inventory. Let's talk about accounts payable.

As we become more global and our footprint as we become larger, we have an opportunity to become more effective in the way we negotiate terms, conditions and price with our largest vendors. And so, as we do that, we're seeing our days to pay extend. I think you're seeing there's a lot of people, we're seeing it as well.

On the accounts receivables side, what we're seeing is that as we're able to integrate our international businesses, we're able to make good progress in reducing their DSO. We have a really strong competency in our organization, and we're able to transfer that to our acquired companies and reduce DSOs.

So, it's really, like all those three things playing together, it things that we know how to do that we've done in the past and that we expect to be able to continue to do in the future..

Okay. If I could just one put in one follow-up with Gerald. And Gerald, it would seem that you guys have said for a long, long time, it seems very intuitive is that over time sell-in and sell-through should match up in the categories you sell-in.

Organic trends have been a little bit negative here for a while, but I do believe that intuition is correct. I'm just wondering as we see these categories move online to places like Amazon and other digital channels, it seems like your categories would be very natural to transition over to those channels.

But it just seems like when we add it all up, the negative organic is like the brick-and-mortar sales are falling faster than e-com channels are picking it up.

Do you see that as something that's temporary, or do you see some reason why sell-in and sell-through are not balancing out right now as we go through these closures in brick-and-mortar and it's not being picked up quite fast enough in the e-commerce channel, is that something that can change?.

Well, certainly there's a disruption in the retail channel going on now with a number of door closings and so forth that is taking sales out of the mix as they sell off their inventory. And as that sale then moves longer term to an online player, particularly pure player they tend to turn their inventory at a faster pace.

So, it takes some period of time for that inventory turn to actually catch up with the lost distribution.

I think the best indication of our success in capturing that business has seen in something like our basics business and particularly, underwear whereas we saw reordering normalized our sales increased, and we see our share across basics increasing with it.

It tells me that as we're growing our business online, we're capturing the share and increasing our share and holding our share in the market. And that's the best indication to me that the business is moving and we're capturing it..

Thank you. And our next question comes from the line of Jim Duffy from Stifel..

Hi. Good afternoon, guys..

Hi, Jim..

So, in your analysis of the online environment, there're some categories where you feel you have more opportunities than others.

And then, what are some of the key areas of omni-channel investment that's been helped with competitive positioning and influence those categories?.

Yeah. Let me start with the – from the standpoint of categories, our intimate apparel categories have traditionally been better developed online. And the basics businesses were a little slower to develop online, they were more traditionally consolidated in the mass channel and so forth. They are rapidly developing online.

In all of our categories, we hold the leading shares online and are growing as we shift our business out, we're expanding that share. Certainly our focus has been on aggressively expanding our capabilities from an omni-channel perspective, which means selling online in the U.S.

heavily, and we're developing that not only with our own sites, but with our brick-and-mortar retailers and with pure plays. And we see our brick-and-mortar retailers in particular making great strides now online, which gives us great enthusiasm to our ability to continue to grow that business and for them to succeed frankly.

In the international markets, it tends to be a bit more of a balance of owned brand stores and online. And so, we balance our investment across those multiple opportunities. And that is typically a combination of people and also in marketing money investment as we shift to engage the customer where they're buying today..

That's helpful. Thanks. Gerald, you mentioned that online retailers have faster turns.

Is there a rule of thumb figure that you think about as to the amount of inventory needed to service the same amount of business online versus in a brick-and-mortar environment? Is there any way to put shape around that?.

Not really. It varies by business, but traditionally I think it's quite simple as they run one warehouse in many cases, or a few warehouses while retailers have a warehouse in multiple stores as well to turn. So you can get a sense of the pace of the turn difference between the two, and I think that's what they're working through.

As in any case, some categories turn faster than others..

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

Great. Thanks so much. Good afternoon, guys. I guess two questions for us. First on the door closures, how much was that impact to sales in 1Q? And maybe talk about what levers do you have in place if there are additional door closures out there? And then secondly on gross margins, really strong results there.

How much of the expansion was the new businesses versus organic improvement? And what kind of gross margin expansion are you implying in the second quarter guide? Thanks..

I'll handle the door closure, I'll let Rick handle the margin portion of that question. From the standpoint of door closures, while we won't give you the exact numbers, we can tell you that it was a heavy impact on the first quarter, and it was a substantial portion of the sales shortfall in the quarter on organic sales.

Rick, you want to handle margins?.

Yeah, I was actually hopping somebody would ask that. Our margins are really good this quarter. We're up 230 basis points on gross margin, 200 basis points of that came from acquisitions, about 30 basis points came from manufacturing cost savings that dropped down to the bottom line.

When you really look at the operating profit margin for the quarter, we saw the base business, the core business generate 40 basis points, that's 90 basis points of improvement from cost savings and synergies, mostly and then offset by about 50 basis points of Booster expenses. So, a really strong performance in the quarter on margins.

In terms of Q2, if you do the midpoint on our guidance back into that, you find that we're expecting operating margins in second quarter to be down about 150 basis points. That's 100 basis points from the dilution from the short-term dilution from the lower margin acquisitions that we did last year.

The core margins, it should be fairly flattish except for the 50 basis points from Project Booster that will flow through in the quarter. We're kind of expecting flattish margins because we're going to see a little bit of a richer mix towards Activewear this year versus last year in the quarter. And that business has a little bit lower margins..

I think there was a last portion of the question was about future door closures. Certainly from the standpoint of 2017, as we entered the year, we planned a number of known door closures into our guidance. And I would say that while they were heavily in the first quarter, we feel that we capture the bulk of them that will be experienced in 2017.

Retailers tend to plan these well in advance. They're complex exercise and. So, we have a good side of what we'll experience in 2017 and feel that's in our guidance and best majority of it is behind us. And so we feel that the like we're well positioned in 2017..

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

Great. Thanks for taking my question. Project Booster sounds like a big piece of it is investing in marketing and brand building.

Can you talk about what Project Booster implies for how marketing as a percent of sales might change as we look forward into fiscal 2018 and 2019, 2020?.

Let me just say that Project Booster is really about taking the Sell More, Spend Less, Generate Cash that we've evolved over time to unlock value and unlocking more value. We're basically leveraging the scale that we create over time.

And it gives us the opportunity as we reduce cost to use a portion of those savings to increase our marketing and address the market challenges and drive the more consistent organic growth that we've been lacking over time, as well as to improve our working capital management to generate higher levels of sustainable cash flow.

As to what percent of marketing that represents would depend – our total sales that represents would depend on doing an entire P&L and looking at the top and bottom line. So, I think it's fair to say that we will ramp that investment over time with the clear intent to drive more consistent organic growth.

In fact, Rick, you may want to touch on the cadence sort of how that's spending and savings might roll out..

Yeah, I think as we talked about in our prepared remarks, we would expect the Booster expenses and savings in 2017 to pretty well offset each other. Then as we roll into 2018 and 2019, you would expect similar to what we've seen with synergies.

We expect to see the SG&A savings come a little faster than the cost of sales because the cost of sales take a little longer to flow through to the balance sheet and then on to the P&L. So, what that would suggest then is that in terms of cadence, you'll see savings in both 2018 and 2019, though skewed a little bit more to 2019 as our current plan.

But you'll see savings and investments throughout that period, and we should hit a run rate net savings of about $100 million by the end of 2019..

Okay, great. And then maybe if I could ask one more on Innerwear in the quarter.

I know there's many subcategories within Innerwear, but can you give us a broad sense of, within sales, can you break down unit growth versus year-over-year change in ASP?.

No, we don't normally. We don't generally give that out. And to your point, I mean, they can be somewhat misleading when you look at it in the whole, because the cost of a pair of socks versus say a bra are so dramatically different that it can really skew that price per unit versus volume analysis when you look at it.

You really have to look at it on a very detail level to really get meaningful numbers..

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

Great. Thanks. Good afternoon, guys. Two quick ones. So, sorry if I missed it, are the $150 million savings dependent on a certain level of organic sales growth over the next few years? And if so, what sales growth would you need to get that leverage that you mentioned in the FAQs? And then just, Rick, sorry if I misheard it.

But just to confirm, did you say that Q1 gross margins benefited by 200 basis points from acquisitions, but then 2Q should be pressured by lower margin acquisitions. I just want to clarify that and get what you said the expected gross margins for the second quarter should be embedded within your EPS guide? Thanks..

Okay. Yeah. Let me clarify the other. First, on your question on Booster. No, the savings are not contingent on achieving any level of growth. The nature of where we expect to see the savings is based on our ongoing operations. And let me clarify what I've said a little earlier.

In terms of the operating margins from the first quarter, the operating margins were down 50 basis points primarily due to Booster, but we did see the margins hit by the acquisitions in the quarter. The acquisitions were generally running 7%, 8% operating margins in the first quarter.

In the second quarter, we expect to see a similar 100-basis-point hit to margins..

Got it.

And the gross margin would see a benefit?.

Absolutely, yeah. We're continuing to see – and let me explain why that is. The two acquisitions, Pac Brands and Champion Europe have a very heavy retail element to them, which has a very different dynamic through the P&L. So, much higher gross profit margin, but also much higher SG&A. So you have to look at them together..

Great. Thanks a lot guys..

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

Thanks. Good afternoon..

Hey..

I guess, my first question I wanted to ask is the timing and impetus behind the cost savings portion of the plan, the Booster plan.

Can you talk about why now and what kind of were the key factors that led to the decision to pursue this course of action as the infrastructure and the platform you built oversized for what where businesses or are you identifying incremental opportunities that you didn't see before to create shareholder value through cost savings.

Maybe help put a little bit of framework around why this and why now?.

Sure. I'd be happy to, Omar. From the standpoint of our strategies, we've consistently evolve the Sell More, Spend Less, Generate Cash strategy over time.

And over the past five years, we've expanded our business dramatically, and we've upgraded our IT infrastructure and further globalized our supply chain and broadened our international reach through acquisitions. But the one thing we haven't done is deliver consistent organic growth or consistent cash flow.

And we really believe that this is important element that we need to deal with.

And so, as we view the growing scale that we have, we view it as a next natural step is for us to leverage the scale that we've created over the past five years to further enhance the productivity of our company, to take advantage of the global scale, to reduce our cost, use a portion of it to spend back to drive our business and improve our working capital management to generate higher sustainable cash flow and frankly, address the things that have been missing from the consistency of our performance.

Why now? As we sat down and looked at the potential of what we've built and the needs we had to correct that this seemed the natural time to put this program in motion, and that's what we've done. And we're very excited about the potential of this and what we can really achieve by unleashing the full revenue and cash flow potential of this company..

That's really helpful, Gerald. And I wanted to ask one follow-up around the omni-channel initiatives and investments you're going to making there.

As you think about potentially the evolving behavioral patterns, when it comes to consumers around underwear and innerwear type purchases, have you thought at all about maybe pursuing something along the lines of subscription model or other creative ways to kind of create the digital social connection with consumers and replace the regular trips that used to happen at retailer now kind of morphing into more digital trips.

I'm wondering if you thought about other creative kind of digital opportunities to create that consistency in the business..

Well, that's one of the great things as we've continued to invest in our capabilities and evolve is that among other things we have our own internal website, people that run that and we have the capability to experiment with all those models. And certainly, other things we do, think about ways to launch those subscription concepts over time.

So, we certainly are looking at that. We're certainly working with our brick-and-mortar partners as well to evolve their distribution capability to capture business as well..

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

Hi. This is a Nancy Hilliker on for Ike. I am wondering if you guys could give us a little more color on the trends in the International business, Hanes Europe, what are the challenges in getting that kind of piece of the business back to growth. And in Pac Brands and obviously you've talked a little bit about the potential for Champion.

And then also if you could just touch on the appetite for acquisitions, is that dependent on the cost savings or could we see acquisitions sooner than that?.

Yeah. Let me start with the International question. Our International businesses are performing well. Our Pacific Brands and Champion Europe acquisitions are doing very well. We're in the early stages of executing their integration plans and they're right on course and frankly, if anything they're exceeding our expectations at this point in time.

So, we feel great about their performance in the management teams. Our Hanes Europe business was a more complicated integration and we're down the path with that.

And from a synergy standpoint, we continue to capture synergies and they're well into their double-digit operating margins each and every quarter, which is a vast improvement from where we acquired that business. There certainly have been some headwinds on to the top line on that side.

There're some political activities certainly in the western part of Europe, if you will, now between Brexit and the political situation in France. That's creates some short-term interruptions that will get passed and that certainly tempers the top line a bit. While in the southern part of Europe, we see very strong trends.

So, I'm very proud of what they're doing, and we believe that those headwinds from the political issues will pass as well. Let me address, from the acquisition standpoint, absolutely, acquisitions remain a significant part of our strategy. They've created significant value for our shareholders over time.

And a perfect example is, you just asked me about some companies that are executing very well and have contributed substantial amount of sales and profit to our company. We followed a disciplined capital allocation strategy that was a combination of dividends, acquisitions and share repurchases.

And we'll continue to do that in the future as we believe that's working very well for our shareholders..

Thank you. And our next question comes from the line of William Schultz from Goldman Sachs..

Hey, guys. Really nice result in Activewear. Good to see that return of growth in the quarter. Can you help maybe dimensionalize the improvement you saw there, Champion U.S., in particular, maybe sort of unpack it between distribution growth, productivity increases in existing accounts would be helpful..

Happy to. As you said, it's great to see Activewear return to growth. And we feel good about it, and that's what we anticipate and it came through as we had planned it in our plan. We did see nice growth in Champion.

It was a double-digit rate of growth, and we saw solid growth particularly in the mass channel as we had some space expansion, but we're also seeing positive trends in our department and sports specialty channel as well. In addition, the sports license business performed very well in the quarter.

So, we saw good activity in several pieces of the Activewear business that drove our growth..

Great. And then second question just on cotton. U.S. cotton prices have moved up a bit.

Can you maybe talk about how you're thinking about the outlook for pricing and AUC, just broadly across your business?.

Sure. In terms of cotton, I'll just make a couple of comments. Just remind everybody that cotton costs are less than 6% of our cost to sales now. And so, yes, well that's have an impact. As long as it stays within a normal band of volatility, which it has, it is up a little bit, but it's not abnormal based on its historical patterns.

As long as it stays in those bands, we're fine. We're locked in through the end of this year on our cotton costs. And so, we have good visibility to that. And we generally try to be nine to 12 months ahead in terms of our locking in our cotton..

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

Good morning everybody. Thanks for taking my question. Afternoon, I should say..

Yeah..

Can you just talk about pre-tax charges related to the acquisitions are down pretty significantly year-over-year this year. Where you think this will trend in coming years? Obviously, this could be another benefit to cash flow if they continue to come down..

Sure. Our guidance for the year hasn't changed, it's $80 million to $90 million of charges this year. As you pointed out, that's a significant drop from last year.

We expect to see again, assuming no new acquisitions, which I wouldn't, but assuming that, you should see another pretty substantial drop next year, and then we shouldn't – then all XA (50:53) charges related to current existing acquisitions should be finished by the end of 2019..

Okay. That's helpful.

And just one follow-up on synergies from all the acquisitions that have done, they've been increasing into this year, just wondering where we are in the realization cycle of all these synergies? How much is left? What you think might fall into 2018 and 2019 from all the acquisitions?.

Sure. Right now, our best estimate is that total synergies from our acquisitions should reach $220 million. We have recognized $125 million of those so far through the end of Q1, which would leave us with $95 million. We recognized $5 million this year in the first quarter, so we've given guidance of $15 million for the full year.

So, $10 million more this year and then the remaining $85 million would come in 2018 and 2019 on a declining scale between those two years..

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

Hi.

Rick, you had mentioned that the gross margin in the second quarter would be more flattish than this quarter where you saw so much improvement...?.

I'm sorry, I meant operating profit margin would be more flattish. Core operating margin would be flattish in Q2..

Okay.

So, on the gross margin side, are you expecting to see a similar improvement to what we saw this quarter?.

I think you're going to continue to see improvement. I don't want to start giving guidance on gross profit margin, but we'll continue to see improvement. It's the same dynamic that you saw in the first quarter that you should see in the second quarter, perhaps not necessarily on the same scale, but should see strong improvements year-over-year..

Okay, yeah. (52:49) first quarter how sustainable is that. It sounded like the pieces that made it up, the mix and while that will move around a little bit, but that it was a sustainable type of rate in Q1..

Yeah, it was very strong, but we expect – what we said historically is that, we do expect – even when we wrap the acquisitions in the beginning of the third quarter, we still expect to see incremental gross margin improvement quarter-after-quarter or year-over-year, improvement in each quarter..

Okay.

And have you given expectation for cash taxes this year?.

Well, I'll tell you, we don't generally give guidance on that. Historically, our cash taxes have been half or less of our estimated tax rate. That varies from year-to-year though, Carla. It's not generally a big driver of cash flow one way or the other..

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to T.C. Robillard for any closing 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 now disconnect. Everyone have a great evening..