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

Susan K. Anderson - FBR Capital Markets & Co. Eric Tracy - The Buckingham Research Group, Inc. Ike Boruchow - Wells Fargo Securities LLC Michael Binetti - UBS Securities LLC Jim Duffy - Stifel, Nicolaus & Co., Inc. Anna Andreeva - Oppenheimer & Co., Inc. Steven L. Marotta - C.L. King & Associates, Inc.

Omar Saad - Evercore Group LLC Simeon Avram Siegel - Instinet LLC Jay Sole - Morgan Stanley & Co. LLC John Kernan - Cowen and Company, LLC Pallavi Bakshi - Credit Suisse Securities (USA) LLC Kate McShane - Citigroup Global Markets, Inc. Bill Schultz - Goldman Sachs & Co.

Carla Casella - JPMorgan Securities LLC William Michael Reuter - Bank of America Merrill Lynch.

Good day, ladies and gentlemen, and welcome to the Hanesbrands Second Quarter 2017 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, sir..

Good day, everyone, and welcome to the Hanesbrands quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress after the second quarter of 2017. Hopefully, everyone has had a chance to review the news release we issued earlier today.

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

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

The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made. Unless otherwise noted, today's references to our consolidated financial results as well as our 2017 guidance represent continuing operations and exclude all acquisition and integration related 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'll now turn the call over to Gerald..

Thank you, T.C. Hanesbrands delivered solid results for the quarter, as revenue and earnings per share were right in line with our guidance. And cash flow from operations year-to-date was up over $160 million from last year.

Overall, the year is unfolding as expected and we are confident in our ability to deliver on our guidance for the remainder of the year. With respect to our revenue outlook, we saw two key trends in the quarter that further support our confidence for return to organic growth in the third and fourth quarters.

First, was the continued sequential improvement in organic revenue trends, even with an unexpected timing shift of sales into the third quarter within our sports apparel business. This sequential improvement was led by our Innerwear segment, which delivered revenue that was right in line with our guidance.

For the quarter, we saw continued progress in our innerwear trends as we gain additional share in basics and we pass the initial impact from door closings.

Our Innerwear business remains on track to return to growth in the second half, driven by stabilizing shelf space in our intimates business and continued momentum in our basics business behind our FreshIQ innovation.

The second key trend was the ongoing strong performance from both of our global growth initiatives as Champion sales worldwide increased approximately 7%. While our global online revenue growth accelerated to roughly 25%.

In fact, we saw accelerating online growth in all of our key regions including the U.S., Europe, Asia and Australia, as well as in key product categories such as basics, intimates and activewear.

Also adding to our confidence for return to organic revenue growth in the second half are the various items that affect the year-over-year comparisons, such as the lapping of our catalog exit, the inclusion of our fast-growing acquisitions into our base and the expected shift in back-to-school timing.

In terms of our outlook for continuing earnings and profit growth in the second half, our confidence is being driven by ongoing efficiency gains within our supply chain, acquisition synergies that are on track and cost savings from Project Booster head count actions.

And with respect to our confidence regarding our outlook for cash flow from operations, our cash flow generation to-date remains substantially ahead of last year as we are executing our plans to drive structural improvements in working capital.

So in summary, we have a number of positive trends building in our business to go along with solid first half results that were in line with our expectation. That's why I am confident in our ability to deliver on all facets of our full-year guidance.

And when we look beyond this year, we believe the strength of our brands, the power of our company-owned manufacturing model, and the expected benefit from Project Booster position us extremely well to exit 2019 at a run rate of more than $1 billion in cash flow from operations. And with that, I'll turn the call over to Rick..

Thanks, Gerald. Through the second quarter, year-to-date revenue and earnings per share were in line with our guidance and we continue to generate cash at a faster pace than last year. We're tracking through our plan for the full-year and we're confident in our ability to deliver on our outlook for the second half.

For the quarter, sales increased 12% over last year, driven by roughly $220 million of acquisition contributions. Gross margin improved 100 basis points over last year to 39.5%, driven by acquisition related mix as well as efficiency gains within our supply chain. Operating margin of 15.5% was better than our guidance.

And when compared to last year, our operating margin was affected by roughly $8 million of Booster-related expenses as well as the short-term dilution from acquisitions.

The tax rate was 6% in the quarter, which was in line with our full year outlook and earnings per share of $0.53 was within our guidance range and included a $0.02 per share impact from Booster-related expenses.

Looking at our segments, Innerwear sales were in line with our guidance as the 2.5% decline represented another quarter of sequential improvement. Point of sale trends remained steady during the quarter, while performance was mixed by retailer and channel.

In our basics business, we gained share in the quarter driven by men's underwear as well as strong gains in both socks and kids' underwear. In intimates, shipments improved sequentially as we saw improving broad trends at certain key retailers.

With respect to Innerwear's operating margins, the decline versus last year was driven by the combination of lower sales and Project Booster related expenses. And as we look to the second half, we expect operating margins to expand driven by sales leverage and the expense savings from Project Booster.

Turning to our Activewear segment, sales increased roughly 1% over last year as the addition of GTM and the strength in our Hanes business more than offset the last of the impact from The Sports Authority bankruptcy and the late quarter timing shift in our sports apparel business.

As we look to the second half, we expect an acceleration in Activewear's growth driven by our Champion in sports apparel businesses. The operating margin decline versus last year in Activewear was driven by short-term acquisition related dilution as well as lower royalty revenues due to the bankruptcy of a licensee.

Switching to our International segment, sales growth was driven by contributions from last year's acquisitions as well as the continued growth of our Hanes and Champion brands in Asia.

Our acquired businesses continued to perform well, as they were above plan in the quarter, while our Asia business delivered another quarter of double-digit revenue growth. Operating margin of 12.3%, increased 370 basis points over last year, driven by synergies in Europe, as well as a positive product mix in Asia.

With respect to balance sheet and cash flow highlights, our core inventory declined roughly 7% over last year while cash flow from operations year-to-date improved $163 million over prior year, as we continue to drive structural improvements in working capital.

Turning to guidance, we reiterated our full year outlook, while also providing third quarter guidance. So, I'll point you to the press release and our FAQ document for any detail. As you can see, our third quarter guidance implies total sales growth of roughly 2.5%, which we also believe is a good growth rate to use for the fourth quarter.

In fact, as I look at both the third and fourth quarter consensus estimates, they're essentially in line with our expectations from a standpoint of revenue, operating profit and earnings per share. So, to wrap up, the year is unfolding as expected. Trends are improving across our business, particularly within U.S. Innerwear.

We're seeing strong momentum in our global growth initiatives, both Champion and online. Structural improvements in working capital are driving better cash flow generation. And as a result, we're confident in our ability to deliver on our outlook for the remainder of the year. And with that, I'll turn the call back over to T.C..

Thanks, Rick. That concludes our prepared remarks. We will now begin taking your questions, and we'll continue as time allows. Since there may be a number of you who would like to ask a question, I'll ask that you limit yourself to one question and a single follow-up and then re-enter 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. And our first question today comes from the line of Susan Anderson with FBR Capital Markets. Susan, your line is open..

Hi. Sorry, forgot to hit the mute button. Congrats on the quarter, nice to see that sequential improvement in Innerwear.

Quick question on the Activewear front, maybe a little bit more color on the timing of the shift of the athletic orders in the third quarter, is that mainly the Gear product shifting and then also the bankruptcy impact, is that mainly the licensee impact or is it some of the smaller sporting goods retailers?.

So let me answer the first half of that question. I'll let Rick answer the last half about the bankruptcy.

But beginning with the quarter for Activewear, it was up low-single-digits, we saw particularly strong performance out of our Hanes Activewear business during the quarter as well as our online business was up a strong double-digit rate in the Activewear business as well. We did have a couple points of headwind from the last of the TSA bankruptcies.

We overlapped that. And then there was a modest shift late in the quarter of some sports apparel business into the third quarter from the second quarter. From the standpoint of the outlook though, we're very confident and continuing to see accelerating growth as we look to the second half. The overall Activewear categories remain strong for us.

The sports apparel business is always a very strong quarter in the third quarter and the products that we carried from or, the orders we carried from the second quarter to the third quarter, we already see shipping which gives us confidence that we will ship that as well.

And then we have a good look at our order book this time of year and we have a good view of the business going forward on that business. And then finally, we have finally overlapped the TSA bankruptcy, The Sports Authority bankruptcy of last year.

There is an awful lot of good things to drive momentum in Activewear as we look toward the balance of the year..

And with respect to the profitability comment, Payless ShoeSource has been our Champion athletic shoe licensee for several years. I'm sure you're aware they declared a bankruptcy little earlier this year. We don't actually sell anything to them. They are a licensee.

The royalty income really didn't have much, really any material impact on our top line, but did have an impact on the bottom line in the Activewear business. That's a transitory thing. We factored all this into our guidance for the back half of the year, that's what the bankruptcy was..

Great. That's very helpful. And then just one follow-up on the online business, nice to see that strong growth there. Maybe if you can just give some color on what you are seeing in terms of the growth coming from key online players and then also what you are seeing at your brick-and-mortar retailers from their online business.

Are you seeing big differences in growth there?.

basics, innerwear, and activewear. And to your specific point, within the channels within online, we saw nice solid growth across our own sites, across our brick-and-mortar partners as well as our pure-play.

So, we really think the time we spent focusing on building our presence in this channel is really paying dividends now and that's why part of our Project Booster is to continue to invest in this area both from a people resources standpoint, but continuing to broaden our assortment online and certainly even as we look at our media to spend more of it in the digital world, engage the consumer there.

So, we feel really good about the progress there and we feel we're well on our way that over the next couple years, online could become a mid teen share of our total business..

Thank you. And our next question comes from the line of Eric Tracy with Buckingham Research. Please go ahead..

Hey, guys. Good afternoon. I guess Gerald or Rick, if we could just go right into the cash flow, again a second quarter here of decent year-over-year improvement (14:40) to kind of structural improvements to the working capital. Maybe if you could elaborate on that.

And then as we think of moving to the back half cadence, I just want to discuss that and then the bridge to that $1 billion kind of build in 2019, if you are able to provide some color there, that would be great..

Sure. Eric, this is Rick. Let me just remind everybody. First, what we talked about at the beginning of the year which was around the first quarter call, which was we have two objectives this year for cash flow from operations.

One is to level it out, so that we don't have quite the – so we're not as back-end loaded as we have historically been, although that gives us a lot more flexibility with respect to how we deploy our capital during the course of the year. And the second thing is to drive structural improvement in working capital.

So, how are we doing that? The focus is really on receivables, inventory and accounts payable. And where you're really seeing through the first half, where you're really seeing the benefit is coming from inventory reductions. You probably saw that our inventory was down. It was basically flat, but down about 7% on the core.

So, we are seeing good improvement in our inventory. That's continuing to be a shining spot and our days to pay and our payables is moving up very nicely and so those two things are providing a good base for the performance of cash flow in the first half.

We expect those things to continue and we expect to see in the second half some additional benefits from accounts receivable as well. So, that's what's really driving it. Part of what we're doing is timing related to balancing things out, but the part is actually true, structural improvement to the working capital.

And as a result, we feel really good about our cash flow guidance for this year and we're right on track to get where we want to get to and very, very excited about it..

Okay.

And then if I could just follow-up in terms of profitability and margins, the back half of this year you start to lap the kind of acquisition contribution, how we think about – should it be sort of an inflection in organic growth helping kind of leverage the fixed cost, but maybe just sort of talk through the margin components, be at the savings from Project Booster really gives you kind of confidence in the improved profitability..

Hello?.

Please standby, the conference will resume momentarily. And please continue to standby. The conference will resume momentarily. Thank you. You may resume. Eric Tracy, your line is open still..

Sorry about that, Eric. Don't take it personally, Eric. We're not trying to avoid you. Now, let me talk a little about margins. First of all, I think we tried to be very clear in our remarks and that the fact that we think that consensus estimates for the back half are right in line with our expectations.

So, I think you can kind of take that as a guide for margins, that does imply margin improvement in the back half. Yes, we are overlapping our acquisitions and so, you won't see quite as large a margin improvement on the gross margin line going forward in the back half as you did in the front halves of the year, that's to be expected.

We do expect to see operating margin up in the back half as well..

Okay. Thanks guys..

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

Hi. Good afternoon, everyone. Congrats on a nice quarter in a tough environment. So, I guess, just to Eric's question about Booster, so it looks like you'll get about $15 million of SG&A back in the first half of next year.

But just kind of curious on top of that, of the $100 million run rate in cost benefits that you're planning by 2019, how should we think about that kind of getting layered into 2018, just trying to think about the build over the next two years?.

Well, in terms of – let me be clear, the $15 million of expenses we've seen in the first half will come back to us in savings in the second half of this year, so it will be neutral for the full year.

Then you'll begin to see the net $100 million; remember, $150 million of total savings and the rest is about $50 million of the business over that two-year period of 2018 and 2019. Typically you would see the SG&A savings come a little earlier, and the cost to sales savings coming a little bit more in the back end of that period.

We haven't given any specific numbers for 2018 and 2019 yet, but we will as we start giving guidance for 2018 later this year..

Okay.

And then I guess at a high level, just curious, so you were looking for organic growth to inflect in the back half, but just if you were to see a sustained negative top-line environment for the next year, so can you just talk about the sustainability of your core margins within the business, just trying to think about how would you think about the ability to match capacity with volume if units were negative for another again 12 months to 24 months?.

Ike, I kind of hate to be negative about it, but let me just remind everybody of what drives our margin improvement. It's driven by things like synergies. We're going to get those regardless. It's driven by manufacturing savings.

Those have been – you don't set your watch by the amount and quality of the manufacturing savings that we've gotten in the past. And so, SG&A leverage, those are the kinds of things that have driven our margin improvement consistently over time. And in fact, during periods when we have seen a challenging top line with respect to organic.

So, I think, we've proven that we certainly can expand margins in both a growing and challenging environment. So, again, it gets back to why those margins get improved..

And this is Gerald. I would just add to that, that as we've said many times from our manufacturing standpoint, we always maintain around 20% of our production outside of our network and flexible capacity, which gives us the ability to flex up or down and offset any short-term impact we may have in volume now.

I don't want to end the question this way, because I want to turn back to what we've talked about is, we are off to a really solid start here, all the trends that we set out to achieve and the sequential improvement we were expecting in our business, we're seeing and we see all the momentum now occurring into the second half and the year is playing out exactly as we expected it would, it will return to organic growth in the second half as Rick noted in this comments.

And we think it will grow at about 2.5% rate in each of those quarters..

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

Hey, guys. Thanks for taking my question.

Could you give us a little color on your comment that your guidance includes some more store closures and just curious what prompts you to say that and how did you try to go about estimating that as you look out your business for the next six months?.

No. Our guidance has always been, Michael, that we expected in the first half of the year that there would be headwinds from the store closures and also a continued maintenance of tight inventory by our retailers in the U.S. market in particular.

The store closure is more heavily in the first quarter and continued constraint of inventory into Q2, and that's the ramp thing that we anticipated, particularly as it affected our Innerwear business and that's why we expected that we'd see the sequential improvement that we are seeing. And it's broad-based when you look at our Innerwear business.

We saw it across our basics business as we drove volume improvement as well as share improvement. We saw an improvement in trends in our intimates business as well that along with our online trends give us great confidence that we'll return to growth in the second half..

And if I could just ask a quick follow-up on that, your comment that you're expecting the holiday build, I think, the back-to-school and holiday build to be lower than last year kind of adds a little layer of conservatism to the guidance.

But are you seeing that dynamic ahead of key shopping dates in the first half? Am I right to assume that you've seen the retailers building a little lower.

And have you seen if their starting point is a little lower or are you seeing them start to chase or maybe your thoughts on how inventories look in the channel today?.

Well, our inventories in the channel, I think, are well aligned, and that's due to the cautious approach that our retailers have taken to inventory management. As part of that, they are tending to bring their inventory in closer to the event and they are more cautions in the builds that they make.

And so that is the reason for our approach, our cautious approach, particularly in the fourth quarter. As we look at what's played out over the last couple of years, we think it's prudent to approach with caution..

And then if I could just ask one last one. I know there's a lot of moving parts on the organic growth. I think it came in a little bit lower than you thought in the second quarter. You pointed out a shift. That seems to explain it.

If we think about the moving parts of the catalog and lapping a destock last year in the second half, if you were to exclude that list of one-time issues that you have been helping us with, is there a sense that the organic growth rate will be positive in the second half?.

Well, yes, the guidance that we've given calls for 2.5% of organic growth in Q3, and as I said in my remarks, I'm expecting 2.5% organic growth in Q4 as well..

Okay..

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

Thanks. Good afternoon, guys..

Hi, Jim..

It seems business is playing out very much as you had planned. With the in line results and guidance, maybe the best use of my question is to ask you to talk a little bit about trends and opportunities you're seeing with Hanes Europe and also Hanes Australasia..

Sure. Let me take that. We're seeing solid performance out of Hanes Europe starting with them. They've done a great job over the last several years now of executing their integration plan. It's gone very well and the synergies are coming through just as we expected. So I can't say anything, but positive things about them.

From the standpoint of their operating margins, they have been in double-digit operating margin for a number of quarters now, which really is playing out to the strength of our integration of the Hanes Europe business. From the Champion Europe business, that's also going well. That integration is fully in motion now.

We'll see the vast majority of those synergies really play out in 2018 as they're supply chain driven, but the business itself is performing very well and it continues to perform at that mid-single digit kind of growth rate that we had said that that acquisition would deliver. If I look to Australia, it's very much the same story.

That's a business that's a combination of wholesale and omni-channel. It too is continuing to grow at that mid-single digit rate that we expected, driven by its omni-channel business in particular.

And there again the integration is going extremely well, the management team is executing well, and we anticipate again to see those synergies well into 2018 as they too are also heavily supply chain driven. So we feel really good about those acquisitions.

And just as a reminder that goes into the base as we look into second half and helps drive that accelerated organic growth as we look to the second half..

Good to hear. And then you're getting a little bit of relief on FX.

Rick, are you working with the same FX assumptions in the guidance? Just being conservative and not passing that through, or is there an update on that?.

Yeah. As we look at the guidance for the back half, we have not assumed any material changes in FX rates in the back half. That's probably a little conservative because I've been doing this a long time and I've learned never to bet on FX rates.

But even if we do see these rates stay at the current levels that they're at, they're really going to have a fairly minimal impact on our full year. You're talking about a 20, 30 basis point impact on revenue growth for the full year, and really almost immaterial impact on operating profit.

So I guess the bottom line is that FX rates shouldn't be a major player in the back half of the year for us..

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

Great. Thanks so much. Good afternoon, guys, and also congrats on navigating the environment..

Thank you..

We had a couple of questions. On Champion up 7% I think globally, it's been up double digits for a few quarters now. Should we expect the brand to revert back to double digits again in the back half? Maybe talk about the new distribution opportunity there as opposed to productivity improvements. And then secondly, just a follow-up on the synergies.

What was the amount you realized in the second quarter? And I think you should have about $85 million less between 2018 and 2019.

How should we think about the number for 2018?.

Let me take the first half of that question, then we'll go to the synergies. From the standpoint of Global Champion, we did see it have another solid quarter of growth in that 7% rate. We expect Champion globally to continue to grow in that high single-digit rate as we go through the balance of the year.

We've got a nice base with our retail stores now, particularly in Champion Europe and our omni-channel push here is also having pretty dramatic impact on sales. As I mentioned in some of my comments, we're seeing strong double-digit rate growth of online in our Champion business, in particular in many of our markets.

So that is a positive trend for us as well. And so as we look to the balance of the year, it's that combination of driving the online, but also we do expect some broadened distribution in the second half of the year on the core Champion business as well..

Yeah. With respect to synergies, we saw $6 million of synergies in Q2, which brings us to $11 million for the year-to-date, right on pace for where we thought we'd be. And you're right, I'm impressed, Anna, that you remember it was $85 million. That's right.

That's what we are expecting for 2018 and 2019, though we haven't given any specific guidance on exactly how that $85 million will roll out. We do expect that it will roll out between 2018 and 2019, and we'll give you more visibility on that as we give guidance for 2018..

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

Good evening, everyone. Can you talk a little bit about the current costing environment and if there has been any changes, either favorably or unfavorably, since the last time you spoke? And even if this bleeds a little bit into commentary regarding those deltas in 2018 that might be helpful..

Well. I think, Steve, I think in general in terms of our cost structure, things have – never really seen any big surprises this year. Cotton continues to be somewhat volatile. It was up earlier in the year. It's now back down. Again, it's kind of operating in a normal band that we would expect.

And we've always said, as long as it does that, then we're fine with that. We're hedged on cotton through about mid-year of next year, and so we got good visibility for the back half of this year and the front half of next year. And then again costs in general, labor costs, other inputs are really unfolding right along with our plan, no surprises..

Yeah. And I would only add to that, Steve, a critical part of our Project Booster though is over the next few years to drive $150 million of cost savings by leveraging our scale and our infrastructure, building toward that run rate to the end of 2019.

And that will be both SG&A and cost of goods savings, and $50 million of that we will invest back in the business. But we have a very tight focus on driving cost down..

Thank you. And I think, Rick, you mentioned – or maybe it was Gerald – that the current point of sale, pace of sales is matching your shipments largely. There's no inventory stocking or destocking that is material or germane at this point, right.

That's correct?.

No, yeah, what we feel is that the retailers have managed inventories tightly and inventory is in line with where it should be at this point in time..

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

Thanks. Good afternoon..

Hi..

I wanted to ask you – thanks guys – I wanted to ask you about the acquisition environment. We've been hearing from some other players out there. There's obviously been some activity in the sector. And we're hearing from other players that it's loosening up a bit. Valuations are becoming a bit more attractive.

I know you're a year out or so from your last one.

Is it time to start thinking about something? Can you kind of corroborate that's a fair assessment of what the environment's like?.

What I would say is, yes, acquisitions have and remain an important part of our strategy, Omar. And we've driven a substantial returns for our shareholders with those acquisitions.

We did say in the first half of the year that we would focus on integrating the two that we had made, Pacific Brands and Champion Europe, and you're exactly right, it's been a year since we made those acquisitions. Those integrations are well underway, and our cash flow is building nicely.

And we do think there is – we always have a long list of potentials that we're out talking to, and we're clearly positioned when the time is right to make an acquisition. And when we have a deal, we'll definitely let you guys know, but it's an important part of our strategy going forward..

Fabulous. That's all I wanted to know. Thanks..

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

Great, thanks. Hey, guys.

Can you talk through where you see the state of Champion growth, just given all the noise around the athletic channels, the retail? So where you see the growth happening from that distribution? And then just with the destockings or some of destockings behind us, can you give us some context on what you see for how long it normally it takes for orders to normalize afterwards and then just comfort that the retailers are where you think they should be? Thanks..

From the standpoint of Champion, I think that our Champion growth is going to certainly come on a global basis. We've got many tools now as we've linked the business back together on a global basis, and we anticipate driving it. Certainly in Europe we have high expectations as we bring Champion Europe into the fold.

Within this market we're seeing particularly strong growth online driving our Champion business as well as we do see some distribution expansion opportunities in our core brand that we anticipate. And then finally, as Rick noted in his comments, we've seen very strong growth in our Asia business and continue to do so.

So we really do see that we have a lots of growth levers in the Champion business going forward. And so we feel that the activewear category is still a nice growth category, and we think we've got room to grow on a global basis.

From the standpoint of destocking, going through this half of the year, we've certainly seen cautious inventory management rather than I would say destocking. The period of rebuild that we would say that won't repeat itself because as we get out to the fourth quarter, we don't anticipate an additional destocking as we went through last year.

We think that's all worked through. We certainly have been cautious about anticipating holiday builds, and we haven't planned them in the fourth quarter, but we had not expected an additional destocking given the tight nature of the inventory.

In fact, if you look at our half, we've taken a balanced approach in the second half anticipating roughly a 2.5% growth between each of the quarters..

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

Great. Thanks very much. Rick, the guidance suggests that from the special charges that you outlined in 3Q, the 4Q special charges will be somewhere in the zero to $10 million range.

Is that a signal that the special charges, assuming no other deals obviously, are starting to recede or maybe there's some of that work being pushed out into the first quarter of 2018 and the second quarter of 2018?.

Well, the answer to actually both of your questions is yes. I think it does signal too that we are seeing a continued decline in the special charges as we continue to work through these acquisition integrations.

You will see it pick up a little bit in 2018, but 2018's XA charges should be well below this year's $80 million to $90 million, and we'll be done with XA charges related to our current acquisitions by the end of 2019. So it will continue to trail off through 2019 to eventually zero..

Got it. And then if I can ask you just about the Innerwear segment, and if you could just walk us through some of the puts and takes in Innerwear gross margin and SG&A and just how the year-over-year change in operating profit percentage of total sales played out that'd be super helpful..

one is lower sales, which kind of implies a little bit of a mix issue that we think will ride itself as we go through the balance of the year. Project Booster expenses impacted that particular business. I think that a lot of the things that hit the Innerwear business are pretty transitory. I'm not really worried about those margins.

They're very strong and have a good long track record of increasing over time and I don't see any integral change in that in the near-term..

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

Good afternoon, guys. Thanks for taking my question. Wanted to go to Project Booster. I think you laid out $300 million in operating cash flow improvement potential by 2019. Just want to go back to your confidence in that because obviously it implies a pretty significant jump in cash flow from operations from where you are now, pretty substantial.

So just want you to talk through, kind of, your confidence in those targets from Project Booster and the timing of it for fiscal 2019? Thanks..

Well, I think as we look at the components of it, we've talked about a lot of them, the key drivers being first of all continued improved profitability always helps for cash flow.

We're continuing to drive our inventory turns more positively, and so as we continue – we aren't done yet by any stretch in terms of where we are and we made great progress the last year or so. But we continue to remain highly focused on that. We've begun to make really good progress in extending terms with our suppliers.

We are I would say in the early stages there. We got a lot of runway left on that to get, and over time we expect to see some nice improvements in our accounts receivables.

So, again, I take all the structural components of working capital, and we see where that's going and we add to that nice profitability improvement over time, and that gets us to our expectations on cash flow from operations..

Yeah. At the highest level it's roughly $200 million in our working capital improvement, $100 million in cost savings through the Project Booster is how it comes together..

Yeah..

Okay, thanks. Final question is on the 2.5% organic growth in the back half of the year.

Can you just give us a breakdown that we should expect from Innerwear, Activewear and International?.

Well, we don't generally give guidance by segment on those sorts of things. But I think Gerald outlined for you what the drivers are without necessarily giving you the exact numbers for each one. I mean, our International business is continuing to grow nicely and those acquisitions as they overlap has been growing in the mid single-digits.

And so we expect that to continue, so we'll see that driving our numbers, we're seeing sequential improvement in our Innerwear business and all the signs that we see suggest that that sequential improvement is going to continue in the back half.

The Activewear business had a couple of temporary kerfuffles in the quarter, but that's globally a strong driver. And Gerald talked about online as being I think 25% growth in that. So we've got a lot of great momentum going in a lot of different areas of our business.

And so we're very excited about the back half of the year and the opportunities for us. So I can't give you the exact numbers for each one, but I think we've got enough there to get you 2.5%..

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

Hi, this is Pallavi Bakshi on for Christian. We were wondering if you could talk a little bit about innovation. We've been seeing a lot of it in our mass channel checks.

What can we expect for back-to-school or the second half as far as the product pipeline? And then secondly, should we expect any changes in the mix within Innerwear basics versus premium? Thank you..

From the standpoint of innovation, one of our key drivers for the momentum in our basics as we look to the back half of the year through both back-to-school and in holidays are FreshIQ initiatives. We're continuing to drive behind that, we're seeing great results.

As I mentioned, our share is building in basics, on a broad basis in socks as well as underwear and kids underwear.

FreshIQ is the key initiative there, but also our X-Temp innovation continues to drive growth, in fact our ComfortBlend and X-Temp innovations together now represent roughly 18% of our basics business so we're continuing to see growth there. And the great thing about these innovations is we're now driving them across the globe.

So X-Temp is now being sold in France as well and we're beginning to use some of our bra innovations in Australia. So we really see that we have a lot of bandwidth to keep driving these innovations as we go through the back of the year.

And certainly that drives some growth in the category when we drive that and many times these are premium innovations that help our retailers as well..

Thank you. And our next question comes from the line of Kate McShane with Citi Research..

Thank you for taking my question.

My first question is just about ASPs and its contributions to sales during the quarter and how should we think about it when organic growth inflects in the second half?.

Well, from the standpoint of ASP, that's a question that runs across many criteria, but if I look at it this way from the standpoint of our pricing has been in place for all the years. So what we're really driving is, is organic growth based on a combination of really unit growth.

We're driving our business and it's going to be driven by unit growth on prices that have been in place.

We see solid increases in volume across the businesses, just as the earlier question asked, where is your organic growth coming from, it's coming in all of our businesses in the second half from the standpoint of Innerwear, Activewear and International businesses. So, you would see your average sales price moving with the unit growth..

Okay. Thanks. And my second question is, we've heard concern before about how a business that's selling more maybe commoditized product will translate online, and just based on the sales growth rates we heard today, that doesn't seem to be a problem.

So, our question is what are you doing digitally to resonate with the consumer? And do you think you're acquiring new customers that you haven't sold to before online?.

First of all, I think brands matter online just like they matter at retail. And when you can pair brands that consumers know with meaningful innovation, they're equally as interested in buying online as they are at retail.

And we've now paired that with our digital media and reaching particularly the millennial consumer where they're increasingly gathering their information and that's in the digital world. What I would tell you is, we see consumers go back and forth, so being able to lever our brands and our product across channels is an important part of this mix.

We don't see consumers that are uniquely tied to one channel or the other. Millennials are equally interested in shopping at retail. So, we really believe having a breadth of distribution tied to strong brands is the key to our success. And as you noted, we're having a lot of success. We're seeing growing and strong growth rates online..

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

Hi, guys. Thanks for taking my question. Gerald, last quarter you sort of alluded to, I guess, like a structural dynamic that's playing out in your wholesale business which is online wholesale.

As online wholesale sort of outpaces offline wholesale, you kind of see some inventory dynamics at play because of the different inventory turnover of those channels.

I am curious if you've sort of quantified the impact of that dynamic to your business, especially in the context of really healthy growth in online wholesale that you guys have been reporting?.

Well, we do know that there is somewhat of an offset when a door closes and the consumer buys the merchandise in that store that they have to go through a purchase cycle before they come back into the market and a number of those purchases are now online.

So you go through the purchase in one and then they have to come back online or wherever their choice of purchase is for years. So generally look at our categories. We know that per capita consumption over time is consistent, and we would expect it to normalize within a year's period roughly..

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

Hi.

I'm wondering, can you give a little more color on the back-to-school shift, was it specific to channel or certain products?.

Well, no really, it was just that we are seeing our retailers increasingly make their purchases closer to the event and so we had anticipated in our last call that we would see some movement of orders from Q2 into Q3 and certainly that's what we see play out. I will remind you that back-to-school itself as a period has also elongated.

So while it now begins in late July, it tends to run through late September even into early October. So we're just in the early phases of that and it will go on for a while, but we did see some of the initial shipments moved from second to the third quarter..

Okay.

And is it cross channel, like the mass as well as department stores, are you seeing it pronounced more in any one channel?.

I'm not seeing it pronounced more in one channel than another, no..

Okay, great. Thank you..

Thank you. And our next question comes from the line of William Reuter with Bank of America Merrill Lynch..

Good afternoon. I just have one. I know you guys have laid out a leverage target of 2 to 3 times. But I'm not sure if you've laid out in the event that you guys were to make a larger acquisition, what the maximum leverage you would push up for the right acquisition would be.

Have you guys laid out that number?.

Bill, we haven't really given a specific number. I think in our history, we've had leverage much higher than what it is today and been very comfortable with that. Not to say that we would want to go back to those days.

But I think a lot depends on the acquisition itself, what we think the synergies are, how quickly can we get the synergies, how quickly can we repay the debt and get back down to 2 to 3 times leverage ratio.

So we take all of that into account in terms of – and obviously, our bank covenants as well, we take all that into account in terms of how far afield from the 3 times we would go..

Okay. And then just another one from me. I feel like a lot of – I am hearing from a lot of apparel companies, such as yourselves that department stores are emphasizing brand, but then I also read articles about companies trying to expand their private label offerings.

Can you talk a little bit about what you guys are seeing or hearing from your customers in terms of their interest in expanding private label?.

Look, in our categories there's always been an element of private label but brands have always resonated very strongly. And if you look at a core category like underwear, it's been 80% plus branded for years. And in good times and bad times that number really doesn't move and in fact if anything, brands gain a little during tough times.

So from the standpoint, we're not seeing any significant pressure on any of our business. We feel good about where our brands and our programs are positioned and we expect to continue to grow them..

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the floor back over to T.C. Robillard for any closing comments..

We'd like to thank everyone for attending the call tonight. We look forward to speaking with you soon. Have a great night..

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..