T.C. Robillard - Chief Investor Relations Officer Gerald Evans - Chief Executive Officer Barry Hytinen - Chief Financial Officer.

Eric Tracy - Buckingham Research Susan Anderson - B. Riley FBR Andrew Burns - D.A. Davidson Omar Saad - Evercore Steve Marotta - CL King & Associates Jim Duffy - Stifel Chethan Mallela - Barclays Kate McShane - Citi Nancy Hilliker - Wells Fargo John Kernan - Cowen Tiffany Kanaga - Deutsche Bank Securities, Inc.

Bill Schultz - Goldman Sachs Anna Andreeva - Oppenheimer.

Good day, ladies and gentlemen, and welcome to the Hanesbrands Fourth Quarter and Full Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like the hand the floor over to T.C. Robillard, Chief Investor 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 fourth 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 a 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 2018 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 Barry Hytinen, our Chief Financial Officer.

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

Thank you, T.C. Over the past several years we have significantly diversified our business model by investing in our core brands, investing in our online operations and investing in international expansion to provide us with multiple pass for delivering growth and long-term shareholder returns.

In 2017, we saw additional signs that are efforts are working. We returned organic revenue growth in the second half, we expanded our gross margin, we generated strong cash flow. We returned over $600 million to shareholders through dividends and buybacks and we continue to deliver on our acquisition strategy.

However, not everything went according to plan. As a different revenue mix and higher cost, causes to miss our operating profit goal in the quarter. While we're not satisfied with our profit performance, we believe these issues are short-term in nature and we see a clear path to return to margin expansion.

Looking forward our business model remained strong. We have diversified in a way that we believe allows us to grow regardless of short-term challenges, whether it's a channel shift in the U.S. commodity pressures or even tax reform, the combination of an organic and acquisition strategies provides us the ability to deliver revenue and EPS growth.

And when you layer on the returns from deploying our significant levels of cash flow, we believe we are well positioned for long-term double-digit total shareholder returns.

Now touching on the quarter sales increased over 4% in the quarter, importantly organic revenue increased 2% in constant currency right at the midpoint of our guidance range with growth across a broad set of businesses.

Online sales increased 22% over last year, Global Champion sales increased 15%, international revenue grew over 3% in constant currency and we also saw organic growth in our U.S. Innerwear and U.S. Activewear businesses. By product category, global Innerwear sales increased 1.5% in the quarter, while global Activewear sales were up over 10%.

Cash flow from operations grew to a record level for the second straight year reaching $656 million. Our focus on working capital management drove more balanced cash generation throughout the year while also improving cash conversion.

Turning to operating profit, the mix relative to our guidance was driven by a higher distribution expenses additional marketing investments as well as revenue mix, all of which we believe are short-term headwinds. Touching on this strong demand for champion and the volume of late orders in several of our businesses drove higher distribution cost.

We believe these cost are a temporary headwind and we have plans in place to improve network efficiencies.

In terms of higher marketing spend, we invested more than initially planned as we look to build on our organic growth momentum and the mix impact resulted from stronger than planned international sales that partially offset a sales shortfall and higher margin into this business.

Through action plans we begin putting in place in late 2017, we believe Intimates sees position for revenue and profitability improvement as we move through the year. And as synergies continue to ramp, we expect internationals margin to be at or even above our corporate average.

Before I turn to our 2018 outlook, let me comment on acquisitions, which remain a key piece of our long-term growth strategy. This morning we announced the purchase of bras and things the leading provider of intimate apparel in Australia and New Zealand.

The company offers a number of its own brands through a consumer direct model with over a 170 stores and a growing online business. They have a proven process of driving growth through store optimization, disciplined pricing and successfully balancing core and seasonal products.

This acquisition fits within our stated acquisition criteria and is expected to be accretive to 2018 earnings. We believe this deal can generate a low to mid-teens IRR a solely on cost synergies and should offer substantial revenue synergies over time, as we leverage their successful model internationally.

Turning to our 2018 outlook, we remain appropriately cautious with respect to the U.S. wholesale environment and we are also factoring in higher input cost to reflect the recent run up in commodities as well as higher levels of marketing investment as we extend our innovation platforms to new product categories.

That spends our diverse revenue base benefits from our acquisition strategy and savings from project booster, position us to offset these headwinds and deliver another year of growth.

At the midpoint, our guidance cost for mid-single digit revenue growth driven by a combination of organic growth and acquisition contributions and mid-single digit operating profit growth with a return to margin expansion in the second half.

After adjusting our 2017 earnings per share to reflect our new tax rate, our guidance implies mid-single digit EPS growth for the year. And we are forecasting over $700 million in cash flow from operations. So, in closing tax reform is now behind us and is not expected to have a material impact on our business or our cash generation.

Looking forward our base business is growing, we are stepping up growth related investments; we have visibility to margin expansion in the second half. Our acquisition strategy is working and our cash flow continues to build.

All of which reaffirms our belief that our multifaceted business model positions us to deliver solid shareholder returns for many years to come. With that, I'll turn the call over to Barry..

Thanks Gerald. As many of you know, I joined Hanesbrands a little over three months ago and I'm excited to be part of the strong management team. What attracted to be here was, this is a great company with strong brands, powerful business model and significant opportunity to create shareholder value for many years.

For today's call I'll provide some additional color on our fourth quarter results, I'll speak to our acquisition and integration related charges, cover the expected impact from tax reform, touch on the key balance sheet and cash flow highlights and then I'll finish with comments on our guidance.

Now let me begin with our performance during the quarter. Sales increased by over 4% compared to last year with approximately 2 points from organic growth, a little more than 1 point from FX and about a point from alternative apparel.

Our adjusted gross margin increased 50 basis points over last year to 40.1% with each business segment delivering expansion in the quarter. Our adjusted operating profit of $231 million was approximately $15 million below our guidance as a result of higher expenses and revenue mix.

We believe these are short-term headwinds and we see a clear path to return to margin expansion in the second half of 2018 and beyond. Our tax rate in the quarter was lower than anticipated due to higher than expected one-time charges, which I will discuss shortly.

This along with the share repurchases offset the lower operating profit resulting in earnings per share of $0.52 which was up in midpoint of our guidance range. Turning to our segments. We delivered organic constant currency revenue growth in each of our three main segments during the quarter.

Innerwear sales increased to approximately 1% over last year as mid-single digit growth in basics more than offset a decline in Intimates. In our basics business, we saw strong performance in both men's and kids underwear, as well as improving point of sales trends and stable retailer inventories.

Segment operating margin down 150 basis points compared to last year driven by Intimate fee leverage and higher distribution expenses. Touching on our Activewear segment, revenue increased 9% in the quarter with approximately 5 points coming from Alternative Apparel.

Organic revenue increased by over 4% driven by our Champion and Sports Apparel businesses. The segment operating margin of 15.3% declined 110 basis points versus last year driven primarily by higher distribution expenses. Now looking at our international segment, sales increased approximately 8% over last year and roughly 3.5% in constant currency.

We saw a double-digit revenue growth in Asia driven by strong demand for Champion. Champion sales were also strong in Europe up low teens on a constant currency basis and we delivered solid growth in our Innerwear businesses in Australia and Latin America. The segment operating margin of 14% was flat compared to prior year.

Now I'd like to speak to our acquisition integration and other action related expenses.

For the quarter, we had a charge of approximately $570 million of which approximately 85% was related to the impact from tax reform, the contingent payment on our Champion Europe acquisition which was finalized in the quarter and the cost associated with our December refinancing.

Of the remaining 15% or $85 million, $50 million were acquisition and integration related which was higher than our prior guidance as we made the decision to accelerate certain integration actions and we experienced higher supply chain cost to support our Australian and European acquisitions.

The other $35 million of charges were mainly cost associated with the storm-related disruptions across our global supply chain. Now I'd like to address tax reform.

Looking first at the impact from the change in U.S tax laws, the charge in the quarter consist of the re-measuring of our deferred tax assets which is all non-cash as well as the transition tax which is a one-time tax on prior offshore earnings.

To a variety of offsets, such as R&D and foreign tax credit, the cash expense related to this charges expected to be approximately $150 million which is payable over 8 years and is heavily weighted to the out years.

On a go forward basis, we estimate our tax rate to be between 15% and 16% similar to our rate in the 2009 to 2014 timeframe in the low to 21% U.S. corporate rate as we continue to benefit from owning our global supply chain.

In terms of cash flow, tax reform should not have a material impact on our strong cash generation and we believe it will actually be beneficial to our capital allocation strategy as cash repatriation is now more cost effective. Shifting to balance sheet and cash flow highlights.

For the year, we generated $656 million in cash flow from operations an increase of $50 million over last year. The main driver of the growth was better working capital performance, specifically inventories and payables as we saw an improvement in our cash cycle more than 10 days.

In December, we amended our senior secured credit facility to lower rates, increased capacity and improved terms. We also repurchased approximately $100 million of stock in the quarter at an average price of just over $20 per share bringing our whole year repurchase activity to $400 million. Now turning to guidance.

This morning we provided our full year 2018 outlook as well as first quarter guidance. So, I'll point you at the press release and the FAQ document for the specifics.

However, I do want to highlight four items, first at the midpoint of our range revenue guidance assumes a 1% increase in organic constant currency sales for the full year tempered earlier in the year by first half door closings and tight inventory management in the U.S.

Second, to help with comparability on our EPS guidance our 2017 adjusted EPS normalized for a 16% tax rate would have been $1.68 or $0.25 lower than reported. Third, our cash flow from operations guidance includes the one-time $30 million contingent payment for our Champion Europe acquisition.

And fourth, acquisition-related and other charges are expected to be approximately $80 million in 2018, about a quarter of these charges which we would categorize as other are related to a multi-year realignment of our supply chain. The remaining charges are related to the integration of existing acquisitions.

We have completed the integration of Nike's apparel, we expect to be complete with the Hanes Europe and Champion Europe integrations by the end of 2018 and we expect to finish the Hanes Australasian integration by the end of 2019. Looking to 2019, we expect acquisition and integration-related charges to be $15 million or less.

So in summary, the combination of our organic acquisition and capital allocation strategies resulting in another year of growth and strong cash generation. The fact we were able to deliver growth in spite of significant challenges in the U.S. wholesale market underscores the capabilities of our diversified business model.

And while we have work to do on the cost side, we believe we are very well positioned to return to margin expansion in the second half and deliver another year of revenue, EPS and cash flow growth in 2018. And with that, I'll turn the call back over to T.C..

Thanks Barry. 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 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. [Operator Instructions] Our first question comes from the line of Eric Tracy with Buckingham Research..

Good morning everyone. Thanks for taking my question.

I guess this relates to the FY'2018 guide, Gerald or maybe Barry you could add this, but could you frame for us the assumption sort of embedded within that, that 1% organic growth, you mentioned the door closures, but just beyond going channel migration sort of the challenges facing within with the domestic business and then just, again as it relates to Innerwear, Activewear and international?.

Sure Eric, let me start and shape it broadly and then I'll let Barry give you more of the specific details on it.

What I would say about the guidance is, it's really reflection of what we've been doing for several years as executing a strategy to diversify our revenue mix to provide multiple pass to consistent revenue growth and cash flow expansion over time.

As you know we've been investing in our consumer direct business, we've been investing in the international expansion, we've been in investing beyond our core brands and innovation.

And we certainly saw that -- our business returned to organic growth in the second half of 2017 as well as we had the benefit of acquisitions and our cash flow reached record highs for a second year in a row. So we see that model working.

As we look to 2018 though we certainly know that there's going to continue to be an evolution of the consumer's purchase patterns within the U.S. And as Barry noted in his comments we're cautious about the U.S. wholesale market again particularly in the first half. We've already seen door closures announced.

We've seen a bankruptcy already early in the first half of the year. And we expect the other retailers to continue to tighten their inventory. So we have tempered our expectations on our growth in the U.S. in the first half. In spite of that, we do expect organic growth for the year and Barry will touch on that more in a minute.

I would also say from the operating profit side as we touched on, we did see a surge in commodity costs late in the last year as we put things together that we will price for over time, but that's a headwind against profit.

As well as we have chosen to invest quite a bit more in marketing, we've stepped up our marketing within this year by another $20 million as we really believe we're seeing the results of driving our business.

So we've taken those opportunities and I think as you'll see in spite of that we've got a business model now that has multiple levers to pull that will deliver that organic growth. It will combine with acquisition growth and it also delivers profit growth and will deliver another record year of cash flow.

So with that let me turn it over to Barry, who will take you a little deeper..

Good morning. Thanks for the question. From a total company basis, I would note that we've got about roughly $180 million rolling in from acquisitions that's for three quarters from Alternative Apparel as well as the deal announced this morning.

And then, about a $70 million benefit from FX tailwind that of course is more first half oriented in euro denominated principally. And then, if you look at the segments, the U.S. Innerwear business, we are to build on Gerald's points. Looking at this in a cautious way and we plan for the first half for that business to be down a low single-digit rate.

And that's across the basics and the intimate business and then to return to growth modest growth in the second half. On balance we're forecasting the Innerwear business for the full year to be just slightly down.

On the Activewear side slightly up in the first half and a little bit more in the second half that does benefit from the Alternative Apparel element. So that's up a very low single-digit for the full year.

And then, on the international side, we are forecasting it to be up kind of high single digits for the year on a reported basis, but that's basically mid-single digit on a constant currency and I'd again note as I called out the FX is more beneficial in the first half. So that's kind of how we're thinking about it.

We feel good about where we're planning at this stage..

That's great. If I could just follow up on the operating profitability cadence and the dynamics between that again it sounds like some transitory distribution costs, but also some higher input costs as it relates to maybe cotton. Gerald I think you mentioned the pricing at some point to maybe look to offset that.

Maybe just walk through that dynamic how you play out and in fact pricing….

Let me touch on the pricing question and I'll turn it over to Barry for the others. From the pricing standpoint as you know, we've always talked about some commodity inflation in our business it would be in sort of that low single digit input cost inflation over time.

We typically have said we would price for that and we would offset it through a combination of pricing and supply chain efficiencies. When we do price we typically put that in place well before we finish the prior year.

In this case, the run up in commodities and related costs like transportation was pretty quick and pretty steep as we came really out of the calendar year and passed when we would normally price. So we're going to do more of that pricing.

We're looking to do some of that pricing in the second half of this year when you'll see it begin to offset that commodities, but that will carry into 2019 as well. Let me now turn it over to Barry for the rest of the elements..

Sure. We're expecting the operating margin to be essentially consistent year-on-year for the full year and that's assuming down some in the first half. As Gerald noted we're increasing our investments in marketing and we've got those distribution and efficiencies that we're working through.

We've got plans in place and we're working actively to improve the distribution line. So we'll return to expansion in operating margin in the second half as the distribution costs come more in line and we really start seeing those benefits from booster and additional synergies start continuing to ramp offsetting the items that we talked about.

So we feel very good about seeing an expansion operating margin in the second half..

Thank you. Our next question comes from the line of Susan Anderson with B. Riley FBR..

Hi. Good morning. Thanks for taking my question. Nice to see the organic growth come back. I had a quick question on the acquisition charges.

Did you pull forward the $15 million in charges that would have normally hit in 2018 or those additional? And then, also if you could give some color on the new distribution charges and kind of what you're doing with the supply chain there?.

Sure. Maybe I'll -- let me just kind of take that in total and break it down some. So in the quarter we have $574 million of charges as you know we discussed it on the call. The vast majority of that 85% was related to the tax reform and Champion Europe earn out and the refinancing.

The remaining approximately $85 million but $34 million from the business disruptions that we talked about and then that remaining $50 million that is a combination of acquisition integration costs.

First it's higher cost to realign the Asian supply chain to support our European and Australian acquisitions, and then you're right we did accelerate some actions to accelerate the completion of those integration. So that's not all accelerated.

It's a smaller portion, but we saw the opportunity to do some additional restructuring and IT work in particular to facilitate the completion of the integrations of our European acquisition both Hanes Europe as well as Champion Europe in 2018 and as well as to position ourselves to be completing the Australia acquisition in 2019.

So I think was a very good opportunity to move forward and accelerate some of the synergies as well as we see those ramping in 2018 and importantly by 2019 having the acquisition integration charges be down to $15 million we have good line of sight to getting to what I would call kind of GAAP non-acquisition, no acquisition charges in 2020 for any current deals..

The question comes from the line of Andrew Burns with D.A. Davidson..

Thanks. Good morning. Just a question on the acquisition looking at a lot of things. Could you spend a little more time highlighting what the synergies are with that -- in the specific brand platform and when people see a brick and mortar refill acquisition [feared about] [ph] traffic print to come up.

Could you help us better understand what that retailers seeing and how they're omnichannel strategy is evolving? Thanks..

Sure. Bras N Things, we think it's a great acquisition. They're the leading seller of intimate apparel in Australia and New Zealand it extends our position as innerwear leader further in Australia and New Zealand. So it's a great complement to what we already have.

The great thing about the Bras N Things business is, it targets very, very closely the millennial consumer through their own direct-to-consumer network of about 170 stores as well as a growing online business.

Their growth CAGR over the last three years has been about 11% on the top line over each year as well as their online business is growing at a fast double-digit rate.

So we see it as an extension of our consumer direct efforts on a global basis to build more of our global direct business certainly from an acquisition standpoint it's justified based on some cost synergies. We see supply chain synergies as we always do when we operate within our core categories but we also see revenue synergies.

We see this model extendable to other international markets as well. And based on them -- both its model which is a very disciplined model, it's a combination of a basic product complemented by seasonal introductions and it's a really well run operation. So we're very excited about the acquisition.

I would just tell you that from the standpoint of where we focus has been one of our key themes to focus on getting closer to that that end consumer by expanding our direct-to-consumer business. And about 20% of our global business today are about $1.5 billion is direct-to-consumer business on a global basis.

It's about half online and about half retail if you break down that number typically the international markets are a little heavier on retail which are not typically over store like the U.S. market while our U.S. efforts are focused more on line. But it's a growing and fairly large piece of our business..

Thanks.

And one follow-up, just in terms of expansion into other geographic markets for the Concept, is that something that could develop in 2019 or perhaps maybe a longer timeframe on that?.

Well, I think its early days to put a long-term roadmap on it. I think we were very excited about the potential in their core countries first. But certainly one of the things we intend to do very quickly is get the team over here and start to study market.

So I think you could certainly see as you get out to the latter part of the decade and beyond that we would be looking to extend it to other countries..

Our next question comes from the line of Omar Saad with Evercore. Please go ahead..

Thanks. Good morning. Two quick questions. The first one I wanted to ask you about Amazon I know your portfolio brand seems to be showing up there in the best seller lists across the basic categories that you guys participate in, in a pretty meaningful way.

But it's hard for us to kind of get a feel for how material it is for the overall revenue mix for you guys. Maybe you can talk about how that relationship is developing and when you see that becoming a more material driver of growth for you. And then, I had a follow up on Champion. Thanks..

Sure. Let me start with online in general and certainly Amazon's a big piece today. But as you know our, we've said for some time that our online business represents a growing part of our business and within the year it was about 11% of our business. It's been growing far faster.

Our business online has been growing far faster than the apparel business in total it's been going on online. And it's been growing across countries now and across channels. From the standpoint of Amazon specifically they're one of our key partners as we grow online.

We are a global partner with them and we're growing our business globally with them within the U.S. We've said before they're growing very fast to be our fifth largest customer. I think that relationship continues to prosper. And as you noted our brands are frequently shown as the top sellers online.

We've seen our business grow across the Activewear and Innerwear segments..

Thanks. And then, can I ask a follow-up on Champion, the brand is such a strong momentum not just in North America but worldwide. A lot of interest in some of these kind of retro Activewear brands.

What are you doing to take advantage of that opportunity and actually I think we noticed that your payment for international piece of the acquisition of Champion internationally seems like there was an incremental payment because it's going so well as part of the earned out. Maybe you could elaborate on that and plans for the brand? Thanks..

Yes. We think Champion is doing really well. It's got a lot of upside to it from a global standpoint. Certainly our global expansion strategy for Champion was about linking the business together around the world part of that was the European acquisition.

Within the quarter globally Champion grew at a mid teens rate and that was really for the second quarter in a row and across geographies we saw teens are better growth in the business.

So the combination of the various products that we brought together around the world and the expansion through bricks and mortar in certain locations online and others and even owned stores as you get into our European markets are all coming together to give us strong momentum and we don't talk much about our Asia business, but some of our fastest growth is coming out of Asia and that is heavily tied to the expansion of the Champion business across Asia as well.

And certainly you read the earn out payment that we made in the quarter exactly as you should read it. Part of that deal was a structure based on their final results in 2016 and there were adjustments for performance beyond expectations and they certainly did perform beyond our expectations.

And I think it is a real message on the strength of that business and the performance of management there..

Thank you. Our next question comes from the line of Steve Marotta with CL King & Associates..

Good morning, everybody. You mentioned that incremental marketing spend will be up about $20 million this year. Can you just remind us what the total aggregate marketing spend was last year and what you expect the online penetration to be as a total percent of revenue in 2018? Thanks.

We don't divulge the absolute numbers of spending but $20 million is a nice increase in support of our brands year-on-year. I would tell you that it's going to be split between international support as well as U.S. support. We saw good results of our support in the fourth quarter.

You may recall at the end of Q3, we said we were going to raise our support in 2017 in Q4 behind our businesses. A great example that is in our basics business in the U.S. where we saw mid-single digit growth in the fourth quarter and gained share across men's underwear, women's underwear and kids underwear all driven by the power of our innovations.

And I believe the media's support behind it. It's what gives us the belief supporting our brands even more strongly in 2018 is exactly what we should do. And in fact you'll see us support some launches in Australia in the [Barns] [ph] brand you'll see us support are our basics.

We have a new innovation coming out in the first quarter and it's called Comfort Flex fit in our underwear business and you'll see that on March Madness as we begin to advertise in the first quarter.

And also as we finish placing some of our product realignments in intimates in the first and second quarter you'll actually see us begin to advertise intimates in the U.S. which we haven't done in several years. So we've got a lot of plans to support our business in the year ahead.

From the standpoint of online as I mentioned it grew to 11% of our business globally in the U.S. It actually reached 12% in Q4 in the U.S. And you may recall just a couple of years ago in 2015, it was only 7% of our business. I think you get a sense of how fast is growing.

We're certainly continuing to manage toward that 15% goal and whether we get there this year or next I think you're going to continue to see us progress nicely toward that mid teens level which we believe is the level where it really starts to have a substantial impact on our business..

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

Thank you. Good morning. Couple of questions for me.

First, can you elaborate on comments around the distribution efficiencies in the fourth quarter, and then, related to that I guess I'm interested in more detail around the objectives to realign the Western Hemisphere network and the efficiencies you hope to achieve with that?.

Yes. Let me take this Jim. And good morning to you too. From the standpoint of distribution there was a couple of things going on distribution in the fourth quarter. First is, our Champion demand is very strong in the business right now and certainly continued through the fourth quarter and will continue into the first.

Along with it, what we have seen across a number of our businesses as retailers drop their holiday builds. The natural tendency is for the orders then to shift closer to the actual holiday event which is later in the quarter.

So the convergence of those two events in the fourth quarter caused a lot of late work in our DCs and extra labor spending and so forth. As we look to this year, we expect the Champion challenge in particular to continue in our DCs in the first half of the year.

What we're doing to fix that is we're realigning our network and of course planning our labor more effectively as we look to the next holiday season. So we think that will work its way through from the realignment of the network standpoint as we work through the through the first half of the year. And we feel that will effectively be there.

From the standpoint of the Western Hemisphere realignment much of our integration effort with our acquisitions has touched on the Asian portion of our network and we've had a number of actions there. Our Western Hemisphere network has been in place for over a decade and has been largely unadjusted since we initially built it.

During that time it has matured nicely the productivity of that network has risen pretty substantially and we see the opportunity actually to take some actions now to further tighten that network, drive more units through the remaining facilities to further improve our efficiencies as we see opportunity in that productivity that is running so well that that networks running extremely well.

And so from the standpoint of capital spending, we won't have a substantial impact on capital spending we've always said we'd be a 1.5% to 1.75% of sales we'll operate well within that this is just more about seizing the opportunity to further enhance our efficiencies..

Thank you. Next question comes from the line of Chethan Mallela with Barclays..

Hey, good morning. I just wanted to follow up on the earlier comments on planned pricing in the back half of the year.

Can you provide a little more detail on the specific categories in which you plan to take the pricing and how the magnitude of that pricing compares to what you've taken at times in the past when you've had inflation? And then, also just how are you thinking about potential elasticity from that pricing?.

Well, I think it's early to comment on elasticity and those kind of things, what I would say is that these costs are coming through from the standpoint of -- the world wants to tend to think about it just being kind cotton, but cotton is a fairly small piece of our total base.

A general surge in commodities and it's also affecting transportation costs and those kind of things. So we will look across our product lines and look to begin to put prices in place where we can in the second half of the year, and then, work into the next year to fully cover the cost of those.

These increases will be fairly modest relative to certainly not nearly the range of that we would have seen during the big cotton bubble of mid-decade 2013/14. These are just more of a normal adjustments you would make to cover inflation. So a few points here and there..

Thank you. Our next question comes from the line of Kate McShane with Citi..

Hi. Thank you. Good morning. Thanks for taking my question. With regards to cash flow the guidance seems to be a little wider than we expected for the year.

I wondered if you could walk us through a little bit more in the puts and takes of the guide and is $1 billion in operating cash flow by 2020 still achievable?.

Okay. Sure. Thanks for the question. So on the 2018 guidance I think we've kind of taken a conservative approach to this if you look at our GAAP net income and then just add back the D&A and stock comps try and get to the level that we're midpoint of our guidance. And so we've prudently taken a look at working capital.

I think we clearly have over the next few years additional opportunity in working capital, but we've planned that essentially flat for the year. I would know that in 2018 it does include the one-time Champion earn out that we talked about that's about $30 million that does run through cash flow from operations.

It does include the $15 million pension contribution we'll be making and of course it also includes the impact of tax reform which we estimate our cash taxes in the year we'll be up a little over $30 million. So that's all embedded in those numbers. As it relates to the $1 billion plan, yes, we are absolutely see that number in the cards.

So I would think about it this way if you just kind of start with the -- our cash flow from operations in 2018, let's use the high-end for the purposes of this just to make it easy at 750 add back that Champion point that I mentioned that $30 million is one time. The pension contribution is really an actuarial type of exercise.

So if we assume that's just this year of course that can move around that's $15 million. The XA charges in 2018 are mostly all cash and that's about $80 million and as we noted by 2020 that will go to zero on the acquisition related charges.

And then, when you look at the after tax benefit that we'll be receiving over the next couple of years from synergies and booster as well as those pricing opportunities that Gerald talked about $1 billion is very much in the cards. And I'd note that that includes the relative impact from tax reform now. So we see good performance there..

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

Hi, everyone. This is Nancy on for Ike. Thanks for our taking our question. I just was wondering if you could dig further into the domestic innerwear and activewear trends.

Could you just talk about for innerwears specifically the breakout of mass and departments during specialty? What were the trends there, and then, also activewear, if you could just talk about the domestic performance there too?.

Sure. From the standpoint of the U.S. innerwear market, we're actually pleased that our business in the fourth quarter was up 1%, our business returned organic growth in the quarter which were important goals we set out to achieve that was driven by our basics business that was up mid-single digit.

And as I commented earlier we had brand support behind it and we saw broad strength behind our various categories within the basic thing and gain share accordingly.

We saw within the channels of that as your question was framed and within the channel, certainly the mass channels generally performed well if you look at category and I'm really speaking to category here more than our general performance. If you look at the category, the mass channel has performed well.

Mid-tier was mixed and department stores recovered as you got closer to the holidays. The intimate side of our business was a little below our expectations and that category in general is more concentrated in the department store and mall based channels than other portions of our Innerwear segment.

And it's been -- it has suffered more from door closures. Our business was a little below our expectations as we have a number of product realignments and so forth that we expected to go out in the fourth quarter some of those got shifted to this year. So we'll see them go out in the first and second quarters of this year.

And we expect that business to ramp sequentially through the year as we get the products in place. And as I mentioned earlier, we're going to support it with advertising as well. So we feel good about where our Innerwear business is going. We feel like it's following the various retail trends of the channels in which it operates.

From the standpoint of Activewear, the Activewear category actually saw growth in the fourth quarter and our business followed suit. Our business overall was up 9%. Some of that was the benefit of our Alternative Apparel acquisition, but on an organic basis the business grew 4% as well.

And certainly our star within that is our Champion business it grew at mid teens rate in the U.S. as well. So we continue to have a lot of belief that the Activewear business is going to continue to be strong and not only in the U.S. but on a global basis and Champion is going to be a big part of that..

And our next question comes from the line of John Kernan with Cowen..

Good morning, guys. Thanks for taking my question. Just on the wholesale channel in the U.S. what we've heard from some larger CPG companies that there's still some fee stocking going on in that channel.

I'm just wondering what your assumptions are for the big box wholesale channel as we go into the back-half of the year when you're assuming I'm going to see a little bit of a pickup in organic what your assumptions are for that channel? Thank you..

From the standpoint of destocking, we think that our inventories exited 2017 in line and generally we think that there we're going to be fine as we go through 2018. We do believe and as we noted in our caution for U.S.

wholesale there is a dealer doing destocking and that customer continues to just manage things very tightly and encounter on quicker turns out of the suppliers to fill their shelves and so forth.

And we think that our retailers will continue to manage inventories tightly and refill when they need to rather than allowing excess to build up in their system and we certainly contemplated that in our guidance as we noted in the first half of the year.

So, we don't anticipate destocking per se, it's just a continued focus on improving their turns and managing inventories very carefully..

Okay.

Just if I could follow-up, I think gross margin was up for four quarters and 2017 I'm just wondering what your guidance implies for gross margin in 2018?.

Yes. Thanks for the question. We are expecting gross margin to be up slightly in the first quarter and to be up for the full year probably in the vicinity of a 100 to 200 basis points..

Thank you. And our next question comes from the line of Tiffany Kanaga with Deutsche Bank..

Hi. Thanks for taking my questions.

You discussed mid-single digit earnings growth in 2018 adjusted for tax reform which falls a bit below the double-digit growth you typically targeted, despite guiding positive organic sales for next year? Can you talk big picture what if I specific example around how you see the path ahead, to get back to this double-digit levels.

I know you've outlined from first half in tax and margins, but where is the most realistic opportunity to cover that GAAP, double-digit EPS or as mid-single digit growth, the new algorithm despite what you are achieving online in the International business and with Champion?.

Okay let me take a shot at that one. So, from a standpoint of what's embedded in the operating profit, we've talked about we see some short-term headwinds particularly the distribution and networking efficiencies that we're working through as well as the mixed elements that is flowing through in some U.S.

portion of the business like in Intimates and obviously we are elevating the marketing spend substantially as we see good return on that. As I look at to the other things that are impacting 2018, I would point out the commodities, we think that's fairly substantial increase that we as Gerald said we'll price for in the back-half of the year.

So, as you look forward, I think you'll see that we're getting passed the distribution in mixed items, we'd be pricing for the commodities and we really start to see the booster in synergies, start to ramp and you'll see the gross margin on our international business continue to rise in the total operating profit on that portion of the business, actually exceed the corporate average as we move through the year, in the back-half there will - we think significant expansion there.

So, I really think as you get out to 2019 and beyond we have a very clear path to growing earning substantially..

Thank you. Our next question comes from the line of Bill Schultz with Goldman Sachs..

Thanks guys. Most of my questions have already been asked already. But, just maybe to dive in on the distribution expenses you had called out.

You frame those higher distribution expenses as being, I guess a little bit more transient in nature, but do you think that's kind of just going to be an ongoing cost of doing business as retailers continue to ship, continue to ask for shipments closer to time of demand, do you see this as an ongoing drag into next year?.

No.

As we noted we see some first half drag as we look into 2018, which is really more about our Champion influx in the strength of that business and there is things you can do to adjust your network and spread out the work among multiple facilities rather than having it surge through one and we'll make those adjustments in the first part of the year.

The holiday transition is one that you expect and you plan your labor for accordingly over time. We've seen a similar shift, I would remind you in the third quarter as retailers have increasingly moved their back-to-school period later in the year and we've adjusted to that over time.

So, we'll adjust to and we anticipate is really about labor management in the back-half..

Thank you. And our final question for today comes from the line of Anna Andreeva with Oppenheimer..

Great. Thanks so much. Good morning guys.

Two quick questions from us, what is the impact from the door closures that you've considered in 1Q and I guess are you embedding any additional closures as we go through 2018? And then secondly, just as you think about margin expansion in the back-half is that more of a functional 4Q recovery or should we expect some improvement already in 3Q as well? Thank you so much..

Yes. So I'll take the second half portion first, we certainly expect operating margin expansion in the entire half and that's third quarter and the fourth quarter.

And that's thanks to the fact that we'll be getting those items that we've talked about that are little bit pressuring in the first half behind us as well as see those incremental opportunities for the ramp from synergies and acquisition improvements and booster and pricing. So, and more of the marketing is first half loaded as we talked about.

And as it relates to door closures and we certainly have embedded door closures into the year and more of that's in the first half in terms of the anniversarying of things that happened throughout the year last year. So, I think you're thinking about that right..

Thank you. And that concludes our question and answer session for today. I would like to turn the floor 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 day..

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