T.C. Robillard - Hanesbrands, Inc. Gerald W. Evans Jr. - Hanesbrands, Inc. Barry A. Hytinen - Hanesbrands, Inc..

Eric Tracy - The Buckingham Research Group, Inc. Susan Anderson - B. Riley FBR, Inc. Chethan Mallela - Barclays Capital, Inc. Steven L. Marotta - C.L. King & Associates, Inc. Nancy Hilliker - Wells Fargo Securities LLC Tiffany Kanaga - Deutsche Bank Securities, Inc. Westcott Rochette - Evercore Group LLC Krista Zuber - Cowen & Co. LLC Heather N.

Balsky - Bank of America Merrill Lynch Laurent Vasilescu - Macquarie Capital (USA), Inc..

Good day, ladies and gentlemen, and welcome to the HanesBrands Quarterly Investor Conference Call. At this time, all participants are in a listen-only mode. As a reminder, today's conference may be recorded. I'd now like to introduce your host for today's conference, Mr. T.C. Robillard. Sir, please go ahead..

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 first quarter of 2018. 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, integration and other action-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..

International, Champion and online. This growth more than offset the expected brick-and-mortar declines within the U.S. wholesale channel. Looking at our sales by product category, global underwear sales increased 2% in the quarter driven by exchange rates and the addition of Bras N Things.

On an organic constant currency basis, sales declined roughly 3%. In March, we launched our Comfort Flex Fit innovation in U.S. men's underwear with a coordinated media campaign during the NCAA basketball tournament and we're pleased with the initial sales trends we're seeing from this new innovation.

We also increased our media spend during the quarter to support our new Bonds product line in Australia as well as our U.S. Intimates business. Our U.S. Intimates business, while down compared to last year, performed as expected. More specifically, our U.S.

bra business, where our turnaround initiatives are more advanced, was down 2% in the quarter, a sequential improvement from the 5% decline in the fourth quarter. We're beginning to see early signs of sales and market share stabilization in our bra business, which we credit to the new programs we have placed at key strategic retailers.

We're encouraged by the improved point-of-sale trends where we have placed these programs, and we believe we are on track for continued sequential improvement in our U.S. Intimates business as the year progresses. Global Activewear sales increased 15% over last year or 8% on an organic constant currency basis.

This was ahead of our expectations, as we benefited from the earlier placement of some of our spring product offerings for Champion. For the quarter, our Champion revenue grew 17% globally in constant currency, with high single-digit growth in the U.S. and strong double-digit growth in both Asia and Europe.

The global growth in Champion more than offset the anticipated space reduction in our Hanes casualwear business within the U.S. mass channel. Our Activewear strategy for the past several years has been to drive revenue and margin growth by focusing on the branded segments of the market, while de-emphasizing the commodity segments.

This brand-focused strategy has been working in both our domestic and our international businesses. Going forward, we'll continue to concentrate on the higher-return segments and channels of the market by leveraging our strong brands, Champion and Hanes, as well as our latest addition, the Alternative brand.

Turning to acquisitions, Alternative Apparel is performing well and though it wasn't part of our company a year ago, revenue was up 8% over last year. Alternative adds another solid brand to our portfolio, one with a strong millennial and sustainability appeal.

While we have only owned Bras N Things for roughly two months, it's an extremely well-run business and is shaping up to be a great acquisition. We've inherited a strong management team, a leading brand in Australia with a core millennial customer base, and a demonstrated omni-channel model.

As we committed last quarter, we expect to complete the integrations of our current deals by the end of 2019, at which time we expect to have no more charges related to our prior acquisitions.

Touching briefly on capital allocation, our plan for this year is to digest our acquisitions and pay down debt with a focus on getting back within our targeted leverage range of two to three times net debt-to-EBITDA. So in closing, we're encouraged by the solid start to the year, but recognize we have work to do.

We're looking forward to seeing many of you at our headquarters in two weeks for our Investor Day, where you'll get a chance to interact with many of our global business leaders.

You'll also hear about our strategies to unleash our full potential to generate shareholder returns as we leverage everything we have been building over the past several years. With that, I'll turn the call over to Barry..

Thanks, Gerald. Let me begin by highlighting that today's commentary regarding operating profit and operating margin reflects the accounting rule change regarding pension expense, as well as our segment allocation change as it relates to certain corporate overhead costs.

All prior-period results reflect these changes, and we've provided a table on our Investor Relations website that recast 2016 and 2017. For the quarter, sales were $1.47 billion, an increase of $91 million over last year and up 1% organically in constant currency.

Operating profit of $166 million and operating margin of 11.3% were both modestly ahead of our expectations. Adjusted and GAAP earnings per share were $0.26 and $0.22 respectively, and cash flow from operations was a use of $128 million. With that summary, let's turn to the details of the quarter's results.

Sales increased 6.6% over last year and included $32 million from the contributions of our recent acquisitions of Alternative Apparel and Bras N Things as well as a $45 million benefit from the effects of foreign exchange rates.

Gross margin declined 10 basis points over last year, modestly below our outlook for a slight increase, as expansion in our international gross margin was offset by higher input costs, which were expected. I will note that we experienced $14 million of raw material inflation in the quarter.

Absent this inflation, our gross margin would have been up 80 basis points. Operating margin declined 60 basis points compared to last year. Absent the impact from raw material inflation, operating margin would have been up 30 basis points.

Other factors weighing on our operating margin in the quarter were the anticipated increases in both media investments and distribution costs.

For the quarter, our media investment was $5 million higher than last year, driven by the items Gerald referenced in his comments, while distribution costs were impacted by the short-term labor inefficiencies we spoke about last quarter.

Looking at the second half, we've secured the planned price increases for this year that we spoke about on our last call.

We have begun to communicate our planned price increases for 2019 and we're progressing on our plans to improve distribution efficiencies, all of which gives us confidence that we are on track to return to operating margin expansion in the second half.

Our 16% tax rate in the quarter was in line with our expectations and included $4 million of one-time expense related to a tax law change in one of our foreign jurisdictions. GAAP EPS of $0.22 increased 16% over last year as we incurred much lower acquisition and other related charges. Adjusted EPS of $0.26 declined 10% versus last year.

Now, given the recent U.S. tax reform, I would note that if the prior year's tax rate was at 16%, our adjusted EPS would have been consistent year-on-year. For the quarter, acquisition and other related charges were $20 million, a decrease of $19 million from last year. We continue to expect 2018 charges to be $80 million.

We are on track to complete the integrations of our current deals over the next 18 months and expect 2019 to mark the end of one-time charges related to all of our prior acquisitions. Consistent with our normal seasonality, cash flow from operations was a use in the quarter and was in line with our expectation.

I would note, first quarter's cash flow from operations included $28 million for the previously disclosed earn-out payment related to our acquisition of Champion Europe. Now let me take you through our segment performance. U.S. Innerwear sales declined 3% compared to last year as both Basics and Intimates were in line with our expectations.

Intimates sales declined approximately 7%, while Basics sales were down just under 1%. On a rolling 12-month basis, we believe we gained market share in Basics, driven by men's underwear and socks as we outperformed the overall decline in the category.

Point-of-sale trends within Basics were better-than-expected in the mass channel and mixed in the department store and mid-tier channels. Innerwear operating margins declined approximately 240 basis points versus last year, primarily due to the impact from higher raw material costs as well as lower sales volume. Turning to U.S.

Activewear, sales increased 6% over last year due to the $16 million contribution from Alternative Apparel and a 1% increase in organic sales. The increase in organic sales exceeded our expectations as growth in Champion and replenishment Activewear more than offset the expected space declines in our mass business that Gerald referred to earlier.

With respect to Champion, sales outside of the mass channel increased over 50% in the quarter driven by strong consumer demand, space gains in the specialty channels and growth in the online channel. This more than offset a decline in the Champion mass business, which we believe is mature.

Activewear operating margins declined 210 basis points in the quarter to 11.1% as favorable product mix was more than offset by the impact from higher raw material and distribution costs. As we discussed last quarter, through pricing and distribution efforts, we expect these particular headwinds to be mitigated in the second half.

In our International segment, sales increased 19% or $92 million with $16 million from the contribution of Bras N Things and $45 million from the effects of foreign exchange rates. On a constant currency basis, organic sales increased approximately 7% compared to last year and exceeded our expectations.

The primary driver of that performance was strong demand for our Champion brand, particularly in Asia where sales grew 30% and in Europe where sales grew 23% versus last year. Growth in both regions was broadbased including online, our retail stores and wholesale.

International operating margins were strong, increasing 250 basis points over last year, primarily due to scale efficiencies, favorable mix and the continued realization of acquisition synergies. As we have discussed before, over time, we expect these same factors to drive further margin expansion in the International segment.

With respect to leverage, we ended the quarter at 3.9 times on a net debt-to-EBITDA basis. As Gerald discussed, we plan to de-lever this year and expect to be approaching the high end of our target range by year-end. In 2019, we expect to be back within our leverage range. Lastly, as it relates to guidance.

We reiterated our full year outlook as well as issued second quarter guidance, so I'll point you to the press release and the FAQ document for any specifics.

With respect to the second quarter, our outlook included the headwinds from raw material inflation, increased media investments and higher distribution costs that we discussed on last quarter's call. These are being partially offset by synergies and cost initiatives as well as contributions from our recent acquisitions.

Our second quarter outlook also assumes that organic revenue on a constant currency basis declines less than 1% at the midpoint, reflecting our expectation for a decline in U.S. Innerwear as well as the shift of certain seasonal Champion programs into the first quarter that Gerald highlighted in his earlier remarks.

So in closing, we delivered a solid quarter. While we remain cautious with respect to the U.S. wholesale environment, we're encouraged that our efforts to diversify our business continue to gain traction.

Looking out over the next several quarters, we remain focused on returning to more consistent organic growth and margin expansion, completing our ongoing integrations and reducing our debt. 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?.

Our first question comes from the line of Eric Tracy with Buckingham Research. Your line is now open..

Good morning, everyone. Thanks for taking my questions and congrats on the quarter. Gerald, I guess for you, if you could talk through – the revenues look to be stabilizing here, but as it relates to Champion, could you guys maybe quantify – it sounds like there's a little bit of a shift into 1Q.

And then just more broadly what you're seeing from the Champion line on a global basis..

Sure and good morning, Eric. Very solid quarter for us. We really think that the year and certainly this quarter are playing out as we expected. And as you noted, Champion has been one of our key initiatives from the standpoint of creating growth for the business, and we've got a great story going here.

We reunited the brand over the last few years and saw really strong growth in Champion across the world up 22%, 17% in constant currency; 8% in the U.S., 30% in Asia and 22% in Europe, so just really solid growth across the world in this business. And it's not just wholesale. It's online and it's in our own stores, particularly in Asia and Europe.

So, we've really got broad growth coming through the business, and we see a real avenue for continued growth as we look forward. It's in the heritage products, but importantly, it's also in our performance products. They're also performing well. So, we've got a broad product line initiative as well in the brand.

And we're really seeing a lot of momentum out of our consumer engagement efforts as well as we bring the consumer, a younger consumer, into the franchise in particular. So really good momentum and really seeing a lot of the results of what we set out to build a couple years ago. So feeling really good about it..

And then if I could just follow up as it relates to the raw material input cost inflation. I appreciate, it sounds like you guys are relatively locked in for the year.

But as we think about the price increases, maybe just walk through where we should be seeing those, sort of the elasticity assumptions that you all might have within the various segments. I'm assuming it's within the Champion, but if it is within the domestic Innerwear, how you guys think about that elasticity..

Yeah, Eric, thanks for the question. This is Barry. Raw materials really playing out very much in line with our expectations. We thought the year would have a net impact net of pricing of $30 million to $35 million of raw material impact, and that's what we see today. I noted the amount we incurred in the first quarter which was about $14 million.

And that's broad based as it relates to commodities and things of that nature. As it relates to the pricing, for 2018 that we talked about on our last call that we were working to communicate, that's all secured at this point. You're right, you know the business well.

You would expect those to be in kind of the seasonal program with some of the Champion. As we look out into 2019, we've begun communicating the pricing actions that we'll take to offset the rest of this inflation, and we would expect to have those in place in early 2019. And that's really across the rest of the business.

I would note if you think about the total net impact that we're incurring this year as compared to our cost of goods sold for the company, it's a relatively small impact but we will be pricing for it. And that's something the company has done for many years..

Thanks for the question..

Our next question comes from the line of Susan Anderson with B. Riley FBR. Your line is now open..

Hi, good morning. Nice job on the quarter. Good to see the top-line inflect. I was wondering in Innerwear, can you give some more color on the women's Intimates, how much was driven by the door closures versus just weak sales in existing doors? And then how much was shapewear and panties down? I think you said bras were down minus 2%..

Sure. Good morning, Susan. From the standpoint of Intimates, as you know, this category has been challenging for some time. It's one that is more heavily distributed in the department store and mid-tier channels, and it's been most affected by door closures.

First, I would tell you that we're encouraged that we see the category stabilizing as we overlap door closures, and that's a very positive sign to us. We have been positioning ourselves to return to growth for a period of time as well. We have been building our online business, and our shares there are equal in size to our brick-and-mortar shares.

Importantly, we have been rebuilding our mid-tier and department store business within the doors and with the accounts that remain. And we spoke as early as Q4 about some of our Maidenform initiatives and, then in Q1, we focused on Bali and putting advertising behind that.

We're seeing progress out of both of those, and certainly those are important drivers of the sequential improvement in the bra performance. Within this quarter, we also launched a number of our Maidenform initiatives, in particular in the mass channel. We're seeing nice traction there early on from a POS standpoint.

So all of this tells us that we're moving in the right direction, and we see our share stabilizing as well. It also tells us that we're gaining ground on our problem.

Now when we look at Q3 and beyond, shapewear is the next area of focus for us, and we have a number of resets around those businesses in the third quarter that will then correct that piece of the business we feel. So we do feel that we're on track to deliver on the sequential improvement we expect out of the Intimates business through the year..

Great. Thank you. And then in Activewear, I think you mentioned constraints in the mass channel, which it sounds like just a mature business assuming obviously there's tough compares from last year.

Maybe if you could also give some color, though, just on the sporting goods channel and department stores, are you seeing any space gains there? Or how the Champion product's performing there? Thanks..

Oh yeah, we're seeing space gains across the board in Champion outside of the mass channel, and certainly it's a very strong performance in the specialty channel as well as department store and sporting goods. And so there's just nothing but good things to say about the Champion business.

And outside of mass, we're looking at a 50% increase in the U.S. market in the quarter..

Our next question comes from the line of Chethan Mallela with Barclays. Your line is now open..

Hey. Good morning. So I actually just want to follow up on that same comment on the U.S. mass channel for Champion, which I think is concentrated largely with one customer and the idea of it being mature. Can you just help us think about the long-range growth assumptions that you have for that business and also remind us how much of U.S.

Champion is currently sold from the mass channel?.

Well, from the standpoint of the mass initiatives, that was one of our early growth drivers in our Champion business. It's a great partnership. It's been built as a partnership for many years, over 15 years in the market, and has some of its best product line ever out now, and the productivity continues to improve.

So we feel really good about that program and expect to feel good about it for many years to come. From the standpoint of the total Champion brand, though, the Champion brand has evolved significantly over time from the standpoint of the many avenues it has to grow.

So today, roughly, 80% of that business is outside of the mass channel around the world, and we are seeing double-digit growth, as you heard, high-teen growth outside the mass channel. So over time, the math would suggest that we would mix more into those other channels and mass will become a smaller piece of the total business..

Perfect. And then just a quick follow up on M&A. I think you've talked about getting back to the high-end of your net leverage range by the end of the year and being within the range next year.

Should we think about a pause in M&A as you focus on kind of taking down leverage, or are you going to be similarly opportunistic if deals come up as we've seen in the past?.

Yeah. Over the past – let me just say first that acquisitions remain an important part of our long-term strategy. Now we have made 10 acquisitions since 2013 as a strategy to diversify our business, including two in the past six months. And that's allowed us to become less dependent on the U.S.

wholesale market and establish multiple paths for consistent organic growth that you're seeing the power of now through the last three quarters. We're really comfortable with these acquisitions that we made and believe we've positioned our portfolio well as well as created substantial value for our shareholders.

But as we've executed this diversification strategy, we've gotten outside of our leverage range. So our focus in the near term is to integrate these acquisitions. We have six integrations underway right now, and as we do, we'll reduce the charges from these acquisitions, recognize the synergies, and let the full cash flow show through.

We plan to, at the same time, to pay down our debt to get back within our leverage target and we expect to be within that leverage range in the latter half of 2019..

Our next question comes from the line of Steve Marotta with C.L. King & Associates. Your line is now open..

Good morning, Gerald, Barry and T.C. Congratulations on a good quarter.

Gerald, could you please quantify the early placement of Champion in the first quarter, what was pulled from 2Q into 1Q?.

Yeah. This is Barry. I can take that one. We estimate that it was about $15 million on a worldwide basis because some of that was even on the international side. And while I'm talking about that, I'd just note that FX did also come in a little better than we thought.

So that was about $7 million to $8 million versus what we had put into the guidance for the first quarter. Not a lot of profit on that, I might add. And as you note, the U.S. dollar has strengthened some here recently, so our foreign exchange tailwind to sales is unchanged in the guidance for the full year.

And then our Bras N Things acquisition came in just close – slightly earlier than we thought, so we got a little bit more revenue from that. So if you – absent those items and the seasonal Champion item that you asked about and FX is really a timing item within the year, so to speak.

Absent those items, we really were at the high end of our first quarter sales guidance, and we feel very good about how the year has begun..

That's very helpful. And inventory was up 9% on a year-over-year basis.

Can you talk a little bit about how the mix is there, how comfortable you are in aggregate inventory level?.

Yeah. Thanks for the question because I do want to clarify that some. If you look at our inventory over last year, couple of things that I would want to call out. Foreign exchange essentially justifies the entire increase. If not for FX rates, inventory would have been essentially flat.

And then acquisitions contributed about $25 million to inventory year-over-year with the two deals we've done. So our base inventory, if you look at it, is actually down, and we feel good about the progress we're making there from – when I look at cash cycle, our inventory days improved to about five days, and that's good improvement.

We've got more opportunity there over time..

Our next question comes from the line of Ike Boruchow with Wells Fargo. Your line is now open..

Hi, everyone. This is Nancy on for Ike. I know you mentioned a little bit about Activewear in the U.S. mass business, but can you just talk about your outlook for the U.S.

mass business more broadly, including Innerwear and how you see Activewear playing out for the rest of the year? And then if you could just talk about global Champion, how big is it today, where can it go? Just talk about the sustainability of Champion on a global basis..

Sure. Let me begin with the mass question. From the standpoint of our mass Innerwear business, it continues to perform very well. We continue to expand the shares in areas such as our basics that we commented in our call.

From the standpoint of the Activewear business, there was some space adjustment in our Hanes Activewear business in the quarter that was built into our guidance. And it's really part of our strategy to focus on the branded segments of Activewear and deemphasize commodity elements.

And there was a portion of that business that was more basic tees and so forth, and we were aware that our customer would be moving that segment to private label. So it is in line with our expectations from the standpoint of guidance. From the standpoint of Champion, as I noted, Champion has many growth avenues beyond the mass channel now.

We expect the growth really to come from those channels as we go forward, and mass will become a smaller share of the total Champion business..

Our next question comes from the line of Tiffany Kanaga with Deutsche Bank. Your line is now open..

Hi. Thanks so much for taking our questions. For those of us sitting here in the United States with limited visibility abroad, can you just give us some additional color around the drivers of the 7% organic constant currency growth and the runway for those businesses going forward? Thanks..

Yeah. Thanks for the question. When we look at our International business, really – and Gerald highlighted this in some of his prepared remarks, it's much about Champion.

It's broad-based, but Champion is growing very well across the world, whether it be in Europe or Asia, and that is the principal driver of the growth, and we feel very good about how that started the year and opportunity going forward..

All right. Thanks so much..

Our next question comes from the line of Westcott Rochette with Evercore ISI. Your line is now open..

Thanks, guys. There's been a lot of discussion in private label. You mentioned it on the call with your Activewear.

As you think about your different categories and your major players, how do you feel the balance of private label is to your categories now, whether it be the socks on Amazon? And how you feel the category is progressing on that front? Thanks..

Sure. From the standpoint of private label, there's always been an element of private label in our categories, and it's an effort that retailers take from time-to-time to differentiate themselves. Now we've always noted our categories are heavily branded, and in a category like Innerwear they tend to be 80% to 90% branded.

Interestingly enough we're just doing some work that we'll talk more about in our Investor Day, that over the last five years we looked across geographies, the branded element has actually grown, and private label has declined in Innerwear across multiple geographies.

So I think that speaks to the strength of brands, and we see that as the Millennials come on as consumers, they prefer brands equally to boomers, and so we're continuing to focus on connecting with that emerging consumer base through our marketing and media as well as our consumer-driven innovation, and continue to drive our brand shares.

On the Activewear side, we have taken the approach of focusing on the branded segments of Activewear and de-emphasizing the commodity segments over time, and I think there you see the power of our Champion initiative as well as our adding a brand like Alternative really give us a number of tools to bring that strategy to bear.

And our shares are growing, and we think our consumer equities are building. When we look at our brands, they're equally strong among the younger consumer and the older consumer, and it's clear to us that brands matter in our categories and we've got a great portfolio to compete with..

Okay. That's great. And just one more question on where you feel the channel is on inventory levels and destocking? It's been an issue kind of in the past, and I know the mass channels continue to be focused on it.

Do you feel that's stabilized, or is there more kind of legs to go?.

We do feel that the mass channel is stabilized. We've seen that channel very effectively tighten their inventory behind over the last few years to get that in line, and we think it is in line. They've improved their turns very dramatically and are very effective now at managing their inventory, and we think it's well positioned..

Our next question comes from the line of John Kernan with Cowen. Your line is now open..

Good morning. This is Krista on behalf of John. Two questions. I think you previously guided fiscal 2018 gross margin expansion to up about 100 basis points to 200 basis points. It looks like in the Frequently Asked Question document it's around 100 basis points now. So that sort of implies quite an outside gain in the second half.

I wonder if you could share with us kind of the various components that will drive that expansion, be it IMU, the supply chain benefits you're expecting, et cetera? And then I have one follow up. Thanks..

Okay. Sure. This is Barry. Thanks for that question. In the first quarter, the gross margin was down very slightly about 10 basis points and not a significant variance really to what we were expecting, we saw a little bit of an earlier raw material, but not much change in the relative mix of the business either versus what we were thinking.

When you look out over the course of the rest of the year and you get a little bit better International mix. Of course we have larger contribution from our new acquisition Bras N Things, which has a very nice gross margin in that business. We start to see the benefit later in the year of the pricing that we spoke about. That's all secured.

That starts to help offset the inflation that we've talked about. And those would be sort of the principal drivers. You also of course will expect to see some more synergy benefit that will play out largely in the International segment.

As we talked about before, we feel very good about seeing those International margins meet, or in fact, exceed the corporate average over time as the synergies continue to play out. And then I'll just note that in the second half, we certainly expect to see the total company's operating margin expand.

So we feel good about how that's playing out at this stage..

Okay. Thank you. And then how should we think about innovation or your launch cadence in Innerwear and Activewear in the second half of 2008 (sic) [2018], especially as it relates to your back-to-school strategy? Thank you..

Well, we made a pretty big innovation launch in March, and that was our Comfort Flex Fit underwear launch and you'll see that as an important part of our focus through back-to-school as well; very impactful campaign, supported by digital activities and influencers.

And we're seeing nice traction out of that launch, and we will continue to ramp that through the balance of the year..

Our next question comes from the line of Heather Balsky with Bank of America. Your line is now open..

Hi. Good morning. Thank you for taking my question. I was hoping you could just touch base on the labor inefficiencies; what you've done thus far to fix the problem and how you think you, I guess, can put up better margins in the fourth quarter as you go against those. What are you doing with your workers to be more efficient? Thanks..

Sure. A couple of questions there that I'll unpack. What we're experiencing right now is the fact that the Champion demand is so strong, as Gerald mentioned, outside of mass growing 50% or more in the U.S. that we have some temporary labor inefficiencies in the distribution centers. And so we are staffing.

We've been staffing up with some temporary and moving to permanent. We're also working to expand the network, and all of that is in process. We talked about some of that on the last call.

And that's one of the reasons why we think we will get this behind us here in the first half and begin to have that be less of an impact if not no impact in the second half.

The other element that you mentioned in the fourth quarter that impacted us on distribution costs that we talked about before was in the factor that we were seeing some retailers move their orders closer to promotional periods.

And that was something that impacted us in the fourth quarter as we had the holiday and as we talked about last quarter, we certainly expect to have the staffing in an optimal position in front of all holidays going forward. So, I think we're in a good place as it relates to the work we're doing there..

Thank you. And then just a follow up on an earlier question with regards to the gross margin guidance.

The fact that last quarter you said 100 basis points to 200 basis points and now you're saying up 100 basis points, do you think you could still hit the high end of the expectation you, I guess, provided last quarter? Or are there some new incremental headwinds on that line? Thanks..

Yeah, so we said I think in the FAQ at least 100 basis points and not to parse it too tightly, I would just note, looking in the first quarter on the original guidance, we were suggesting that it would be up – I believe I used the word slightly on the last call, which was in the vicinity of 10 basis points or 20 basis points and we came in about 10 basis points down.

So not a big variance, but as you work through the year, since we weren't adjusting the guidance much, we did take the opportunity to just note that we think the gross margin would be up at least 100 basis points. Is it conceivable it could be up more than that? Certainly, we used the words deliberately as it relates to at least.

So we feel good about the fact that we've secured the pricing that we've talked about. We have nice synergies coming through the model. We've got that mix that I mentioned before. And I think we've got the raw material called appropriately..

Our next question comes from the line of Laurent Vasilescu with Macquarie. Your line is now open..

Good morning and thanks for taking my question. First, on SG&A, it looks like about $5 million of first quarter's SG&A from last year was moved down to the other expense line. Maybe you can parse out further the driver for this decision.

And then second, should we assume about $5 million of SG&A per quarter for 2017 to create an apples-to-apples comparison?.

Yeah, so on our last call, we did mention that we were adjusting pension expense for the change in FASB and accounting rules related to pension. So that is now in other, and we had disclosed that I believe in our K and the recasted historical financials reflect that.

So you should expect, that's correct, that I think our total pension last year was about $20 million. And that's essentially on a quarterly basis. So you are right..

Okay. Thank you very much. And then second question, I wanted to follow up on the reiterated full year cash flow from operations guide. I think cash flow from operations was down $128 million for the quarter due to various puts and takes.

Curious to know if you have any directional guidance and if we should see the second quarter cash flow from operations up relative to last year? Or should we see it more back-end weighted?.

Okay. Cash flow from operations for the company is playing out just as we expected. Q1 was very much in line with our expectations. So we continue to expect the full year to be in the $675 million to $750 million for the full year.

I would note that the first quarter cash flow from operations does include that earn-out payment on the Champion Europe acquisition due to the way accounting treatment (39:37) working capital. And so as I look at the full year, we certainly would expect the second quarter to be sort of typical seasonality. We don't see any variance.

So you'd have naturally more of the cash flow in the back half as you know the company well. But broadly speaking, working capital in the first quarter was just as planned and seasonal. We had that few days of improvement in cash cycle from the inventory that I mentioned, and we feel good about the cash flow from operations for the year..

And our last question comes from the line of Carla Casella with JPMorgan. Your line is now open..

Hi. This is May (40:19) in on for Carla. We just wanted a little bit more clarity on the distribution cost that you highlighted.

Is there anything of note that we should know about? Was it, like, shipping costs? Or was it driven by an increase in Champion sales or anything like that? And I know that you mentioned that it's going to normalize in 2Q or later this year.

Should that be relatively even?.

Okay. Thanks for the question. Let me clarify some of that. When we're talking about distribution in this case, it's really inside our distribution centers and within our network. It's not in the form of freight, although we do see a little bit of kind of ocean freight, et cetera, being a factor.

However, from a distribution standpoint, really we're talking about the labor-driven inefficiencies we talked about earlier on the call and last quarter.

And as it relates to how that will even out, we really do expect there to still be – and it's embedded in the guidance – some elevated level of distribution cost here in the second quarter, and by the back half, it to be more normalized to levels that are embedded in the guide..

And I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Robillard for any closing remarks..

Thank you. We'd like to thank everyone for attending our call today, and we look forward to speaking with you soon. Have a great day..