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

Susan Anderson - B. Riley FBR, Inc. James Vincent Duffy - Stifel, Nicolaus & Co., Inc. Omar Saad - Evercore ISI Michael Binetti - Credit Suisse Securities (USA) LLC Chethan Mallela - Barclays Capital, Inc. Ike Boruchow - Wells Fargo Securities LLC Tiffany Kanaga - Deutsche Bank Securities, Inc.

Jay Sole - UBS Securities LLC Simeon Avram Siegel - Nomura Instinet Kate McShane - Citigroup Global Markets, Inc. Heather Balsky - Bank of America Merrill Lynch John Kernan - Cowen & Co. LLC Laurent Vasilescu - Macquarie Capital (USA), Inc. Doug Thomas - GAMCO Investors, Inc..

Good day, ladies and gentlemen, and welcome to the HanesBrands Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today's conference is being 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're pleased to be here today to provide an update on our progress after the second 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'll now turn the call over to Gerald..

Thank you, T.C. For the quarter, Hanes delivered revenue, operating profit and earnings per share that were at the midpoint of our guidance, while operating cash flow came in ahead of plan. Overall, the year is unfolding as expected.

We reiterated our full-year guidance and we remain well positioned for accelerating revenue, profit and cash flow growth in the second half.

At our Investor Day in May, we spoke about our efforts over the past several years to reinvigorate our Sell More, Spend Less, Generate Cash strategy by diversifying our business to become a more global company, one that's able to fully capture the leverage and power of our global supply chain.

This strategy is designed to return the business to more consistent organic growth, further improve profitability by leveraging our increased scale and generate significantly higher levels of cash flow. And our progress continued in the second quarter with strong performance across our key growth initiatives.

Consumer-directed sales increased to 22% of total sales, including double-digit growth online. Global Champion sales grew high-teens and International revenue increased mid single-digits on an organic constant currency basis.

For the total company, organic constant currency revenue was up modestly in the quarter, marking our fourth consecutive quarter of growth, as we outperformed our projection for a first half decline.

We're on track to deliver higher levels of organic revenue growth in the second half, driven by continued growth in our key initiatives, as well as the strong reception we're seeing to our latest product innovation, our alignment with key retailers for the back-to-school selling season and our action plans to stabilize our U.S. Intimates business.

We're also making progress on improving profitability and remain well positioned to return to margin expansion. Acquisition synergies are tracking to plan. The expected first half cost headwinds from marketing investments and distribution costs are essentially behind us, and we should see margin leverage from increasing organic growth.

In terms of cash flow, GAAP earnings are on plan, putting us firmly on track to deliver our cash flow guidance for the year. Looking at the quarter by product category, global Innerwear sales increased 1% over last year, driven by acquisition contributions and currency benefits.

On an organic constant currency basis, sales declined roughly 2.5%, driven by a 3% decline in the U.S. Overall, the U.S. Innerwear business performed in line with our prior outlook.

In the quarter, our Basics business delivered growth, driven by improving point-of-sale trends, a low single-digit increase in men's underwear and a solid return to growth in women's underwear. This more than offset the expected short-term pressure from door closures. We're seeing strong reception to our latest innovation Comfort Flex Fit.

In aggregate, innovation products now represent 20% of our Basics revenue. With respect to our Intimates business, while revenue declined compared to last year, which we expected, our growth plan remains on track, as we're beginning to see positive sell-through trends associated with our space gains and new program launches.

Global Activewear sales increased 12% over last year. On an organic constant currency basis, sales increased 6%, as strong growth in Champion as well as growth in our licensed sports apparel business more than offset the expected declines in the U.S. mass channel.

At Investor Day, we highlighted that within Activewear, we're seeing an ongoing convergence of casual and performance apparel and the consumers are demanding brands with athletic authenticity. Over the past several years, we have driven a brand-elevation strategy for Champion to capitalize on these consumer dynamics.

We have reunited the brand globally, allowing us to coordinate product design around the world. We've significantly increased our investments, including engaging directly with the consumer through digital platforms, and we're expanding our global points of distribution, including our owned branded stores.

These elevation efforts are paying off and have driven strong demand for the brand across geographies, across product categories and across channels. Global Champion sales in constant currency have grown at a mid to high-teens rate in each of the past four quarters, with all of the growth coming from outside the U.S. mass channel. Excluding the U.S.

mass channel, Champion's constant currency growth has been in the high-20% to low-30% range over the last four quarters. Moreover, growth outside the mass channel continued to accelerate in the quarter, increasing 33% globally. And in the U.S., growth accelerated to over 70%, up from 50% in the first quarter and 40% in the second half of last year.

Looking forward, we believe the strong momentum of our Champion brand-elevation initiative will continue to drive growth in existing accounts, as well as distribution expansion in new accounts, new geographies and our owned retail stores, positioning us to achieve $2 billion of Champion sales by 2022 outside of the mass channel.

Turning to acquisitions, as we highlighted at our Investor Day, our acquisition strategy focuses on acquiring businesses that, when integrated, provide additional revenue growth opportunities, significant profit improvement by leveraging our company-owned supply chain, as well as additional management talent.

Our most recent acquisitions, Alternative Apparel and Bras N Things, both fit this mold. These are very well-run companies with strong management teams and attractive growth profiles. Integration actions are well underway and are tracking to plan. Acquisitions remain a key part of our long-term capital allocation strategy.

Over time, we believe a balanced approach to capital allocation through reinvestment, dividends, buybacks and acquisitions will drive sustainable high returns for our shareholders.

And as you heard last quarter and again at our Investor Day, our short-term focus is on reducing our leverage to get back within our stated long-term range of 2 to 3 times net debt to EBITDA. So, to wrap up, the quarter was right in line with our expectations and the year is unfolding as we expected.

We remain focused on executing our long-term strategy to unlock our full cash flow potential. Our revenue diversification efforts are working, as we have delivered multiple quarters of organic growth.

We're well positioned to return to margin expansion in the second half, with additional opportunities to further improve profitability by leveraging our global scale. And we're committed to reducing our acquisition charges as well as our leverage, all of which is expected to generate significant cash flow growth over the next several years.

Before I turn the call over to Barry, I'd like to briefly touch on this morning's announcement. We announced that Target made the decision not to renew the contract for our exclusive C9 by Champion program in Activewear after the current agreement expires January 31, 2020.

The C9 program is fully booked for 2018 and is reflected in our 2018 guidance, and we don't expect our C9 business in 2019 to be meaningfully different from this year. Hanes and Target are proud of their partnership and remain focused on providing a great experience during the C9 transition.

Today's announcement does not affect the balance of our ongoing Target business, where we look forward to continuing our longstanding partnership of driving mutual growth with our leading national brands.

As we look out over the next several years, the progress we're making across our multiple growth initiatives, including Champion, as well as our diversified global business leaves us well positioned and gives us great confidence that we can achieve all of the long-term goals we set at our Investor Day. With that, I'll turn the call over to Barry..

Thanks, Gerald. At our Investor Day, we outlined our long-term strategies to deliver organic revenue growth, improve profitability, grow cash flow and increase shareholder returns over the next five years. We are executing on our strategy and we're tracking to the goals we laid out in May.

We have delivered quarterly organic growth over the last year, and we are positioned to deliver higher levels of organic growth in the second half, driven by demand for our Champion brand, improving trends in U.S. Innerwear and the strength of our diversified global business.

With respect to profitability, we project a return to margin expansion in the second half. Acquisition synergies are building. Transitory costs that impacted the first half are behind us. Organic growth will drive leverage and we'll have modest pricing benefit late in the year with increasing price benefits expected in 2019.

Cash flow is on track to grow in 2018 and beyond. Over the next few quarters, we expect to lower leverage into our target range, and then we'll be well positioned to deploy increasing cash flow to shareholder-friendly activities.

Looking at 2018, for the quarter, sales were $1.72 billion, an increase of $69 million over last year and up 10 basis points organically in constant currency. Operating profit was $245 million and operating margin was 14.3%. Adjusted and GAAP earnings per share were $0.45 and $0.39 respectively.

Sales, operating profit and EPS were all right at the midpoint of our guidance range. In the quarter, we generated $64 million of cash flow from operations, which was ahead of plan. With that summary, let's turn to the details of the quarter's results.

Sales increased 4.2% over last year and included $52 million from the contributions of our recent acquisitions of Alternative Apparel and Bras N Things, as well as a $16 million benefit from the effects of foreign exchange rates.

The dollar strengthened versus our last guidance and resulted in $12 million less benefit than what was embedded in our guidance. Gross margin declined 40 basis points over last year, as expansion in our International gross margin was offset by higher input costs as well as product mix within our Innerwear segment.

In the quarter, we experienced $11 million of raw material inflation. Absent this inflation, our gross margin was up 30 basis points.

Operating margin declined 150 basis points compared to last year, right at the midpoint of our guidance range, as we made planned investments to support our brands and growth strategies, as well as experienced the transitory costs we previously discussed. Absent the impact from raw material inflation, operating margin declined 80 basis points.

For the quarter, acquisition and other related charges were $25 million, in line with our guidance and represented a decrease of $1 million from last year. We are making good progress on our initiative to complete ongoing integrations, and we continue to project that all integration charges for prior acquisitions will end during 2019.

Now, let me take you through our segment performance. U.S. Innerwear sales declined 3% compared to last year, in line with our prior outlook. In the quarter, Basics revenue increased 50 basis points and Intimates declined, both consistent with our expectations. We're on track for Intimates to return to stability by the end of the year.

We're seeing early signs of progress as we continue to implement our action plans. Our new bra programs are performing well, we have gained space in the mass channel and we are seeing a corresponding increase in point-of-sale. In addition, our new shapewear products, which include new cooling innovations, will begin shipping in the third quarter.

While Innerwear margins declined 180 basis points compared to last year, the rate of decline improved from the first quarter. We experienced higher raw material costs and product mix headwinds principally in our Basics business. U.S.

Activewear segment sales increased 7% over last year due to the $20 million contribution from Alternative Apparel and a 1.5% increase in organic sales. The organic sales increase exceeded our expectations, as growth in Champion and licensed sports apparel more than offset the previously disclosed space declines in our mass business.

Activewear's operating margin declined 140 basis points in the quarter to 14.2%, an improvement from the first quarter due to the scale benefits from Champion's growth. As compared to last year, favorable product mix was offset by higher raw material costs, start-up manufacturing inefficiencies and higher distribution costs.

Our International segment sales increased 15% or $71 million with $31 million from the contribution of Bras N Things and $16 million from the effects of foreign exchange rates. On a constant currency basis, organic sales increased 5% compared to last year, driven primarily by Champion growth in Europe and Asia.

International operating margins increased 140 basis points over last year to 14% due to leverage and the continued realization of acquisition synergies.

Now, moving on to the balance sheet and cash flow items, in the quarter, we generated $64 million of cash flow from operations, and consistent with normal seasonality, for the first half, cash flow from operations was a use of $64 million. First half cash flow performance was better than we planned, driven by working capital performance.

Inventory was up year-on-year, in line with our second half guidance for sales and includes the balances from our recent acquisitions. Accounts receivable was up in line with sales. Cash cycle improved seven days from the same period last year, driven by both payables and inventory days.

In terms of leverage, we ended the quarter at 3.9 times on a net debt to EBITDA basis, which was consistent with the prior quarter. We expect to be approaching the high-end of our target leverage range of 2 to 3 times by year-end, and as we move through 2019, we expect to be back within our target range.

Turning to guidance, since our last update in May, the dollar has strengthened, creating a $30 million revenue headwind in the second half as compared to our prior guidance. Despite this headwind, we reiterated our full-year outlook for revenue, operating profit, earnings per share and cash flow.

We continue to expect acquisition contributions of $180 million. Given the strong performance of our key growth initiatives, we now expect organic revenue growth for the full-year to be slightly better than our prior 1% projection. As it relates to our full-year operating profit, our guidance reflects the impact from the stronger dollar.

Our outlook also continues to include approximately $35 million of net input cost inflation, $30 million from acquisition contributions, as well as the benefits from acquisition synergies and cost savings initiatives.

With respect to our third quarter guidance, at the midpoint, our revenue outlook reflects an $18 million headwind from exchange rates, acquisition contributions of approximately $55 million and organic growth of 2%. We expect U.S. Innerwear sales to be down between 1% and 2%, reflecting growth in Basics and improving trends in Intimates.

We expect organic constant currency growth in U.S. Activewear and International. In terms of operating margin, at the midpoint, our third quarter guidance implies approximately 30 basis points of margin expansion and reflects acquisition synergies, leverage from organic growth, as well as price increases for certain seasonal programs.

This is offsetting higher input costs, which are trending to our initial expectations, as well as slightly elevated distribution costs to support Champion's accelerating growth. So, in closing, we're pleased with the way the year is progressing.

We're well positioned for accelerating revenue, profit and cash flow growth in the second half, and we feel good about our full-year guidance.

Looking forward, as we highlighted at our Investor Day, we're focused on executing our long-term strategies to generate significantly higher levels of cash flow and improving shareholder returns over the next several years. 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 reenter the queue to ask any additional questions.

I'll 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 Susan Anderson with B. Riley. Your line is now open..

Hi. Good morning. Thanks for taking my question and nice job on the quarter. I guess I wanted to maybe drill down a little bit, if you could provide any more detail on Target exiting C9 and just any thoughts around why they didn't want to renew the contract.

And then also if you thought there could be other retailers that potentially could take the exclusive brand, and then maybe if you could just map out the growth you expect from Champion by region or distribution channel to offset this, that would be great. Thank you..

Sure, Susan. Good morning. It's Gerald. Let me start with just a quick overview of our business and how we're feeling about the core, because we feel really good, as you suggested, about how the quarter went.

The year is really unfolding in total as we expected, our diversification across geographies and channels and customers is working, and we came in right at the midpoint of our guidance in revenue, EPS and operating profit.

And so, feel good about the start, feel good about the fact that we delivered our fourth consecutive quarter of organic growth and better than frankly our outlook for the first half of a slight decline.

So, real good, reaffirmed our guidance for the year, as you heard in our comments as well, and expect organic growth to continue to accelerate, including late in the year in the fourth quarter seeing U.S. Innerwear come back to organic growth. So, again, feeling very positive about the year and all that we're seeing about accelerating of the business.

Specific to your question about the C9 program, let me just reiterate first what I said in my comments that this is an exit of a contract that ends in January 31, 2020. So, we will work together for another two years frankly from the standpoint of executing that business.

The 2018 business is fully booked and is in our guidance, and as I mentioned in my comments, we don't expect the 2019 volume to be materially different than what we're doing in 2018. It's a long-running partnership. It's over 15 years old.

It was one of our original growth initiatives in the Champion business, actually pre-spin for us, and it's been a wonderful experience for us. But as businesses do, they do mature over time, and this one has certainly begun to mature, the fantastic product out there, but it has begun to mature.

Specific to Target strategies, I need to leave that to Target to speak to.

But what I can tell you from our side of things on the Champion business is that we've been evolving the Champion business over the last few years from what was a domestic business with a maturing mass component to a global growth story, and it's been through our elevation strategy.

And it started with repurchasing the Champion Europe business and the Japanese licensee, and we evolved our business from a U.S. business to one that's now a global business selling across multiple channels and creating a number of avenues to growth. And you're seeing it in our numbers. You heard the numbers.

I mentioned that in this year, we've seen four consecutive quarters of mid to high single-digit growth at a constant currency basis. And importantly, as we've evolved this business, now the vast majority of it is outside the mass channel.

And when you exclude the mass channel from those numbers, the numbers have been in the high-20% to low-30% growth rate for the last four quarters, and in this past quarter, it was actually 33%. So, you see a nice ramping and it's going on globally. It's over 70% growth outside mass in the U.S., 31% in Asia and 30% in Europe.

So, we see the momentum building. We think it's a natural evolution for channels to shift as we go down this path.

And as we look forward, we see the strong momentum of our Champion elevation initiatives will continue to drive us in our existing accounts, and we see new accounts coming on every month and we see our geographies expansion potential as well as driving our own retail stores.

So, as I noted in my comments, we feel well positioned to continue on our path toward our $2 billion goal by 2020 outside of the channel, and we have clear view to that momentum continuing.

If we look at our bookings for the second half of this year, which we now have view to, we can see that the momentum continues into the second half outside of the mass channel in spite of us now overlapping some pretty strong growth trends in the latter half of last year.

And even as we now get initial signs of our programs in 2019 for spring, we're getting very favorable responses. So, we're very excited about Champion. I can see it in the enthusiasm in my global Champion teams. There's a lot of momentum building and we feel great about the potential for Champion in the years ahead..

Great. That's really helpful. Thanks for all the details, and the product does look good in the specialty channel. Just one more, if I could squeeze in there on the Intimates side. So, it sounds like you expect some stabilization in the back half.

Maybe if you could expand on those action plans, and was the pressure in the first half, was it more related to the department store door closures or was it the mass channel too? Just trying to figure out if this is kind of a problem within the department stores or more of a brand – I guess a brand and space problem. Thanks..

Yeah. It's a great follow-up question, and we are on track with our Intimates stabilization plan. And it has been – it is a multi-quarter plan, as we've talked about, and we expect it to truly reach stabilization in the fourth quarter.

To your channel question, some of our early initiatives were to launch some new initiatives in the mid-tier department store and in the mass channel, and we're seeing both of those demonstrate positive POS as they go into place.

There were more door closures in the department store and mid-tier channel, and we overlapped those – the last of those in the third quarter. So, that's an important overlap as we look to our stabilization as well. And it was more a headwind certainly in that area where the door closures were.

But another key big initiative for us is, is in the third quarter, we relaunch our shapewear programs within both key mass customers as well as mid-tier customers, and that includes the new innovations including our cooling shapewear items.

So, as – we think as we overlap this quarter and get those in place and overlap the door closures, we're well positioned to stabilize the business in Q4..

Our next question comes from Jim Duffy with Stifel. Your line is now open..

Thank you. Good morning. A couple questions for me. First, you've called for an inflection in the Innerwear segment before year-end.

Do you have sight lines to stabilization in the Innerwear margins?.

Hey, Jim. Good morning. We feel good about the margin trajectory for the back half. We've been – just as a reminder, we've been calling for an improvement in margin expansion in the back half all year long, and that includes Innerwear. And just as a reminder, a few things are playing out in the back half that are very helpful.

First off, as we talked about, we've got pricing benefit late in the year, and that's in addition to the seasonal plans that we already have got in motion for the third quarter. So, there will be less raw material impact, and as you know, the raw material has been impacting our Innerwear business particularly through the year.

We'll have the organic growth that we've discussed. And then, just as a reminder, if you think about last year in the fourth quarter in particular, we called out the fact that we had ramped up our marketing spend in that quarter. And so, on a year-over-year basis, that headwind goes away.

The distribution inefficiencies that we had in the fourth quarter of last year that we talked about also go away on a year-over-year basis. And then, we had some mix impact last year in the back half. So, we feel very good about where we are as it relates to margin expansion both in Innerwear and in the total business.

And I'll just point out that we've got building synergies, our International margins have been improving and Champion's doing great, as Gerald just mentioned. So, we feel good about where we are..

Thanks, Barry. A follow-up on that. In your prepared comments, you spoke about pricing visibility into 2019.

Can you speak in more detail on that?.

Yeah. Jim, this is Gerald. From the standpoint of visibility, we're certainly out now communicating our planned price increases for 2019.

We said there would be some in 2018 that we have in place, but the majority of the price increases were actually in 2019, as those are more the replenishable programs and we tend to work around the retailers' fiscal years. This is really inflation-driven increases that are across input costs.

And as we go out and communicate those, our retailers are really seeing it come through their supply chains as well. So, there's not a surprise when we discuss these price increases with them, and we feel we're well down the path of getting those communicated, in place..

Our next question comes from Omar Saad with Evercore ISI. Your line is now open..

Good morning. Hey, thanks for all the information. Wanted to ask a follow-up on Champion. Actually, I want to make a statement. You can respond to it or not. And then, I have a question.

It's surprising that given the global kind of momentum and strength behind the parent Champion brand at this current moment that it's the time when Target would choose to kind of walk away from that growing halo around it and move in another direction.

But that being said, is it an opportunity to rethink how you're managing the overall Champion brand? Maybe it doesn't make sense given its kind of global renaissance to have a sub-brand at a value price point or maybe it does make sense.

So, maybe you can talk a little bit more about the strategy for the broader Champion brand to get to $2 billion from a brand standpoint, product standpoint, and then talent too. Are you hiring talent to build that division out? Thanks..

Sure. And just to reinforce first, the C9 business does run through 2019 and the contract ends in early 2020. But from the standpoint of how we're managing the brand, we're definitely managing the brand as a global brand now, and that was an important part of reuniting the brand.

And with that came the ability to merge our global product lines and lever the strength of all of those across the world.

And we are elevating the brand from that standpoint and we're driving our brand position both from the standpoint of communicating with the consumer, but importantly, we're using our own retail stores in a number of locations to drive the business further.

And we're seeing all of that come together and drive our equities of the brand even stronger, particularly among the younger consumer, which is a fantastic thing to see as a whole group of consumers discovering a brand for the first time. And we're seeing it play out in our L.A. store, for example, our La Brea store.

We've had fantastic success and we're looking to open three more stores this year as we roll that out across New York, Chicago and Boston. We've seen the same in Europe, as we pushed the brand up out of what's been typically an Italy base up into Northern Europe.

We've expanded both wholesale with some of the key retailers there, as well as we've opened stores. They've had extraordinary success, and we opened one in London. We've just opened our second in Amsterdam. So, as we look then across Asia, where we've been more established and running our own retail for some time in Japan, we see the same thing there.

We see that it's taking hold now in China. Our early initiatives in China have really been extraordinarily successful, as we've opened some stores with a partner there.

And even in Japan, we've gone from a business that offered all genders at one store to where we're experimenting with new formats, including one focused at the female consumer only and it's having extreme success. So, we're very happy and we certainly are elevating the brand and driving it around the world..

Does it potentially make sense after 2019 to kind of let the C9 label go by the wayside and just focus on the parent brand? Is that something you thought about?.

Well, a question that was asked earlier and I didn't – I failed to answer it at the time is the C9 brand is our brand and we do own it. And through 2019, we are certainly focused on driving that and being very successful in Target – with Target and the relationship. What we do with it post 2020 is yet to be determined. There is equity in that brand.

It is a potential tool that we could use. There's potential upside to the brand. But we do think that in the core brand, given all we've done to reunite it, we have incredible momentum and we're going to drive that hard..

Our next question comes from Michael Binetti with Credit Suisse. Your line is now open..

Hey, guys. Thanks for taking our questions here.

Could you speak to the margins on the C9 business that you'll be exiting, how we can think about flowing that into what we saw at the Analyst Day as far as your margin expectations? And then, is there a point on the horizon more broadly where we could expect to see the margins turn positive for the Activewear segment considering all the top line contribution that's coming from that segment?.

Yeah. Michael, this is Barry. I think those are very good questions, and let me take both of those. On the C9 margin, I think you can appreciate that for competitive and proprietary reasons, as well as frankly the terms of the contract, we can't give specific margins for a program like that.

But I can also fully respect and appreciate why you'd want to know. So, let me give you a few thoughts to help frame that. First off, I think it's important to note that that business for us is essentially 100% sourced. So, you should expect no deleveraging because it's all sourced.

The second thing is let me help you think about the operating margins of our U.S. business for Champion, C9 and then the core U.S. Champion business that's growing so fast. On operating margin basis, they're essentially the same currently.

Importantly though, what we're seeing – and this goes to the last part of your question, we are seeing a rapid expansion in that core Champion margin as we scale that business.

In fact, in the most recent quarter, the gross margins in the core Champion business expanded several hundred basis points year-over-year, and the operating margins were up well over 1,000 basis points year-on-year. So, we're continuing to see the core U.S. Champion margins continue to expand as we scale the business.

We got a great outlook on it and we feel really good about the leverage opportunity that's inherent in that business. And frankly, by the way, that concept is playing out around the world in our global Champion growth. Now, the other part of your question was how does it play into the Investor Day scenarios we talked about.

Well, Gerald already talked to you about the $2 billion Champion goal. So, let me speak to the scenarios that we laid out at the end of the Investor Day. First off, nothing's changed regarding our views related to the goals we laid out in the Investor Day or frankly the conservative scenarios that I presented.

You'll recall, at the Investor Day, the team presented all those growth strategies, and we also presented the conservative scenarios of what was the business capable of driving for profit and cash flow with just 1% organic CAGR. We separated those two from – the scenarios from the strategies.

And as you will probably recall, we've been continuing to see the Champion business really grow, and as it specifically relates to the conservative scenarios, C9 was excluded from those scenarios. At the time, we had been talking to you about the fact that that business was mature and we had seen some headwinds there.

And frankly, at the time of the Investor Day, the renewal was still pending. So, we specifically excluded it from our CAGRs and the 1% scenario. Said differently, frankly, if the contract had been renewed, we would have significantly exceeded those goals. So, we feel good about where we are and nothing's changed as it relates to those scenarios..

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

Hey, good morning. So, your gross margin guidance for the full-year implies a better year-over-year trend in the back half, which is consistent with how you framed it throughout the year, but still is a pretty big change in trend versus the first half.

And I think you've talked about acquisition synergies, the easings of some transitory costs, and improvement in pricing and inflation, and some operating leverage as tailwinds.

But is there a way to maybe give a little more detail on the magnitude of each of the factors, just so we can understand what are kind of the larger swing factors that drive that outlook?.

Sure. I think you hit on several of them. I'd remind you the raw material inflation was $11 million year-on-year in the second quarter. It was more than that in the first quarter. The pricing benefit is ramping through the back half. And so, as we move through the second half, we see that headwind essentially go away.

We have considerably more organic growth in the back half, thanks to the trajectory we see the business is on, and that provides significant leverage. And I'd suggest that if you just work through the organic growth that's implied in the guidance, you'll find a fair amount of improvement in gross margin there. And then, you're absolutely right.

The synergies and our Booster efforts are playing out across the P&L, but certainly help the gross margin considerably. And then in addition, our International margins continue to expand. And so, that part of our business is one that we see, both in the back half as well as moving through the next few years, as continuing to drive margin improvement.

So, we feel very good about the gross margin as we move through the back half..

Great. And then, just one quick follow-up on back-to-school, just how are you thinking about that time period? It sounds like, from the prepared remarks, you have some pretty good alignment with key retailers and you're obviously lapping a pretty easy comparison. But just any context there would be helpful..

Yeah. From the standpoint of back-to-school, we're right in the middle of it right now. In fact, some of the biggest ads of the season, if you follow them, dropped last week for the key mass customers. So, we feel we're well positioned for that, and we'll see how it plays out over the next few weeks. And as you know, it's an extended period.

Back-to-school starts now, back-to-college a little longer, but we feel we're well prepared..

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

Hi. Good morning, everyone. Just a couple questions on the C9.

I guess, Gerald, just for some history maybe, is it possible to tell us what year and maybe what revenue base the C9 business peaked at, because it sounds like it's been in decline for a little bit? And then, maybe over the last 12 months, what has the top line trend in that business looked like, because again, it seems like that business is declining while the core U.S.

business is doing really well?.

Frankly, Ike, we're limited on what we can share based on our agreement. I can tell you that the business has been in place since 2004 and has grown nicely for many years. It has been mature the last few years, and I think that's where I'll leave it at this point..

Okay. And then, based on how you're talking about the business will continue through January, I think, 2020 I think you said or 2019. So, we're okay for fiscal 2018 and fiscal 2019.

But when we get into fiscal 2020, should we essentially model that year assuming there is roughly a 5-point headwind to the total company top line? Or – I'm just trying to understand how it should be – how the decline should layer in or when exactly we should expect that in our multi-year models..

I think if you look at the size of the business with the momentum in the balance of the global Champion business, you should see that that is offset by that period of time..

And Ike, I just want to note that you mentioned when it goes through, it goes through January 2020, and so that's where you ought to be thinking about that..

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

Hi. Thanks for taking our questions.

In the wake of the C9 announcement, what can you say to help us build confidence that Target and other retailers wouldn't also look to more aggressively extend their private label programs to Innerwear potentially disrupting Hanes there? Or said it differently, because I know you can't control what other companies do, can you dig into what gives you confidence in your competitive moat?.

First of all, from the standpoint of that relationship, we have a strong relationship with Target and have so for many years. We've got an ongoing business that, in the Innerwear side of the business, is doing very well, and we anticipate and expect that longstanding partnership to continue as we drive mutual growth.

From the standpoint of what gives me confidence, it's in the strength of the brands, the things that we've consistently talked about is brands do matter in our core categories. And as we looked – at Investor Day, we looked at 2013 and we looked at 2017.

And in all cases, for example, in a category like Basics, the branding percentage was in the 80% to 90% in 2013. It was the same in 2017. Consumers do care about brands, young and old, and what we focus on is reinforcing the equity of our brands through innovation and brand investment to continue to maintain that consumer loyalty..

All right, thanks so much..

Our next question comes from Jay Sole with UBS. Your line is now open..

Great. Thanks so much.

Just to follow up on Champion, can you maybe describe to us what percentage of the business right now is in the Activewear segment and what percent is in the International? And as we see the C9 business, when we get to January 2020 change, how we could see the growth in both of those segments for Champion change?.

Jay, we don't generally break out the specifics of the business. But I think if you work through the disclosures that we made at the Investor Day, you'll have a good sense of what we've been seeing from Champion in terms of the sizing of it.

And in particular, I think the important thing to call out here is the growth that we are seeing is coming across the globe outside of the mass business.

If you look at our growth in the quarter, we saw very strong growth in Europe out of Champion, we saw very strong growth out of Champion in Asia, and outside of mass in the U.S., it's just growing over 70%. It's just amazing what we're experiencing here.

So, without parsing it much more than we did at the Investor Day, I would just point you to the trajectory we're seeing is phenomenal..

Okay. And maybe to follow up on that, Gerald, you said that 2019 for Champion and mass is not going to be different from 2018. Can you just maybe give us some more color on that? Because presumably Target will want to have kind of a smooth transition from C9 to whatever they're going to do next.

So, is it that the business is going to operate as usual, but sales might be down a little bit as that transition happens? Or do you still expect the sales to be at that same kind of $380 million level that they are this year into next year?.

First of all, the bookings for 2019 are still underway. So, from what's – what we expect is that we won't see a material difference. We haven't finalized those bookings. So, we'll see how that plays out. But from what we know, the contract runs through January of 2020, and we intend to be providing that program through 2019.

And at this point in time, we just – we do not expect a material difference in the business to what we see this year..

Our next question comes from Simeon Siegel with Nomura Instinet. Your line is now open..

Great. Thanks and thanks for all the color. Just to clarify or contextualize, did you say how much Champion sales are excluding mass or can you? And then, just your point about the current margin expansion is encouraging.

Is it surprising that the core Champion business margins were the same as that sourced C9 business just given the benefits we know you have from the manufacturing model? Thanks..

We really don't break it out much more, but we'll consider that for future disclosure. As it relates to the margins, I think what you're seeing there is an inflection in the core Champion margins, and it's been growing for some time, but really now hitting a major amount of scale benefit.

And that's one of the reasons – you point out the internalization of that line. That's one of the reasons we expect that margin to continue to move higher as we see incremental benefit from both the scale of just the organic growth of the line, but also the internal production. So, we feel very good about the margin opportunity on Champion.

We are seeing it be favorable to our mix this year, and over the next couple of years, I expect that to continue to play out in a very meaningful way..

Okay, great. And then, just one follow-up, if I can. Can you just – on the cash flow, the operating cash flow line, can you talk through the drivers there around the comfort in hitting your numbers just given – I think it looks like we're about $100 million behind last year at this point? So, if you can just help understand the drivers there. Thanks..

Sure. Maybe I'd start with, just as a reminder, for our full-year cash flow guidance, it's pretty simple straightforward view. You take our GAAP net income and you add back D&A and stock comp and you kind of are there.

Now, having said that, for the second half is what I think you're most focused on, let me start by noting we're ahead of plan for cash flow through the first half. Working capital has been less of a use than we planned for the first half.

So, I'd start with that guidance and I would look at our GAAP net income for the second half, and then of course add back the D&A and the stock comp. Then, I'd encourage you to look at our working capital performance that typically occurs in the second half.

As you would appreciate, we're at the seasonal peak for inventory, and that will come down naturally and be a significant generator of cash as we move through the year. Accounts receivable is typically a source in the back half as well, and we certainly expect that again.

And frankly, if we just simply repeated last year's second half working capital improvement, not even including the benefit we got from tax reform, we would easily achieve the cash flow guidance that we've put out there.

So, we feel good about where we are through the first half and we feel very confident in the guidance we've given for the full-year..

Our next question comes from Kate McShane with Citi. Your line is now open..

Hi. Good morning. Thanks for taking our questions. If we could go back to the product cost discussion, I know we've already talked about some of the pricing actions you are thinking about.

But how much control do you have in offsetting some of these costs through efficiencies in your supply chain in the short-term?.

Well, we certainly constantly work on supply chain efficiencies and certainly a part of Project Booster is exactly that project. But our philosophy has always been over time that on inflation, you price for inflation over time. And so, we have done things in the interim to offset some of the costs.

But as the inflation builds, we're focused on implementing the prices to recover that inflation..

Okay, great. Thank you. And as an unrelated question, just with your online business, it seems like you saw some good growth again this quarter.

Can you just walk us through any changes you are seeing in how that business is growing, whether it's at your own website or at the pure plays or your retail partners, and where are you seeing the most success and will be seeing any new initiatives in the second half to support the online business?.

Well, first of all, I'd say yes, it did grow well, and thanks for calling that out. We're continuing to see it grow generally across the various channels. The biggest change for me would be on a global basis is that we're seeing the traction online build in our International businesses too.

It was a little later start there, but we are seeing that build and – even and across the global pure players. So, it gives us confidence that our strategies are continuing to gain momentum on an International basis..

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

Hi. Thank you for taking my question. First, on the product cost side, just a follow-up.

Can you talk about I guess what's driving the inflation, how much does cotton costs matter and how are things looking for next year?.

Well, let me just give you a broad – let me shape it broadly, and I'll let Barry answer the specific cotton question we always get. But what I want to say first is we're no longer a cotton-dependent company as many people often think we are. And this is not just a cotton question.

This is general inflation that comes with a strong economy and the pressure on input costs, and you see it coming across oil, you see it coming across packaging materials and you see it coming across cotton. This is natural inflation. And so, it will touch all the products.

That's why our retailers are seeing it come through their own supply chains as well. And so, we are pricing to offset that.

From the standpoint of what percent cotton represents of our total, Barry, it's fairly small, isn't it now?.

Yeah, it is. It's kind of a mid single-digit kind of rate in terms of total. That said, I would just echo the point, inflation is coming across a number of inputs. It's really essentially in line with our expectations.

All year, we've been kind of calling for about $35 million of net impact net of pricing, and we continue to see that play just as we've been projecting. And the important thing here I think is that we have good visibility on the pricing line to offset that with the strength of our brands..

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

Good morning. Thanks for taking my question.

Barry, can you quantify the acquisition synergies that are embedded in the guidance for the back half of the year?.

Sure. In terms of – in the third quarter, it's about $55 million, and in the fourth quarter, it is – of course, we have Alternative Apparel....

Yeah, synergies, not contribution (48:55)..

Oh, synergies. Oh. In terms of synergies, I would say we don't generally break out the specifics. But I would tell you that the synergies are actually ramping. That's one of the things that came in better in the second quarter as compared to our guidance.

We noted that we had a couple of elements in the second quarter that were more of a headwind in terms of the guide, but synergy is actually building.

We have, I would say, as it relates to the first half several million dollars of upside on a run rate basis, and that's particularly because the International side is seeing significant uptake as it relates to – and that's both on the gross margin and the SG&A line..

Okay, great. That's helpful.

Can you talk to the consumer reception to the Hanes brand on Amazon and how you feel about the product placement there and just the overall competitive environment on Amazon?.

Look, yeah, we feel great about the Amazon relationship. We were one of the early partners with Amazon and have built a nice business there.

It is a business that we continue to work on to ensure that our brands pop up first and that it is more competitive than it once was, but we're very focused on continuing to win that buy box and it really is about – then about marketing.

Just like you do in any channel, you have to maintain that presence and invest appropriately, and that's where we're focused..

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

Good morning. Thanks for taking my question. Organic revenues were down low single-digits in 1H 2017, but then they meaningfully inflected up to low single-digits in 2H 2017.

How should we think about the implied organic revenue growth for 2H 2018 as we consider the two-year stack basis?.

If you think about it on the prior year, part of that was on the Innerwear, and that was really related to what was going on in the prior year before that in terms of the inventory destocking that the company incurred. So, I think the way you ought to think about this year's organic is a couple of factors.

One, Champion is growing really, really well across the globe and continues to be quite additive to the business. Our Basics business is seeing good trends and is improving.

Gerald spoke to the men's and women's underwear growth that we were seeing that actually came in better than we were expecting as the Comfort Flex Fit is driving significant upside on men's. And I would say that our sports apparel business was also ramping better than probably previously expected. So, that's – those are some factors that I would say.

And just generally speaking, the trends in our International business are modestly better than what we were expecting earlier in the year. And so, I would be looking at those factors and recognize that we have a very strong visibility on the Champion side since it's mostly a seasonal commit business..

Okay, very helpful. Thank you. And then, I wanted to follow up on the C9 revenue guide for FY 2019. Just curious to understand if there are minimum revenue contract thresholds. Just curious to reconcile since I think the FAQ this morning calls out that C9 is a seasonal commitment business from a sourcing standpoint.

And then, your Target Innerwear business I think was $400 million last year. Maybe you can parse out how that relationship is different and or more long-term compared to the C9 business..

Yeah. Let me start with the first part of your question. From the standpoint of a guide, what I would say is it is a seasonal commit business. So, the commitments have not been finalized for 2019.

So, what we give you at this point is an expectation based on the best information we know at this time, and we do feel like we're well positioned to not see meaningful change from 2018 to 2019. But that will only be confirmed as we go through the bookings for the 2019 period.

We certainly have great lines prepared and we're looking forward to driving that business very strongly with Target as we go through that 2019 period of time. The Innerwear business is built on – it is a replenishable business. It's built on a replenishment basis in our national brands. It runs with all our businesses as a replenishable business.

It's not a contract business. But we feel very good about where our brand shares are and where our performance is within all of our customers, including in particular our key mass customers. So, we feel good about those businesses..

Our next question comes from Doug Thomas with Gabelli. Your line is now open..

Hey. Good morning. Gerald, I guess my first comment is I guess – I just feel like Target must be really out of touch with maybe their core consumers even who – given the success you guys are having in Champion, this is not the – this is the time in my view and I guess a lot of other people's view to redouble their commitment to Champion.

But that notwithstanding, my question is can you talk about – you talked about sort of the – as Activewear and Comfort are coming together, you're relaunching the shapewear business, the shapewear line.

Can you talk about what went into the relaunch and what your expectations are long-term? And I guess looking back at the first wave we saw of this before, I'm not – I don't want to think it was a fad necessarily, but what do you do to try to make this a really sort of long-term growth business?.

Well, Doug, let me say first thank you for your comments on the strength of Champion, and we too believe it's got tremendous momentum and feel really good about its momentum going forward toward that 2022 goal of $2 billion. From the shapewear question, it's interesting. You have a lot of insight on the business.

The shapewear products, what we've done with these cooling items – and it's very similar to what we saw across our Basics business, particularly millennial consumers prefer products that perform in some way and they're more familiar with some of the Activewear type products that do something for you.

So, in the case of shapewear, shapewear has traditionally been a very constricting product, can be very warm, and so we have adopted some of the same technology from a cooling yarn standpoint to make the product cooler when it's worn.

And that brings an aspect to the business it's been lacking and one that we know has been a consumer – has made consumers unhappy. So, we feel like along with resetting our programs in Q3, that upgrading it with some of these innovations gives the consumer a reason to come back to the business and purchase again..

Can you create – can HanesBrands create an aspirational line in that segment of apparel?.

Well, we think....

Or how do you – yeah..

We do think we can, because what we try to do with all of our segments is understand the consumer wants and deliver those to them – or consumer needs in particular. And we know this is one of them. Along with the strength of our Maidenform brand, it's a pretty compelling offering.

Now, we have to get it placed, we have to do our job to attract the consumer to it. But we do believe that we're making a compelling offer to a consumer that hasn't bought in a while. And this is a less frequent purchase than some of our other Innerwear categories.

So, bringing them back and making that purchase with something new is a pretty important step..

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

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

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