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. Michael Binetti - Credit Suisse Securities (USA) LLC Laurent Vasilescu - Macquarie Capital (USA), Inc. Omar Saad - Evercore ISI Jay Sole - UBS Securities LLC Kate McShane - Citigroup Global Markets, Inc. Chethan Mallela - Barclays Capital, Inc. Steven L. Marotta - C.L.

King & Associates, Inc. Ike Boruchow - Wells Fargo Securities LLC Tiffany Kanaga - Deutsche Bank Securities, Inc. Simeon Avram Siegel - Nomura/Instinet John Kernan - Cowen & Co. LLC David Swartz - Morningstar.

Good day, ladies and gentlemen, and welcome to the Hanesbrands Third Quarter 2018 Earnings Conference Call. 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 are pleased to be here today to provide an update on our progress after the third 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, other action-related charges and expenses, as well as the impact from the recent Sears bankruptcy.

Additional information, including the 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' call, Gerald and Barry will provide some brief remarks.

And then, we'll open it up to your question. I will now turn the call over to Gerald..

Thank you, T.C. As we review the highlights of our third quarter results, Barry and I will exclude the impact from the recent Sears bankruptcy, which will allow for a more relevant comparison to our prior guidance and provide increased clarity on the underlying performance of the business.

Total company results were in line with our guidance, benefiting from our business diversification. We continue to make progress toward our long-term goals with a fifth consecutive quarter of organic revenue growth, improved profit margins, reduced leverage and continued strong sales growth of Champion around the globe.

We believe we are poised to deliver full-year results in line with our expectations coming into 2018, based on our fourth quarter view of the continued strong performance in our Activewear and International businesses, combined with the positive underlying consumer trends in our Innerwear business.

Revenue in the third quarter experienced greater-than-expected FX pressure, but still met the low end of our range. Organic sales increased over 1% in constant-currency, driven by better-than-expect performance in Champion across both our Activewear and International segments.

While we were disappointed that our Innerwear segment had lower-than-expected results, there were a number of positive consumer signals in the quarter that point to improved revenue trends in the fourth quarter.

Our gross and operating margins increased over prior year and the strong margin performance drove operating profit and earnings per share to the midpoint of our guidance range. We also generated over $200 million in cash flow from operations, which was used in part to pay down debt, lowering our leverage to 3.8 times on a net-debt-to-EBITDA basis.

Touching on our business segments; for the quarter, U.S. Innerwear sales declined 7%, below our outlook for 1% to 2% decline. Our U.S. Innerwear results were particularly frustrating this quarter, as our replenishment orders lagged, despite experiencing some of the strongest point-of-sales results across our categories that we've seen in years.

This imbalance between point-of-sale and shipments, particularly within panties and socks, accounted for the vast majority of the sales shortfall relative to our outlook. Within our basics business, we believe our fundamentals remain strong. Point-of-sale increased in the low to mid-single digit rate, each month during the quarter.

Men's underwear revenue grew 5% as innovation drove market share gains and our shipments matched our point-of-sale. And then, in panties and socks, where we saw the majority of the shipment and balance, point-of-sale increased to the mid to high single-digit rates in the quarter.

Within Intimates, we're seeing incremental signs that our revitalization plan is gaining traction, albeit at a more uneven pace than we've been anticipating. Our market share is beginning to stabilize after multiple quarters of decline.

And point-of-sale trends are rebounding within the key accounts where we have re-launched with new product offerings. Most recently, we've seen progress in shapewear, where we introduced product resets in late August in two key accounts.

Since the reset, we have experienced low double-digit point-of-sale growth as consumers reacted positively to our new product designs and innovation. While early, we are encouraged by the initial consumer reception and we plan to roll these innovations out to other retailers in the first half of 2019.

Based on our bookings for the first two weeks of October, we expect Innerwear sales in the fourth quarter to be flat with prior year. This marks a significant improvement from third quarter's performance, and there are two trends driving this outlook. First, our point-of-sale strength continued through October.

Second, we're seeing alignment between our point-of-sale and our shipments across basics, specifically within panties and socks.

As we look to 2019, we expect the Innerwear business to be essentially flat, reflecting expanding shelf space in basics, the benefit from price increases, which have already been accepted by retailers, a conservative view on elasticity, as well as the complete removal of Sears from our forward outlook.

Now let me discuss the strong performance of the Activewear and International segments in the quarter. On an organic basis, Activewear revenue increased nearly 4% and International segment sales increased 10% in constant-currency.

Organic growth in both segments accelerated in the quarter, and results were above the high-end of our expectations; driven primarily by the continued strength of Champion globally. As I did last quarter, I'll first discuss our Champion results, excluding the mass channel.

For the quarter, Global Champion sales grew 40% in constant-currency and operating margins continued to expand. Sales growth in the quarter was broad-based, up double-digits in all regions. We also saw growth across global channels of trade, including wholesale, owned-retail and online.

On our trailing 12 month basis, sales were over $1.2 billion at the end of the quarter and we expect full-year Champion sales outside of the mass channel to exceed $1.3 billion. Even though, we're cycling tougher comparisons, Champion's growth rate continues to accelerate, with this quarter's 40% growth coming on top of last year's 33% increase.

In fact, over the past five quarters, constant-currency growth has been up 33%, up 29%, up 32%, up 39% and up 40%. This is a clear indication that our coordinated global strategy to elevate the Champion brand is driving increased demand for the product.

And based on our bookings, we expect strong double-digit growth to continue through the first half of 2019, putting us ahead of schedule in achieving our $2 billion revenue goal.

Touching briefly on our Champion at mass business, sales in the quarter were up mid-single digits compared to last year, while on a trailing 12 month basis, sales declined at a mid-single-digit rate. Looking forward, mass channel bookings through the first half of 2019 are essentially flat for the first half of 2018.

As we get visibility into future bookings, we'll provide additional updates. So in closing, we anticipate 2018 results to be consistent with the expectations we laid out at the beginning of the year, excluding the impact of the Sears bankruptcy. While we've made progress on many fronts, there are others that have yet to be achieved.

And we recognize the importance of this, especially as it relates to the fourth quarter. In Innerwear, our fundamentals remain strong. Innovation is working. Our market share is increasing. We've secured price increases for next year, and we're gaining shelf space in basics.

With shipment patterns aligning with point-of-sale, we expect to see improving Innerwear revenue trends in the fourth quarter and in 2019. Momentum in our Champion business continues to accelerate with bookings visibility through the first half of next year.

Our operating margin is expanding in line with our long-term goal and our leverage is coming down. As we laid out at our Investor Day, over the next five years, our business model is primed to double the amount of free cash flow that we generated in the previous five years. With that, I'll turn the call over to Barry..

Thanks, Gerald. Before I discuss third quarter results, I'd like to briefly touch on Sears, which represents approximately 1% of total company revenue. Our approach to accounting for the bankruptcy was to eliminate the exposure upfront. In the third quarter, we reserved our exposure, resulting in a $14 million charge.

And for our fourth quarter guidance, we took the same approach. We removed all sales to Sears Holdings from our forecast, which lowered fourth quarter revenue by $15 million and operating profit by about $5 million. Now, let me discuss our third quarter results, excluding the bankruptcy charge, which can be seen in Table 5 of our earnings release.

Overall, our results for the quarter were good. While the replenishment lag Gerald mentioned impacted our Innerwear results, we achieved or exceeded our expectations on nearly all of our other key metrics. To highlight a few of those, organic revenue increased over 1% in constant-currency.

Champion sales were above plan, which drove better-than-expected organic revenue growth in both our Activewear and International segments. As projected, we drove increases in gross and operating margins versus the prior year.

We reduced our debt and leverage, and our cash flow continued to build, even with inventory investments to support Champion stronger-than-expected growth. For the quarter, sales were $1.85 billion, an increase of $49 million over last year.

Adjusted operating profit increased 6% to $292 million, while adjusted operating margin increased 50 basis points to 15.8%. Earnings per share were $0.55 and we generated over $200 million in cash flow from operations during the quarter. With that summary, let's turn to the details of the quarter's results.

Sales increased 2.7% over last year, including $48 million from the contributions of our recent acquisitions of Alternative Apparel and Bras N Things. The impact from foreign exchange lowered reported revenue by $22 million, which was $4 million worse than expected as the dollar continued to strengthen since our August guidance.

We increased gross margin by 140 basis points over last year. Favorable mix, driven principally by Champion, contributions from Bras N Things as well as the benefits from acquisition synergies and cost savings initiatives more than offset higher input costs.

Operating margin increased 50 basis points compared to last year, driven by the improved gross margin performance, partially offset by our planned investments to support our growth strategies. For the quarter, acquisition and other related charges of $20.7 million were in line with our guidance.

We continue to make good progress on our initiative to complete ongoing integrations and we project that all integration charges for prior acquisitions will end during 2019. Now let me take you through our segment performance. As Gerald discussed, U.S.

Innerwear sales declined 7%, while operating margins declined 170 basis points compared to last year, due to volume deleverage and higher input costs. U.S. Activewear segment sales increased 7% over prior year, driven by solid organic sales growth of 4%, as well as the contribution from Alternative Apparel.

Organic sales growth accelerated in the quarter, fueled by strong performance in our Champion and replenishment Activewear businesses. Activewear's operating margin of 16.9% was consistent year-over-year.

Scale benefits from Champion's growth drove improved segment gross margin, which was offset by investments behind our growing Champion brand as well as a short-term dilutive effect of Alternative Apparel.

Our International segment sales increased 11%, or $63 million, which included a $32 million contribution from Bras N Things and a $22 million headwind from the effects of foreign exchange rates. On a constant-currency basis, organic sales were strong and increased 10%, or $53 million compared to last year.

Now a key highlight from me in the quarter was that our International team delivered organic growth across all of our major regions around the world, Asia, Europe and Australia.

International's operating margin increased 200 basis points over last year to 16.1% due to favorable mix, driven principally by Champion, contributions from Bras N Things as well as acquisition synergies. Now moving on to the balance sheet and cash flow items. In the quarter, we generated $206 million of cash flow from operations.

Inventory was up year-on-year, with the increase primarily due to our investment to support Champion's global growth, as well as the added balances from our recent acquisitions. Days sales outstanding was consistent year-over-year, while our focus on both payables and inventory days resulted in a four-day improvement in our cash cycle.

We reduced debt by $115 million in the quarter and despite taking the bankruptcy charge, I referred to earlier, we were able to lower leverage to 3.8 times on a net debt to EBITDA basis. We expect to be approaching the high-end of our target leverage range of 2 times to 3 times by year-end and to be back within our range in the second half of 2018.

Now, turning to guidance. For the full-year, if you exclude the Sears bankruptcy, which was not accounted for in our prior guidance, the midpoint of our revenue and profit ranges remains unchanged. We narrowed our revenue outlook within our prior range.

This reflects our performance year-to-date and our positive outlook for the fourth quarter, driven by growth from Champion and International. I would note that's despite an incremental $20 million headwind from foreign exchange rates since our last guidance and the removal of Sears from our fourth quarter outlook.

With respect to profit, our revised range reflects an incremental $23 million headwind from the Sears bankruptcy and foreign exchange rates. And our revised cash flow guidance reflects transitory working capital investments to support Champion's growth as well as the after-tax profit impact of Sears and foreign exchange rates.

Looking at our fourth quarter guidance; at the midpoint, our revenue outlook reflects a $29 million headwind from exchange rates, acquisition contributions of approximately $45 million and organic constant-currency growth of approximately 3.5%. We expect U.S. Innerwear sales to be flat compared to the prior year.

And I should note that's up 3%, excluding Sears from both years. U.S. Activewear organic growth is expected to be consistent with the third quarter at 4%. And on a constant-currency basis, we expect organic growth in International to be consistent with our performance year-to-date.

In terms of operating profit; at the midpoint, our fourth quarter outlook reflects 10% growth versus prior year and implies approximately 70 basis points of operating margin expansion, driven by favorable mix, the contribution from Bras N Things, as well as SG&A leverage, partially offset by higher input costs.

Acquisition and other related charges are expected to be approximately $15 million in the fourth quarter, consistent with our full-year outlook of $80 million. Interest and other expense in the quarter is expected to be $54 million, and our full-year guidance reflects the increasing rate environment.

As we look into 2019, at this point, we would expect interest and other expense to be roughly flat year-over-year as our aggressive debt paydown plans are offset by a conservative outlook for higher interest rates. As a reminder, about half our debt is floating. The remainder is fixed at a blended rate of 4.5%.

Lastly, fourth quarter adjusted earnings per share at the midpoint is expected to increase 12%, when normalizing last year's tax rate to reflect the impact from tax reform. So in closing, just a few comments as we finish the year and head into 2019. Champion's growth accelerated for the third consecutive quarter.

And with our bookings visibility, we expect continued strong double-digit growth through the first half of the next year. In Innerwear, with shipments and point-of-sale aligning, we expect improved revenue trends in the fourth quarter. We've locked in all of the 2019 price increases we've previously talked about, which go into effect in February.

Our margins are expanding as we projected. Our cash generation is growing and we're paying down debt. Momentum is building across our business and we look forward to unlocking our full cash-flow potential in delivering higher shareholder returns over the next several years. And with that, I'll turn the call back over to T.C..

Thanks, Barry. That concludes our prepared remarks. I'll now turn the call back over to the operator to begin the question-and-answer session.

Operator?.

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

Good morning, everyone. Thanks for taking my question. I guess, first, if I could, just as it relates to the domestic Innerwear, Gerald, you mentioned just the sell-through being quite strong, which is not aligning, but feeling confident that that sort of takes hold in 4Q.

Could you just provide a little bit more color in terms of the dynamic of that, and what gives you confidence that it does accelerate in 4Q?.

Yeah, good morning, Eric. Sure, I'd love to. When we look at our Innerwear business, in particular, and I'll be quite specific.

While it was below our shipment expectations in Q3, we saw a number of positive trends, and I'll tell you, in my experience, it's some of the most positive trends I've seen across Innerwear, in quite some time, and it comes in many places.

We saw our basics POS up low to mid-single digits every month during the third quarter, we're seeing our shares grow across men's underwear, women's underwear as well as socks.

And we're seeing our Intimates revitalization tactics begin to take hold, we saw a nice POS gains in the accounts where we put our shapewear, in particular, late in the quarter as well as our share within Intimates flatten out. These are all good trends that tell us that with this kind of strength that those shipments will follow.

And as we've gotten into October, that's exactly what we've seen. We've seen the POS continue to be strong, for example, in our basics business, but along with that, we've now seen the shipments aligned with that POS, and it's been particularly true in our panty and socks businesses, where we saw some of the softest shipping coming out of Q3.

So, we see that strength building, we know that our innovations are working, our Comfort Flex Fit underwear, for example, potentially exceed our expectations and you've heard my comments about underwear, POS, in particular and how strong that performed in the quarter. We see our innovations in shapewear working.

We haven't seen growth in shapewear in some time, and this POS turnaround as we've put our cooling innovations in place with shapewear really tells us we've got strength building there. So, we feel as we turn to the fourth quarter, we see the bookings that we are well positioned to deliver, a very solid fourth quarter.

And as we look beyond it, we feel good about going to next year. We can now see the momentum building, we see our shelf gains already locked in for next year in basics as well as our Intimates revitalization, we'll continue to roll forward, and we've got our prices locked in.

So, we feel that the strength we're seeing in Innerwear tied to our International growth and our Activewear growth positions us well for a very solid fourth quarter..

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

Hi, good morning, nice job on the quarter. I was wondering maybe if you could touch a little bit more on the Intimate performance.

I guess, I was curious, did you see that weak performance in the quarter really across all the distribution channels, or was it weaker in one channel versus the other? And then, I know you mentioned the strength in October, I mean, if you could just talk about, if there's any change there? Or where you're seeing the strength across Innerwear in those channels also?.

Sure, let me answer your Intimates question as part of probably the broader question. If I look at Innerwear in general, we've seen very solid POS across channels as we have come to the October period, it's continued, and we've seen the shipments aligned as well, including in the intimate side of things.

If I break down your question on Intimates, in particular, the shipments were lower than we had projected going into the month and there was really a couple areas as we've looked at it relative to our POS, because as you heard in my comments, we felt good about our revitalization efforts, particularly in shapewear.

They did go in place later in the quarter, in late August, and so while we saw the POS come about, we did not yet see the refill behind those initiatives, and we anticipate we'll see that as we now get into the fourth quarter, and that was about half of what was lower than what we projected in Intimates.

The other half was actually that we did some trade spending with some specific accounts that we have planned in the fourth quarter, it actually occurred in the third quarter, and that spending is a net to revenue. So, that will flip around as a tailwind, as we look into the fourth quarter.

So, between the refill on the Intimates POS that we expect and the flip around in that trade spending to a positive, we feel we've got nice tailwinds going into the fourth quarter for Intimates as well..

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

Hey, guys, good morning. Thanks for taking my question. Could we talk about the comments on Innerwear flat for next year? I think it has been running behind that for a while now and it sounds like in the mass channel to be general there, it's taken fairly big steps towards private label in some of these categories.

As far as – I'm wondering, if you could just help us make sense of that narrative, and how the channel is looking at branded versus private label strategy? And what's changing, I guess versus a historical view that channel has taken in terms of brands versus private label in the past?.

As far as our channels in the Innerwear category, we're not seeing any change in the level of private label in that business. As we've said for some time, in Innerwear, the presence of private label is fairly small. And you may recall back at our Investor Day, we looked at it across our global markets.

In France, for example, between 2013 and 2017, 90% of those categories have been branded. As we look at the U.S. market, in 2013, about 18% of the business was private label and it dropped to 11% in 2017. So, we're not seeing a dramatic shift. And, in fact, the branded presence online in Innerwear is bigger at over 90%.

So, we see branded still make a big difference to a consumer. As we've also discussed, price is a distant fifth to consumers relative to their decision tree and brands is number one. So, brands are tied to fit and comfort are the critical things when we get into Innerwear. And so, we're seeing growth.

As you heard me mention, we've already booked additional doors, including some new doors that we've taken from competitors early in next year in our basics business, so we feel good about the presence of brands and the ongoing need for brands in that channel..

Thank you..

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

Hi. Good morning. Thanks for taking my question. I want to follow-up on Michael's question. I think this morning a key competitor announced that they secured a new private label underwear program for 2019 with its largest mass retail customer.

Just curious, how should we take that into consideration with regards to Innerwear revenues guided to flat for next year? And then, if I could squeeze one more question, maybe, Barry, if you can walk us through the assumptions for cash flow for the fourth quarter, that would be very helpful. Thank you..

From the standpoint of our basics business in men's underwear in particular, I mentioned, we were up 5% in the quarter. We had one of our strongest share gain quarters as well as we look into the quarter in men's underwear.

So, the branded nature of our business and you should think that our underwear business will continue to be very strong next year.

From the standpoint of competitors, it's difficult to speak about their particular strategies, but in many cases they are talking about space that they switch from private label to a cheap product that they put in on a brand with no awareness on and now that's gone back to private label.

So, there's a lot of noise around the same space, but what we've seen is that branded shares over time have remained very strong in the basics business, particularly in underwear..

Hey, Laurent. This is Barry. Good question. Thanks for that. In the fourth quarter, our cash flow is expected to be in excess of $500 million. And that, together with the year-to-date performance, would get to the midpoint of our guidance. And there's three things I would want you to think about with respect to that $500 million.

The first is, if you take the midpoint of our fourth quarter, GAAP net income plus our typical non-cash items in the fourth quarter, that's $215 million. And then, the second thing that you should look at is, we are expecting the typical seasonal benefit that we generate from accounts receivable.

And as you've seen over the last few fourth quarters of the last few years, that generates $100 million to $150 million on average. And then, third, again, typical with normal seasonal trends, you would see over the last couple of years, inventory is a benefit of well over $100 million, and we're certainly expecting that again this year.

So, all-in, we feel very good about our ability to generate that $500 million of cash flow from operations and we feel quite good about showing the cash flow performance over the next several years as we continue to move toward our $900 million to $1 billion goal..

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

Hey. Thanks for taking my question. I just wanted to clarify, I didn't hear the word destocking used, but it sounds like the spread between the strong POS you're seeing and the shipments, isn't necessarily a retailer destocking issue, it's other factors. I wanted to make sure I'd clarify that point. And then, I wanted to ask my question on Champion.

Obviously, the strength there is significant. How are you thinking about building the team, accessing talent, given the long-term huge opportunity for that brand? Thanks..

Sure. I agree with you, Omar. It's not a destocking. That was a period where some of our customers were really reducing inventories and so forth. This is more what we have seen with some of our customers as they've gotten much better at their order cycles and so forth. And from time to time, we see a fluctuation as they try to order closer to the event.

So, we view it more as that, it was just merely timing. And as we can now see and particularly in socks and women's panties, as I mentioned, we've seen that rebuild. It's just more of a fluctuation and timing, so we don't view it as destocking at all. And in fact, we feel we've entered the quarter well-positioned out to deliver the fourth quarter.

From the standpoint of Champion, to your point, we couldn't be more excited. We're seeing double-digit growth around the world in our business as we mentioned at our Investor Day. We set a goal that we'd go from $1 billion of sales outside of mass to $2 billion by 2022, which was about a 15% CAGR at that point.

In my comments I mentioned that this year we would finish above the $1.3 billion number. So, I want a 30% CAGR. We're running basically twice the pace of what we said. So, we're well positioned to beat our goal of getting to that $2 billion number and to keep the momentum in the business in 2020 and beyond from the standpoint of growth.

It's really exciting what's going on with that business. So, we are continuing to invest in the business and we'll do so from a digital standpoint, something I know you've been very aware of. We'll also continue to open stores in select markets to drive our brand image.

And we, of course, are staffing behind it, because it's one of our key growth initiatives over the years to come..

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

Great. Thank you. I just want – just wanted to ask about the Australia Pac Brands business.

Can you give us an update on how the integration is going, what kind of synergies you've been able to realize, and how sales growth was in the quarter for the year so far?.

Sure. We couldn't be more delighted with the Pac Brands business. We knew it was a great business when we bought it with a very solid management team. It did deliver organic growth in the quarter.

The synergies continue to track to our expectations, and it's delivering in our double-digit margin range, which we had targeted as we see the synergies coming through. The thing we also love so much about that business is it came with a very strong management team, and it allows us to build upon that management team.

So, they are also managing the integration of our Bras N Things acquisition that we announced early in the year..

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

Hi, thanks for taking my question.

On underwear, how long do they take for the shipments to catch up, I guess, to the demand that the retailer was seeing? And is it something that we can expect more as the retailers continue to manage their inventory and create more choppiness to your business? And related to that, I noticed in the FAQ today that you have some commentary around the remaining $70 million of your business at Target.

And I wondered if you could explain that a little bit more?.

Sure. The cycle is pretty quick on these. We get replenishment orders every week. So, if we see a fluctuation down, it can also quickly come back up. And that's exactly what we saw in the case of those orders, and particularly, in the basics business as we entered October.

So again, to the earlier answer I gave, we view this more as a short-term fluctuation. And we take orders every week and we ship orders every week, so these things correct themselves pretty quickly. From the standpoint of the C9 business, the vast majority of that business is an Activewear business.

There's a small amount of basics that's complementary to that Activewear business, about $70 million of business that the space is secured for 2019.

As we look beyond that, we anticipate that we will transition that business into our Hanes mass basics business, as well as we have a very strong growing business now in our Champion basics business that is adding space outside of the mass business, in line with our ongoing growth of the core Champion brand.

So, we anticipate absorbing all that business into our other businesses in the years ahead..

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

Hi, good morning. I want to ask about the 2019 price increases that have been accepted at retail.

I think you've said in the past that these increases are expected to be a little more sizable than the increases you took in 2018, but can you just remind us of the order of magnitude there? And then I think there was a comment about having a conservative view on elasticity.

So, can you just talk about the elasticity you've seen in response to the 2018 pricing? And give a little more detail about how you're think about that for 2019? Thanks..

Hey, Chethan, this is Barry. I'll take the first part of that and then let Gerald talk to the elasticity historically. You're right that we will be passing through the pricing. That's all been communicated and is in place, it will go into effect in February, so we feel very good about that.

That will help offset the raw material inflation we've been absorbing this year. Those increases are kind of average 4% to 5% across the majority of our U.S. Innerwear business. Now I'd note that you're right. We did take a conservative view, at least at this point, for planning in 2019 as it relates to elasticity.

Gerald, do you want to speak to historically what we've seen?.

Sure. We've traditionally seen that elasticity is less than one as we go into these types of price increases, an important part of implementing these price increases for us is to put the appropriate advertising and brand support out, during those periods of time as the prices get set in the market. And we'll, of course, do that again this year..

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. Two very quick questions. One is, when was the last time that constant-currency organic growth was greater than 3.5% in any quarter? And also, if you could provide a little bit of an update on C9 and your thoughts about replacing the current channel distribution, and perhaps the timing of that as well? Thanks..

As it relates to the organic constant-currency, Steve, I think we'll – let me look at that on a quarterly basis, and get back to you, or put that in a FAQ as it relates to the specifics of that.

We feel – I will tell you this, we feel very good about the fourth quarter organic constant-currency, specifically because the Champion growth we're seeing around the world is very strong. The bookings that we've got and the orders that we see for the fourth quarter continue the trajectory that we've been seeing.

And as we noted in the third quarter, there was considerable acceleration there. We also see our International business around the world continuing to build as we mentioned in the quarter, we saw very strong organic growth across all regions, so that Asia was really strong, Europe was very strong and Australia also contributing nicely.

As it relates to our U.S. business, the other thing I'll point to you is, as we've talked about this year, some of our mass space and Activewear, we were lapping some space loss and that becomes less of a headwind in the fourth quarter.

So, Gerald, do you want to take the rest?.

Sure, as you heard in my earlier comments, Steve, from the standard of our momentum in our core Champion brand, it's far exceeding our expectations at this point in time.

So, we're basically growing at twice the pace that we expected and well ahead of pace at this current rate to achieve our $2 billion goal and drive momentum in 2020 and beyond from that standpoint of our Champion business. We do have the 2020 or the Champion C9 contract until early 2020.

We continue to execute against that (36:24) any discussions we're having at this point would be post that 2020 period and would only represent upside to the current momentum that we have. But we feel there's a tremendous amount of momentum in that core Champion business in 2020 and beyond..

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

Hey, good morning, everybody. Barry, I think two quick questions for you. You've talked about, continue to talk about getting the leverage ratio down to your targeted range by the end of next year.

Can you maybe give us some color, how much EBITDA growth are you expecting next year versus how much debt paydown are you expecting within that commentary? And then just really quick, if I'm reading this right, it looks like the acquisition revenue in the quarter was $7 million light of your plan.

Just kind of curious what would happened there, if that's currency or if it's something else?.

Okay. Hi, Ike, good morning. Couple of things as it relates to next year. So, as we projected at the Investor Day in terms of our base model, we were, I think, conservatively postured in that de-risked model too, relatively low organic growth and a modest operating profit improvement.

And at this point, in light of the, we're not providing guidance for 2019 at this stage, but I think that we are on track or even a little bit better than that expectation, so that will be contributing to EBITDA some.

The vast majority of the debt will be – leverage improvement will be through paydown of debt, because as you look out into next year again without giving guidance, we certainly would expect our cash flow from operations to be up nicely next year.

There are several add backs that we've talked about this year that are one-time impacting cash flow, for example, a couple of things to think about. We won't have that earn out payment that we had this year as well as the acquisition charges will be down appreciably, together with improvement from the standpoint of the pricing actions we've taken.

So cash flow from operations ought to be up nicely. And in light of CapEx being relatively low, kind of running in the $90 million to $100 million range, we will have a considerable amount of debt paydown next year. And so I think you should feel very good about our trajectory to get back into the range in the back half of 2019.

As it relates to the acquisition sales in a quarter, you're right, they were just a few million light, and that is really more timing than anything. We feel very good about our Bras N Things acquisition is doing phenomenal, and that business is extremely profitable and is just continuing to do very well.

I think you'll see the fourth quarter is traditionally one of its strongest with holiday. And then our Alternative Apparel business continues to perform well and we're getting nice synergies on both businesses and that contributes to the margin improvement we've been seeing. So, we feel good about them..

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

Hi, thanks for taking our questions. I want to touch on a phrase you used.

Can you dig further into these positive consumer signals that you've mentioned in terms of Innerwear potentially turning the corner? I'd love some granularity as to what they are to the extent that it wasn't covered and what you've already said specifically about your segment this morning.

And also, could you discuss in more detail what triggered the reduction in your full-year gross margin guidance, despite the 140-basis-point gain in the third quarter? Are there specific drivers you can highlight that have changed in your view? Thanks..

Yeah, let me start with the consumer signals part and I'll turn it to Barry for the second half. From the consumer signals, it's really, what I referenced early. I'm seeing trends that are strongest I've seen in quite some time in our Innerwear business. And there are things like POS, low to mid-single digit POS across so many segments of our basics.

Every month within a quarter and into the balance, frankly, into the back end of the second quarter are really strong trends and we're seeing that continue into the October month, as we mentioned earlier.

The rebounding in Intimates as we got our innovations in place, the return in the business, particularly in shapewear to positive POS growth in our core accounts, where we did the innovations is something we haven't seen in some time.

Our market shares were up nicely across our men's underwear, our women's underwear, as well as our family socks businesses, reinforcing the strength that that POS is going through and showing up in the way consumers report their purchases.

And so, all of those are very positive trends that are now linked as we look forward with the shipments aligning with that, tell us we're well-positioned to not only deliver that fourth quarter, but as we look to our space gains in basics next year, along with the additional innovations that we will introduce more broadly in our Intimates business, we feel really good about where that Innerwear business is going, and it's the consumers sending those signals first through their purchases and the share gains we're seeing..

Hi, Tiffany. It's Barry, good question. A couple of thoughts to think about there; first of all, in the third quarter, since you referenced it being up 140 basis points, we were very pleased with that and it was very consistent with our expectations, if not even a little bit better. On organic basis, I'll just tell you.

The favorable mix we've been seeing has generated a considerable amount of benefit, $20 million to $25 million in the quarter. And our synergies and cost savings have been generating considerable benefit there as well, probably like $15 million in the quarter, something of that nature.

And you know, since you're asking about gross profit, FX was a headwind of some $12 million. That's one that has certainly gotten more negative on us, since the last guidance, and so that would be factored into the fourth quarter. We mentioned that the sales impact there has moved up appreciably.

And in the fourth quarter, I expect FX to be probably $15 million gross profit headwind. And we've taken a conservative view as it relates to synergies and cost savings, although those will continue to contribute in the fourth.

And then, inflation has probably been just slightly higher, maybe $5 million higher than we were expecting earlier in the year for the quarter. So, that is the primary items that I would say to think about.

As it relates to mix, it will continue to be, I think, a very nice contributor in the fourth quarter, which speaks to the fact that Champion is growing, our International business is building and we'll have that organic growth we've spoken about.

So, we feel very good about it and we are positively inclined to 2019 when we get that pricing benefit to offset that raw material inflation..

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

Great. Thanks. Hey, guys. Good morning. I know you mentioned the impressive Champion growth globally.

Did you talk about how much it was in the U.S.? And then, can you just help us walk through just the 30% global constant-currency growth number versus the 7% or the 4% Activewear growth numbers to help us bridge the other components in there? And then, what would you expect Activewear to look like in Q4 based on the expected double-digit growth for Champion? Thanks..

Let me start on the first part of that and I'll let Barry do some of the parsing of the pieces. But from the standpoint of global Champion, as we noted, it was up 40% in the quarter, it's actually showing strengthening momentum. The U.S. trend is actually better than that. And so, while we don't parse out the pieces, I could tell you that the U.S.

is gaining at a very rapid pace, as well as the world, but it's helping drive that momentum at this point even higher.

Barry?.

Sure. And then, as it relates to Activewear in the fourth quarter, our guidance at the midpoint would be about 4% organic growth. In the quarter, that's essentially all organic. In the third quarter, that compares – it's basically the exact same organic growth rate, but Alternative Apparel goes into organic at that point.

So, we feel good about where it is. I'll tell you that from a domestic standpoint on Champion, that was up mid-30s on a year-to-date basis LTM, and we feel good about where it's going. That core Champion business continues to accelerate as well. So, we are feeling very good about our Activewear story..

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

Good morning. Thanks for taking my question. So, Barry, a lot of helpful commentary around cash flow for next year. You talked about the earn-out being down, the acquisition charges being down and pricing being up.

Just wondering, if there's any plans for stepped-up inventory investment in Champion and Innerwear, given the better trends you're seeing in both those businesses going into the fourth quarter.

And then, Gerald, my follow-up question to you would be, there's a lot of price increases being talked about all throughout retail at this point, particularly could hear a lot more if tariffs start to become a bigger issue.

So just wondering, with all the categories that are expected to see price increases, whether it's shirts, shoes, detergent, food, how do you think the consumer in that mass channel is going to respond to, what could be very high price inflation across the entire store at this point? Thank you..

Okay. Hi, John, good morning. I would say a couple of thoughts there. As you look at our cash flow guidance that's been updated here, there's really just two things to think about versus our last guidance. One is the after-tax GAAP net income impact of Sears and the more negative FX rate and that's about $20 million.

And then the second thing is, in fact, some incremental inventory to support Champion's growth, and that's roughly $40 million versus our last guide. As we've noted, the Global Champion is growing in excess of 30%. And we're seeing really strong bookings for the first half of 2019.

Incidentally, I'd say that we know we've actually lost some sales here in the back half due to limited inventory. So, we are investing in inventory to support that growth. As it relates to going into next year, if we need incremental inventory into 2019, at this point I would say this amount of inventory is appropriate.

Now if we needed incremental inventory next year that would probably be a very good, if you will, "problem" because that would imply that it's continuing to accelerate. So, we feel good about where we're positioned the business now at year-end for inventory and on the fuel of Champion's strong positioning..

From the standpoint of price increases, ours are relatively small. They're in the 4% to 5% range, and they're in our Innerwear business. There certainly is right now some heightened chatter about that. We've obviously been discussing this for some period of time. They're really offsetting input costs.

We haven't seen tremendous elasticity in this category, and in fact, when the price increases were much larger back in the days of the cotton bubble, what we saw was that in times of rising prices, consumers tend to move to brands as re-assurance that when they spend their money, they spend it appropriately.

And in our category, we know that price is really a distant fit in the ways that they choose a product and brands and the things that brands deliver are most important. So, I don't think that the pricing will really have an impact on the business..

And our last question comes from the line of David Swartz with Morningstar. Your line is now open..

Yes, thank you.

Can you talk about the store openings for Champion and your efforts to increase distribution? And was that the main source of the growth in Champion in the different geographies?.

Thank you for the question. Actually, Champion grew globally across all channels. It grew online; it grew across our wholesale customers. And it did grow in our own stores. And we use varying mixes of our own stores depending on the market.

International markets are a little less developed in retail, and we tend to have more stores, particularly in the Asian markets where we're now expanding into China as well as we have a strong presence in Japan. And we have a growing presence in Korea. And many of those are Champion-specific stores. You will see a few showing up in the U.S.

market as well. They are certainly selling locations for us, and we open them for profit. But they also then extend the brand. And we open those carefully. We're aware that the U.S. market is heavily stored, but when they're opened in the appropriate markets, they reinforce our brand and become a profitable entity.

So fewer stores here and appropriately placed, but all profitable and all doing very well..

That concludes today's question-and-answer session. I would like to turn the call back to Mr. Robillard for closing remarks..

Thank you. We'd like to thank everyone for attending our call today. 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..