Gildan Activewear Inc. (GIL) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Gildan Activewear Annual Shareholders Meeting. My name is Donald Berg, and I am Chair of the Board. I'm joined today by Glenn Chamandy, our President and Chief Executive Officer; Rhod Harries, our Executive Vice President, Chief Financial and Administrative Officer; and Lindsay Matthews, our General Counsel and Corporate Secretary. Although we are disappointed we cannot be with you in person today, our thoughts are with you, your families and your communities as we all navigate together through this unprecedented situation. Health and safety is important to Gildan, and we hope you agree that we did the right thing by moving to a virtual meeting format in light of the circumstances. We thank you for your flexibility and for being with us today. We will begin by conducting the official business of the meeting. After the official business is completed, Glenn and Rhod will address shareholders concerning the company's results and business plans. After that, we will answer any questions submitted during the meeting. The business of the meeting will be conducted in English. However, facilities for simultaneous translation in French have been provided to you. You may, of course, ask questions in either English or French. I will now call the meeting to order and will ask Lindsay Matthews to act as Secretary of the meeting and to take us through certain procedures for the meeting.

Thank you, Mr. Chairman. As this meeting is being held virtually through live audio webcast, we think it's necessary to set out a few rules for the orderly conduct of the meeting. Only registered holders of common shares of record as of March 4, 2020, or their duly appointed proxy holders who registered with our transfer agent and obtained a control number prior to this meeting are permitted to participate, ask questions and vote at this meeting. All other proxy holders are entitled to join the meeting as guests. Registered shareholders and duly appointed proxy holders who have already voted are not required to vote again unless they wish to change their vote. [Operator Instructions] When asking a question, we would ask that you please indicate your name, which entity you represent, if any, and confirm that you are a registered shareholder or a duly appointed proxy holder. Questions will generally be received shortly after they are submitted, but will only be addressed during the question period at the end of the meeting. Provided however, the questions that relate to procedural matters, which are the motions before the meeting, may be addressed during the meeting. Questions or comments containing inappropriate language or that are otherwise disruptive to the orderly conduct of the meeting for all shareholders will not be answered. Questions which were already answered or that are redundant or repetitive will not be answered. We would also like to advise you that today's votes on: One, the election of directors; two, the resolution to confirm the adoption and ratification of the shareholder rights plan; three, the advisory resolution on the company's approach to executive compensation; and four, the appointment of auditors will be conducted by a single electronic ballot. Registered shareholders and duly appointed proxy holders will be asked to vote on each item of business after all items of business have been presented. The Chairman will vote -- will move all motions, and no motion will need to be seconded. When you're asked to vote, you will receive a message on the virtual meeting platform requesting you to register your votes. You will only have a certain amount of time to do so. I would also like to draw your attention to the text on the current slide and to advise everyone that certain of the comments you will hear today are forward-looking statements that involve assumptions, risks and uncertainties that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. We also refer you to our disclaimer regarding forward-looking statements contained in our management's discussion and analysis for the 2019 fiscal year, which is available on the SEDAR, EDGAR and Gildan websites.

Thank you, Lindsay. I now appoint Computershare Investor Services as Scrutineer to report on the number of common shares represented in person and by proxy at this meeting and to report on the voting results. The Scrutineer has already provided me with their report on attendance at the meeting, and it shows that a quorum has been reached. I, therefore, declare the meeting regularly constituted for the transaction of such business as may properly be brought before it. I now present to the meeting the consolidated financial statements of the company for the fiscal year ended December 29, 2019, and the auditor's report therein. Copies of such documents have been made available through notice and access to our shareholders. We will now proceed with the election of the Directors. The Board has determined that 11 persons should be elected as Directors of the company and has proposed 11 candidates to hold such office for the ensuing year. In addition to Glenn Chamandy and myself, 9 independent and highly qualified individuals are being proposed for election as directors. Their biographies are included in the company's Management Information Circular made available to our shareholders. Each of the nominees has expressed a desire to serve as a Director of your company. I nominate each of the following persons for election as a Director of the company to hold office until the close of the next annual meeting of the shareholders or until his or her successors are duly elected or appointed. The nominees are: William Anderson; Glenn Chamandy; Maryse Bertrand; Marc Caira; Shirley Cunningham; Russell Goodman; Charles Herington; Luc Jobin; Craig Leavitt; Anne Martin-Vachon; and myself, Donald Berg. As mentioned at the beginning of this meeting, voting today will be conducted by a single electronic ballot after all items of business have been presented. We will, therefore, continue with the next item of business on the agenda, and you will be prompted to vote on the election of each Director and all other matters to be voted upon shortly after that. We will now turn to the item on the agenda relating to the resolution to confirm the adoption and ratification of Gildan's shareholder rights plan as set forth in the Management Information Circular. On February 19, 2020, the Board of Directors of the company adopted a shareholder rights plan and subsequently entered into a shareholder rights plan agreement with Computershare Investor Services. This rights plan renews Gildan's previous shareholder rights plan which expires today. And recommending the ratification of the shareholder rights plan, it is not the intention of the Board of Directors to preclude a bid for the control of the company. The shareholder rights plan encourages a potential acquirer to proceed either by way of a takeover bid, which satisfies certain minimum standards designed to promote fairness or with the concurrence of the Board of Directors. The shareholder rights plan was not adopted in response to any specific proposal to acquire control of the company nor is the Board of Directors currently aware of any pending or threatened takeover bid for the company. The shareholder rights plan will come into force at the close of business today, provided the resolution to confirm the adoption and ratification of the shareholder rights plan is approved by a majority of the votes cast by the shareholders who vote in respect of this resolution. The full text of the resolution is produced as Schedule C to the Management Information Circular, and a copy of the shareholder rights plan is available on SEDAR, EDGAR and the company website. I move that the resolution confirming the adoption and ratification of Gildan's shareholder rights plan set forth in the Management Information Circular be adopted. Again, as voting today will be conducted by a single electronic ballot, we will continue with the next item of business. The next item of business is an advisory vote on the company's approach to executive compensation as set forth in the management information circular. We are pleased to offer a say-on-pay vote to our shareholders as we are committed to maintaining an ongoing and active engagement process with you. We are confident that you will find that the Gildan's executive compensation program is based on a pay-for-performance approach that is aligned with the long-term interest of our shareholders. The results of the vote will not be binding on the Board. However, the Board will take into account such results together with other comments from shareholders when considering the company's approach to executive compensation in the future. The full text of the advisory resolution is reproduced as Schedule D to the Management Information Circular. I move that the resolution on the advisory vote on executive compensation set forth in the Management Information Circular be adopted. As voting today will be conducted by a single electronic ballot, we will continue now with the next item of business. The next item of business is the appointment of KPMG LLP as the company's auditors and to authorize the Audit and Finance Committee of the Board of Directors of the company to fix the remuneration of the auditors. I move that KPMG LLP be appointed as the company's auditors and that the Audit and Finance Committee of the Board of Directors of the company be authorized to fix the remuneration of the auditors. We will now proceed with the voting by single electronic ballot. As a reminder, today's items up for vote are: one, the election of directors; two, the resolution to confirm the adoption and ratification of the shareholder rights plan; three, the advisory resolution on the company's approach to executive compensation and for the appointment of auditors. You will now be prompted to register your vote in respect of each of the 4 items of business. Please register your votes by addressing the voting page when prompted, and by first, pressing on the For or Withhold button next to the name of each proposed Director; second, pressing on the For or Against button next to the resolution to confirm the adoption and ratification of the shareholders rights plan; third, pressing on the For or Against button next to the advisory resolution on the company's approach to executive compensation; and fourth, pressing on the For or Withhold button next to the resolution with respect to the appointment of KPMG LLP as the company's auditors. Once the electronic balloting closes, the voting page will disappear, and your votes will automatically be submitted. We will now provide you with a few moments to complete the electronic ballots, and we will reconvene shortly once the voting is complete. [Voting]

Thank you for waiting. I have received the Scrutineer's report on the voting results, and I can confirm the following. Regarding the election of directors, I am pleased to announce that William Anderson; Glenn Chamandy; Donald Berg; Maryse Bertrand; Marc Caira; Shirley Cunningham; Russell Goodman; Charles Herington; Luc Jobin; Craig Leavitt; and Anne Martin-Vachon have all been duly elected directors of the company. I am also pleased to report that the resolution confirming the adoption and ratification of the shareholder rights plan, the advisory resolution on the company's approach to executive compensation and the resolution for the appointment of KPMG LLP have all been carried. Detailed results for each vote will be available shortly on the SEDAR, EDGAR and Gildan websites. This completes the business on the agenda for the annual meeting. I'll now ask Glenn and Rhod to provide us a business update.

Thank you, Don, and good morning to all. Thank you for joining us today. I will start by talking about our actions regarding COVID-19. Then I'll update you on our Back to Basic strategy. Rhod will then cover a short financial overview of 2019, touch on our liquidity position and financial flexibility and provide a quick update on our first quarter of 2020. Next slide, please. Let me start by saying, I hope all of you listening today stay safe and healthy. From the beginning of the pandemic, our first priority has been the health and safety of our employees, our customers, our suppliers and all other partners. Our second priority was to ensure the financial health of our business by controlling our cost, deferring noncritical capital expenditures, managing our working capital and strengthening our balance sheet. Our third priority, to contribute to the shortage of personal protective equipment, to support local governments and to distribute to health care organizations through our wholesale and retail partners. The impact of COVID-19 has been significant on our business as social distancing measures and retail closures have made a significant impact on our sales. Our company has been successful navigating through difficult times before. We have an experienced management team, a strong business model and good financial position to weather this crisis. Next slide, please. Our Back to Basic strategy started in 2018. As we realigned our sales groups into one consolidated go-to-market strategy with a focus on SG&A reduction. In 2019, we continued the strategy, focusing on 3 key initiatives: simplify our product line, drive manufacturing cost savings and scale and reduce complexity in our distribution centers. We rationalized our SKU base by 45%, reducing from 32,000 to 17,000 SKUs in our Printwear product line. We closed down AKH, a high-cost textile facility, transitioned the production to a new state-of-the-art Rio Nance textile plant. We consolidated high cost share manufacturing. We divested our small high-cost sewing facilities and most recently, we closed down our Mexican operations in the first quarter of 2020. The equipment is being relocated into existing plants in our Central American locations to increase our scale and reduce our costs. We exited ship to-the-piece activities and closed down 11 distribution centers in 2019. We are very pleased with the progress of our Back to Basic strategy. We are well positioned to support organic growth in 3 key growth drivers. First, our Printwear business, they continue driving our North American focusing on our Fashion Basics growth. Second, within Printwear, our international markets where we are in early stages of our development. Our second driver is the Gildan family brand sold to retail and online, which includes our Gildan brand, Gold Toe, American Apparel, Under Armour, Comfort Colors, et cetera. Our third initiative that continue taking advantage is the shift to private label. By leveraging our large manufacturing strength, our long-standing relationships with key customers, the shift of global sourcing and to leverage our organizational infrastructure to take advantage of large programs. With that, I'd like to say stay safe and thank you and turn the call over to Rhod.

Thank you, Glenn. Good morning, everyone. I'm pleased to be addressing you today. I hope everyone is staying safe and keeping healthy, and my thoughts go out to those who have been directly affected by the virus. Let me start with a brief financial overview of how we finished off 2019. Over the last 5 years, we generated compound average growth rates in sales of 4%; 7% in adjusted EBITDA; 8% in adjusted diluted EPS; and strong free cash flow, totaling $1.7 billion. While these are all solid growth rates overall, in 2019, our sales were down, affected primarily by the challenging market environments we saw in the U.S., Asia and Europe in the back half of the year, which hampered demand for imprintables. We were also impacted in 2019 by our decision to exit certain low-margin sock programs on the retail side. There were positives, however, and we were particularly pleased by the strong double-digit underwear sales growth we saw in 2019, which stem from our new private brand men's program, which continues to do well and which has allowed us to win additional shelf space as we've moved into 2020. In addition, in 2019, we saw higher sales of Activewear in retail driven by growth in our global lifestyle brand business and strong sales in the craft channel. On the profitability side, adjusted gross margins last year were down 100 basis points due to higher raw material costs, inflation and foreign exchange impacts, which offset stronger product mix and net selling prices. We were able to offset some of this pressure by improving SG&A expenses as a percentage of sales by 40 basis points, which reflected our continued focus on driving cost efficiencies throughout our system. So the combination of all these factors as well as the impact of a trade receivable impairment related to one of our imprintables distributor, which we saw earlier in the year, led to lower adjusted EBITDA of $548 million and adjusted earnings per share of $1.66 in 2019. This translated into lower free cash flow of just over $225 million last year, which we returned to shareholders via dividends and share repurchases. Turning to the next slide. I would like to touch upon our financial flexibility, which has become a key consideration as we have moved through the first quarter of 2020, squarely into the impact of the COVID-19 pandemic. When we ended 2019, we had $862 million of net debt drawn on $1.6 billion of facilities, with our net debt-to-adjusted EBITDA leverage ratio at 1.6x. This leverage was well within our framework of 1 to 2x and provided us with good access to liquidity. When we started 2020, we did not think we would need to utilize all of this liquidity, but by mid-March, with the onset of COVID-19, we elected to draw down on the remaining available portion of our revolving long-term bank credit facility, which was not drawn, effectively positioning us with just over $500 million of cash and $50 million of credit lines. As the effects of the pandemic continue to unfold over the last few weeks, given the uncertain duration of this crisis and the broader economic impacts, we have moved forward with major additional actions to strengthen our balance sheet and liquidity position further. On April 6, we secured an additional $400 million of long-term debt. And today, we are now positioned with liquidity of over $950 million. This is together with $1 billion of finished goods at our distribution centers, which we can use to service our customers, while our manufacturing facilities remain idle, gives us good flexibility to drive necessary operating actions, reducing fixed cost and discretionary spend, delaying noncritical capital requirements and supporting customers while managing credit risk as we navigate through this crisis. Finally, after suspending our share repurchases under our buyback program in early March, yesterday, we announced the suspension of our quarterly dividend, starting with the first quarter. Let me emphasize that returning capital to you, our shareholders, is a key priority for Gildan, and we remain fully committed to doing so when the environment normalizes. However, these actions, together with all the other actions we have taken, have been necessary to ensure we are in the strongest position possible to move through this evolving challenging and highly uncertain environment. Before wrapping up, let me give you a quick overview of our first quarter results, which we announced end of day yesterday, and which reflect the demand downturn caused by COVID-19. Specifically, although during the first 2 months of the quarter, our sales performance was relatively on track with what we were expecting, we saw a sharp drop in March due to the pandemic, which is typically the biggest sales month of the first quarter. Consequently, we generated sales of $459 million in the quarter, down 26% over last year. Our imprintable sales were more significantly impacted. And while retail sales were also down as many retailers started to close stores and people stayed home, the decline in demand was less severe as some channels like mass and e-commerce fared better than other channels. We saw significant gross margin pressure in the quarter as we absorbed labor and overhead and other COVID-related costs, while manufacturing facilities were idled. These costs offset the benefits of stronger product mix stemming from improved profitability on our underwear business, lower raw material costs and most notably, the benefit of an improving cost structure from manufacturing optimization initiatives under our Back to Basic strategy. The COVID-19-driven environment also triggered the recognition of certain impairment costs. First, although we did not incur any significant customer-specific accounts receivable write-offs, we increased our allowance for expected credit losses to reflect heightened credit risk in this environment. Second, this quarter, we recorded an impairment charge of $94 million relating to goodwill and intangible assets acquired in previous sock and hosiery business acquisitions. Although we believe that our hosiery business is well positioned from a competitive perspective, and the longer-term outlook for this part of our business remains unchanged. The impairment review was triggered by the broad impact of the pandemic on market valuations. So after adding up all these elements, we reported a GAAP loss of $0.50 per share for the quarter and adjusted EPS of $0.06 per share compared to $0.11 in the prior year quarter. Finally, although it's unclear how things will evolve with the ongoing phases of the pandemic given the recent demand trends we have seen in April and given broader economic expectations, we do expect our sales will be significantly down in the second quarter of 2020. And this, combined with the impact of fixed cost absorption, while our manufacturing facilities remain idle, we'll likely see us incur a significant earnings loss in the second quarter of 2020. Despite this negative outlook, however, we believe we have taken the necessary actions so far in response to the COVID-19 pandemic, and we believe we are well positioned to be able to navigate through this challenging environment, which we fully recognize could extend at least through the remainder of the year and into 2021. So turning to the next slide, I'd like to conclude our business update today by reiterating some of the themes that Glenn and I have talked about in this presentation. Gildan is a leader in this industry, and we have a strong foundation to support us going forward. We've made significant investments in building our world-class low-cost manufacturing base and have developed a skill set for manufacturing excellence. Our commitment to operating responsibly and sustainably is embedded in our business strategies. Being vertically integrated, we control every aspect of our manufacturing process, and we can ensure that we are employing strong ESG practices. This is not only our responsibility, but a critical driver of our success. We've built a strong brand portfolio with our Gildan family of brands with customer relationships that span over decades, and we intend to continue to develop those relationships. We have a strong balance sheet and financial flexibility. And most importantly, Gildan's key strength is our people. We know that anyone can buy the equipment we use in our manufacturing operations but no one can replicate the quality and talent of our people. Our Back to Basic strategy that we've been implementing over the last 2 years has put us in a better position to deal with the current difficult circumstances, but also with what comes afterwards as we move forward. And finally, given our history, this is not the first time we've faced challenging environments, and our resilience and adaptability has always allowed us to successfully navigate through tougher markets, and we are confident that we will emerge stronger. This concludes our remarks, and I will now turn it back over to Don. Thank you, stay healthy and safe.

Thanks, Rhod, and thank you, Glenn. Before concluding this meeting, we would be pleased to answer questions from any registered shareholder or duly appointed proxy holder who wishes to address the meeting. For each question we answer, I will read out the question as well as the name of the person who asked the question. And if applicable, the entity that the person represents. We ask that you please limit your questions to topics relating to today's subject matter and to keep your questions short and to the point. We would also like to remind you that questions which were already answered or that are redundant or repetitive will not be answered. The question period will now start.

We have a question that has come in from Maria Reit. Maria asks where are the masks, which you are producing, going to be distributed? And Glenn, I think I will pass that question over to you for a response.

Thank you, Don. The masks and gowns. First of all, we're going to make about 150 million masks and gowns we've projected so far, I think, with more to come. And the focus is to support local governments and distribute to health care organizations, and we're utilizing both our wholesale customers and our retail partners to bring the products to market.

Thanks, Glenn. I'm going to just wait a couple of moments to see if any other questions happen to come in. I don't see any further questions at this time. So in closing, on behalf of the Board, I want to thank Gildan's management team and all of the employees of Gildan on all the great work they are doing and the sacrifices they are making as they guide the company through this unprecedented pandemic. We are fortunate to have a strong, experienced management team. And while the future remains very uncertain, we applaud the actions you have taken to date. And you have all of our support as you manage through the crisis. In addition, on behalf of the Board and the management team, I want to thank our shareholders for their ongoing confidence and continued support. With that, I declare that this meeting is now terminated, and we thank you for taking the time to be with us today. Thank you.