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Edited Transcript of GIL.TO earnings conference call or presentation 23-Feb-17 1:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Gildan Activewear Inc Earnings Call

MONTREAL Feb 23, 2017 (Thomson StreetEvents) -- Edited Transcript of Gildan Activewear Inc earnings conference call or presentation Thursday, February 23, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Sophie Argiriou

Gildan Activewear Inc. - VP of Investor Communications

* Rhod Harries

Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer

* Glenn Chamandy

Gildan Activewear Inc. - President & CEO

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Conference Call Participants

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* Kenric Tyghe

Raymond James & Associates, Inc. - Analyst

* Mark Petrie

CIBC World Markets - Analyst

* Derek Dley

Canaccord Genuity - Analyst

* Vishal Shreedhar

National Bank Financial - Analyst

* Stephen MacLeod

BMO Capital Markets - Analyst

* Sabahat Khan

RBC Capital Markets - Analyst

* Jim Duffy

Stifel Nicolaus - Analyst

* Andrew Burns

D.A. Davidson & Co. - Analyst

* Keith Howlett

Desjardins Securities - Analyst

* Anthony Zicha

Scotiabank - Analyst

* Chris Li

BofA Merrill Lynch - Analyst

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Presentation

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Operator [1]

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Welcome to the Q4 2016 Gildan Activewear earnings conference call. My name is Jason, and I will be your operator. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note this conference is being recorded.

I will now turn the call over to Sophie Argiriou, VP, Investor Communications. You may begin.

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Sophie Argiriou, Gildan Activewear Inc. - VP of Investor Communications [2]

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Thank you, Jason. Good morning, everyone, and thank you for joining us. Earlier this morning, we issued our fourth quarter and full year 2016 press release. Gildan's management's discussion and analysis and its audited consolidated financial statements will be filed with the Canadian Securities Regulatory Authorities and with the US Securities and Exchange Commission on/or before February 27, 2017.

Glenn Chamandy, our President and Chief Executive Officer; and Rhod Harries, our Executive Vice President and Chief Financial & Administrative Officer are on the call today. We will begin with Rhod taking you through our fourth quarter and full year performance and our business outlook, which will be followed by a question-and-answer session during, which Glenn and Rhod will respond to your questions.

We would like to remind everyone that certain statements included in this conference call may constitute forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve unknown and known risks, uncertainties, and other factors, which could cause actual results to differ materially from future results, expressed or implied by such forward-looking statements. We refer you to the company's filings with the US Securities and Exchange Commission and Canadian Securities Regulatory Authorities that may affect the company's future results.

And with that, I will turn the call over to Rhod.

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [3]

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Thank you, Sophie. Good morning, everyone, and thank you for joining us. Today, we announced 2016 results for the fourth quarter and full year, and provided our expectations for sales and earnings growth in 2017. On a full year basis in 2016, we generated sales essentially in line with our most recent guidance of $2.6 billion, and adjusted diluted EPS of $1.51, just above our guidance of $1.48 to $1.50. Overall, we are pleased to have successfully managed through fairly challenging market conditions for the year and the anticipated headwinds in 2016 that we had initially projected.

We are particularly pleased with the record level of free cash flow we generated in 2016 and the $470 million we were able to return to shareholders through dividends and share repurchases. We believe next year will be another record year of free cash flow and combined with our confidence in earnings growth, we announced this morning that we will be raising our dividend by 20% for the fifth consecutive year.

We also announced the renewal of our NCIB program to repurchase up to 5% of our outstanding common shares. In 2016 we completed two acquisitions and earlier this year we successfully emerged as the winner bidder for the American Apparel brand. Confidence in our long-term strategy, cash generating capabilities, and our strong balance sheet continues to place us in an attractive position to execute on all of our capital allocation priorities, including organic growth, acquisitions and returning capital to shareholders.

Now let me take you through our fourth quarter results. Consolidated sales of $588 million were up 8% with increased sales in both segments in the quarter. In the midst of a more challenging retail environment than we anticipated when we reported for Q3.

Our Printwear business performed right on plan with sales increasing more than 14% to $326 million. After excluding the $30 million sales contribution from Alstyle, we were pleased to achieve 4% organic growth in the quarter. The increase was driven by higher sales of fashion basics and double-digit growth in international shipments, offset in part by anticipated lower net selling prices and foreign exchange.

Branded Apparel sales in the quarter totaled $262 million, up just over 1% compared to the fourth quarter last year. The Peds sales contribution of $20 million and positive point of sales growth for our products in the quarter, offset the effects of weak store traffic trends and a weak holiday period, which drove retailers to limit replenishment and manage down inventory levels during the fourth quarter.

In addition, Branded Apparel sales were impacted by the planned exit from certain private label programs. We were very pleased with our ability to grow our market share for the Gildan brand in a tough retail market during the quarter. While point-of-sales for men's socks and men's underwear for the total market were down in the fourth quarter, Gildan unit POS in these categories was up. And, in particular, in men's underwear we continue to see strong double-digit unit POS growth.

Unit market share in men's underwear for the Gildan brand was 9.2% for the December quarter, up 210 basis points compared to December quarter last year. As we moved into January of 2017, we hit and exceeded our 10% market share target in this category with Gildan branded men's underwear attaining a 10.9% market share, reflecting the positive impact of our ongoing marketing efforts and new features and reformatted package sizes for our product offerings, as well as expanded distribution.

In the men's socks category, where the Gildan brand holds the number one position, market share for the quarter was 22.1%, up 220 basis points compared to December quarter last year. So as I mentioned, we are very pleased with these market share gains which fundamentally underpin our long-term strategy to grow sales and margins in this business.

Turning back to our consolidated performance, gross margin for the quarter was 26.7%, slightly up versus Q4 2015. The benefits from lower raw material costs and other input costs were largely offset by expected lower Printwear net selling prices. Consolidated operating margins in the quarter of 11.9% were down from 13% in the prior year quarter, mainly as a result of higher marketing and advertising expenses and the impact of SG&A deleveraging in Branded Apparel due to lower sales driven by the unanticipated impact of retailer destocking.

Printwear operating income of $69 million was up 9% compared to last year. The operating margin was 21%, down 90 basis points over the fourth quarter in 2015. Although raw material costs were favorable compared to last year, expected lower net selling prices and currency headwinds as well as the transitional dilutive impact of the Alstyle acquisition offset this benefit.

Finally if we look at the full year, we were pleased with Printwear operating margins of 23.5%, in line with 2015 margins and in line with our original guidance for the year. Branded Apparel operating income was $24 million or 9.1% of sales in the quarter, down from $31 million or 12% in the fourth quarter last year. The decline in operating margin was mainly due to re-timed marketing and advertising expenses and SG&A deleveraging resulting from lower organic sales due to retailer destocking in the period.

For the full year, Branded Apparel's operating margin was 9.1%, up 20 basis points over 2015. At a consolidated level, we generated adjusted diluted EPS of $0.32 in the quarter, above our implied guidance of $0.29 to $0.31, and up 14.3% compared to the fourth quarter in 2015. The increase over the prior year was primarily due to higher gross profit and income tax recovery in the quarter and the benefit of share repurchases during the year, which were partly offset by higher SG&A and financial expenses.

Moving to our strong free cash flow performance, we generated $142 million of free cash flow in the quarter, $43 million or 43% higher than the fourth quarter last year. This resulted in record free cash flow for the full year of $398 million, up 151% over the prior year, driven by higher cash from operating activities including strong working capital management and lower capital expenditures than in 2015. Capital expenditures of approximately $140 million for the year came in slightly lower than our previous projection of approximately $150 million, and included investment towards the ramp-up of the Mocksville facility, development of Rio Nance 6, and capacity expansion in Bangladesh.

During the fourth quarter of 2016, we bought back approximately 1.6 million common shares under our NCIB program for a total cost of approximately $43 million. This brought the total amount of share repurchases for the year to 13.8 million shares at a total cost of $395 million.

Finally, we ended the year with net debt of $562 million and a leverage ratio of one times adjusted EBITDA in line with the leverage framework we put in place at the beginning of 2016.

Now, before I cover our outlook for 2017, I would like to briefly talk about the American Apparel acquisition. We were pleased to emerge as the successful bidder of the auction with a final bid of $88 million. American Apparel is a strong brand with a premium positioning in the fashion segment in Printwear. We are confident that we can leverage our deep and extensive distribution network both in North America and internationally to grow the brand and achieve attractive returns on this transaction.

We have quickly begun implementing our integration plans, which include leveraging our manufacturing network, while at the same time working on a supply chain to also support Made in the USA product. As we move through this transitional period, we are leveraging inventory we purchased from American Apparel and have secured contractors in the US to support production.

Now let me cover our guidance for 2017. Adjusted EPS is expected to be in the range of $1.60 to $1.70, which at the midpoint of the guidance range represents growth of 9% over 2016 on overall high single-digit sales growth.

Printwear and Branded Apparel sales in 2017 are each expected to increase in the high single-digit range. Adjusted EBITDA guidance for 2017 is $555 million to $585 million. Printwear sales growth guidance assumes unit sales volume growth, including continued penetration in the fashion and performance segments of the North American market and double-digit unit sales volume growth in international market.

Printwear sales are also expected to benefit from favorable product mix in 2017, while foreign exchange impacts on international sales are now expected to be unfavorable, primarily related to the weakening of European currencies relative to the US dollar. While price increases have been implemented in Europe to offset foreign exchange impact, there is typically a temporary misalignment of price increases and changes in foreign exchange.

Projected sales growth in Branded Apparel in 2017 reflects the impact of increased shelf space and new programs based on commitments from retailers, as well as favorable product mix partly offset by the impact of approximately $20 million related to the exit of certain private label programs.

The incremental impact of the acquisition of Alstyle, Peds and American Apparel on adjusted earnings in 2017 is expected to be $0.05 to $0.07 per share on projected incremental sales of approximately $160 million to $185 million. While Peds and Alstyle are expected to be accretive to earnings in 2017, we have conservatively assumed that the impact of American Apparel on earnings will be neutral in 2017, as we ramp-up our supply chain and we will see accretion in 2018.

The positive factors contributing to earnings growth in 2017 are expected to be partly offset by related increases in SG&A expenses and higher income taxes. The company's income tax rate for 2017 is expected to be approximately 5%. We are projecting operating margin expansion in 2017, driven primarily by margin expansion in Branded Apparel.

On the earnings growth profile for the year, we expect earnings growth in 2017 be weighted to the first half of the year with strong earnings growth in the first quarter, in particular. The overall net impact of net selling prices, cost savings from capital projects and raw material costs is expected to be neutral to earnings for the year.

The net impact from these factors is projected to be unfavorable in the first half of the year -- sorry, is projected to be favorable in the first half of the year and unfavorable in the second half. We will also see the wrap-around impact from the Alstyle and Peds acquisitions in the first half of 2017 as they were completed in the second and third quarters of 2016, respectively.

Moving on to cash flow guidance. We are expecting another record year of free cash flow generation in excess of $400 million. Capital expenditures are projected to be approximately $125 million for the year, related primarily to investments in textile capacity, including the continued development of the Rio Nance 6 facility in Honduras, capacity expansion in Bangladesh, as well as investments in distribution and selling capacity aligned with increases in textile capacity. Construction of Rio Nance 6 will now be completed by the end of 2017 available to support 2018 sales.

So wrapping up, we were pleased with our performance in 2016, given the challenging environment and are comfortable with the targets we have set for 2017 in this context of current market conditions.

Our outlook for the business remains promising and with our strong free cash flow and balance sheet capacity, we believe we are well-positioned to drive organic growth, pursue complementary acquisitions while at the same time, returning capital to shareholders.

Thank you. And I will now turn the call back over to Sophie.

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Sophie Argiriou, Gildan Activewear Inc. - VP of Investor Communications [4]

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Thanks, Rhod. That concludes our formal remarks. Before we move to the Q&A session, I ask that you limit the number of questions to two in order to give everyone the opportunity to ask a question and we will circle back for a second round if time permits.

I will now turn the call over to the operator for the question-and-answer session.

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Questions and Answers

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Operator [1]

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Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Kenric Tyghe from Raymond James.

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Kenric Tyghe, Raymond James & Associates, Inc. - Analyst [2]

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Thank you. Good morning. Glenn, just with respect to your outlook what strikes me as absent in the outlook given current cotton, is any discussion around pricing or potential price increases given what has been going on in the cotton markets. Could you speak to your conservatism on the guidance and is it just a reflection of there is no setting of back to school pricing or no real visibility as yet, and it is a little early to be making any determination as yet on how prices settle out?

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [3]

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Well, like Rhod said in his remarks, we have increased prices in Printwear in December, which was a modest price increase really to support our cost of 2017. We do have selective price increases going into effect during the year in Branded as well. And if cotton remains at the level it is today, we will most likely take further action on pricing as we move into 2018, that is the way you should think about it.

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Kenric Tyghe, Raymond James & Associates, Inc. - Analyst [4]

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Great. Thank you. And then, just on American Apparel. The contract manufacturing and the effect being sort of a net neutral in the year, is that again just a conservative stance given that it is early days and perhaps we should look at that as being something that could be a moving target through the year, how should we be thinking about the American Apparel integration, as we move through the year?

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [5]

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Well, I think, you are right. I mean, look at it is early days for us. We just recently as couple weeks ago took over the company. We are very excited about it. It is a premier brand in our segment. It really is going to help us to focus in capturing a bigger share of the fashion basics. And it is going to be priced at -- it will be our highest price point product line within Gildan. The great news is, is that we are going to leverage our infrastructure and our distribution network in Printwear. The acquisition will be integrated seamlessly into Gildan, and the total integration from order to cash and distribution will be complete within the month of March. So, it should go relatively quickly.

Our big challenge is obviously re-feeding the line and getting the supply line up and running. Customers have brought a lot of inventory, pre-bankruptcy to support the sales, and we should start shipping product towards the end of April and the beginning of May.

So we are excited about it. Yes, there could be some potential upside in American Apparel obviously, but it is early days, and we just need to get a little bit more understanding. And we are really excited about the opportunity.

And maybe one last point is that we are still also looking at evaluating our strategy in terms of our consumer strategy. The Printwear strategy is fully implemented, and we have very good visibility on it. But we have not really defined a 100% our consumer strategy, which we are in the process of doing.

And one last point, I would add out is that where we really see the American Apparel brand opportunity is really also in our international markets. I mean, we have huge interest from all of our international customers to carry this brand. So we think we have again had a great acquisition, and we are really excited about it. And as we get into next quarter, we will probably have a little bit more understanding and light on the situation.

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Kenric Tyghe, Raymond James & Associates, Inc. - Analyst [6]

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Thank you. I will leave it there.

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Operator [7]

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Thank you. Our next question comes from Mark Petrie from CIBC.

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Mark Petrie, CIBC World Markets - Analyst [8]

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Hey. Good morning. I wonder if you could just talk a little bit about the US retail environment and the impact of destocking through Q4 and how that is trending. Thank you.

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [9]

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Okay. Well, look, I think that the market is obviously challenging. We have not seen a big rebound so far in January and one of the contributors to that could be that the tax refunds are not helping the situation because apparently they are late. But putting that aside and even putting aside the destocking because destocking for us is irrelevant, I mean that is just a point in time.

I think the most important thing for us is really the growth that we have. And our core business basically and our focus in our Gildan brand strategy -- our sock unit POS in the quarter was up 9% and the overall market was down 1.4%. And in underwear the market was down roughly 3% in the quarter, and we were up 25% to 9% market share.

So we are really, I think, achieving our goals and driving our strategy basically even in a bad market. And then, as we moved into January as Rhod said our sock POS was up 4.5% in a flat market, but our underwear unit POS was up 41% in January and we have a 10.9% share achieving our target of 9%. And you know we have taken a long-term approach to driving our market share and you know we are constantly working on improving our product features.

You know, we have new product features in our core underwear. We have reformatted our package sizes. We have launched new products this year, our stretch product which is out today, which is doing very well. We have expanded our shelf space. We have expanded our distribution. So, all these things are leading to a long-term growth rate in market share and in our segment. So despite the challenging market, we think that we are positioned well.

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Mark Petrie, CIBC World Markets - Analyst [10]

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Okay. Thanks. And could you just talk a little bit about how your business did online and e-commerce has been performing, and what your plans are to grow that business for 2017 and beyond?

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [11]

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Well, sure. Look like we said in previous calls, I mean, our focus is on online and e-commerce. Obviously, at this -- look, everybody is racing to drive an e-commerce strategy and we have done very well this year. Our e-commerce businesses ended up the year around 5% of our revenue base in branded, up significantly over last year.

So we are still in the beginning stages. I mean, I would say that, look, there is a huge opportunity for us. We are not where we need to be today, but that is the emphasis of the senior management team and our Board is to make sure that we take advantage of the opportunity. So we are focused on it as we go forward into 2017.

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Mark Petrie, CIBC World Markets - Analyst [12]

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And sorry just to follow-up on that, I mean, is the capital that you need expand in order to accelerate that growth, or as you said be where you need to be or is it just simply execution?

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [13]

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Yes, it is combination. It is not only capital. I mean, it is really more of an execution. It is having the ability to drive our marketing strategy, our sales strategy and our distribution strategy which we are making huge strides for. We are just not where we want to -- where we need to be really to make it happen. But we are putting the resources and the structure in place to continue penetrating. We are doing well already, we are just now where we want to be and that is upside to as we go forward into the future.

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Mark Petrie, CIBC World Markets - Analyst [14]

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Very helpful. Thank you very much.

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Operator [15]

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Thank you. Our next question comes from Derek Dley from Canaccord Genuity.

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Derek Dley, Canaccord Genuity - Analyst [16]

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Yes. Just one quick housekeeping question here. Does the EPS guidance you guys gave for 2017, does that include completion of the NCIB, the 5% NCIB?

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [17]

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When you look at the guidance that we gave, the top end of the range assumes that we would do the NCIB, obviously we will see how the year goes.

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Derek Dley, Canaccord Genuity - Analyst [18]

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Okay. But the bottom end does not then? That is what you are saying.

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [19]

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Does not.

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Derek Dley, Canaccord Genuity - Analyst [20]

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Okay. Good. Thank you. In terms of the large retailer inventory destocking, I mean, this has been something that is kind of been plaguing your Branded division for quite some time now. Is there any visibility on to -- is this likely to end any time soon or do you expect this destocking to continue?

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [21]

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We think that the inventory levels are in line with our customer's expectations. And, again, look at -- I mean, at the end of the day, destocking is a point in time really what the driving factors are, are the market share and POS gains, and that is I think how we really need to measure our business. But as far as the destocking is concerned, we think, it is at a level that it needs to be.

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Derek Dley, Canaccord Genuity - Analyst [22]

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Okay. And maybe just one more if I can, in terms of the -- you commented on a slight increase here in SG&A spending going forward. Where is the bulk of that going to be directed?

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [23]

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Well, some of it is going into our distribution capacity as we look to support our businesses. That would probably be the main driver of our SG&A increase this year.

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Derek Dley, Canaccord Genuity - Analyst [24]

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Okay. Great. Thank you very much.

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Operator [25]

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Thank you. Our next question comes from Vishal Shreedhar from National Bank.

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Vishal Shreedhar, National Bank Financial - Analyst [26]

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Hi, thanks for taking my questions. Just on the CapEx, $125 million seems to be coming down for 2017, down year-over-year, and I think 2017 was lower than you indicated. Is there any room to take that CapEx lower? Just want context on that given your expectations to increase ROIC over time.

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [27]

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Well, look, we are in the process of obviously still committing to put in our $1 billion of capacity to support our growth. We are building Rio Nance during this year, and putting all the infrastructure in place to support potential start-up for 2018.

We also have been very pleasantly surprised with our Mexican facility which has brought on additional capacity, which has really changed our look at CapEx as we looked into the future because of the fact that the plant is a large state-of-the-art facility with room to expand which we are in the process of doing.

So I think the way you need to look at it is that we are spending our capital right now this year partly to complete the start-up of six. We are doing a little bit of work in our AKH facility and we are completing some yarn investments as well as some distribution, some selling. So it is spread out everywhere. So I mean if you look at I think in the long range where we think CapEx would be it is probably pretty much in line with the $125 million.

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Vishal Shreedhar, National Bank Financial - Analyst [28]

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Okay. And in terms of online, seems to be a big focus for many people in the apparel space. Could you give us some benchmarks of where you are right now, maybe mix of sales online, so we can measure to see how you perform over time as you put more focus on it?

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [29]

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Well, online, right, I said just recently is about 5% in our Branded revenues.

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Vishal Shreedhar, National Bank Financial - Analyst [30]

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Okay. And is online overwhelmingly an opportunity in branded non-Printwear?

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [31]

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Well, Printwear is a little bit -- the answer is where we are measuring online today is really on retail consumer, direct-to-consumer. That is what we consider online. What is driving Printwear and growth rates in Printwear is the capabilities of companies that are selling product via internet.

Like, to give you an example, before that happened, if you wanted to have a birthday party for your child, then you needed 14 shirts. So you basically probably would not be able to find it. Today, you can go online to various online suppliers and just send a picture of your daughter or your son. And bing, bang, boom, and two days later you got T-shirts at your house. So online is driving business in Printwear via the screen printer, et cetera. So it is actually been, I think, a catalyst that keeps supporting the growth rate of Printwear.

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Vishal Shreedhar, National Bank Financial - Analyst [32]

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Okay. And that 5% includes both pure plays and the retailers that you are operating. Is that right?

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [33]

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Yes.

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Vishal Shreedhar, National Bank Financial - Analyst [34]

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Or are the retailers --

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [35]

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That is correct.

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Vishal Shreedhar, National Bank Financial - Analyst [36]

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Okay. Thanks a lot.

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [37]

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Okay.

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Operator [38]

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Thank you. Our next question comes from Stephen MacLeod from BMO Capital Markets.

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Stephen MacLeod, BMO Capital Markets - Analyst [39]

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Thank you. Good morning. I was just wondering if you could provide some more color around the breakdown of sales for your acquisitions in 2017?

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [40]

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Yes. If you look at the overall impact of acquisitions and incremental impact of acquisitions in 2017, it is a $160 million to $185 million. The way to think about that is about $60 million related to Alstyle, about $50 million related to Peds, and about $50 million to $75 million related to American Apparel. We will see where we land. But that is sort of the general breakdown between the three acquisitions.

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Stephen MacLeod, BMO Capital Markets - Analyst [41]

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Okay. So on a run rate basis, would American Apparel sort of still be in that $100 million range?

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [42]

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Yes. I mean, the $50 million to $75 million obviously takes in not a full year of sales.

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Stephen MacLeod, BMO Capital Markets - Analyst [43]

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Okay. That is great. And then just circling back on the retail business, I mean very strong market share gain despite a weak retail environment and lower destocking. Can you just provide a little bit more color like where are you seeing that growth, is it with specific customers or is it pretty broad-based, specific product, just a little bit more color on that would be helpful?

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [44]

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Well, our unit growth in socks is driven amongst all of our customers, as well as our underwear share. So we are seeing it across the board and that is really been driving obviously our sales growth. I mean, one of the, I would say, negatives in the quarter is that our core business was down and was obviously offset by driving of our underwear and our sock market share, but our core business in department stores was negative in the quarter. So what is really driving our growth going forward will be our core business of our Gildan brand, our Peds and our underwear market share.

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Stephen MacLeod, BMO Capital Markets - Analyst [45]

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Okay. And are those market share gains coming from more with new retail program wins or is it higher POS sales?

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [46]

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It is a combination of higher POS and our existing products, expanded shelf space and as well as new programs and new products. So, it is combination of assortment of different things, so as we move into 2017 we are going to continue to increase the shelf space. We have new product launches in 2017 and we are constantly -- I mean what should grow our market share as we go forward and that is in underwear. And in socks we are actually going through a pretty good change in terms of our product features and building up our quality features in our socks which will be set to sometime in the, let us say, fall, our June, June-July period. So we are always looking to continue driving our share by having better quality, better prices obviously, and which was driven and made the success for Gildan from day one.

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Stephen MacLeod, BMO Capital Markets - Analyst [47]

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Okay. That is great. Then just one final one if I could. On the American Apparel business, have you made a decision or have you come to like a final -- your decision on whether you would be manufacturing in the US for American Apparel or integrated into your existing --

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [48]

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We are definitely going to manufacture product in USA in support Made in USA product. But at the same time, we think that there is an opportunity to offer product that is more price centric basically, and allow us to drive the potential of the brand. And as well as using that also to help us to support our international growth as we go forward.

So we are going to do a combination of both. We think that we are going to continue to support their core main USA business, but we also are going to offer product where they could not compete before at price points relative to the competitive landscape.

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Operator [49]

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Thank you. Next we have Sabahat Khan from RBC Capital Markets.

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Sabahat Khan, RBC Capital Markets - Analyst [50]

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Thanks. I just wanted to maybe get some color on the Printwear outlook for 2017. It looks like taking into account the acquisitions, you are probably looking for low single-digit top line growth there. Can you talk about how your traditional Printwear business in the US is expected to do? And then, how much growth you are expecting from the fashion apparel and how the mix looks, kind of, going forward in terms of how much each of those two are going to make up your sale?

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [51]

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Okay. Well, first of all, the market conditions in Printwear are just okay. I mean, they are not gangbusters. So, just as a segue into really our outlook for 2017. What is driving really our business in Printwear in the US market really is our fashion base. Our organic sales are driven by our fashion basics, and will be continue to be driven by our fashion basics and our performance.

We have new product features in both of those categories being launched in 2017. We will also benefit from continued growth in our international markets which we saw in 2016 and we think it will continue in 2017. And then we will also get the benefit of the Alstyle and American Apparel acquisition.

So, we add all this together, we are going to have high single digit growth. And we think we are well positioned, both domestically and internationally, to continue supporting all of our brands and we are pretty excited about 2017. And one last thing I would add to that is that, we have only put through a small modest price increase in beginning of December, and if cotton stays at the levels it is now, there could be potential room for further price increases to support 2018.

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Sabahat Khan, RBC Capital Markets - Analyst [52]

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All right. Thanks. And then just on the Alstyle, I know when you guys acquired it, there was a lot of capacity in that facility. How much has it ramped up and kind of how is the progress coming on improving margins at Alstyle, I think, there was some opportunity to bring it up to a level that Gildan was doing?

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [53]

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We will be close -- I mean, bring up margins in Alstyle as we went through this year close to the Gildan model. The plant is running very effectively. And maybe just to point out in terms of the overall capacity of Gildan, we have ample capacity to support if sales are better than we anticipated we have the capacity to support it. But we are also mindful of our working capital, and that is a big focus for the company.

We are projecting to generate significant free cash flow again this year. And so we will manage our capacity based on supporting our working capital requirements.

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Sabahat Khan, RBC Capital Markets - Analyst [54]

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If I could get one more quick one in, terms of -- giving your strong free cash flow for next year, what is the acquisition outlook? Is there a segment you are more focused on, any comments there?

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [55]

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Well, look we are constantly looking for acquisitions. I mean our first use of case is acquisition. I mean that is just what we have stated for many years now and I think we have got a pretty good track record on acquiring companies, and have built up the skill set of integrating these companies seamlessly into our organization.

And our appetite for acquisitions is varied. In both Alstyle and Peds have been 100% fully integrated into Gildan systems. The frontend, order to cash, distribution and they were complete by December 31st of this year. And the American Apparel will be fully integrated as we go into next month. And all of our integration really has been seamless to us from a cost perspective in terms of integrating these companies into our organization.

So we have the bandwidth to continue to support further acquisitions. You know, we are not committing to we have something on our table, but we are constantly looking today for ways to continue to support our organic growth trajectory in all aspects of our business and that is both in Printwear and in Branded.

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Operator [56]

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Thank you. Our next question comes from Jim Duffy from Stifel.

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Jim Duffy, Stifel Nicolaus - Analyst [57]

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Thank you. Good morning. Couple questions --

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [58]

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Good morning.

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Jim Duffy, Stifel Nicolaus - Analyst [59]

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To start, Rhod, can you provide some color on the state of your inventory positions exiting the year and the expectations for inventory contributions to that $400 million plus free cash flow objective.

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [60]

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Yes, I mean, if you look at where inventory levels are or were at the end of the year, they were basically where we thought they would be -- I mean, they were up just a little bit obviously because of the retailer destocking, but I think largely in line with where we thought they were going to be. The obviously the less inventory positions reflected the impact of the acquisitions. And then as we go forward, as we look in 2017, I mean, we definitely do not see the inventory levels rising above where they are, overall. And obviously, we will be focusing on working capital as Glenn suggested in order to drive cash flow.

So look, I think if you look at our free cash flow for 2017 and that will be driven by our operating cash flow, it will be driven by disciplined working capital and obviously we are running with lower CapEx.

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Jim Duffy, Stifel Nicolaus - Analyst [61]

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Okay. Thank you. And then, Glenn, can you comment on screenprint distributor inventory positions. Are there any indication they are building stocks ahead of anticipated pricing adjustment?

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [62]

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No, I think, we ended up the year in line with last year, so our inventories are in a pretty good balance right now.

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Jim Duffy, Stifel Nicolaus - Analyst [63]

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Very good, I will leave it at that. Thank you.

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [64]

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Yes.

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Operator [65]

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Thank you. Our next question comes from Andrew Burns from D.A. Davidson.

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Andrew Burns, D.A. Davidson & Co. - Analyst [66]

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Good morning. I have two brand question for you. First, could you touch on Gold Toe performance and the potential for the brand going forward, especially in light of its exposure in the department store channel? And then with American Apparel coming into the mix do you see any reason to pivot Anvil strategy? Thanks.

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [67]

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To Anvil strategy?

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Sophie Argiriou, Gildan Activewear Inc. - VP of Investor Communications [68]

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Yes.

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [69]

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So, your question was what is the status of Gold Toe today? Because you cut out there for a second, and then your question is Anvil versus -- okay. So Gold Toe, the retail environment obviously in the national chains and department stores has been weak, but we have still done very well with Gold Toe. We maintain relatively the same share as we had previously, but just in somewhat -- space has declined somewhat. So we have not factored that coming back in our forecast, so that could potentially be some upside to us, if the market re-bounce back to normalized levels. At the same time, look we are pushing the brand in areas of growth like e-commerce and hopefully we can potentially see some pickup in our Gold Toe strategy.

As far as the American Apparel, it is going to be positioned as a premium brand within our portfolio of the fashion basics. So the competitive landscape today for Anvil brand positioning is it is priced below, I would say, how we view some of the competitors in the market, and American Apparel will be slightly higher than that.

So we will have a position where we will keep pricing strategy separated between these two brands, as one is considered more premium and consumer driven, and the other one has a lot of legs. I mean, our Anvil positioning this year and our Anvil brand grew phenomenally this year. It was our fastest-growing brand in our portfolio. So it is also doing very well. So, we are very excited because we think that we have a good brand positioning in both -- they can both coexist in the same environment.

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Andrew Burns, D.A. Davidson & Co. - Analyst [70]

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Thanks. And in the fashion basics now that you have both brands, do you see any potential or need to do tuck-in additional fashion basics brands or will your growth in the category going forward be primarily organic? Thanks.

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Rhod Harries, Gildan Activewear Inc. - EVP, CFO & Chief Administrative Officer [71]

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Well, we think we have enough on our plate right now definitely in the US market. We also have Comfort Colors, which is one of our also another fashion brand that we have a little bit different in definition, but it is also in that fashion segments. So we think we have the market covered. We have four different price points, four different positionings in an area which is growing and we are seeing phenomenal growth there. So, I think, we are covered.

The big opportunity for us is to leverage some of these brands in international markets, which we have not done for various reasons capacity like, for example, Comfort Colors, we have not brought it outside really the US because we are still fighting on capacity.

We have a huge interest in the American Apparel brand. So that is another big opportunity for us because international growth is growing at obviously a much faster rate than our US market.

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Andrew Burns, D.A. Davidson & Co. - Analyst [72]

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Thank you.

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Operator [73]

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Thank you. Next we have Keith Howlett from Desjardins Securities.

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Keith Howlett, Desjardins Securities - Analyst [74]

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Yes. On the Printwear market in the US, is the basics segment in decline and growth is in performance and fashion basics?

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [75]

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It is not really growing, I would say, as maybe we are looking at it. I mean, it is not necessarily shrinking. It is just not growing. And the growth is all coming from the fashion segment. So, it is slightly down, but it is insignificant. But it is basically I would consider it flat and the growth of the market is really coming from the fashion side.

Now there is one thing I can tell you, which is an important part, is that -- our basic shirts are selling in the range of $1.50 to $1.80. You know, fashion sells for $3, because the end user price of a screen printed shirt, let us say, is $20 at the end. So which tells me we have opportunity in basics even from a pricing perspective. So we think that, that is a good factor in terms of taking the opportunity and looking at it in a different way I would say. So we are pretty excited in the way we are positioned, and , we are flexible to drive the market in whichever way it is going.

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Keith Howlett, Desjardins Securities - Analyst [76]

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And in terms of manufacturing and inventory levels, as you move to sort of a more diverse range of products in the fashion basics and performance, how does that affect your manufacturing efficiency and your inventory levels?

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [77]

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Well, our inventory levels are going to remain flattish for the year. So there will be -- we are working on our inventory. There is still opportunity to manage inventory, mainly because of the acquisitions that we brought on. I mean, as we have worked through some of the inventories. You know the way we are set up today is we have different facilities producing different type products. So the answer to your question is that we are gearing our manufacturing to support this part of the business, I mean, and actually to bring innovation, new products.

If you look at what we are bringing to the market today we are bringing in polyester tech fleece sweatshirt in Printwear which is going to be really beautiful garment, priced right. We are bringing on a whole slew of other fabrications. So as we look at structurally changing our capabilities, , one of the things we are putting in is the type of equipment that is conducive to producing these types of fabrics. So we will have different plants producing obviously different product segments and each one of them will be strictly very efficient in their own structure, but will allow us to maximize our sales opportunity for both our divisions.

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Keith Howlett, Desjardins Securities - Analyst [78]

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And just finally on the international business, is it sort of lagging in the shift to fashion basics and performance or is it sort of right along with you?

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [79]

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Well, it is actually believe it or not basics in Europe are a much smaller percentage of the business. In the US, the basics segment was 60% and the fashion was 40%. It is the other way around in Europe. basics is 40% and fashion is 60%. So that is really why we are so excited about all these fashion brands we are bringing in, because that is going to accelerate our growth in Europe.

We are already growing and most of our growth today because of our limited product offering in these international markets were still because we are new -- we are still picking up all the share from basics, but really where we have a big opportunity is to continue growing through the fashion segment. American Apparel could be the big driver of that, but we have a lot of runway in front of us in international markets.

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Keith Howlett, Desjardins Securities - Analyst [80]

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Thank you.

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Operator [81]

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Thank you. Our next question comes from Anthony Zicha from Scotiabank.

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Anthony Zicha, Scotiabank - Analyst [82]

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Hi, good morning. A follow-up question, Glenn. Could you please comment on M&A market and considering that the US retail outlook is weak, are you seeing more potential targets appearing on your radar and have the valuation multiples declined?

And could you give us an idea, you mentioned that you are going to be looking at acquisition, how big of an acquisition would you be looking at and what kind of leverage you would be willing to go up to?

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [83]

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Well, look, I mean, we have been very tactical about our acquisition strategy. I think that is the most important thing. We do not want to do acquisitions for the sake of doing an acquisition. We are looking at our key value we can create by integrating these acquisitions seamlessly without any major cost to the company, making sure that they help us to drive some benefit to the company, either a brand, a product.

So we have to have a strategy behind our acquisitions because look, we have a lot of runway still on our organic growth between our Printwear, our international business, and in branded, we are just at the beginning stages. I mean, we have just hit 10% market share in underwear. Our next target for branded is 20% market share as we continue to look at setting targets for ourselves.

So we have a lot of opportunity organically to keep growing our business. So we want to still maintain a very tactical profile of how we do acquisitions and not just do them to create top line sales. We want to make sure that they are fully integrated, that they are meaningful for the company, that they give us a brand, a channel distribution, a product, something that will keep our core organic business from growing successfully and generating huge amounts of cash flow as we go forward.

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Anthony Zicha, Scotiabank - Analyst [84]

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Okay. And in terms of leverage, any picture?

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [85]

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Leverage, look, we have committed to one to two times leverage. I think, it is a fair target. We think that we rather be on the conservative side, we think that we can grow the top line sales with tuck-in acquisitions as well as organic growth strategy and still maintain a very conservative balance sheet, but still at the same time using some leverage to return cash to shareholders and make sure that we use our balance sheet effectively.

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Anthony Zicha, Scotiabank - Analyst [86]

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Okay. And then the last question, with reference to capacity expansion and in light of a weak retail market, when would be the earliest Gildan would launch a new Costa Rican facility and could you -- if that is the goal then what kind of capacity and cost would it be if you could please remind us on that? Thank you, Glenn.

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [87]

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Okay. Well, look, I mean, when we announced Costa Rica really Mexico was not in the equation, and Mexico is actually the size of what we were planning to put in Costa Rica, so what we ended up doing is we ended up building in excess of $1 billion of potential capacity with the existing footprint that we have today.

So we have enough capacity support a lot of growth. We still own the property. We have not invested a lot of capital there at this point and we will bring on that capacity in increments of how successful our business is as we go forward. So, there is nothing in the near to short-term saying that we need Costa Rica at this point.

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Anthony Zicha, Scotiabank - Analyst [88]

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Okay. Thank you.

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [89]

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Thank you.

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Operator [90]

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Thank you. Next we have Chris Li from Bank of America Merrill Lynch.

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Chris Li, BofA Merrill Lynch - Analyst [91]

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Hi. Good morning. I just have two questions. I guess, first, when looking at your guidance range of $1.60 to $1.70, the $0.10 of difference, what would you say is sort of the main variance or you have the least visibility on? Is it branded volume growth? Is it your ability to take up pricing? What would you say would sort of make up that $0.10 gap between your new guidance --

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [92]

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Look, I would say look at, we have very good visibility on our business and our business plan. I mean the only thing that really is questionable is the market conditions. We made certain assumptions on market growth.

But I can like for example, in underwear and socks we are projecting flattish type environment, in Printwear we are slightly positive but flattish. So, unless there is something that is materially different than our assumptions, we feel very comfortable with our guidance.

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Chris Li, BofA Merrill Lynch - Analyst [93]

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And the pricing increase you have put in December, did most of your competitors follow through as well?

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [94]

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Yes, everybody followed that price increase, and it was relatively small.

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Chris Li, BofA Merrill Lynch - Analyst [95]

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Okay. My last question and I know this is a difficult one to answer because there is not a lot of certainty at the moment. But I would love to get your thoughts on border adjustment tax and how do you think internally?

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [96]

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Well look, I mean, first of all, I would say is that the tax would affect everybody in the segment because there is really -- other than American Apparel, there is no apparel made in the United States really to say, okay, so I think that that is the first thing.

Secondly, we think we are well-positioned because 50% -- in excess of 50% of all of our cost are dominated in the US from US products, I mean, cotton, spinning, transportation, et cetera. So we think that we are a little bit insulated from -- because we are not a completely like an offshore company.

Thirdly, if you look at our two business units Printwear, we know we have capabilities of raising price. We sell T-shirts today for $1.50 and if they sold for $1.80, would it make a huge difference? I do not think so. The net retail price of those shirts is $20, and today even in the fashion segment, I mean, they are selling for over $3, and that is the fastest growing segment in the market.

So when it comes to basics, I do not think that a $0.30 increase in a shirt is going to materially affect our sell-through at all in the Printwear business. In fact, our customers gravitate to higher prices and that is why it is pretty easy for us to increase prices, raw material prices continue to go up.

And in branded, when we went through the last cotton bubble, our competitors raised prices significantly and we never did and our competitors never lowered their prices and we kept our prices pretty neutral. So we have a significant differential between our price and our competitor's price.

So if you walk into the store and you just take our underwear for example and you raised the price by 20% it would still be significantly below the competition, but at the same time we think that if our competitors raise prices, they become irrelevant to the consumer basically. So we are not concerned about that at all.

And probably last thing with the tax changes is that they are considering implementing debt to be nondeductible, and as I just said earlier is that we have a pretty conservative balance sheet. So we do not see that as a major issue as well.

So, look, we do not think it is the right thing because we think, obviously, overall it is going to create instability and I think it will be very disruptive to the markets, but as a company we are well-positioned and we are not really worried about it at this point.

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Chris Li, BofA Merrill Lynch - Analyst [97]

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Okay, great. Thanks for your answers. And best of luck in 2017.

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [98]

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Thank you.

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Operator [99]

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Thank you. And next we have a follow-up question from Mark Petrie from CIBC.

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Mark Petrie, CIBC World Markets - Analyst [100]

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Yes, thanks. I guess, I just wanted to follow-up actually on the branded business and understanding that margins were pressured in Q4 because of deleveraging on your SG&A line, I wanted to just ask you about your general outlook for the profitability of the branded business in 2017 and over the next couple of years and is leveraging your cost base really the key driver of margin expansion or is it a matter of narrowing price gaps and then supported by favorable product mix?

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [101]

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Okay. The first step is obviously as we go into 2017 is we are going to leverage our operating business and our SG&A. I mean that is really the first thing as we increase our sales and also we fully integrated our Peds business basically which is obviously even though it is adding on sales through acquisition. The fact is that that we have been able to manage our SG&A accordingly. So it is back in line. So we see our SG&A next year in branded relatively flattish over on a year-over-year basis, right? So we are going to leverage that.

As we go forward look we think like I said just earlier is that look we have room on price, I mean, we are significantly priced below our competitors. And at the same time we have a very narrow product offering in each one of our segments. I mean, we have got x feet, our competitor has got x times three feet in the retail store. So as we continue to gain more space and add more product that product comes at a better mix and better margins to us.

So we should be able to mix up our margin and our operating gross margins just through mix and continue to drive topline sales from our core business. So those two things as we go forward into the future will continue to improve the operating margins of Branded.

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Mark Petrie, CIBC World Markets - Analyst [102]

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Okay. That is helpful. And I guess just to follow-up. So the SG&A investments in 2017, that is on the Printwear side then?

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [103]

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Yes.

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Mark Petrie, CIBC World Markets - Analyst [104]

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Okay. Thank you.

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Operator [105]

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Thank you. And our final question is a follow-up from Keith Howlett from Desjardins Securities.

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Keith Howlett, Desjardins Securities - Analyst [106]

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Yes. So just wanted to ask about the American apparel market positioning, did you keep any of the American apparel product designers and also I am wondering whether their retail image, which was quite edgy, is an important part of the brand in the Printwear channel or not really relevant there?

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [107]

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Well, the answer is yes. We are going to run a small office in LA that will allow us to keep the heritage of the brand alive, at the same time continue to use social media, a platform to drive the image and brand image of the brand. We have not really completed our retail evaluation in terms of how we are going to bring the product to consumers. But we are going to make sure as we go forward that the brand is relevant with consumers, which we think will continue to help drive our Printwear business and we will definitely come up with a consumer positioning for the brand in the near future.

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Keith Howlett, Desjardins Securities - Analyst [108]

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Thank you.

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Glenn Chamandy, Gildan Activewear Inc. - President & CEO [109]

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Thank you.

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Operator [110]

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Thank you. And that will conclude our question-and-answer session. I will now turn the call back to Sophie Argiriou for closing remarks.

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Sophie Argiriou, Gildan Activewear Inc. - VP of Investor Communications [111]

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Thank you. Again, thank you all for joining us this morning. This concludes our call and we look forward to speaking to you soon. Thank you and have a great day.

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Operator [112]

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Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.