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Edited Transcript of HBI earnings conference call or presentation 7-Feb-20 1:30pm GMT

Q4 2019 HanesBrands Inc Earnings Call

WINSTON-SALEM Feb 8, 2020 (Thomson StreetEvents) -- Edited Transcript of HanesBrands Inc earnings conference call or presentation Friday, February 7, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gerald W. Evans

Hanesbrands Inc. - CEO & Director

* Markland Scott Lewis

Hanesbrands Inc. - CAO, Controller & Interim CFO

* Thomas C. Robillard

Hanesbrands Inc. - Chief IR Officer

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Conference Call Participants

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* Carla Casella

JP Morgan Chase & Co, Research Division - MD & Senior Analyst

* David Swartz

Morningstar Inc., Research Division - Equity Analyst

* Heather Nicole Balsky

BofA Merrill Lynch, Research Division - VP

* Irwin Bernard Boruchow

Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst

* James Vincent Duffy

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Jay Daniel Sole

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury

* John David Kernan

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Omar Regis Saad

Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team

* Paul Lawrence Lejuez

Citigroup Inc, Research Division - MD and Senior Analyst

* Susan Kay Anderson

B. Riley FBR, Inc., Research Division - Analyst

* Tiffany Ann Kanaga

Deutsche Bank AG, Research Division - Research Associate

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the HanesBrands Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference to your speaker today, T.C. Robillard, Chief Investor Relations Officer. Please go ahead, sir.

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Thomas C. Robillard, Hanesbrands Inc. - Chief IR Officer [2]

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Good day, everyone, and welcome to the HanesBrands quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress after our fourth quarter of 2019. Hopefully, everyone has had a chance to review the news release we issued earlier today. The news release, updated FAQ document and the replay of this call can be found in the Investors section of our hanes.com website.

On the call today, we may make forward-looking statements either in our prepared remarks or in the associated question-and-answer session. These statements are based on current expectations or beliefs and are subject to certain risks and uncertainty that may cause actual results to differ materially. These risks are detailed in our various filings with the SEC and may be found on our website as well as in our news releases. The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made.

Unless otherwise noted, today's references to our consolidated financial results, as well as our 2020 guidance, exclude all restructuring and other action-related charges and expenses. Additional information, including a reconciliation of these and other non-GAAP performance measures to GAAP, can be found in today's press release.

With me on the call today are Gerald Evans, our Chief Executive Officer; and Scott Lewis, our Chief Accounting Officer and Interim Chief Financial Officer. For today's call, Gerald and Scott will provide some brief remarks, and then we'll open it up to your questions.

I will now turn the call over to Gerald.

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Gerald W. Evans, Hanesbrands Inc. - CEO & Director [3]

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Thank you, T.C.

HanesBrands delivered a solid fourth quarter with record cash flow. Overall results were once again right in line with our guidance and demonstrate that our multiyear strategy to improve our business is working.

Key highlights in the quarter include operating cash flow that exceeded the high end of our guidance for both the quarter and the full year. We delivered on our commitment to bring our leverage back within our target range. We saw continued strong performances in International, Consumer-Direct and Champion. And adjusted gross margin improved 130 basis points over prior year, driven by increases in both our U.S. Innerwear and U.S. Activewear segments.

And U.S. Innerwear's operating profit and operating margin increased over prior year, with both metrics exceeding our guidance in the quarter despite lower-than-expected revenue. We believe this is an indication that U.S. Innerwear's profit has begun to stabilize.

In addition to U.S. Innerwear's fourth quarter profit performance, we saw 2 additional developments that point to improving revenue and profit trends in 2020.

First, our Intimates business improved sequentially and was in line with our expectation for the quarter. The strong performance was driven by our bra business, which increased over the prior year, as our revitalization efforts and product innovations, such as Easy Light and Dream Wire, continued to gain traction.

And second, while early store resets by a major retailer had a short-term impact on Basics sales in the quarter, we're pleased with the longer-term potential this reset holds for our business. Within the stores that have been reset, we're gaining shelf space and we're gaining market share. Once completed, we believe this reset should have a positive impact on our Basics business beginning in the second half of this year.

Over the past several years, we have executed a strategy to diversify our business and position the company for increased earnings growth and shareholder returns. To accomplish this, we set 5 specific goals, and we've delivered on each, as highlighted by our fourth quarter and full year results.

First, we have diversified our revenue. International revenue now accounts for 36% of sales, up from 11% in 2013. Consumer-Direct revenue, which represented 30% of fourth quarter sales and 25% of full year sales, is up from 9% in 2013. And on a constant currency basis, Global Champion, excluding C9, generated more than $1.9 billion of revenue in 2019, an increase of more than $1.1 billion in just 3 years.

Second, we've consistently delivered organic revenue growth. The fourth quarter marked our tenth consecutive quarter of constant currency growth. And we accomplished this despite challenges in our U.S. business that included a muted holiday and a $46 million headwind from exited programs.

Third, we position the business for higher levels of profitability over the next several years by exiting unprofitable businesses and restructuring our supply chain to lower costs. We believe our supply chain restructuring initiatives have positioned U.S. Innerwear, and the company, for improving margins over the next 2 years. We also believe this represents an important milestone for U.S. Innerwear as it remains a critical driver of our strong cash flow.

Fourth, we are generating higher levels of operating cash flow. In 2019, operating cash flow increased 25% over prior year to more than $800 million. This is approximately $200 million higher than our cash flow from just 3 years ago.

And fifth, we have reduced our net debt by more than $1.1 billion in less than 2 years. We ended the year at 2.9x levered on a net debt-to-adjusted EBITDA basis which is a full turn lower than our peak. Now that we're back within our long-term range of 2 to 3x, our priority for 2020 is to use our excess free cash to buy back stock.

The focus of our entire organization for the past several years has been on strengthening our business to return to a model that is able to magnify sales growth into faster operating profit growth and ultimately even faster EPS growth. With a lot of heavy lifting done and our program exits behind us, we believe 2020 represents an inflection point for our company, one that reveals the underlying strength of our ongoing business and unleashes the full potential of our capital allocation model to drive accelerated shareholder returns.

Turning to our 2020 guidance. Through the remainder of my remarks and for comparison purposes, I'll be referencing our rebased 2019 results which adjust for the exits of C9 at Target and our DKNY intimates license. This will provide a clearer view of the underlying trends within our business.

Using the midpoint, our 2020 guidance implies approximately 3% revenue growth. This is driven by strong performances in International, Consumer-Direct and Champion.

And while we continue to plan conservatively with respect to our U.S. Innerwear business, we expect improved revenue trends in 2020 in both Basics and Intimates. Our guidance for U.S. Innerwear assumes revenue growth ranging from down 1% to up 1% for the full year.

And for the total company, we expect adjusted operating profit growth of 7% as our investment spending normalizes and cost savings from our supply chain restructuring flow through, particularly within our U.S. Innerwear segment, where we expect operating profit to be up over prior year.

With lower interest expense and lower share count, we expect adjusted earnings per share growth to accelerate to 15%. Embedded in our guidance is $200 million of share repurchases. And we expect to generate between $700 million and $800 million of operating cash flow.

So in closing, we delivered solid performances for the quarter and the full year. And as our 2020 outlook suggests, we believe we've reached an inflection point in our business model. With our exited programs behind us and all of our capital allocation tools at our disposal, we believe we are well positioned for accelerating earnings growth and shareholder returns over the next several years.

And with that, I'll turn the call over to Scott Lewis, our Chief Accounting Officer, who is serving as Interim Chief Financial Officer. Scott has held leading roles in our strong global finance organization since the company went public and is providing us with a seamless leadership transition to support our goals and strategies.

Scott...

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Markland Scott Lewis, Hanesbrands Inc. - CAO, Controller & Interim CFO [4]

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Thanks, Gerald. Before I discuss our fourth quarter results, I want to highlight a supplemental document on our IR website that reflects revisions to our prior period results. These revisions primarily relate to adjustments to our income tax balances. The revisions had a minor cumulative earnings per share impact of $0.01 over the 3-year period from 2017 to 2019. Additional information can be found in our FAQ document as well as in our 10-K.

Now let me discuss the quarter. Overall, we reported solid fourth quarter results. Revenue, adjusted operating profit and earnings per share were in line with our guidance, while cash flow from operations exceeded the high end of our range.

For the quarter, sales were $1.75 billion. On a constant currency basis, sales increased slightly over prior year. I'll note that our results reflect $46 million expected headwinds in our Activewear segment from the exit of commodity programs in the mass channel as well as the planned wind down of C9 at Target.

Adjusted gross margin increased 130 basis points over last year to 41.4%, driven by higher margins in both our Innerwear and Activewear segments.

Adjusted operating profit in the quarter was $263 million and included $3 million of currency headwinds as compared to last year. Our adjusted operating margin of 15% increased approximately 40 basis points over prior year as our strong gross margin performance more than offset higher distribution costs and an unexpected bad debt charge of $3 million related to a retailer bankruptcy in Australia.

Both adjusted and GAAP earnings per share were $0.51, an increase of -- over prior year of 13% and 24%, respectively.

In the quarter, we generated $559 million in cash flow from operations, an increase of $57 million compared to prior year. For the full year, we generated a record $803 million in cash flow from operations.

With respect to the balance sheet, as compared to last year, we reduced our inventory balance by more than $150 million, and we paid down over $600 million of debt. Our leverage at the end of the quarter was 2.9x on a net debt-to-adjusted EBITDA basis. This is down 1 full turn from our peak in the first quarter of 2018 and brings us back within our target range of 2x to 3x.

With that summary, let me take you through our fourth quarter segment performance.

As compared to last year, U.S. Innerwear sales declined 4%. However, operating profit increased 5% as our operating margin expanded 210 basis points to 24.6%. The operating profit and margin exceeded our forecast in the quarter as the benefits from earlier price increases and lower distribution expenses more than offset higher commodity costs and lower unit volume.

For the quarter, Basics revenue declined 5% due to the impact from door closings and an earlier-than-planned disruption from store resets at a large mass retailer. While these resets are causing short-term fluctuations, we believe, once completed, this should have a positive impact on our Basics business beginning in the second half of this year.

And with respect to our Intimates business, as expected, our trends improved sequentially, driven by our bra business. For the quarter, bra revenue increased slightly and operating margins improved nearly 300 basis points over last year as our revitalization efforts and new product innovations gained traction.

Turning to our U.S. Activewear segment. Sales declined nearly 7% over last year and were slightly better than our forecast. The segment's results reflect the $46 million of expected year-over-year headwinds I referenced earlier.

As compared to prior year, Champion Activewear sales, excluding C9, increased 14%. C9 revenue declined 26% or $26 million. And sales in the remainder of our Activewear segment declined approximately $30 million, which was better than our forecast.

Activewear's operating margin of 15.8% declined 30 basis points over prior year. Activewear's gross margin increased in the quarter, driven by the benefits of our remixing activity, including a higher mix of Champion sales. This was more than offset by higher SG&A expense, including higher distribution costs.

In our International segment, revenue increased nearly 7% and was above our forecast, driven by stronger-than-expected results in both our activewear and innerwear businesses. On a constant currency basis, international sales increased 10% or $60 million over prior year, with mid-single-digit growth in innerwear and 22% growth in Champion.

International's operating margin of 14.9% declined 130 basis points over last year as the benefits from higher sales were more than offset by short-term FX transaction cost pressures as well as the $3 million Australia bad debt expense I referenced earlier.

Touching briefly on our Global Champion business. Excluding C9, constant currency sales increased 22% over last year and were in line with our expectation. This consisted of 22% growth in both our domestic and international Champion businesses.

And now turning to guidance. To present a more representative comparison of our ongoing business between 2020 and 2019, we've provided a supplemental table on our IR website. This table provides rebased financial information for 2019 that adjusts for the exits of C9 at Target and the DKNY intimates license. During my guidance discussion, all year-over-year comparisons will reference our rebased 2019 results. I'll also point you to our press release and FAQ document for additional guidance details. However, I would like to share a few thoughts to frame our 2020 outlook.

We expect solid growth with enhanced profitability even though the first quarter is expected to see difficult comparisons. With a strong balance sheet, our capital allocation strategy is expected to drive accelerating earnings per share growth. And we've identified additional cost-reduction actions to those we began last year that should generate further profit improvement in 2021 and beyond.

Our 2020 guidance demonstrates accelerating growth rates as you move down the P&L. At the midpoint, our full year guidance implies revenue growth that's approaching 3% and adjusted operating profit growth approximately 7%. With expected benefits from lower interest expense and $200 million of share repurchases planned early in the year, we expect adjusted earnings per share growth of approximately 15%.

We expect to generate $700 million to $800 million in cash flow from operations. Absent any additional capital allocation initiatives this year, we expect our leverage to decline to 2.7x by year-end.

With respect to our restructuring and other actions, we expect approximately $50 million of charges in 2020. Approximately $10 million of these charges are costs related to the exits of C9 and the DKNY license. Approximately $10 million relate to our 2019 supply chain restructuring, which were previously planned. The remainder of the charges are focused on additional actions to further reduce cost, primarily within our supply chain. In isolation, we expect these additional restructuring actions to deliver approximately $40 million of incremental profit, with $30 million coming in 2021 and the remaining $10 million coming in 2022.

Touching on the first quarter. We expect muted revenue and operating profit growth due to transitory and timing issues in the international and U.S. Innerwear segments.

Within U.S. Innerwear, we're facing headwinds from a large sock shipment in last year's first quarter as we displaced a competitor at a large value retailer. We also expect continued short-term disruption in our Basics business from the previously discussed store reset at a large mass retailer.

International constant currency revenue growth is expected to slow to 2% in the quarter before returning to mid-single-digit growth in the second quarter due to the timing of the Asia expansion this year compared to last year. And International's first quarter operating profit is expected to decline due to the increased investments to support our Asia expansion as well as short-term FX transactional cost pressures.

For the rest of the year, we expect revenue and operating profit growth as we benefit from the continued momentum in our Intimates business, the completion of store resets in the mass channel, expanded distribution in Asia, cost savings from our supply chain restructuring and price increases in certain international markets to offset the cost pressures from foreign exchange rates.

So in closing, we delivered solid results for both the quarter and full year. We delivered on a number of initiatives to improve our business model. And as our outlook suggests, we believe we've reached an inflection point now that our program exits are behind us and we've brought back our leverage within our targeted range. We believe the combination of our strengthened business model, our strong balance sheet and all of our capital allocation tools position us for accelerating earnings growth and total shareholder returns in 2020 and beyond.

And with that, I'll turn the call back over to T.C.

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Thomas C. Robillard, Hanesbrands Inc. - Chief IR Officer [5]

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Thanks, Scott. That concludes our prepared remarks. We'll now begin taking your questions and we'll continue as time allows. I'll turn the call back over to the operator to begin the question-and-answer session. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Omar Saad with Evercore ISI.

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Omar Regis Saad, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team [2]

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I wanted to ask -- nice quarter, guys. I wanted to ask for a little bit more color around the Basics reset. What's happening in that kind of core Basics business? I think there's -- sounds like something's going on at a mass retailer. Sounds like an opportunity for shelf space. But maybe you can give us a little bit more color what's happening there, how do we expect it to kind of flow through the P&L, and timing of when that part of the business might reaccelerate again.

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Gerald W. Evans, Hanesbrands Inc. - CEO & Director [3]

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Omar, it's Gerald. Thanks for the question. And we are pleased with the fourth quarter. Our record cash flow and double-digit EPS growth, and our in-line guidance really speak to what we've been doing to improve our business model. We really do look to 2020 as a an inflection point for this business. And an important part of that is the underlying strength of our ongoing businesses.

And then part of that is Innerwear. And we did see improvement from a profitability standpoint certainly at the end of 2019. As we look to 2020, we do expect the revenue to improve as we work through the store resets in the large retailer. The large retailer started the reset at the end of last year, in 2019, a little earlier than we had expected. And as you see with resets, there's sell-off of exited SKUs and businesses and so forth that can create some short-term interruption. But what we do see and what we like is our space is expanding. And with that space expansion, we're seeing our share expand.

So the balance of the chain resets through the first part of 2020. But we expect, as we get past that, that as we get to the second half, we'll pick up the tailwind of that on our Innerwear business and the benefit we saw from share expansion in their initial reset, along with the improving trends we're seeing out of our Intimates business. On the revenue side, we expect to also then pick up the additional restructure -- cost restructure benefits that we implemented in 2019 to flow through the second half.

So we really do expect a stabilization of our revenue line as we work through the balance of 2020, and we expect our operating profit to be up. And so we're very encouraged by that, and that's an important punctuation on our strong cash flow as well when we see our profit growing within Innerwear.

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Operator [4]

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Our next question comes from Jay Sole with UBS.

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Jay Daniel Sole, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Softlines & Luxury [5]

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Great. So I have a 2-part question. Number one is, Scott, can you maybe give us a little bit of a direction on how you expect gross margin to play out for this year?

And then secondly, the press release mentioned something about identified control deficiencies that the constitute a material weakness in internal control. Can you just give us an idea of what that means and what's some of the actions you've already taken, and say, will continue to take over the year to address that situation?

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Gerald W. Evans, Hanesbrands Inc. - CEO & Director [6]

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Yes, let me -- this is Gerald. Let me take the gross margin part, and I'll turn it over to Scott to talk about the revision part of the question.

From a gross margin standpoint, we would expect our gross margins to strengthen as we work through the year. We've got a number of restructure initiatives that we undertook in 2019 that will flow through in 2020 as it works its way off the balance sheet into the second half of the year. So you would expect that to ramp -- along with our revenue, is ramping in the first as we get -- overlap some of the headwinds in the first quarter of 2020.

So Scott, would you -- do you want to take the...

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Markland Scott Lewis, Hanesbrands Inc. - CAO, Controller & Interim CFO [7]

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Thanks, Gerald. Thanks for your question. For the revision, just to put some context around this item, the impact of the revision adjustments had a minor cumulative earnings per share impact to us of $0.01 over the 3-year period of 2017 to 2019. And I think it's important to understand, as we look forward, this tax issue will not impact our tax rate as we move forward. We continue to expect a tax rate in the mid-teens.

We discovered the issue as we were preparing our year-end financial statements this year. And the issue revolves around or relates to the tax treatment of intercompany inventory transactions and ultimately impacted our prior period tax balances. Now when we identified this, we've -- we had -- we quantified it and we've revised prior period financial statements to correct for these errors. And we also addressed it for other immaterial out-of-period items at the same time.

And you mentioned the controls. And from a controls perspective, we already made some process improvements in this area. We -- actually, one of the process improvements that we were working through have helped identify this issue. We ultimately did conclude that this was a material weakness. And we have, and we'll continue to, refine and enhance controls in this area. We're taking this very seriously. And we intend to implement these enhancements through the course -- over the course of 2020.

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Operator [8]

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Our next question comes from Susan Anderson with B. Riley FBR.

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Susan Kay Anderson, B. Riley FBR, Inc., Research Division - Analyst [9]

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I was wondering if you could maybe quantify a bit how much the Innerwear business is impacted next year by C9, DKNY and then the door closures. And then also, you're thinking about the growth of Champion sales in 2020 as we go throughout the year, both domestically and internationally. And the impacts of the Asia distribution expansion.

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Gerald W. Evans, Hanesbrands Inc. - CEO & Director [10]

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Sure. Let me look at -- let me start with the C9 portion of your question. It's in the rebased numbers that we looked at on the Basics or the Innerwear side of things. It was approximately $42 million of sales that was in Innerwear Basics. We have recovered the vast majority of that, but it's a bit masked in the rebased numbers because as we planned for 2020, we also assumed there would be the impact of door closures of about $35 million to $40 million, so they offset in the numbers.

But I think you should take solace in knowing that we have planned conservatively on the Innerwear side. And as we begin to hear about door closures in other places, we have those covered in our guidance as we look toward 2020. So we feel we've appropriately planned the Innerwear business from the standpoint of being conservative, yet -- and know the phasing of that business as we also see the revenue and profitability ramp throughout the year. So we feel good about that business and where it's positioned and appropriately planned from a conservative standpoint.

From the Asia?

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Markland Scott Lewis, Hanesbrands Inc. - CAO, Controller & Interim CFO [11]

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Champion, just kind of how the year maybe unfolds for growth.

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Gerald W. Evans, Hanesbrands Inc. - CEO & Director [12]

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Yes, from the Champion business, first of all, let me just say, last year, Champion had another -- we finished really well in the fourth quarter. Champion was up 22% in the fourth quarter again, and it was 22% domestically and 22% internationally. And just to give you a sense of how big that business has become, it's about $460 million globally in the quarter and it finished up 40% for the year.

So as we look at to 2020, we expect to surpass the $2 billion mark. We expect to do another year of double-digit growth for Champion. We are overlapping some very large comps in the first part of the year. So we've planned a mid- to high single-digit growth rate for Champion in the first half of the year and a double-digit growth in the second half of the year -- low double-digit growth in the second half of the year.

So we're continuing to be very bullish on Champion and its ability to continue to grow. We're seeing strong POS, we saw strong POS through the holiday periods around the world as well. And we are well on our way, obviously, to reach our $2 billion goal in 2020 2 years early. And we believe we can add the next $1 billion in the next 4 to 5 years.

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Operator [13]

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Our next question comes from Ike Boruchow with Wells Fargo.

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Irwin Bernard Boruchow, Wells Fargo Securities, LLC, Research Division - MD and Senior Specialty Retail Analyst [14]

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Gerald, 2 questions. In FAQ, there's some commentary about finding a new C9 partner and something -- new revenue stream in the second half, but it sounds like it should be minimal. Just any more color on that would be really helpful. It's interesting that you guys are able to get a partner for the brand.

And then secondarily, there was a big department store that talked about a 3-year store closing program. Just curious if you could let us know how that impacts your multiyear view of Innerwear, how tied to those 125 doors you are. Just anything there over the next 3 years would be helpful as well.

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Gerald W. Evans, Hanesbrands Inc. - CEO & Director [15]

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Sure. Let me start, Ike, with the C9 part of the question. C9 has continued to perform well right through the balance of 2019, really, exceeded our expectations through the balance of 2019. And it's clear to us that there's a strong consumer base out there that's very loyal to that brand. We are in the final stages of discussions with a new partner, and we expect to launch that program, an initial program, in the second half of this year.

Relatively small to start with. And as you noted, it is in our guidance at this point in time. But it has the potential to ramp nicely over time as we get the program going. So we'll provide some more specifics on that in the coming months, but we're very pleased to have the opportunity to keep that brand in the market and satisfy those consumers.

From the standpoint of the department store information. The vast majority of the business we do in Macy's is at -- on macys.com and in their largest stores. And that's where all of our, really, growth comes from in that account. As noted in the announcement, the stores targeted for closures are a small part of their total business. And while the closure list has not yet been fully communicated, we believe the doors targeted for closure do not represent a material part of our business.

In regards to 2020, as I noted in my earlier comments, we had planned the possibility of additional door closures in the market, and we feel that we have the initial 30 covered in our guidance. And as the list develops, we'll continue to assess that. But we feel we've got it covered in our guidance for 2020.

I think, once again, it reinforces what we've been focused on for a while, is the consumer's choice of where they shop and their shopping habits continue to evolve. And we've been focusing over the last few years on diversifying our revenue base and where we sell, and particularly developing our consumer-direct piece of the business, which is -- as we noted in our comments, was 25% of our business in the last year. And so macys.com is part of that as well as pure plays and as well as our own site. So we'll continue to diversify where we sell to meet the shifting needs of the consumer.

So we feel good about where we have Innerwear going and that will continue. And Innerwear is one of our fastest-growing consumer-direct businesses.

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Operator [16]

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Our next question comes from Jim Duffy with Stifel.

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [17]

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Nice job with the cash flows and the balance sheet. So this gives you some newfound balance sheet flexibility into 2020. Looking at the implied cash flow outlook for '20 well in excess of the dividend obligation and the $200 million in planned repurchases, does the balance go to debt reduction? Or could you see repurchases beyond that $200 million?

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Gerald W. Evans, Hanesbrands Inc. - CEO & Director [18]

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Jim, it's Gerald, and thanks for that. We have definitely focused on delevering, as you know, and we're very proud to have achieved that goal, it gives us a lot of flexibility. And we are very disciplined in our capital allocation approach. We have noted that our intent is to use the $200 million of excess cash to repurchase shares. That will allow us to continue to delever. We'll assess as we work through the year, but certainly getting solidly back in our range gives us significant amount of flexibility in exercising our full capital allocation. So we'll work through the year, but we are very pleased to be back within our range.

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Operator [19]

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Our next question comes from Heather Balsky with Bank of America.

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Heather Nicole Balsky, BofA Merrill Lynch, Research Division - VP [20]

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First, with regards to your Champion guidance for next year. Can you just talk about the different components in terms of Activewear and international and how you're thinking about the growth there?

And then also, in terms of your cash flow guidance, if you could just help us with a little more color. How do we think about some of the moving pieces, especially working capital?

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Gerald W. Evans, Hanesbrands Inc. - CEO & Director [21]

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Sure. Let me take the first half of that and I'll let Scott take the second half of that. From the standpoint of Champion, we expect to continue to see balanced growth really between international and the domestic piece. It is growing nicely. Actually, the Innerwear piece of our Champion is growing at a very rapid rate as well and is helping drive that total strong growth that we're seeing around the world. So we expect both the Activewear and Innerwear elements of our Champion business to grow.

We -- as we've said before, we've been very successful in the men's business. We still have room to grow as we develop a greater share in the women's business as well as the kids business, and outerwear represents a new category for us as well. So we see multiple areas that we can continue to expand the business as well as continue to grow, of course, where we have distribution today.

Scott?

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Markland Scott Lewis, Hanesbrands Inc. - CAO, Controller & Interim CFO [22]

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Excellent. I appreciate your question. We are very proud of the record level of cash flow that we had in 2019. The team did a fantastic job this year. We had a good improvement in our cash cycle days. We feel this takes us to a new level from a -- and reinforces our ability to generate cash flows. Our operating cash flows in '19, we accomplished that through strong GAAP net income and working capital management.

And as you think about the 2020 cash flow levels, our guidance is the $700 million to $800 million, you can arrive at that in a couple of ways. And one way is looking at our 2020 GAAP net income, the midpoint is around $585 million. If you add back our noncash items like depreciation and amortization and stock compensation, which is typically around $180 million to $190 million, you land right in the midpoint within that guidance range.

Another way of thinking about it is if you look our 2019 cash flow level of $803 million. Our 2020 GAAP net income is at the midpoint, it's around $20 million lower than '19 as we talked about the program exits. And just using the same working capital assumption that we had in '19, which is actually flat of that year. We -- you arrive right within that guidance range again.

So we thought this was a prudent way of looking at cash flows in 2020. And we felt like, again, we're in a really good position to drive strong cash flows in 2020 and beyond, and this is helping with strong returns. And again, like Gerald mentioned earlier, this gives us opportunities to continue to delever for share repurchases and really drive shareholder return.

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Operator [23]

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Our next question comes from Tiffany Kanaga with Deutsche Bank.

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Tiffany Ann Kanaga, Deutsche Bank AG, Research Division - Research Associate [24]

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Would you please help us understand a bit better what drove the bra revenue increase in the fourth quarter? And if you anticipate that carrying forward as part of flattish rebased full year guidance for Innerwear despite retailer door closures? Or put another way, would you quantify what level of bra growth is baked into your 2020 plans?

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Gerald W. Evans, Hanesbrands Inc. - CEO & Director [25]

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Sure. From the standpoint of what drove that growth, it was -- we certainly have been on a -- working on our revitalization program for some time now within the Intimates business. And one of our key elements of our bra expansion was innovation, and we've seen both our Dream Wire and our Easy Light innovations perform very well. And as you may recall, we paired that with both online, our digital support as well as TV support in the case of the Bali Easy Light.

So we saw nice traction from the standpoint of those launches and we've seen it ramp. And we expect it will continue to ramp, particularly as we get through the -- into the later quarters of the year. So we are expecting actually growth out of our Intimates business next year in the guidance that we gave.

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Operator [26]

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Our next question comes from Paul Lejuez with Citi.

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Paul Lawrence Lejuez, Citigroup Inc, Research Division - MD and Senior Analyst [27]

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It seems like you took some price on the Innerwear side that helped margins in that segment. Can you just maybe talk about how your retail partners have adjusted their pricing? What sort of sell-throughs that they are seeing? Just basically, what's the consumer reception to the price increases?

And also, I just wanted to make sure. On the international side, you mentioned some bad debt that negatively hurt your profits this past quarter. Was that a onetime thing? Or do you expect any more of that to continue in F '20?

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Gerald W. Evans, Hanesbrands Inc. - CEO & Director [28]

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Sure. From the pricing question, we implemented our pricing in Innerwear really last February, so February of 2019. You may recall at the time, we were pricing because commodities had peaked ahead of that pricing and we put that pricing in place. So it's been in place a long time. We've generally seen that the pricing in the market has settled out around it and so forth.

What we're seeing now, though, is as the pricing continues to lap itself, the peak of the commodities is past, and we're actually seeing margin improvement as the commodity costs begin to ramp down and the pricing overlaps that. So we're seeing that now.

As we look to Innerwear in the second half of 2020, we get the added benefit of the supply chain restructurings that we had executed in 2019 will work their way off the balance sheet and give us added improvement in our operating margins and profit within Innerwear, in particular.

From the standpoint of the international bad debt, that was a bankruptcy in Australia. And we would expect that to be an individual event, not something that's ongoing there.

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Operator [29]

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Our next question comes from David Swartz with Morningstar.

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David Swartz, Morningstar Inc., Research Division - Equity Analyst [30]

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Can you give us an update on the new distribution agreements for Champion in South Korea and China? And also, do you think that the health crisis in China will affect store openings this year?

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Gerald W. Evans, Hanesbrands Inc. - CEO & Director [31]

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Sure. From the standpoint of the distribution agreements, we have 2 new partners, 1 in Korea and 1 in China, as you noted. From the standpoint of their -- how they will flow, they are planned for later in the year. So at this point in time, we do not see the current issue having an impact on that business. You may recall that our Chinese commercial business is fairly small today, less than 1%.

From the standpoint of that overall issue, we're taking it very seriously. It's an evolving issue. We have stopped our own travel of our employees, as well as we're watching very carefully from the standpoint of our vendors. And we will keep that travel stopped until we see that the illness is stopped or ceased.

From the standpoint of our business, we don't see it having any meaningful impact on our business at this time, and we certainly are working on contingency plans, either from a sourcing standpoint or a business standpoint. But back to your original question, we feel good about those distributors, and they will have more of a second half impact.

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Operator [32]

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Our next question comes from John Kernan with Cowen.

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John David Kernan, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [33]

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Gerald, you mentioned and called out Champion hitting your target earlier than you had anticipated, and you mentioned $1 billion in incremental top line that you thought the brand can generate. Can you walk us through how you're getting there and just the bridge between distribution growth in North America and international in kind of how we should think about that $1 billion in revenue opportunity that you're talking to?

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Gerald W. Evans, Hanesbrands Inc. - CEO & Director [34]

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Sure. As we began to look at it from the standpoint of the next $1 billion, we see it as continued to be a global expansion. And in many ways, some of the categories I touched on earlier are important elements to that. The drive from just -- from simply being predominantly a men's brand to one that becomes across genders and includes a kids business as well. It would obviously include an important ramping in markets like Asia, where we think there's tremendous opportunity; further expansion in our Europe markets. And within the U.S. market, for example, where we have pretty solid distribution, that's where you would expect certainly us to build a bigger business across women and kids as well.

And then there are categories out there that we really don't play in, such as outerwear. And we also are in the midst of partnering with a company on some initial shoe offerings as well. So we see lots of avenues to grow, and we would see it sort of being consistent growth over time.

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Operator [35]

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Our next question comes from Carla Casella with JPMorgan.

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Carla Casella, JP Morgan Chase & Co, Research Division - MD & Senior Analyst [36]

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You talked about both the shelf space gains and losses, and I think you gave us some nice clarity on the intimates in Korea and China. But can you say the timing of -- was that the only major change in shelf space this year? Or was there something else that was embedded in one of the other categories that I missed?

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Gerald W. Evans, Hanesbrands Inc. - CEO & Director [37]

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No, I think from the standpoint of shelf space, we're fairly stable from a shelf space. And when I speak to you about that, in shelf space, I'm speaking more on the Innerwear side of things. Shelf space is -- it's fairly stable. We do see the solidification of the Basic space within the mass channel, as we referred to earlier. But we feel good about our shelf space and our innovations behind it.

Of course, on the Activewear side and Champion in particular, we're continuing to drive distribution expansion in the U.S. as well as globally. So we have a nice trend there as well.

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Operator [38]

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Thank you. That concludes our question-and-answer session. I would now like to turn the call back over to T.C. Robillard for any closing remarks.

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Thomas C. Robillard, Hanesbrands Inc. - Chief IR Officer [39]

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

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Operator [40]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.