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Edited Transcript of HBI earnings conference call or presentation 7-Feb-19 1:30pm GMT

Q4 2018 HanesBrands Inc Earnings Call

WINSTON-SALEM Feb 8, 2019 (Thomson StreetEvents) -- Edited Transcript of HanesBrands Inc earnings conference call or presentation Thursday, February 7, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barry A. Hytinen

Hanesbrands Inc. - CFO

* Gerald W. Evans

Hanesbrands Inc. - CEO & Director

* 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

* Chethan Bhaskaran Mallela

Barclays Bank PLC, Research Division - VP

* Daniel Ryan Stroller

Instinet, LLC, Research Division - Research Analyst

* Edward Alfred Ryan

UBS Investment Bank, Research Division - Associate Director & United States Research Associate of Retail

* Heather Nicole Balsky

BofA Merrill Lynch, Research Division - VP

* James Vincent Duffy

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

* John David Kernan

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

* Laurent Andre Vasilescu

Macquarie Research - Consumer Analyst

* Omar Regis Saad

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

* Steven Louis Marotta

CL King & Associates, Inc., Research Division - Senior VP of Equity Research & Senior Research 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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Good day, ladies and gentlemen, and welcome to the HanesBrands Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I'd now like to introduce your host for today's conference, Mr. T.C. Robillard, Chief Investor Relations Officer. Sir, please go ahead.

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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're pleased to be here today to provide an update on our progress after the fourth quarter of 2018. Hopefully, everyone has had a chance to review the news release we issued earlier today. The news release, updated FAQ document and 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 uncertainties that may cause actual results to differ materially. These risks are detailed in our various filings with the SEC and may be found on our website as well as in our news releases. The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made.

Unless otherwise noted, today's references to our consolidated financial results as well as our 2019 guidance represent continuing operations and exclude all acquisition, integration and other action-related charges and expenses. Additional information, including a reconciliation of these and other non-GAAP performance measures to GAAP, can be found in today's press release.

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

I 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. We're very pleased with our fourth quarter performance, including strong organic revenue growth, significant cash flow generation and reduced leverage. Our 3 growth initiatives: Champion, consumer-direct and International delivered stronger than expected results in the quarter. And our U.S. Innerwear business saw meaningful improvement from the third quarter, with revenue and profit results that were in line with our guidance. This growing momentum across our business delivered our best fourth quarter performance in 4 years. And as we look into 2019, we're well positioned to accelerate our operating cash flow growth as well as bring our leverage back within our long-term range.

At our Investor Day, we spoke about how we've diversified our business and increased our global scale to provide a path to significantly grow our cash flow and generate higher shareholder returns over the next several years. Our strong fourth quarter results and our 2019 operating cash flow outlook underscore the progress we are making toward achieving the goals we laid out in May.

For the quarter, revenue growth of more than 7% exceeded our expectations. Organic constant-currency growth of over 6% marked our sixth consecutive quarter of growth as well as our highest organic growth quarter in 8 years. And for 2018, the 2% organic constant-currency growth was our first full year increase since 2014.

Fourth quarter adjusted operating profit increased 10%, and margins expanded 40 basis points over prior year. We generated $0.5 billion in operating cash flow in the quarter, the highest of any quarter in our company's history. And we reduced our leverage on a net-debt-to-EBITDA basis by half a turn to 3.3x.

Touching on our growth initiatives. Champion revenue growth continued to accelerate in the quarter. Excluding the mass channel, global Champion revenue was up more than 50% in constant-currency. This growth comes on top of last year's 29% and once again, highlights that our coordinated global strategy to elevate the Champion brand is driving increased demand for the product.

Consumer-direct revenue, which we define as our own stores and all online channels, increased more than 20% globally compared to the prior year and represented approximately 25% of global sales in the quarter. And on a constant-currency basis, our International segment delivered another quarter of high single-digit organic revenue growth, driven by Champion and our Innerwear businesses in Australia, Asia and the Americas.

With respect to our U.S. Innerwear business, we're pleased that fourth quarter sales and operating margin were in line with our outlook. For the quarter, basics revenue increased 2% over last year. And our intimates business, while down, improved sequentially. That said, the U.S. retail landscape remains challenging. We're encouraged by a number of positive signs underlying both our basics and intimates business, but the prolonged bankruptcies and door closings are impeding our return to consistent growth in this segment.

Despite our improving fourth quarter trends, we decided to take a more conservative view of our U.S. Innerwear segment for 2019 than we held in November, given the ongoing uncertainty in the U.S. mid-tier and department store channel. Our outlook now reflects a more cautious stance with respect to door closings in these channels. However, as a strong diversified global company, we're more than offsetting this with our growth businesses. For 2019, we're forecasting approximately 2.5% organic constant-currency growth at the midpoint as the momentum in our U.S. Activewear and International segments continues to fuel our overall revenue growth. We expect operating margin expansion of approximately 10 basis points at the midpoint as we leverage our global scale and implement price increases to offset input cost inflation.

We're forecasting operating cash flow of $750 million at the midpoint of our range, an increase of approximately 17% or $100 million from last year. And we're committed to bring our leverage below 3x by the end of the year.

We fully understand investors' focus on our U.S. Innerwear business, and we remain committed to returning this business to long-term growth. In 2019, we're increasing our marketing investment behind our key brands and innovations. We're also taking additional steps to further streamline our U.S. intimates supply chain, which should lower cost and increase our speed to market. However, we don't want to lose sight of the fact that we have transformed to become a diverse, global apparel company, operating a portfolio of profitable businesses with many avenues for growth. And these efforts are delivering their intended results. We're producing consistent organic revenue growth, 6 quarters in a row and counting. And this is being driven by the areas we have diversified into such as Champion, consumer-direct and International. We're leveraging our global scale and brand strength to improve our operating margins. Our leverage is coming down, and we're poised to accelerate cash flow generation as our acquisition integrations come to a close.

With all this momentum, we feel well positioned to deliver accelerated value creation to our shareholders over the next several years.

With that, I'll turn the call over to Barry.

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Barry A. Hytinen, Hanesbrands Inc. - CFO [4]

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Thanks, Gerald. Overall, we delivered solid fourth quarter results as we achieved or exceeded our expectations across all of our key metrics, including sales, operating profit, earnings per share and cash flow.

For the quarter, sales were $1.77 billion, an increase of $123 million over last year. Adjusted operating profit increased 10% to $260 million, while adjusted operating margin increased 40 basis points to 14.7%. Adjusted and GAAP earnings per share were $0.48 and $0.44, respectively. We generated over $500 million in cash flow from operations, and we paid down $400 million of debt, lowering our leverage to 3.3x.

With that summary, let's turn to the details of the quarter's results.

Sales increased 7.5% over last year, which included $45 million from acquisition contributions and a $26 million headwind from foreign exchange. On an organic constant-currency basis, sales increased 6.3% in the quarter. Gross margin of 40.1% was consistent with prior year as the impact of input cost inflation, product mix and foreign exchange offset the benefits from acquisition contributions, synergies and price increases for certain Activewear products. Operating margin expanded 40 basis points compared to last year driven by acquisition contributions and expense management, partially offset by investments to support growth.

For the quarter, acquisition and other related charges of $15 million were in line with our guidance as was our tax rate of 14.9%. Normalizing the prior year for the impact of tax reform, adjusted and GAAP earnings per share increased 12% and 175%, respectively.

Now let me take you through our segment performance. U.S. Innerwear sales were flat to last year, in line with our guidance. Basics revenue increased 2% driven by growth in men's and women's underwear, while intimates sales declined 7%, which was an improvement from last quarter. Within intimates, strong consumer reception to our new product designs and innovation drove double-digit revenue growth in Shapewear for the quarter. This was offset by lower bra sales, which continue to be impacted by door closings and the challenging retail landscape within the mid-tier and department store channel. For the quarter, U.S. Innerwear's operating margin was consistent year-over-year.

U.S. Activewear segment sales increased 13.5% in the quarter and 13% organically. This growth was driven by strong performance in our Champion and American Casualwear businesses. Domestic Champion sales, excluding the mass channel, increased over 50% in the quarter. And as expected, Champion at mass, which is our C9 business, declined less than 3%. Activewear's operating margin declined 150 basis points in the quarter to 16.1% due to product mix as well as our planned investments to support future growth initiatives, inclusive of brand support and distribution network expansion.

In our International segment, sales increased 12% or $64 million, which included a $43 million contribution from Bras N Things and a $26 million headwind from the effects of foreign exchange rates. On an organic constant-currency basis, sales increased 8.5% or $47 million compared to last year.

International's operating margin increased 200 basis points over last year to 16.2%. An important takeaway for me: International's operating margin was above the corporate average for the second straight quarter, reflecting the improved profitability from scale and synergies that we had forecasted earlier in the year.

Before I move on, let me touch on our global Champion business. For the quarter, on a constant-currency basis, revenue increased 33% over last year, while revenue, excluding C9, increased over 50%. For the full year, constant-currency revenue, excluding C9, was $1.36 billion, up from approximately $1 billion in 2017 and was split equally between Domestic and International.

Now moving on to the balance sheet and cash flow items. In the quarter, we generated $502 million of cash flow from operations. Inventory was up year-on-year, primarily due to increased investments to support the global demand for our Champion products. Our focus on both receivables and payables resulted in an 8-day improvement in our cash cycle versus prior year.

With respect to leverage, we paid down over $400 million of debt in the quarter, lowering our leverage to 3.3x on a net-debt-to-adjusted-EBITDA basis. This is down from last year and down significantly from our peak of 3.9x in early 2018 after the acquisition of Bras N Things.

And now, turning to guidance. To assist you with your models, we have provided a number of details on first quarter and full year 2019 guidance in our FAQ document. Therefore, I'll focus my guidance comments on certain assumptions that should help describe the cadence of the year.

For the full year, at the midpoint, we expect total sales growth of approximately 2% and organic constant-currency growth of approximately 2.5%. Our outlook reflects approximately $60 million of currency headwind, with the vast majority of that impacting the first quarter. For the first quarter, at the midpoint, we expect total sales growth of more than 4% and organic constant-currency growth of approximately 6%.

With respect to our segments, the midpoint of our revenue guidance assumes a 2% decline in our U.S. Innerwear segment for the full year and a 4% decline in the first quarter. This outlook reflects the impacts from door closings that Gerald mentioned and an improving trend in the remaining quarters due to the mid-first quarter timing of our price increases and our conservative view on elasticity.

In U.S. Activewear, the midpoint of our full year outlook reflects approximately 2.5% revenue growth. This assumes Champion, excluding C9, grows at a double-digit rate in each quarter and that our C9 business declines at a low-teens rate for the full year. It also assumes a decline in our American Casualwear business as we continue to shift this business to higher-margin products. The vast majority of the full year decline in both C9 and American Casualwear is expected in the second half of the year.

The mix impact of these assumptions should yield significant margin improvement in our Activewear segment for the year with margin expansion in each quarter. For the first quarter, we expect Activewear segment sales to increase approximately 10%.

In our International segment, the midpoint of our full year guidance assumes reported sales growth of approximately 6%. On an organic constant-currency basis, our guidance reflects approximately 8% growth, driven by our International Champion businesses as well as our Innerwear businesses in Asia, Australia and the Americas. Partially offsetting this are the macro headwinds impacting our European Innerwear business.

For the first quarter, we expect reported revenue growth of approximately 8%, which includes the non-organic contributions from Bras N Things and approximately $40 million of currency headwind. At the midpoint, our full year guidance implies approximately 50 basis points of gross margin expansion and 10 basis points of adjusted operating margin expansion. We expect interest and other expenses of approximately $224 million and a tax rate of approximately 14%. Therefore, our full year adjusted net income guidance at the midpoint of our range is approximately $643 million. Our guidance assumes diluted shares outstanding of approximately 366 million.

Our 2019 outlook assumes approximately $55 million of charges, of which $35 million are cash. These charges reflect the completion of all remaining acquisition integrations as well as our supply chain actions, including the reduction of associated overhead costs, principally within our Western Hemisphere network. This is $20 million higher than previously estimated as we've expanded our plan to improve our cost position and drive improved profitability.

In isolation, we would expect these actions to deliver approximately $50 million of incremental profit, with approximately $40 million of that coming in 2020.

Lastly, with respect to cash flow, we expect to generate between $700 million and $800 million of cash flow from operations in 2019. And consistent with our normal seasonality, we expect cash flow from operations to be a use in the first half.

For 2019, our capital allocation priority remains focused on using all excess free cash flow to pay down debt. Therefore, we currently project our leverage on a net-debt-to-adjusted-EBITDA basis to be at approximately 2.9x at the end of the year.

So in closing, we delivered a strong fourth quarter. Our diversification efforts are delivering consistent organic growth. We're taking additional actions to improve profitability, and we're well positioned to further accelerate our cash flow growth in 2019 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, Barry. That concludes our prepared remarks. We'll now begin taking your questions and will 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 the line of Susan Anderson with B. Riley FBR.

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Susan Kay Anderson, B. Riley FBR, Inc., Research Division - Analyst [2]

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I guess, I wanted to may be drill down a little bit more on the Champion growth. It's nice to see that continue to grow strongly. Maybe if you could talk about the growth across regions and then also just the growth profile as we look out through 2019, where you think the opportunities are within shelf space, new doors and new products. And then also if there's any thoughts for the C9 brand after it exits the mass business.

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

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Susan, this is Gerald. Yes, thank you. We're very proud of the fourth quarter. We thought it showed strongly the efforts we put in place to diversify our business and create many paths to profitable growth. And one of those is certainly the Champion brand. As we look at the story, it's a great story, the reuniting and elevating of that brand globally has had tremendous success for us. It -- as we noted in our comments, it grew at above 30% rate in 2018, and we're expecting that again in 2019, leaving us well ahead of our goal -- the pace to reach our goal of $2 billion by 2022. The acceleration is really -- and the strength is really around the world. We saw strong double-digit growth around the world. We noted in the fourth quarter, for example, that we -- excluding C9, it was up 50% on a global basis, the Champion brand. And we see it coming through expansion within our wholesale partners. We also see it through our own stores around the world and partner stores. And we're seeing it come online. In fact, some of the new geographies we're bringing on as we're seeing growth in China now, as we've entered that market, and we're seeing nice expansion of our presence in China as well as the Korean market has begun to -- beginning to develop for us. So we see a lot of runway to continue to build the business as we look forward. Just -- I just had a personal opportunity to review the fall line. It looks great. And we see lots of opportunity to continue to incorporate more and more style into the brand. This is an important year for us. It's the 100th anniversary of Champion, and we've just launched our first global campaign behind the brand with a particular focus on that young consumer that's really adopting the brand. That 18- to 24-year-old group is going to carry this brand on to the next generation for us. From the standpoint of C9, we -- that brand continues to perform very well at retail from a point-of-sale. We certainly continue to look at options for that. As you can tell from my comments, our first priority is to continue to optimize the performance of the growing Champion business, but we continue to look at options for that as well. And if one were to emerge, that would just be upside to the strong momentum we have in the brand.

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Operator [4]

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Our next question comes from Omar Saad with Evercore.

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Omar Regis Saad, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team [5]

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Great to see the cash flow production and debt reduction as well guys, but I do want to ask a follow-up on Champion. It really feels like the brand's at a point where it could really benefit from a significantly more aggressive marketing spend, talent acquisition. It feels like, especially when you're talking about this basics -- Champion basics business you're doing, you're thinking more about segmenting the Champion brand across channels. Maybe you could talk about that. The website, too, is another area where there's probably a lot of room for investment and opportunity given what you've got going on the brand. Maybe you could talk about how you're prioritizing investments. How much the investment levels are increasing around Champion? And how you're thinking about segmenting the brand to keep it -- to keep the demand for it as strong as possible.

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

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Sure, Omar. Yes, we -- you definitely are on the right track, we are stepping up the investment. And as I noted in my prior comment, one of the first things we've done is launch our first global campaign. As you know, we've used digital very effectively to connect with the younger consumer. We're stepping up our efforts that way as well as driving this global campaign. Our online presence does have opportunity for further development and as one of our key focuses is to develop our own website as well as working with others on their sites as well. And a key part of developing the business is the segmentation of the line, and that was a lot of what I saw in our own fall line that I referenced in the prior note. And one of the great things about having our global brands -- our global connection of the brand is, we're able to lift and land products from around the world. So we are carefully segmenting the business by channel and even within customers, within channels to keep that strong presence for the brand and keep the differentiation for our core customers. The basics reference was really around the basics socks and underwear business. It's developing very nicely behind the brand and the strength of the brand, and we are selectively placing that within our customers as well, and that's differentiated as well by individual customer channel.

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Operator [7]

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Our next question comes from Laurent Vasilescu with Macquarie.

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Laurent Andre Vasilescu, Macquarie Research - Consumer Analyst [8]

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I wanted to hone in on the U.S. Activewear guide for 2019. If we take the guidance of 2.5% growth for 2019 and ex out the C9 business by about $15 million this year, that would imply that the non-C9 Activewear business will be up about 7%. Is that the right way to think about it? And then can you tell us how big the American Casual (sic) [American Casualwear] business was in 2018 and where does it go for 2019?

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Barry A. Hytinen, Hanesbrands Inc. - CFO [9]

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Laurent, this is Barry. Good question. And let me dive a little deep into Activewear -- U.S. Activewear to help everyone. Within U.S. Activewear, for the first quarter and really for the first half, we're planning U.S. Activewear to be up slightly over 10%. Now for the year, as you noted, we're planning the segment to be up 2.5%. We're basically currently projecting the third quarter to be flat and the fourth quarter to be down mid- to high singles, let's say, 7%. Now if we dive deeper, let me start maybe by framing U.S. Activewear based on some of the questions you just had. In 2018, that was about $1.79 billion for the segment. Now that's made up of C9 in Activewear of $382 million in 2018. As the Champion -- recall global Champion was $1.36 billion, of which about half of that was in the U.S. So that's $680 million in total U.S. Champion, but $30 million of that is in Innerwear for the Basics that Omar was asking about. So there's about $650 million of Champion in U.S. Activewear. The balance of that -- of the U.S. Activewear segment of $760 million in '18 includes our American Casualwear business, our bookstore, our sports apparel, Alternative Apparel. There's a lot of businesses in there. So turning to 2019, you are correct. For C9, we're planning it down, and really much of that is in the back half. We're planning the first half to be down in line with the decline we saw in the fourth quarter. So it's down about 4% or 5%. As Gerald noted, we've got good visibility on first half bookings already. As the program winds down, we're planning for the third quarter to be down, say, 15% and the fourth quarter down about 30%. That's about $15 million and $30 million, respectively, or $45 million for the back half. Now that brings C9 to be a decline of just over $50 million or 14% for the full year. We've got U.S. Champion up on a percentage basis in the high 20s, which is about $180 million of growth for the U.S. Activewear segment. Now we have that planned in the first quarter up more than the full year, following the trends we saw in the fourth quarter of '18 and additionally, the bookings we already have from customers. We assume the year-on-year growth kind of naturally tapers as we start to lap higher comps through the year, though with double-digit growth across all the quarters. And frankly, that trajectory is just us being prudent. And frankly, I think this is probably an area where we could prove to be conservative because Champion is doing incredibly well, and we continue to fuel its growth, but we'll update you all as we move through the year. And that brings you to that balance of U.S. Activewear, which year-on-year is impacted by the transition of the higher-margin products that we mentioned out of the American Casualwear business as we transition there, and we anticipate the balance of the business to be down, say, 11% or 12%, which is about $80 million, with more of that in the back half. So that was a lot, but I appreciate the question. I wanted to help you unpack it.

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Operator [10]

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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 [11]

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Nice work on the cash flow, guys. Barry, can you help us by speaking to the building blocks of the '19 cash flow from operation guidance, including the working capital components that bridge the gap between the GAAP net income guide of $596 million at the midpoint and cash flow from ops guide at $750 million at the midpoint?

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Barry A. Hytinen, Hanesbrands Inc. - CFO [12]

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Sure. Thanks, Jim. And appreciate the kind words about '18. It was a big team effort and we're very pleased with the performance, and I think it speaks to what we've got going forward in the cash flow in this business inherently. So moving to '19, yes, I'll start exactly where you did with GAAP net income of $596 million at the midpoint. If you add back our noncash items for such things as D&A and stock comp, that's probably in the order of the same area it was this year for those items, which is about $180 million -- $170 million, $180 million. Now note that in the supply chain actions and charges we mentioned of the total $55 million, I called out that about $20 million of that is noncash, so you'd add that back. Just those 2 alone with our GAAP net income puts you very close to the high end of our cash flow guidance for the full year. And so if you think about our midpoint, frankly, I'm just kind of being a little bit of conservative on working capital. And I say conservative because, frankly, the team has got a lot of actions around continuing to reduce inventory as we move through the year. And as you noted, or as we've noted before, I should say, we grew inventory to support Champion. And I think as we move through the year, we'll be able to sell that down. So I feel very good about the cash flow guidance and frankly, moving forward into 2020 and beyond.

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Operator [13]

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Our next question comes from Jay Sole with UBS.

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Edward Alfred Ryan, UBS Investment Bank, Research Division - Associate Director & United States Research Associate of Retail [14]

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This is Eddie Ryan on for Jay Sole. Can you help us unpack that 50 basis point gross margin expansion guide for the full year? And how much of that is mix versus pricing versus product cost?

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Barry A. Hytinen, Hanesbrands Inc. - CFO [15]

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So I would tell you that there's a nice piece from pricing in our Innerwear business. You -- when you think about the pricing opportunity, we noted last year that we had about, call it, $40 million of input cost inflation. We'll price for that here in the mid-quarter of first quarter. We've taken a conservative view on elasticity. And so I would say that pricing is driving about, call it, $40 million or so of benefit in the year you'll lap and get more of that in the first quarter of 2020. There's a very nice mix coming out of both Champion on a global basis together with the remixing that transition we mentioned out of some of the lower-margin products in Activewear. And those are the primary items I'd call out. And then as it relates to one -- a couple of drags, our -- when you think about our Innerwear guidance and it's kind of our prudent nature for where we're guiding U.S. Innerwear, that's a higher-margin segment. So as it has an organic, if you will, nonprice-based decline, that will drag on margin and that will impact the first quarter since we don't have the pricing benefit until the second. So those would be some key call-outs.

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Operator [16]

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Our next question comes from Simeon Siegel with Nomura Instinet.

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Daniel Ryan Stroller, Instinet, LLC, Research Division - Research Analyst [17]

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This is Dan Stroller on for Simeon. With regards to Champion growth this year, is there any way to parse out the expectation for North America growth between units and price and expanded distribution or comps? And then on the Champion stores, if there's any productivity and metrics you're willing to share, that would be great.

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Barry A. Hytinen, Hanesbrands Inc. - CFO [18]

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Yes. I would say, when you look at our Champion business and beyond just the U.S., it's globally, we're seeing good benefit from both distribution expansion, more space within the customers we already have as well as price. So it's really a blend of everything you mentioned. Additionally, we'll have some more retail store outlets as we continue to build those out around the world. So it's a good balance.

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Operator [19]

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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 and Senior Research Analyst [20]

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Can you talk to the Innerwear category in general. You've clearly made some progress in the fourth quarter, the trend of the business did show improvement and you have had some revitalization initiatives in that category. Can you just talk to the overall health of that channel in terms of inventory and how you're viewing that, the Innerwear, particularly in the mass category going forward?

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

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Yes, John, we're very pleased with Q4 and our U.S. Innerwear business. It came in right on our guidance and was flat to last year. And your right, we're seeing a lot of positive signs in that business. Our basic revenue is up 2%. Our space is expanding for 2019 in basics. We got price increases in place. And in our Intimates, we're seeing traction behind our initiatives there. So we feel like we've got our business on path to for -- to return to growth long term. We are viewing the market with caution, and we noted that in our comments. Certainly, the Shopko bankruptcy coming early in the year on top of the late 2018 Sears bankruptcy and some general thoughts that there could be other door closures in the market or -- and/or tightening of inventory caused us to really step back and view the market with a little more caution as we entered the year, and we adjusted our numbers accordingly. We do acknowledge that these -- some of these assumptions could prove to be conservative as we work through the year. But given the ongoing upheaval at retail, we felt it was best to approach the year with some caution. From the standpoint of the market, it's generally performing as we expect. And our inventories, we finished in line with where we expect it to be for the year. And we -- you may recall that last quarter we commented that there'd been a little bit of a lag in reordering behind our POS. We saw that catch up early in the year and we felt like as we entered -- ended the year, we were in line from an inventory standpoint.

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Operator [22]

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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 [23]

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Would you break down and quantify your International performance for us in more detail by geography to give us a better picture of the sources and offsets of growth, especially if you've called out headwinds in Europe Innerwear? Additionally, how much margin expansion can we expect to the segment in 2019 as we move further past the Champion Europe and Pacific Brands acquisitions?

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Gerald W. Evans, Hanesbrands Inc. - CEO & Director [24]

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Yes. Let me take the first part of that question. I'll let Barry take the last part of the question. But from the standpoint of our International business, it performed tremendously well in the quarter and really speaks to the strength of what we've been building there and the diversity of what we're building. We saw strong growth with Champion across the businesses, but we also saw strong growth across our Innerwear businesses in Asia, Australia and the Americas. And we saw 200 basis points of operating margin improvement in that business in the quarter, so you're seeing the synergies come through. As we noted in our comments, there was some softness in our European -- in Europe that we experienced in our Innerwear business, and they were really macro pressures. We're well established in the German and the French economies -- or in our French markets, and those economies did feel some slowing as we went through the back quarters of the year. We saw the apparel businesses in total slow or the category slow in total in those markets in back half of the year. Our shares held as we came through, and we have leading shares in those markets. So that's important for us to know and it tells us our businesses are solid in those markets. So as we look into 2019, we are guiding toward a high single-digit organic constant-currency growth again for our International businesses, including a strong first quarter. And it's going to be driven again by our Champion growth, but also Innerwear growth across Asia, Australia and the Americas. And we have cautiously planned Europe. Should that market begin to turn from a macro standpoint, then certainly we can see some improved performance there as well.

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Barry A. Hytinen, Hanesbrands Inc. - CFO [25]

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Tiffany, this is Barry. I'll give you a little bit more help on sales and maybe operating profit to -- some thoughts to think about. In our International segment, we have reported sales growth expected around 8% in the first quarter and it's about 6% for the year. Now as we've already mentioned, in the first quarter, reported growth is benefited by the -- both the organic, but also the inorganic growth from Bras N Things, offset by unfavorable FX. And the remaining quarters, we've got them planned very similar in terms of growth with one call-out being that we expect FX to still be a headwind in the second quarter. From a profit standpoint, if we just start with sales, I think International operating profit is probably up $35 million, $40 million on $136 million increase in sales. Bras N Things' inorganic contribution, as we called out, is about $3 million help, but that's more than offset by the FX headwinds of, say, $7 million. Now that -- those note -- I do -- I would note that we'll be investing to support our brands on a global basis. And in total, for the company, I would estimate that our increase in investment to support growth is probably in the $25 million range year-on-year with the vast majority of that supporting brands and a slight expansion to our distribution network to support all the growth we're experiencing.

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Operator [26]

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Our next question comes from Steve Marotta with CL King Associates (sic) [CL King & Associates].

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Steven Louis Marotta, CL King & Associates, Inc., Research Division - Senior VP of Equity Research & Senior Research Analyst [27]

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Considering the guidance for the current fiscal year includes 50 basis point gross margin improvement and 10 basis point increase in operating margin there as an inherent SG&A deleverage there. I believe you mentioned in the prepared remarks that you'll be increasing marketing as well as investments for the year. Can you talk a little bit about those and quantify them to the best you can? Also if there is lumpiness from quarter-to-quarter standpoint, that would be extremely helpful as well.

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Barry A. Hytinen, Hanesbrands Inc. - CFO [28]

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Okay. Sure. I mean, I guess I'd start with where I just finished off. The big investment that we're -- one of the big investments we're making is the -- that to support growth, and that's $25 million globally. I would generally plan that kind of pro rata across the quarters, and that's one of the reasons why the first quarter is showing the profit that we have there. So if you -- a figure of, say, $6 million of headwind to the first quarter profit from those investments to support growth. And we are naturally adding back the onetime bankruptcy charge we had in '18, and that's partially offset by variable compensation going back to target levels and things of that nature. But for the most part, Steve, we feel very good about where we are. And other than the first quarter call-out, which we have in both the FAQ and I spoke to some extent, I would say the year is consistent and seeing a margin expansion second quarter through fourth quarter.

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Operator [29]

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

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Heather Nicole Balsky, BofA Merrill Lynch, Research Division - VP [30]

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I guess, I had a question and then a follow-up. So the first is on, you talked about putting more marketing behind Innerwear and your Basics. I was hoping you could talk about sort of what level of marketing you're putting in and your willingness to kind of spend to reinvigorate that business. And then I'll give you my follow-up.

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

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Yes. Let me just start with how -- what we're going to do, and I'll let Barry comment a little bit on the other piece of it. But from the standpoint of what we're doing, we're certainly going to put support as we always do behind our Basics business. We've got some important innovations out there, and we will support those with our ComfortFlex Fit underwear being in particular one of them. On the intimate side, we have been supporting our Bali business and we intend to do that, but we also intend to invest behind our Maidenform business. It's -- has a lot of appeal among the millennial consumer, and we intend to take the -- some -- take some success from our playbook with Champion and apply it to Maidenform and really begin to connect digitally with the young consumer. And we opened up Maidenform.com at the end of the year. We're already seeing some nice connection and the younger consumer coming to the brand, and we'll reinforce that with our investment.

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Operator [32]

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(Operator Instructions) Our next question comes from the line of Chethan Mallela with Barclays.

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Chethan Bhaskaran Mallela, Barclays Bank PLC, Research Division - VP [33]

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So 2 quick questions for me. First, as we think about the 50% constant-currency growth rate for Champion, excluding the C9 business in the quarter, can you just help us think about the relative growth rates between the performance and the lifestyle product? And then second, on the Innerwear pricing, I believe that's going in effect at the beginning of February. So can you just talk about what you're seeing in the competitive marketplace, whether you've seen your peers start to move or not? And it's probably too early to see real reads, but I think you referenced more cautious elasticity assumptions than before. So just a little bit more detail on how that's changing and why.

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

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Sure. From the standpoint of Champion, we're seeing growth across the entire business. There's certainly a developing performance business within that broader range. And certainly, the brand -- the business has a performance heritage. So we see that we've got breadth in development of that line across. And I think many would say that after 6 -- well, 2 years now, strong growth, it's certainly far beyond a fad. This is a real growth brand, and we've got a lot of room to continue to grow that business. From the standpoint of our price increases, they are going in place as we speak, and so they are going into the market. We have seen that many consumer goods are -- companies are also implementing price increases, and so we all know that we're dealing with input cost and many of us are taking price increases. It's hard to say what the competitive market we will do. We have seen some of our competitors in some of our other businesses like Printwear, take price increases, and they too are incurring input cost increases. And I'm sure that they will have to deal with those as we go forward, but that's yet to be seen. Barry, anything on that?

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Gerald W. Evans, Hanesbrands Inc. - CEO & Director [35]

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From an elasticity standpoint, I think was the final part of your question, we plan -- the price increases go in mid-quarter, and we planned cautiously. We'll see how that plays out.

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Operator [36]

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We have a follow-up question from the line of Heather Balsky with Bank of America.

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Heather Nicole Balsky, BofA Merrill Lynch, Research Division - VP [37]

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I missed my chance in the follow-up, so here I am. The other question is with regards to your synergies and your savings from Project Booster. Can you just update us on where you are and how much you have remaining for the, I guess, next few years?

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Gerald W. Evans, Hanesbrands Inc. - CEO & Director [38]

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Yes. And Project Booster has been a great program for us, we've generated a lot of savings as we've gone through the program. The environment has changed a lot since we started that program, and we've experienced some broader and higher input cost inflation over that period of time and had some additional door closures. But as we looked at it, there's really 2 areas -- Booster had 2 main elements, the cost savings element and an investment element. And those benefits are visible in the expanding gross margin, certainly from a savings standpoint. And we've had a multiyear increase in brand support that has shown up and we've discussed numerous questions today. So at this stage, everything that -- from Booster is flowing through, but as is always in our DNA, we're moving on to the next cost savings project, and that's the Western Hemisphere project we spoke about in our comments and Barry referenced, where we'll look to further tighten our supply chain and improve the -- and eliminate some overhead cost as well. As we noted, that would be a 2-year savings project, that will generate about 4 -- $50 million in total, about $40 million of that would be in 2020, and the balance of $10 million would be in 2021.

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Operator [39]

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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 [40]

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I'm wondering if you can talk to the department stores and how much have you built into your guidance further closures from Sears and JCPenney? And then what percentage of your sales are department stores today?

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Barry A. Hytinen, Hanesbrands Inc. - CFO [41]

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Carla, it's Barry. We are taking, I would say, a prudent approach as it relates to Sears. We have not included it in our guidance for 2019. And as Gerald mentioned in his prepared remarks, if you kind of look at our U.S. Innerwear business, factor out the pricing, kind of think about the Sears point, what we've really planned is a kind of conservative view as it relates to mid-tier / department store. And while we don't have any specific -- and there was 1 additional small bankruptcy earlier and that's about $10 million of sales. But beyond that, the remainder of the decline that we're kind of forecasting is all in the area you're describing, and I would describe it as just being kind of prudent because we are seeing some nice trends in our Innerwear business as it relates to basics space and just the trajectory we saw in the back half in that kind of movement in the fourth quarter off the third quarter trend. So we feel good about where we are. I think we're planned in that area, and we will continue to update you through the year.

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Operator [42]

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And that concludes today's question-and-answer session. I'd like to turn the call back to T.C. Robillard for closing remarks.

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Thomas C. Robillard, Hanesbrands Inc. - Chief IR Officer [43]

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

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Operator [44]

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