HBI
#Thanks, <UNK>
Given my recent decision to retire by the end of the year, let me reflect on the past few years as a way to help frame the company's future as we launch Project Booster
Over the past five years, the implementation of our Sell More, Spend Less, Generate Cash strategy and all its variations has significantly transformed our business
Over this time, we've added approximately $1.6 billion of revenue
We've expanded our global footprint with nearly a third of our sales now coming from our international businesses
We've more than doubled our operating profit, while expanding margins by over 500 basis points
We've completed $2.3 billion of acquisitions, and we've returned roughly $1.5 billion to shareholders through dividends and buybacks
The evolution of our business model has clearly driven strong results over the past five years
With Project Booster, we're entering the next phase of our evolution, which is where we fully leverage our large global footprint and unlock the full revenue and cash flow potential of our business model
And we believe this positions us for continued growth over the next five years
In terms of the impact and cadence from Booster; the project, which began late in the first quarter, is expected to be neutral to operating profit and cash flow in 2017. We incurred approximately $7 million of cost in the first quarter or about $0.02 a share primarily from head count-related actions
We expect an equivalent level of expense in Q2, which is factored into our current guidance
The Booster-related costs are reflected in our adjusted results
So, to be clear, these costs are not part of our acquisition and integration-related charges
The savings from these actions, which are expected to fully offset the first half costs, should flow through in the third and fourth quarters
Looking forward, gross cost savings, working capital improvements as well as growth-related investments in Project Booster are expected to build over the next two years reaching on an annual basis $100 million of net cost savings and $300 million of incremental cash flow from operations by the end of 2019. I want to emphasize that the benefits from Booster are on top of our annual $30 million to $40 million of supply chain efficiency gains and on top of the remaining synergies from our prior acquisitions
And as <UNK> noted, when you combine the remaining synergies from our existing acquisitions, with the expected benefits from Project Booster, we are very well positioned to exit 2019 at a run rate of more than $1 billion a year in cash flow from operations
Now let me walk you through some of the specifics for the quarter
We're off to a strong start to the year as our results were in line with our expectations and our guidance
Sales increased 13% over last year, driven by roughly $210 million of acquisition contributions
With respect to organic sales, was 4% decline versus last year, was in line with our expectations and showed sequential improvement from the fourth quarter
Organic growth in Activewear, Online, Asia and the Americas was offset by expected declines in Innerwear as well as our new Other segment, which consists of our businesses that are being managed for cash
Touching briefly on organic sales
There were a number of encouraging signs within the quarter that reinforced our confidence for continued sequential improvement as the year progresses
Online sales in the U.S
across all channels grew at a double-digit rate
Our largest business, men's underwear, grew low single-digits as order patterns normalized with a large mass retailer
Our Activewear segment returned to organic growth, while our Asia business continue to grow at double-digit rates
And as we look through the second half, simply wrapping our higher growth acquisitions and last year's exit from our legacy catalog business is expected to add over 150 basis points to organic growth
Looking at our segments
Activewear sales increased 3% over last year, driven by low single-digit organic growth and a modest contribution from last year's acquisition of GTM
Champion sales in the U.S
were up double-digits, as we continued to benefit from our refreshed product offering and increased space within the mass channel
This more than offset the decline in our Hanes Activewear business
Operating margin of 10.2% was essentially flat relative to last year
Switching to our International segment
Sales growth was driven by the contributions from last year's acquisitions, while organic sales on a constant currency basis were essentially flat in the quarter
Operating margin of 10.6% increased 170 basis points over last year driven primarily by synergies from Hanes Europe
Turning to our Innerwear segment
Sales decreased roughly 6% over last year in line with our expectations
Operating margin of 20.3% was essentially flat versus last year
In basics, the strength in our men's underwear business was more than offset by declines in other product categories due to challenging traffic and cautious inventory management by retailers
With respect to intimates, the entire year-over-year decline was driven by a single retailer who began its planned door closings during the quarter
We felt good about our outlook for the second half as our shelf space is stabilizing, and we're seeing traction with our new Maidenform offerings, which are being rolled out across multiple channels throughout the year
Looking at our overall results, gross margin improved 230 basis points over last year to 40.2%, driven by acquisition-related mix as well as efficiency gains within our supply chain
Operating margin of 11.6% declined 50 basis points over last year, due entirely to the roughly $7 million of costs related to Project Booster
Core operating margins increased 40 basis points in the quarter, driven primarily by $5 million of acquisition synergies
The tax rate was 6% in the quarter, in line with our full year guidance, while EPS of $0.29 was at the high-end of our guidance range despite the $0.02 per share impact from Booster-related expenses
With respect to balance sheet and cash flow highlights
Core inventory declined 8%, while cash flow from operations improved $262 million over last year
About half of the cash flow improvement was timing related, while the other half was from structural improvements to working capital
We also invested approximately $300 million during the quarter to repurchase nearly 15 million shares
Turning to guidance, we reiterated our full year outlook while also providing second quarter guidance
So I'll point you to the press release and our FAQ document for any specifics
That said, let me touch on a couple of items regarding Q2. First, with respect to sales, our guidance includes approximately $200 million from acquisition contributions, which implies an organic sales decline of roughly 2%, continuing our improving trend to return to organic sales growth in the second half
And second, our guidance includes approximately $8 million of Booster-related expense or about $0.02 a share, which will fall primarily in SG&A
So, in summary, we're off to a strong start for the year as our results were right in line with our expectations
We grew revenue 13%, we grew earnings per share 12%, we delivered strong improvements in cash flow, and we returned over $350 million to shareholders
And with that, I'll turn the call back over to <UNK>
Well, as we said, about $100 million of the Project Booster number will come from cost savings
Those cost savings will be both SG&A related, but mostly cost to sales related as we continue to leverage our supply chain
And then $200 million of the $300 million cash flow improvement from Project Booster will then come from working capital improvements, and that's going to come across the board
It'll come through continuing to drive improving inventory turns
It'll come through – and also as well in improving our accounts payable and accounts receivable management
So, there are lot of elements to it
It's really not one thing, but a whole organizational effort
<UNK> <UNK> <UNK> - Credit Suisse Securities (USA) LLC Thanks
And could I ask about your expectations for return to organic growth in the back half of the year? What are you seeing at point-of-sale to give you comfort in that trajectory?
Thank you, <UNK>
Sure
I'd be glad to, Mike
So, let's take inventory first
When we began our acquisitions a few years ago, we actually saw our turns begin to decline as we begin to integrate new businesses into our organization
As we've now become better at that, and we've kind of bottomed out kind of that two turns type of a range
What we now see is that we are able to continue to integrate but do so and we returned our turns to a more normal level
So, I would expect to see about a 10th of a turn a year in improvement in turns from that two turns base on average
So that's inventory
Let's talk about accounts payable
As we become more global and our footprint as we become larger, we have an opportunity to become more effective in the way we negotiate terms, conditions and price with our largest vendors
And so, as we do that, we're seeing our days to pay extend
I think you're seeing there's a lot of people, we're seeing it as well
On the accounts receivables side, what we're seeing is that as we're able to integrate our international businesses, we're able to make good progress in reducing their DSO
We have a really strong competency in our organization, and we're able to transfer that to our acquired companies and reduce DSOs
So, it's really, like all those three things playing together, it things that we know how to do that we've done in the past and that we expect to be able to continue to do in the future
Yeah, I was actually hopping somebody would ask that
Our margins are really good this quarter
We're up 230 basis points on gross margin, 200 basis points of that came from acquisitions, about 30 basis points came from manufacturing cost savings that dropped down to the bottom line
When you really look at the operating profit margin for the quarter, we saw the base business, the core business generate 40 basis points, that's 90 basis points of improvement from cost savings and synergies, mostly and then offset by about 50 basis points of Booster expenses
So, a really strong performance in the quarter on margins
In terms of Q2, if you do the midpoint on our guidance back into that, you find that we're expecting operating margins in second quarter to be down about 150 basis points
That's 100 basis points from the dilution from the short-term dilution from the lower margin acquisitions that we did last year
The core margins, it should be fairly flattish except for the 50 basis points from Project Booster that will flow through in the quarter
We're kind of expecting flattish margins because we're going to see a little bit of a richer mix towards Activewear this year versus last year in the quarter
And that business has a little bit lower margins
Yeah, I think as we talked about in our prepared remarks, we would expect the Booster expenses and savings in 2017 to pretty well offset each other
Then as we roll into 2018 and 2019, you would expect similar to what we've seen with synergies
We expect to see the SG&A savings come a little faster than the cost of sales because the cost of sales take a little longer to flow through to the balance sheet and then on to the P&L
So, what that would suggest then is that in terms of cadence, you'll see savings in both 2018 and 2019, though skewed a little bit more to 2019 as our current plan
But you'll see savings and investments throughout that period, and we should hit a run rate net savings of about $100 million by the end of 2019.
I'm sorry, I meant operating profit margin would be more flattish
Core operating margin would be flattish in Q2.
I think you're going to continue to see improvement
I don't want to start giving guidance on gross profit margin, but we'll continue to see improvement
It's the same dynamic that you saw in the first quarter that you should see in the second quarter, perhaps not necessarily on the same scale, but should see strong improvements year-over-year
Yeah, it was very strong, but we expect – what we said historically is that, we do expect – even when we wrap the acquisitions in the beginning of the third quarter, we still expect to see incremental gross margin improvement quarter-after-quarter or year-over-year, improvement in each quarter
Well, I'll tell you, we don't generally give guidance on that
Historically, our cash taxes have been half or less of our estimated tax rate
That varies from year-to-year though, <UNK>
It's not generally a big driver of cash flow one way or the other
