Hanesbrands Inc. (NYSE:HBI) Q4 2022 Earnings Call Transcript

Hanesbrands Inc. (NYSE:HBI) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Good day and thank you for standing by. Welcome to the Hanesbrands Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, TC. Robillard, Vice President of Investor Relations. Please go ahead.

TC Robillard: 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 2022. 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 include those related to current macroeconomic condition, consumer demand dynamics, the inflationary environment, cybersecurity and our previously disclosed ransomware incident and any on-going impact of the COVID-19 pandemic. These risks also include those detailed in our various filings with the SEC, which 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 and guidance exclude all restructuring and other action-related charges and speak to continuing operations. Additional information, including a reconciliation of these and other non-GAAP performance measures to GAAP, can be found in today's news release.

Any references to 2019 reflects rebase 2019 results consistent with prior disclosures and can be found in our investor relations website. With me on the call today are Steve Bratspies, our Chief Executive Officer; Michael Dastugue, our Chief Financial Officer and Scott Lewis, our Chief Accounting Officer. For today's call, Steve and Michael will provide some brief remarks, and then we'll open it up to your questions. I'll now turn the call over to Steve.

Steve Bratspies: Thank you TC. Good morning everyone, and welcome. For the quarter, Hanesbrands delivered sales that were above the high end of our forecast and adjusted operating profit and earnings per share that were essentially at the midpoint of our range. I'd like to start by thanking all of our associates around the world. The Global operating environment has been anything but easy over the last three years. However, despite the significant volatility and uncertainty through their dedication and hard work, we've been able to deliver for our consumers, serve our retail partners, and continue to progress on our full potential plan. I'm most grateful and proud of their tremendous efforts. While I'm pleased we delivered on our guidance under difficult operating conditions, we expect the macro economic challenges impacting consumer demand and the lingering pressure from inflation to continue in 2023, particularly in the first half.

Consistent with the mind-set we've adopted since my first day, we're not standing still. We'll continue a proactive approach, remain agile and continue to adapt. Focusing on the things we can control and taking action allows us to manage their short-term challenges, while at the same time continue to implement our long-term transformation strategy. To that end, there are three important topics I'd like to discuss today. First, the near term actions we're taking toward reducing our leverage and strengthening our balance sheet. Second, the path to higher margins and operating cash flows as the year unfolds, including actions to mitigate near term macro related challenges. And third, an update on the implementation and progress of our full potential plan.

Let me walk you through each of these beginning with our strategic actions to strengthen the long-term financial foundation of the company. Today, we announced we're shifting our capital allocation strategy, eliminating the dividend and committing to reducing debt. To be clear, investing in the business and our full potential growth plan remains the priority for capital allocation. And we believe we are well positioned to fund these investments through operating cash flow. What's changing is the allocation of our free cash flow, which will now fully direct toward accelerating debt reduction. This decision was not made lightly. And we believe that a meaningful reduction in our debt will drive significantly higher shareholder returns long-term.

We also updated our credit facility management to drive greater near term flexibility, given the uncertain macroeconomic environment. Michael will discuss this further in his section. In addition to these actions, we expect to refinance our 2024 maturities in the first quarter of this year, subject to market conditions. Turning to margins and cash flow, we see the path to higher margins and operating cash flow as the year unfolds. The lower cost inventory we're currently producing should begin to hit our P&L in the second half, particularly in the fourth quarter. We'll anniversary last years' time out costs, and we're well positioned to benefit from the actions we're taking to help mitigate the near term macro related challenges. Looking at our mitigation actions, last year we set an aggressive target to reduce our inventory units by the end of 2022, which we accomplished.

This created a short term drag on second half gross margins as we took time out in our manufacturing facilities. However, by taking this action, we believe we're well positioned to release working capital and drive operating cash flow this year. We also began and expanded upon a number of cost savings initiatives, including exiting unproductive facilities, consolidating sourcing vendors, and aggressively managing SG&A. Looking to 2023 we're building on these initiatives with additional cost reductions as well as prudent investment management. We reduced corporate headcount in January. We're expanding our savings actions across our procurement operations, including contract renegotiations, and we're strategically managing our investments to align with the current macro environment, just to name a few.

We believe the combination of these actions positions us to generate approximately $500 million in operating cash flow in 2023, to exit the year with a meaningfully higher run rate for both gross and operating margins, and to operate more efficiently, which unlocks long term growth. Lastly, I'd like to touch on our full potential plan. Our long-term strategy is fundamentally unchanged. The plan we are executing is right, and our long-term financial targets remain. However, given the realities of the near-term, macroeconomic and consumer demand environment, our timetable has shifted to the end of 2026. Though the timeline has shifted, we're confident in our ability to deliver $8 billion of sales, and he made 14% operating margin. Our confidence is reinforced by the improvements we've made in the way our business operates.

We've added new capabilities across the organization and exited non-strategic businesses. We've enhanced our inventory and demand planning processes as well as streamlined our innovation process and innerware, which began to bear fruit with the launch of our Hanes originals product. We've improved the go-forward efficiency and effectiveness of our supply chain. We reduce global skews by 45% since 2019, as well as exited unproductive facilities. We're consolidating distribution centers, and we're generating high single digit savings rates in our sourcing and procurement operations. Plus, we're continuing our technology investments to improve our data analytics, drive global integration, efficiency, and ultimately lower costs. We've also changed leadership and our global activewear business, the new team is moving fast.

Photo by Alyssa Strohmann on Unsplash

They're streamlining the operating model, including global coordination of product design and merchandising, increased speed to market and portfolio simplification. This in turn is expected to drive a more focused global product and channel segmentation strategy that provides greater clarity to retailers and consumers as well as improves the long-term health of both the Champion and Hanes activewear brands. It's also expected to build the right foundation to drive revenue and margin growth well beyond the timeline of our full potential plan. We've accomplished a lot. There's no doubt that we're a better, more disciplined operating company today than we were just two years ago. But we're not done. And we'll continue to make progress this year.

So in closing, we'll continue our proactive approach, remain agile, and continue to adapt to serve our customers innovate and reduce costs while continuing to execute our long-term transformation strategy. We're making progress, and we see the path to improving cash flow and margins as the year unfolds. Before I turn the call over, I want to take a moment to thank Michael for his contributions to Hanes Brands over the past two years. He's been instrumental in the progress we've made to unlock our full potential. Michael has been a great partner, and I respect his desire to spend more time with his family. To that end, I'm pleased to have Scott Lewis step back into the interim CFO role. As you all know, Scott held this role before Michael joined the Company and performed extremely well.

I'm confident in Scott and our entire finance team as we move forward. So thank you both Michael and Scott. And with that, I'll turn the call over to Michael.

Michael Dastugue: Thanks, Steve. I really appreciated the opportunity, and I'm proud of what we've accomplished over the past two years. I'm confident in the full potential plan. And I know you and the company are in great hands with Scott and the entire finance team. For today's call, I break my comments into three sections. First, I'll highlight a couple of key items from our fourth quarter results. Second, I'll address our debt and our actions to strengthen the balance sheet. And third, I'll provide some thoughts on our 2023 outlook. With respect to the fourth quarter, I was encouraged by the team's ability to deliver results that were in line or above our outlook despite the challenging environment. I'll point you to the news release for the details, including our segment performance.

However, I would like to provide additional context on inventory, as well as the non-cash adjustment to our deferred tax asset as they drive some of the assumptions in our 2023 outlook. Starting with inventory. As Steve mentioned, we accomplished our goal as we ended the year with inventory units 6% below prior year. As expected, timeout actions we took in our manufacturing operations to deliver on our goal resulted in a drag of approximately 220 basis points to fourth quarter gross margins. However, by quickly aligning inventory units with demand, we believe we're positioned to generate better efficiencies, and more importantly, to release working capital and drive operating cash flow back to more historical levels in 2023. Looking at deferred taxes, we recorded a reserve in the quarter, which was not contemplated in our GAAP guidance.

Based on recent results, as well as our 2023 outlook, which reflects meaningfully higher interest expense, we were unlikely to utilize this asset in the short term. Therefore accounting rules required we record a reserve against this asset. Additionally, and related to the deferred tax asset accounting treatment, this will increase accounting tax expense and the effective tax rate in 2023. However, I'll note this reserve is non-cash and therefore does not impact our cash taxes. Next, I'd like to take a moment to address our balance sheet and leverage. We've taken a number of proactive steps to further increase our financial flexibility as well as de risk the balance sheet long-term. We've made a commitment to meaningfully reduce our debt. To accelerate this process, we've shifted our capital allocation strategy.

We have eliminated the quarterly cash dividend to focus all of our free cash flow, which we defined as cash flow from operating spends less capital expenditures to pay down debt and bring our leverage back to a range that's no greater than two to three times on a net debt to adjusted EBITDA basis. We also work with our bank group to adjust our credit facility amendment to provide additional near term flexibility given the continued uncertainty in the macroeconomic environment. Specifically, we increase the leverage show by one to one and a half turns for Q1 through Q3 this year, and we extended the relief period by one quarter, which now runs through the end of the first quarter of 2024. Summary details of the amendment can be found on our IR website.

We are also working to de risk the balance sheet in the near term. We've already begun the process and we are working with the necessary parties and subject to market conditions we expect to refinance our 2024 maturities in the first quarter of this year. And now turning to 2023 guidance, I'll point you to our news release and FAQ document for additional details. But I'd like to share a few thoughts to frame our outlook. At a high level, given the continued macroeconomic uncertainty, we have taken a muted view of consumer demand in 2023. This is expected most pronounced in the first quarter as we overlap last year strong results. For Q1 at the midpoint, we expect net sales to decline 11% compared to prior year in constant currency, or 13% on a reported basis.

Looking at the full year, we expect net sales to decline 1% in constant currency or approximately 2% on a reported basis, as comparisons ease beginning in the second quarter. With respect to gross and operating margins as we communicated last quarter, we expect margin pressure to continue through the first half as we sell through the remainder of our high cost inventory. As we move through the second half, particularly the fourth quarter, we expect year-over-year margin improvement as we begin selling lower cost inventory and we anniversary last year's manufacturing timeout cost. Looking at adjusted gross margin, for the first quarter we expect a decline of approximately 300 basis points as compared to prior year. This reflects a headwind of more than 300 basis points from commodity and freight inflation as we continue to sell through our higher cost inventory.

For the full year we expect adjusted gross margin to be flat to slightly down as compared to prior year. In terms of adjusted SG&A, at the midpoint we expect first quarter SG&A to be relatively consistent with prior year on $1 basis. However, given the sales outlook, we expect SG&A which carries a higher fixed cost component to delever approximately 370 basis points as compared to last year. For the full year we expect a slight increase in SG&A dollars. On a percent of sales basis, we expect SG&A leverage to improve over the course of the year as sales comparisons ease. For adjusted operating profit our outlook is for a range of $500 million to $550 million for the full year and a range of $50 million to $70 million for the first quarter. We expect adjusted interest and other expense to be nearly $300 million for the full year, an increase of approximately $130 million over prior year.

Our outlook assumes that we refinance approximately $1.4 billion of our 2024 maturities at current market rates in the first quarter, as well as higher average rate on our variable rate debt. For the first quarter, we expect adjusted interest and other expense to be approximately $65 million. With respect to taxes, our outlook reflects an adjusted tax expense of approximately $90 million to $100 million for the full year, and approximately $17 million to $20 million for the first quarter. With respect to earnings per share for the full year, we expect adjusted earnings per share from continuing operations to range from $0.31 to $0.42. For the first quarter, we expect adjusted EPS from continuing operations to range from a loss of $0.09 to a loss of $0.04.

And lastly, we are well positioned to release working capital and drive operating cash flow back to more historical levels in 2023. For the full year, we expect to generate approximately $500 million in cash from operations. So in closing, although the macro related challenges are masking the progress we've made, I'm encouraged by the improvements we've made and the actions we're taking to transform the business. We're taking steps to meaningfully reduce our debt. We see the path to improving margins by the end of the year as inflation eases and we benefit from our savings initiatives for driving higher operating cash flow, and we're continuing to progress on implementing our full potential plan. We believe this will drive higher sales, profits and shareholder returns over time.

And with that, I'll turn the call over to TC.

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

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