Hanesbrands Inc. (HBI)

HBI 
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Hanesbrands Inc. (HBI)

Q3 2012 Results Earnings Call

October 23, 2012 4:30 PM ET

Executives

Charlie Stack - Chief Investor Relations Officer

Rich Noll - Chief Executive Officer

Bill Nictakis - Co-Chief Operating Officer

Rick Moss - Chief Financial Officer

Analysts

Eric Tracy - Janney Capital Markets

Omar Saad - ISI Group

Susan Anderson - Citi

Jim Duffy - Stifel Nicolaus

David Glick - Buckingham Research

Joan Payson - Barclays

Scott Krasik - BB&T Capital Markets

Steve Marotta - C.L. King & Associates

Eric Beder - Brean Capital

Andrew Burns - D.A. Davidson

Presentation

Operator

Good afternoon. May name is Nick, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hanesbrands’ Third Quarter 2012 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Charlie Stack, Chief Investor Relations Officer. You may begin your conference.

Charlie Stack

Good afternoon, 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 the third quarter of 2012.

Hopefully everyone has had a chance to review the news release we issued earlier today. The news release and the audio replay of the webcast of this call can be found in the Investors section of our hanesbrands.com website.

I want to remind everyone that we may make forward-looking statements on the call today, either in our prepared remarks or in the associated question-and-answer session. These statements are based on current expectations 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 such as our most recent Forms 10-K and 10-Q, and may be found on our website and in our news releases and other communications. The company does not update -- undertake to update or revise any forward-looking statements which speak only to the time at which they are made.

Please also note, in May 2012, Hanesbrands announced exiting certain International and Domestic imagewear businesses that are now classified as discontinued operations and as noted in today’s press release, additional information can be found in our 10-Q’s and in the Investors section of our hanesbrands.com website. Unless otherwise noted, today’s speakers will be discussing our performance from our continuing operations.

With me on the call today are Rich Noll, our Chief Executive Officer; Bill Nictakis, one of our two Co-Chief Operating Officer’s; and Rick Moss, our Chief Financial Officer. For today’s call, Rich will highlight a few big picture themes, Bill will provide a sense of what is happening in a few of our businesses and Rick will emphasize us some of the financial aspects of our results.

I’ll now like to turn the call over to Rich.

Rich Noll

Thank you, Charlie. We had a very good quarter with EPS of $1.11, operating margins of 12.8% and free cash flow of $287 million, with all three being at the highest levels in our history.

Sales grew 3% with notable strength in panties which were up mid-single digits, male underwear up nearly double digits and activewear up mid-teens. We also had a great back-to-school at mass, although it was diluted somewhat by softness at mid-tier.

From an operating profits standpoint, Innerwear, direct-to-consumer and International, all grew double digits versus prior year and Outerwear’s profit performance improve sequentially as we cycled through the last of a very high cost cotton.

Gross margins improved as expected and we continue to see substantial SG&A cost savings from efficiency initiatives and distribution.

Lastly, free cash flow was truly exceptional and we’ve already completed our 2012 goal of paying down $300 million of debt.

We not only delivered a great third quarter but I’m also encouraged about the earnings momentum we carry into the fourth quarter and beyond. As we look to Q4, we expect sales growth to sequentially improve, operating margins to expand to another record of over 13%, EPS to exceed a dollar, and free cash flow of another $200 plus million. It is great to finally have the cotton bubble behind us.

Our margin momentum is strong fueled in part by cotton becoming a tailwind but also from the continued benefits of our optimization initiatives that are reducing both supply chain and SG&A cost.

And additionally, as Bill will further detail, our innovate to elevate strategy is beginning to help us new products, such as ComfortBlend, slim fit underwear and Smart Size bras are driving both higher sales and margins, as well as leading to shelf space gains for 2013.

Lastly, free cash flow should continue to build and we expect to exit the year with substantial cash flow in our balance sheet positioning us well to prepay another $500 million of bonds in 2013.

So to wrap up, we are extremely pleased with our third quarter results. Our organization is executing well. Our brands are strong. Our new products are working. And I’m excited about what I see in our innovation pipeline. I’m always watchful of the macro-economic environment. Our current momentum will certainly help us finalize specific plans to achieve 2013 EPS in the low $3 range.

And with that, I’ll turn the call over to Bill.

Bill Nictakis

Thanks, Rich. Our core categories continued to strengthen and performed well in the third quarter. We are consumer driven company and our consistent focus against the consumer is paying off.

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