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Hanesbrands, Inc. (NYSE:HBI)

Q4 2012 Earnings Call

February 5, 2013, 4:30 p.m. ET

Executives

Charlie Stack - Chief Investor Relations Officer

Rich Noll – CEO

Gerald Evans – Co-COO

Rick Moss – CFO

Analysts

Susan Anderson – Citi

Eric Tracy - Janney Capital Markets

David Glick - Buckingham Research

Omar Saad - ISI Group

Jim Duffy - Stifel Nicolaus

Bob Drbul (Joan)– Barclays Capital

Scott Krasik - BB&T Capital Markets

Steve Marotta - C.L. King & Associates

Carla Casella– JP Morgan

John Malcolm - Citi

Operator

Good afternoon, ladies and gentlemen. My name is Alan and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Hanesbrands fourth quarter 2012 earnings call. (Operator Instructions).

I'd now like to turn the call over to Mr. Charlie Stack, Chief Investor Relations Officer. Please go ahead, Sir.

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 fourth 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 investor 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 undertake to update or revise any forward-looking statements, which speak only to the time in which they are made.

Please also note in May, 2012, Hanesbrands announced exiting certain international and domestic inventory categories that are now classified as discontinued operations. Unless otherwise noted, today's speakers will be discussing our performance from our continuing operations.

Also, today's references to earnings per share and EBITDA represent continuing operations excluding the charge for bond prepayment associated with retiring $250 million of the company's 8% senior notes due 2016.

Additional information including reconciliation to GAAP performance measures can be found in today's press release and in the investor section of our Hanesbrands.com website.

With me on the call today are Rich Noll, our Chief Executive Officer, Gerald Evans, one of two co-Chief Operating Officers, and Rick Moss, our Chief Financial Officer.

For today's call, Rich will highlight a few big picture themes. Gerald will provide a sense of what is happening in a few of our businesses. And Rick will emphasize some of the financial aspects of our results.

I'd now like to turn the call over to Rich.

Rich Noll

Thank you, Charlie.

Normally, I start by discussing earnings, but not today. Today, I want to stop and pause and talk about achieving a major milestone. We ended the year with a long-term debt to EBITDA ratio of 2.5. 2.5, that has been a long time coming and it feels really good.

Fifteen months ago, we told you we would reduce our debt substantially and we did. Paying down ¾ of a billion dollars at a very short period of time. The era of high leverage is now a thing of the past. Going forward, we are targeting a long-term debt to EBITDA ratio of 1.5 to 2.5 times. We accomplished this monumental achievement by focusing on free-cash flow. Both our profit and working capital improvement efforts are paying off. In 2012, we generated $500 million of cash, the highest in our history. And we expect another great year in 2013 generating $350 to $450 million. In just these two years, we will generate more cash than in the previous five years combined. And we are committed to using this cash wisely. Over time, we will consider a mix of dividends, share buy-backs, and quickly accretive bolt on acquisitions to create further value for our shareholders.

Now turning to earnings, the back half of 2012 showed our true earnings power. The operating margin of 13% demonstrates the benefits of our multi-year efforts of building our brand, filling our innovation pipeline, and transforming our supply chain to build a more profitable business. More specifically, our leading brands remain strong and should only strengthen as we increase our media spending this year. The innovation we have at retail and in the pipeline through our innovate to elevate strategy is contributing sales and importantly margins for 2013. This strategy is designed to drive value added higher priced and higher margin items for both us and our retail partners. And we're seeing the results as our core businesses are performing very well. You'll hear specifics about all of these topics plus many more exciting initiatives at our upcoming investor day.

A year ago, we laid out our guidance for both 2012 and for 2013. Not only did we hit our metrics for 2012, we are on track for 2013 raising this year's guidance to $3.25 to $3.40 per share. When you combine this level of earnings with our low level of debt, we have truly improved our financial profile in a very short period of time.

To wrap up, 2012 was a very successful year under very challenging circumstances. And we are coming out stronger, more innovative, and more profitable. I believe we are only seeing the beginning of our true earnings power. And I look forward to a successful 2013.

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

Gerald W. Evans

Thanks, Rich. I am very pleased with our performance in 2012. When we began the year, we had four clear goals. First, to manage our pricing to navigate through the cotton bubble. Second, to leverage our strong brands and innovation pipeline to accelerate growth and expand margins in our core categories. Third, to de-risk our business by exiting the unprofitable segments of our U.S. image wear category and our European operation. And our fourth and final goal was to optimize the performance of our supply chain to deliver additional cost savings and operate with lower inventory. We accomplished them all. And our momentum in the second half of the year demonstrates the full potential of our efforts.

Nowhere shows greater evidence of the power of our actions than inner wear, where we delivered progressively improving performance throughout the year culminating in a strong 7% sales increase and record operating margins in the quarter.

Our men's underwear category grew at a double-digit rate in the quarter and mid-single digits for the year. Comparative price gaps, which returned to historical levels aided growth as did incremental sales driving by shelf space gains from innovative new products like ComfortBlend underwear and Slim Fit T-shirts.

I am delighted to tell you that our intimate apparel category was a particular bright spot in the quarter. You may recall that two quarters ago, I discussed the early sales success we were seeing in our panty category as we up-rated our product offering and added space in our key customers. The sales momentum in our panty category has continued achieving double-digit growth in the quarter.

Our work to revitalize our bra category started a little later. And in the fourth quarter, we began to see the results of these efforts with bra sales up mid-single digits driven by our innovative Smart Side seamless bras and space expansions at several of our retail partners. I am pleased with our momentum across intimates. And anticipate continued growth in the quarters ahead.

For the full year, inner wear sales were up 3% despite a $40 million headwind from JC Penney. Excluding that decline, inner wear sales grew 5% for the year. Inner wear profit was up 18% for the year. And the full year operating margin was an impressive 17%.

Turning to outer wear, sales also sequentially improved, up 6% in the quarter. Champion, Gear for Sports, and Casual Wear also increases with Casual Wear posting growth of more than 20% driven by the launch of our Hanes BCT program.

For the full year, outer wear sales increased 6%, excluding the managed decline in our branded print wear category where we de-emphasized the more commoditized sector. Outer wear's full year profitability was adversely affected by cotton inflation in the first half of the year, but showed substantial improvement in the back half. We expect to see continued improvements here as we recognize lower cotton cost and realize the benefits of our strategy to drive our strong brands with a more profitable mix with a goal to have outer wear reach double-digit operating margins.

Let's now shift to international where we consistently perform below our expectations in 2012. S we communicated last quarter, there are macro issues in certain countries that have slowed growth. But there are also executional issues that we've identified. Where in the past, we ran internationals as a collection of countries, we are now undertaking steps to take advantage of our regional scale, drive innovation, and better leverage our supply chain. But we do not expect a return to double-digit growth this year.

Next, let me speak to the retail landscape. Overall holiday sale through for our products was as expected. We did see a different pattern at retail this year. Where leading up to Christmas, many of our retailers saw relatively soft sales, but then ended strongly in the weeks following. Retail inventories also finished in line with expectations. Looking to 2013, we feel good about our own competitive situation. But the overall consumer environment continues to feel mix causing us to be somewhat conservative when thinking about our top line growth.

As mentioned last quarter, the majority of our pricing is set for 2013. For inner wear, wholesale pricing and pack counts are set for the year. And our promotions are locked in through back to school.

In outer wear, pricing for our seasonal programs is locked in for the majority of the year. We do expect branded print wear pricing to continue to drop in advance of lower cotton working through the supply chain as it did in 2011. All of these assumptions have been contemplated in our guidance.

Also in our guidance is an increase in media spending of $30 to $40 million to further drive our already leading brands. As a testament to the strength of our brands, the HanesBrand recently placed second in the Women's Wear Daily consumer survey of top 100 brands. With cotton inflation behind us, we will invest in our brands and innovative new products to insure we remain number one in the minds of our consumers across each of our brand equity metrics.

Finally, I'd like to talk for a moment about our supply chain. There are many lessons the industry is learning from the recent factory fires in Bangladesh. One of these is that not all manufacturers adhere to high ethical standards. Unlike most of the apparel industry, we produce approximately 90% of our annual units within our cell phone facilities. We have employed a staff of professionals for more than 20 years that holds our factories and those of our vendors to the same high standards of corporate social responsibility no matter where they are located throughout the world. Not only does this allow us to manufacture high quality products in our lowest cost manner, but it also allows us to create conditions for the workers that are both comfortable and safe. It is clear that retailers are increasingly viewing this as an important advantage. And are beginning to shift more business to vendors that they can trust to operate responsibly and ethically.

We are happy with the performance of our supply chain. In particular, we are pleased with our success in Vietnam where we currently have about 8,500 employees, or roughly 70% of our Asian workforce. We have seen Vietnam efficiencies exceed our expectations. And that country is quickly becoming the central hub of our Asian supply chain.

So to wrap up, we are excited about the momentum we gained in the back half of 2012 and the actions we've taken to drive higher margin branded products. Our strong brands, our innovate to elevate strategy and our world class supply chain are delivering strong results for Hanesbrand and for our retail partners. We look forward to delivering another strong year in 2013.

I'll now turn the call over to Rick to discuss our financial performance.

Rick Moss

Thanks, Gerald.

Before I review our results, let me take you back to my first call as CFO in November of 2011. On that call, I laid out three key areas of focus. Driving growth in our higher margin businesses, improving profitability in our underperforming businesses, and driving cash flow so that in turn, we could deleverage our balance to a level below three times debt to EBITDA. We made tremendous progress in all three areas in 2012. Inner wear grew. Branded print wear was rationalized to become less volatile. And we meaningfully de-levered the balance sheet.

To echo Rich's sentiment, I also want to celebrate the fact that in the last 13 months, we have paid down $750 million of long-term bond debt. And brought our long-term debt to EBITDA ratio down to 2.5 times. This is a significant accomplishment for our organization. And I'm proud that we've kept our focus on generating strong free-cash flow to improve our risk profile.

Now let's turn to our results for 2012. Sales for the full year were $4.53 billion, up 2% despite the challenging first half and a two point headwind to our growth from reducing the size of our branded print wear category combined with lower sales to JC Penney.

For the fourth quarter, sales increased 5% as the holiday period unfolded in line with our expectations. And our momentum picked up through the back half of the year.

While gross margins were down for the year, I want to put this year's results in perspective. When you look at the five year period preceding 2012, our annual gross margins have been very consistent plus or minus only about 40 basis points. In 2012, margins were impacted by abnormally high cotton costs with most of the margin declines coming early in the year. Gross margins returned to a more normalized level in the back half. In fact, slightly higher than our five year average. Our focus on driving higher margin businesses and improving the profitability of underperforming businesses should help us continue that consistency going forward.

For the year, SG&A was down $66 million as we benefitted from planned lower media and marketing spending and lower distribution costs. SG&A in the quarter decreased approximately $9 million.

Operating margin for the year was 9.7%, down 40 basis points driven mainly by cotton headwinds in the first half. However, our operating profit margins improved sequentially, 1% in the first quarter, 10% in the second quarter, and 13% in the back half of the year. In the fourth quarter, all four segments achieved at least double-digit operating profit growth. I'm very pleased with that momentum.

The tax rate in the fourth quarter was 10.3%, slightly lower than our guidance due to the impact of the debt pre-payment. This is worth a couple of pennies to earnings per share, which put us just over the top end of our guidance at $2.62 for the year. As expected, the back half of the year was very strong, and generated $2.18 of our $2.62 in earnings.

Turning to free-cash flow, we generated a record $508 million of free-cash flow in 2012 with solid business performance and a focus on reducing inventory. With this free-cash flow, we prepaid approximately $550 million of a long-term bond debt in 2012. And we intend to complete the remaining $250 million prepayment of our 8% notes later this year.

So let's turn to the 2013 guidance. Our sales guidance for the full year is approximately $4.6 billion, or up about 2%. It reflects our overall cautiousness on the current macroeconomic environment. When you correct for the planned decline in branded print wear, we're planning the rest of the business up about 3%.

As a result of our pricing strategy and cost outlook, we have a great deal of confidence in our margin rates and achieving our operating profit guidance of $500 to $550 million. At the midpoint of our guidance, the implied operating margin rate would improve about 170 basis points. This improvement should be mainly driven by gross margin with SG&A slightly de-levering due to the increased media spending of $30 to $40 million.

Interest and other related expenses are expected to be $120 million, including approximately $15 million in prepayment expenses to retire the remaining $250 million of 8% notes.

The full year tax rate is expected to be in the teens. But should fluctuate by quarter with the first and third quarter rates expected to be towards the lower end of the range. And the second and fourth rates being at the higher end of the range due to anticipated discreet tax items including in the first quarter the impact of tax changes signed into law on January 2nd of this year. These factors combined with the overlap of cotton inflation from 2012 should result in 2013 earnings growth that's more pronounced in the first half of the year.

Free-cash flow is expected to be $350 to $450 million including expected pension contributions of approximately $38 million and net capital expenditures of approximately $50 million. As we pay off the remaining $250 million of 8% bonds, we should end 2013 with $1 billion in bond debt and a long term debt to EBITDA ratio towards the lower end of the 1.5 to 2.5 times range Rich mentioned.

In many respects, we are a very different company today than we were at this time last year. At the end of 2013, we will have paid off $1 billion of debt in just 24 months all while successfully navigating through unprecedented cotton inflation. We'll continue to drive our high margin businesses. We've made necessary changes to exit those that are volatile and under-performing. And our new normalized level of free cash flow of $350 to $450 million is stronger than it's ever been. When you add it all up, our sales growth, EPS growth, and our strong cash flow, I'm feeling really good about 2013.

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

Charlie Stack

Thanks, Rick.

That concludes the recap of our performance for the fourth quarter. Before we take your questions today, I'd like to remind everyone about our upcoming investor day at our headquarters on February 28th. Feel free to contact me if you'd like to attend or have any questions regarding the event.

Now we will begin taking your questions and we'll continue as time allows. Since there may be a number of you who would like to ask a question, I'll ask that you limit your questions to one question plus a follow-up. And then re-enter the queue to ask any additional questions. I will now turn the call back over to the operator to begin the question and answer session. Operator.

Question-and-Answer Session

Operator

(Operator instructions). Our first question queue comes from the line of Susan Anderson from Citi. The line is now open.

Susan Anderson – Citi

Hi you guys, and congrats on a really great quarter in Europe.

Rich Noll

Oh, thanks Susan.

Susan Anderson – Citi

So, looking at your cash flow, it seems pretty amazing, and it seems to be exceeding your expectations also. So, after, you know, we get past kind of this cotton-giveback, where do you see that going longer term? Is there more that you can take out of working capital to drive that further? And then also, what the debt pay down coming to an end, can you maybe give us a little bit more detail on your capital priorities? I know you’ve talked about, you know, share repurchases, dividends, acquisitions. But not that we’re kind of getting closer, do any of these rank higher on the totem pole?

Rick Moss

Sure. Let me take, this is Rick, let me take the first part of that Susan. You know, in terms of, you know, the sustainability of free cash flow, particularly with respect to working capital. We had – we made good progress in reducing inventories this year, a little over 350 million down. You know, once you take the (diskoff) piece out of that, about half of the unit – or half of the decline in inventory was in units. We think that’s an important trend that we’re going to continue to drive, do that we can continue to improve our inventory turns. And that’s going to help over the next couple of years sustain this free cash flow. That, and as we continue to drive higher earnings.

Rich Noll

Yes, so if you think of the 2013 probably is a more normalized level of cash flow to 350 to 450, right Rick?

Rick Moss

Um-hmm

Rich Noll

You know, then going into the second part of your question Susan, so what are we are going to do with it in 2014 and beyond? And I think it’s really simple. You know, first of all, we want to be really, really good stewards of capital and make sure that when we invest cash, we’re going to get high returns for our shareholders. That said, there’s really only a couple of choices where we can return cash to shareholders through dividends and/or share buybacks.

And [inaudible] acquisitions can also be a possibility. We purchased Gear a couple of years ago, that acquisition continues to play out fairly well. We’re overall pleased with its integration into our company and its long-term prospects. There can be other things such as that, that’s in our core categories that we can use to leverage our global supply chain, reduce cost and justify any premium that we may pay. And we’d also have a goal in mind of any type of acquisition where it would be relatively quickly accretive.

So, those are also a possibility for the use of that cash flow going forward. I think – well, we don’t need to do acquisitions to be successful. We have a lot of great opportunities on our own. But if those things play out, it could be a great way to create value. So, you’ll see a mixture of those things I think play out over time.

Susan Anderson – Citi

Okay, great, that sounds good. And then my last question is, just on your new product launches. It seems like your Comfort Line has been really successful, and you’ve been able to get higher prices for this. Do you think that’s going help you get into – you know – I guess go more upstream to new distributions points?

And then also, maybe if you could talk a little bit about anything you have coming out on the innovation side for this year.

Rich Noll

Sure. We are definitely delighted with how our innovations are doing. The one thing we learned coming through the past couple of years is that, strong brands and innovations are what drives sales. And our ComfortBlend product continues to exceed expectations, and we’ve just got a pipeline full of innovations coming through, and look forward to talking to all of you more about it at our Investor Day coming up later in February. Because we really do believe that is the way to drive growth.

And we do continue to push our brands higher and higher. And each brand is an incredible brand. Cuts across many channels of trade and performs very well. So, we’re delighted about what we’ve got in the innovation pipeline.

Susan Anderson – Citi

Okay, great. Thanks you guys, and congrats again.

Rich Noll

All right, thanks Susan.

Operator

Next in queue we have the line of Eric Tracy from Janney Capital Marketing. There line is open for you now.

Eric Tracy – Janney Capital Markets

Hey, guys. Good afternoon. And all of my congrats particular on the debt pay-down.

Rich Noll

Thank you Eric.

Eric Tracy – Janney Capital Markets

So, Rich for you, maybe if you could just provide sort of a broader prospective on what you are seeing in the market. Again, you mentioned sort of macro potential headwinds that are developing relative to sort of your visibility to the business clearly and where it is performing quite strongly. But maybe just frame sort of the backdrop, and maybe how conservative that 2% sort of top line guide is?

Rich Noll

Yes, let me just talk a little bit about that for a second. Because there’s no one thing that, you know, we can point to that says, you know, let’s be a little bit cautious here going into ’13. I think it’s – you know, actually is here on the macro level housing looks like it’s getting better, the stock market is doing better. Yet, when we talk to our retailers, I think since a little bit sometime before Christmas, they started being a little bit more cautious about 2013. To be honest, I think a little bit more cautious than we’ve probably heard them in the last 12 to 18 months or so. And I think a little bit of it had to do with the pattern of Christmas, and this is across a broad set of retailers.

Where things were a little bit slow before Christmas, but the week of Christmas and the two weeks after Christmas were unbelievably strong. So, everybody had a good Christmas overall, but made it right at the end. And so, it was – I think they were sort of a little bit nervous throughout the entire season.

And then I think everybody is just a little weary about what’s going to happen with the tax increases, and importantly the delayed tax refunds to consumers, and is that going to impact spending.

So, when we hear our retailers being a little cautious, I think that in turn makes us just a little bit cautious, and we think it’s prudent to be sort of at the lower end or our range that we were talking about before.

Given that, though we feel very good about our prospects for the year. We feel very good about our margin increases, very good about operating profit cash flow earnings per share and so on.

Eric Tracy – Janney Capital Markets

And then yeah, I guess maybe my follow-up would then be the operating profit of 500 to 550 million. What are the various, sort of puts- and-takes, you know that gets you at that low end of the high end? It seems like [inaudible] or the marketing spend bill is relatively now. I guess the first question is, is that fair in terms of the expected marketing spanners, or could that flex depending on the environment?

And then, you know, what are the different sort of puts-and-takes on the gross margin? Is it supply chain manifestation pricing that could potentially come through, to sort of drive that delta between the 500 and 550?

Rich Noll

Yes, Eric, this is Rich. Let me start with the high level question, I’ll turn it over to Rick to talk a little bit more specific about some of those.

But it think one of the important things I want to communicate in terms of our overall ability to get to our higher level of operating margin goal of 12 to 14%, is this innovate to alleviate strategy is an important part of that in terms of increasing margins. So for us, we got the traditional cost reductions that we’ve talked about historically, but the idea of getting products with features that consumers desire more and are willing to pay a little bit more for, is also part of our margin increase strategy, both on a pennies per unit, as well as a percent basis.

And so, some of the flex that we’re talking about is exactly when these new products his, exactly how strong they are in the first couple of months, and so the stronger they are, the slightly – you know, it’s going to have a slightly more positive impact on our margin. And that’s sort of at a very high level.

Rick, if you want to talk more about some of the specifics of ’13.

Rick Moss

Sure. I think I would narrow some of the flexibility dwindling the 5 to 550 down to a couple of things. One is, as Rich indicated, the success of some the new products that have higher margins. The more successful those will be, the more margin expansion we’ll get from that. And that’s really the, you know, one of the key benefits from that.

I think though that also we have a lot of cross optimization initiatives that we’re undertaking right now. I think the more successful those are, the higher – the more we’ll be at the higher end of that range.

And then as you said, the [inaudible] 30 to 40 million, that’s pretty fixed.

Eric Tracy – Janney Capital Markets

Okay, I appreciate it guys.

Rich Noll

Thanks.

Operator

Next in queue we have the line of David Glick from Buckingham Research. There line is open for you now.

David Glick - Buckingham Research

Thank you. Rick, I just had a question that maybe you can help us think about how the year unfolds. I mean, certainly you talked about first half earnings growth being, you know, the year being first halfway. When you’re up against an EPS loss in the first quarter, obviously and you look at the first quarter of 2011, you know, that’s a huge swing.

So, if you could help us think about how we – without, you know, being specific on [inaudible] guidance obviously, but how to think about the revenue trends as the year progresses, as well as, you know, gross margin. Whether we should think about that on a static basis, on the gross margin line, are there any? You know, you mentioned Q1 sales, you know, the bigger impact on [inaudible] being in Q1. Just help us think about how the year unfolds maybe a little more specifically.

Rick Moss

Sure, let me walk you down the P&L. The key items on the P&L and give you a sense of where there may be some variability through the course of the year. As you rightly pointed out, David, the (Branded Print Wear) sales declines will occur primarily in the first quarter, about a half, may be a little less than half in the first quarter, but certainly mostly in the first half. So you need to factor that in.

As you think about gross margin, think about it being more stable in 2013 than it was in 2012, though we tend to have a little bit lower margin in the first quarter because it’s our – well a sales quarter. So, your fix cost tend to play in a little bit more there.

But after that, you should see a lot less variability quarter-to-quarter, though again, we had very high cotton cost last year in the first half, and those won’t repeat.

As you think about SG&A, I would think about the key driver there as being the 30 to 40 million of additional media spend, two-thirds of which will come in the back half of the year. So that will be kind of the key driver there.

I’ll point out a couple of other things though. One, is our debt prepayment charge will be about $15 million, so that will come in probably in the fourth quarter. So the other $105 million of interest expense will be pretty flat, or will be pretty even for the rest of the quarters.

Then finally, we do talk about some tax rate variability. The tax law that was signed on January 2nd gives us about $5 to 6 million of benefits that we are required under the Accounting Rules to recognize, specifically in the first quarter.

David Glick - Buckingham Research

Okay. And any chance that that December prepayment could come any earlier in fiscal 2013?

Rick Moss – CFO

It’s certainly possible. If the year unfolds on the higher end of where we are of our guidance, then I think it’s entirely possible you’d see it earlier in the year.

David Glick - Buckingham Research

Okay, and just given what you’ve said, with sales up 2%, I mean, will sales be at least flat to [inaudible] singles in each quarter, or is it enough to create a negative sales growth say in Q1?

Rick Moss – CFO

I’d rather not go into that level of detail on the sales per quarter. Again, I think the big watch out is making sure you get the Brand to Print Wear number in the first quarter right.

David Glick - Buckingham Research

Okay, thank you very much. Good luck.

Rich Noll – CEO

Thanks, David.

Operator

Next in queue we have the line of David Glick from Buckingham Research, their line is open for you now.

David Glick - Buckingham Research

Thank you. Rick, I just had a question that maybe you can help us think about how the year unfolds. I mean, certainly you talked about first half earnings growth being – the year being first half weighted. You know, when you’re up against on an EPS loss in the first quarter. Obviously, you know, and you look at the first quarter of 2011, that’s a huge swing. So if you can help us think about how we – without, you know, being specific on quarterly guidance, obviously, but how to think about the revenue trends as the year progresses as well as, you know, gross margin, whether we should think about that on a static basis on the gross margin line? Are there any, you know, you mentioned Q1 sales, you know, the bigger impact on printwear being in Q1. Just help us think about how the year unfolds maybe a little more specifically.

Rick Moss

Sure. Let me walk you down the P&L, key items on the P&L and give you a sense of where there may be some variabilities through the course of the year. As you rightly pointed out, David, the branded printwear sales declines will occur primarily in the first quarter, about half, maybe a little less than half in the first quarter, but certainly mostly in the first half. So you need to factor that in. As you think about gross margin, think about it being more stable in 2013 than it was in 2012, though we tend to have a little bit lower margin in the first quarter because it’s our lowest sales quarter. Obviously, your fixed costs tend to play in a little bit more there. But after that, you should see a lot less variability quarter to quarter though. Again, we had very high cotton costs last year in the first half and those won’t repeat.

When you think about SG&A, I would think about the key driver there as being the 30 to 40 million of additional media spend, 2/3s of which will come in the back half of the year. So that will be the – kind of the key driver there. I pulled out a couple other things. One is our debt prepayment charge will be about $15 million. So that will come in probably in the fourth quarter. The – so the other 105 million of interest expense will be pretty flat or be pretty even through the rest of the quarters.

And then finally, we did talk about some tax rate variability. The tax law that was signed on January 2nd gives us about 5 to $6 million of benefits that we are required under the accounting rules to recognize specifically in the first quarter.

David Glick - Buckingham Research

Okay, and any chance that that December pre-payment could come any earlier in fiscal 2013?

Rich Noll

It’s certainly possible if, you know, if the year unfolds on the higher end of where we are of our guidance, then I think it’s entirely possible you’d see it earlier in the year.

David Glick - Buckingham Research

Okay, and then just given what you said with sales up 2%, I mean, is there – will sales be at least flat to up to low singles in each quarter or is it enough to create a negative sales gross in Q1?

Rich Noll

I’d rather not go into that level of detail on the sales per quarter. Again, I think the big watch out is making sure you get the branded printwear number in the first quarter right.

David Glick - Buckingham Research

Okay. Thank you very much. Good luck.

Operator

Next in queue we have the line of Omar Saad from ISI Group. Their line is open for you now.

Omar Saad - ISI Group

Thank you. Good afternoon, guys. Can you hear me now?

Rich Noll

We can now.

Omar Saad - ISI Group

Okay, thanks, guys. Good afternoon. So I wanted to ask you a question on the top line. You know, it sounded like you kind of – international is still going to be a little bit of a transition year, it sounds like you’re repositioning how you’re approach those markets and maybe a little bit more on a market-by-market basis as opposed to a broader approach. How do you think – what is apparent when you think about topline growth from here? Obviously it’s been pretty good the last couple of years despite existing some of those businesses. Should it be some sort of mix of price and some market share gains and kind of natural GDP growth, you know, and then when international – and then hopefully comes on line in a couple years, is that the right way to think about it? Where are the big revenue opportunities for Hanesbrands?

Rich Noll

You know, Omar, we’ve always talked about organic growth for us with 3 to 4% total company growth that with that kind of growth you get a little bit of share gains, which really comes from shelf space. The categories tend to modestly grow, but we can magnify that, you know, in a greater rate of operating profit growth through both our optimization and our innovation and elevate strategies at a much faster rate, and then with our strong cash flow we can go from operating profit down to EPS at a much faster rate. So we’ve always said that 3 to 4% of organic growth for us can easily translate into double digit EPS growth for a very, very long time to come. And that model hasn’t changed at all.

Omar Saad - ISI Group

But diving into the top line piece, Rich, you mean, with cotton inflating again, should we think about inflation as a steady piece of that, like on the revenue, understanding the P&L and how much leverage you guys can generate against it, where do you see like the big chunks of topline opportunities for the company, or is it just a little bit of shelf space, a little bit of…

Rich Noll

Yes. So you want to think about it as this is a game of inches, right, every little bit counts. You know, so you margin up a little bit on this product, you gain a couple of feet of shelf space this year in this account and this product category. You know, we’re so broadly distributed, each and every year you’re just making a little bit of progress. Inflation will work into that. Over time, clearly, the area of – era of deflation in apparel industry is now over. It’s obviously got a little more lumpy in the short term but I think over time that will contribute a little bit. And you know, so for us, it shouldn’t be that hard to piece together a consistent 3 to 4% topline growth and we feel good about those prospects.

Now, obviously, if you step back and you start to say, look, do you make an opportunistic acquisition here or there and use the – if we can get it at a good price, that’s obviously going to fuel that topline growth at a faster rate. So when you do that, you’re going to have a year where you’re going to be a little bit higher or substantially higher than that. So you could get to even high single-digit growth rates, you know through acquisition. But just raw organic growth, topline is 4% and that’s all we need to make this whole model work for us.

Omar Saad - ISI Group

Understood. Thank you.

Operator

Your next question in queue comes from the line of Jim Duffy from Stifel Nicolaus and their line is open for you now.

Jim Duffy - Stifel Nicolaus

Thank you. Nice job, guys. Congratulations on the execution through a challenging period.

Rich Noll

Thank you.

Jim Duffy - Stifel Nicolaus

I’m going to build on Omar’s question. Rich, could you maybe put some shape around some of those ongoing efficiencies and cost optimization savings opportunities for ’13? What are some of the biggest areas of opportunities? What’s the total size of the opportunities when you look out over the course of the year?

Rich Noll

Yeah, Jim, we’ve always talked about we can continue to make optimizations savings with 30 or $40 million a year overtime. That will tend to decline. We’ve also got margin opportunities we’ve talked about from innovate to elevate. So we feel that there’s a lot of opportunity to continue to have those margins increase. Any one particular one, again, it’s a lot of – within the four walls, as we take out inventory and improve our turns, we’re able to make labor more efficient, we’re able to rationalize a few facilities here and there and continue to strive our cost and improve productivity.

Jim Duffy - Stifel Nicolaus

Okay. And then in the prepared remarks, you highlighted the Vietnam efficiencies. Is there any shift of manufacturing between geographical regions that’s contributing to some of the efficiencies that you’re seeing?

Rich Noll

No, we just really continue to build out Vietnam and the Asian part of our supply chain came on later and that’s the piece that we’ve been ramping up. But you know, just to reiterate, we’re delighted with how that’s going. It couldn’t be more efficient. It’s just fantastic.

Jim Duffy – Stifel Nicolaus

I see. Okay, thanks guys. See you in a couple of weeks.

Rich Noll

All right, thanks.

Operator

Next in queue, we have the line of Bob Drbul from Barclays. That line if open for you now.

Bob Drbul ([inaudible]) Barclays Capital

Hi, good afternoon. It’s [Inaudible] on for Bob, and congratulations on the quarter.

Bob Drbul ([inaudible]) Barclays Capital

Just to talk a little bit more about the price strategies that you’ve locked in for 2013 so far, how do those compare to what you did in 2012 on the increasing pack sizes versus bringing prices down and where have pricing levels sort of fallen out at this point compared to where they were at their peak?

Gerald Evans

Sure, hi, this is Gerald. Just, you know, first of all, having come through the past couple of years and all the challenges in cotton pricing, our first focus now is to really reinvest in our brands and our innovations. We clearly learn that’s the way to drive sales. So that’s our first objective is we come out of that period.

As we look at pricing though, you really have to sort of look at the pieces of our business to understand – to really answer that question. If you look at our underwear business, that pricing is largely – is in place effectively for 2013. The wholesale pricing is set. Our pack sizes are set. We put those in place later – in the latter part of last year and those are set. And really, our promotions are set through Back to School.

Our outerwear business is very much in the same way. When we look at the retail portion of our outerwear business we have seasonal programs that we set prices with our retailers and effectively, for 2/3s of the year, those are set and we’ll be setting the balance of those prices over the next few months.

The one business is our branded printwear business and in this business, prices do tend to change constantly and they tend to change – as cotton falls, prices tend to fall before them. We saw that in 2011, we’re already beginning to see some of that in the branded printwear category now and it’s certainly one of the reasons that we began to de-emphasize portions of that business last year. It only represents about 3% of our total business today, but that is the one where we see some pricing activity and we’ve built that in our guidance. We’ve anticipated that in our guidance.

Bob Drbul ([inaudible]) Barclays Capital

Okay, thanks, Gerald. And then what have you seen also in terms of promotional activities during fourth quarter in the competitive environment heading into this year and how did that compare to last year?

Gerald Evans

It really played out as we expected. I think it sort of reflected the generally higher prices that the market had moved to at that point in time, but generally played out as it had in prior years from the number of events and so forth.

Bob Drbul ([inaudible]) Barclays Capital

Okay, thank you.

Operator

Next in queue we have the line of Scott Krasik from BBT Capital Markets. Their line is open for you now.

Scott Krasik - BB&T Capital Markets

Thanks. Hey, gentlemen, congratulations.

Gerald Evans

Thanks, Scott.

Scott Krasik - BB&T Capital Markets

Just – I guess, two question. One is sort of a numbers question and the second one is big picture. In terms of the first quarter, I know you don’t want to give guidance, but you know, the range goes from about $0.15 to $0.50 cents with a mean somewhere in the mid-30s. So you know, is the mean sort of in line or could you point us in one direction or the other? And then the second question, Rich, you did a great job growing shelf space even with the lower marketing spend. As you get back into a phase of spending a little bit more, you know, should you expect to capture some benefit from the marketing spend and how are you able to capture share even with [inaudible]?

Rich Noll

So I’ll let Rick not answer the first question, Scott, and then I’ll answer the second. Go ahead.

Rick Moss

I’ll find a polite way not to answer your question, Scott. No, in Q1, I would, again, reiterate a couple of things that you should keep in mind. So the brand printwear business will have a negative impact on sales. However, it will not have a material impact on profitability because you know, the sales that we’ve gotten away from were less profitable or unprofitable sales.

We will see a significantly – in the first quarter of last year, our cotton costs were in the mid-180s and they’ll be substantially below that in the first quarter of this year. And don’t forget to factor in the 5 to $6 million of reduced tax expense in the quarter.

Scott Krasik - BB&T Capital Markets

Okay.

Rich Noll

In terms of a bigger picture question on media and how it relates to sales and so on, and you know, really, the impact of media is cumulative over time. It’s not something that is going to drive your sales in the short term. You know, we’re – you know, at our heart, we’re really a packaged goods company that also sells apparel and so when we approach talking to consumers and innovation, it’s not just an art, it’s also a science. We have models that can tell us, you know, how effective TV advertising is, how it’s going to impact purchase intent, how it’s likely to increase your sales over time and we understand a lot of those metrics. And what you’re able to do, you can pull back for a year or so and you’re not going to have a detrimental impact, but you can’t – then you’re going to have a long-term problem if you stay at those reduced levels.

So we’re really getting back to a more normal level. I think you’re seeing the benefits of all those media spins over the year. It’s why we were able to navigate all of those high-cost cotton and increase prices when we needed to, put out there with innovation and higher price points. It’s a cumulation of the efforts of our innovation coupled with consumer advertising. And so it’s going to continue to allow us to have a healthy sustainable business going forward.

Scott Krasik - BB&T Capital Markets

Okay. Thanks.

Operator

Our next question in queue comes from the line of Steve Marotta from C. L. King & Associates. Their line is open for you now.

Steve Marotta - C.L. King & Associates

Good evening, everyone. What was the aggregate marketing spend in 2012?

Rick Moss

We don’t actually give that level of detail, Steve.

Steve Marotta - C.L. King & Associates

Okay, no worries. I believe you commented on the delta in the past. Can you remind me what that was?

Rick Moss

Tens of millions lower than what is has historically been.

Steve Marotta - C.L. King & Associates

Right, great. And also very quickly, what inventory level do you expect to end 2013 with?

Rick Moss

I don’t want to give you a specific number on that, but it will be – we expect it to be substantially lower than this years. We’ll continue to see inventories decline as we improve our turns this year.

Steve Marotta - C.L. King & Associates

And you believe that will be sequentially as well?

Rick Moss

Well, you normally see a build in inventory in the first quarter and then it comes down from there.

Steve Marotta - C.L. King & Associates

Excellent. That’s great. Thank you.

Operator

Our next question in queue comes from the line of Carla Casella from JP Morgan. Their line is open for you now.

Carla Casella– JP Morgan

Hi. You talked about the impact from the J.C. Penney weakness. I just wanted to clarify, this is all just weakness in their business, this isn’t lost shelf space? Is that correct?

Rich Noll

Generally, it’s correct, yeah. It’s more about that they’re going through a pretty significant strategy transition of their own and there’s been traffic fall off in their stores.

Rick Moss

And inventory correction as their sales drop to be fair.

Carla Casella– JP Morgan

Right. And they’ve brought inventory down a lot. Would you say – it sounds like you think inventories in most of the channels are clean. Do you think that would be the same with J.C. Penney?

Rich Noll

Yep. We definitely believe our inventories are clean in our retailers, including J.C. Penney. That’s correct.

Carla Casella– JP Morgan

Okay, great. And then how much of the cold – has the colder weather this year helped the business, or would you say it has had a meaningful impact on either sell through our replenishment orders?

Gerald Evans

I wouldn’t say it’s had a meaningful impact one way or the other. We have some businesses that respond well in cold weather and some that aren’t affected by cold weather. And in case of our cold weather businesses, we started out cold in the fall and then it got warm for a while and then it’s gotten cold and it really sort of played out as we expected.

Carla Casella– JP Morgan

Okay, great. And then one question on the factories. Where does your utilization stand today? Does it vary dramatically by region?

Gerald Evans

It doesn’t. It doesn’t vary dramatically by region, we’re generally in the 80/90% utilization at any point in time.

Rich Noll

Actually, it would be higher overall. We tend to run our inventories – or we tend to run our factories to match our sales and slightly improve turns over time. It’s all built into our guidance.

Operator

(Operator instructions). Your next question comes from the line of John Malcolm. Their line is open for you now.

John Malcolm - Citi

John Malcolm from Citi. Thank you for taking my question. Given the – your leverage target of 1.5 to 2 times, do you guys have an investment grade rating set in your sites and if so, how many years are you looking to get there? Thank you.

Rich Noll

Excuse me. No, we have not explicitly said investment grade is a goal for us.

Operator

And it appears at this time that there are no further questions in queue. I turn the call back over to you.

Charlie Stack

Great. We’d like to thank everyone for attending our quarterly call today and look forward to speaking to you soon.

Operator

Ladies and gentlemen, thank you for your participation on today’s conference call. You may now disconnect.

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