Kontoor Brands, Inc.

Greetings and welcome to the Condor Brands' second quarter 2020 financial results. At this time, all participants are in live and only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Eric Tracy, Senior Director, Investor Relations. Thank you. You may now begin.

Thank you, operator. Good morning, everyone, and welcome to Contour Brand's second quarter 2020 earnings conference call. Participants on today's call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to materially differ. These uncertainties are detailed in documents filed with the SEC. We urge you to read our risk factors, cautionary language, and other disclosures contained in those reports. The amounts referred to on today's call will often be on an adjusted dollar basis, which we clearly define in the news release that was issued earlier this morning. Adjusted amounts exclude the impact of restructuring and separation costs, changes in our business model, and other adjustments. Reconciliations of gap measures to adjusted amounts can be found in the supplemental financial tables included in today's news release, which is available on our website at contourbrands.com. These tables identify and quantify excluded items and provide management's view of why this information is useful to investors. Unless otherwise noted, amounts referred to on this call will be in constant currency, which excludes the translation impact of changes in foreign currency exchange rates. Constant currency amounts are intended to help investors better understand the underlying operational performance of our business, excluding the impacts of shifts in currency exchange rates over the period. Joining me on today's call are Contour Brands President and Chief Executive Officer, Scott Baxter, and Chief Financial Officer, Rustin Welton. Following our prepared remarks, we will open the call for questions. We anticipate the call will last about an hour. With that, I turn it over to CEO, Scott Baxter.

Thank you, Eric. Good morning, everyone. Thanks for joining us. We will go through our second quarter results in a bit, but before that, I'd like to share my thoughts on a few key areas. First, I'd like to provide context around the current environment and how we continue to navigate through the COVID-19 pandemic. Next, I'll talk to how the strategies implemented at the SIN are driving the decisive actions we've taken and are supporting improvements across our business, despite the impacts of COVID. The investments we are making in key growth enablers, quality of sales, digital transformation, international expansion with a focus on China, new business development, Innovation and sustainability and high ROI demand creation are helping to strengthen our core and support enhanced growth in the future. And finally, I'll share insights as to why we believe our model is well-positioned to win in the marketplace, even as we expect an uncertain operating environment to continue. But before I begin, I want to thank our employees around the world for their extraordinary efforts. I'm extremely proud of the resilience and perseverance they have demonstrated through this challenging time. Our priority remains the health and safety of our colleagues. While most of all our retail stores are now open across the globe, we continue to employ social distancing and work remote protocols where appropriate across our offices, facilities, and distribution centers. So let me start by by providing some thoughts on how the COVID pandemic has impacted our business. As we expected, the impacts from COVID weighed on our second quarter results, as stay-at-home orders and retail door closures across the world pressured consumer demand. We said on our first quarter call that we were seeing signs of improvement, principally in China and the U.S., in late April and early May. We were encouraged to see these trends accelerate as we moved through the second quarter with easing of restrictions in door openings supportive of improving traffic and sell-through. In Asia, at the peak of the crisis, approximately 90% of our owned and partner stores were closed. Currently, the China recovery continues to gradually build momentum, led by the digital channel, and all brick-and-mortar stores are open. We are encouraged by the momentum we have seen broadly in China, especially in our digital business, increasing 24% in the quarter. In Europe, significant demand declines weighed most heavily on this region during the second quarter. Our distribution network remains operational for digital and wholesale orders, and while stores in the region have started to reopen, traffic remains inconsistent. In North America, early signs of improving consumer demand began in late April and early May and strengthened. as the second quarter progressed, with a combination of additional retailer door openings and improving traffic, as POS significantly outpaced shipments during the quarter. While no one at Contour is satisfied with our second quarter results, given the unprecedented environment, I am extremely pleased with our level of execution on the strategies we put in place 15 months ago at the spin. These actions were further amplified during the second quarter, and we anticipate will lead to sequential improvement through the second half of 2020. Over the last year and a half, we've talked about how investing and nurturing these two iconic brands would take time and how sequencing matters. Investments in people, culture, processes, and globalizing our organization are The benefits will manifest over time. But as you've seen over the last few quarters, despite the challenging landscape, these strategic investments are beginning to drive green shoots of operational improvement as we seek to evolve our model. When you consider we began on the starting line as a new company, I could not be more proud of the organization and the progress we have made. And while I am really encouraged by these early successes, I am even more excited about what the future holds for Contour as we are just in the beginning stages of this journey. So let me discuss where we are focusing our efforts to accelerate fundamental performance and unlock value creation for all stakeholders. We've talked about Horizon 1 for the first 12 to 18 months post-spend. being a period of optimization as we set the foundation for long-term success. We told you our focus would be on quality of sales, enhancing gross margin, and using our strong cash flow generation to aggressively de-lever our balance sheet, all through our TSR lens. Despite one of the most difficult consumer environments in history, we've made tremendous progress on many of these strategic efforts. Rustin will provide more insight with respect to margins and capital allocation, but I'd like to share my thoughts with respect to the top line, including solid proof points of how our strategies are paying off, as well as how we expect to accelerate more profitable and sustainable revenue growth in the future. As a reminder, our focus has been centered on four key growth areas. First, strengthening our core by winning with winning retailers and optimizing distribution, investing in quality of sales, innovation, sustainability, and demand creation, and leveraging our world-class integrated supply chain. Second, destroying growth to D2C and becoming a digital-first, consumer-led organization. Third, expanding internationally with a laser focus on China. And fourth, broadening categories beyond denim, capturing meaningful opportunities across outdoor and T-shirts. So let me start with the core. While the COVID pandemic has had significant impacts on both the Wrangler and Lee U.S. wholesale businesses, we were encouraged by how each experienced strengthening sell-through as the second quarter progressed. Additionally, beyond the impacts of COVID, we also experienced a timing shift that had a negative impact on Q2 Wrangler revenue but will benefit the third quarter. Our continued optimization within the wholesale channel is a major distinction from many of our competitors. With three of our four largest retail partners, Walmart, Target, and Amazon remaining open throughout the pandemic, while Kohl's reopened doors during the quarter. We have made tremendous strides in our quality of sales efforts domestically, and our exposure to challenge retailers and channels is very limited. Given our assumption that the U.S. will experience a prolonged COVID operating environment, we are really well positioned with this key best-in-class retailers. And how do we expect to not only strengthen this core position, but grow it? By continuing to invest in key enablers such as innovation, sustainability, and demand creation. From an innovation perspective, during the second quarter, we continued to scale technology platforms like never before. With Body Optics and MVP for Lee and ATG and Rooted for Wrangler, we are scaling innovation both vertically, up and down the pricing spectrum, and horizontally across various product categories to more effectively capture consumer mind and wallet share. and I want to take a moment to highlight our work on sustainability. Similar to our innovation pipeline, Contour's efforts around sustainability is a key pillar to becoming a consumer-led organization, and we intend to be more active from a sustainability perspective going forward. Our into-good and rooted collections already provide solid proof points, and we will be accelerating investments across key wastewater dyeing processes, materials, energy and climate initiatives to further scale our sustainability platform in the years to come, as we are excited to announce today that we will be publishing CONTOUR's Sustainability Goals Report during the third quarter, and we look forward to sharing more detail with you at that time. Beyond innovation and sustainability, we are also investing in demand creation efforts to strengthen our core, We will be consumer-led organization, and staying engaged with our consumer during the COVID pandemic has been critical as we focus our efforts on high ROI marketing areas. During the second quarter, our teams did an amazing job of creating tone-right campaigns that connected with our consumer in empathetic yet powerful ways. For Wrangler, we continued our successful long-lived Cowboys campaign and Can't Stop Music Country. series driving enhanced consumer connection during the COVID crisis. We also introduced new collaborations with musical artists such as Diplo, partnering for the release of his highly anticipated country album, and in honor of what we have been Bob Marley's, in honor of what would have been Bob Marley's 75th birthday, we recently announced a partnership with the Marley family to launch a limited edition collection with heavy reggae influences in revival of Marley's favorite Wrangler styles. These are just a few of the initiatives that are allowing the Wrangler brand to reach a younger and more diverse consumers. The demand creation investments in digital and social are fueling the strong growth we saw in uswrangler.com during the quarter and and enhance our core positioning with key retailers. These initiatives also support new distribution opportunities, including our Wrangler by Fred Siegel collaboration that we will be launching at Nordstrom's this fall, both in-store and on digital platforms. And with Lee, we drove incremental demand creation spend in the second quarter in support of our upcoming launch in over 2,000 doors with Walmart this fall. In China, We leveraged live streaming events with two premier online influencers in the region, Vaya and Austin. With our event with Vaya, we sold 4,000 women's shorts in 25 seconds. And with our event with Austin, we sold 8,000 pairs of jeans in 30 minutes. We remain excited about the direction the brand is headed in the second half of 2020 and beyond. And last but With respect to strengthening our core, we continue to leverage our own manufacturing here in the Western Hemisphere to service our large customers with scale and speed, further driving competitive separation within the market. Our advanced manufacturing capabilities allowed us to aggressively align production with demand, and with inventory levels down 20% in the quarter, we are well positioned for the second half of 2020, and even more importantly, for 2021. We believe this has been and will continue to be a distinct advantage relative to much of our competition in the marketplace. Beyond strengthening our core, we continue to embark on the company's digital transformation. With new leadership now in place, we are enhancing our total digital ecosystem from owned.com to digital wholesale to retailer.com. And while still in the early stages, the second quarter provides solid evidence that our investments are paying off. During the second quarter, usowned.com grew 48%, with wrangler.com increasing 62%, and lead.com increasing 22%. Our digital wholesale grew 36%. We also went live with our U.S. and European digital platforms during the quarter. Consumer behavior was already rapidly migrating to digital, and we believe this adoption has only accelerated during the COVID pandemic as new users become increasingly comfortable with buying online. And our categories, in particular, are ideally suited to this new environment. This is creating massive new opportunities to evolve our digital capabilities from interactive live stream platforms to growing social channels. In developing this new digital ecosystem, the consumer must be at the center of everything we do. Benefits will accelerate over time, but we will leverage our growing data analytics capabilities and will mark value from our new global ERP infrastructure to ensure Contour is a consumer-led, digital-first organization. While we are under-indexed with digital currently, we are aggressively investing in support of this accretive growth opportunity, and we intend to leverage improved systems, processes, and capabilities to drive significantly greater digital penetration over time. From a geographic perspective, we continue to augment our core U.S. business by accelerating international growth with a sharp focus on China. As I stated earlier, the recovery in the China region continues to gradually stabilize. While China declined in the second quarter, it sequentially improved from the first quarter and by month in Q2. But beyond the near-term quarterly results, our disordered investments in China are creating significant opportunities for both of our brands. We are confident that we will extend our leadership position with the Lee brand, utilizing key regional influence that we discussed earlier in new collaborations, such as our recent partnership with Coca-Cola to drive further brand heat in the region. We have more than 25 years in the market, but the Li brand is just getting started. With deeper penetration of existing markets and significant runway in extending its reach to Tier 3 and 4 cities. And we will leverage this tremendous experience in the region to launch the Wrangler brand in China. While we chose to delay the launch, in light of COVID, we are ready to go, and we will be executing a soft launch this fall and a more robust full launch plan for spring 21 to most effectively optimize the consumer environment. We expect the business will take time to scale, but the long-term white space opportunity remains tremendous. And last, but certainly not least, our ability to extend these brands into additional categories is Beyond core denim is enormous. We see two primary areas of focus, outdoor and T-shirts. Within outdoor, our Wrangler All-Terrain Gear Line, or ATG, has had incredible early success, a natural extension for the Wrangler brand. ATG affords the customer high-quality, performance product at an exceptional value. The nearly $30 billion global outdoor market is poised to accelerate in the post-COVID world, and we intend to leverage this brand-right opportunity. During the first half of 2020, ATG experienced up to triple-digit year-over-year growth with our key retail partners, a great proof point for the early traction the line has garnered. And with key new international distributions set for the second half of 2020, including presence in over 400 Dressman stores in the fall and opportunities in the outdoor specialty and sporting goods channels, The future is bright for ATG and Contour's evolving outdoor platform. With respect to T-shirts, as we've previously discussed, the addressable market for Contour is significant, and we intend to increase investments to capture share. For the first time, we recently hired a category leader to focus on this important opportunity. We are adding design and marketing talent and defining our go-to market strategies. From logo to lifestyle to license, T's afford us the ideal organic extension for our brands. Expect to hear more on this opportunity in the coming quarters. But how do these strategies come together in support of our rapidly evolving model? Investments in new business development, innovation, sustainability, and demand creation act as enablers to not only strengthen our core positioning, but accelerate growth across category, channels, and geographies. And while we continue to expect a prolonged COVID operating environment, these strategic decisions, looked at through our TSR lens, will position us for more sustainable and profitable growth. Combined with our underlying structural margin expansion and robust cash flow generation that fuels optimizing our capital structure, we, as a leadership team, remain as excited as ever about the incredible opportunities ahead. With that, I turn it over to Rustin.