Kontoor Brands, Inc.

Greetings, welcome to Contour Brand's fourth quarter earnings call. At this time, all participants will be in listen-only mode. A question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to Eric Tracy, Senior Director of Investor Relations. Mr. Tracy, you may begin.

Thank you, Operator, and welcome to Contour Brand's fourth quarter earnings call. and fiscal 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. 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, business model changes, non-cash impairment charges related to our Black and Republic trademark, 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 exclude 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. Additionally, as a reminder, our fiscal 2020 included the benefit of a 53rd week, which fell in the fourth quarter. Joining me today on today's call are Contour Brands President and Chief Executive Officer, Scott Baxter, and Chief Financial Officer, Rustin Wilton. In addition, on today's call, we will also be joined by Tom Waldron, Global Brand President of Wrangler, and Chris Waldeck, Global Brand President of Leigh. Following our prepared remarks, we'll open the call for questions. We anticipate the call will last about an hour. With that, I turn it over to CEO, Scott Baxter.

Thanks, Eric, and thank you all for joining us today. On behalf of Contour, I hope you and your families continue to be healthy and safe. As Eric mentioned, our global brand presidents, Tom Waldron and Chris Waldeck, will be joining us for this year-end review. We believe these year-end calls provide a great opportunity to have them share insights from the past year, as well as go-forward strategies for each of their respective brands. You'll hear more from each of them in a bit. We are pleased to share our fourth quarter and full year results with you today, results that came in ahead of our expectations, driven by broad-based improving performance across the business. Let me start by thanking our colleagues around the world, as the strong fourth quarter results and momentum we are seeing into 2021 are a direct reflection of our team's tremendous efforts over the last year. Their resiliency, agility, and focus on execution during these unprecedented times has been truly inspirational. Like most companies, during 2020, we experienced challenges never seen before as the impacts of COVID-19 were far-reaching. However, we were nimble, and we quickly focused on supporting the safety and well-being of our associates. while also strengthening our financial and liquidity positions. And, as important, we've been flexible in evolving our strategies, and in fact, amplified many of these proactive initiatives to not only help navigate the near-term environment, but also set the foundation for long-term success. Recall, at the time of the spin, we defined Horizon One as the first 12 to 24 months as our own independent company. During this time, our focus has centered on stabilizing and optimizing our model through restructuring and quality of sales initiatives to bolster margins while driving TSR accretive actions from our significant cash generation. Rustin will take you through more detail on these measures later, but these efforts have helped de-risk our model and we're the exact right thing to do in setting the stage for healthier, sustainable, long-term growth. Even with the challenges from the pandemic, The strategies we've implemented and the investments we've been making have allowed us to end 2020 with great momentum. These strategies are clear. First, enhance and accelerate the core through share gains and expanding the marketplace within U.S. wholesale. Second, transform our D2C and digital ecosystem in driving channel expansion. Third, expand geographically with a focus on China. And fourth, broaden our reach in the new categories and usage occasions, emphasizing outdoor, t-shirts, and workwear. Despite the pandemic, in support of realizing these strategic growth opportunities, we've been laser-focused on ramping investments behind key enablers. These include amplifying demand creation and marketing spend, elevating innovation platforms, including becoming an industry leader in sustainability, driving further competitive separation with our best-in-class supply chain, unlocking efficiency and productivity gains through the implementation of our global ERP and digital infrastructure, yielding enhanced consumer insights and building data analytic capabilities, and finally, identifying and cultivating world-class talent to create a high-performance, purpose-led culture. These are the investments and strategic priorities that will fuel our transition to Horizon 2, catalyzing fundamental growth, greater cash flow optionality, and the evolution of our TSR model over time. We will provide much greater detail on this next phase at our upcoming Virtual Investor Day in May, but we're really excited to share what lies ahead with all Contour stakeholders. Turning to our fourth quarter results, we saw strong fundamental improvement across all areas of the business, with revenue, margins, and cash flows coming in above expectations. Overall, revenues sequentially improved in Q4, increasing 1% on a reported basis, compared with down 43% and 9% in the second and third quarters, respectively. Importantly, we saw growth across both of our global brands and in the U.S., Europe, and China. The U.S. business saw continued strength in the quarter, led by Wrangler in our digital business, as well as the continued development of the Lee brand in both premium and value channels. Our digital transformation continues to be a bright spot, with an evolving platform that is driving elevated consumer engagement, traffic, and AURs. We saw really nice growth across the U.S. own.com business, which was up 50% in Q4. as well as the U.S. digital wholesale that increased 75% in the quarter. As we think about the U.S. landscape, I want to be clear. We are winning in the marketplace, taking share and adding incremental business as well. During 2020, according to NTD, we added over 200 basis points of share with our core denim and casuals business. And importantly, these share gains are healthy, with a balance of additional units and increasing AURs. Our strategies are paying off, with quality of sales, new innovation, and design initiatives helping support the mixing up of price across the business. Turning to select international markets, our Europe and China businesses continued sequential improvement during Q4 as expected, both inflecting positive in the quarter, with Europe increasing 7% and China up 11% on a reported basis. Given increasing lockdowns in the region, we do expect volatility in Europe will continue, but new business development wins, particularly with our Wrangler ATG line, as well as our recently announced LEED licensing collaboration with H&M, are examples that we will remain on offense, positioning Contour for long-term success in the region when conditions normalize. And certainly, China will continue to be a focus for our strategic investments given the significant white space opportunity the region represents. At the risk of stealing Chris's thunder, we are already seeing great returns on our investments in the Lee brand in the region, as our leadership position in denim was extended during 2020. And with respect to Wrangler, we've been extremely pleased with our soft launch of the brand into the marketplace during Q4. While we are in early days, we are really encouraged by the early reads, and our broader launch in the region remains on track for this spring. I'll let Rustin take you through greater detail in a bit, but I'd be remiss if I didn't highlight Comfort's solid financial position. We announced today the proactive early termination of the covenant relief period in our amended credit facility, a testament to our improving fundamentals and robust cash generations. Our board of directors also declared quarterly cash dividend of 40 cents per share in Q4, the first quarter in which we could reinstate under the amended credit facility. And despite the pandemic, we've been aggressively delivering our balance sheet over the past several quarters. And that continued in Q4 as we paid down an incremental 125 million in debt, taking our net leverage ratio to under three times to end 2020. Our improving fundamentals, coupled with increasing cash flow optionality, affords a powerful combination as we position the contour model to transition into Horizon 2. Before I turn it over to Tom and Chris, let me close with this. We win together, and I couldn't be prouder of our team's efforts to manage through this highly dynamic environment. We ended the year strong, and while macro conditions remain uncertain, I'm confident that we are executing on our strategic playbook, investing in key growth enablers such as demand creation, and setting the stage for an exciting next phase of the journey. That should continue to unlock great value for all Contour stakeholders.