Kontoor Brands, Inc.

Good morning, ladies and gentlemen, and welcome to the Contour Brand's first quarter 2025 earnings conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. I would now like to turn a conference call over to Michael Karapetian, Vice President of Corporate Development Enterprise Strategy and Investor Relations. Please go ahead.

Thank you, Operator, and welcome to Contour Brands' first quarter 2025 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 and is available on our website at contourbrands.com. Reconciliations of gap measures to adjusted amounts can be found in the supplemental financial tables included in today's news release. 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. Joining me on today's call are Contour Brands President, Chief Executive Officer and Chairman Scott Baxter, and Chief Financial Officer Joe Alkire. Following our prepared remarks, we will open the call for questions. Scott?

Thanks, Mike, and thank you all for joining us today. I'd like to begin our call with the exciting news we shared this morning. We have cleared regulatory approval for the acquisition of Helly Hansen. In the coming weeks, we expect to close the transaction and begin the next chapter of our story fueled by accelerating top-line growth, stronger earnings and cash generation, and significantly improved capital allocation optionality. The goal is clear. drive greater value for our shareholders, and structurally increase our TSR potential. We expect to see an immediate benefit to 2025 revenue growth, earnings, and cash flow, and long-term benefit is even greater. To ensure we deliver on our commitment, we have established a value creation framework built on four pillars. First, accelerate Helly Hansen's growth. The global opportunity for the brand is significant. As we discussed in February, the U.S. is the largest outdoor apparel and footwear market in the world. While it is Heli's fastest growing, it remains significantly underpenetrated relative to its peers. Through a combination of wholesale and retail expansion, strong digital growth, and investments in demand creation, we see a clear path to double-digit growth in our home market. In addition to the U.S., we see significant opportunities in direct-to-consumer, China, global workwear, and category expansion that will further support long-term sustainable growth. As a result, we expect a meaningful increase in our fundamental growth profile, greater diversification, and increased penetration in the attractive outdoor and workwear markets where we have deep expertise. Second, Double Heli's operating margin. We expect to increase operating margin from high single digits today to mid-teens through a combination of gross margin and SG&A benefits. We will leverage our global operating model as well as our supply chain and technology platforms. This will provide significant scale advantages for both organizations while driving greater back-end efficiency, improved decision-making, and increased investment capacities to support growth initiatives. Third, increase capital allocation optionality. Over the near term, we will focus on improving Heli's profitability and networking capital. Within 12 months, we expect to be under two times leverage, and within 24 months, back to pre-deal leverage, while consolidating a significant increase in earnings. Long term, we will deploy the increase in cash flow potential to support our capital allocation framework, including our dividend and share repurchase programs. And finally, establish contour as the employer of choice in the industry. Attracting and retaining top talent will ensure long-term success. At the same time, any potential transaction needs to be a strong cultural fit. Heli accomplishes both. We continue to be impressed by their organization. There is depth of talent at all levels, but it is also humble, gritty, and committed to doing things the right way. These are the same qualities that you'll find at Contour. Canadian Tire has been a great steward of the business, but there has been one consistent message I've heard from the team above all others. Contour will be the first owner of the business in 20 years that operates in the apparel industry. We know the business and speak the same language. They have been executing at a high level on their own, but I am more confident than ever in the significant benefits as a more synergistic global brand owner. Before turning to our results, let me spend a few moments on the current environment. As you are well aware, there has been an increase in macro volatility over the past few months. In the past, you have heard me talk about our focus on execution and controlling what we can. This time will be no different. We have operated through multiple cycles and have the team and operating playbook to not only navigate the current environment, but come through the other side even stronger. Our first quarter highlights the resiliency of our organization with multiple paths to deliver our outlook. Despite a slowdown in POS mid-quarter, operational agility and the strength of our supply chain drove a significant increase in gross margin and better than expected earnings and cash flow. While the consumer remains under pressure around the globe, it has been resilient. In times of disruption, consumers and retailers lean into brands they know and trust. We are managing the business prudently, but as Joe will discuss, we have seen trends improve in March and April. On tariffs, we do not expect an impact to second quarter results due to recently announced policy changes, and mitigating actions have been put in motion that will begin in the third quarter. As an organization, we challenge ourselves to look around corners. Coming through the supply chain disruptions over the last several years, we put plans in motion to create a more agile organization. As part of Project Genius, we kicked off an SKU level analysis to create increased flexibility within our manufacturing and sourcing operations. This body of work has given us a tremendous head start and I am confident we will be able to meaningfully offset the impact from tariffs in a 12 to 18 month period. We have dealt with supply chain shocks in the past and have proven the resiliency to maintain profit and returns over time. With that, let's review highlights from Q1. Wrangler had another solid quarter, with global revenues increasing 3%. Growth has been broad-braced across all regions and channels, including a 15% increase in digital. Female continues to be a remarkable success story. During the quarter, female grew 40%. Our investments in the team, product development, and marketing are delivering excellent results. Following a very strong year, our collaboration with Laney Wilson is off to a great start in 25. We launched our second collection in the spring, including a broader expansion in EMEA that coincided with Laney's European Tour kickoff. And we are building on the momentum generated by our female fit innovation, Bespoke. We are scaling the platform following a strong 24. And I am pleased to share the collection continues to perform very well, driving greater growth and penetration within the specialty channel. At just 10% of global revenue, Wrangler's female business is just getting started. What used to simply draft off the male business is now a dedicated focus. We are targeting the female consumer and seeing results, giving me tremendous confidence in the long-term growth opportunity in the years ahead. The heart of the Wrangler brand, Western, also drove strong growth in the quarter, coming off mid single-digit growth in 24, trends accelerated to mid-teens in the first quarter. Our key wholesale customers are healthy and growing, Western culture is expanding, including record rodeo attendance, and our product portfolio has never been better. As a result, Wrangler delivered another quarter of share gains. According to Cercana, in our men's and women's bottom business, Wrangler gained 70 basis points of market share in the first quarter. Wrangler is on an incredible trajectory, and 2025 is off to a great start. Turning to Lee, the quarter performed as expected with revenue declining 8%, our brand repositioning is tracking to plan, and we are seeing green shoots that give us confidence in sequential improvement going forward. Our new creative vision is starting to show up in the marketplace. We are driving better segmentation across consumer types, sharpening our storytelling to be more aligned with Lee's consumer, and addressing challenges in mid-tier distribution. We are confident we have the right team in place and a new strategic playbook to build our way back to growth over time. To support these efforts, we are leveraging our improved multi-brand platform. Over the last 18 months, we have doubled the tools available to the team to drive greater consumer-driven insights. As a result, digital traffic, brand equity, and purchase intent all increased in the first quarter. The barometer of the business is digital. where we have a direct path between building better product and telling better stories and engaging our consumers. This is where we expected to see the first proof points that our realignment is working, and that's exactly what we're seeing. In the first quarter, digital increased 8%, and we have seen that momentum continue in April. Looking ahead, our new equity campaign is planned for the back half of the year, which will bring our new vision to life. We are sharpening the brand's focus, establishing a stronger foundation, and refining consumer choices. I am confident these steps will put the brand on its best footing in decades and fuel the brand's return to growth. Before I turn it over to Joe, a few closing remarks. Regardless of the environment, we have tremendous optionality in the business. Wrangler has momentum and is winning with the consumer. Lease performance improvement is underway. Project Genius is ramping, and Helly Hansen will significantly enhance our fundamental algorithms. Our first quarter was better than expected, and we remain on track to deliver the outlook we provided in February. While our outlook for Helly Hansen has strengthened, our teams are executing at a high level, and I am confident we are on a path to drive long-term value creation for our shareholders.