Tupperware Brands Corporation

Good day and welcome to the Tupperware Brands Corporation third quarter 2022 earnings conference call. Please note today's conference is being recorded. 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. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star followed by the number one again. Thank you. At this time, I will turn the conference over to Doug Lane, Vice President, Investor Relations and Strategy. Mr. Lane, you may begin.

Thank you, Operator. Good morning and welcome to Tupperware Brands' third quarter 22 earnings conference call. Joining me today are Miguel Fernandez, President and CEO, and Mariela Matude, CFO. We will be available for Q&A following our prepared remarks. Earlier this morning, we issued a press release announcing our financial results for the third quarter of 2022, which can be found on our investor relations website. Let me remind you that the following discussion and our responses to your questions reflect management's views as of today, November 2nd, 2022, and may include forward-looking statements. Actual results may differ materially from such statements. Additional information about factors that could potentially impact our financial results is included in our Form 10-Q for the third quarter of 2022, subsequent filings with the SEC, and our press release filed this morning. Please review the forward-looking statements disclosure on page three of today's press release. Please note that all references are being made on a constant currency basis, which reflects the application of the current period foreign exchange rate to any prior period results. Enabling comparisons excluded the impact of foreign exchange rate fluctuations. Additionally, in the third quarter of 2021, the company made an accounting change to classify our sold and held for sale beauty and personal care businesses as discontinued operations, consistent with our strategy to fix our core. Please also note that all references, unless otherwise noted, are being made on a continuing operations basis. During this call, we'll discuss certain non-GAAP measures, including those we refer to as normalized measures. Additional disclosures regarding these non-GAAP measures, including explanations and reconciliations of these measures to the most comparable GAAP measures, can be found in today's press release. Finally, a replay of this call will be available on our investor relations website later today. With that, let me turn the call over to you, Miguel.

Thank you, Doug. Good morning to everyone, and welcome to our third quarter call. We released our third quarter results this morning, which were below our expectations. The global macro environment continues to be challenging, and we're not executing internally at a level or consistency that we believe we should be. While the sales declines in the third quarter was consistent with the trends in the first half of 2022, we had expected improvement on the much easier comparisons. Persistent COVID quarantines in China are impacting consumer behavior in that important market. and geopolitical tensions along with inflationary concerns in Europe continue to impact consumer sentiment there. Additionally, actions we've taken internally as part of our turnaround plan have also impacted sales. For example, we have taken pricing decisions to protect our margins. In North America, plan changes and IT upgrades have created service issues adversely impacting sales. Fortunately, an improving South American region helped offset some of the declines. Currency headwinds increased in the third quarter and created a 600 basis point hit in our dollar reported sales and a 13 cent hit to EPS as the dollar continues to strengthen against most major currencies. Our operating margins suffer as a result of continued inflationary pressures coupled with the lower than expected sales, partially upset by price increases that we continue to implement to mitigate the higher input costs. We ended the third quarter with price increases averaging 11% globally, up from an average 7% price increase coming out of the second quarter. Please remember that many of our larger markets, such as U.S. and Germany, haven't implemented price increases of this magnitude in decades. The good news is that our gross margin held in the mid-60 percentage range, only 90 basis points below that the year ago. much better than the 400 basis points year-over-year decline that we had in the second quarter. And we expect year-over-year improvement in gross margins in 2022 fourth quarter due to many initiatives underway. However, to improve our operating margins, we believe we need to take further action to reduce our SG&A, which has a large fixed cost component. We plan to address this over the next two quarters. But rest assured that we remain keenly focused to right-size our business and find the necessary investment dollars to support future growth. At the beginning of the fourth quarter, we began to cover products sold in 1,900 target stores in the U.S. This is an important step in reengaging with today's shoppers, particularly Gen Zs and millennials, and more affluent consumers who probably have never been to a top-order party. We think it's critical to reach out to younger and more affluent consumers and bring them into our ecosystem. We believe that once they have the opportunity to more easily access our brand and experience the quality and design of our products, they will be left wanting more. Also, it's important for us to let consumers know that there's only one authentic Tupperware brand. Once consumers are in our ecosystem, they can engage with Tupperware.com or any member of our independent sales force to have access to our full line of products. It is important for us to leverage what is unique to Tupperware as we open up new channels. First, our brand name. Second, our quality. Third, the ease of use and functionality of our products. And last but definitely not least, our independent sales force who have the ability to demonstrate the products and offer the complete line of Tupperware products. We have over 8,500 functional design and utility patents for kitchen and home products. From our traditional food storage container to pressure cookers, and grills designed to work in the microwave. In two or three years, we want to be in many more categories where consumers give us permission to operate. Our goal is simple. We want to be in every room of the house. After two and a half years of no meetings, we returned to holding in-person sales events in many markets around the world in the third quarter for the first time since 2019. While this impacted our SG&A spending comparison versus previous year, We believe that the return to in-person meetings is critical to the health of our direct selling business. While technology allowed us to survive during the pandemic, there's really no substitute for in-person training and recognition. These in-person meetings, events, and promotional vacations should improve our self-proclaimed activity, recruiting, and retention efforts going forward. But as I've said since I arrived in 2020, the top of our brand goes beyond direct selling. Our goal is to leverage this great brand recognition and expand our product reach outside the direct selling channel of distribution. Let's face it. According to the WFTSA, direct selling did $186 billion in retail sales last year, which is tiny compared to the $96 trillion global economy. For perspective, Walmart did $568 billion in sales in the most recent fiscal year, and Amazon did $407 billion this last year. Direct selling built the brand through millions of microentrepreneurs around the world over the past seven decades, and we believe it will continue to be an important part of creating a competitive product ecosystem. But future growth in most of the global markets will come from increasing Tupperware access to broader consumer base through omnichannel distribution and moving its social selling DMOs from analog to digital. Now let's review our third quarter results, starting with our top four markets. In the U.S. and Canada, sales were down 15% in the quarter. Complaint changes coupled with a second round of price increases in September resulted in a 34% decline in active sales force. Despite the price increases, segment profitability was impacted by lower than expected unit volumes, increased discounts and promotions, an adverse product mix as we focused on selling excess product inventory, and added costs associated to return to the in-person meetings during the quarter. Mexico was down 19% due primarily to service challenges that began earlier in the year and were exacerbated by the failed software upgrade in the third quarter. These ongoing service issues continue to cause reduction in the number of active Salesforce members. We believe it will take some time to build our Salesforce back in Mexico over the next two quarters. Additionally, we have lower B2B sales, which accounted for 600 basis points of the decline. Price increases taken in August also dampened Salesforce activity, but helped protect profits with segment margins improving over 300 basis points in the quarter, driven by increased gross margin. Mexico is an important source of cash for us, so protecting the profits there is a priority. In Brazil, sales declined 5% in the quarter due to a lower activity rate, which we believe reflects the weak economics of this market and high inflation and macroeconomic and political or centric expression in consumer spending. While this is a deceleration from the second quarter trends, we believe we outpaced our non-cosmetic direct selling peers, reflecting the strength of our brand and the desire for our products to help reduce food costs. Gross margin improved due to favorable pricing of nearly 9% and favorable product mix. However, higher G&A spending slightly reduced the segment margins versus last year. However, like Mexico, Brazil carries segment margins and free cash flow conversion rates that are above our company average. As we look forward, we're cautious with the outlook for this market as the national elections and World Cup this quarter may add volatility to normal consumer behavior and therefore our results in the near term. Turning to Asia, China was down 28% versus last year. A rapid rise in COVID cases during the summer resulted in continuous strict quarantines and made for logistical challenges in many parts of the country. Economic activity overall remains weak by historical Chinese standards, and consumer spending remains soft. Despite the lockdowns, we continue to make investments to upgrade the look and feel of our retail studios, which were approximately the same number as last year, upgrade our outlets, open up our first experience center in Guangzhou in December, and begin the pursuit of e-commerce opportunities. We also have several new product offerings in the quarter that we believe could add excitement to our Salesforce and attract new customers. Excluding China, our Asia-Pacific business was down 20% with Australia, Indonesia, and Malaysia, each declining 30% or more, continuing the softness we have been seeing in those markets, driven primarily by external factors and a compensation plan adjustment. The bright spot in this region continues to be Korea, where sales increased 16% in the quarter, with 9% growth in core direct selling sales, augmented by an additional 700 basis points in B2B sales, including direct response to B2B spots. We will implement in Australia, Indonesia, and Malaysia what we know has been working in Korea. Another early read of our success of our omnichannel approach is in Belgium, where we roll out nationally in the second largest retailer, Delhaize, over the summer. This fall, during the two of the business weeks, The direct selling business reported 4% growth despite the widespread availability of our products on retail. While it is early days, we're encouraged to see that our omnichannel approach is truly expanding the Tupperware ecosystem to reach more consumers we otherwise wouldn't have. While we are also increasing the potential of our Salesforce to create a relationship with new customers who saw or purchased our products at retail. We also just published our latest ESG report. We believe we're making good progress towards achieving our 2025 and 2030 committees. We know ESG is important for shareholders to assess the investment risk, for lenders to provide capital, for retailers concerned about responsible sourcing, and for consumers, particularly Gen Z, in assessing who they want to do business with and work for. We believe we're on track to significantly reduce waste generation and water usage in our manufacturing facilities. reduce greenhouse emissions in our manufacturing facilities, and single-use plastic packaging, increase our use of non-fossil fusing resins, and explore the opportunity to reuse returned Tupperware products. In fact, our sponsorship of the National Park Foundation is to replace single-use plastic bottles with our reusable products. Lastly, since we set out this company's turnaround plan two and a half years ago, the strategy has remained the same. to build a business as big as the Tupperware brand. That meant shifting our mindset to one that places the consumer in the middle, making sure that we have the right commercial strategies in each of our respective markets to speak to the respective market consumer. Our 2020 organizational structure was set up to stabilize, delay, and simplify our traditional direct selling markets and to get them to a place where they are ready to grow. Additionally, our investments have been focused on expanding the top of our brand into new channels while energizing our current ones in the markets, where consumers give us permission to do so. As we soon embark 2023, we will enter a new chapter in our turnaround plan, creating a unique product ecosystem in the marketplace. By channel, with the right product mix, and consistent pricing strategy will be key. And we need to organize accordingly. I am pleased to show that Hector Lezama, has been promoted to Chief Commercial Officer to holistically oversee our efforts to achieve sustainable growth and improve profitability. He will be responsible for guiding all of our commercial activities around the world. Our omnichannel strategy is an uninclusive strategy. The more our brand is easily accessible, the more opportunities we have to bring new consumers to us, whether as customers or as Salesforce members. We've seen this be successful in many markets around the world. where when ourselves adopt the change, we see the tide lifting for all. If you haven't already, please read and consider sharing my LinkedIn post, where I share more about the strategy and what it means for this company and for all of our channels where we do business. As you may know, Doug Lane recently joined our team as our Vice President of Investor Relations and Strategy. Doug has covered Tupperware for many years at Southside Anno. I was riding on us when the company went into Target some 20 years ago. Unfortunately, our presence in Target was short-lived there due to decisions made by prior management. I'm going to now pass the call along to Doug, who wants to provide investors with some perspective on why our approach today is so much different. Doug?