Kontoor Brands' KTB CEO Scott Baxter on Q4 2019 Results

Thank you, Eric, and good morning everyone. Thank you for joining us. As Eric mentioned, our global brand presidents Tom Waldron and Chris Waldeck will be joining us for this year-end review. We believe this call is a great opportunity to have them share insights from post-spin to today, as well as go-forward strategies for each of their respective brands. We intend to have them join us for these year-end reviews on subsequent fourth-quarter calls. You'll hear from each of them in a bit. Let me start by acknowledging what a dynamic environment we are all currently in. The last few weeks have seen the emergence of the COVID-19 coronavirus, which has driven quite a bit of headline risk and uncertainty in global markets. While conditions are fluid, we remain extremely confident in the underlying fundamentals of our business. The strategic initiatives we are implementing, coupled with our best-in-class supply chain and robust cash flow generation, provide us with distinct competitive advantage, particularly in times such as these. The past may not be linear, but the levers in our control are significant and we believe will unlock meaningful value creation for our shareholders over time. I will touch on this more in a bit, but let me first share some thoughts on the past year. 2019 was a highly transformational year for Kontoor Brands. It was a year of successful transition for our organization, our leadership teams, and our employees around the globe. While we have accomplished much over the last year, including delivering on our financial commitments laid out earlier this year, we remain in the early stages of investing behind and leveraging our two iconic brands, Wrangler and Lee, to drive more profitable growth longer-term. Let me remind everyone of our stated strategic plan that was purposely structured over two horizons in a way that we believe will best represent the evolution of our operating model, investments in globalizing our organization, and sequencing of our capital allocation strategies. I want to reiterate that word 'sequencing' because it is a really important piece of understanding our story. To develop a global best-in-class model, we have to first set the healthiest foundation for sustainable longer-term growth, and that is exactly what we have done in 2019 and we will continue to do during what we call Horizon One, the first 18 to 24 months post-spin. First, as you think about our top-line growth algorithm, proper sequencing is a critical component for fully capturing the multitude of whitespace revenue and distribution opportunities in front of us, and there are many. We've needed to make some difficult but necessary decisions to level set and stabilize our business. So during 2019 and Horizon One, we have been keenly focused on the implementation of strategic quality of sales initiatives that elevate our brands and will better yield more profitable revenue growth. These actions, while necessary to support our sustainable brand building efforts, pressured near-term revenue results, contributing nearly three points of headwind to our 2019 top-line. In addition to our proactive strategic actions, disruptions within a rapidly evolving retail landscape, primarily within the US, have also negatively impacted our shorter-term results. Along the way, we've worked to be very transparent of how select retailer bankruptcies and store closures would impact our 2019 sales performance. These factors weighed on our full-year revenue by about two points, which is in line with our initial outlook. While we believe it is prudent to expect some continued disruption in certain points of retail distribution and our quality of sales actions are not fully complete, we believe four points are important to consider. First, our exposure to challenged distribution within the US is limited as we exit 2019. Second, we continue to focus on winning with the winning retailers, including our largest customers, many of which are well-positioned in their respective channels of distribution. Third, while our quality of sales actions may continue, we intentionally front-loaded these efforts post-spin, completing the largest projects first, and we would therefore expect associated top-line pressures to moderate in the back half of this year as we anniversary these actions. Fourth, and most importantly, we are just in the beginning stages of new business development, diversifying our existing revenue base as we improve growth across category, channel, and geographic vectors. Again, we have always planned that new business development would accelerate in the second half of our Horizon One and sequence into Horizon Two. Make no mistake, our brands are under-distributed both within the US and internationally, a distinct competitive difference to many in our peer set. We have meaningful and exciting expanded points of distribution that will begin in earnest in the second half of 2020, and you will be hearing more about these programs over the next few months. From a margin perspective, which Rustin will detail a bit later, appropriate sequencing is again important to note as we executed several restructuring cost savings and quality of sales actions prior to and subsequent to the spin that have driven margin recapture opportunities and are really critical to our margin expansion story. We remain highly under-indexed and under-penetrated in DTC, digital, and international. As we invest behind and distort growth in these areas, we will benefit from the structurally accretive mix shifts to drive incremental profitability expansion. Further growth of these higher margin businesses will generate the capital that allows us to more meaningfully invest back into revenue enhancing areas like new product development, design and innovation, and demand creation, building a productive virtuous cycle over time. And finally, as it relates to sequencing, let me touch on free cash flow generation and our capital allocation strategies with a focus on 2019 and Horizon One. One of the key pillars to our story remains our robust, consistent free cash flow generation. Despite facing top-line pressures driven by our quality of sales actions in 2019, that strong cash generation continued. We've stated that during Horizon One, beyond our investments in standing up the organization, our capital allocation strategy would focus on aggressively deleveraging the balance sheet and paying a superior dividend. We're pleased to announce that within just seven months post-separation, we've paid down $127 million in debt, $27 million above our initial guidance, even while making significant restructuring investments in the business, and we've now paid two consecutive quarters of dividends at 56 cents per share, with the third just recently approved by our board to be paid out in a few weeks. Our superior dividend yield allows us to return cash to our shareholders while we continue to evolve our operating model. So sequencing matters. Sequencing of our revenue growth, margin expansion, and capital allocation strategies are essential in the proper evolution of our model. Rustin will go through more specifics on our full year 2020 guidance, but as we turn the calendar, I'd like to offer a few highlights of our 2019 performance relative to our financial commitments and share some thoughts into 2020. We are on track executing on the strategies established at our spin, and our playbook is evolving as we've intended. We guided 2019 adjusted revenue of more than $2.5 billion and delivered actual adjusted revenue of $2.52 billion, in line with our expectations, even as we amplified brand-elevating initiatives that pressured shorter-term top-line results. For adjusted EBITDA, we guided 2019 at $342 to $360 million. We delivered actual adjusted EBITDA of $341 million. Without the amplified actions in India, we would have been above the midpoint of our original range. We set our restructuring and quality of sales actions should result in improved, healthier, and more durable gross margins, and we are seeing just that with gross margin expansion the last two quarters. Finally, we set our capital allocation strategy during what we call Horizon One would focus on aggressively deleveraging the balance sheet and paying a best-in-class dividend. We paid down significant debt well ahead of guidance. Our dividend payout offers an attractive yield to our shareholders as we continue to evolve our operating model. While we are absolutely moving in the right direction, we acknowledge some unexpected softness during the fourth quarter. As you've heard from many of our branded apparel and retailer peers, traffic in the US was soft during the holiday period, and we were not immune to this slower traffic, coupled with the exit or reduction of some non-core programs and lower distress sales, caused us to come in a bit softer than we expected from a top-line perspective. However, as we entered 2020, we saw trends improve, and we are confident in continuing to optimize and globalize our model through Horizon One. These actions that require some patience will set the stage for accelerated growth with cash flow optionality in Horizon Two, while yielding more profitable and sustainable growth that unlocks substantial value creation for our shareholders. Our outlook for 2020 maintains solid underlying structural fundamental improvement, but we recognize the heightened uncertainty around factors beyond our control, most notably the potential impact of the recent COVID-19 coronavirus developments. So let me share some thoughts on the subject as I know it's on your minds. We are carefully monitoring the situation, which as you all know is highly fluid. As always, our top priority is to ensure the health and safety of our employees, and our efforts are focused on addressing their needs. Our thoughts are with those impacted during this difficult time. We have created an internal coronavirus task force that monitors developments daily, with contingency plans in place should conditions worsen. We realize that from a demand perspective, the potential impacts are no longer just confined to the China region, and we have factored the global impact within our first order color, but most is derived from our commercial business in China. I do want to note that prior to the emergence of coronavirus, we were seeing really solid trends in our China business. In fact, during January, our China comps were up a solid double digits year-over-year. And while we expect some impacts to near-term results, we are confident that we will regain momentum as conditions normalize. We have not seen any material issues within our supply chain or sourcing, and while we believe our own Western Hemisphere production provides a distinct competitive advantage in a challenging environment such as this, we will certainly continue to monitor events as they develop. As you all know, we were scheduled to launch the Wrangler brand in China this spring. Given the current environment, we believe the prudent course of action is to delay the launch for a short period until fall of this year, when we can more effectively optimize our go-to-market strategies, our interactive consumer engagement, and better leverage our demand creation spend. While the team is extremely excited to get going and we are ready, this is the best decision for the brand and most importantly our employees' safety. We remain optimistic about the long-term growth potential of this market for both our brands, and we will execute against our strategies to most effectively capture the opportunities. And finally, I want to reaffirm our commitment to our longer-term TSR model of 8 to 10 percent annualized returns. Special thanks to our employees all around the world for their tireless work ethic, inspiring collaboration, openness to change, and dedication to success in 2019 and the year ahead. With that, I turn it over to Tom Waldron, global president of Wrangler.

Aaron, this is Scott. Let me start. The situation is fluid, but we're monitoring closely. We learned from Asia and have a task force meeting daily. Contingency plans are in place, and we base decisions on facts, not speculation. In January, China was up double digits, and we remain confident in that business. Recovery is slowly starting. With that, I'll turn to Rustin.

From Asia, we're pleased with our brand positioning, new leadership team, and product momentum. We have a balanced approach with D2C and digital. It will slowly normalize. On Europe, it's too early; we have few stores in Italy and are monitoring closely.

Adrienne, from my perspective, the key is that we laid out horizon 1 and 2 strategies. As we merge toward horizon 2, the strategy is taking hold, and I'm pleased with the team's execution.

Bob, our internal sourcing capabilities are a strategic advantage. Our mills are up and running with workforce back at 75–80%. Things are fluid, but we're in good shape and confident.

Thank you for joining us. While conditions are dynamic, our underlying fundamentals are improving, cash flow generation is robust, and we are uniquely positioned to generate significant shareholder value over time. We look forward to speaking with you on our first quarter call.