Greetings and welcome to the Kontoor Brands' Second Quarter 2020 Financial Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eric Tracy. Senior Director, Investor Relations. Thank you. You may now begin.

Thank you, operator. Good morning, everyone, and welcome to Kontoor Brands' 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. Amounts referred to on today's call will often be on an adjusted dollar basis, which we clearly defined 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 GAAP 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 kontoorbrands.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 basis, which excludes the translation impact of changes in foreign currency exchange rates. Constant currency amounts are intended to help investors better understands the underlying operating performance of our business, excluding the impacts of shifts in currency exchange rates over the period. Joining me on today's call are Kontoor 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 after spend by 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 to 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 across the globe, we continue to employ social distancing and work remote protocols where appropriate across our offices facilities in distribution centers. So, let me start by providing some thoughts on how the COVID pandemic has impacted our business. As we expected, the impacts from COVID weigh on our second quarter results as stay-at-home orders and retail door closures across the world pressured consumer demand. We said in our first quarter that, we were seeing signs of improvement, principally in China and the U.S. in late April early May. We…

Thank you, Scott, and good morning everyone. I will discuss our second quarter results in a moment, but I'd like to begin by addressing a few key topics I know are on your minds. Specifically, I will provide an update on Q2 trends and the current operating environment. Our balance sheet, strong cash flow and debt repayment and finally, how our key strategic initiatives are driving improved fundamentals even given the challenging landscape. On our Q1 earnings call, we shared that, we had begun to see early signs in late April and early May of strengthening wholesale order patterns and digital trends. As we move through the second quarter, we saw sequential monthly improvement in our global business. Our strategies of winning with winners and accelerating digital has levers to differentiate performance were evident in the quarter, led by the 48% growth in usowned.com. Next, we were able to strengthen our balance sheet during the quarter by driving improved working capital performance. Cash generation is a cornerstone of our operating model and capital allocation strategy for Kontoor. Accordingly, as the primary lever to influence cash generation, inventory has been and remains a critical component of our working capital focus. Post then we began a journey utilizing a TSR-driven approach to drive improvement by focusing on quality of sales initiatives, business model changes and exiting select, non-strategic lines of business and points of distribution. In the back half of 2019, our net inventory decreased $80 million or 15%. In 2020, our plans focused on continuing to drive incremental inventory improvement. As liquidity became paramount for all companies with the acceleration of COVID, our vertically-integrated manufacturing allowed us to right size production in light of decreased demand, avoid creation of excess inventory and minimize cash flow impacts. Accordingly, our first half 2020…

Thank you. [Operator Instructions] The first question comes from the line of Erinn Murphy with Piper Sandler. Please proceed with your question.

I guess my first question is for Scott and maybe Rustin you can weigh in. You talked about strengthening trends throughout the quarter with POS now outpacing shipments. Are you in a position that, you're chasing this demand now? And then just curious maybe for Rustin, how is it fitting into your commentary when you referenced the sequential year-on-year improvement in the back half? And then I have a follow-up.

So, Erinn, this is Scott. Good morning. Thanks for joining today and I'll start. We did see really nice improvement as we've mentioned, both Rustin and I, in the second quarter. So, we were pleased with that. One of the things that we've talked a lot about, you've heard me talk about it is that, we're under-distributed here in the United States, specifically from a brand standpoint, both brands. And these big wins that we've had that we shared last time and we actually added a little bit more color, over 2,000 doors with Lee both male and female, which is a key component, both men's and women's denim and men's and women's casuals for the fall. And then in addition to that, we have some additional programs next year in spring of '21 with those two programs. And then the Dressman's program with ATG, really bringing ATG to Europe in pretty big way, but we think with that -- and also the fact that, we've really done a nice job as far as our strategy about winning with the winners and who we do business with. And then we talked a lot about at the beginning, how we've cleaned up this quality of sales initiative. You couple those things together and we feel like, there's going to be sequential improvement going into the second half of the year. Rustin, do have anything to add to that?

No, I think the only other thing I would add is, sort of a timing shift in certainly is material. You saw that it was $33 million in the quarter that is in the Wrangler U.S. business, so just a little bit of context and perspective there. Wrangler U.S. in the quarter was down 27%. So, had those timing shifts occurred as originally or has historically taken place. The Wrangler business would have been down about 16% of the U.S. So, a pretty material impact and obviously that will move to the third quarter. And you may recall Erinn, we talked about that on our fourth quarter call as a timing shift that we were expecting moving from Q2 to Q3. And so that's what we were referencing.

Okay, thank you. And you've kind of answered part of my second question, so maybe if I could just ask on the U.S. landscape broadly in the second half. Can you just speak a little bit more about what you're seeing in the channel and how you're seeing promotions? Like from our perspective, it does seem after very lean inventory in the mass channel for some of your brands and even some of your peers, so just curious on your expectations broadly for the landscape? Thank you so much.

Yes. So Erinn, I'll go ahead and start. This is Scott. We feel pretty good about second half, like we said, from a sequential improvement standpoint. Our inventories are in tremendous shape. We're really clean specifically in the mass channel also, so we feel really good about that. We're probably going to chase a little bit back to school and we actually think that's a good place to be. But I'll tell you why we think that's a really good place to be and we've talked about this a lot, and it's a real strategic advantage that really got to flex this muscle during this time and that's owning our own distribution about a third of our own manufacturing facilities. We're going to be able to really go ahead and manage that here the rest of the year pulling those in relative to what the supply and demand is. So, we feel like we're in a real enviable position having that right here in the North American market. Rustin?

Yes, I would just say from our inventory position. Erinn, you talked a little bit about that. I would say that, this journey really started at the time of the span. And, we really started focusing on quality of sales and in the business model changes and really exiting some of the non-strategic lines of the business all through a TSR lens, and so in the back half of last year, we drove an $80 million improvement or up 15%. As we came into this year, inventory remained a really important focus for us. And in the first half of the year, we drove about a $25 million improvements are an additional 5%. Just for perspective in 2019, our first half inventory actually increased $50 million. So, we are certainly focused on inventory, aligning the supply and demand signals that we're getting from our retail partners as Scott mentioned, and making sure that we can service the market. And so we feel good about where we're positioned from an inventory perspective and our ability to service those new program wins and the marketplace demand in the back half.

The next question comes from line of Bob Drbul with Guggenheim. Please proceed with your question.

Couple of questions, actually, the first one, can you elaborate a little bit more on terms of where you are, like you mentioned that you ERP implementation, but just sort of where the milestone and sort of where you are and what we should be looking for? And the second question is. You talked about minimum exposure the challenge retailers. So can you just talk a little bit about like doors that you were selling last year just sort of that are closed? How many doors like that are closed and sort of do you see any risk in the doors that you're continuing on the channel retail side?

Thanks. Yes. Thanks Bob. I'll go ahead and start on the ERP implementation. Certainly, it's been a big series of activities for us over the past 100 days or so as it relates to the implementation. Certainly, as you know, we began the ERP project about the time of a span and there's been significant work ongoing on that. Obviously, as we moved into 2020 with the advent COVID and working remotely, some additional challenges certainly as we prepared for this second quarter activity, but couldn't be more proud of the team and how they've worked together, heavily relying upon collaboration tools. During the quarter, we did have some significant milestones that were out there from an ERP perspective. So, Scott talked a little bit about in his prepared remarks, going live on both on new e-commerce platform for EMEA and the U.S. in the second quarter. We also shifted over our production, our distribution, I should say, in Europe to a 3PL. And then just recently went live with our first region on a new ERP and infrastructure platform in Asia. And so, in terms of the timeline, we talked a little bit about that. We still have, are making great progress and we still have the U.S. and Europe in front of us. But, that's the last region -- Asia is the last region we have planned for this year. So hopefully, I give you a little bit of color, more color on the ERP side. Scott, you weigh in on the exposure to challenge retailers?

Yes. So, Bob, when we think about it, we really think about going back to our Horizon One and our strategy and how we thought about, how we wanted to set this business up for success. And we took a hard look at the marketplace globally and said, where do we want to align and who do we want to align with? And we chose some certain folks to make big investments with and they are really paying-off now. So one of the things that we've talked a lot about is that, our four largest customers represent about 50% of our business, so if you think about Walmart, Target Amazon and Kohl's. We feel really good about how we think about that from a win with winners and it positions really well going forward. And then if you think about department stores and we've talked about this. We've just always had very limited distribution there, and now we have even more limited distribution there, unlike our competition. So for us, that puts us in a really good position as far as going forward. And I think the other thing is, from the very beginning, we've talked a lot about the fact that we were going to amplify our digital. And we have spent an incredible amount of time and energy and investment on doing that, and it's starting to show both Rustin and I talked a lot about how that's kind of started to really pay us, benefits back to the organization. But we think there's a long way to go and we've hired a leader that's doing a terrific job and we've made investments in that business. So, the combination of those things, we think puts us in a really good spot as far as going forward.

The next question comes from the line of Alexandra Walvis with Goldman Sachs. Please proceed with your question.

Good morning everyone. Thanks so much for taking the question. I have got two questions. The first question is. I wonder if you could share any thoughts on the structural changes that could result from the COVID pandemic, as it relates to your business and relates to the broader market? I'm particularly interested in, how the wholesale model evolves and how wholesale partners will approach holding inventory and taking your seats in the, in the future and how you're positioned for that? And then I've got a follow-up question.

Okay. Thanks, Alex. Good morning. It's Rustin. And I'll start with the first piece about some of the structural changes that we're seeing a little bit internally and then ask Scott to weigh in about a little bit more on the wholesale market dynamics that we're seeing. But certainly, I think as we think about structural changes with COVID, we've talked a little bit about, it's, we've taken a step back and really examined all of our expenditures in the business and how we work together. So last quarter, we talked a little bit more just even about doing kind of virtual design work and certainly virtual sales meetings. So, we're seeing some changes from a structural side that we're certainly looking at. We did pick a number of temporary actions, furloughs and salary reductions to manage through this year. But certainly we're looking at, how we would spend those dollars moving forward. Scott mentioned quite a bit about the focus on digital. And many of the investments in the strategies we really had in place at the time of the span. Certainly, we're trying to distort and amplify now. We're early in that journey, but it is -- we are taking fresh look as a result of COVID about how much we're spending and where we're spending our dollars to make sure that we're prudent there. So Scott, maybe you want to weigh in on the market side?

Yes, from a strategic standpoint. I think this is one of the areas where we have really benefited. And we had a vantage point from the very beginning, taking a business that was kind of disparate all over the world doing their own separate things, making their own product, having their own offices and all that. And we brought it all together. And we're in the process right now and it's happening very quickly as globalizing this company and doing that in many different ways. So whether it's Rustin speaking about the ERP, or Tom and Chris, and how they're bringing the global product teams together across the world, but that structurally is really important to us going forward. And then to complement that with how we think about digital and how we're thinking about, a headquarter office where we brought Lee here and we brought the team together and we've talked a lot about that. And I can't say enough about how much that's benefited us as an organization. So structurally, we were way down that path and only now we just continue to accelerate. So for us, it's actually been a real push and a good one.

Awesome. And then my second question is on cash generation. So I'm wondering you can share any color on way of forecasting cash generation for the year. You exceeded expectations in this quarter and use that to make incremental discretionary debt pay downs. Can you talk about how in a way you're forecasting for the year and how you're thinking about paying the pace of debt pay down?

Yes. Thanks, Alex. It's Rustin. I'll take that. So, as we've talked many times since the span d cash generation is of paramount importance to our investment thesis and just really frank they're operating model. So, we've maintained focus on cash generation since the span. And as I talked a little bit earlier about some of the inventory trends that we saw late last year with a $80 million dollar improvement in the back half, continuing to accelerate that, certainly in light of COVID and liquidity as we moved into Q2. So, as we think about the back half of the year. Certainly, I'm not going to guide specifically on cash generation, but we did call out that we do have line of sight to continued inventory improvement that that is out there in the back half. So, we do see additional improvement. We're pleased with the progress we've made so far. But that is the single largest lever from a working capital perspective we can pull in terms of cash generation. So, it continues to be a focal point for us and we see additional opportunities to continue to improve in the back half.

The next question comes from line of Sam Poser with Susquehanna. Please proceed with your question.

Thank you for taking my question. Hope everybody's well and I got a handful. Let's start with, I'm just going to ask them and then we can deal with them. The dividend, what is the status of your plans for the dividend? And, I'll follow up on it, if I need to. What are you -- are you expecting the sales to be positive in the third quarter given the Wrangler that shipped to the $33 million plus the Walmart, Lee order? And can you go to some idea of the size of that Walmart order? And the same thing is true on the gross margin, given that things are starting to get cleaned up. So like, sort of like on a comp basis without those new businesses, I assume you're expecting some improvement in the trends and then you add those new businesses in. Where does that leave you? I know you don't want to give specific guidance, but these are two large orders, I would guess.

Okay. Well, Sam, why don't I go ahead and start with the dividend and then Rustin will go ahead and take it from there. So, as we stated in the release, we want to reinstate the dividend as soon as appropriate. Obviously, we here as a team has been part of our investment thesis. We absolutely understand how important it is. Just to remind everybody, we suspended for the second and third quarter of '20, and we can make payments as long as certain criteria is met after the third quarter and we know how important it is to the story. And I hope everybody here knows how important it is to our Board and to all of our shareholders. So, we take it very serious. There are a lot of things that go into that decision, as we work with our Board to go ahead and reinstate. We're going to go ahead and comment on that and the next quarter, of course, and bring everybody up to speed. We're not going to go into any specifics at this time. But again, we know absolutely how important it is. We will go ahead and comment in the next quarter on it and bring everybody up to speed. Rustin, you want to go ahead and talk about the sales?

Good morning, Sam. I'll go ahead and take your next two questions. Obviously, as we stated, we're not going to guide on the back half, but we did talk on the revenue side about seeing sequential improvement in the second half and certainly, the timing shift of the $33 million that we talked about and the new distribution gains, specifically the Walmart program with Lee, which we won't dimensionalize, but you do know it's over 2,000 doors. Just to give you a little bit of perspective will help and that's where we're seeing some of that sequential improvement. But I will stress then that we continue to assume a prolonged operating environment, and we stated that last quarter. We continue to believe it's prudent to assume a level uncertainty from a macro perspective. So, that's how we're envisioning the sales in the half, again, sequential improvement. From a gross margin perspective, we talked a little bit about tougher comps, certainly in the back half of 2019, as we started to see some of that improvement from our quality of sales initiatives and the restructuring. We started doing inflection little bit in the back half of '19. So, we will be up against tougher comps. General mix will shift a little bit as well certainly not a lot of distress goods necessarily being sold in the front half, that there'll be a little bit more distress. And again, that timing shift from Q2 to Q3. So, we do in his pay will likely have some continued downtime in inventory reserves. But we anticipate those a moderate spend as we go into the back half. And so, that's a little bit more sort of context again on the gross margin, but we won't guide specifically on the margin piece, so --

The next question comes from a line of Adrienne Yih with Barclays. Please proceed with your question.

Yes, good morning. Scott, I wanted to talk about two of the strategic initiatives. I guess your own brand digital. So can you give us the penetration that it is pre-COVID in the U.S. versus in China? And then what has COVID done in terms of those targets either on a next year basis or on a three year long range plan basis? How is that accelerated? And then on category expansion little bit more in all terrain gear, the notion of moving from jeans-wear inclusive outdoor and then Ts. How much bigger is the total addressable market? You gave a number in your prepared remarks, but who's buying it? Is it new customers to the business Wrangler? And so just wondering how much bigger that footprint looks like? Then for Rustin, I think you're thinking about talking about margin but I'll then ask again anyway, given your inventory discipline and its additional sales in the third quarter. Should we expect a positive gross margin in collections in the third quarter? Thank you so much.

Okay, Adrienne, I will start with digital. So, it's the primary focus for us. We didn't put a lot of energy and effort into this in hold co. And so we've kind of started from new about almost two years ago. And it wasn't a priority for the business and it wasn't a priority for hold co from an investment standpoint. So what we've done is we've gone ahead and got the leadership situation right, hired an external talent and extreme talent. We're really happy and that person's been bringing on their team. And then we've been sequentially making investments into that business as we grow it. So you've seen we've had some really nice success this past quarter obviously with Wrangler U.S. being up 62%. What we're really doing is turning that into an opportunity vehicle for us from the standpoint of how do we connect with our consumers in a really positive way. It used to be for us, it was just simply a vehicle of making a transaction. And that obviously wasn't a positive thing for us going forward. So, you can see how we've transitioned. We've also built new platforms that have gone online here just recently around the globe both in Europe in the U.S. for both Lee and Wrangler. So, we're real pleased with how that's gone. And then I think the other key piece is, how we tie in our data and analytics capabilities relative to the work that we're doing with our ERP. So our digital team is tied to the hit with our ERP and IT team. And they've worked really hard to make sure that we're putting in the right systems, so that when we turn this on here, it'll be a very powerful machine for us going forward. And…

Thanks.

ATG.

No, we've got one more there with.

Adrienne, I'll go ahead and comment quickly on your gross margin inflection question in Q3. Obviously as I said, I can't. I'm not going to guide on Q3 specifically, and whether that is positive or not. We do anticipate some of the structural benefits from the quality of sales, restructuring product costs that we've been driving to continue, but we anticipate some of the downtime and inventory reserves to moderate as well. And as I mentioned, we have it a little bit tougher comp in the back half of '19 that we're comparing to. So, hope that helps to provide a little bit of additional color. Thanks.

The next question comes from the line of Jay Sole with UBS. Please proceed with your question.

Great. Thank you so much. You've given us some great color on gross margin quality of sale already. I just want to follow up a little bit, if you sort of explain to me, where you are and in journey on getting the quality of sales to where you wanted it to be. And if you can sort of offer any examples specifically of like, what kind of actions you've taken to improve the Company's quality of sales? Thank you.

Yes, Jay. It's Rustin. Good morning. I'll go ahead and take that. So, as we think about quality of sales, it really is a journey. And so, the word you use there, I think it's really appropriate. As we think about it, it continues on. We do everything here at Kontoor through a TSR lens. And so, certainly as we came out of the span, we really looked at our operations across the world and started to look at unprofitable markets or channels. So, we exited some countries, one in Europe. Certainly, we've exited unprofitable points of distribution, and just making sure that, as Scott said in his prepared remarks that, we're optimizing the foundation for continued growth. So, we've taken a lot of steps since the span and quality of sales. Again, it will continue. We're always going to be looking at skew rationalization items like that. And certainly, all of this is in the context of the TSR lens, which will help us to drive up our AURs and our gross margins overtime and really create that positive structural mix shift moving forward.

Got it. Thanks. And Rustin, if you just talk a little bit about liquidity given the pandemic situation is still quite fluid. Can you just talk about what the Company's liquidity position is at this point and the kind of flexibility that you have looking ahead?

Sure. Yes, Jay. If we take a step back, we kind of ended the first quarter. We had about $479 million in cash. That was about $1.4 billion. As we talked about in the prepared remarks, we did pay down $175 million on that revolver on closing and had amended credit facility in May. Again, the strong cash generation, we paid down an additional discretionary $75 million of revolver in June. So, we ended the second quarter with $256 million in cash, about $1.1 billion in debt. As we think about liquidity, we have about $225 million or so -- I'm sorry, yes $225 million are still in the revolver, that's available for us as well as the $256 million in cash. So, hopefully that gives you a little bit better sense on the liquidity side and I will emphasize that. Despite all the macro economic challenges in the quarter, we did improve our liquidity during the second quarter. So, that's a big milestone for us as an organization. End of Q&A

There are no further questions at this time. I'll now turn the floor back over to Scott Baxter for closing comments. Thank you.

Well, as a team, we just wanted to say thank you everyone for spending some time with us today. We really appreciate it. We're certainly looking forward to talk to you soon and spending some time with you again next quarter. So thanks, everybody. Have a great week.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.