Greetings. Welcome to the Kontoor Brands Q1 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Eric Tracy, Senior Director of Investor Relations. Thank you. You may begin.

Thank you, operator, and welcome to Kontoor Brands First Quarter 2022 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. First quarter 2022 results are on a GAAP basis. Select comparisons to first quarter 2021 results will be on an adjusted dollar basis, which we clearly defined in the news release that was issued earlier this morning and is available on our website at kontoorbrands.com. Reconciliations of GAAP 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. Comparisons will be in constant currency, unless otherwise stated. Joining me on today's call are Kontoor Brands' President, Chief Executive Officer and Chair, Scott Baxter; and Chief Financial Officer, Rustin Welton. We anticipate this call will last about an hour. Scott?

Thanks, Eric. We appreciate all of you joining us on today's call. Before I speak to our first quarter results, I'd like to acknowledge the ongoing crisis in Ukraine. The tragic events that have unfolded in the last few months are having a profound impact on the world. Our priority continues to focus on supporting the health and safety of our team and community in the European region. From humanitarian aid donations to organically-driven initiatives from our European leaders to simplifying organizational movements in the region, we will continue to do our part and hope for a fast and peaceful resolution to this unspeakable crisis. And beyond the war in Ukraine, we also recognize the many ongoing global macroeconomic challenges, the mandatory COVID lockdowns in China, inflationary pressures and supply chain disruptions, all weighing on the global operating environment. As we have consistently stated, Kontoor is not immune to these macro pressures. However, we rigorously pressure test our assumptions from inflationary pressures on input costs like cotton and oil or China lockdowns, in attempting to best capture how these macro factors could impact our outlook. To be clear, our confidence comes from what we control. With our Kontoor-specific strategies and superior execution driving first quarter outperformance and supporting our raised guidance here today. Our first quarter results are a direct function of the incredible efforts of our colleagues around the world. Their resiliency and passion for excellence, allowed us to navigate the challenging environment to deliver strong Q1 performance. Turning now to our first quarter results. We once again saw a broad fundamental strength across our portfolio, with performance coming in above our expectations and guidance for both revenue and earnings. Global revenue came in above our plan, growing 5% over last year. These gains continue to be supported by…

Thank you, Scott, and thank you all for joining us on today's call. As Scott mentioned, we are very pleased with our first quarter results, results that came in above expectations driven by our catalyzing growth strategies. I will start with a review of the quarter before providing additional context on our outlook for the balance of the year. As a reminder, comparisons will be in constant currency unless otherwise stated. Additionally, my discussion of 2022, first quarter results are on a GAAP basis and will be compared with adjusted results from 2021, which we believe is the most relevant and accurate method for investors. My comments will focus on key highlights, and I will refer you to this morning's release for additional detail on the quarter. Beginning with revenue, Global revenue increased 5% compared to the prior year. Growth was broad-based across brands, categories, channels, and geographies, reflecting the progress we are making against our initiatives. We saw particular strength in our digital businesses, as well as strategic growth categories, including the incredible performance in Ts and workwear that Scott highlighted earlier. In addition, the growth we are seeing is healthy, as we continue to chase demand in the marketplace. On a regional basis US revenues increased 4%, driven by continued momentum in key channels and categories. It is important to note domestic revenue and corresponding profitability results were significantly tempered by year-over-year comparisons, associated with timing shifts in advance of the North American ERP implementation in the first quarter last year. In our digital business, US owned dot-com increased 43% compared to the prior year supported by continued AUR increases across both brands. Our investments in our digital platforms are also helping to drive growth with new consumers. During the quarter, female had the number one selling style…

Thank you. At this time we will be conducting a question-and-answer session [Operator Instructions] Our first question comes from the line of Jay Sole with UBS. Please proceed with your question.

Great. Thank you so much. Scott, you talked about your comments in raising the full year guidance given macro uncertainty. Maybe can you just elaborate a little bit more on some other aspects that give you the confidence to raise that full year guidance, especially with some of the challenges on supply chain costs? And also maybe you can tell us a little bit more about your assumptions for global and US consumer demands that are embedded in the guidance? Thank you.

Sure. Hey, Jay. How are you? Thanks for the question. Good to hear from you. Jay it stems from the momentum that we had last year. And that momentum carried into the first quarter this year which we felt really good about. And obviously, we've got a nice view of the second quarter and the rest of the year that gives us confidence in our business. But I'm going to tell you the single most important thing is this is not the company it was four years ago. We've made so many structural changes. We were landlocked a few years ago as far as the channels that we were in. But now the channel work that our team has done across the globe, the categories that we've expanded into, if you think about what's happening now globally as people go back to work and people go back to leisure, think about how we structured the company and how we're set up with people going back to leisure with our outdoor and T-shirt line, people going back to work with our denim line, which has been fantastic because consumers have now gone to a casual workwear attire which has been really important for us. Obviously, China is closed right now. But all of us know and all of us have been doing this a long time China is going to reopen again and there's going to be some pent-up demand there. And prior to their closing, our business was really strong as we've talked about. And most importantly, our brand is really healthy there and our team is really healthy there. So it gives me really good confidence. And the fact that, since we've come out as a public company, we have navigated some incredibly difficult waters and we continue to…

Okay. Thanks so much.

Our next question comes from the line of Adrienne Yih with Barclays. Please proceed with your question.

Hey, thank you very much. Good morning and nice job in the first quarter. I guess Scott, can you – I'm going to stay on the topic of China for a second. Can you remind us how many Lee stores are there in China? And what's the proportion of your sales that are sort of a Tier 1 or say the impacted cities? What's the expectation for "the normalization" or kind of like when you would see that demand normalize? And then for Rustin, a couple of questions here. Pricing power, how does the order book look for fall holiday? And any improvement in sort of like pricing power to your channel partners? My last question is, more broadly on transportation. Spot pricing on intermodal coming down, you don't have a lot of exposure to the China Far East manufacturing. So just wondering, if you're embedding that into the back half in any way? Thank you very much.

Thanks Adrienne. Adrienne, I'll go ahead and start on China. And then, I'll hand the ball over to Rustin. He can go ahead and talk about the other pieces.

Thanks.

But from a China standpoint, I look at it like this. Our business there has been extremely healthy. We introduced the, Wrangler brand last year, during a difficult time to introduce it there during the pandemic, but it has caught on with the consumer and they're really now starting to get it. Our network is really stable there as far as our franchisees and our own stores. Our team is really stable. We really like the team. We really like the leadership. Most importantly, as I mentioned brand health is exceptional. We had a really good last year. We had great momentum going in this year. We are really strong in January and February. And then, obviously the lockdown, if you think about our business as we stated before we are really strong on the Tier 1, cities the Beijing the Shanghai the Hong Kong, and then that's where the opportunity lies. So as we build our model out as China's Tier 2, Tier 3 and Tier 4 cities get larger and more metropolitan and sophisticated we have an opportunity to go ahead and build our model out in those cities. So we think that there's really, really big green space opportunity going forward in China in a pretty significant way. And again, it's a top-of-the-line brand with extremely good brand health with a very young consumer and a brand that's very well known. We've been there 20-plus years have a really strong leadership position there. So feel really good about China going forward. And like everything else these things happen. But China will open and we will continue to grow there and feel good about the team.

Great. Thanks.

Yeah. Thanks. Hi good morning Adrienne, it's Rustin. I'll go ahead and talk a little bit about the pricing power order book as well as the intermodal that you mentioned. So as we think about -- certainly every inflationary cycle has its own kind of nuances. But as Scott talked about earlier, our brands are in a meaningfully different place versus the last cycle and we feel like we're really well positioned for several important reasons. First is the strength of our brands, as Scott talked about? Our efforts around strategic product categories like western like work wear and brand-enhancing collaborations that Scott talked about are really driving that brand strength and that momentum that we see moving into that second half. And it's providing a great opportunity for us to strategically price. Second, the investments, in demand creation are just improving the engagement with new and existing customers and we're seeing that in strength in areas like female that we talked about in our prepared remarks. So we saw that in the first quarter results. And it's really helping support our confidence in providing our raised guidance. But I will dimensionalize this a little bit. We want to make sure that we're prudent and you heard us talk about that in our remarks here as well as our prepared remarks. We feel like we've been prudently cautious on China, on EMEA, consumer demand as Scott spoke of earlier and then the elasticity. So we've reflected that in. And when you look at our guidance our first half revenues are now expected to be up mid-teens versus the low-teens that we talked about in the prior guide and full year at 10% approximately. So that implies a second half of mid-single digit on the revenue side. So we're factoring in those elements, but feel really good about the strength of the brands and the momentum we have. In terms of your question on Intermodal, certainly, we're watching every day all of the supply chain movements on distribution, transportation, whether its ocean, air, inland parcels et cetera. And certainly are blessed to have kind of what we believe is the world-class supply chain that's helping us navigate, these items. You saw in the first quarter we talked about transitory headwinds near-term of 210 basis points. That's really chasing that demand that we're seeing in the market. So we factored in the latest thinking around intermodal as well as the other elements of transportation here into the guide and again, holding that full year gross margin at that 44.6% consistent with prior year.

Fantastic. Super helpful. Best of luck.

Thanks, Adrienne.

Thanks, Adrienne.

Our next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.

Good morning and thank you so much for taking my question. There's a lot of moving pieces within the margin profile of the business. But I heard in the prepared remarks that you're now anticipating even better sequential improvement in your structural gross margin drivers relative to the last call. And I was wondering if you could talk to the drivers of that sequential improvement in the structural gross margin gain. What is it that's driving that improvement? And then perhaps on offsetting that can you quantify the pressure that you anticipate in 2Q and into second half between China AUC and air freight? Thank you.

Sure. Very good morning. Let me go ahead and take those. I'll say we were pleased. Our first quarter gross margins came in above our plans. So, certainly that's encouraging. We talked in our guide about how we expect it on an annual basis up to 100 basis points of transitory headwinds, almost exclusively front half affected as we chase demand here. So, certainly you're seeing that play out in the first quarter here. In terms of the full year, in our prepared remarks, we said up to 100 basis points previously of structural margin gains, given the first quarter given what we're seeing now the fact that we've got raw material input costs really projected to impact the 2022 P&L that are largely finalized. We said we saw an opportunity to be modestly above that 100 basis points improvement on the structural prior to the mix impact from China. So, again, that pulls us back into that range of up to 100 basis points on the structural piece and allows us to absorb that unanticipated mix impact coming from China. So, that's how the pieces play out a little bit. As you think about Q2 specifically, certainly not going to guide an individual market here in China. But we talked a little bit about taking a more conservative view to Q2 and a cautious view on a full year basis to China. So, certainly that's -- we're fortunate to be able to offset with the strength in the US, that topline impact from China in Q2 and hold our prior guidance of $640 million to $650 million in the second quarter. But it does create a mix issue as you certainly know. And so that's putting some pressure on Q2 gross margins. And certainly we've seen some movements on oil prices et cetera that have continued to move. So, we factored all of those in to our guidance here in Q2 and that's what's driving a little bit of the pressure from an EPS perspective in the second quarter. But again, with draw back the first half EPS largely consistent with our prior guide and certainly on a full year basis raising the EPS given the confidence we have.

Thank you. And then maybe just a follow-up for Scott. As you look across your network of the business across the US, can you talk to the areas of the portfolio where you're seeing the most strength in demand? And where that demand is really coming through as a result of the increased demand creation spend that you've been putting into that market? Thank you.

Yes, I sure can do that Brooke. So, if you think about some of the things that we've talked about one of the things is that we have a really strong core denim business as you know and we've seen really good demand there. It has to do with a couple of things. It has to do with the fact that as we talked about we have really increased our investment in demand creation. So, people are much more aware of our brands. And then of course, from a channel standpoint, we've increased that. But in addition to that you've got a new world that's happening relative to how people dress and go to work and socialize. And that's that casual world. So, we're going to be one of the great benefiters from playing in that category in that world. So, we're pleased with that. We do work. At the end of the day, we're building some really great product too with our teams and that really resonates in a pretty strong fashion. And when you go ahead and start at like the top of the pyramid, Nordstorms and places like that and then you have a really good offering a segmented offering all the way through it really lends to your brand health which is important for us. But I'll tell you the other places that we're really seeing really strong demand and this is important for our brands is that when you introduce these new categories like T-shirts and outdoor and workwear and you put some really significant investments behind them you need those engines to work and we've got those engines really firing right now. So, the consumer loves our outdoor category. They love value in our brands, they love the name, and they love how those…

Thank you so much,. I will pass it on.

Our next question comes from the line of Bob Drbul with Guggenheim Securities. Please proceed with your questions.

Hi. Good morning. Just a couple of questions. First, on the European, sort of, performance and/or outlook can you give us a little bit more color like by country what you're seeing? And, I guess, just -- have you moderated your plans around the expectations in the back half of the year? Just trying to understand exactly how you're looking at it by market and if you've seen any major changes over the last few months? I think the second question is just back on the gross margin. When you consider the air freight that you have I just want to make sure are you done with significant air freight for the year and your gross margin expectations? And then my third question would just be just if you could give us a little more updates on capital allocation specifically around the share price and the levels of the shares and where we are today that would be great share repurchase program? Thanks.

Okay. Thanks. I'll go ahead and start off Bob and take the questions on Europe and gross margin and then pass to Scott for the capital allocation one. If you step back and you look at our European business as you know Bob we are predominantly Western European focused in our business. We certainly talked in the prepared remarks about Russia and Ukraine being de minimis to our overall business. We did see a strong first quarter here up 19% in constant currency again in Europe. Certainly, I think, it will be a little bit sawtooth as we go through the year. In Q2, you'll recall that Europe actually went live on their ERP implementation at the beginning of Q3. So certainly some timing shifts associated with Europe as well. Q2 in Europe will be a little more pressured given the timing shifts in 2021 in that market. Whereas Q3 we anticipate will be stronger certainly comping the go-live from the prior year. So wanted to dimensionalize that certainly a much less magnitude as you know Europe relative to our US business that's out there. But again focusing on what we can control in that market. And again certainly we saw great strength as we mentioned in our Wrangler business in almost all markets in Europe, but predominantly Western European focused. As you think about airfreight Bob, we said up to 100 basis points of transitory -- incremental transitory cost here in 2022 almost exclusively front half loaded. So certainly if you go back to the back half of 2021 certainly the supply chain disruptions really started to begin in Q3 and Q4 of last year. So we had incremental transitory cost there. But again the additional transitory we expect really in the front half here as we chase demand and anticipate being in a stronger inventory position at the end of the second quarter.

Hi, Bob. How are you?

Good Scott. Thank you.

Thanks. I would say for us really you think about capital allocation and how we think about it we paid our debt back much quicker than we thought because we create so much cash that we put ourselves in a really great position. So if you think about how we kind of positioned ourselves. I think back to last year we increased our dividend. We already had a very strong dividend and increased it 15% on top of that. So the yield today with a very attractive stock price is really significant obviously because of that increase in the dividend and what was already there. In addition to that, creating $1 billion in cash over a three-year period puts us in a position where if we wanted to pay back some more debt, although we feel like we're in a really good position there we could. We've been buying back shares as you know. We bought back last year and we bought back this quarter. We still have dollars available in our share repurchase program that's out there right now. So we still have a big incremental piece that we can do. We do like the stock at the price it is now. Obviously, we were buying back in the first quarter. But we're also still thinking about M&A too. But M&A has got to be right. It's got to be the right price. It's got to be the right fit. It's got to work with our company and our brand. And we have to be able to add value to it. And really be able to show the investor world why and how and make sure it has value. But I think most importantly is that we're going to continue to create this cash. And we don't have to do just one thing. That is probably the most important thing, we're creating so much cash that we can do everything I just said and still be in really good shape and execute in all. And quite frankly, as you know we're executing on a few of them right now as we speak and still generating aggressive cash. So we're going to continue to be aggressive in our share buyback going forward. We're going to continue to do everything we can to make sure we're running a really good business and investing back in the business and investing back in the brands and the people. So hopefully, that answers your question, but I really like where we sit right now.

Thank you, Scott.

Thanks, Bob.

Our next question comes from the line of Sam Poser with Williams Trading. Please proceed with your question.

Thank you for taking my question. Good morning.

Good morning.

I have a handful here. Number one on China. You mentioned that it was strong in January and February. Can you give us some -- like a little more specific on what you were seeing then so we can sort of -- and what it sort of turned to -- or what you're anticipating it will be for the second quarter relative to the strong start of the year?

Yeah. Sam, good morning, it's Rustin. I'll go ahead and take that one. We mentioned in our prepared remarks, we did see strength at the start of the year, significantly above prior year and our plan February year-to-date. Certainly, we saw softness start in March and April as the lockdowns spread. So we're very confident that it's -- the softness that we saw was not a result of our strategies or our brands in any way. It's the traffic that's been affected. We're continuing to monitor the situation there. We've taken a conservative approach to our Q2 outlook relative to China given the current situation. But as you know it's very fluid. So hopefully, that helps provide a little context.

Well, I mean you said that all before. I'm wondering sort of like what it significantly mean were you up 20% going in and then it fell to low single-digit or negative? I mean that's what I'm trying to just sort of get some context to sort of the definition of significantly?

Yeah. I understand, Sam. I'm not going to break out an individual numbers by market. But certainly, you know that our China growth rate is out there on a long-term basis. We're investing heavily in the region. And so certainly have growth expectations that are out there in that double-digit range longer term as we've talked about. So certainly, we're taking a more conservative look in Q2 and a cautious look on the full year, but not going to provide specific numbers.

Okay. And then, you mentioned this investment in the demand creation sort of across the board and that it was working. Can you give us some idea of in the first quarter, if you sort of had a number like an expectation of what you would drive from that demand creation versus what you actually drove, it doesn't need -- I mean sort of like did that demand creation drive 10% more than what you originally anticipated or -- like what can you attribute -- what part of the beat in the first quarter can you attribute to the demand creation?

Yeah. When we think about demand creation as you know Sam everything we do we take a total shareholder return lens to it. So -- and we don't measure it on a quarter-by-quarter basis. I mean we do, but we don't set expectations and plans on a quarter-by-quarter basis. We look at it on a program basis. So when we accelerated some demand creation in the fourth quarter last year, as we've talked about before that was intended not only to support holiday, but to support the front half of 2022 as well. So we're certainly in the middle of that now. Scott talked a little bit about the campaigns. We feel really good about the campaigns. Again that mid-single -- mid-teen growth in the front half demand creation is certainly a key element of that and keeping the brand strong but not going to split out any specific return numbers today.

Yeah. And Sam this is the first time our consumer in the last three years since we've taken over the business has seen a consistent pulse of us from an advertising standpoint. Four years ago, we would come in and do something, something and it would be quick, it would be a quick hitter. We'd move on, we'd move out and we didn't have the budgets to go ahead and do something consistent in the long-term. But now our consumers are seeing us do different exciting things and we're testing things and we're doing things digitally. We're doing things like we haven't done before. So -- but it's a consistent message and I think that's been really helpful and I think it's been beneficial with the consumer globally too, which is really the key component.

Thanks. Then one last one. When you updated your -- the first half guidance on March 8th, you -- a lot of the numbers change like for instance a lot of the combined estimates on the Street were pretty close to where you ended up in Q1 and the estimates for Q2 were fairly close to what the guidance is for Q2. So can you define -- like can you give us some specifics as to what drove the results in the last 3.5 weeks of March that -- had you beat that number? And why and what changed to lower Q2? Just because somebody mentioned saw-tooth it feels like a little saw-tooth for us. So if you could help us there or just give us some context to that that would be great?

Yeah, absolutely Sam. So in the first quarter, again, we provided a revenue guidance on March 8th as you indicated $650 million to $660 million. We've talked for several quarters, we're chasing demand and we're chasing product and managing through global supply chain challenges that certainly are very fluid, Sam. So we've said that the demand is out there for our products. And if we have the product availability that -- certainly we feel like demand is there. And you saw that in the first quarter. So as we were able to expedite product and you saw 210 basis points of transitory cost in the first quarter. Expediting that product in we were able to ship out and exceed the $650 million to $660 million range that we had previously provided. As for the second quarter, it's very simple as to what changed in the second quarter and that's China. Certainly we saw some oil prices continue to move a little bit. But for the most part it was China. And we held the top line because of that strength that we're seeing in the demand with the product availability that we have, Sam, the demand creation we talked about, the category Scott talked about. We were able to absorb and offset the China softness, given the lockdowns that were there. But from a profitability perspective we wanted to make sure that we were reflecting the mix impact of shifting between China and the US, as well as some of the inflationary pressures in the guide. So hopefully that explains the change from the March 8. Thanks for the question. Appreciate it, Sam.

Thanks, Sam.

Our final question comes from the line of Jim Duffy with Stifel. Please proceed with your question.

Hi, guys. This is Peter McGoldrick on for Jim. Thanks for taking my question. I was just curious on the brand outlook into second quarter and the rest of the year. Lee, obviously, is impacted by outside China exposure. But how do you think of the building blocks to your updated guidance? What has changed over the last few months on a brand growth perspective?

Yes. Peter, thanks for the question. It's Rustin. I'll go ahead and take that with the outlook. Certainly, first quarter and as we've talked about, we see strength in both brands moving forward, as we laid out at our Investor Day. So I feel really good about both brands. You're correct that, certainly, China today is much larger in Lee than it is in Wrangler, so we'll have a little bit more of an impact from that perspective. But, again, the strength you saw in the first quarter here, with the brands being up mid-single digits to high single digits, depending upon the brand, we see strength and momentum moving forward with both brands but Lee will be more impacted by China.

Okay. And then, finally, just looking at the embedded assumptions for AURs and unit costs and their influence on gross margin for the balance of the year, what's your capacity to adjust for the rest of the year on the pricing side of the equation? And how should we expect that to progress quarterly?

Yes. Certainly, we've passed strategic price and we've reflected that in our outlook here, Peter. We're going to continue to monitor the situation, as everyone is doing. And certainly, we'll adjust accordingly, but feel good about kind of the price, the combination of that strategic pricing, mix improvement, the cost savings, we talked about that, the ability of that combination of those three to be able to offset inflation that we see today. And that's what's reflected in our guidance. Certainly, we'll continue to monitor the environment as we do every day. Thanks Peter.

Thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Scott Baxter for closing remarks.

I just wanted to thank everybody for joining us on the call today. I know these are difficult times, globally, right now. But obviously you can see we here, at Kontoor, all of our employees globally are doing everything that we can to control our environment and to have great outcomes for our shareholders going forward. And hopefully, you've seen the leadership that our team is providing across the globe to do that -- to do just that for all of us. Thanks again, and we'll look forward to touching base with you again next quarter. Thank you.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.