Good morning, ladies and gentlemen, and welcome to the Kontoor Brands 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. [Operator Instructions] I would now like to turn the 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 the Kontoor 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 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. 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 Kontoor 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 Helly'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 Helly'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…

Thanks, Scott, and thank you all for joining us today. For the balance of the call, I'd like to focus on three topics. First, I'll provide an update on the acquisition of Helly Hansen. Second, I'll review the highlights of our first quarter results. And finally, I'll provide an update on our full year outlook, including tariffs and add some perspective on the current operating environment and why we believe we are well positioned to continue to drive strong returns for our shareholders. Starting with Helly Hansen. As we announced this morning, I am pleased to share we have cleared all required regulatory approvals. The acquisition of Helly significantly increases our long-term TSR profile by both accelerating growth and increasing our cash flow optionality. We have progressed well through integration planning and anticipate closing the transaction at the end of May. We are looking forward to welcoming the entire Helly Hansen organization to the Kontoor family. We expect Helly Hansen to contribute approximately $425 million to full year revenue as the business is on track to deliver double-digit growth on a year-over-year basis in the second half of the year. We expect Helly to now contribute $0.20 to full year earnings per share, including $0.48 in the second half of the year, excluding synergies. This compares to our previous expectation of $0.15 of accretion. Our confidence in the significant value creation opportunity as a combined company has further increased. Let me share one example. As we discussed in February, Helly operates as a stand-alone business today. Within the supply chain, it utilizes its own inbound and outbound freight contracts independent from Canadian Tire. As you'd expect, Kontoor's supply chain and global scale will provide Helly with capability enhancements and significant cost advantages. More specifically, as part of Kontoor, Helly's freight…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question is from Ike Boruchow from Wells Fargo. Your line is now open.

Hi, thanks. Good morning, everyone. A couple of questions for me. Maybe I wanted to start high level, just state of U.S. consumer. I think you used the word confused 3 months ago when kind of describing the end market. Is that still the case in your mind? It sounds like things are a little better, but is anything changing? And then just to kind of take that same conversation over to your retail partners, how has that trended relative to the last time we heard from you?

Good morning, Ike. This is Scott. I'll go ahead and take that one. Yeah, I think incredibly resilient is how I would term it now and coming back in a very, very positive way. The start of the year was really strong in January. And then all I would say about February is that people were absorbing all the information that was coming in at them from the new administration and all that was happening. I think things have settled now down to a normal path, and we've seen March bounce back incredibly strong. April also, and now it's inflected positive in May, which has been really nice. And I think really what it boils down to for us is we're controlling what we can. Our product is terrific, our male and female, which is really nice to be able to talk a lot about the great female product that we're making right now in addition to the fact that we continue to gain share. Joe talked about that. I talked about that. We continue to market. We're going ahead and taking advantage of the time. You know, I think the other thing I can - we've talked about this in the past is times like this for a product like ours, we're catching the up and the down. We are in a great space. We're at a great price. We're at a trusted brand, and we have very broad distribution across the globe. And you probably saw the results in our international markets was pretty strong, too. So I would characterize this as a really good time heading into an even better time, and we feel real confident going forward. Thanks.

Got it. And then just one more for Joe. Just the guidance that's kind of implied for 2Q in the back half, is it basically kind of POS in that flattish range that you're kind of baking into plan? And then, Joe, any chance you could help us with some initial 2026 algo commentary. You'll have Helly. Obviously, things will be a little bit more stable. Just curious if you could give us any insight to how you would start to plan that out.

Yeah, sure. Good morning. Good morning, Ike Yeah, on the second half, we took the top end of our full year revenue growth down about a point. So we now are expecting 1% to 2% growth on an organic basis. That implies second half growth of just about 3%. The growth in the second half that we have contemplated is effectively all driven by the 53rd week, new programs and some distribution expansion where, frankly, our visibility is quite high, similar to the same dynamic we had in the second half of '24. We have moderated our POS assumptions somewhat on the top end of our guide relative to where we were before, just given the overall environment. And we have assumed that inventory levels remain at their current state, which as we talked for several quarters in a row now, they continue to be quite lean as our retail partners manage inventory very conservatively as you would expect. On '26, while we're not going to have a '26 outlook today, certainly appreciate the question given all the moving parts to our story. But I will give you a high-level framework. And again, this is barring a major slowdown in the macro environment. The organic business, Wrangler and Lee, the brands are performing well, and we do expect those businesses to grow. Next year we do have the tariff impact or potential tariff impact, but we expect to substantially offset that impact over a 12 to 18-month period, as we said. You'll have Project Jeanius savings that will be maturing to a full run rate, and we'll reinvest at least a portion of those savings back into the business to continue to drive growth. The Helly business, as you can see, is performing really well given the cash we expect to generate as a combined company, we'll delever quickly, and that will be a tailwind, as well as add some additional capital allocation optionality as we consolidate and grow the earnings and cash flow of the combined business. So again, we like where we are. We like our model. We clearly have a lot of levers we can pull to drive accelerated growth and returns over the next handful of years.

Thanks, Joe.

Thanks, Ike.

Thank you. Your next question is from Brooke Roach from Goldman Sachs. Your line is now open.

Good morning and thank you for taking our question. Scott, I was hoping that you could unpack the Lee transition in a little bit more detail. How is that progressing versus your expectations? And how should we be thinking about the time line for an inflection back to growth in the Lee brand, specifically in the U.S. business?

So I would characterize it like this, and I'm going to hit three bullet points that are really meaningful to me. I've been around this business, Brooke, for almost 20 years now. And in those 20 years, I have never seen better product. And that's where it all starts with great product. We have been testing some product. We've been pushing some product out early. We've done some collabs. We've done some things that we have never done before. And what we're hearing and what we're seeing and the feedback we're getting is exceptional. And we've been rolling product out, as you can imagine, for fall and spring next year. So I would start with the fact that in those 20 years, we're listening to our consumer, building better product, doing things that we've never done before. So that's what gives me incredible confidence. The next piece is the digital piece. That's the thing that we can get after quickest, and that's the thing that we can be closest to, storytelling online, things like that. And the consumer is just grabbing our product, they love it. So both male and female. So we're up, as you heard us both say, about 8% in the digital space, and it continues to grow, and we see that continuing throughout the year and into next year. So really positive from the standpoint of where we can touch the consumer very quickly. It's really resonating and working exceptionally well. And then there's one other thing that's really interesting that's been really good for us and really good for the team is that we are now coming out with a fairly sizable equity campaign, and that comes out in the fall. And we're testing that, and it tested even better than the Wrangler campaign that we just rolled out this past year that's done exceptionally well that all of you have seen. So we've got a really good campaign being supported by incredible product and really good storytelling. And we've really worked really hard at this, and I want to give a shout out to the teams that have been leading this effort. And I think that in '26, we'll start to see this inflect positive again, but feel very confident about what that team has done and real proud of that group and what they've done to put us in a position to win in the Lee brand here going forward.

That's really helpful. Thank you. Joe, can you help us understand the drivers of the significant gross margin outperformance this quarter and the levers that are driving the higher margin outlook that was offered today for your base business? How should we be thinking about the sustainability of each of those drivers of outperformance?

Sure. Good morning, Brooke. So yeah, in the quarter, on a year-over-year basis, we were up about 200 basis points. Mix was about 80 of that. We're still seeing the benefits of lower product costs. That was about 40 basis points. And then the balance is Jeanius and a handful of other things, which adds the additional 80. I'd say relative to our plan and our prior outlook, we were about 170 basis points higher than where we thought we'd be. There was some conservatism built into the outlook in light of the environment, and we executed really well across the quarter. We also have a fairly meaningful mix benefit with Western DTC and our international businesses performing above plan. As you know, those are accretive areas of the business for us, and you start to have Project Jeanius benefits that are beginning to kick in, in a fairly meaningful way. As you think about the balance of the year, the mix benefit will moderate a bit, but still remain positive. Our Jeanius benefits are intact. And then our input costs, our product costs will become more muted in the second quarter relative to the prior year and flip to a modest headwind as we enter the back half.

Great. Thanks so much. I'll pass it on.

Thanks, Brooke.

Thank you. Your next question is from Paul Kearney from Barclays. Your line is now open.

Hi, good morning. Thanks for taking my question. One quick clarifying question and then a follow-up. What's assumed in the $50 million unmitigated tariff impact? Is it just a continuation of the tariff rates for the pause period? And what are the mitigating efforts already being put into place?

Yeah, I'll start. Good morning, Paul. So on the $50 million, so recall, Paul, last quarter, we had estimated $50 million for just the Kontoor business. That's now $35 million. And the biggest change there is Mexico. So where we had assumed Mexico would be at a 25% tariff rate, that's now zero and protected under USMCA, at least currently. For the rest of the world for KTB, we've assumed a 10% baseline tariff. China for us is de minimis. On the HELI side, there's about a $15 million estimated impact. That's really 10% for Southeast Asia, and then you have China at a more elevated rate.

Okay. Great. And the follow-up is with the advantage that Mexico now has under the current tariffs, what is the capacity in Mexico to take on further production? What are the opportunities to further lean on vertical integration? And what are the constraints? Thank you.

Hey, Paul, it's Scott. I'll go ahead and take that. We run those plants really well and have for a very long time. And then if you recall, about a year ago, we moved out of Nicaragua and we moved a lot of the production from there into our Mexico plants. So I got to say that there's not much room left, but I got to say that, that's an extreme positive because we run those plants so well and so efficiently. So we do a really nice job down there. So right now, I think we're in a really good place.

Thank you. I'll pass it on.

Thank you. Your next question is from Peter McGoldrick from Stifel. Your line is now open.

Hi. Thanks for taking my question. I was curious how we should think of the annual run rate contribution from Helly Hansen relative to the $650 million revenue and $75 million EBITDA performance in 2024 as you scale to the U.S. penetration opportunity, can you help us think of the pace of development upon ownership?

Yeah. Hey, Peter, I'll start. Scott can jump in. Yeah, I think a little bit premature to go too far given that we don't own the business yet, but I will say a couple of things. So year-to-date, through the first 4, 5 months of 2025, the business has performed in line to modestly better than what we expected. For the second half, we talked about $400 million to $405 million of revenue. That reflects double-digit growth on a year-over-year basis. So pretty solid growth, pretty broad growth across channel, geography and categories. We do expect the brand to expand margins and profitability in the second half of the year. That excludes synergies. So the fundamentals of the business are in pretty good shape. I think longer term, medium term, we have said that our expectation for the brand is to grow at a high single-digit rate. And we think under our ownership, we can not only invest more back into the business, but also improve profitability given our capabilities.

And Joe, I'll add a couple of things, Peter. Maybe this will help clarify some of maybe what you're getting at a little bit. Relative to an outdoor brand, and we've all been around outdoor brands quite a bit, seasonality can play a big part in that, that being weather. The one thing we love about Helly Hansen here is that workwear component. That large workwear component is a very steady annuity in the business month-to-month, year-to-year. So that is a benefit relative to how we think about owning this entire business. And I think Joe's points are spot on for the rest. But as you think about how the business is going to play itself out, I think of it as an outdoor company and how that usually works, and you know the strong quarters there, but now underpinned with that really, really strong workwear business that's just very steady month-to-month.

Thanks for that perspective. And then I was curious on working capital, strong working capital progress in the quarter. Can you talk about the requirements for working capital for the Helly Hansen business and how that contributes to the $350 million of cash flows from operations? I think the commentary was for inventory in line with forward sales growth in the back half. And I just wanted to make sure that, that was on a consolidated basis with including Helly Hansen.

Yeah. Thanks for the question, Peter. Yeah, on the KTB side, from an inventory perspective, we expect inventory to be down year-over-year and then grow in line with our revenue expectations in the second half, which are more in that 3% kind of range. As it relates to Helly, you can see the cash contribution that we expect from that business. That does not yet include a fairly significant working capital benefit that we see for the business that will happen over the course of 2026.

Thank you.

Thank you. Your next question is from Laurent Vasilescu from BNP Paribas. Your line is now open.

Good morning. Thanks for all the color this morning. So back in late October, I think it was called out that 1H '25 top line should grow 4%, but today's guidance calls, I think, for 1H ex-HH [ph] slightly down, maybe down as much as 1%. Organic compares do get harder in 2H. So curious to know what gives you the confidence that 2H organic revenues should grow slightly low to mid-single digits? Thank you very much.

I'll go ahead and start and then kick it over to Joe. I really think it's the team. And you think about - as I think about this, the product that we are developing here is so exceptional. The fact that we're getting after our female consumer in a really significant way, you're seeing this Wrangler campaign that we kicked off really gaining traction. You're seeing us continue 12 quarters in a row to gain market share in bottoms, which is really significant. You're starting to see the turnaround of Lee in an equity campaign of Lee. So you've got a lot of green shoots there. You've got a really strong, resilient economy and consumer. We play at a great price point, really good distribution, adding Helly Hansen and a really, really strong workforce. And then we've got our Target business that kicks in, in a more significant way. So as I look around and think about all the things that are going very well and the things that we simply that we can control, it's a really positive environment. And then the one thing that's been really nice is the international businesses have really found their footing and have done really well. So we've been pleased with that, too. And then I'll tell you, there's another thing here, too. And lastly, and then Joe, I'll kick it over to you if you have some comments. But the fact the Helly Hansen acquisition has been a real shot in the arm for the organization. I think the organization is really, really energized and really excited about the fact that we're adding them to our portfolio. And then on the reverse side of that, I think the Helly Hansen group is really excited to join our organization because we speak the same language. They haven't worked for an apparel company for 20 years, haven't been owned by an apparel company for 20 years. And now they're going to be, and I think there's high energy there. And I'll tell you what we have been thrilled with the talent that we've seen there, too. So absorbing that talent, bringing that brand in-house, all of us working together, all the things that we have going on, I think it gives us a lot of confidence here at Kontoor Brands.

Yeah. Laurent, I'd say just a couple of things. So as you think about what we communicated or flashed last fall for the first half versus today, a few pieces. So FX became a larger headwind than what we saw in the fall, we clearly did not anticipate a high single-digit decline in POS for February and certainly did not anticipate the volatility in the overall environment. Those are the biggest pieces. I think as you think about the implied growth in the second half, like I said, it's really the 53rd week and the visibility we have into new programs and distribution. As Scott just mentioned, the POS assumptions are pretty much what we saw in March, April, which is down about 1%.

Super helpful. And how much of the 53rd week contribute for top line and bottom line? And then I've got a follow-up question on the HH. Thank you.

Yeah. On the 53rd week, Laurent, I mean, we don't have a big retail business. As you know, it will be bigger with Helly. So just pure KTB organic, it won't have a meaningful impact, but it is bigger for the second half and for the fourth quarter in particular.

Okay. Very helpful. And then the remaining question is on HH. It looks like it's losing $0.28 in 2Q for the guide, but that's only with 1 month of ownership since the deal closes in late May. So I'm just curious, is it the right way to think about it that if you owned it for 3 months, it would lose something around $0.70? Or asked another way, how should we think about this business as we think about on an NTM basis, like EPS contribution in 2Q and 1Q? Thank you.

Yes, I'll take that, Laurent. So this business does exhibit typical seasonality similar to other outdoor peers, as you know very well. Q2 is Helly's lowest volume quarter, and it has historically generated losses in that quarter. I'd say the $0.28 impact for really just June is not reflective of a full quarter. So I would not run rate that. It's really timing within a single month, which can have an outsized impact. You also have some interest expense and financing amortization for that month without the benefit of the earnings of the business. So there's a little bit of noise in the stub period, but I would not take the $0.28 and assume that, that's what a full quarter will be for the business going forward.

Okay. Thank you very much. Best of luck.

Thank you. There are no further questions at this time. I will now hand the call back over to Scott Baxter, CEO, for the closing remarks.

Thanks, everyone, for joining us for the call. Really appreciate it. We're looking forward to getting together again this summer, and we'll continue to stay in touch. Best of luck to all of you as we head into the summer season, late spring, and we'll talk to you soon. Thanks again, everyone.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.