Greetings, and welcome to the VF Corporation Third Quarter 2023 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 that this conference is being recorded. I will now turn the conference over to our host, Allegra Perry, Vice President, Investor Relations. Thank you. You may begin.

Good afternoon, and welcome to VF Corporation’s Third Quarter Fiscal 2023 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 differ materially. These uncertainties are detailed in documents filed regularly with the SEC. Unless otherwise noted, amounts referred to on today’s call will be on an adjusted constant dollar basis, which we’ve defined in the press release that was issued this afternoon, and which we use as lead numbers in our discussion, because we believe they more accurately represent, the true operational performance and underlying results of our business. You may also hear us refer to reported amounts, which are in accordance with US GAAP. Reconciliation of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management’s view of why this information is useful to investors. Unless otherwise noted, results presented on today’s call are based on continuing operations. Joining me on the call will be VF’s Interim President and Chief Executive Officer, Benno Dorer; and EVP and Chief Financial Officer, Matt Puckett. Following our prepared remarks, we’ll open the call for questions. I’ll now hand over to Benno.

Hello, everyone. Since I stepped into my new interim role about two months ago, I have been fully immersed in the business. I have uncovered areas of strength and promise, but also gained a deeper understanding of where we must improve. And I have been impressed with our talent at all levels and their leadership and commitment to VF on which our future success is dependent. Many of you know about my career history, which culminated in roles as CEO and Chair of The Clorox Company until my retirement from a full-time corporate career two years ago. This gave me the opportunity to lead a global purpose-driven consumer portfolio company towards more profitable, sustained and responsible growth with financial discipline, a fully engaged organization, brands people love, consistently strong product innovation and a differentiated approach to the portfolio to maximize value. You also know that, I have served on the Board of VF for the last six years, including as leading independent director from July 2021 until December 2022. I believe that, my deep insight into VF. My passion for the company, its people and brands, coupled with my prior career experience gives me a solid foundation for the interim CEO role. And I do plan to use my time to make a positive difference to VF's business and organization. My overall theme for today is that, VF will sharpen its near-term focus on the biggest consumer opportunities, within our existing brand portfolio and on enhanced operational performance. Consistent with this objective, we are shifting resource priorities across the company. This will include rightsizing our dividends, exploring the sale of non-core assets and cutting costs in lower value areas to strengthen our execution and to enable incremental targeted investments in our brands and the consumer. With that, I'm pleased to…

Thank you, Benno, and good afternoon, everyone. As Benno mentioned, our Q3 results amidst the continued difficult macro environment, exhibited areas of continued strength, as well as parts of the business with clear opportunity for improvement. During the quarter, revenue was up 3%, with balanced growth across both direct-to-consumer and wholesale. Adjusted gross margin was down 140 basis points. And adjusted operating margins declined by 280 basis points, leading to adjusted EPS of $1.12, down 17% or 10% in constant currency. Taking a look at our revenue results across geographies, the Americas region was down 1% during the quarter. As Benno alluded to in his remarks, North America was particularly challenging at Vans and also at Dickies due largely to the continued impact of inventory actions taken by their largest wholesale partner, as well as softer performance across the value and work consumer. Momentum continued in the EMEA region, with revenue up 10%, which marked our seventh consecutive quarter of double-digit growth and represented broad-based strength across brands, with 10 out of 11 brands in the geography growing during the quarter, including the five largest brands. Looking at the countries, all major markets were growing with four of the top five by volume, up double digits. Lastly, in our APAC region, we saw further sequential improvement versus half one, with revenue up 4%, driven by improving performance in Greater China, which was down 1%, coupled with strong mid-teens growth in the rest of Asia, where most countries were up double digits. Moving on to gross margin, which was down 140 basis points during the quarter. As anticipated, we saw mix become a tailwind in Q3 for the first time in several quarters, driven by the strength of our international business and channel mix. However, this was more than offset by…

Thank you. And ladies and gentlemen, at this time we will be conducting a question-and-answer session [Operator Instructions] And our first question comes from Laurent Vasilescu with BNP Paribas. Please state your question.

Thank you very much for taking my question. Benno, I'd love to ask about Vans. What gives you the confidence that changes you're implementing at the brand are the right strategies and will make a difference in turning this business around? And then I have a follow-up question regarding the dividend.

Yes. Thanks for the question, Laurent. And several ways of answering your question. The first one is that we have a role model in-house that does exactly what we're trying to do at Vans and that's North Face. And that's performing exceedingly well as results even this last quarter. The second thing that gives me confidence really is that it's clear that improving the performance is not some obscure concept, but it's entirely within our control. We know how to do this. And the way to do – the way to bring Vans back is by consistently executing against consumers with excellence. What that means is great product, great marketing, great shopping experiences and of course, the customer service issues that we talked about. And then when we think about the specific plan in which we indeed have quite a bit of confidence. There are a number of actions that impact the business now. As I said in my remarks, we're moving to ROI-based digital spending, and we're seeing really strong results behind that. We're boosting awareness of existing product platforms like UltraRange, and we're seeing good results behind that. We have new products expanding now like a low land and our new school shoes and also UltraRange VR3, those are going out now, and we think that those are attractive new products. And finally, I have seen the new challenge that we've brought in to complement our leadership team in action and I have high confidence in them. And if you add to that some of the more fundamental changes that we're making, which will begin to impact the business in the second half of next fiscal year, like the new consumer segmentation like a digital-first operating model and a new go-to-market upgrades, which again, we've already applied in EMEA, in Europe, and that's working well. The SKU reduction for which we have a store test with really strong results. And then they had on top, the increased spending that we're planning to put in place behind product innovation. Those are all very tangible things. Those are things that have worked for Vans in the past. Those are working elsewhere in the portfolio, and those are all on us. And that's really the good news here. The good news/bad news, I should say. The bad news is that we're in this situation but the good news is that addressing the performance opportunity that we have on Vans is entirely within our control, and we're pursuing a plan that is very specific very credible with a high sense of urgency. That's where my confidence comes from.

Very helpful, Benno. And then Matt, on the dividend, what changed since your last update? Is this an indication that capital allocation priorities has shifted? How do we know there isn't a bigger dividend cut coming? And then on the PACs business, I think it's about a $500 million, $600 million revenue business. Can you kind of give us some framework, I think you talked about $100 million cash proceeds from noncore assets. Any kind of benchmark on how we think about potential cash proceeds from the sale of these noncore assets?

Yes. Laurent, I'll get going on a dividend, and I'll let Matt comment on your second question around PACs. So, as I also said in my remarks, right-sizing the dividend is not a step we took lightly and but we strongly believe it's necessary and prudent. What this does is it strengthens our balance sheet. Our gross debt to EBITDA right now is about 4.5x and this gets us much closer to our target of 2.5:1. It realigns to our target payout ratio of 50%, and we expect to land close to that in fiscal year 2024. Of course, we'll continue to offer strong dividends to our shareholders, which is important. So, to answer your question directly after this one-time adjustment, we remain very committed to the dividend. This was an important part of comprehensive TSR package for our shareholders and we expect to grow it in line with earnings from here on out. And then what are we going to do with the capital, pay down debt, serve the dividends. And then I would say, secondarily, but still importantly, it gives us flexibility to invest in our brands and consumers. And as you've heard, that's the core theme for us today, free up money from within our P&L that we can invest in our brands and consumers. But this would protect us against the potential downside scenario macroeconomically if there's a downturn, we will still be able to execute this plan. But in an ideal scenario, we'll also invest incrementally in the progress against our plan. As you've heard, we have confidence in it, but it's also early. But what we'll do is stay agile to invest and when we think we can get a return, we'll also be confident to increase our investment. And this dividend cut will put us in a position to do so. Matt, do you want to comment on Packs?

Yes, Laurent. Really, both of these announcements, the dividend and Packs, we believe are the prudent actions to take at this time, specific to the Packs, active portfolio management, small mini core competency and strength of VF and remains a priority of our Board. The evergreen evaluation efforts that are always underway and the process has led us to the determination, we're likely not the best owner of these brands at this time. And we need to ensure the focus of our management team, and the focus of our capital, while at the same time, giving these great brands the best opportunity to reach their full potential. Let me state though, and really to those brand teams as well. These brands are core brands and businesses and they're performing well. We've seen strong revenue and margin growth in fiscal year 2023 from all these brands. And this is Eastpak, JanSport and Kipling collectively as they're benefiting from a return to the usage occasions that they really are leaders in travel gear, school packs, and school care, other activities. It's a process we've begun. It's going to take some time. We certainly won't rush it. We don't need to do that, but we're very confident with the term and find the right and best owner of these brands. And as it relates to proceeds, it's kind of the same message that we Benno reiterated in terms of the proceeds, in terms of the use of capital, accelerating our path to deleverage, supporting growth and value-creating opportunities in our organic business and we continue to prioritize the return of capital in the form of the dividend, and we'll grow it with earnings moving forward. And lastly, on the non-core assets that I mentioned in my remarks, $100 million, that's really primarily non-strategic land and real estate. Also includes the previously announced at least it's certainly an external known the sale and leaseback of our headquarter location in Stabio, Switzerland, which we thought made infinite economic sense. So that's all inside that $100 million, which will all be finished in cash in the bank, so to speak, by the end of our fiscal year.

Very helpful. Thank you very much.

Our next question comes from Dana Telsey with Telsey Advisory Group. Please state your question.

Good afternoon everyone. As you think about the initiatives for enhancing the business in all the brands, frankly, what do you see is the inventory structure going forward, how that changes given the wholesale account base and how they're placing orders go forward? Thank you.

Yes, hi, Dana, thank you. Yes, I mean certainly, inventory has been a challenge. It's been an overhang for us for a couple of quarters and continue to certainly persist. Our inventories kind of nearly doubled on an absolute value, if you just look at the balance sheet, clearly, there's an impact there of the in-transit inventory on the comparison. When you back that out, we're up about 67% on a gross, kind of, comparable basis year-over-year with most of the increase in the Americas. I think as you think about moving forward, we actually think there's opportunity to get more efficient with our inventory as we get closer to market. One of the challenges that we faced this year is the elongated lead times led to earlier buys, which ultimately led to lower forecast accuracy, which created excess inventory that's been exaggerated by the higher level of cancellations through the fall and even the late deliveries at the same time, which also led to higher cancellations. So we've got a lot of inventory today. Fortunately, it's primarily in core carryover replenishment inventory. We'll carry that moving forward into fiscal year 2024, even after a pretty substantial reduction in inventory here Q4. And we've got plans in place. It really is contemplated in the next season in terms of merchandising and assortment plans, and we'll work our way through it. But if you think about where we're moving forward, our direct-to-consumer business becoming a larger percent of the total, we think that's a good thing, overall. I mean, from an inventory management standpoint, certainly, we love the idea that we have a large outlet network to move through excess inventories, and that's always our first avenue. But the work that we're doing to more modernize the supply chain, and Benno talked about some of the things that we need to be doing there, we think will allow us to be more efficient from an inventory utilization moving forward, not less.

Thank you.

Thank you. And our next question comes from Michael Binetti with Credit Suisse. Please state your question.

Hey, guys. Thanks for taking the question, here. I guess, just the first one, Benno, the company is known over long periods as a best-in-class supply chain operator. You pointed to a medium-sized list there of items that you think -- it sounds like you think got off track. I'm curious what you think happened in the supply chain, what do you think has changed there? And then maybe, this one is for Matt. But I think to get to double-digit EPS growth on the low single-digit revenue growth next year, trying to think about how you're building that. I think you need to pencil out to about 100 basis points of EBIT expansion -- EBIT margin expansion. Maybe just trying to help us think about some of the high-level drivers there? I'm assuming it tilts to the back half of the year, given the comments on Vans revenues in the first half and how to think about the gross margin expanding next year with the inventory up relative to sales in the fourth quarter heading into the year?

Hey, Michael, thanks for the question. I'll take the one on supply chain. And I will say coming into this role. Clearly, as you say, supply chain is known to be a whole much strength for VF. And I think, in general, and over a prolonged period of time, that's a reputation that's well reserved. But that doesn't mean that we can't be clear eyed about the issues. And some of the issues, certainly, I think, were known before, especially the longer lead times on the manufacturing and freight. But I would say, these issues were exacerbated in Q3, given that it's the high-volume quarter, but also because there was so much volatility, high promotions to get rid of inventory, order cancellations from customers in part because the consumer, of course, is somewhat cautious, but in part also, because we haven't been able to meet their expectations and therefore, they cut cancellations in anticipation of perhaps further customer service issues. And then, you add the strain from the longer lead times, that really gives you a confluence of issues that created a perfect storm in this quarter. And I would say that, part of it is maybe that my added perspective coming into the business shift is the perspective within our team a little bit and our own role in these issues. But the fact is this quarter had a lot of volatility and pressure on the supply chain. And it did expose some of the internal issues, and we'll talk about them all fixable, but certainly requiring a lot of focus. So maybe first, where we are is against the higher manufacturing and shipping lead times, we're seeing improvements. Those have started to come down, and we need to continue to focus on that trajectory. The customer service clearly…

Yes, Michael, the second part of your question on the outlook for next year. And I think certainly, we're in the midst of our planning process. So, I'm sensitive here in terms of not getting too far ahead of ourselves, but we clearly wanted to provide some expectations and kind of how we're thinking and how we're seeing next year unfold as it relates to top and bottom-line. I agree with your kind of sentiment in terms of what it would take. My comment was about double-digit operating earnings growth, I haven't said anything yet about what it means below EBIT in essence. But we do need to see a little bit of margin improvement and how I think about that and kind of what the puts and takes there are from a from a margin standpoint, it's primarily in gross margin, I would say, in my view. There are tailwinds. We do expect an overall lower promotional environment through the year. We'll come into the year with a bit heavier inventory. But remember, most of that inventory is core carryover replenishment product that won't necessarily need to be marked down or discounted in a significant way next year. We're biting the bullet pretty aggressively here in Q4 to move through that seasonal excess which is a bit heavy at the end of December, we're going to be back at the end of March, kind of at a normal level of seasonal excess coming out of our fiscal year, maybe a little elevated, but something pretty manageable. So, we think the inventory position, while heavy and will create some cost pressures in the short-term, we don't think it's a huge overhang from a promotional standpoint throughout next year. Freight, we expect to be a bit of a tailwind. That's both -- the mode, we're going to see a lot less usage of air freight. That's already happened. We're not going to see a lot here in Q4, by the way. But as you look throughout the year, we're going to see, we think, some moderating costs on the freight side. We do have some targeted pricing actions; less than we've seen in prior seasons that we have some there. And we think mix will be a slight benefit. It was good to see mix come back and be a benefit here in this most recent quarter. There are headwinds for sure. There will continue to be some FOB cost increase, a little bit more modest than we've seen over the last few seasons. We expect FX given our hedging program to be a little bit of a headwind as well. So, there's definitely some puts and takes that we would net on the side of our gross margin expansion opportunity, which will flow into operating margin.

Okay. Thanks a lot for the detail.

Our next question comes from Brooke Roach with Goldman Sachs. Please state your question.

Good afternoon. Thank you so much for taking our question. My question is on the North Face. As you exit the lending selling season, can you talk a little bit about the channel inventories that you have for that brand? And any initial order books that you're seeing for calendar 2023? Are there any new innovations or product pipelines that we should be focused on? Maybe said another way, how do you comp the comp following a very strong year for the North Face?

Let me take the first part of that and then maybe Benno will talk a little bit about kind of the innovation pipeline. Actually, inventories at retail with our wholesale partners are in a pretty good place for the North Face. We had a good selling season. We've had good performance in our own channels. Our DTC business grew 18% again in the quarter across the world. And we're seeing a similar kind of sellout results with our wholesale partners. If anything, we would have probably benefited from having more inventory on the shelves. And Benno referenced the challenge that we faced with the higher cancellations in the North Face and Timberland as well, but certainly the North Face. So, inventories are really in a pretty good position. Now, that said, the wholesale partners are taking a really cautious approach in the near-term as we look forward. We're not going to disclose anything about the order. But certainly, contemplated and kind of the underlying expectations for next year is a cautious environment -- a cautious wholesale environment in the US and to some degree in Europe as well.

Yes. And then to your good question, Brooke, on what we're doing going forward. So dealing – first of all, most importantly, I'm product fanatic, and I think that's the backbone for every ongoing business success, and we feel good about the pipeline. What the North Face does particularly well is to establish platforms, platform innovation that we can drive over multiple years. And the Summit here is, is one of those platforms that has done well for us for an extended period of time, and we'll continue to drive that, because there's so much growth left. Right now, we're relaunching the platform because there's a lot of extra awareness and trials to be had. They're also loyalists that are waiting to buy more products within the platform. And we're giving a new apparel and also new footwear. So you'll see that on our website starting now. The business also does a nice job sequencing. So obviously, the Nuptse jacket is very hot right now, but we have the next generation of jackets waiting in the wings. This winter, we started to see the Sierra jacket, and we expect to ramp up our efforts and growth on that jacket next season, hoping that, that can become the next generation of North Face jackets that will excite consumers. And we have successor to the Sierra already waiting in the wing. So this is a strategic and long-term approach to the innovation pipeline that is complemented by more tactical executions that drive excitement and the cars collab that we executed this last quarter was tremendously successful and is an example of how the brand is able to engage consumers with great products, but also great marketing content. In particular, in digital. The North Face is the business that has the strongest digital growth among all of our brands, and that's another area that Vans can learn from, and we're reapplying some of the North Face learning on Vans. Beyond that, what I would say also reflecting that perhaps knowing that high tides always 2020. When we saw the particularly strong growth on Vans, one opportunity we perhaps missed was to invest into it. And what we're doing on the North Face now and what you can expect on the North Face in fiscal year 2024, is an increase in our investment towards the consumer. And the money will go towards digital performance marketing, the money will go towards brand building and the money will go towards innovation. We fully realize that we cannot take growth momentum for granted, but that we have to keep earning it. And we will invest into that. And that coupled with the strong execution and what we know to be strong future plans give us really a lot of confidence on the North Face long-term. We have a lot of momentum, but we'll keep investing in it.

Thank you. And our final question for today comes from Jay Sole with UBS. Please state your question.

Great. Thank you so much. Can you just talk about the business in China? Can you give us an idea of how the business of China has performed since the country started to reopen? And sort of what's embedded in your guidance for next year as you think about that market recovery? Thank you.

Yes, perhaps detailed. Too early to talk about the specific guidance for next year. But what I can tell you is what we're seeing. The business has certainly seen sequential improvements in Q3, was about flat at minus 1% in constant currency. And that's been better than in previous quarter. And we've seen that momentum carry forward into January, as the country continues to reopen. So we're certainly cautiously optimistic, especially for the back half of fiscal year 2024. But it's too early to say when and how much the momentum picks up. There's certainly a possibility that we may see more momentum earlier and we’re watching that closely. We should be in a much better place to predict that and give an update in May. But what we do know is, first, that there's a long-term investment case that's quite strong. We have a nascent, but growing outdoor and active markets, and we have leading brands that serve that. It's a great white space for many of our brands. It's a great space to apply our digital capabilities, as we all know, that market is very strongly driven by digital capabilities and that's, of course, an area of focus for us as a company. And what you should also know is that, we're willing to invest in that momentum. So as we continue to see, hopefully, a pickup in consumer off-take, we will invest in an increase in brand penetration, which in many cases quite a bit lower than here in our home market. We have an opportunity to enter new categories and also enter with new brands and Supreme and Ultra are just two examples of brands that have a strong right to win in that market. And we will apply our marketing prowess to drive localized and engaging omnichannel experiences. And the teams did a nice job there that maybe hasn't shown in results just yet, given the state of the country. But we feel bullish about the long-term prospects, and we could be, knock on wood, at an inflection point that could lead to much stronger momentum, certainly, throughout the calendar year of 2023.

Got it. Thank you so much.

Thank you. And with that, I'll hand the floor back to Benno Dorer for closing remarks. Thank you.

Yes. Thank you all for joining today. As you hopefully will have heard from us today, our commitment to our consumers, our people, our shareholders and also VF's purpose in service of the greater good is what's going to continue to guide all of our actions. And the last two months in the CEO role, for me, have reinforced my excitement in the company's potential. And add to that, that we have a clear view of the areas which are critical to help us realize it. And those are world-class leadership, the company's executive leadership team and its broader organization is stable. Talented and committed to leading this great company, improved execution near term. Clearly, we have a clear idea of what must be done to improve performance, and we're starting to implement aggressive actions to do so. And that starts with a much greater focus on the consumer to realize our brand's full potential, a future with sharpened strategies, the right investments, exciting product innovation and excellent marketplace execution and importantly, financial strength and predictability. The board and I are committed to strengthening our financial position and also to returning to consistent value creation, emphasizing a unique portfolio of core brands. So in a nutshell, we're confidence that -- we're confident we're taking the right steps to improve the strength and consistency of VF's performance to deliver strong shareholder returns over the medium and long-term and we look forward to updating you on our progress in May. Thank you all, and have a good rest of the week.

Thank you. This concludes today's conference. All parties may disconnect. Have a great evening.