Tupperware Brands Corporation (TUP) Q1 2020 Earnings Call Transcript

Tupperware Brands Corporation (NYSE: TUP)
2020 first quarter earnings call
Apr 29, 2020, 8:30 a.m. ET

Content:

• Prepared observations
• Questions and answers
• Call participants

Prepared observations:

Operator

Welcome to Tupperware Brands Corporation. First Quarter 2019 – 2020 Earnings Call. Speakers for today’s call will be Rich Goudis, Executive Vice President; Sandra Harris, Executive Vice President and CFO; Jane Garrard, Vice President of Investor Relations. There will be no questions and answers today. Call Jane Garrard at 407-826-4475 for any follow-up questions.

I will now pass the call on to Jane Garrard. Please go ahead.

Jane Garrard – Vice President of Investor Relations

Welcome to the Tupperware Brands First Quarter 2020 Earnings Conference Call. With me on today’s call are Rich Goudis, our Executive Vice President, and Sandra Harris, our Executive Vice President and Chief Financial Officer. Earlier this morning, we released a press release announcing our financial results for the first quarter ending March 28, 2020. The press release is available on our Company’s website on our Investor Relations page.

We will start with our Safe Harbor Statement. During the course of today’s call, we will make forward-looking statements that are subject to risks and uncertainties as described in our press release and in our filings with the SEC. You should listen to today’s call in the context of that information.

We will also discuss some of our results for the quarter on a non-GAAP basis. Reconciliations between GAAP and adjusted measures can also be found in our press release. You can access the publication and our forward-looking statement language through the Investor Relations section of the Company’s website, where you can also access a repeat of this call online later today.

Now I will pass the call on to Rich for his comments.

Richard Goudis – Executive vice-president

Thanks Jane and good morning everyone. Let me start by extending my gratitude to our employees and our independent sales force worldwide. We are operating in unprecedented times filled with many unknowns, and I am continually impressed by the sense of community, work ethic, and business resolve among our Tupperware family. Due to the weak business trends in 2019 along with the impact of the Covid-19 pandemic, this is really on display [Phonetic] time for our organization.

Starting last November, the Board of Directors conducted a search for new Company leadership and, given the rethinking and trends in the business, the Board decided that a team approach was necessary to turn the Company around. Miguel Fernández, the CEO, focusing on fixing the core business and motivating the sales force and me, as Executive Vice President, to address the capital structure and markets and develop the growth strategy. Now, along with the entire Board, I have the utmost confidence in the ability of this new leadership team to guide us during this period, develop realistic growth plans, and take the actions necessary to turn the Company around, reposition and strengthen the Company. for the future .

Before I turn the call over to Sandra for an update on our financial performance, I would like to cover three important topics with you. First, our operational response to COVID-19; second, what we are doing to fix the core business; and third, some highlights of our growth strategy.

We continue to take quick steps to manage the uncertainties that COVID-19 poses to our global business. Protecting our employees and their families has been our top priorities, as we continue our ongoing operations, so that we can provide the necessary support to our sales force. Before the disruption caused by the pandemic, which began to greatly affect our performance in March, the consolidated business was operating according to our expectations. I know we are not alone in dealing with the uncertainties related to COVID-19, however I am confident that we are doing everything we can to weather this period, while making the necessary structural changes to build a stronger, more agile society. and consumer oriented. Company for the future.

Throughout the world, we have rapidly modified our marketing message to become “Part of the Solution” to the real consumer problems they face in today’s environment. We recently launched a marketing campaign called Problem Solved [Phonetic] That highlights the problems our customers face today from COVID-19 and the solutions we offer by helping food last longer, helping to store food safely and helping reduce waste, and saving money to help prepare food. healthy and create enjoyable family experiences around meal preparation and family meals, all from the comfort and safety of your homes. While it is not possible for us at this time to estimate the full impact that COVID-19 could have on our business and that is why we withdrew our financial guidance for the full year, we believe that we have taken rapid action to weather this period. of unprecedented time, positioning ourselves for life after the pandemic. Later in the call, Sandra will review COVID-19’s specific adverse impacts.

As you have read, our world will probably not return to normal, therefore, a new normal. We believe our company is well positioned to succeed in the new normal with products that help consumers keep their food safer and more durable, products that make home cooking more enjoyable, and products that provide a reusable solution in no time. More and more people are realizing the devastating impact single-use plastics have on our environment, along with a fantastic business economic opportunity that people can operate from their homes.

The second issue, what are we doing to fix the core business? Let me take a few minutes to share with you what the Company has been doing to correct the business and position itself for change. The Company had an initial advantage in late 2019 by identifying areas that needed improvement and developing plans to correct the Company’s size. In terms of cost structure and liquidity front, we hired a leading consulting firm. And to redesign our organizational structure and develop realistic growth plans, we engaged with Boston Consulting Group. Together, these advisory firms, along with our leadership team, played a critical role in introducing rigorous improvement initiatives before the impact of COVID-19. To correct the size of our business, given the business trends we experienced in 2019, the Company initially developed a cost savings plan for 2020 of $ 50 million. Now, due to the COVID impact on our revenues, we have taken a more aggressive stance, increasing our 2020 cost savings plan by 50% to $ 75 million, and taking quick steps to improve our liquidity position amid the realities. evolving. We believe that the change the Company has made in recent weeks will help us resist the COVID-19 effect and help correct our core business.

In early April, we made changes to our leadership team, bringing in proven executives whose experience we know and trust. In addition, we realigned the structure of our organization, dividing the front-end from the back-end of the business to allow the commercial leadership team to focus on growth, while creating service excellence groups to improve financial rigor and increase the efficiency and effectiveness of the company. In addition, led by Miguel, we are evaluating the company’s key drivers and country-by-country work to develop growth initiatives that can generate rapid profits and ensure long-term sustainable growth.

Throughout the rest of 2020, we will begin to use a more data-driven approach to segment our sales force and improve our marketing communications, taking a more analytical approach to making business decisions, introducing new digital tools and training to help our force of sales to be more productive and efficient, and to reach more customers than ever, and together with our sales force, increase the number of access points, where our products can be demonstrated and purchased. We believe in the unique competitive advantages of an entrepreneurial sales force and are committed to making the right decisions and investments to grow our core business, while also looking to explore new opportunities for consumers to access our products and accelerate our sales rates. long-term growth. .

Let me conclude by sharing some initial thoughts on our future growth strategy. In November, the Board and management recognized that their transformation plan needed to be modified to be successful. While Tupperware’s recent challenges had been executive in nature, rising fixed costs in a business that should have low fixed costs further hampered financial returns. When Miguel and I joined the Company, we agreed on the need to quickly become a slimmer and more centrally organized Company. We also recognized the need to develop a realistic growth plan, incorporating the unique opportunity to increase consumer access to the iconic Tupperware brand, along with proven growth initiatives from our past experiences. Together, we call this the Restructuring Plan.

Furthermore, we fully support the Company’s recent change in its capital allocation policy to focus on making long-term investments in our core business with proven initiatives rather than returning capital in the form of dividends or share buybacks. Miguel and I bring with us a very disciplined approach to capital allocation that we believe will provide long-term sustainable returns for all concerned. The Board’s decision to create two strong leadership positions, a CEO and an Executive Vice President, is proving to be just what the Company needed to meet this current challenge.

While we hope to reveal our strategic thinking more fully later this year, let me share a few highlights with you now. We are developing a growth strategy that will result in a significant strategic change in the Company by looking back exclusively through the eyes of our sales force with the consumer push model to now turn and look through the eyes of the consumer and create a model consumer attraction that can coexist with the strength and uniqueness of our independent sales force. This is a dramatic change in the world of Tupperware. What gives us confidence in that success is the underlying consumer permission of our iconic brand that consumers have trusted their homes for over seven decades. As we develop this new strategy, we must remember that it has always been consumer trends and consumer demand that have created success for our sales force.

As you know, this is a new management team in the past few weeks, and therefore our thinking continues to evolve as we learn more about the business. To share some of our excitement around our growth strategy with you, let me highlight a few key elements that you will hear us build on in the coming quarters. First, we will enter more product categories with the Tupperware brand in [Phonetic] consumer permission We will create a good, better and better product and pricing strategy to meet and address the needs of all socioeconomic levels of the consumer, A, B, C and D. Together with our independent sales force, we will create more access points for customers in person. and online We will explore alternative B2B and licensing revenue streams, and most importantly, align our brand more closely with significant megatrends, such as reusable products that are environmentally friendly, products that help you save time preparing food, products that help you save money by keeping food safer and fresher for longer, and of course, the growing large economy of people working from home.

The Board and the management team are very focused on our short-term priorities to correct the size of the business, manage our liquidity position and meet our debt obligations, while strengthening our balance sheet. We are committed to making prudent investment decisions that support radical change and trigger an aggressive growth strategy, while strictly adhering to balance sheet discipline and our long-term capital allocation strategy.

Let me now turn the call over to our CFO, Sandra Harris, to provide more details on the first quarter. Sandra?

Cassandra Harris – Executive Vice President and Chief Financial Officer

Thanks Rich. Today I will talk about the first quarter financial results, the actions we are taking in relation to the Restructuring Plan and COVID-19 and our response to address the impact it is having on our business. As Rich said, the performance and underlying trends in our business during the first part of the first quarter were in line with our expectations. For example, China opened 176 new outlets in January, outperforming the plan and outperforming the entire fourth quarter of 2019. However, as the quarter progressed, COVID-19 negatively impacted our global businesses, and this impact has been more pronounced in Europe and Asia-Pacific, where we experience partial or national blockages of operations in various markets, including, but not limited to, China, France, Italy, and the Philippines. Our top priority is to protect our employees, their families, the sales force and consumers, and our operations.

As for the first quarter, sales fell 23% compared to last year and 17% in local currency. $ 15 million in B2B sales in the first quarter of 2019 contributed 200 basis points of the decrease, while we estimate that the impact of COVID-19 will be approximately 500 basis points. The active sales force decreased by 15% and sales declines were recorded in all segments. Asia decreased 20% in net sales in local currency for the first quarter. We began to see the impact of COVID-19 in China from the end of January, while India, Malaysia and the Philippines were under blockade as of March. In China, we take quick action to support the owners of our retail studios by offering rental subsidies for February and March and launching a Tupperware Eco Health [Phonetic] marketing and product campaign, targeting healthy eating by using Tupperware products to cook at home and store food to last longer. Our sales force also quickly switched to using our online platform and WeChat, conducting product demos and hosting cooking classes that help stop sales decline during closing. As the quarter progressed and China started emerging from COVID-19, we continued to open new studies, 299 new studies in the quarter, but experienced closings and lower productivity due to lower food traffic and consumer spending. Q1 ended with approximately 6,300 studies, essentially flat with the fourth quarter.

Returning now to Europe. While net sales fell 19% in local currency, the core only fell 9%. A $ 15 million B2B program in 2019 accounted for 10 percentage points of the decline. And as COVID-19’s impact increased, numerous countries were blocked as of March and were unable to ship.

Now let me turn to North America, which was down 11% in net sales in local currency. In response to requests from various states to stay home in the United States and Canada in March, our sales force leaders in the field launched digital and social media training to train other members of the sales force on how to use tools like Zoom, Facebook Live and Tug Social to continue connecting with our consumers and demonstrate and sell products. We also continue to use our recently updated eCommerce platform in October to continue to allow online sales. These actions, combined with a responsive sales promotion using excessive inventory, show favorable trends in April.

In Mexico, under new leadership, our Fuller Mexico business improved sequentially, but still decreased with low digits, as lower reps and reps activity were partially offset by higher productivity and a new marketing strategy showing signs initials of success. Therefore, we are also increasing the production of hand sanitizers to offer our sales force in response to COVID-19 and we are currently evaluating B2B opportunities for growth.

As I mentioned, the COVID-19 pandemic greatly affected the results of March during the first quarter. While the duration and severity of this pandemic is uncertain, we expect the second quarter of 2020 to have the most severe impact, while subsequent periods may also be adversely affected. As I move forward in the discussion of earnings, I will talk about the actions we are taking in response to the fixed cost structure of our business, plus the expected effect of the pandemic.

Diluted earnings per share was a loss of $ 0.16 compared to earnings of $ 0.76 in the first quarter of last year. Earnings per share for the current year include an impact of $ 0.25 due to reengineering, consulting and leadership transition costs associated with the Restructuring Plan. We also estimate the impact of COVID-19 at approximately $ 0.24. The remaining decrease was primarily driven by lower sales on a high fixed cost basis, including DS&A expenses at 64.6% of sales versus 53.9% in the prior year. The high fixed cost, combined with the impact of COVID-19, has led us to accelerate and increase our Change Plan cost savings program by 50% to $ 75 million by 2020.

I’ll talk about specific actions like while [Phonetic] update it on taxes and cash flow. The first quarter tax rate reflects the losses for the quarter. Most of which are from countries that have a full valuation allowance and therefore no benefit is recorded. The tax rate is also affected by lower profitability year after year due to lower B2B sales and profits, unique costs associated with the Restructuring Plan and the negative impact of COVID-19. The associated tax rate is not indicative of the rest of the year, which is expected to be similar to 2019 with some improvement. The cash flow from operations, net of investment activity, was an outflow of approximately $ 55 million, which was consistent with last year and in line with the traditional seasonality of our business. We continue to identify opportunities to improve our working capital, and for inventory, we are now using excess inventories globally versus regionally to provide fresh produce to each market to increase sales and reduce our inventory balances. We are also accelerating opportunities to sell real estate in Orlando and around the world to focus our attention on our core business and improve our liquidity position.

In February, we received support from our banking group to modify our credit agreement to modify the consolidated leverage ratio in exchange for additional guarantees and guarantees. New consolidated leverage ratios are less than or equal to 5.75 times in the first and second quarter of 2020, less than or equal to 5.25 times in the third quarter, and less than or equal to 4.5 times in the fourth quarter. . We ended the first quarter under our revised covenant with debt to EBITDA at 5.36. In addition, to improve our liquidity and provide additional financial flexibility, at the beginning of the second quarter on March 30, we withdrew $ 225 million under the credit agreement, of which $ 175 million was used as a proactive measure, given the resulting uncertain environment of the COVID-19 pandemic. The remaining amount of $ 50 million was spent for regular working capital needs during the second quarter of 2020.

Now more details on the response plan, specifically cost reductions and organizational design. In our 10-K of 2019, we communicated that we had reevaluated our transformation program and that we would now spend $ 50 million to generate $ 100 million in savings by 2022. About half of the savings that come from streamlining the organization with the other half of global leverage for sourcing, procurement and manufacturing. We anticipate that $ 50 million of the gross savings of $ 100 million would be in 2020. We took our first organizing actions in January, reducing the staff that contributed $ 15 million toward the goal. Under the direction of our new leadership team and due in part to the impact of COVID-19, we have further improved the program and now refer to it as the Restructuring Plan and have accelerated and increased the expected savings in 2020 by 50 % to $ 75 million. We are committed to executing the necessary cost reductions and organizational realignment to stabilize our core business and reduce fixed costs.

On April 9, we announced the execution of the Company’s first planned realignment steps, separating the business functions from the back office function, allowing our business organization to focus exclusively on driving sales. The 4 main markets, Brazil, China, Mexico and the US markets. USA And Canada now report directly to our CEO, Miguel Fernández, while the remaining markets will be led by our new world commercial president, Patricio Cuesta. He will also oversee sales and marketing activities for all of our countries. Additionally, operating functions, including manufacturing, distribution, procurement, research and development, and customer service have been aligned under our new chief operating officer, Bill Wright, to improve operational efficiency and the customer service experience. And finally, the finance, human resources, and legal departments are now filing core reports versus reports to individual markets to ensure standardization, better controls, and better efficiencies. We hope that the full impact of these changes will be implemented in the second half of 2020.

Now to COVID-19. As I just mentioned, we have increased our 2020 savings plan by 50%, partially attributable to the impact of our COVID-19 sales. The incremental actions we have taken in response are the elimination of non-essential operating expenses and capital expenses, including the continuation of a discretionary expense and travel freeze that began in the fourth quarter of 2019; We have also suspended the increase in corporate and unity merits worldwide; a 20% salary reduction for the CEO, Executive Vice President, Commercial President and COO of the Company for the second quarter; in addition, a 20% reduction in our Board of Directors cash retainers for the second quarter and exemptions from certain other Board fees; And we have taken temporary leave, unpaid leave, or reduced wages in corporations, factories, and associates globally.

Moving on now to our next debt maturity. We have approximately $ 600 million in outstanding senior notes with a maturity date of June 2021. We are proactively working with various financial sources and advisors to evaluate our options to address our liquidity and cash flow needs in relation to this maturity.

Now I will call Rich back to close our call. Rich?

Richard Goudis – Executive vice-president

Thank you Sandra. This is a crucial time for Tupperware Brands and, together with our Board of Directors and our CEO, we believe that we are rapidly addressing the most pressing needs of the Company; improve the cost structure; improve liquidity; and implementing initiatives that will result in growth. This company is special. It has an iconic brand. We are loved by consumers around the world. And we believe you are ready for a dramatic change. Our goal is to reposition the Company with a realistic growth strategy that allows beautifully designed, easy-to-use, and environmentally responsible products to be in the hands of more consumers than ever. We are excited that we are already on the way in this need for change. Thank you.

Operator

[Operator Closing Remarks]

Questions and answers:

Duration: 22 minutes

Call the participants:

Jane Garrard – Vice President of Investor Relations

Richard Goudis – Executive vice-president

Cassandra Harris – Executive Vice President and Chief Financial Officer

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