TUP (2020 - Q4)

Ladies and gentlemen, thank you for standing by, and welcome to the Tupperware Brands Corporation Fourth Quarter 2020 Earnings Conference Call. Now, I would like to hand the conference over to your speaker today, Jane Garrard, Vice President of Investor Relations. Please go ahead. Jane Gar

Welcome to the Tupperware Brands fourth quarter 2020 earnings conference call. With me on today's call are Miguel Fernandez, our President and CEO; and Sandra Harris, our Chief Financial and Operations Officer. Earlier this morning, we issued a press release announcing our financial results for the fourth quarter ended December 26, 2020. The press release is available on our company Web site on our Investor Relations page. We will begin with our Safe Harbor statement.

Thank you, Jane, and good morning, everyone. In 2020, we started down a path to modernize the company. Let me summarize key wins for us in 2020. We rightsized our business with gross cost savings in excess of $190 million. We revamp our leadership team and reorganize the company. We strengthened our balance sheet, improved cash flow and restructure and refinance our debt. We initiated a new growth strategy to unlock the power and consumer acceptance of our brand. And we started executing on our new defined purpose to nurture a better future every day, putting our environmentally friendly, reusable message front and center. As a result of this performance, we have now achieved two quarters of improving performance on our way to turn around the company. With sales growth of 20% in the last two quarters, we believe we’ve changed the negative trends of prior years. COVID-19 was an unexpected disruption that we'll have to deal with in 2020. On the negative side, we estimate a negative top line impact of about $62 million due to force closures and other restrictions. But on the positive front for us, we see a new consumer trend emerge around the world. In 2020, more people have been staying home due to pandemic, which led to more cooking at home, more time in the kitchen, and more off an awareness to prepare food, minimize food waste and decrease their use of products made with single use materials. Tupperware products were a solution to these consumer needs. To overcome the restrictions related to the global pandemic, our sales force accelerated their adoption of digital tools and methods. As a result, they were able to modernize how they reach and service their customers and how they demonstrate our innovative products.

Thanks, Miguel. Our Turnaround Plan accelerated as we move through 2020 and is now well underway. In 2020, we established a firm financial foundation by right sizing the cost structure, refinancing the 2021 debt obligations, improving liquidity, centralizing the finance and accounting organization and strengthening our control environment.

Thanks, Sandra. Today we also announced the appointment of three new Board members effective March 15. We're excited to add these new three members whose strengths and experiences we believe will improve our ability to successfully execute our 3-year growth strategy. I will now turn the call back over to Q&A.

Your first question comes from the line of Linda Bolton Weiser from D. A. Davidson. You may now ask your question.

Hi. How are you? Congratulations on a strong quarter. I guess my first question has to do with top line growth, which was very strong in the quarter and it did exceed our expectations. However, it did slow a bit from the third quarter. And it looks like mainly Europe was the area where the growth actually slowed. Can you talk about whether that was pandemic closures or any particular market in Europe? And also Asia, who was a little -- was kind of in the third quarter as well. So was that something other than China in Asia? Thank you.

Hi, Linda. Thanks. Yes, this is Sandra. So for Europe, the difference between Q3 and Q4 was predominantly related to B2B business. In Q3, we had almost $11 million of B2B that did not happen in Q4. And so that's the largest difference in Europe. If you actually look to the core business, the growth was relatively the same and the profitability also improved in Europe. And then, for APAC, and maybe I'll let Miguel expand upon what we're doing there. Yes, China had an impact, but we still do have some continued challenges in other parts of Asia, specifically in Indonesia. And in both locations, we've made strategic choices on leadership. So I'll turn that over to Miguel to talk about what we're doing in Asia.

Yes. Well, hi, Linda. So, Sandra was saying, we are facing challenges in various markets in APAC. We recently announced leadership changes pretty much in the biggest markets in APAC. I think there were four of them or five of them. The other big market in APAC that got impacted by COVID was Philippines because we have mainly a retail type of model, and those are the ones that were got hit greatly by COVID. But other than that, we were consistent with our strategy. And the one that we've been talking about and the one that we have in other countries that we know that are working, which need to have the right players, so we can execute appropriately in those countries.

Okay, thank you. And then can you just talk about -- I mean, you've talked about kind of going a little bit more to a good, better, best pricing strategy to capture more consumers. Are you implementing that kind of starting out in 2021? And if so, would that be expected to impact gross margin in 2021? You had very good gross margin performance here in the fourth quarter. So kind of what can we expect along those -- in that line in 2021?

So we already started with some pilots around the world. And we've seen a lot of positive momentum and positive response. Obviously, in some cases, the gross margin gets a little bit lower, but we've been able to offset it even more with higher volumes. So one important factor is that the sales force ends up making a lot more money even with the same amount of efforts, which is -- which was key for us. And with achieving this new price points, we're actually becoming more relevant because our products are getting to hands of more consumers in every single experimental pilot that we did around the world. So this is something that got us very exciting, and we're going to continue to do. And obviously we're learning through the path, but very excited with the pilots that we've run so far.

Okay, thank you. And then you've done really great on the cost reduction in 2020, and your margins have come around very nicely, really across the board. Are there additional actions that you're looking at? I mean, you've talked about being able to maintain margins kind of going forward. But are there additional actions that you're kind of looking at longer term? And are you looking at more like ongoing productivity? Or maybe another cost reduction program? Or what what's kind of the thought there? Thank you.

Yes. So, Linda, we talked about is that 75% of the cost savings would carry into 2021 and annualized. The other 25% were largely related to the furlough programs and other reductions in travel and incentive trips and things of that nature that will start to come back on as we start to see some relief from COVID. So we did assume that 25% of that would come back into the businesses cost for 2021. The other thing that I think we've reiterated is that we do need to invest in the business. And so, our intentions are that we're carrying forward that cost savings and the future investments that we're making in the business, and we do need to make investments in our continued digital strategies that's really what contributed to the growth in the quarter. And, quite frankly, the last half of this year, we have investments that we want to make to continue offering great products that excite consumers. And we'll also be working through other investments that are focused on this new business expansion that we're working on. With that said, we are very committed to continuing our efforts. We realized that the SG&A percent is still very high. And so, we're continuing to focus on leveraging throughout the business where we can. We have a global business services initiative that we've been working on, as we started to separate the back end functions from the front end functions. And we're starting to stand those up in three different geographies around the world, and we do expect that we'll be able to scale the organization at a more efficient and effective cost and leverage costs across the board. We also know that we had challenges this year in supply chain. And so we're committed to the extent we can. The whole world is being impacted by the FedEx surcharges. And so, those types of things we can't necessarily affect, but what we can do is become more efficient and effective within our distribution footprint, within our manufacturing footprint and we'll continue to look for opportunities to optimize in that way. The other thing and I'll see if Miguel wants to expand on it further, but we're also looking at segmenting our customer set, right, and offering different promotional cadences between what a preferred buyer is versus a business builder. And that will also have an impact on our margins as we offer different permissions to the different segments of our business. So, Miguel, do you want to expand on that?

Yes. Everything is based out of our segmentation strategy. With the use of data we’re understanding who is here for the business and who is here for the product. And with that knowledge, we've been able to segment promotions, which obviously, the return of those investments is way higher. So you can argue that a good way to lower an SG&A is just by increasing the top line and being more -- a lot more sophisticated in that promotion strategy that we're carrying around the company. And that's -- again, that's one of the things that I've been getting a lot of traction, and we see a lot of promising results in the initial efforts that we've done around the markets.

And then, Linda, one final comment. Historically, we've noted that our B2B businesses are more profitable. And as we move toward more business expansion in our business, we do anticipate that, in general, those would deliver a higher margin.

Great, thank you. And then finally, do you have an outlook for your plastic resin costs in 2021?

Yes, we are seeing some slight increases in resin costs. We anticipate that we can offset those through other cost savings throughout the supply chain and or through pricing in specific markets. They're relatively small single-digit increases, but we are seeing some increases on that one.

Okay. Thank you very much.

Your next question comes from the line of Steve O'Hara with Sidoti & Company. Your line is open.

Good morning. Thanks for the questions. I was hoping just in terms of the free cash flow outlook for next year, is that just -- just want to make sure I understand what you're including in that. It's kind of operating cash flow, and then any disposals on the property and so forth less CapEx with the is?

Yes, the free cash flow is our operating cash flow net of investing. So it include all the cash flows coming from operations. And then as I noted in the commentary, we do expect to return to a more normal capital expenditure level. So, we spent roughly $28 million this year and we intend to go back to somewhere around $60 million to $70 million in 2021. But yet, we still do believe that through our continued work on working capital and also through the growth of the company and the operating cash flow improvement that we can deliver, roughly around where we ended this year in that $200 million range.

Okay. And then, just on the outlook for divestitures, things like that. I mean, what are you baking in next year for that? Or for this year, I guess for on that line?

Yes, I'll reaffirm our commitment. I mean, we want to focus on our core business. So, we made the announcement that we’ve successfully divested in 2021 of Avroy Shlain. We continue to look at all of our non-core assets, even our real estate, which will continue to make efforts on. We have learned that obviously, it's unpredictable as to when transactions can close, especially in a COVID world. There's a lot of administrative work that delayed timelines around those. And so at this juncture, it's still part of our strategy and our goal that we haven't necessarily predicted the timing around the remaining sale of the land here in Orlando, nor future divestitures.

Okay. Yes, that's fair. And then I just wanted to jump back to the unallocated expenses. I think you laid out kind of what was in there. But could you just remind me just on the -- I just need to ask, it looks like $30.3 million and that's up obviously almost 3x from last year, and I’m just kind of curious what -- what's in there exactly. And I mean, is that -- what's the right way to think about unallocated going forward?

Yes, so one of the largest components year-over-year is that -- is that obviously based on the performance this year, we are able to pay out our annual incentive program, which is something that hasn't been done in over 2 years for Tupperware. So the performance became evident during the second half and we had to modify quickly our reserves, which is why there was a $0.13 impact on EPS in the fourth quarter of this year versus last year for that annual incentive plan. So that's probably the biggest increase. We have made investments in more in the unallocated area as we separated the back end from the front end. So you heard the announcement -- the commercial leaders Patricio and Hector, and so we are building centers of excellence around digital and other items that would fall in unallocated. But over time that cost, we'll come back out of the markets as we work on a more standardized approach for that. So those are really the two biggest components, I think in unallocated. And yes, we hope and anticipate that our annual incentive plan continues. And obviously on a go-forward basis that would be built into our 2021 numbers as we develop that. It was just something that was not expected as we entered into this year, and so it was a delta.

Okay, okay. And -- okay, so yes, I mean, I guess, does it make sense to think about that line as a percent of sales or segment profit there? I mean, $32 million in . I mean, it's something kind of letting the difference, maybe the better way to think about it in terms of, if results improve in 2021, you get more performance based comp and things like that and growth initiatives is that maybe not as high as this year because of the step up or the accrual was behind.

Yes, I mean, I can tell you that traditionally, obviously, we reported the unallocated as a Tupperware method. I would tell you that my focus is more on the SG&A, since the majority of that unallocated sits in our SG&A numbers. So the fact that this year, we continue to improve our SG&A, for the quarter, last year with 59.3%, we dropped to 54.1%. And then -- and for the four year, we've also had improvement from 55.6% to 54.5%. So, again, we've acknowledged before that being in that 50% range is not where we'd like to be. So we'll continue to make efforts on that. An unallocated is a part of that. And so we're balancing this now on a global basis versus we're in the past the unallocated was largely what was considered worldwide, but we're looking at it from a holistic global perspective of continuing to optimize our costs.

Okay. And I mean, you said 50% range isn't where you want to be. I mean, is there -- what's kind of the long-term thinking around where that would get to everything's operating, as you hope and be -- I don't know, if you, peers are -- range peers are in, but I mean, is there a way to think about that longer term, what level that SG&A could get to?

Yes, and I think I may have said in the past, Steve, but I mean, over 3 to 5-year period, we anticipate that we get into the 40s, that's where we would like to be, and not hanging out in the 50s. But we are going to reinvest in the business. And so we're trying to balance that as we reinvest and make those digital investments, the investments we're making in the segmentation work. And so, we would like to be in the 40s over our strategic long-term plan period. But we're going to balance that so that we can continue to grow this business on the top line.

Okay, great. And then maybe you just follow-up on the -- I think last quarter, you guys noted some supply chain issues. But I didn't hear -- I mean, it sounded like you guys fulfilled the backlog in North America and that was a boost. So did something happen kind of inter core that relieve those issues? Or are there still supply chain issues going forward or maybe they're less …?

Yes, we're excited that we were able to make significant progress on our backlog. Again, the backlog was created by basically three reasons. I mean, one, the increase in demand was outside of what we have been able to forecast and that's really positive. The other thing is that just within our distribution network, the change in the business model, and also to meet the backlog and this is what caused the increase in distribution expense is that, we are shipping whenever it became available. So since the demand created product shortages, we were shipping more packages as soon as we could get them to ensure that we continue to delight our sales force. And so that's something that added to it. And then, the other piece of the backlog is just investing in new leadership and new talent in the supply chain that understand what consumers want and how we need to improve every day in our distribution centers on the efficiencies of how we pick pack and ship. And so, that new leadership came on board early in the fourth quarter. And you saw the results the $21 million in the backlog got shipped in the fourth quarter. And so, we continue to see those deficiencies and improvements happening as we invested in that new leadership.

Okay, all right. Great. Thanks for the time.

Thanks, Steve.

Your next question comes from the line of Wendy Nicholson with Citibank. You may now ask your question.

Hi, good morning. First two questions, just housekeeping. Sandra, did you offer a sort of a target tax rate for 2021?

Yes, I did. It was -- we're going to be in the mid 30s is what we're predicting for 2021.

Got it. Perfect. Sorry about that. And then just regarding the dividend, I know you suspended that, which made sense. But obviously, you've made huge progress on debt paid down any plans to reinstate the dividend?

Yes, our priority right now, Wendy, we have, obviously, we're excited about the Turnaround Plan, as part of the Turnaround Plan, our goal was to right size this business and also start to grow the top line. So our first priority is reinvesting in the business and so we'll do that. With the sale of the non-core assets, we're committed to paying down our debt even further. So we've made tremendous progress on our overall debt, obviously improving our leverage ratio every day, but we'd like to become a much healthier company from that perspective. And so, we've committed and also the term loans, obviously have a higher interest burden on them. So, as we sell the non-core assets, our focus there is to start to pay down the debt and then, hopefully we'll renegotiate that to a healthier level at the right point in time. Once we do those two, then we're absolutely open to looking at concept of share buybacks or dividends that would be in that way.

Fair enough. Okay. Thanks. And then, Miguel, for you maybe sort of bigger picture, strategic question. Just thinking about the benefits that the business clearly saw during COVID and some of the things that you're working on in terms of new products and all of that good stuff. Just as we think kind of high level about a revenue outlook for 2021. I know you don't want to give too much in the way of guidance at this point. But is there any reason we shouldn't think of kind of close to $2 billion as a reasonable top line forecasts for 2021 just taking the puts and takes of some tough times in some markets, all that kind of good stuff. But high level are we still running that kind of 484, 90 and sales per quarter in your mind?

So Wendy you're not going to like my answer because that we don't -- we're not giving guidance. But what I can tell you is that the things that we implemented, the ones that you know, invest in detail and making sure that there's adoption there. We are, as Sandra said we're investing in that. We're investing in new products, we're investing in the brand, we're investing in the data, and all those things are getting traction. So, we're very confident and feel really good about all the things that we're inputting into the system. Obviously, for the last part of the year, we have different -- difficult comps. But overall, for a big strategic point of view, we are on course. We’re exactly we want to be probably even a little bit ahead of where we expect it to be at the very beginning. So we're very excited about the future. And I guess …

Yes, and Wendy, just to reiterate what I said is that for the first 2 months, we are seeing the low to mid teens in the first quarter, but that is our easiest comp of the year. And so as we go throughout the year, we would expect that it's complicated, much more difficult, but that's what we're tracking as a structure.

And can you -- and again, I don't mean to push, but just in terms of maybe in the U.S where there are some parts of the country that are really kind of back to normal for the most part, people have gone back to work, people are back in school, et cetera, et cetera. Can you talk about, or do you have any visibility into those areas or those regions? Or are your sales still running up that strongly? I'm just I think bottom line, what we're all worried about or thinking about is, as people go back to their normal day job, is -- are they going to be there part time job selling Tupperware. So that's kind of what we're all thinking about. So, let me just let me tell you something, hopefully, it helps. One of the key reasons why we experienced this great growth in there during last year was obviously the difference in consumer behavior, but also the adoption of digital tools from our sales force. And as you've heard me saying before, this is like the horse and the car. Once people start trying the car and they saw that it was safer and went faster, they never went back to the horse. So it's the same with a lot of segments of our sales force. They are using new tools. They're falling in love with the new tools, and they realize that they're more productive and efficient. So there's no -- there's no reason why they would go back to the old way of doing business. And that's why we keep on investing. I'm saying about the -- the Digital World, because that’s -- that actually improved the whole Tupperware proposition into any market, not only the U.S because with less effort, you can actually earn more from the sales point of view.

Fair enough. That's hugely helpful. Thank you so much.

And we have a follow-up question from Steve O'Hara with Sidoti & Company. Your line is open.

Yes, thanks for taking the follow-up. Come back to free cash flow forecasts for '21. I'm just curious, I'm not sure, did your guidance include some level of disposals? Or does that guidance for free cash flow only include the CapEx?

Yes, so I'll just say it again. That on the divestiture side of any of our businesses, at this point, we have not predicted the timeline associated with that. We're still focused on it, but we're not necessarily including any type of proceeds from continued divestitures other than the ones that we talked about, I mean, obviously, Avroy Shlain fell into 2021. So we provided that number at around $34 million of proceeds. And then we did have the sale of a French manufacturing site in February. And it was roughly around $9 million, that cash proceeds will come over the course of three quarters, which is what we agreed to with the potential of buyer. So we closed the deal at just the $9 million over three quarters.

Okay, great. Thank you very much.

All right. That concludes the Q&A session of today's call. I'll hand the call back over to Mike -- to Miguel Fernandez for final remarks.

Thank you. I'm pleased that we've finished 2020 stronger than initial expected. I feel confident that we're now entering to the foundational phase of our turnaround plan, where we can begin executing our vision for the company. We expect to build a consumer centric company, one that is stronger, more resilient, with the right processes, technologies and mindsets in place to expand our iconic brand into the future. Thank you very much for your time today.

Thank you presenters, and thank you ladies and gentlemen for joining us on today's call. You may now disconnect.