Operator:
Good day and thank you for standing by. Welcome to the Tupperware Brands Corporation's First Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session Please be advised that this conference is being recorded. I would now like to hand the conference over to your speaker today, Jane Garrard, Vice President of Investor Relations. Please go ahead.
Jane Gar
Jane Garrard:
Thank you. Welcome to Tupperware Brands first quarter 2021 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.
Miguel Fernandez:
Thank you, Jane, and good morning everyone. Just 13 months ago, along with a new leadership team, we began the process of turn around this iconic company. We're committed to right-sized the cost structure, to fix the core business, increase the use of digital tools and to strengthen the balance sheet. And as you saw in the press release this morning both our top and bottom line performance along with our liquidity and capital structure improved significantly from a year ago, but more about the quarter and our performance in just a minute. Let me first reiterate key elements of our strategic growth plan that are well underway. We want to pivot from a distributor push to consumer pool and distributor push model. Update our brand architecture to allow us to segment branding, products, channels and pricing to appeal to a broader consumer base. Expand into new product categories and push consumer permission of our iconic brand. Our line of product development efforts to address needs of all consumer social sub-segments. Expand distribution and access points to meet consumers where they shop. And most importantly, fix the core direct selling business with proven methods. Today in our 75th year, the brand is very strong, widely known and accepted. And we intend to leverage this important asset. We also believe we are on trend with a worldwide focus on ESG by producing and selling environmentally friendly reusable products. You've seen our increased efforts in this area with the sponsorship of national parks and our use of new, more environmentally friendly materials.
Sandra Harris:
Thanks Miguel. The strong revenue momentum from the second half of 2020 carried over to the first quarter of 2021 reaffirming the firm financial foundation we are establishing as part of our turnaround plan. Our first quarter sales of $460 million, which was an increase of 20% compared with last year in local currency and up 22% on a reported basis. Three of our top four markets, U.S. and Canada, Mexico and Brazil contributed 74% of the dollar increase. Additionally, reflecting the breadth of our efforts to fix our core business, the majority of our markets posted improved sales in the quarter as well. On a regional basis, North America increased 43%, South America increased 53%, Europe increased 12% and Asia was up 6% excluding the negative impact from China's decline that you heard Miguel say. These higher sales coupled with our turnaround plan cost savings, led to a gross margin of 70.3%, 480 basis points higher than a year ago. Of the improvement, 330 basis points was attributable to lower manufacturing costs. The balance of the improvement reflects favorable changes in country and product mix. Like other companies, you may follow, we are experiencing higher resin costs. But so far, we've been able to offset this negative impact through additional cost savings throughout our operations.
Operator:
Your first question comes from the line of Linda Bolton Weiser with D.A. Davidson. Your line is open.
Linda Bolton Weiser:
Can you, Sandra, just repeat the statement you made about EBITDA guidance going forward? I think you said that excluding the additional investment, the EBITDA would be lower, but yet up year-over-year. Can you clarify that I just understood that correctly? And then can you just kind of comment on the cadence of the additional investment in what the EBITDA what kind of flow including the additional investment? Thank you.
Sandra Harris:
Yes, so EBITDA in the quarter was $88.6 million and the adjustments that we would make against EBITDA would be the one-time items that I discussed. So one was the $9 million gain on sale of the French manufacturing facility in Avroy Shlain. There was a $3 million timing difference on when we recognize the China government grant, it typically comes in fourth quarter. So that would lower forward looking EBITDA and then the bad debt reversal of one-time of $2 million. And then to your point, I discussed between $30 million and $40 million of additional investments that we need to make. And roughly those are going to be a little heavier in Q2, but then more rateable throughout Q3 and Q4. We're accelerating some of the work around IT, specifically to ensure that we are more prepared for the business expansion opportunities that we have with consumers so, enhancing our IT infrastructure around cyber security, data privacy, and all the things that are necessary as we approach more consumers and provide more access.
Linda Bolton Weiser:
And can you clarify too Sandra, if the $30 million to $40 million of investment is on top of the amount of cost cutting that you expected to come back, which I think that was about 25% of the original cost savings. So this is like incremental back-to-back that will come back? Thank you.
Sandra Harris:
Yes, Linda. So we had said that 25% or roughly $45 million, those were largely either one-time COVID-19 actions like furloughs. But I would also say that the $45 million, even though we had some in Q1, it's also more back-end loaded as we add back-end more of the commercial program incentive trips and commercial opportunity. So for the most part, the $45 million is really hoping, generating and driving more of our turnaround plan sales whereas the additional $30 million to $40 million, we're talking about is getting the infrastructure prepared for those sales. And so it is incremental to that $45 million.
Linda Bolton Weiser:
Okay. And then as you think about kind of the long-term and the turnaround and the longer that the management team has been there, in thinking about further investment beyond 2021? Are you kind of thinking that there will be some more like incremental type investment or do you think you can work in the required investment in terms of normal operations in kind of past 2021? Thanks.
Sandra Harris:
Yes, so we did choose to use some of the profit that we achieved about based on the higher 20% growth to fund these additional investments of $30 million to $40 million. So we are always looking to balance that, Linda. What I would say is that as we look to really expand into more channels, yes, we have a lot of work that we need to do in our supply chain to be prepared for that. And we're going from a distributor model where we had a different packing cadence, a different shipping cadence to both a consumer model, which has smaller units per carton, but then also we have potentially partnerships that ship big crates. So we're having to really look at our supply chain and choose to make investments. The other piece is as we continue to expand, we need more products for those channels and as we innovate and have more product availability, we realized that most of that will be coming from a third-party sourcing situation. So part of the investment that we're talking about this year is to start to build out a robust sourcing organization that really partners with suppliers on obtaining those products, finding new innovations that are in the market. And so, we do feel like we potentially will augment that as we go forward depending upon how our sales respond to these new product categories.
Linda Bolton Weiser:
Thanks. And then in terms of the strategic initiatives to get into other channels Miguel, could you just talk about kind of, will we see that as an effect on sales performance in terms of incremental sales in 2021 or is it more 2022 where we would see the actual sales results of your actions?
Miguel Fernandez:
Hi, Linda good morning. I think you're going to start seeing it a little in Q3, but mostly in Q4 and definitely next year.
Linda Bolton Weiser:
Okay. And then Miguel, at this stage of the game, now that you've been at the company or I guess about a year, what are you seeing as kind of the biggest challenges to the turnaround? Is there anything that your thoughts have changed versus when you first came to the company in terms of strategy or ability to execute on any parts of your strategy?
Miguel Fernandez:
So basically, the short answer is no. I mean, the answer you know the same strategies is in place. We're very confident in our ability to execute. The big challenge that we have which we knew all along is that as you know, we are primarily a direct selling company. And by expanding to other channels, we need to build higher, how are you want to call it, these new skills to get into other channels. And this is skill set that many other companies have and that's how they were founded and grew up. We need to build them and build them fast. And obviously we're going to start with the bigger markets. But at the same time, I think our P&L is going to be able to sustain those investments, because the whole P&L of these other channels is completely different than the one in direct selling.
Sandra Harris:
Yes, and Linda, I could add one more comment to that as well you know as Miguel said these other channels will support incremental margins and we also are continuing to improve our margins as we can through centralization and leveraging. And so from that respect back to your question of, will these additional investments be funded. We will continue to look for ways to optimize across the enterprise to keep our margins very healthy.
Operator:
Your next question comes from the line of Steve O'Hara with Sidoti. Your line is open.
Steve O'Hara:
Thanks for taking the question. Could you just, I know you guys had made, I think some leadership changes in look was it China or in Asia, generally. Can you just talk about - I mean it sounds like China is still not performing up to where you'd like it to be? Just wondering if you're starting to get traction with the new management team and maybe how that might take shape over the next few quarters to years and et cetera?
Miguel Fernandez:
Good morning, Steve. This is Miguel here. So obviously, Kayne who has joined us in early February, so he literally has been 90 days with us. And a few of the key things that he is already been working on, is to change the incentive plan for the field. So we can motivate the top sellers to continue - and the top of business owners to continue to build new outlets in China because there was a limitation to 10 for each of these leaders. So now we increased the limitations so the successful people can be even more successful. Another of the quick things that he is being including the market is they seek detailed practices, I mean - merchandising, category manager, management, store locations and so on. And then finally he comes with a very strong e-commerce background. So he is bringing his people that he worked within the past are only e-commerce experts, and that's something that is a big, big over for 24 hours, and I said in the script it's going to take time, but we're very confident that we are setting the right ingredients into the market. We have the right management. As Sandra mentioned, we are going to be invested in third-party sourcing, so we're going to get a lot more product into China for the Chinese consumers. So we're very excited about our future in China.
Steve O'Hara:
Okay, thank you. And then maybe just big picture, you had a very strong 2020 as the turnaround started to take shape, and I think this is kind of the last quarter of what was a fairly easy comp, I guess although the turnaround continues to work. Can you just talk about maybe longer-term kind of where you see, I think in the past you guys have talked about kind of a certain level of sales and earnings and I'm just wondering is that thinking still the case, either in the near-term or longer term. And then maybe what are the long-term goals around sales profitability things like that?
Miguel Fernandez:
Yes. So Steve, we continued to not provide guidance, just because of the uncertainty still around COVID-19 as well as our turnaround plan. We're doing a lot of interesting and new things, I mean it led to the decision to make these incremental investments, what we are reiterate is that we have a growth strategy, and the growth strategy is not only around growing our direct selling business, which we said we would grow in the competitive range of what other direct sellers are doing. And so longer term, what we said is that's usually in the low single digits on our direct selling side, but as we add these business expansion opportunities, we know that those can grow much faster in the double-digit range that helps us to continue to grow together both businesses and add more to our revenue. So it is a growth story. On the profit side, we've proven that we were able to aggressively take out costs, where we're more realizing that and that growth will help to fund these investments that we're talking about in the future and that's why we've chosen to accelerate them. And so all-in-all what we're looking at is a very balanced strategy of growth on the top line with continued efforts around ensuring that we have very healthy profitability and this quarter we delivered the 20% return on sales on our operating margins and we will continue to look for ways to return to investors on both metrics as we look forward to the future.
Steve O'Hara:
Okay and then just, I know you noted continued effort to shed non-core assets. Can you just remind me where the land sales process is and what the timing might be on that?
Miguel Fernandez:
Yes, so we do still have one more parcel here in Orlando. We still do estimate the proceeds somewhere in the $40 million range. We're continuing to have conversations with the partner that we did the deal with last year, it's O'Connor. Recently, there was a press release that they actually have sold the loan that they had done for this piece of property which hopefully gives them the ability to go faster on executing on the second piece, but we also are in a non-exclusive with them and so we are continuing to look at any option that's available and we're committed to the sale of the non-core assets.
Operator:
Your next question comes from the line of Wendy Nicholson with Citibank. Your line is open.
Wendy Nicholson:
First question, you sell some of the non-Tupperware branded businesses. Do you think you can maintain any of those sales people and just shift them to selling Tupperware instead of the brands that you're going to discontinue or divest? Are they really just going to leave the system entirely? And I'm just wondering sort of impact on the P&L as we go through the course of the year and into 2022. I know its revenues are relatively small, but I'm wondering about the number of bodies?
Miguel Fernandez:
Yes. Good morning, Wendy. How are you?
Miguel Fernandez:
So, basically once sales force member joins a brand, they work with the brand and they represent the brand and there are separate, right. So for example, the people that we have in Tupperware Mexico versus the people that we have in Fuller Mexico they are completely different, different sets of people and they are loyal to the respective brands. Once in a while we might do a cross brand promotion, but generally speaking, they stay with their own brand. I mean, at least at the top levels. At the bottom, the little level, let's just brand new people, I mean, as you know they represent many times four, five, six different brands. So, but that wouldn't change by changing their ownership.
Wendy Nicholson:
Got it. Okay, fair enough. And then second question on some of the sustainability stuff that you talked about and using the new whatever ingredients or products, raw materials for the products. Is there any impact notably on gross margin? Are those harder or more expensive to source or will you price up for those or is it neutral to pricing and margin?
Sandra Harris:
Yes. So Wendy, what I would say, as I mentioned earlier the incremental investment to build out a third-party sourcing organization. Today, the answer to that would be we're largely 60% manufacturing and so we've been opportunistic on sourcing but as we build out this organization and start to form the partnerships with the right suppliers and start to leverage them then your expectation is that we can obviously maintain margin and maybe even improve some of our pricing through the third-party sourcing. Obviously, we'll continue to look for margin accretive products to add to our portfolio and as with all of our incremental investments, its ROI driven, right? So we will make the choices that continue to grow both profit and sales.
Wendy Nicholson:
Got it. Fair enough.
Miguel Fernandez:
Let me just add a thought. Okay, got it. Let me just add a thought. We're going to be developing sub-brands and let's say if we brand speaks to the consumer around sustainability and the product cost is higher than we would price it up, because that's just the nature of that sub-brand that we're going to be offering to the consumers. So we're going to be very disciplined.
Wendy Nicholson:
Fair enough. And then my last question, just has to do with sort of the concept of increase in consumer pull and it sounds like a lot of the investments you're making this year are kind of internally focused on the IT side, supply chain, which is awesome. But in terms of sort of building the brand with consumers, I'm wondering kind of what you're thinking on that? What's your timing on that? And is that going to be primarily digital and social media, why not have a Tupperware add in my People magazine or on the Food Network, just to get more people familiar with, oh gosh, look at those new products, didn't realize Tupperware was doing that stuff. How do you think about that as a component of the consumer pull strategy?
Miguel Fernandez:
So Wendy, all things are going to come eventually. The first thing is that we need to put our housing order. Once we get the right products, the right channel and we get everything, you know again the housing order, then we're going to be able to start investing in different media, outlets and channels and start doing AB pilots and see which one works better for us and what's the brands and so on. So it's in the horizon. We just need to finish up, I guess getting us ready with the whole strategy.
Operator:
Thank you. That concludes the question-and-answer session. I hand the call back over to Miguel Fernandez.
Miguel Fernandez:
Thank you. We believe we are well on our way to successfully execution of our three-year return ramp plan. During 2021 with our rightsizing organizational changes behind us, we're now able to shift our time and resources to implement our growth strategies and become a more consumer-centric company. Thank you for your time today.