Greetings, and welcome to Columbia Sportswear Company Fourth Quarter and Fiscal Year 2019 Financial Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to introduce your host, Andrew Burns. Please go ahead.

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's fourth quarter and full years results and 2020 outlook. In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary explaining our results and the assumptions behind our 2020 outlook. The CFO commentary is available on our Investor Relations website, investor.columbia.com. With me today on the call are: Chairman, President and Chief Executive Officer, Tim Boyle; Executive Vice President and Chief Operating Officer, Tom Cusick; Senior Vice President and Chief Financial Officer, Jim Swanson; and Executive Vice President and Chief Administrative Officer, Peter Bragdon. This conference call will contain forward-looking statements regarding Columbia's business opportunities and anticipated results of operations. Please bear in mind that forward-looking information is subject to many risks and uncertainties and actual results may differ materially from what we projected. Many of these risks and uncertainties are described in Columbia's annual report on Form 10-K and subsequent filings with the SEC. Forward-looking statements in this conference call are based on our current expectations and beliefs, and we do not undertake any duty to update any of the forward-looking statements after the date of this conference call to conform with forward-looking statements to actual results or to changes in our expectations. I'd also like to point out that during the call, we may reference certain non-GAAP financial measures, including non-GAAP results for 2018. For further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures and an explanation of management's rationale for referencing these non-GAAP measures, please refer to the supplemental financial information section and financial tables included in our fourth quarter 2019 earnings release. Following our prepared remarks, we will host a Q&A period during which we will limit each caller to two questions, so we can get to everyone by the end of the hour. Now I'll turn the call over to Tim.

Thanks, Andrew. Welcome everyone and thanks for joining us this afternoon. 2019 was another strong year for Columbia Sportswear with record net sales, surpassing the $3 billion mark for the first time in our company's history, as well as record gross margin, operating income and diluted earnings per share. Broad based growth was led by the momentum of the Columbia and SOREL brands and our brand led consumer focus strategy. I'd like to thank our global team, whose dedication and focus made these outstanding results possible. While we celebrate these financial results, 2019 was also a year of remembrance, as we lost our one tough mother; Chairman and Matriarch, Gert Boyle, whose strength and character guided this company for nearly 50 years. Her mantra, it's perfect, now make it better. Guys, our culture of relentless improvement and our image and likeness -- likeness will remain an integral part of our branding. In the fourth quarter, we experienced the challenging retail environment, particularly in outerwear, which resulted in higher levels of promotional activity in our DTC business and higher close up sales in our wholesale business as we took actions to reduce inventory levels. Globally, many regions also experienced weather that was meaningfully warmer than historical averages, particularly late in the quarter. And this environment, we delivered results generally in-line with our guidance, including strong sales growth for the SOREL brand. Overall in the fourth quarter we generated 4% net sales growth and operating margin compressed 230 basis points, resulting in a 1% decrease in diluted earnings per share, compared to non-GAAP fourth quarter 2018 results. Please note discrete tax items resulted in a lower than planned tax rate in the quarter, which benefited diluted earnings per share by $0.09. For the year, we generated 9% net sales growth, expanded operating…

Certainly. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is in from Bob Durbl from Guggenheim. Your line is now live.

Hi Tim. Good evening.

Hey Bob.

I don't think I need to tell you but I'm missed Kurt and I know you do. So, my sympathies. And Andrew Burns you guys you were cut off for you buddy in terms of that safe harbor.

Well, thanks.

So, I'm sorry, Tim. And then I guess just on the guidance for 2020, I was just wondering if as you look forward in terms of the business, your visibility on spring versus fall the U.S. expectations for high single-digit. Can you sort of fuel some layers back on that? And just help us understand the drivers behind that piece of it? That's my first question. And then my second question is, essentially I think the inventories was up 16%. I think it was – just if you could sort of help us understand the gross margin guidance your inventory levels and just sort of put those two pieces that would be pretty helpful as we think about 2020 going forward? Thanks.

Certainly. Well as you know Bob, we have a high percentage of our business is wholesale, where we have an advanced book. So we have significant visibility against the book for spring and we're in the process of shipping that product now. So we have a good idea about what we can expect from a gross margin and inventory liquidation period. We also have a good view on fall 2020 as well. And we've liquidated or I should say, we have orders against a high percentage of our carryover inventory that we have at all going into the fall portion of 2020. We probably got a little aggressive on our inventory purchases for 2019 based on the exquisite year that we had in 2018 and beginning of 2019, where inventory levels were compressed. We ran out of inventory in certain categories. And so we probably got a little ahead of ourselves. But as our business is a high percentage of repeat products, where we have a significant business and so those – that merchandise has been as I said, on orders that we have for our wholesale customers as well as inventory that we'll be placing in our outlet stores. So we have a high degree of confidence in our visibility, we've given you today. And we have the balance sheet to provide a significant comfort for the company.

Okay. And then if I could just do one follow-up, which is essentially on the footwear business, it seems to perform pretty well. Just give us maybe an update on where you think you are? Where you think you're going on that piece of it? What you've learned thus far with Peter? Thanks.

Certainly. Well on the Columbia brand, we think there's enormous opportunities. I've been talking about this since we went public 20 years ago that it should be the biggest product category for the company. And we're well on our way now with some of these interesting products that bring together the outdoor business and the comfort and convenience of the athletic business in footwear. And I'm just very convinced that we're going to have a very solid business over time. It's not growing as rapidly as we'd like but it's still growing at a high clip and growing faster than our apparel business in the Columbia brand. As it relates to SOREL brand, Mark and his team have done just a spectacular job of really melding fashion and function together in a really interesting characteristics of products that has really resonated, especially with women. Now that being been said, our fall 2020 SOREL product will include men's product not for the first time but for the first time in casual footwear. So it's really an exciting time for that brand today and we're looking forward to great things.

Great. Thanks Tim. Good luck.

Thanks Bob.

Thank you. Our next question is coming from Alex Perry from Bank of America. Your line is now live.

Yes, thanks for taking my question. Just first can you talk about how you feel about over inventory -- about overall inventory levels in the channel as we stand here today given the warmer weather both in the U.S. and internationally?

Certainly. Well, by comparison to last year, they're elevated. We just had an enormously warm winter really globally. So, I think they're elevated. And this is why we talk a lot about our history in the winter products business and our balance sheet which gives us tremendous confidence and comfort that we're in the right place, we understand how to run these seasonal businesses, and how to build product and stage our products, so it will be to the extent we can be insulated from these weather events. So, yes, they're elevated from last year certainly and -- but we're comfortable we're in the right place with our inventories today.

Great. Thanks. And then just one on the Columbia brand footwear specifically, I know you called out some key styles, but can you remind us what's driving that business? When the SH/FT platform continues to scale? And just more color about the Columbia brand footwear business specifically? Thanks.

Certainly. Well, the footwear -- the Columbia brand footwear for the back half of 2019 was supported in large part by our traditional products including the Ridge Bugaboo and others, Ice Maiden. And SH/FT created a number of interesting product rollouts from Sneaker brands and Sneaker retailers globally. I was in a Sneaker store in Prague two weeks ago and the entire front of the store was Columbia SH/FT product. So, it's really helped us to gain some notoriety there. But I think the whole concept of us putting together the athletic shoe comfort and a traditional hiking shoe to give ourselves city comfort and high performance on the trail is going to really be the right way to go and we're very excited about the potential of that product combination.

And Alex, this is Jim. Our outlook for 2020 also contemplates a faster pace of revenue growth coming out of Columbia footwear. It's in the teen range of growth. So, pleased with the direction that we're anticipating from that area business.

Great. That's super helpful. Best of luck.

Thanks.

Thank you. Our next question is coming from Chris Svezia from Wedbush. Your line is now live.

Thanks for taking my questions and congrats on the year. I guess, just first, I guess, product questions. Number one, just PFG, what do you think that business can ultimately grow to? And just sort of the thoughts for 2020? And also, secondarily, just on the omni anniversary for fall, just what are you looking to do? What can we expect from a product pipeline perspective? That's my first question.

Certainly. Well, PFG -- fishing is the most popular participant sport in the United States. So, the market is significant. And our expectation is that that brand will continue to grow at mid-teens level the way it has been over the last several years. We are really -- I should say, we are just tapping into footwear as it relates to PFG. So the combination of the footwear and the PFG apparel products, I think are going to be a significant business for us over time. There are already a couple of hundred million dollars in revenues, but it's a unique product. We don't have a lot of competitors in this marketplace. And we expect that this will continue to allow us to expand our business and it really allows us to have innovations present in clothing for warm weather. So as we get warm events, we have a particular point of view on innovations including sun deflector and Omni Freeze, et cetera that goes through that. As it relates to Omni-Heat as you know we're one of the few companies that really focuses on developing product and product characteristics and components internally. So, we have patented products in Omni-Heat’s family that will allow us to have a highly visible technology, which consumers immediately understand how that works. And we have a few different variations of that product today where we have some elevated with more enhanced thermal capacity, as well as our initial original Omni-Heat. And it creates -- it allows us to create assets around Omni-Heat, which can really continue to differentiate our products over others that don't include that. So, we've got a whole collection of digital assets that will be debut sometimes in the first part of the fall September, October, which we're going to highlight Omni-Heat. And then we have a pipeline of new interesting Omni-Heat variants, which will be introducing into fall of 2021.

Got it. Thank you. And just Jim for you, just on the -- I guess the first half guidance. So any additional color you can maybe provide? I'm just curious you're talking low to mid single-digit revenue growth. I can understand Q2 is going to have I guess the guidance assumes it loses some money. Just any color about where maybe more of the gross margin pressure could be or the SG&A deleverage just any color there would be helpful?

Yeah. I think as it relates to the gross margin and we've provided guidance that that's coming down slightly in the first half of the year, keep in mind the comparisons that we had to the first quarter of this last year. Again it was similar to the fourth quarter of 2018 that we had an exceptional backdrop from a weather standpoint that really drove demand not as heavily promotional as we've seen the first part of this year in January. We're just anticipating some degree of margin pressure. Separate from that and to answer your question with regard to SG&A. The SG&A growth is effectively the anniversary or the annualized effect of many of the in-flight initiatives we've begun executing over the course of the better part of last year that we've touched on. It encompassed everything from the direct-to-consumer investments with new stores the C1 and X1 initiatives and so forth. And then as we get into the latter part of the year certainly our expectation would be that we begin to see a normalization of that rate of SG&A growth.

Okay. And just a final thing for me. Just on the overall growth rate for the company, it just assumes an acceleration into the back half. Is that just because of the Q4 comparison or do you really have I guess confidence in that -- in the backlog and the order book visibility to feel that confident in that improvement in revenue cadence as you go into the back half of the year?

It is in part going to be the latter, the prior comment you made with regard to the more favorable comps that we'll have in the fourth quarter. As it relates to the wholesale order book, as Tim commented on, we've got the lion share of that order book in. And that would indicate to us that our wholesale business globally for the fall 2020 seasons growing in the in the mid-single-digit range probably in the low end of the guidance that we're providing here today.

All right. Thank you very much. All the best. I appreciate it.

Thank you. Our next question is coming from Jonathan Komp from Robert W. Baird. Your line is now live.

Yes, hi. Thank you. Maybe just a bigger picture question on how you're viewing the operating margin for the business overall. Just with two years of kind of flat to slightly down operating margin including the guidance for 2020 following a number of years of really strong increases, do you think longer term you're kind of reaching a ceiling in terms of operating margin? Or how do you -- how would you characterize the business longer term?

Yes. Certainly yes. There's a slight moderation in 2020 contemplated. If you look back over several years we've raised the operating margins about 300 basis points. And if you go back even further in the company's history, there were periods of time when we had over 20% of operating margins. And I think frankly from my particular view of history, we were to have been criticized for having operating margins that much higher than the average of our peer group because I think we could have reinvested those profits into marketing funds that would have paid the company larger quicker. So, our goal is to always raise our operating margins to the extent possible, but we want to make sure that we've got the correct advertising and marketing funds demand creation funds available so that we don't -- that we'd grow the business as fast as we can.

Yes, Jon I would add we're just -- we're taking a balanced approach. I mean there's going to be years in which we're making investment as we've demonstrated the past couple of years and on the same token longer term and we don't see the 13% operating margin that we achieved here in 2019 as being the high watermark. Certainly, we've got the aspirations as Tim described to continue to expand those operating margins over time. And as we look at our performance over the last few years, the EBITDA margins that we're achieving there every bit is as strong as our peer group in the upper quartile.

Okay, great. That's very helpful. And then one follow-up just on the high-level commentary about the coronavirus and developments there. I'm wondering if you could help provide any more parameters kind of the major kind of risk in terms of financial and operationally just any more color. And I guess just specifically related to the China disruption maybe separate from the global tourism, do you think there's scenarios that the risk might be contained within your full year earnings guidance? Or just any other thoughts about how to frame it up?

Well, yes, as we said the guidance does include -- does not include any implications on coronavirus beyond what we've talked about today. The first and foremost order of business is to make sure, our employees and our partners are safe and protected. But there are going to be implications throughout the supply chain and into our sales and purchases. So maybe -- might be better for Tom to talk a little bit more about that topic.

Yes Jon. So for our -- or excuse me our Spring '20 production is largely complete to the extent, we've got orders in process for fall. Those -- the line show that production has not been made to the extent we don't have that inventory on hand. So that's where we'd be -- there's -- the most risk in our business as we sit here today.

Okay. Appreciate the color.

Thanks. The next question is coming from John Kernan from Cowen & Company. Your line is now live.

Hey good afternoon guys. Thanks for taking my questions. Congrats on a good year. I just wanted to – a lot of color on the domestic business first, a lot of us were out outdoor retail kind of now going on in terms of the promotional environment with outerwear here. Just any comments on EMEA, I think -- in Latin America, Asia Pacific I think you did give some guidance on the revenue side for both of those regions? Any comments there on the state of the inventory in outwear in those regions and what your outlook is for international this year?

Certainly. Well I think in general the inventory levels are elevated over last year as I said earlier. But again, we have the history of the balance sheet to be able to navigate these kinds of temporary issues well. The areas that we can predict, I think we've certainly accounted for, in our LAAP business you have to remember that we have a significant Hong Kong, Chile, Argentina business which in addition to weather issues, there's also been geopolitical issues in those markets which are -- which have been well documented. EMEA, frankly that business has the biggest opportunity for us outside of China in terms of a strong economy, great brand acceptance, not our best brand awareness levels, but certainly brand acceptance and product acceptance in those markets is significant. So we see big opportunities there. And so those -- those areas that we can have an impact on, we're well coordinated. There's -- areas that those particular political or health issues that we have no control over, we have the balance sheet to be able to get through those things.

Got it. And then Jim, the $350 million to $400 million guidance for operating cash flow and the $90 million to $110 million in CapEx guidance it seems to give you at the high end close to $300 million in free cash flow this year. Any comments on capital allocation this year? I know over a year ago the stock was back kind of in the 80s mid-to-low 80s you were fairly aggressive in terms of Any comments on capital allocation this year if you hit towards the high end of that capital guidance?

Yes John, I would say that no fundamental change relative to how we thought about use of cash in the past. As we've demonstrated first and foremost, we're putting investment back in the business. We've done that in the form of the demand creation, some of the capital investments to ensure that we're able to continue driving growth beyond that and when we think about return of capital to shareholders, obviously we've made an increase in the dividend year-to-date. And then, consistent with our past practice, we've got $215 million remaining on our current share repurchase authorization. And we'll be opportunistic in how we leverage that. And then, one of the things that also embedded in our outlook in our share count is the fact that we do offset the effect of the dilution from our employee stock plans. That's already reflected in that free cash flow estimate.

Got it. And then maybe one funnel question. Inventory of 15%, you're guiding gross margin up for the year. And just based on, I think, where your operating cash flow guidance is for the year, it seems like you're embedding the expectation that inventories back in line by sales by the back half of the year. Is that a fair assumption?

Yes, absolutely. I would expect it to normalize beginning in the first half and then getting down below the rate of sales growth, as we get into the back half of the year. And, certainly, as we look at the composition of the inventory that we're carrying into 2020, there's a chunk of it that is currently in our carryover inventory that was carried into fall 2020. So as it relates to the working capital side of the equation, that's certainly going to benefit how we're thinking about operating cash flow for the year.

Excellent. Thank you.

Thank you. The next question is coming from John Morris from D.A. Davidson. Your line is now live.

Okay. Thank you. Congratulations on a good year as well. Wondering, if you can tell us a little bit about how city attack went for you? What were the learnings there, the extent to which you might be thinking about rolling that up further in the coming year? And then, I got a quick follow-up.

Well, unfortunately, we picked this year to have a very real focus on New York City where the weather was a little bit warmer than we expected. So, I would say, the results this year were lackluster, but we're committed to this kind of focused activities around certain cities and we'll continue to amplify our voice in those important markets, especially around the areas of outerwear consumption and PFG. So we think it's a way for us, with our modest marketing funds, to be more important in certain markets. So that plan is in place for future seasons.

Thanks. And then, my follow-up on -- for the Columbia brand, as you're looking into next year, with respect to apparel, are there any kind of innovation initiatives that you can call out? I know you don't want to tip your hand competitively. But question, kind of, going towards, can we see further differentiation with the apparel business in, vis-à-vis, the other terrific brands in the portfolio? Anything you're excited about there?

Certainly. Well, I would say, the lead technology that we've talked about in 2020 is, something called Black Dot, which is, if you think about our Omni-Heat reflective technology on the inside of the garment, this is basically a heat sink application to the exterior of the garment. So these are technological innovations which we're very excited about. They performed terrifically. They're a little bit unusual, so maybe that the uptake is not as thrilling as the technology, but we're excited about that possibility. And then, as we go forward into 2021, we've got further enhancements of our Omni-Heat, as I said, which will be an exciting expansion. Our Omni-Heat, we've sold billions of dollars of products with Omni-Heat ornament and consumers know them well but applying them to a more fashionable product has also been really important for us.

Great. Looking forward to seeing this. Thanks.

Thanks.

Thank you. Our next question is coming from Mitch Kummetz from Pivotal Research. Your line is now live.

Yes. Thanks for taking my questions. Tim, did I hear you correctly that you said that fall orders are mostly in and that's embedded in the outlook for the full year?

Yes. We have a high percentage of our order book in yes and that gives us confidence in the outlook we've given you today.

So Tim can that change over the next couple of months? I mean you mentioned that channel inventories elevated. I talked to a lot of people OR last week, where they were seeing the retailers or they're trying to get clean hopefully at the end of February. It seems like there's a lot of wild cards. A lot of question marks around the ability to get clean given kind of what the weather is doing. I'm just wondering if channel inventories stay elevated in the next month or two, could that put some risk to the orders that you guys have in hand?

Well, as we say frequently, we get orders every day and cancellations every day. But frankly, we've never had an experience where we've had significant cancels on future orders in any kind of meaningful way, certainly at this time of the year. And you also remember this coronavirus is going to be likely impacting the importation of new products. So actually, if we have inventories in line with good product today, we think we're in a superior position and somebody who might be sold out.

Got it. That makes sense. And then Jim on the guide, you guys mentioned a slight loss for Q2 that implies Q1 that EPS are better than $0.80, $0.90 you guys did $1.07 last year if I'm correct. You mentioned an exceptional backdrop to the first quarter last year. I'm just trying to understand how you kind of get to sort of the implied outlook for Q1. Again I would guess that maybe January is not off to a great start. You got a tough compare in February. So I'm just trying to understand some of the assumptions around maybe the weather or just how you see market shape up?

Yes, I probably don't want to get into parsing the quarters too much. We're not providing quarterly guidance. I think the outlook that we've provided for the first half based upon all assumptions you have around the order book. Mitch to your point, certainly the first quarter poses some additional challenges for the D2C business, just given the favorable backdrop. That's all factored into the outlook that we're providing here today. So we look forward to providing more of an update on that.

Got it. Okay. Fair enough. Thanks, good luck.

Thanks, Mitch.

Thank you. Our next question today is coming from Paul Lejuez from Citi. Your line is now live.

Thanks, guys. I'm sorry if I missed this but did you say anything about what you're seeing in China currently in terms of the percentage hit to the business? I just want to understand how F 2020 guidance might be reflecting what you're seeing right now based on current trends? And if it's not based on current trends what is driving your assumption for China growth in 2020? Maybe any color you can give there? Also if you could remind us on the percent of your sourcing that is coming from China. And also just how you're thinking, generally about raw material costs and the impact on gross margin in F 2020? Thanks.

Yeah. What we said early on that the guidance today does not include the impacts of the coronavirus. That having been said, we have a decent business in China and we've given guidance in the prepared remarks today about what our plans are in that market. I have to go back…

Yeah, maybe just to jump in a couple of specifics. So, certainly as Tim indicated, we've got a fair amount of stores that are closed both that we operate directly ourselves as well as many of our wholesale dealers and over half of those stores are currently closed. We've not at this point in time this is a fluid situation. We have been able to estimate the financial impact and that's not embedded in our outlook at this point.

So does that mean that you're giving guidance as if those stores weren't closed? Is that way to interpret that?

That's correct at this stage.

Got it. Okay. And then just on the sourcing piece, the percent coming from China and just raw materials the impact on gross margin?

Yeah. So China is a low double-digit percentage of our total production higher than that for footwear, a little lower than that for apparel. And raw materials -- the lion's share of footwear raw materials are sourced in China. And a fairly significant portion of raw materials for apparel are sourced in China.

Great. Thank you guys. Good luck.

Thank you. Our next question is coming from Jim Duffy from Stifel. Your line is now live.

Thanks. Hello guys. Thank you for taking my question.

Hi, Jim.

Tim, I want to follow-up on channel inventories. When you discuss channel inventories you spoke using last year is the comparison given how tight inventories were a year ago that seems almost an unfair comparison. How would you characterize them versus some other years maybe like 2017 or 2018, my sense is that channel inventories are nowhere near as out of bounds as we've seen in recent history. Is that fair?

Yeah, I think you're right. The average inventories, they might be slightly elevated from an average point of view but frankly -- and again I hate to talk about ancient history, which seems like 1989 when we went public it's a long time ago. But we have a long history of managing our way through seasonal inventories. And again the balance sheet of the company provides us a lot of comfort. But I would say as your -- specifically your question about inventories, they probably are a little bit elevated over average but this is not an unusual situation.

Good to hear. Okay. And then SOREL success that's been really impressive to watch. Mark and his team have done a terrific job. Are there specific pages from the SOREL playbook that you think are applicable to the footwear business for the Columbia brand?

Probably, I would say Mark has a much higher focus on fashion and design than we have at Columbia. The fashion and design in addition to the functionality of the SOREL products are the key differentiator. For Columbia, we've always emphasized our innovations and maybe we overemphasize that. But frankly the results for the last, call it 18 months on our footwear business have been significant. And as we add design into the innovation packages at Columbia, I think we're -- we've got the opportunity to grow the business very rapidly. It's still the biggest opportunity product categorical wise for the company.

Very good. Thanks. Good luck.

Thanks Jim.

Thank you. We've reached the end of our question-and-answer session. Let's turn the floor back over to management for any further or closing comments.

Well, thank you very much for listening in. We look forward to talking to you again at the end of Q1. And we're all hopeful that the coronavirus topic will be behind us by then.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.