Greetings. Welcome to the Columbia Sportswear Fourth Quarter 2023 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]. Please note, this conference is being recorded. I will now turn the conference over to your host Andrew Burns. Please proceed.

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's fourth quarter results. In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary and financial review presentation explaining our results. This document is also 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 Financial Officer, Jim Swanson; and Executive Vice President and Chief Administrative Officer and General Counsel, Peter Bragdon. This conference call will contain forward-looking statements regarding Columbia's expectations, anticipations or beliefs about the future. These statements are expressed in good faith and are believed to have a reasonable basis. However, each forward-looking statement is subject to many risks and uncertainties and actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Columbia's SEC filings. We caution that forward-looking statements are inherently less reliable than historical information. We do not undertake any duty to update any of the forward-looking statements after the date of this conference call to conform the 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 constant currency net sales. 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 earnings release and the appendix of our CFO commentary and financial review. Following our prepared remarks, we will host the 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, and good afternoon. I'm proud of what our global workforce was able to achieve in 2023 as we navigated a challenging environment. One of our top priorities throughout the year was executing an inventory reduction plan. I'm pleased to report that, we exited the year with inventories down 27% compared to last year. This inventory reduction helped us to generate over $600 million in operating cash flows for the year. International markets were another bright spot, growing 7% on the year. In constant currency, China full-year net sales grew low 30%. The investments in talent and operational improvements we have made over the last several years are yielding results. Our Europe direct business grew low double-digit percent, reflecting strong execution across our product, brand and marketplace strategies. We also generated healthy growth in Japan, up low double-digit percent. In Canada, up mid-single-digit percent for the year. In the U.S., the marketplace proved more difficult. Consumer demand and traffic tapered off throughout the year. In the fourth quarter, a warm winter impacted cold weather categories. I'd note that, the onset of winter weather more recently has boosted sell through. This helps us and our retail partners work through seasonal inventories and mitigate the impact of carryover inventory in future seasons. Overall, 2023 net sales increased 1% to $3.5 billion. In this muted growth environment, we experienced SG&A deleverage and our operating margin performance was well short of my personal goal for the business. Our balance sheet is strong. We exited the year with $765 million in cash and no debt. This provides resiliency during turbulent periods and allows us to continue to fund growth initiatives, while returning capital to shareholders. In 2023, we repurchased $184 million in stock and paid out $73 million in dividends. Our commitment to returning…

[Operator Instructions]. Our first question comes from Bob Drbul from Guggenheim. Bob, please proceed.

So, Tim, two questions for you. The first one is, when you look at your full-year projections how much of the order book on the wholesale side is complete at this point? And then the second point around sort of the U.S. market is, could you just comment on where you think the channel is, especially with some of the more recent weather that've been positive over the last few a month or so?

Certainly, as relates to our older book, I wouldn't say in the range of high eighties to 90%. It's a focus for the company and we will complete everything by the end of March, something in that range, where we have full complete view. Remember, we take orders and cancels every day and so we are going to continue to focus on building the book stronger, we get further in the market. As it relates to the USA market conditions, we think that, they have improved substantially since the first of the year. Our DTC business has been incredibly successful and I know that our retailers have had great success liquidating major products after the first of the year. I'm expecting that it's going to be reasonably good marketplace to sell into for fall 2024.

Got it. And then, if I could just follow-up on China. Can you expand a little bit more just in terms of the success that you are seeing, the encouraging results in China and the outlook that you talked about?

Sure. Remember, we have been operating in China for many, many years, both through a distributor and then as a joint venture and then as our own business. We really underperformed historically there, I would say, in the last several years. Our new team, we call it our new team, Pierre Leon, who is a veteran of the industry has been focused on that market and we are just now seeing some of the key results. He has built a great organization, which is highly focused on localizing the product and engaging with not only the consumers there, but some of the large motor and retail operations. Our expectations is that, that business is going to lead the geographies for us and be very, very successful over time. It's got great metrics right now.

The next question comes from Laurent Vasilescu with BNP. Laurent, please proceed.

Thank you, very much for taking my question. I want to ask a couple of questions here. Last quarter, the entire Q&A was focused on PFAS. I didn't hear anything about PFAS in the prepared remarks. I was just curious to know, where do we stand with that from a legislative standpoint, from an inventory standpoint? Do you think you will be able to clear through that, when it comes to the New York and California deadlines for 2025?

Yes. The reason we mentioned ism we are well-organized and controlled within our own inventories. We have a modest amount of inventory of PFAS remain to be liquidated, which will easily be taken care of during the year. As it relates to legislation in other jurisdictions other than California and New York, there's been noise around the system, the globe frankly on this topic. But there are no other areas that we know of right now that will be anywhere near the deadlines of the California and New York office. I think we can talk about the impact of the threat on our retailers, and I think that's been part of the issue, where we have put a damper in confidence from our retail team, retail partners, excuse me.

Okay. Very helpful, Tim. Maybe, Jim, a question for you. I think in your CFO commentary, you talked about expected benefits of $75 million to $90 million and profit improvement across gross profit in SG&A. Maybe can you just unpack that a little bit more? How much of it is coming through gross profit versus SG&A expenses and how do we think about that cadence over the course of the year? First half, second half?

As it relates to the breakdown in terms of how to think about it, between cost of goods sold and SG&A approximately $20 million, I'll speak to the high end of the range, that $75 million to $90 million on the high end of the range. The cost of goods sold components about $20 million, and that's comprised of freight optimization work that our team's been working on as well as packaging savings. And we're well long in terms of the execution in lining those savings up. The balance is in SG&A and what I would say about that is six 30 [indiscernible] of that is relates to the normalization of our inventory. And you'll recall that we incurred pretty heavy inventory carrying costs in ‘23 related to distribution, third party logistics and termination related costs. So, this is the recovery of the vast majority of that. And then there's another $30 million or $40 million rather of savings that are tied up in operational cost savings across our business, as well as some organizational cost savings. Tim touched on that does include unfortunately headcount reductions and there's a component of indirect spend. So that really breaks it down in terms of being able to quantify that over the course of the year on a quarterly basis. That'd be tough to do. Much of the execution around this we're targeting have done late in Q1, and so you'd expect it to be Q2 through the balance of the year.

And then maybe just last question, Jim. Obviously over the course of December and January, there's a lot of questions around the Red Sea. I recognize probably right now it's just the logistics challenge of a two-week delay. But just curious to know with spot rates recognize a lot of companies go through contracts, but spot rates going up 3x 4x versus November and potential surcharges. Can you maybe just kind of walk through maybe just the -- what would be the impact if the rates hold over the course of the next two quarters at these levels? Thank you.

Well, we can speak to thus far is we've got long-term contracts in place with certain of our ocean carriers. And to date, we have not been incurring by and large those spot rates that are in the market, nor are we incurring the surcharges. So thus far, we don't anticipate that having a meaningful impact on our business.

Okay. Thanks so much for taking my questions.

The next question comes from Abbie Zvejnieks with Piper Sandler. Please proceed.

Just in terms of the gross margin expansion for the year, I understand the guidance for the first half. So, I guess what gives you confidence in the expansion in the second half, and is that this PAS issue that could drive more promotional cadence of that product, like implied in that guide already. And then just secondly how, I think you talked a lot about -- but how are you thinking about the footwear business at Columbia for this year? Thank you.

Yeah, I'll touch on the first part of that and then pass it over to Tim as it relates to the footwear part of the question. As it pertains to the gross margin, I think keep in mind the single biggest driver when you consider the year in its entirety in the gross margin expansion that we've got planned, we're in much healthier shape in terms of the underlying quality of our inventory throughout 2023 and we are working through a fair amount of excess inventory, the overall assortment of what we will have within our business across our D2C business in our retail stores, themselves will be a better assortment. That gives us some of the gives us that confidence in terms of what you are seeing in the gross margin. [Technical Difficulty] are providing here today.

Okay. Andrew, can you hear us?

As it relates to the Columbia footwear, Columbia has got heavy presence in winter footwear as well. Although, we do have a new set of products launching in spring '24 called Omni-Max, which is a full contingency of platforms including uppers and shared mid soles and outsoles, which has been very well received. And then as it relates to our international business, the footwear component of our international business is much larger. We have a lot of confidence that, we have got the right approach to the business and we will continue to invest in that area as well.

Our next question comes from Paul Lejuez with Citigroup. Please proceed.

Thanks. It's Tracy Kogan filling in for Paul. I had two questions. The first, I was wondering if your first quarter guidance contemplates the improvement in performance, you have been seeing in January or if it's more based on what you were seeing in fourth quarter? And then I was hoping you could talk more about the U.S. DTC channel and what You attribute the difference in performance in e-commerce and bricks-and-mortar to in the fourth quarter? Thank you.

Yes. Tracy, as it relates to the first quarter and the outlook that we provided, certainly January gotten off to a brisk start within our B2C business from a growth standpoint and we have seen the same thing as it relates to the wholesale sell through within our wholesale distribution. Those updates or that impact on the business has been updated in our Q1 outlook. We did build the overall trend for the quarter, based on what we were seeing in the fourth quarter. So, we have adjusted January, but we have been a bit conservative, as you think about the balance of the quarter, just knowing how challenging marketplace conditions were in Q4. As it relates to the other part of your question on Q4 and our retail business...

Yes. I think we are seeing in our business as well as our wholesale partners that, bricks-and-mortar businesses tend to do better today than the digital businesses. We see a move for the consumer to move closer to that. We see and feel it as a coach doing digital. And then as it relates to our own e-com business, a portion of the weakness is our structured move away from highly promotional events to have the brand be better representative full price in our own e-comm business. And we talked during the period remarks about how we're planning to bankrupt the food showcase for the brand, but we would expect over time to have less promotional activity.

The next question comes from John Kernan with TD Cowen. Please proceed.

This is Krista Zuber on for John. Just sort of more of a big picture question, if I could, on the long-term operating margin target. I think, Tim, you said you're now sort of targeting a low teens operating margin, kind of how do you see the pathway towards that over sort of a timeframe developing from here? And I have one follow-up.

Well, clearly there has to be revenue enhancements. So, I mean that, we're expecting that the investments we're making during this period and even the prior year will be extended and will yield revenue growth. This is what's going to be important to the business. We see the kinds of revenue growth that we're excited about internationally. We need to get that kind of growth domestically as well. So, I'm confident that we can grow the operating margins back to those numbers. We've historically hit those numbers or greater as the company's history, as a public company. We'll have to be very mindful of our expenses, continue to manage those in a way that our investors are used to seeing us manage those.

And then just on the inventory basis, can you just give us a little sense of kind of what you're seeing in the wholesale channels with your key wholesale partners and sort of the expectation of where you see inventory leveling out given all your plans for reorganization restructuring in fiscal ‘24.

Well, we saw significant conservatism in our wholesale partners purchasing patterns, not only in preparation for fall ‘24, but also in preparation for fall ‘20, for spring ‘24, where there was a lot of noise about PAS, et cetera. So, I think the purchasing is been made by our retail partners, excuse wholesale partners, has been on the conservative side. We're prepared to help a bit with inventory that will be have available, but we're not going to take risks on inventory to satisfy anything that they've forgotten to purchase or purchase them and conservatively. So, my expectations are that the inventories at retail will be quite produced and will be in a much healthier position.

And I think, Krista, just to put that in context, when we look at where retailers inventory levels are in the channel currently, this is specific to the US for the Columbia and the sore brands inventory, the channel's actually down year on year. So, it gives you some sense for we believe it to be quite healthy despite the fact that retailers are being awfully cautious as, as Tim's touched on.

The next question comes from Alex Perry with Bank of America. Please proceed.

Hi, thanks for taking my question. I just wanted to ask about the overall promotional environment. I guess how should we think about the promo environment right now compared to last year? And then Jim, how do we square that away with your comments? That inventory seems to be in a much healthier place, compared to last year? Thank you.

Well, I can speak, the company's promotional activities have moderated, certainly, as I said earlier in the e-com space. We can be in a better position with the brands held in our most visible environment. I would expect that as inventories moderate across the channel that you are going to see much less promotional activity. The question depends on the particular retailer and what their own financial, fiscal health is, but I think in general you will see less promotional activity.

And that's by and large Alex, that was reflected in our outlook as well. As our inventory is cleaner, as the retailer's inventory is clean, that's more or less reflected I think in the front part of the year Q1. Certainly, they are working to clean up remaining inventory that's coming out of fall season. There is some promotions out there. But as Tim touched on, increasingly as we go throughout the year and that further normalizes and it's healthy, that should be a net positive to how we are thinking about gross margin.

The next question comes from Mauricio Serna with UBS. Please proceed. Please proceed.

Great. Good afternoon. Thanks for taking our question. Maybe just thinking about the sales guidance from that 2% to 4% decline, what does that imply or the underlying growth of the outdoor category? Any difference that you are seeing between apparel and footwear? And maybe, is there like any impact that you could attribute to your efforts or your initiatives to reduce the PFAS product that is talking that's happening because of that?

Yes. Our basic underlying products have not changed. We have merely changed the chemistry that's applied to the product to a chemical that has equal performance, but no PFAS. I think there is frankly some moderation in demand on outdoor products, certainly in U.S. So, we are seeing that, but at the end of the day, balance sheet matters. When there is a moderation in the terms of total demand that's going to impact less financially capable companies more quickly than it will us.

Got it. And then just a quick follow-up on the gross margin. I see like the cadence is like some 70 basis point to 110 basis point expansion first quarter. And then the first half is like slightly up. So, I guess that implies some contraction in the second quarter. Just wanted to understand what's behind that. And very lastly, two quick follow-up on the temporary outlet stores. I mean, how does that work in terms of like, how long are they supposed to be open, given they are called temporary and shouldn't those impact your gross margin because of, I guess, like they tend to be more promotional? Thanks.

Let me talk about the temporary outlet stores first and maybe last Jim to talk a little bit gross margin topic. When we knew at the beginning of last year or maybe even the last part of the prior year that we had too much inventory, there were two strategies that we took to liquidate the inventory. One was to approach the typical vendors that would buy this kind of stuff T. J. Maxx and et cetera, that we have long history with. And there was so much inventory around, frankly, that it became much clearer that we could clear these inventories through our own temporary stores that we could open them profitably, which we have been able to do. So, we're going to maintain the stores as long as it's necessary to complete the final liquidation of the access inventory. And then we'll take, we'll analyze how many of them ultimately end up being kept, but by far the majority of them will be likely closed.

The -- as it pertains to the gross margin and why we would expect greater gross margin expansion in Q1 as compared to the first half. Bear in mind, through the first quarter, we still anticipate lower inbound freight costs. Those will carry through basically the first quarter. And we've seen about a 300 basis points benefit in Q2 through Q4 of ‘23. And it's the continuation of that into Q1 and then there's an offset to the degree we are continuing to work through certain of our inventory liquidation efforts. And then I should mention in the second quarter of last year. In the second quarter of last year, we did have some inventory obsolescence provisions that were favorable. That'll be a make a difficult comp. And then Tim was just pointing out to me as well, our distributor business from a growth standpoint carry the lower gross margin. So, that'll have an impact here in the first quarter or rather Q2.

[Operator Instructions]. We appear to have no further questions in queue. I'd like to turn the call back to management for any closing remarks.

Thank you, operator. This is Tim. So, I just want to point out that I'm personally very disappointed [indiscernible] we provided today. Our global team is focused on returning and surpassing the levels of growth and profitability that we've historically produced. So, we look forward to talking to you next quarter about how well we're doing on that plan? Thank you.

Thank you. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.