[Starts abruptly] (00:00) Second Quarter 2016 Crocs Incorporated Earnings Conference Call. My name is Adrianne and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded. I will now turn the call over to Brendon Frey. Mr. Frey, you may begin.

Thank you. And thank you, everyone, for joining us today for the Crocs' second quarter 2016 earnings conference call. This morning, we announced our second quarter 2016 financial results. A copy of the press release can be found on our website at crocs.com. We would like to remind everyone that some information provided in this call will be forward-looking and accordingly, are subject to Safe Harbor provisions of the Federal Securities Law. These statements include, but are not limited to, statements regarding future revenue and earnings, prospects and product pipeline. We caution you that these statements are subject to a number of risks and uncertainties described in the Risk Factors section on the company's 2015 report on Form 10-K filed on February 29, 2016 with the Securities and Exchange Commission. Accordingly, all actual results could differ materially from those described on this call. Those listening to the call are advised to refer to Crocs' Annual Report on Form 10-K, as well as other documents filed with the SEC for additional discussions of these risk factors. Crocs is not obligated to update these forward-looking statements to reflect the impact of future events. The company may refer to certain non-GAAP metrics on this call. Explanation of these metrics and reconciliations to the nearest GAAP metric can be found on the earnings release filed earlier today and on our investor website, once again at crocs.com. Joining on the call today are Gregg Ribatt, Chief Executive Officer; Andrew Rees, President; and Carrie Teffner, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. I'll now turn the call over to Gregg. Gregg Ribatt - Chief Executive Officer & Director: Thank you, Brendon, and good morning, everyone. This morning, we announced our second quarter 2016 financial…

Thank you, Gregg. Today, I want to update you on three key topics. One, our turnaround in China; two, our global DTC performance; and three, our product line performance. Firstly, our turnaround in China. In the quarter, we made substantial progress transitioning our business from our challenged distributors. The resolutions are in the form of transitioning stores to existing partners, replacing some distributor stores with company-owned stores, as well as some store closures. For some perspective, the challenged distributors represented approximately 20% of our partner stores, and 30% of our China wholesale revenue, or approximately $13 million of revenue in the first half of 2015. As you may recall, we stopped shipping to these distributors in Q3 last year. In addition, China revenues have been impacted by a new credit policy that we implemented in 2016 for several distributors, which has initially resulted in lower revenue, but reduces our overall credit risk. As Gregg mentioned, it has taken more time than expected to work through the challenges. But we continue to make progress, and we're confident that the changes we have made are positioning us to return our China business to sustained and profitable growth, with a focus on DTC and working with our stronger China distributors. Secondly, global DTC performance. Global direct-to-consumer revenues were up 1.1% as reported, and comp sales were up 2.9%. This is our fifth consecutive quarter delivering positive DTC comp growth. Our e-commerce business was up across all regions, led by the U.S. and Asia. Overall, global e-commerce revenue growth was 19.5%. Our e-commerce business continues to benefit from our new product line and better channel execution, including enhanced digital marketing efforts and a commitment to better in-stock position on core product. As we have said, the bulk of our store closings are behind us.…

Thank you. We will now begin the question-and-answer session. And our first question comes from Jim Duffy from Stifel. Please go ahead. Jim Duffy - Stifel, Nicolaus & Co., Inc.: Thank you. Good morning. Can I ask you to provide more detail on the revenue puts and takes and the changes to the guidance? Carrie W. Teffner - Chief Financial Officer & Executive Vice President: Sure. So this is Carrie. Specifically, with respect to the overall revenue shortfall in the quarter, I think we have talked – well, first about Q2, and then that will help inform the full year change to our overall guidance. Well, we mentioned Q2 revenues came in below our expectations, primarily related to the decline in the Americas wholesale at-once. Despite solid sell-throughs, we have cautiousness with retailers using their open-to-buy dollars and then the China transition taking longer than we had hoped. So factoring that impact into our overall guidance, we've projected full year revenue down to the low single digits, and that really is incorporating that Q2 performance and taking that continued cautious outlook from our wholesale business as well as the China business. That said, I think what I want to make sure is clear relative to our guidance for the full year, and again, Q2 is a great example of taking how we performed in Q2 and translating that into our guidance. Despite the revenue shortfall in Q2 from our guidance, our improved margin and our SG&A performance allowed us to deliver our EBIT above the consensus expectation. So as we take that into the full year, we are calling our gross margin up 50 basis points from our last guidance. We are also lowering our SG&A spend $10 million from $510 million down to $500 million for the full year. So with that gross margin improvement and the SG&A improvement, we're expecting both of those to help mitigate the majority of the revenue – call it, shortfall in our revenue guidance. Jim Duffy - Stifel, Nicolaus & Co., Inc.: Okay. Thanks for that. And the China situation, we're now going on over a year of challenges there, can you give us more detail on where you stand with respect to distributors? When we should expect a return to growth in China? Perhaps itemize the expected impact to the top line guidance from the China situation? That'd be helpful.

Yeah. Thank you, Jim. You're right. Look, the resulting distribution issues in China have taken absolutely longer than we planned. I do want to highlight that, during the first two quarters of this year, our DTC business actually grew very strong double-digits in China. Resolving the wholesale issues with our key distributors is really a two-step process, the first of which is terminating the relationships with the troubled distributors. And I can tell you at this point, that's effectively complete. The second step is then transitioning the stores that those distributors operate, and there's two parts to that. Firstly, some of those have gone to other strong distributors, and others that we've taken over ourselves. And I can tell you that that's substantially complete. There are one or two transitions to take place during this quarter, but the majority of that's done. So in terms of handling and dealing with our troubled distributors, we can update you that that is, at this point, largely complete. We then turn our attention to building back our distribution, which is hiring incremental, or building relationships with incremental distributors for key parts of the country and probably, more importantly, working with a base of distributors that, through this process, have been working well. As we look to the second half of the year, to the second part of your question, there's a couple of critical things to keep in mind. In Q3 and Q3 onwards, we're no longer up against revenue to those troubled distributors. So the last revenue that we placed with them was in Q2 of 2015, so we're not up against that business anymore. And secondly, the DTC portion of our business, both retail and e-com, grows as a proportion of the overall revenues in China, and that's been tracking all…

And our next question comes from Erinn Murphy from Piper Jaffray. Please go ahead. Erinn E. Murphy - Piper Jaffray & Co. (Broker): Great. Thanks. Good morning. I guess I wanted to follow up just a little bit more in detail on the Q2 mix. I mean it seems like it was mostly wholesale. Could you just maybe parse out as you've thought about that at-once order business, particularly in North America, that you were planning for the quarter? And then where that ended up coming in. I understand the China issue a little bit, but just trying to understand the Americas shortfall in that planning process. Gregg Ribatt - Chief Executive Officer & Director: Yeah. Thanks, Erinn. Look, when we look at our Q2 performance, our overall performance was, from a business at retail perspective, it was solid. We obviously had strong delivery throughout Q1, which we talked about. That continued into Q2. Our products performed well at retail, and we had solid sell-throughs throughout the quarter. New product introductions performed well. Shoes that we talked about in our prepared remarks, like the CitiLane, the Duet, the Isabella, but shoes like the Roka as well, performed well and give us confidence in terms of both the strategic direction we're heading, as well as key platforms that we're building for the future. We had solid global DTC performance which relates to, obviously, the other side of the business. But when you take a step back, our North America business in the first half, and North America is where we've always talked about we expect the business to turn first. Our North America wholesale business in the first half was up about 7.6%. And so we feel good about that. What we saw in Q2 is, as the quarter progressed, the retail environment got more challenging and at-once orders became more difficult to fill. And we saw that progress, in particular, in the last two months of the quarter. And so when we look at our peers, and despite being very disappointed in our top line results, we feel, in light of the overall environment, and when you look at the first half figures, our overall performance was solid and that – there's strong indicators that we're moving in the right direction and it's set a foundation for our plans going forward.

Yes. And I think the only piece I'd add to that, Erinn, would be in China, which was the other real big piece of this. I'd say it was largely due to our credit policy, which I've highlighted in the script. We made a change in our credit policy in 2016 to really tighten the provision of credit to the ongoing distributors. The vast majority of our ongoing distributors in China are paying cash before delivery, so we're not providing credit. That caused them to be more cautious in terms of their receipts. We think that was the right decision relative to making sure that we have a quality business in China. Erinn E. Murphy - Piper Jaffray & Co. (Broker): Okay. That's helpful. And then maybe just, Carrie, for you if you think about the cadence of the year I would just take the midpoint of your revenue guidance for the third quarter. It implies about down 9% in terms of sales. So are you seeing trends weakening quarter-to-date or is there a timing shift in terms of how you're planning that wholesale business between Q3 and Q4? Just trying to understand that third quarter and then it obviously implies growth again in the fourth quarter to get to a down low single for the year. So any constructs of how you're thinking about or what you're seeing right now that provides that range would be helpful. Carrie W. Teffner - Chief Financial Officer & Executive Vice President: Yeah. I think so (29:42) as you think about Q3 and Q4, there is a step-up in Q4 and part of that is what we've talked about previously in our ability to shift more spring/summer 2017 products in the fourth quarter to the warm weather markets, and that's been factored into…

And our next question comes from Mitch Kummetz from B. Riley. Please go ahead. Mitch Kummetz - B. Riley & Co. LLC: Great. Can you hear me okay? Gregg Ribatt - Chief Executive Officer & Director: Yep.

Yes. Mitch Kummetz - B. Riley & Co. LLC: Okay. Sorry. I just want to reconcile some comments around China, because, Andrew, I thought you said earlier either in response to Jim's question or Erinn's, you expect China to grow in the back half. Is that right?

That's correct. Yes. Mitch Kummetz - B. Riley & Co. LLC: But not in the third – I think you said – or you guys said Q3 is still going to be tough on China. So China doesn't grow in Q3 but it grows in the back half, so a lot of that comes in, in Q4. Is that how to think about China? Carrie W. Teffner - Chief Financial Officer & Executive Vice President: I think the way to think about China is more that we expect it to grow in the back half, it's just not growing at the rate that we had previously anticipated.

Sure, that's exactly right. Yeah. Mitch Kummetz - B. Riley & Co. LLC: Okay.

We talked about up. Gregg Ribatt - Chief Executive Officer & Director: Yeah.

Yep. Mitch Kummetz - B. Riley & Co. LLC: And then on, Gregg, I know you talked about a positive response to – initial positive response to spring 2017. How – I know it's early to talk about next year, but how do you think about potential spring pre-books, coming out of a, what looks like, a spring/summer season that was pretty challenging at retail. I mean I would think that retailers are likely to take a pretty cautious stance on pre-books. How do you kind of think about all of that, positive response with products but maybe retailers being a little gun-shy to order? Gregg Ribatt - Chief Executive Officer & Director: Yeah. I think if you look at it from a Crocs perspective, we had a number of things to prove coming into spring/summer 2016. Clearly, one of the issues we've talked about over the last year has been delivery. Throughout Q1 and Q2, we delivered what we call on time in full top quartile in terms of industry performance and having done that kind of two quarters in a row and leveraging people, processes, new systems, we're confident that issue is behind us. So to us, that was kind of a first step that we had to – that we had to address. In terms of the second issue, our spring/summer 2016 sell-through was solid, including taking the brand and introducing some new style – an elevation of style in molded product, and – as well as providing and kind of try to put a new energy into our core clog category. And I think we've performed in both of those areas well. So we're able to leverage those learnings and use that as a foundation. Yes, the retail – the broader retail environment in the U.S. and across the globe is more difficult. So as we're thinking about the business in the back half and into 2017, we're absolutely taking that into consideration. But I will say we're a critical spring/summer 2016 resource in the industry, and I think we've had some key learnings that we can build off of and that gives us confidence in the direction we're heading.

Yeah. Mitch Kummetz - B. Riley & Co. LLC: Okay. Thanks. And then maybe lastly, could you talk a little bit about maybe differences in performance by gender in the quarter? I'm just curious whether it's men's, women's or kids. If you saw any differences in how that product performed or if it was all pretty consistent.

Yeah. No, there were some differences, Mitch. So I think we saw stronger progress in women's, particularly in sandals and in clogs. And some of our men's business was more challenging. So I think we can see some clear differences. That's relative to U.S. wholesale on a global basis. I think we saw progress in kids as well. But really, there's – the highlight in the U.S. wholesale business was women's in the sandal category and in the clog category. Mitch Kummetz - B. Riley & Co. LLC: Got it. Okay. Thanks, guys. Good luck. Gregg Ribatt - Chief Executive Officer & Director: Thank you.

And our next question comes from Sam Poser from Susquehanna. Please go ahead.

Good morning. Thank you for taking my question. I guess, what changed in China from when you gave the guidance in the first quarter to now? What was it that changed in that period of time, because it really sounded like you were turning the corner on the first quarter call? And then it seems like they did decelerate.

Yeah, Sam, the critical thing that changed is it just took longer, right? So we felt like we had agreements with our troubled distributors that we're moving them out and we're replacing them. And that has taken probably six months longer than we thought it was going to take. But at this point, they are – our relationship is over with (36:50) those distributors, that is done.

Okay. And then secondly, granted the macro environment isn't as good as people would like to see and your sell-throughs at retail have been good. When you look at your wholesale accounts, you have to maybe get more focused, do more work with those retailers to do better in-store storytelling and so on to create items that they can't live without rather – because what happened this year is when you had a great item, people filled it in. If it was a good item, people tended not to, from what I gather. So what can you do to raise the bar, I guess, on those items that have performed well and work to make them more compelling within the wholesale account?

Yeah. Broadly, Sam, that's right, right? So going into this year, as Gregg said, we have two challenges. One was deliveries and giving them confidence in that because previously they felt like they placed orders and never received product, right? So I think we gave them that confidence. And we've done that two quarters in a row now. The second was really making those items big and making them really successful. And exactly as you said, making them must have. And I think what we've landed in this season is they've really seen a number of items, they've seen both the core products, clogs are 49% of the business in Q2. They were 43% of the business last year in Q2. So the core product with newness in graphics and newness in terms of key styles within that category has resonated. We've seen sandals move forward into some really critical items that we'll be building upon next year and really landing those. The second is absolutely reinforcing that sell-through with marketing. We've got some really exciting programs that we're working on for next year. There is also importantly some real shifts going on in the marketplace in terms of channel mix. We've seen the e-commerce and the digital channels really taking a lot of share. That's working for us, it's working for other people, and we're really focused on partnering very strongly with our large, digital partners and with our family channel partners. Gregg Ribatt - Chief Executive Officer & Director: To Andrew's last point, we also think we're well positioned relative to the channels of distribution which we're focused so obviously family and e-tailers within the wholesale business, outlet and e-com in terms of our DTC business and then distributors internationally. So we think we're kind of well-positioned in that we've built enough of a foundation in the first half of spring – in the first half of 2016 to leverage that for growth into 2017.

Thank you. And then lastly, I guess just one – on the full year gross margin improvement, Carrie, what – you said it's at 100 basis points? Carrie W. Teffner - Chief Financial Officer & Executive Vice President: Yeah. We said we expect it to be 150 basis points above last year, which is a 50 basis point improvement from our most recent guidance.

And so all of that's going to come in – I mean you've got 500 basis points improvement in Q3 and then the balance in the fourth quarter, correct? Carrie W. Teffner - Chief Financial Officer & Executive Vice President: Correct. Yeah. And leverage and, of course, we can deliver better than we planned in Q2 as well, so that factors in.

Okay. All right. But it is 500 bps in Q3 improvement over last year, that is correct? Carrie W. Teffner - Chief Financial Officer & Executive Vice President: Yes, it is.

I'm just...

Yup.

Okay. Thanks for that. Carrie W. Teffner - Chief Financial Officer & Executive Vice President: Just kind of the...

I'm sorry. Carrie W. Teffner - Chief Financial Officer & Executive Vice President: No, that's fine. Gregg Ribatt - Chief Executive Officer & Director: Thanks, Sam.

Thank you, guys.

And our next question comes from Jim Chartier from Monness, Crespi. Please go ahead. Jim A. Chartier - Monness, Crespi, Hardt & Co., Inc.: Good morning. Thanks for taking my questions. Just the direct-to-consumer comps were positive again, which is great to see, but it deceled [de-accelerated] from the last couple of quarters. Do you think that was primarily weather related? Or was there something else going on?

There's a couple of things going on. Probably the biggest is the e-com component, as you saw in the – e-com was up 20% this quarter. I think prior quarters, we've been up 30% plus but importantly, we are now lapping when we started to make real traction on the e-commerce business Q2 last year. So Q2 last year, we were up a strong 30% in e-commerce. We are now lapping that with an additional 20%. So that's one factor. The second factor is underlying DTC. We saw a little deceleration in the Americas and Asia, and I think that's really a reflection of the tough marketplace we're operating in, and in particular, the tourist markets. We haven't talked about that at length in this call, but it continues to be a challenge. The tourist markets are important to us, and tourist traffic is clearly down. Jim A. Chartier - Monness, Crespi, Hardt & Co., Inc.: Okay. And then, any color in terms of how the DTC comps progressed over the course of the quarter? And any color on third quarter to date?

Yeah. So, we are not going to comment on quarter to date. And we don't break out DTC comps by month. But they did clearly decelerate during the quarter. The strongest month of the quarter was the first month, and they decelerated through the quarter. Jim A. Chartier - Monness, Crespi, Hardt & Co., Inc.: Okay. And then Andrew, you mentioned that increased or stricter credit standards was part of the issue in China. Did that cause lower orders with the quote "non-troubled" distributors, the go-forward distributors, as well as the troubled distributors?

Well, just to be clear, in the first half of this year, we've shipped nothing to the troubled distributors. We haven't shipped them since Q2 of last year. So the deceleration in orders was to our ongoing distributors, where they're really managing their inventories more tightly, as you'd expect them to do if they have to pay for their goods upfront. Jim A. Chartier - Monness, Crespi, Hardt & Co., Inc.: Okay. And then...

Sorry, but we think that gives us a stronger and higher quality business in China. Jim A. Chartier - Monness, Crespi, Hardt & Co., Inc.: Absolutely. And then, Carrie, on the SG&A improvement versus plan for the quarter and the year, does that primarily lower incentive comp, or are there savings elsewhere? Carrie W. Teffner - Chief Financial Officer & Executive Vice President: So, versus prior year, it was lower bad debt and some variable comp, and variable comp was versus expectation. We also had some lower T&E and those types of things, and some of the variable expenses, we were able to reduce. Jim A. Chartier - Monness, Crespi, Hardt & Co., Inc.: Great. Thanks and best of luck. Carrie W. Teffner - Chief Financial Officer & Executive Vice President: Thank you. Gregg Ribatt - Chief Executive Officer & Director: Thanks.

And our next question comes from Steve Marotta from C.L.K. Associates (sic) [C.L. King & Associates, Inc.] (43:41). Please go ahead. Steven L. Marotta - C.L. King & Associates, Inc.: Good morning, everybody. Gregg, you've mentioned in the past that increasing penetration across channels and across geographies is very important. Obviously, if you only have, say, two or three styles in a particular door, going to four or five is very important. And you can even do that sometimes in a more difficult environment. Can you talk a little bit about where you are in that process? Where you think you might be a year from now, both domestically and internationally? Gregg Ribatt - Chief Executive Officer & Director: Yeah, sure. Thanks, Steve. Look, I think, as I said before, I think we did make significant strategic progress in terms of delivering our spring/summer 2016 line, connecting with consumers. I think our DTC performance is an indication that they're reacting favorably to our product offering, particularly given the overarching retail environment. We've also had a lot of learnings, whether it's things that we can leverage and build on, to help drive growth. I think our relationships with our wholesale partners around the globe have strengthened pretty materially, and sets a foundation. So we believe we can grow dollars per door, and grow shelf space. It is something that's going to happen over time, but we do believe we can move forward and make some progress as we head into 2017, and continue to leverage that as we move beyond 2017 as well. Steven L. Marotta - C.L. King & Associates, Inc.: Thank you. And Carrie, could you quantify how much those earlier deliveries in the fourth quarter, what the delta is over the previous year? Or give a little bit…

And our next question comes from Benjamin Bray from Robert Baird. Please go ahead. Benjamin Bray - Robert W. Baird & Co., Inc. (Broker): Hi. Thanks for taking our question. So coming out of the first half of the year, can you just comment on the reception of some of the new products and comment on what learnings you have coming out of this year for next season?

Yeah. I think the greater successes we saw during the first half of this year, I think, was innovation we put into products that we're well known for. So molded product, clog product, we talked about clogs being 49% of the business versus 43% of the business last year. The appealing part of that, which you've seen in our margins, is those are high margin products. The second place where innovation has really played is in the sandal category where the Isabella and the number of other sandals that we highlighted, the Sloane, the Meleen, et cetera, have been particularly strong. And I think, as Gregg also highlighted in one of his answers, as we look at our top 10 selling styles, three of them were brand new items. So to get to 30%, three brand new items in your top 10 global styles, I think, is a good result. We see NPI performance about 40% of our overall business whereas if we looked (47:53) a couple years ago, NPI was about 20% of our in-season sell-through. So hopefully, that gives you a little color about the new product introductions. Benjamin Bray - Robert W. Baird & Co., Inc. (Broker): Yeah. Thank you. And then as a follow-up. Did you comment on what the marketing spend was in the quarter? And related to those initiatives, are you seeing any impact on how consumers are approaching the brand?

So, yeah. Marketing spend in the first half in the season and in the quarter was consistent with what it was last year as a percent of sales. So we've maintained the same stance in terms of the amount of money we're willing to invest in marketing. As we've talked about previously, we've narrowed the focus of those marketing dollars to our key markets, and we've really been spending against five key markets this season. In terms of the impact relative to consumer perception of the brand, I think we talked previously that we've seen some evidence that through some of our research, that that improved fairly markedly towards the end of last year. And we keep a close eye on that on an ongoing basis. Benjamin Bray - Robert W. Baird & Co., Inc. (Broker): All right. Thanks. That's helpful.

Thank you. And that was the last question. Thank you, ladies and gentlemen, this concludes today's conference. Thank you for your participation and you may now disconnect. Gregg Ribatt - Chief Executive Officer & Director: Thank you, everyone.