Good morning. My name is Jack and I'll be your conference operator today. At this time, I would like to welcome everyone to the Crocs, Incorporated Fourth Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Marisa Jacobs, Senior Director of Investor Relations. Ms. Jacobs, you may begin.

Good morning, everyone, and thank you for joining us today for the Crocs' fourth quarter 2018 earnings call. Earlier this morning, we announced our fourth quarter results, and a copy of the press release can be found on our website at crocs.com. We would like to remind you that some of the information provided on this call is forward-looking and accordingly is subject to the Safe Harbor provisions of the federal securities laws. These statements include, but are not limited to, statements regarding future revenues, gross margin, SG&A as a percent of revenues, operating margins, CapEx and our products pipeline. Crocs is not obligated to update these forward-looking statements to reflect the impact of future events. Adjusted SG&A, income or loss from operations, net income or loss attributable to common stockholders and earnings or loss per share are non-GAAP measures. A reconciliation of these amounts to their GAAP counterpart is contained in the press release issued earlier this morning. We caution you that our forward-looking statements are subject to risks and uncertainties described in the Risk Factors section of our Annual Report on Form 10-K. Accordingly, actual results could differ materially from those described on this call. Please refer to Crocs' Annual Report on Form 10-K as well as other documents filed with the SEC for more information relating to these risk factors. Joining us on the call today are Andrew Rees, President and Chief Executive Officer; and Anne Mehlman, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will open the call for your questions. At this time, I'll turn the call over to Andrew.

Thank you, Marisa, and good morning, everyone. Ahead of last month's ICR conference we updated you on our fourth quarter performance, so you know we had a very successful year. The more detailed results reported this morning offer further evidence of our success. At ICR we spoke about our expectations regarding 2019 revenue growth. Today we are raising those expectations. We now anticipate revenue growth of approximately 5% to 7% in 2019 and excluding the impact of store closures our 2019 revenue growth will be 7% to 9%. During the balance of this call, Anne and I will cover a number of topics. We will highlight our tremendous progress in 2018, the strength of our brand and our products and delve more deeply into our priorities and guidance for 2019. We had an outstanding 2018 as we returned the company to topline growth. We grew revenues in each quarter and for the full year grew revenue 6% or 12% excluding the $60 million impact from store closures and business model changes. Both our Americas region and our e-commerce channels set new revenue records. Our initiatives to improve the quality of our revenues materially improved our margins. In 2018, we expanded our gross margin by 100 basis points to 51.5%, our highest level since 2013. Over the past three years we have improved our gross margins more than 450 basis points. We have successfully completed our SG&A reduction plan by eliminating approximate $75 million of annualized expenses from our cost structure between 2017 and 2018. In 2019 we will realize approximately $10 million in additional cost reductions. We are reinvesting some of those savings into marketing and our e-commerce business to further strengthen our brand and drive incremental sales growth. With strong growth margin improvement much of our work related to…

Thank you, Andrew and good morning everyone. I'll begin with a short recap of our fourth quarter and full-year 2018 results. For simplicity I'm going to limit my remarks to our non-GAAP results. Please refer to our press release which includes reconciliation of non-GAAP to GAAP results. For 2018 our results far exceeded what we had guided to at the beginning of the year. We made important progress with respect to growing revenues and improving our operating margins. We strengthened our balance sheet and simplified our capital structure. In terms of the fourth quarter, revenues were $216 million up 8% from a year ago, including a negative currency impact of approximately $6 million versus the fourth quarter last year. Store closure and business model changes reduced revenues by approximately $7 million in the quarter. Absent that $7 million impact revenues would have grown almost 12%. This marks our fifth consecutive quarter of double-digit revenue growth, once you adjust for store closures and business model changes demonstrating the strength of our underlying business. I do want to note that because fourth quarter sales significantly exceeded our expectations, inventory currently available for purchase is limited. This is reflected in our first quarter revenue guidance which I'll turn to momentarily. We sold 11.6 million pairs of shoes, an increase of 5.9% over last year's fourth quarter. Our average selling price for footwear during Q4 increased 2.2% to $17.93. ASP gains were achieved through less discounting and selective price increases. For 2018 in total we sold 59.8 million pairs of shoes, 3.4% more than in 2017 at an average selling price of $17.71, up 2.3% from the prior year. In the Americas revenue grew by 15% to $121.6 million in the fourth quarter including a negative currency impact of $2 million. We saw exceptional…

Thank you, Anne. In 2018 we demonstrated that the course we embarked upon back in 2016 was the right one to revitalize our business and strengthen our financial position. We have significantly improved brand engagement, enhanced Clog relevance and sandal awareness and improved the way we operate from a segment and channel perspective. These advances took incredible commitment and teamwork across the whole organization. I want to convey my sincere thanks to our whole team. 2019 is off to a great start and I'm confident in our ability to maintain the positive trajectory of our business. We will continue to build on our strong Clog tradition and expand our sandal business with on trend, comfortable and affordable sandals. We will upgrade our supply chain and maximize the growth potential across all three channels while improving our top and bottom line. Operator, please open the call for questions.

Certainly. [Operator Instructions] Your first question comes from the line of Steve Marotta with C.L. King and Associates. Your line is open.

Good morning, Andrew and Marisa, congrats on the fourth quarter and a productive year. I just have a couple of questions. The first is, as it relates to the new DC being opened by the end of ‘19 can you quantify the duplicative costs associated with that within ‘19? And also, Andrew I believe that you mentioned that when the new distribution facility is completely operational, it will be additive to about a 100 basis points of gross margin. Is that for all of 2020 or will there be some, is it going to be by mid 2020 that will be the run rate, if you could just add a little bit of color on the ramp of the DC?

Yes. Thank you, Steve. Yes, happy to do that. So look I think this is a really important investment for Crocs. It shifts our nexus of distribution from the West Coast to the center of the country. We're making a substantial investment and I would say a much more sophisticated DC operational run in the past which will run at a lower cost and it will run at a lower cost for a couple of reasons. One is, obviously the land and the building is more economical in Dayton, Ohio than it is on the West Coast. Labor rates are generally less and probably more importantly the automation means it will run the DC with substantially less labor. So, the 100 basis points of improved gross margin, yes that will be in effect for the whole of 2020. And in terms of the sort of onetime costs or all the costs that we're going to incur, Anne will address that.

Yes, hi Steve. The 100 basis points of margin improvement as Andrew said for next year is on an annual basis and then we actually have 100 basis points of headwind this year. So if we think through our full year gross margin guidance, our adjusted gross margin guidance is 50.5% if you exclude the DC costs which is about a 100 basis points.

All right. That's very helpful, thank you very much. One followup and then I'll jump back in queue. Was there any delta in the currency expectations and the negative currency expectations or the current fiscal year from a revenue standpoint since ICR? I don't recall you talking about the negative currency implications on fiscal '19 revenue at ICR.

Yes, we did talk about that our currency expectations at ICR did include a negative impact of currency. It really hasn't changed much. If you remember currency is going to more strongly impact us in Q1 and Q2. The way I would think about that is approximately at currency rates. The vast majority of the $20 million is going to be in Q1 and Q2 the way I would think about that is approximately at current currency rates is approximately $18 million out of $20 million is going to be in the first couple of quarters of the year.

Very helpful, thank you very much. I'll jump back in the queue and take everything else offline.

Thanks Steve.

Your next question comes from the line of Jonathan Komp with Baird. Your line is open.

Hi. Thank you. I wanted to follow up just on the near-term guidance in the first quarter. I don't know if there's, if you're willing to quantify the impact from being tight on some inventory or the Easter shift or maybe differently if you could comment maybe on roughly kind of the first half growth that you see, just to give us a sense of that first to second quarter shift that you're projecting?

Yes, yes, I think so Jonathan. Yes, I think the first thing is let's start with the year. So for the year obviously we're raising our revenue guidance. We've previously talked about that being mid single digits. We're now giving you kind of 5% to 7% growth for the year. And that's really due to what we see as continued strengthening of the brand. We would continue to see very strong demand and increasing demand. I would say particularly in the U.S. but frankly also in our other regions. So, we feel really great about that. From a Q1 perspective, there are number of things. I would say the biggest damp on q1 from a revenue growth. It is really the currency and the business model changes. So currency is about 10 million of headwind in Q1. Business model changes is also the largest There are a number of things I would say the biggest damper on Q1 from a from a revenue growth is really the currency in the business model changes. Right. So currency is about $10 million headwind in Q1, business model changes, is also the largest in Q1, we think that is about $6 million, so that's about $16 million headwind just in Q1. And in addition to that, Easter shift and some constraints in our supply particularly around our Classic Clog. So frankly, I think constraints around supply is kind of a high class problem. We're not overly concerned about that and we are spending the money to accelerate supply and have done a number of critical things to improve that quickly. I don't think it's kind of productive to quantify that, but if we think about the first half, I would say our first half is very consistent with our full-year guidance.

Okay excellent. And then may be just a follow up on the DC and the capacity and throughput expansion. Pretty significant expansion for both and I'm wondering how we should view that in terms of your views on the U.S. growth potential and any thoughts on how far you expect that capacity to cover the growth that you see?

Yes. So, yes you're right, pretty substantial. So I think the overall square footage of the DC as we're building it out is 40% bigger than our prior facility, and we also have expansion room built into the footprint. So we can build bigger at relatively low cost when we need to. And the automation just gives us dramatically higher throughput with lower labor. So it's a big investment. Obviously it's a significant CapEx and obviously we're making that investment as we believe we have significant growth runway here in the U.S. I think also being closer to our customers will dramatically improve our e-commerce customer service and is able to reach our customers far more quickly and far more efficiently. So we think it's a very important investment and it will fuel our future growth.

Okay. And last one if I could just squeeze in on the gross margin for '19, it does look like underlying you're assuming some decline and I know you called out a couple of factors and I'm just curious, maybe the decision of not to take pricing to the level that you need to offset those pressures? Thanks.

Right. So, we have taken some pricing as you know on our Classic Clog both in Europe and the U.S. and we'll continue to evaluate pricing as it makes sense. From underlying gross margin factor, if we think through the adjusted gross margin of $50.5 for the year excluding the onetime of 100 basis points from the DC. The other 100 basis points we have about 40 basis points of FX for the year and about 60 basis points of freight, which includes higher freight costs and then the use of accelerated freight to help us replenish some of our core sales as Andrew just discussed in Q1. We still feel good though from a long term perspective that low 50s is the right level for our gross margins and that also is supported by the new DC investment in the U.S. where we get 100 basis points of favorability starting in 2020.

Okay. Thanks for the perspective.

Great, thanks Jonathan.

Your next question comes from the line of Erinn Murphy with Piper Jaffray. Your line is open.

Great, thanks, good morning. I've got two questions and then a follow up, but first just on the team phenomena or the Gen V phenomena you are seeing, are there pockets of the U.S. that you still haven't feel, you've seen that team surge yet. And I'm just curious how you think about the sustainability of that trend broadly? And then my second question is really related to the DC again. You talked to Andrew a bit about the speed to market opportunity. I'm curious how you're modeling what that could look like in 2020 and beyond whether it you know two days shipping or kind of just closer connectivity to the consumer. So any kind of help there on what the true benefit will be to the everyday consumer?

Yes. So, okay well let me take the classic trend and the traction that we're seeing with our younger consumer group first and then, and Anne can then talk a little bit about the DC. So in terms of traction with the younger consumer group, we've clearly seen it stronger in the Midwest and the East. It's not as strong on the West. So and from our experience with these kinds of things they do spread across the country. So we think we've got incremental traction, our incremental opportunities for strong traction in the U.S. I would say it's the combination of the Classic and the personalization, we are seeing that get traction in other parts, particularly Europe and other parts of our global distribution. And frankly, we don't see this as a short term trend. We see this as a real connection to a generation and a consumer group. We're offering them a product which has incredible value. And I think the whole personalization aspect and the use attributes to make it really important for them has been really important. And we plan to continue to invest in the marketing activities and the stimulation activities that have driven this, whether that be collaborations, whether that be social media, whether that be digital connectivity with these customers. So I think we've seen with parallel brands, done the right way and executed the right way. This is not a one season, one year opportunity this is a multi-year growth opportunity.

And then on our DC, as Andrew discussed as our e-commerce business continues to grow, we feel even more important for us to be centrally located. And that allows us to reach our customers sooner. We're not discussing going to a two-day ship promise. We have great eTail partners that can offer you accelerated ship options. We feel we don't need to be that fast, but we will be more in line with industry standard, not from the use of upgrading our promise, but more that it's just faster because we're centrally located. So we gain speed to market by being centrally located and we naturally speed up our shipping to our customers.

Okay. Thank you. And then just my clarification on the inventory kind of being fairly tight exiting the fourth quarter, when do you expect inventory to be in a better position? And then Q1 gross margin, obviously the low water mark, how much of the pressure is airfreight? I know you said freight in total for the year at 60, but I'm imagining that bucket is a lot bigger in the first quarter given your air freighting right now. Thanks.

Yes, so. On inventory we're really proud of the work we've done over the past few years to improve our working capital. We view lean inventories as key to ongoing brand's strength, but we do obviously have a little bit of shortage in Q1 and we feel like that is encompassed in our full year guidance and we're confident in our outer quarters. It's mostly in the Classic and it's mostly in the U.S. that's impacting. And from an airfreight perspective, when you think through the margins in Q1 we didn't break it out. Currency is about 80 basis points in Q1 and the rest - and the remainder is mostly freight. And then we have some of the Easter shift which does shift the higher margin direct-to-consumers.

Okay, that's helpful, and thank you and all the best.

Thanks Erinn.

Your next question comes from the line of Mitch Kummetz with Pivotal Research. Your line is open.

Yes, thanks for taking my questions. I guess I just have a few housekeeping ones. So first one, so in this press release you guys are giving a non-GAAP reconciliation for the quarter and the year and I'm curious on a go forward basis, are you going to be doing that as well?

Yes. Good question. So we well. We felt like it was necessary especially because we have the large accounting charge associated with Blackstone and we'll need to bridge that for the remainder of the year.

Okay. Will you provide some sort of reconciliation for the prior quarters to 2018, so that we have kind of a comparable basis to look at that?

What we've provided in our release will be similar to what we'll provide all year. So when we do report on Q1, we will provide a similar walk for Q1 in 2018.

Got it. And then Anne on the 2019 EBIT margin guidance, I know you're saying low double digits on a non-gap basis. I guess when I'm doing my math I'm not quite getting there. I think that's based on our gross margin of like 50.5% and excluding the $3 million to $5 million SG&A charges, I'm coming up with something like 9.9 at the high end. Am I missing something, is there something else that gets you to low double digits.

I think within the revenue range you're right around 9.9%, 10%

Okay. And then also on 2019, could you maybe talk to us about interest and the share count, kind of what's sort of baked into, I mean I know that in the reconciliation today for 2018 it looks like pro forma interest is $5.6 million. Is that kind of the interest expense that we should expect for 2019? And obviously the share count changed and with the buyback and all that I'm just kind of wondering what sort of average and weighted diluted shares you're looking for in 2019.

Yes. The best way to think through the average diluted shares is, we ended the year with approximately 73-ish million shares on a fully diluted basis. We do have some dilution that will occur through the year and we'll continue to evaluate our programs, but I think is using an ending share count is the right way to think about it. And from an interest perspective, we haven't guided where our interest is going to be but we do pay LIBOR plus 175 basis points on our line which is a bit about 4.75% interest. Right now we have $120 million at the end of Q4 financed on the line and we'll continue to look at our cash and think through the best use of that cash.

Okay. May just one for Andrew, there was a comment on a competitor's conference call yesterday talking about an uptick in the flats business. I know that that historically is a core competency for the company. I think that's been a category that's been a big challenge over the last couple of years. I'm just curious if you have any thoughts on that, is that an opportunity going forward, are you seeing an uptick in that side of your business as well?

That would be an opportunity. So we are not really seeing an uptick today I would say. I would say you are absolutely right. Historically we've had a very good flat business and I think our manufacturing technique, technology and our aesthetic does lean itself towards flats. You're also absolutely right, it has been a silhouette that's been under severe pressure for probably the last three to four years to be quite honest. So if that silhouette does rebound it would be an opportunity for us, but to be clear we're not really seeing it today.

Got it, all right, thanks. Good luck.

Your next question comes from the line of Sam Poser with Susquehanna. Your line is open.

Thank you for taking my question. Let's - just want to talk about the Easter shift and how many dollars you foresee there in the med shift from Q1 to Q2 because that's a lot in your DTC business which is higher margin which would make the [indiscernible] that would also make up a lot of margin in the second quarter because of the nature of that business?

Yes, I would say Sam, we're not breaking that out. But, you know you're absolutely right. The impact is in the DTC business, it's particularly within the North American DTC business is not as exaggerated obviously in Asia. It's a little bit in Europe, but it's very strongly in the North America DTC business. And yes, it is – those are higher margin dollars right. So our retail an e-com and as you've seen in Q4 and for a number of quarters now, our comps in North America e-com and retail have been exceptionally strong and so that does shift dollars and margin into Q2.

Thank you and then you've had some success with some of these collaborations if it's – and is a bunch pleasures Chinatown Market and Post Malone. Are you – are we going to see any scaling of that. I mean they did very well, but it doesn't sound like there were hardly any pairs of any of it out there. Are you - do you have plans to scale that in any way to make it more meaningful or make the offer more of them. I mean how are you thinking about that to continue to build the momentum of the brand?

Yes. No it's a good question Sam. So I would say our approach is a portfolio of collaboration. So some of them will be niche and are really about exploring, how you - where you can take the Classic Clog, where you can have it appeal to different consumer groups and some of them - our nation are small but do derive significant resonance and PR and an activity around the brand. Others will be bigger. And as we look into 19, we have a portfolio of kind of segmented collaborations that hit particular consumer groups. We have broader collaborations with other brands that are bigger in scale. We have collaborations planned with particular retailers that could be more significant in scale. So it is a portfolio and you'll see. Obviously we're not going to talk about that in advance. Part of the power of this is the surprise and delight nature of it. And but you'll see that roll out through this year and frankly we're already filling the pipeline for next year.

But, let me just follow up on that. I mean, you had such, I mean some of the issues as you mentioned, I mean they sold out in like 5, 10 minutes. Are these other, are we not, given that kind of response it's telling you that there's a ton of demand off of, I would assume you're regarding as Post Malone is a little more niche, but I mean maybe that niche is bigger than what you think it versus a partnership with a retailer that may be good but you might not see that kind of rate. So I mean…?

Yes, I think – what I would say Sam is Post Malone might have been a little bit less niche than you thought it was. We did sell a lot of pad in a very small space in time and it is a portfolio, right, it's a portfolio. So you'll see that evolve as we go through the year and we're very confident, both in the level of interest we're getting from a very interesting group of brands, retails, celebrities, personalities that we can put together a very compelling portfolio that will keep a very broad range of consumers focused and interested and will also fuel our commercial appetite.

Great and then lastly just to go back to the gross margin, if we think about the gross margin on the front half and back half, I mean how does that break out? I mean Q1 is going to be down net around 340 basis points. How should we think about the gross margin and how it runs on an annual basis on the front after the back half?

A good question. So on gross margin, the best way to think about it again our gross margins for the year 50.5% on an adjusted basis which includes the 100 basis points of headwind from the DC 1 times. Then the FX just like the revenue is the FX impact on margins going to be much more upfront half weighted.

Then you're offset by the, but then you are offset by the mix issue in the second quarter. So do you expect gross margin to be down in both parts of the year but more down in the front half of the year. Is that a fair statement?

I think we're really confident in guiding our full year gross margins and I think the best way to think through it is the FX doesn't pressure Q1 and Q2. Like you said you do have a little bit of a pickup in Q2 because of the DTC quarter, but it's all encompassed in our full year guidance.

Thank you, very much. Good luck.

Good luck Sam.

Your next question comes from the line of Jim Duffy with Stifel. Your line is open.

Good morning. Hope you guys are all doing well. Andrew, a few questions for you, the team has done very well to revitalize Clog demand, that's proved a very effective strategy. I guess I'm curious how you're thinking about that from here. Do you foresee Clogs continuing to grow as a percent of the mix or do you see it strategic to try to push out growth from some of the other areas to build balance.

Yes, I think that's a really good question. Yes, I think we will continue to see growth in Clog. I think the differential between clog growth and sandal growth will mitigate, so it won't gain as much share of overall percent to total as it has in this year. So I think, as we look next – as we look into '19 we anticipate acceleration in our sandal business over '18.

Great, okay. I also wanted to ask you to speak more about the engagement with marketplaces that you mentioned. I believe you said that started in the second half of the year. Who were those earlier relationships with, was it just a change in the nature of the relationships with marketplaces? What's different about the engagement? Does that change the economics? Any help there would be great. Thanks.

Yes. That's so, the way to think about that and I'll use an example probably to highlight it. Right? So there are a number of marketplaces around the world where we participate on a 1P basis. So that means essentially we sell them wholesale, the marketplace takes ownership of the inventory, and then resells the inventory. And there are an increasing number where we have augmented or paralleled that participation with a 3P relationship. So that means we own the inventory, we manage the onsite presence for that portion of the inventory and so yes, the economics are different. So we sell at retail and we incur all the costs to get the product to the customer, whether it be directly from our own DCs or are using their fulfillment operations. So, and the 3P business will be included in our e-commerce business on a go forward basis that shows up in our e-commerce segment. The 1P business shows up in our wholesale segment. And so, as we're adding 3P marketplaces and a good example would be Rakuten in Japan where we opened up that in the late fourth quarter of last year. It was a marketplace which we did not have a 1P relationship with historically, so its new territory for us and our strategy there is really to take control of the brand in that environment. When we looked at that environment, there were other people selling Crocs on that environment. We felt like we needed to elevate how the brand showed up in that environment and frankly we could also take ownership of the economics of selling product on that environment. So I would say, as you look at the portfolio go forward it's a combination of taking ownership of environments where we have not participated historically directly and also complementing environments where we have an effective 1P relationship and we want to add a 3P environment and really the reason in that case to do that would be potentially to showcase products that might not historically have showed up in a wholesale type transaction. Does that make sense?

It does. It makes good strategic sense. Are you indifferent from an economic standpoint as to whether it's a 1P or 3P sale? What would you…?

It would probably look a little different. Yes.

Yes, we talked a lot about that is, whether we sell to one of our eTailers which as Andrew talked about would be 1P showing up in wholesale, whether we sell directly on our own e-commerce website or whether we sell directly on a marketplace which Andrew talked about as being 3P. We're happy to connect with the consumer wherever that consumer shows up.

Very good. And the last one for you, obviously fourth quarter demand came in much stronger than you'd expected, but given the replenishment nature of the business, does that make you think any differently about your targeted inventory levels?

We're really proud of the work we've done with inventory. We're headed for turn business last year and we think that's about right. We believe that we need inventory to support of the brand and support the heat of the brand. Obviously we did have, we were a little bit short on our Classics but the team is working to replenish and we're looking at different capacity options to make that happen.

Okay. Thank you, guys.

Awesome, thanks.

Thank you.

The Q and A portion of the call has completed. I would now like to turn the call back over to Andrew Reese for closing remarks.

Thank you. I'd just like to close out by thanking everybody for their continued interest in the company. We're very excited about this year and the future. So we look forward to talking to you again in the future.

This concludes the Crocs Incorporated Fourth Quarter Earnings Call. We thank you for your participation. You may now disconnect.