Good afternoon, Ladies and gentlemen, and welcome to Columbia Sportswear Second Quarter 2022 Financial Results Conference Call. [Operator instructions]. It is now my pleasure to turn the floor over to your host, Andrew Burns. Sir, the floor is yours.

Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company’s second 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, 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 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 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.

Hey, thanks, Andrew. And good afternoon everyone. I hope everybody is well. As I review our first half 2022 financial performance and the current environment, I'm confident that our strategies are working. And we have tremendous long-term growth opportunities ahead. In the first half, SOREL circle net sales surged 33%, Columbia grew 12%, Mountain Hard Wear 11% and prAna grew 3%. These results reflect the strength of our combined brand portfolio. The Columbia brands differentiated innovation, value proposition and Outdoor Heritage uniquely positioned the brand to capitalize on the popularity of outdoor activities. SOREL continues to outperform the marketplace, led by the brands bold new summer in year-round styles. Mountain Hard Wear’s product driven resurgence is underway, with innovation fueling continued growth. prAna’s leadership continues to sharpen the brand's focus on the opportunities ahead. Globally, trends vary greatly by region, Canada, Europe Direct, Japan and Korea all had excellent first half performance. These markets continue to realize a healthy pandemic recovery curve with strong consumer demand. In other regions, our business was impacted by external headwinds. In China, the impact of recent zero-COVID policies restrictions resulted in a sharp net sales decline, as anticipated, our EMEA distributor business also declined substantially reflecting the impact of the ongoing Russia Ukraine conflict. In the US, we generated strong first half net sales growth, despite later receipts and deliveries of spring ‘22 product, which constrained inventory availability and sell-through. US market also faced difficult comparisons as we anniversary government stimulus which boosted consumer demand last year. We remain focused on unlocking the growth opportunities we see across all regions as we navigate these markets specific challenges and supply chain constraints. As we look forward, I believe it's prudent to take a more conservative approach to our financial outlook for the balance of the…

[Operator Instructions] And the first question is coming from Bob Drbul with Guggenheim.

Hi, Tim, guys, just couple questions, from your perspective on, I guess if we could start on the inventory side. Can you just give us a little more color around the composition of the inventory maybe some color on cancellation, how you're approaching it. Will you just solely use your outlet business on the inventory? And if there's like buckets of sort of you said, you got a lot of evergreen type merchandise in there. But any more color on the inventory and sort of plans or disposition, I think would be pretty helpful for us. And any more color on the order book and any early numbers on ‘23. Thanks.

Sure. Well, as you remember, for its seasonal business, so we have a high percentage of our inventory today is fall inventory. And we're looking at a global lack of inventory at retail in winter merchandise. So we're confident that we've got a good opportunity to fulfill our order book and get that merchandise into retailers. We're just a little concerned about the state of the consumer at this point. And so that's why we've noted the potential for cancellations later in the season. We have a strong balance sheet, we have multiple methods to just to liquidate our inventories not only through the value channel and some of our regular retailers in terms of closeouts but also through our own extensive outlet chain. And so that's how we're looking at it, we've got the potential to be to improve our situation. And but a lot of it’s depending on what the consumer does in the next few months. As it relates to the order book. We've got a high percentage of our order book in already for fall, excuse me for spring ‘23. And it shows that we're going to grow them in spring ‘23. So we're pleased with that. And we got a lot of great opportunity ahead of us.

Yes, Bob. And I would just add, as it relates to inventory composition, the quality of our inventory remains quite healthy. The aging is highly current in line with where we've historically been, certainly inventory is a bit more elevated. We're carrying a bit more excess than we traditionally do. But as Tim touched on, we believe it's very manageable. And we would certainly look to leverage our outlet stores and buy more tightly to anticipated demand as we look out to next year, and leverage those outlets to sell that product profitably.

The next question is coming from Jim Duffy with Stifel.

Thanks. Good afternoon. Thanks for taking my questions. I want to start just digging into on the second quarter. Can you help us understand how much the US was light of expectations in the quarter? And how much of that was change in demand, end market demand versus product flow issues that cause you to miss some shipments?

Yes, Jim, as it relates to our second quarter versus our internal outlook, we were off kind of a high mid to high teen number. And half of that was associated with China and the lockdowns, lasting longer in duration than we had initially anticipated. The balance to the half call it in the $8 million to $10 million range. That was US related and part of that was wholesale based with regard to cancellations that we saw, and I think, those cancellations are by and large, what Tim had reflected in terms of being late in delivering supply to the marketplace, in the early part of the quarter, and then some softening that we saw in the latter part. And then DTC made up a component out as well. And we touched on in the month of April and May, our DTC business performed quite well, as we got into the month of June, we saw some declines in traffic levels where that softened, and that's essentially where you're seeing the performance relative to the guidance we've previously provided.

Understood. And then can you help us think about spring product inventories in the channel currently, in the CFO commentary document, there was some mention of anticipated accommodations? Are you indeed, building that into, the guidance that you've provided for the back half?

Well, as it relates to spring inventory, Jim, we did take incremental cancellations relative to what we historically would have given where marketplace inventories stand at this point in time. And so we really see in this being much more a function of cancellations, as opposed to anything significant in the way of accommodations or returns there. To a lesser extent, there's some of that but by far and away, the more significant element that's impacting us and we've been tentative to this as well. We want to make sure that we're keeping the marketplace clean, in terms of the amount of inventory that we add out there. So we've been proactively working with our retailers throughout the season.

The next question is coming from Laurent Vasilescu. Can you hear us Laurent?

Yes. I can. Thank you very much for taking my question. I was hoping to ask about the full year guidance that 36 points midpoint cut full year, correct if I am wrong, Jim, I think about 180 bps is FX versus the last CFO commentary. You've got about 420 bps of pressure here. How do we think about that from a brand perspective? I think your CFO commentary talks about that SOREL is still the fastest growing brand. But is there any really steps to change function in one particular brand? And then another way to look at it is I think you gave us some high level color about regions in the CFO commentary, but how do we think about just that, that bridge of that 420 bps declined from a geo perspective?

Yes, the reduction in our outlook on the years predominantly revenue and to a lesser degree related to gross margin. And from revenue standpoint, it's probably a bit more weighted on the [Technical Difficulty] in China, so there is going to be factor related to that. The size of the Columbia business internationally and when you think about some of the currency pressures that’s going to also pertain to the Columbia brands. So by and large it’s going to be in that part, Laurent. The other emerging brands are certainly going to have reductions as well, because a lot of pressure that we're anticipating, our second quarter results were still quite strong. This is really an anticipation of the broader economic climate, particularly here in the US. So when we took the top line down in our full year guidance, aside from currency in China, the lion's share of the balance of the change is US based. Our business internationally, in the US, and other of the Asia markets, ex China, are continuing to perform quite well.

Very helpful, Jim. And then in your CFO slides you are calling for about 20% growth in 3Q, which would imply 4Q, would it be up low single digits? Is the 20% growth rate that you're calling for higher or lower equal to what you expected 90 days ago? And on 4Q, what's driving that slowdown? Is it driven by wholesale order cuts, which I think you alluded to, or just increased caution from the macro factors with the economy?

Yes, a lot of, so the difference between Q3 and Q, Laurent, is largely going to relate to timing shifts and the delivery of our wholesale shipments for the fall ‘22 season. You recall a year ago, we were late in getting fall ‘21 product to market. And so it was a bit more weighted to the fourth quarter, we've seen some improvement in our expectations around receipt of inventory and shipment out to our customers, albeit not where we'd like it to be. And it'll be late relative to historical terms, but better than where we were last year. And so the lion's share of the 20% growth is going to be exactly that just the shift in our expectations around the wholesale business. And then how much that's changed Q versus where we were 90 days ago. I don't have that. I don't have that handy.

No worries. Thank you for that. And if I can squeeze in one on the Jim’s last question here. Obviously, you notch down the gross margin by 100 bps for the full year. But if I kind of bridge that 20% growth for top line and then imply let's say 162 in EPS for 3Q, it would imply a pretty significant gross margin impact in 3Q. I don't know maybe upwards of 300 to 400 bps, is that the right way to think about it or can give us any guardrails on how we think about 3Q, 4Q evolution of [Inaudible].

Yes, I mean, the third quarter will be on par with essentially what we've experienced through the first half of the year. Keep in mind, we'll continue to have certain of the inbound ocean freight costs hit us disproportionately in the third quarter before that becomes a bit more of a tailwind in the fourth quarter. So if I think -- if you think about it in those terms, gross margin will still be down in the fourth quarter, but not to the degree that we've seen through the first nine months. And the reason being is the ocean freight will become a tailwind. And then the big thing also that we've adjusted in the gross margin outlook is just that we're contemplating a higher inventory balance. And with that we do see the risk of the marketplace being more promotional and making sure that we adjust our outlook to be able to respond to changes in consumer demand and market conditions.

The next question is coming from Camilo Lyon of BTIG.

Hi, this is Mackenzie Boydston on for Camilo Lyon. Thanks for taking our question. Kind of dovetailing on what you -- in your last response on ocean freight. Just want to confirm so it seems like Q4, then you're still contemplating will be a tailwind to margins and then continuing into ‘23.

Yes, we've secured freight contracts with our ocean carriers dated back early this year. So we're confident with the contracts that we've got in place. We have built into our outlook. However, given where oil prices are, we have built in some costs as it pertains to fuel surcharges until we see oil abate.

Okay, that's great. And then I guess, in terms of demand trends, you saw in Q2, is there any specific call outs by month you could provide and then kind of any update on the consumer landscape that you're seeing into July be helpful?

Well, as it pertains to Q2, and as Tim touched on the prepared remarks, April and May, business was still quite healthy, looking at the DTC business in particular, we were essentially on plan, and then I think as the economic news, inflation, in particular, just risk of recession has continued to weigh on the minds of, at least the US consumer that it began seeing some of that trickle through in the form of lighter traffic levels and softness in demand in the latter part of the quarter. And we've seen that to some degree, I would say that trend has continued in the early part of July.

The next question is coming from John Kernan with Cowen.

Hey, good afternoon, guys. Thanks for taking my question. Could you talk to where you think inventory levels will be maybe by the end of 4Q? I think some of the peers in the space have spoken of inventory peaking this quarter, just curious where you think inventory shakes out as we get into next year?

Yes, I think as it relates to inventory, we would anticipate that at the end of the third quarter is where we would anticipate more of our peak and looking at the rate of growth and inventory being at or greater than where we are here on the second quarter, June 30. And then as we get out to the end of the year, we'd anticipate it to begin to come down albeit remain elevated, I'd put it probably in the low 30% range. But keep in mind, trying to -- try to nail that number down just given the amount of inventory production that we'll have for spring ‘23. And the timing of that can create some volatility and in what our inventory positions are end of the year.

Understood. Maybe just on price increases, can you talk to the impact of price increases anticipated in the guidance for the back half of the year?

Are you talking about our costs or our selling price this quarter?

Selling prices.

Yes, I mean, I think there's been some but just basically been moderated, the concept for us is to make sure that we've got a highly differentiated product with innovations that can have pricing power in the marketplace and we haven't seen any degradation of any meaningful amount in our order book based on pricing.

The next question is coming from Mitch Kummetz with Seaport Research.

Oh, yes, thanks for taking my questions. Just to follow up on the margins and freight in particular, so you're expecting our gross margins to be down 180 to 210 bps year-over-year, how much of that is freight? And it looks like you expect year-over-year benefit in Q4. I know you're not looking to give Q or ’23 guidance, but if ocean container freight rates or ocean container rates kind of hold where they are today, how much pickup could you possibly see next year?

I think maybe just to put it in perspective, Mitch, the way I would think about it is through the first half of this year, ocean freight had about a 300 basis point impact on our gross margins. And then we'll see that step down in terms of the grade has an impact in the third and fourth quarter before it becomes a tailwind. So I think that's probably the best way of framing it. And obviously, as you're in the first part of the year, and they have a little bit more of a disproportionate impact, I wouldn't anticipate it quite being at 300 basis points in the third quarter, it will begin to decline a bit.

Yes, Mitch, and I might just point out --

Go ahead.

I might just point out that even though we have a tailwind against last year's freight rates, ocean freight rates, they're still incredibly elevated, based on our historical experience. And so it's important to understand that.

Sure. And then Tim or Jim, you guys talked about now assuming a slightly more well, a more cautious stance over the balance of the year around cancellations promotions, DTC, I guess, two questions. One, is that really focused on the fourth quarter and more than the third quarter? And two, as you think about your assumptions around those items, are you kind of assuming a normal environment? I mean, last year would have been a better than normal environment along those metrics. Are you basically just sort of assuming this year is normal? Are you assuming working better or worse than that?

The last year was much higher demand from the consumer and much less supply from all vendors including ourselves. So this year, we have more supply, who knows what the consumer is going to be looking at. So it's very likely that has the propensity for promotional activity, as retailers look to clear inventory. So it's hard to describe, and then when you throw with the closures in China into the mix, it's just -- it makes it really difficult year to call normal. So we're, we want to make sure that we're cautiously approaching the business, we have, certainly the balance sheet to allow us to make the right decisions, not necessarily the most expedient ones. But we're managing the business in order to be come through this at the end. It just a straws we went into it.

And, Mitch, typically within our wholesale business, we wouldn't anticipate to see significant cancellations until we get deeper into the quarter. As Tim touched on, inventories as it relates to seasonal fall, winter merchandise is quite low. So retailers are going to have the need in the early part of the season to take those goods. So it can be until we get out to September, really October, November, where we see anything meaningful in the way of cancellations. And then the other way to think about how normalized we've planned the business in the back half of the year, our DTC businesses planned up a mid-single digit percent growth combined between brick-and-mortar and online ecom globally. So that gives you a little bit of a sense we grew but a low teen number through the first half of the year with Q2 coming down. So we planned it a little bit more in line with what we've seen in the second quarter.

The next question is coming from Paul Lejuez with Citigroup.

Hey, thanks guys. I was curious within the US wholesale channel, if you can maybe talk about sales to your sporting goods, retail partners versus department stores versus others. How you're seeing the trends in each and I think you mentioned seeing some cancellations, so just curious, where you might be seeing those pop-up out of those different channels. And I believe just secondly, you talked about high single digit low double digit price increases, wondering if that's what you have falling through into the spring season as well. So we talked about the spring order books being up I'm curious how much of that is price versus units. Thanks.

Well, the channels, as you know, that company's quite broadly distributed in terms of its products. And so we've seen it impact across all channels, I would say that the department store channel probably is going the most rapidly among all the channels. But we had great business with our internet retailers as well. I would say maybe the slowest might be the sporting goods channel. And then as it relates to spring orders, we're seeing solid improvement across really all the brands and categories. And but understanding that retailers are going to be leaving the season this year with a little bit more inventory than they otherwise have been in prior seasons.

Yes, then it’s relates to price versus unit all. If you look at the second quarter as an example where we grew 2% that's going to be, units are going to be down a bit knowing that our pricing for the spring season was up a mid-single digit percentage.

And how about for the spring season? Is that thing same dynamic pricing up units down.

Looking at spring ’23, so my comment I just made was with regard to spring ’22. Spring ‘23 I think it'd be premature at this point to provide any details with regard to how we're thinking about rate of growth and mix between prices versus unit. We are certainly continue to operate in an inflationary environment. So there are further price increases that are contemplated in our spring ‘23 order book.

The next question is coming from Mauricio Serna with UBS,

Great. Thanks so much for taking my question. I just wanted to ask if you could elaborate a little bit more on your sales growth expectations by region in the second half of the year, and particularly in Europe, I was wondering if we should expect that kind of negative growth rate to continue in the second half? And maybe just elaborate also on China? How that will impact the Latin America and Asia Pacific Business? Thank you.

Well, I think as it relates to Europe, specifically, our European-direct business is growing. And as Tim touched on, it's quite healthy. And we'd anticipate that Europe continues to drive growth in the back half of the year. So essentially, what's driving the declines in our EMEA business when we look at the first half, it's the fact that we didn't ship or by margin shipped to Russia, during the second quarter. So that's going to be big factor there. And then I missed the second part of the question on LAAP.

Basically, China, we expect that there will be continued shutdowns in certain geographies in China, whether or not we have business relationships or customers in those specific regions. We're really detail how we do in China for the back half of the year. So we're being cautious in terms of how we're guiding in that geography. But as Jim said, we've got solid business in our direct to European -- our direct business in Europe, as well as in many of our EMEA regions, including Turkey and Israel, where we have solid business and good growth. It really is a Russia impact for the present for this year.

We have Alex Perry with Bank of America.

Hi, thanks for taking my questions. And just first I wanted to ask a little bit more in terms of what you're seeing from or what you're expecting from a commercial environment, especially with some mass retailers calling up loaded inventory levels in parallel. Does that affect you at all? And what have you seen sort of the overall promotional environment come online yet? Or is that just what you're expecting, given what you're seeing from the consumer?

Yes, we have, actually it’s been modest promotional activity certainly in the US where we have the most data around our customers activities. It's been more modest in the first half, we're expecting because of the consumer sentiments that we're all reading about that there likely be more promotional activity as inventories in the channel become elevated. And so it's hard to understand or to know in advance, which one of our customers have the ability to keep inventory longer, which ones have to liquidate. But we're -- our expectations are that the economic conditions will dictate a more perfect promotional environment.

And on the whole, Alex, when we look at our second quarter results, and we monitor a high proportion of our US customers, and their promotion levels, and promotion levels were quite lean through the second quarter. So there hasn't been an overreaction to what's going on with the consumer, and likewise, can be said for our B2C business in which margins are really quite healthy through Q2. So the adjustments that we've made in our outlook are really just in contemplation of the risks that we proceed with everything that we're seeing in the news.

Yes, that makes a lot of sense. And then my second question is, I just wanted to ask about what you're seeing in terms of product input cost pressures, or maybe just a little more color on how that would sort of flow through in terms of the gross margin guide?

Certainly, well, in our analysis, about half of our product input costs are a function of the collusion in the ocean freight carrier network. The balance is a function of factory disruptions and oil commodity impact on the products that we make and the components that we use. I would say it's a mid-single digit to just slightly north of that impact on costs. Well, we're able to pass those on. We'll see what happens in terms of the ocean freight carrier’s car charges and then what happens with oil over the next several years.

I would now like to turn the call back to management for closing remarks.

All right. Well, thank you for listening in. We're really excited about the opportunity to show you the various activities our brands have planned for the future in our September 22 Analyst Day. We hope that you'll be able to come in and see those things in person and look forward to sharing that with you.

Thank you, ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.