Crocs, Inc.

Good day and welcome to the Crocs, Inc. fourth quarter and full year 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Cori Lynn, Vice President, Corporate Finance. Please go ahead.

Good morning, everyone, and thank you for joining us today for the Crocs fourth quarter and full year 2022 earnings call. Earlier this morning, we announced our latest quarterly and annual results, and a copy of the press release may 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 the acquisition of Hey Dude and the benefits thereof, Crocs' strategy, plans, objectives, expectations, financial or otherwise, and intentions, future financial results and growth potential, anticipated product portfolio, our ability to create and deliver shareholder value, and statements regarding potential impacts toward business related to the COVID-19 pandemic. These statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performances, or achievements expressed or implied by the forward-looking statements. Crocs is not obligated to update these forward-looking statements to reflect the impact of future events except as required by applicable law. We caution you that all forward-looking statements are subject to risks and uncertainties described in the risk factor section of our annual report on Form 10-K and our subsequent filings with the SEC. Accordingly, actual results could differ materially from those described on this call. Please refer to the CROC's annual report on Form 10-K as well as other documents filed with the SEC for more information relating to these risk factors. Adjusted gross profit, adjusted gross margin, adjusted selling general and administrative expenses, adjusted income from operations and operating margin, adjusted income tax benefit and effective tax rate, adjusted basic and diluted earnings per common share are non-GAAP measures. Reconciliation of these amounts to their GAAP counterparts is contained in the press release we issued earlier this morning. Joining us on the call today are Andrew Reese, Chief Executive Officer, and Ann Melman, 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, Kari, and good morning, everyone. As you saw in our press release issued this morning, we delivered extraordinary 2022 results, including record $3.5 billion in sales and industry-leading adjusted operating margins of 27.7%. These results underscore the high consumer demand globally for the Crocs brand, the growing momentum of the Hey Dude brand, and our ability to consistently deliver strong profitability while investing for the future. Looking forward to 2023, we expect another year of robust revenue growth, top-tier margins, and significant cash flow generation. Now let me share a few highlights from the full year of 2022. Total revenues grew 54%, as we added a second fast-growing brand, HeyDude. Kroc's brand revenues were $2.7 billion, increasing 19% on a constant currency basis. Kroc's brand international growth was exceptional at 47% constant currency for 2022 and accelerating to 75% constant currency growth for Q4 in both Asia and Amelia. Adud brand revenues exceeded initial expectations and reached nearly a billion dollars on a pro forma basis and delivered over $275 million in adjusted operating income. Consolidated digital revenues grew 58% to represent 37.8% of 2022 revenues. Exceptional adjusted gross margins of 54%, even with significant freight and inflationary pressures. Adjusted income from operations increased 42% to nearly a billion dollars and adjusted operating margins of nearly 28%. Adjusted diluted earnings per share increased 31% to $10.92. And strong cash flow allowed us to reduce gross leverage from 3.1 times upon the acquisition of Hey Dude to 2.25 times at year end. As we transition to 2023, I want to give you additional insights into three of our long-term growth drivers for the Crocs brand, sandals, international, and innovation in both product and marketing, as well as provide an update on Hey Dude. Sandals, an important growth initiative for Crocs, allowing us to extend into the adjacent $30 billion global sandal category, where we believe our molded technologies, accessible price points, Strong go-to-market will allow us to compete effectively in a relatively fragmented market. The category also provides an additional entry point to the Crocs brand for consumers who may not choose to engage with the clog. We know our sandals resonate with consumers since saddle consideration is now on par with that of clogs, and we already have a sizable $310 million sandal business. Within sandals, we refined our focus on four subcategories. everyday, style, street slash sport, and adventure. The everyday category offers broad reaching classics for everyone and includes our personalizable slides, two straps, and flips. Our style category is female centric, trend driven, and includes styles such as the Brooklyn, Crush, and Mega Crush. Our street slash sport category is rooted in street style with a focus on him but inclusive of her and includes our new Echo and Mellow franchises. Finally, our Adventure category has functionally designed for the whole family and includes our all-terrain and swift water franchises. 2022 for the Crocs brand sandals was a year of two halves. In the first half, sandals revenues declined due to the lack of newness following the Vietnam factory shutdowns in 2021. In the second half of 2022, sandals grew by 31% as we introduced a strong cadence of newness, such as the Crush, Mellow, and Echo, supported by effective sandal-specific marketing. We're incredibly confident in sandal growth in 2023, given planned newness and a significant increase in marketing allocated to sandals, and the strong Crocs brand trajectory in important sandal markets, such as India and Southeast Asia. With respect to newness in our style category, we're planning additional height and new uppers in our popular Brooklyn franchise. In our street slash sport category, we continue to use innovative technology in our Mellow franchise, and we'll launch a new flip during the year. With the new product introductions, marketing investments, and regional brand momentum, we expect Sandals to be our fastest growing product category in 2023, reaching approximately $400 million in sales. Moving to another important growth driver for the Crocs brand, our international markets. We have now seen eight consecutive quarters of strong double-digit growth outside of North America. We anticipate even greater growth as the Crocs brand has approximately one-third the penetration internationally that it has here in the U.S. The drivers of this growth are in essence the same drivers of growth that we saw in the U.S. First, focusing on our iconic clog and driving relevance with innovation and collaborations. Second, leveraging gibbets for personalization and consumer engagement. Third, expanding our addressable market with sandals. And finally, always on social and digital marketing to continuously engage our existing and new consumers. Our unique playbook for Crocs has been successful in the U.S. and across all of our key focus markets. In Emilia, Western Europe grew revenues by 38% constant currency, with the United Kingdom up 105% constant currency. In Asia, South Korea grew over 30% constant currency, despite having an already high level of penetration. India grew 91% constant currency. Additionally, we see our global brand building activities having a halo in many of our distributor markets, resulting in triple-digit revenue growth in Latin America, the Middle East, and Southeast Asia. China has been a unique case. As you know, we completed the repositioning of our China business in 2021. Since then, China has been constrained by COVID lockdowns. Yet we still invested in our team and in marketing to build brand relevance. We have seen green shoots in the second half of 2022. Revenues grew 35% constant currency. As China reopens and the consumer returns to more normalized shopping, we're excited about the prospect of building significant Crocs brand presence in 2023 and beyond. While still a smaller base than we would like, we expect China to grow approximately 30% in 2023. Product and marketing innovations is another important driver of the Crocs brand. Our marketing calendar is extremely robust as we look to put more Crocs on more consumers. In 2023, we expect to have record new product introductions, some of which I mentioned when discussing sandals. Product newness will be critical to our always-on brand drumbeat, as well as a strong pipeline of more than 60 global brand partnerships across a healthy mix of celebrities, mega brands, and licenses, of which 25% will be regionally led. We will invest in a record amount of marketing dollars, over $200 million, to drive the Crocs brand relevance. amplifying our products and engaging new and existing consumers. This will be achieved by maintaining our digitally led and social first approach to engage consumers through digital first drops, social innovation, and brand ambassadors. Turning now to Hey Dude. Today represents our first full year of ownership, and we've accomplished a lot. The integration is on track, although there is still much work to be done. We've developed a clear plan for the brand and the future is bright. With respect to recent accomplishments, there are many. We have updated the brand identity and clarified its purpose and meaning. We've expanded the line with several new icons to be trialed in 2023. Staffed the entire leadership team and hired over 150 roles. Stabilized and expanded the manufacturing footprint. Developed a business systems roadmap. expanded distribution capabilities to handle the immediate throughput needs, turned over many international distributors, and spent nearly $60 million of marketing in the second half alone, which on an annualized basis was almost 4x the amount spent in 2021. We've also seen great initial results exceeding our expectations. Brand revenues in 2022 grew 70% on a pro forma basis. driven by wholesale partner expansion in the United States. DTC revenues were approximately 36% of sales. Gross margins have been lower than anticipated due to channel mix, unfavorable pre-acquisition freight contracts, and higher inventory handling costs as we work to expand the Haydew Distribution Center to support the billion-dollar and growing brand. Even with this, Haydew generated over $275 million in adjusted operating income a 31% adjusted operating margin. While we have more to do, we are incredibly excited about our results thus far. The potential for the HeyDude brand and the value of this acquisition will generate for shareholders. The addition of HeyDude has brought other benefits as well. It enables us to access a larger addressable market, which is now approximately $160 billion on a global basis versus $40 billion prior to the acquisition. We are now far more diversified from a product perspective, with casual hey dude silhouettes representing 27% of 22 revenues on a pro forma basis, clogs representing 57% of consolidated revenues. Finally, we substantially leverage our shared services across the two brands, further supporting our industry-leading operating margins. Before I turn the call over to Anne, I'm incredibly proud that our five-year annualized TSR of 54% would have placed Crocs, Inc. as the number two best performing company in the S&P 500. This exceptional performance is a testament to our strategy, our execution, and our talented team. I want to express my gratitude to the entire Crocs, Inc. organization for the hard work and commitment to delivering best-in-class growth and profitability. 2022 was a transformational year as we integrated Hey Dude. But the Crocs and Hey Dude brands entered 2023 with incredible strength and momentum. I'm confident in our brands, our team, and our demonstrated ability to deliver sustainable growth, profitability, and shareholder value. With that, Anne will now review our financial results in more detail.