Alcoa Corporation

gentlemen, and welcome to the Under Armour Fourth Quarter Earnings Webcast and Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Lance Allegra, Vice President of Investor Relations and Corporate Development. Sir, you may begin.

Thank you, and good morning to everyone. Thanks for joining us on today's call to discuss Under Armour's fourth quarter 2018 and full year results. Participants on this call make forward-looking statements. These statements are based on current expectations and are subject to certain uncertainties that could cause actual results to differ materially. These uncertainties are detailed in this morning's press release and documents filed regularly with the SEC, all of which can be found on our website. During our call, we may reference certain non-GAAP financial information, including adjusted and currency neutral terms, which are defined in this morning's release. We use non-GAAP amounts as the lead in some of our discussions because we feel they more accurately represent the true operational performance and underlying results of our business. You may also hear us refer to amounts in accordance with U.S. GAAP. Reconciliations of GAAP to non-GAAP measures can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors. Joining us on today's call will be Under Armour Chairman and CEO Kevin Plank, President and COO Patrick Frisk, and CFO David Bergman. Following our prepared remarks, we'll open the call for questions. And with that, I'll turn it over to Kevin.

Thanks, Lance. Good morning, everyone. And we really appreciate you joining us today. Before we get into our prepared remarks on 2018, I'd like to take a moment to reflect on what an amazing 2019 it's already been for Under Armour's ranks of world champions, MVPs, and partnerships. from Tom Brady winning his sixth Super Bowl championship, to Stephen Curry and Joel Embiid, who are starting in this weekend's NBA All-Star Game, to joining forces with Zhu Xing, the number one ranked volleyball player in the world, and our recent partnership with Virgin Galactic to create a new generation of space apparel and footwear for astronauts, as well as an astronaut-specific performance training program. Our brand is off to a great start. And with a well-deserved nod to one of Under Armour's longest tenured athletes, one that redefined alpine skiing as we know it. With 82 World Cup wins, 20 World Cup titles, three Olympic medals, and eight World Championship medals, Lindsay Vaughn has accomplished something that no other woman in history has ever done. We are incredibly proud to have been a part of her journey and legacy. Thank you, Lindsay, for the amazing years supporting our brand and making our job so much fun. Looking forward to what we do together next. With respect to our internal team roster, We're also pleased to welcome Trenavia Rocker to the Under Armour family as our Chief People and Culture Officer. As a 22-year veteran, she brings deep expertise and a proven track record at best-in-class HR practices to our team. So, very happy that she's here, excited for what the future holds, and with that, let's get back to 2018. On our call a year ago, we spoke about working to create a more stable business for Under Armour by transforming our operating model and long-term strategy to significantly strengthen our foundation. Ultimately, an operational, strategic, and cultural transformation with the goal of empowering greater capabilities, more disciplined, efficient processes, and a structure designed to protect and fuel our brand for sustainable, profitable growth over the long term. While the past year has certainly presented a number of challenges, our fourth quarter and year-end 2018 results demonstrate both stability in our business and the emerging strength of our operating model to deliver more consistently for our consumers, customers, and shareholders. As we closed out 2018, we held an investor meeting where we provided an in-depth overview of our five-year strategy and the key initiatives designed to drive growth and profitability through 2023. At the core of this strategy is a clearly defined consumer, supported by a disciplined go-to-market process, data science and analytics, and an accelerated innovation agenda. To give perspective on our past and present and how we're thinking about the future, we used a chapter contract to detail our strategic and operational assumptions and the things that could impact our business moving forward. In this respect, 2018 marked the second year of the 2017 to 2019 chapter, which we refer to as Protect This House, where we are focused on running a smarter, faster, and stronger business and committed to protecting the $5 billion global brand that we've built. With two years in the books of what we believe will prove to be the most transformative phase in Under Armour's history, the offensive and defensive strategies we've employed are empowering us to make better decisions and deliver consistent results, results that we're proud of, and results that have delivered against last year's objective of strengthening our foundation and transforming our operating model. With that, let's review some full-year 2018 highlights, which are a bit better than the outlook we gave on just December 12th. Total revenue grew 4 percent and reached $5.2 billion with balanced growth from our wholesale and DTC businesses, which were up 3 and 4 percent respectively. As a percent of total revenue, DTC was 35 percent for the full year. In line with expectations, North American revenue was down 2 percent, and our international business was up 23 percent, driven by continued growth in EMEA and Asia Pacific. Also in line with expectations, Apparel and footwear were up 5% and 2% respectively, and accessories was down 5% for the full year. Reported gross margin was unchanged from the prior year at 45.1%, which includes approximately $21 million in restructuring charges. Excluding these charges in both periods, adjusted gross margin was 45.5%, an increase of approximately 30 basis points driven primarily by product cost improvements, lower promotional activity, and foreign currency changes, which were offset by channel mix. And with respect to channel mix, this gross margin improvement is made even more remarkable by the fact that we made a strategic decision to significantly reduce our inventory position throughout 2018, resulting in elevated sales to the off-price channel, which carries a lower margin. In fact, when you consider we ended 2017 with a 26% increase in inventory, And we ended 2018 with a 12% decrease in inventory, whether considering we held gap, gross margin flat, or posting a 30 basis point improvement on an adjusted basis, executing a 38-point drop in comparable year-end inventory positions, truly demonstrates the commitment and incredible resilience of this team and our brand. And what we're capable of as our operational, structural, and cultural transformation continues to take hold across the business. Moving to SG&A, we are continuing to work through our highly committed cost structure and asset build over the past few years and are making good progress. From SG&A dollar growth of 22% in 2016 to 14% growth in 2017 and 4% growth last year, we're prioritizing this line item as a key unlock to driving higher optionality for investing in our brand while increasing returns for our shareholders. Which takes us to the bottom line. where we reported an operating loss of $25 million for the year, or $0.10 of diluted loss per share, which on an adjusted basis is $179 million of operating income, which is $0.27 of diluted earnings per share. In total, 2018 was a productive, evolutionary year for Under Armour, one that we delivered against our plan and made great strides forward in our transformation. With an improved go-to-market process empowered by significant SKU reductions, a shorter calendar, and an enhanced regional structure, we're back on offense. As we work through 2019, we will seize the opportunity to stay on offense to protect this house by remaining focused on the things that will continue to keep us healthy this year and beyond, including, first and foremost, it starts and it ends with the brand, the brand, the brand, and delivering innovative products and experiences that make our athletes better. Secondly, further optimizing operations and investments to maintain our premium athletic performance brand positioning. Third, building even stronger relationships with our customers. And finally, delivering appropriate financial performance while ensuring our ability to deliver sustainable, profitable growth over the long term. In closing, our operating model is working and we're confident and committed to our long-term strategic plan. We are in control and command of our business and actively applying the lessons we've learned. We're also acutely aware of just how special the Under Armour brand is. And most importantly, the hard work, choices, and effort it has taken and will take from this team to keep it in reverence for the years to come. I am proud of the entire global team and am excited about what lies ahead for Under Armour. And with that, let me hand it over to Patrick.