Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the Rocky Brands' Second Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. And now, we'll turn the conference over to Brandon Ray of ICR. Please, proceed.

Thank you, and thanks to everyone joining us today. Before we begin, please note that today's session, including the Q&A period may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Such statements are based on information and assumptions available at this time and are subject to changes, risks, and uncertainties, which may cause actual results to differ materially. We assume no obligation to update such statements. For a complete discussion of the risks and uncertainties, please refer to today's press release and our reports filed with the Securities and Exchange Commission, including our 10-K for the year ended December 31, 2020. And I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands.

Thank you, Brandon. With me on today's call is Tom Robertson, our Chief Financial Officer. We had a fantastic second quarter, which followed a very strong first quarter and second half of 2020. Demand for our brands and products has been growing over the past year and recent trends have been particularly strong. The combination of innovative product introductions, enhanced consumer engagement, timely fulfillment, and effective inventory management are fueling share gains in our work, restaurant, and outdoor markets. Our second quarter 2021 top and bottom line results were also bolstered by the addition of The Original Muck Boot Company, XTRATUF, Servus, Neos, and Ranger brands, following our acquisition of Honeywell's performance and lifestyle footwear business in March. I'll get into more detail in a moment, but collectively, the acquired brands are also performing very well compared with the year-ago period, adding to our excitement about the growth opportunities for this portfolio, especially once we've completed the full integration of our two organizations. Tom will go through the numbers in more detail, but here are just a few of the financial highlights. Net sales increased 134% to $132 million. Adjusted gross margin was up 270 basis points to 39.1% and adjusted earnings per share rose 120% to $0.99. Our reported results would have been even better; however, due to very strong demand late in the quarter, we experienced some congestion in our distribution facility, which shifted some orders from the second quarter into the third quarter. To better understand the underlying strength of the business, I think it is important to one, provide separate color on what we refer to internally as our Ohio and Boston groups, or said another way, our existing and acquired brands; two, look at our results against the second quarter of 2019, which eliminates the benefit from the easy comparison due to COVID. Our Ohio group grew 44% year-over-year and was up 39% compared with two years ago. While the Boston group wasn't included in our prior year results, I'm pleased to share that the business increased 47% and 46% on a one- and two-year basis respectively. The recent performance of our Ohio group has been driven by strong growth in both our wholesale and retail segments. Beginning with wholesale, our Western business maintained its incredible momentum from the first quarter with second quarter sales increasing triple digits. The Durango brand remains on fire as demand for new product introductions, especially western work product and legacy styles are reaching new highs. We are experiencing strong gains across our wholesale network, including key and field accounts, especially in the farm and ranch channel along with key e-tail partners. As has been the case since the start of the pandemic, Durango's strong performance at retail has been boosted by much healthier stock positions, relative to many of its industry peers who have struggled with inventory issues. This has led to important shelf space gains and new customer acquisitions for the brand. Turning to work, Georgia Boot posted another very strong quarter as the economy more broadly reopens and the need for work footwear has surged. In addition, the wholesale channel benefited from the shift back to brick-and-mortar retail as consumers returned to in-person shopping compared with a year ago when buying was more heavily concentrated online due to the pandemic. This provided a strong boost to sales across large retail partners, as well as our robust network of smaller independent accounts. The Rocky brand, which spans work, outdoor, western, and commercial military, had another strong quarter with work and western delivering exceptional growth. The addition of new large programs with key retail partners that included both in-line styles and exclusive new product as well as new disruptive wins fueled the brand's work business. Similar to Durango, Rocky was able to take advantage of competitor supply chain issues to fulfill strong consumer demand in the western category. Sales were driven by traditional best sellers, plus the delivery of new premium collections that have been very well received. In terms of Rocky outdoors business, second quarter growth was a bit more restrained due to the strong sell-through earlier in the year, which depleted our inventory position in several top styles. The good news is demand for Rocky remained strong heading into the key outdoor season, including in the non-hunting boot category where we are growing our presence with innovative new product introductions. With respect to Rocky's commercial military division, business has accelerated as retail foot traffic has picked up dramatically across key retailers in this channel. That said, we've had challenges in terms of supply as the sales uptick outpaced manufacturing and raw material availability. We are making adjustments to put us in a better position to capitalize on the growth prospects for this business over the remainder of the year. Turning to our retail segment. Following a triple-digit increase in our Ohio group's e-commerce channel in Q2 of 2020 when most of the country was shut down, we are very encouraged that sales remain consistent on a year-over-year basis. As the market environment further normalizes and comparisons for this channel ease, we expect to see e-commerce sales resume growth fueled by the work we've done enhancing the functionality of our sites and expanding our direct-to-consumer efforts on marketplaces, particularly Amazon and more recently, Target Plus and eBay. Meanwhile, our Lehigh Safety Shoe business continues its recovery with Q2 sales increasing 30% year-over-year, up from the 18% gain in Q1. As more companies have resumed normalized operations, our activity with existing and new accounts has continued to pick up, leading to a record level of on-site iFit events. We expect this trend to continue based on our pipeline of new accounts and the further loosening of on-site restrictions in the coming quarters. Recent momentum is also being driven by the implementation of a new email and SMS strategy, which is improving participation rates across our account base. Shifting to our Boston group, the 47% sales increase I cited earlier was driven largely by Muck and XTRATUF, the two largest and most popular brands in the portfolio, with XTRATUF being the standout. Meanwhile, we saw strong demand for Muck products in Europe, which is translating to healthy forward orders for next year and we are seeing signs of growing traction for XTRATUF in the region as well. On our last call, I outlined that our primary focus for the acquired business over the remainder of 2021 is on three main areas: people, systems, and inventory. I'll provide a brief update on each, starting with people. Our people are the foundation of Rocky Brands and they are the reason for the success we've achieved over the years. Based on interactions and discussions with Honeywell through the process, the same is true of the people coming over to Rocky as part of the acquisition. We are fully engaged while integrating our two great organizations and are harnessing the power of the combined teams to support and drive our powerhouse brands. In terms of systems, migrating the acquired business off Honeywell's ERP system and under Rocky's is underway. This step is critical to providing our newest brands, customers, and consumers with the world-class service we've been executing at Rocky for years. We still expect this to be completed in the fourth quarter as we have made significant progress over the last couple months. Finally, inventory. We started moving the acquired inventory to our state-of-the-art distribution facility in Ohio back in April and expect the process to be completed by mid-August. With the investments we've made in technology and people, we are extremely confident we'll be able to realize important savings over time by meaningfully lowering the fulfillment costs for the new brands. After we execute these critical first steps, we'll shift our focus to leveraging our collective strengths across the powerful brand portfolios we've assembled to create new growth opportunities for our business. I've never been more excited about the future for Rocky Brands. Our results before, during, and as we are emerging from this pandemic underscore that we have the right strategies and the people in place to drive increased profitability and greater shareholder value over the near and long term. I'll now turn the call over to Tom.

Thanks, Jason. As Jason outlined, we had another very strong quarter as demand for our brands fueled strong gains compared with the second quarter last year, which was negatively impacted by COVID, especially our wholesale business as most of our retail partners experienced significantly reduced traffic or were forced to temporarily close their doors. Our overall results also reflect the acquisition of Honeywell's performance and lifestyle footwear business that we completed in March of this year. Now, to the results. Net sales for the second quarter increased 134.2% year-over-year to $131.6 million with wholesale sales increasing 195% to $101.1 million. Retail sales increased 36.8% to $22.3 million and contract manufacturing sales were up 45.6% to $8.1 million. The second quarter of this year includes approximately $51 million in sales from the acquired brands for the Boston group, with approximately $47 million found in our wholesale segment and $4 million in retail. A quick note; we were recently engaged to do some private label manufacturing for a couple of retail partners because the margin profile of these programs is similar to our contract military business, as is the volatility from year to year. We made the decision to combine them and rename our third segment, Contract Manufacturing. Turning to gross profit. For the second quarter, gross profit increased 152.6% to $49.2 million or 37.4% of sales compared to $19.5 million or 34.6% of sales in the same period last year. This year's gross margin includes a $2.3 million inventory purchase accounting adjustment, while last year's gross margin includes approximately $1 million in expenses related to the temporary closure of our manufacturing facilities due to COVID-19. Excluding these items, gross margin for the second quarter of this year and last year were 39.1% and 36.4% respectively; the 270-basis point increase to adjusted gross margin was primarily attributable to higher margins in all three segments with a 470-basis point improvement in wholesale, the largest driver of the year-over-year increase, as we benefited from increased manufacturing synergies, higher volumes, experienced less promotional selling, and were up against some easier comparisons due to higher tariffs in the year-ago quarter. Gross margins by segment were as follows: Wholesale, 35.9%; retail, 49.7%; and contract manufacturing, 21.8%. Adjusted gross margins by segment were as follows: Wholesale, 38.1%; retail, 49.7%; and contract manufacturing at 21.8%. Operating expenses were $40.7 million or 30.9% of net sales in the second quarter of 2021, compared to $16.4 million or 29.1% of net sales last year. Included in this year's second quarter were approximately $1.3 million of acquisition-related expenses and approximately $900,000 in acquisition-related amortization. Excluding these expenses, operating expenses as a percent of net sales were 29.2%. The small increase in the adjusted operating expenses was driven primarily by the expenses associated with the brands we acquired in March of this year. Income from operations increased 172.2% to $8.4 million or 6.4% of net sales, compared to $3.1 million or 5.5% of net sales in the year-ago period. Adjusted operating income, which excludes the inventory purchase accounting adjustment and the acquisition-related expenses in Q2 of 2021 and the expenses from the manufacturing facility shutdowns in Q2 last year, was $13 million or 9.9% of net sales compared to $4.1 million or 7.3% of net sales respectively. For the second quarter of this year, interest expense was $3.5 million, compared with essentially no interest expense in a year ago. The increase reflects interest payments on the senior term loan and credit facility we used to fund the Honeywell Footwear acquisition. Net income for the quarter increased 59.5% to $3.9 million or $0.52 per diluted share, compared to net income of $2.4 million or $0.33 per diluted share in the year-ago period. Adjusted net income for the second quarter of this year was $7.4 million or $0.99 per diluted share, an increase of 129% compared to adjusted net income of $3.2 million or $0.45 per diluted share last year. Turning to our balance sheet. At the end of the second quarter, cash and cash equivalents stood at $8.4 million and our total debt was $187.4 million, consisting of our $130 million senior secured term loan facility and borrowings under our senior secured asset backed credit facility. As of June 30, 2021, we had $71 million of borrowing available under our credit facility. With regard to our outlook, we want to provide some updated thoughts on 2021. Based on our strong second quarter performance combined with a good start to the third quarter, we are now expecting our Ohio group's standalone revenue for the full year to increase to approximately 24% over 2020, up from our most recent guidance of 20%. With respect to the Boston group, we're still expecting revenues to increase approximately 20% over the approximate $205 million in revenue of the acquired brands generated in 2020. As a reminder, we will recognize roughly 80% of the 2021 revenues based on when the transaction closed. Our revised revenue projections incorporate the current disruptions in the global supply chain, particularly in Asia where we source roughly 65% of our annual inventory. While our own manufacturing facilities in Puerto Rico, Rock Island, Illinois, and the Dominican Republic provide a clear competitive advantage versus the rest of the industry. If conditions become more challenging, there is some risk that a portion of our projected Q4 revenue would shift into 2022. In terms of margin, we are now expecting consolidated gross margins for 2021 to be approximately 39%, down slightly from our previous estimate of 40%, reflecting the higher inbound freight costs and logistics costs that have recently emerged. That concludes the prepared remarks. Operator, we are now ready for questions.

Thank you. At this time we will conduct a question-and-answer session. Our first question comes from Camilo Lyon with BTIG. Please, proceed.

Thank you. Good afternoon, everyone. How are you? Great results here. I wanted to touch on a couple of topics, really as they relate to the gross margin and maybe beneath that, if you could just give us some puts and takes on the quarter. So, more broadly, the supply chain component and the costing on the gross margin. How should we think about what you just told us about incremental costs and the impact that that's having on the outlook going forward? And also, if there are any offsets perhaps from the acquisition of the Boston group brands being layered into the business. I'll start there and I have a follow-up to see if I could.

Awesome. Hey, thanks, Camilo. This is Tom. Yes, to kind of take those two parts, if we think about the business today, post-acquisition, the acquired brands of the Boston group, particularly the Muck brand in particular, carry slightly higher margins than our Ohio group. And so, that will certainly from a mix perspective help raise the overall margins. Another important mix consideration to consider would be that the contract manufacturing segment of our business, which is a lower margin segment, has now become a much smaller piece of the total pie. So, the overall margins will benefit from that. As it relates to the current supply chain and logistics out of Asia, we're certainly seeing significantly higher freight costs, inbound container costs from Asia, 2x to 3x what we're paying this time last year. And so, that's meaningful when you're talking about on a per unit basis. So, we have announced price increases at the beginning of July of this year that will go into effect during the third quarter. So, that will help mitigate some of these inbound freight container prices that we're seeing, particularly seeing that benefit more in the fourth quarter than the third quarter. But it's definitely a significant issue that I think everybody in the industry is contending with. I think we do benefit, as I had in my prepared remarks. We certainly benefit from having a big portion of our business not coming from Asia, the 35% coming from either the Dominican Republic, Puerto Rico, or Rock Island, Illinois, where we're not seeing the same increase in freight costs.

Yes. I think just to add on that, Muck and XTRATUF brands are probably about 90% sourced out of the Far East. So, the service brand is coming out of Rock Island, and so I just wanted to make sure we were clear. There are still a lot of products in the Boston group brands that are coming across the ocean.

That's great color, Tom and Jason. Following that and you had gone to a couple of other questions I have regarding pricing, it's great to hear that you're taking some pricing with that. So, how much pricing are you taking on? Is that across the board or on select brands and/or new introductions? And on the supply chain side, can you shift particularly with Muck and XTRATUF some of that Asia production to the Dominican Republic, or the Puerto Rico, or the Rock Island over time?

Yes. So, as far as the pricing goes, yes, we were consistent across all brands. We took our kids' boots up a couple of bucks and our adult boots, we took up like $3. There will be instances where we felt it was important to increase even more, but very few of those incidents. So we tried to keep it pretty level across the board. I think the retail partner appreciates that, and so we wanted to keep it pretty simple. And then your question about looking at different distribution for the other brands, I think that that is an idea that we will absolutely be looking at in the future. It is a long and complicated process, and if you don't do it well, you will find yourself really damaging that brand and its reputation in the marketplace. But the idea is absolutely correct, and we will be looking at that very hard in 2022 and 2023 as we move forward. Yes. Quick add on here. Whether it relates to the price increase we took, we didn't take as aggressive price increases as some of our peers. We think that this will help us continue to drive growth for our brands and maintain or even grow market share that we've already captured over the last year. So, we think that will play in our favor. As Jason said, we can spread out the price increase across all brands and really any geography where we produce the boots from. So we think that will continue to play in our favor given our diverse sourcing.

Great. And one more if I could, this quarter was a pretty down quarter for multiple reasons. Not the least of which is getting to a very robust margin, around 10%. In which you've generally done that before. How do you guys think internally or discuss what the long-term opportunity is now that you've got the Boston blue brand, and you're starting to see the synergistic opportunities in front of you?

Yes, another great question. I think so a word we use right now, internally a lot is 'patience'. Because I think every week, the people in the company, via the Ohio group people or the Boston group people, we are seeing opportunities that are going to be spectacular. It's going to take some time. As we indicated on the prepared remarks, we're not going to be off the Honeywell ERP system until Q4. We'll be out of their distribution center here sometime this month, and once we're able to really get that done and start tweaking and combining and finding those synergies. They're there and the brands, this group of people that came with the acquisition, they are footwear people, they're good footwear people. They understand it, the brands are strong and so I think there are really great opportunities in 2022 and 2023 as we move forward.

Fantastic. Thank you, gentlemen.

Our next question comes from Jonathan Komp with Baird. Please proceed.

Yes, sorry about that. Hopefully, I'm coming through okay. First question just on the Boston business as you work through the integration. Any surprises or challenges? Or has that gone smoothly? And how should we think about that business, the 20% growth rate for the year, relative to the mid to upper 40s? You just saw in the second quarter? Just any thoughts there?

Yes. As far as the integration goes, absolutely, we've seen some bumps in the road, right? I doubt there's ever been an integration that's ever gone smoothly 100%. I think we have navigated those bumps pretty well. The probably biggest bump, that's really surprised me and maybe our team is the demand that has come with these brands was stronger than we anticipated. And so getting that inventory, moving that inventory as quickly as possible; that's what we kind of talked about with the distribution center getting a little clogged at the end of the quarter. That's been a big surprise because the demand for the XTRATUF brand is just exceptional right now. We're seeing really good stuff with Muck and Service. I think those are exciting things. And once we're able to get off of their ERP system and once we're able to get everything in our distribution center, it's really going to change the dynamics of it. So, I'm pretty pleased where we're at from an integration standpoint. And I'm sure we'll see some more bumps here in the next couple months. But we'll navigate those just fine too.

The second real quick too on the demand side for the Boston group, the demand is there in excess of the 20% guidance that we're giving. I think what's really going on is that when we acquired the brands, I think we took a more aggressive inventory position than maybe Honeywell historically had. As Jason alluded to earlier in the call, the majority of the XTRATUF products are sourced out of Asia, so the lead times out of Asia, in particular, what's going on with the supply chain right now, is certainly keeping us from keeping up with total demand. So I'm optimistic that these brands are growing faster than the 20% that we signed up for.

Okay, great. Very helpful. And then, maybe switching to the Ohio brands. In the wholesale business when you look compared to 2019. Correct me if I'm wrong, it looks like the first half is up about 30%. For the wholesale business for the Ohio brands, can you just share a little bit more what you think is going on with the key categories? What's driving the consumer demand? Where are you seeing the strength at retail, just any more color? What you've seen and sort of how we should think about it continuing going forward?

Yes. As I stated, Jonathan, the Durango brand is really seeing tremendous success right now and has for about three, almost four quarters. Really, if you look at Q3 of 2020 it started and it just has continued to grow. I believe it's really for multiple reasons. One, our product is great; we've been able to find new shelf space with that product, and I think the consumer is responding well to it. Again, I'll go back to the fact that we took a more aggressive position on an inventory stance and we were able to have inventory to put on those shelves which has really helped us as well. We've performed so well that the consumer said, 'I like that product, I'll go back and buy it,' or 'I'll recommend it to a friend of mine.' We've just seen tremendous success there. The Georgia brand and the Rocky brand have seen really nice success as well. I think it goes back to our functional type product, right? It's the boots that people need as tools. The people that we sell to not only didn't get furloughed and didn't lose their jobs, but now that we're coming out of this, we need more people, and they're hiring more people, and they're looking for more people. So, I think we were in a really great position from an inventory standpoint, we were in a great position from a product standpoint; good innovation, quality product, comfortable product. I think we were able to capitalize on an opportunity and we've taken advantage of it.

Any comments through what channels within your retail sector you’re seeing the best performance or where you're seeing the outsize market share opportunities?

Yes, absolutely, Jonathan. I apologize for missing that part. Our key large Western retail partners are doing very well, especially in the farm and ranch category. Outdoor hunting saw a nice spike, and while it has leveled off a bit, we consider the outdoor market in terms of hiking, camping, and backpacking. Although it's a small segment for us, we introduced some new styles earlier this year that have performed well with major outdoor retail partners. This represents a new category for us that, while not large in numbers, is showing promise. To recap, our key Western retailers are doing well, and the farm and ranch segment is quite strong.

Okay, great. And then the last one, maybe for me. Tom, I know you provided the update on the revenue outlook, raising the Ohio outlook somewhat for that business. I know you didn't guide to earnings or operating margin previously. But are you willing to comment? You know, given the gross margin pressure you outlined, has your profitability or your earnings outlook changed meaningfully from the update after the last quarter?

Yes. Obviously, we were anticipating selling more when we're on this call last quarter. But with the margin taking down to 39%, that's certainly going to have a negative impact on our earnings. But I think one of the key takeaways that I want to make, given model perspective is, as we talked about, the Boston group having kind of a higher initial margin or initial gross margin, but the operating expenses are comparatively higher than our Ohio group traditionally has. As Jason talked about, I think we will continue to see a lot of our duplicative costs in 2021 from an operating expense standpoint. As we get out and get this business fully integrated in the middle of Q4, we anticipate to start seeing those synergies really get realized in 2022. Hope that helps.

I guess as a follow-up, what do you expect operating margin still to grow versus 2020? I know it's a bit apples to oranges, but just trying to gauge where you think operating margin directionally may fall and then obviously, there may be more expansion in the out years.

Yes, no, I think we definitely think that there'll be some growth; it's just that the growth in our operating margin this year will be smaller than what we anticipated due to the downturn.

Okay, thanks for taking all the questions. Very helpful.

Thanks, Jonathan.

Our last question comes from Robert Sussman with Bentley Capital. Please proceed.

Looking at the company's inventories, at the end of the second quarter, they were about $143 million versus about $125 million at the end of the first quarter. So, it looks like you've been building inventories and not necessarily having trouble sourcing products. Can you discuss that?

Yes, hi. Thanks, Robert. Good to hear from you. So, if you look at the increase in inventory, there are really a couple of drivers. One is, we had a lot of inventory sitting at the doors ready to ship out at the end of the quarter that, again, we spoke about earlier. But really the big increase there is in transit inventory. So, boots on the water or all in trucks coming towards us, as well as with the move from the Honeywell distribution center to ours. That slowed down outbound shipments. So, I think that's really the big takeaway there. Also, I think, given some of the supply chain concerns we have going on, even product that's produced in the Dominican Republic; some of the raw materials are sourced from China. So, I think we're taking a more aggressive inventory position on raw materials at our manufacturing facilities as well.

Okay. Second question is, I've always thought that the Boston group would be accretive. Yet, you had the full contribution in the quarter, compared to the first quarter, and yet earnings were lower in the second quarter than the first. Were there unusual operating expenses in the Boston group that held profitability down because I would have thought with the higher margins of the Boston group and their contribution, earnings would have been higher in the second quarter than the first.

Yes, fair question, Robert. I think as if we look back in Q2, we certainly were not doing things as efficiently as we would have liked to, particularly as it relates to the distribution of the product and the move of all the inventory, as we said. As Jason alluded to earlier in the call, we will work around here called patients. I can promise you that we'll get those details ironed out here by 2022. But we're still very, very pleased with the results of the second quarter.

Okay. So in the second half, should the acquisition be additive then to what Ohio would have done on its own?

Yes, certainly.

Thank you, ladies and gentlemen. At this time, I would like to turn the call back over to management for closing comments.

Great, thank you very much. Appreciate everybody's interesting questions today. I just want to end the call with a thank you to the Rocky team here in Ohio and the Boston group team and all their efforts in bringing this acquisition together and a successful Q2, and we look forward to many more great quarters to come. Thank you all so much for your time today.

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.