Good afternoon, ladies and gentlemen. And thank you for standing by. Welcome to the Rocky Brands Second Quarter 2022 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. I would like to remind everyone that this conference call is being recorded. I will now turn the conference over to Mr. Brendon Frey of ICR.

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, 2021. And I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason?

Thank you, Brendon. With me on today's call is Tom Robertson, our Chief Financial Officer. We are very encouraged with the continued strong demand we experienced for our portfolio of leading brands during the second quarter, especially in light of the growing pressure on consumer spending from inflation and other macroeconomic headwinds. Our top line performance year-to-date underscores the desirability of our innovative functional footwear, the strong connections we've forged with our core customers in multiple categories, led by work, western, outdoor, and commercial military. Over the past 15 months, we have integrated our acquisition of Honeywell's performance and lifestyle footwear business, which includes the Muck and XTRATUF brands, and made important infrastructure investments to support growth, most notably, the opening of a new distribution and fulfillment center in Reno, Nevada. At the same time, we have faced certain internal and external challenges that have hampered our ability to fully capitalize on our progress and deliver the profitability this company is capable of generating. Most recently, we have seen higher-than-expected costs throughout our supply chain from initial costs with our suppliers to inbound freight and port-related logistics expenses. We raised our prices at the start of the year; however, it hasn't been enough to fully offset the continued increases we've experienced, which resulted in second quarter earnings coming in below our expectations. In response, we will be taking our pricing up again on September 1, which, along with improved supply chain conditions and the expense synergies we announced in early June, will put Rocky Brands in a much stronger position to deliver sustained, profitable growth. Tom will go through the numbers in more detail, but I want to spend a few minutes reviewing the highlights for each of our brands from the second quarter, beginning with Durango. The brand continued to experience robust demand and finished up double-digits for the eighth quarter in a row. We saw strength in both key and field accounts, driven by strong sell-through and better on-hand inventory levels, with particular outperformance in our farm and ranch channels. While we saw broad based strength across our core Durango styles, we also shipped new styles, our very popular Maverick XP, Westward series and Rebel Pro, adding to the tremendous strength with our field accounts. In summary, the Durango brand continues to have major momentum and is poised for further gains as we continue to capture new shelf space with new and existing customers. Turning to Georgia. The brand continued its strong performance with strong double-digit gains this quarter, fueled primarily by growth in the field accounts. We are particularly pleased with the headway we've made diversifying the Georgia business. While the Original Wedge, Georgia Giant, Romeos, and Mud Dog all represent major volume for the brand, we are also having success with newer items with more features and comfort. In response to certain competitor supply chain constraints, both large and small farm and ranch accounts increasingly stocked Georgia loggers and work Western styles to fill vacant shelf space. Additionally, we saw the new AMP LT wedge, a more modern take on our classic wedge, grow almost 50% and our work hikers grow 74%, fueled by strength in our Pacific Northwest accounts, an area usually dominated by our logger and classic Romeo styles. The diversifying of regionality and new styles bodes well for the success of Georgia, even as market forces weigh on the industry. The Rocky Brand, which includes work, outdoor, Western, commercial military, and public service footwear, also had another solid quarter. Outdoor and Western in particular were areas of strength, while in work, the timing of key orders in the year-ago period that we didn't anniversary was nearly offset by new distribution we've added this year. Importantly, the hunting season got off to a strong start, especially our outdoor apparel, as many retailers were under inventory this time last year. Overall, the outlook for Rocky work, outdoor, and Western for the balance of 2022 remains solid. With respect to Rocky commercial military and public service division, the categories registered high teens year-over-year growth, one of the best quarters on record. As the teams capitalized on growing market momentum, better product availability, coupled with increased deployments, helped commercial military sales continue the positive trend established in the last quarter. At the same time, our public service business had a terrific quarter as the team adeptly executed its comprehensive sales strategy that focuses on proper forecast and on-time delivery for factory direct orders, as well as increased customer contact, informing them of our in-stock position for key Alpha Force styles. With both groups, the growing demand and improved inventory positions, along with the closing of the US government fiscal year in September, bodes well for a continuation of a strong momentum. Our Muck and XTRATUF brands both posted solid gains in the second quarter. For Muck, the logistics and distribution challenges experienced in Q4 and Q1 dramatically improved this quarter. As a result, total shipments were up 41% year-over-year. Looking at the competitive landscape for Muck, the category is currently overstocked, but the Muck brand continues to perform very strongly, with double-digit sell-through at some of our key farm and ranch accounts. With the rising cost of energy in key Muck markets, the natural resources industries are booming, which is driving opportunity for our work and industrial Muck products. XTRATUF also continues to see positive momentum, especially with the brand's key outdoor and fishing retail partners. In addition to demand for XTRATUF's core offering, new styles such as the Omni sandal and the kids' ankle deck boots, which provided brand entry into two new product categories, have performed well since arriving at retail stores in the second quarter. Turning now to our Retail segment. There were some very positive developments in the second quarter. Most significant was the implementation of our Reno, Nevada distribution center's singles processing function. This allowed us to bring live much-needed inventory for both Muck and the XTRATUF US sites, as well as enable our ability to fulfill those orders within one to two business days. We went live with this new processing function at the end of April, and since then, we have seen average daily sales for those two ecommerce sites double compared to last quarter. Unfortunately, at the same time, we were continuing to experience extended carrier delivery times. To help mitigate this, we expanded our expedited shipping options at checkout on some of our sites and continue to send tracking information, so that customers can closely monitor the shipping process. We will also soon begin going live with alternative payment methods such as PayPal on our Canadian Muck and XTRATUF sites, which should lead to increased conversion and overall revenue capture. Equally important, we saw double-digit increases in our Rocky, Georgia and Durango brands on their respective ecommerce sites. Average order volume on full priced items increased mid-teens year-over-year due to strong full price selling and new price increases that went into effect. Looking ahead, digital-first marketing programs, enhanced online user experience, and compelling new product launches have us optimistic about the growth prospects for this channel. Meanwhile, our Lehigh B2B retail business had another strong quarter, driven again by significant growth in both new and existing accounts. With prices going up across the footwear industry, many of our customers have increased subsidy amounts for their employees, helping fuel our top line performance. Additionally, many accounts are beginning to view providing safety PPE such as footwear, orthotics, and compression socks as a tool to drive employee retention. With its wide offering of safety products, Lehigh has been able to organically drive additional revenue with existing accounts. And as COVID concerns have continued to abate, our number of on-site iFit events is gaining pace, which combined with our email and SMS strategy, is driving higher account participation rates and increasing our account revenue and penetration rate. Overall, I'm very pleased with our top line results and momentum at the midway point of 2022. While we are cognizant of the impact of certain macroeconomic factors could have on our overall industry demand in the near term, we believe our comprehensive portfolio of leading brands and continued focus on operational improvements puts us in a great position to continue capturing market share and to start driving enhanced profitability. I'm very excited for what the future holds for Rocky Brands, and we look forward to a solid finish to the year. I'll now turn the call over to Tom. Tom?

Thanks, Jason. As Jason outlined, growing demand and strong inventory to meet that demand drove another solid quarter for Rocky, though operational challenges did hinder our ability to convert that demand into bottom line results. Reported net sales for the first quarter increased 23.1% year-over-year to $162 million. By segment, on a reported basis, wholesale sales increased 29.7% to $131.2 million, retail sales increased 16.4% to $26 million, and contract manufacturing sales were $4.9 million. Turning to gross profit. For the second quarter, gross profit increased 9.4% to $53.8 million or 33.2% of sales compared to $49.2 million or 37.4% of sales in the same period last year. The decrease in gross margin was primarily attributable to higher-than-expected increases in product cost, inbound freight, and other shipping and logistics costs. Gross margin by segment were as follows: Wholesale down 500 basis points to 30.9%. Retail down 80 basis points to 48.9%. And Contract Manufacturing down to 10.5% from 21.8% a year ago. As Jason noted, we're raising prices on September 1. And with this action, along with improving supply chain conditions, we expect gross margins in the second half of the year to improve compared to the second quarter. Operating expenses were $48.2 million or 29.7% of net sales in the second quarter of 2022 compared to $40.7 million or 30.9% of net sales last year. Excluding $2.1 million in acquisition-related amortization, integration expenses, and restructuring costs this quarter, and $2.3 million in acquisition-related expenses in the second quarter of 2021, adjusted operating expenses were $46 million in the current period and $38.5 million in the year-ago period. The increase in operating expenses was driven primarily by higher outbound freight expenses and higher variable expenses associated with the increase in sales. As a percentage of net sales, adjusted operating expenses improved 80 basis points to 28.4% in the second quarter of 2022 compared with 29.2% in the year-ago period, and improved 70 basis points compared to 29.1% in Q1 of this year. Income from operations was $5.6 million or 3.5% of net sales compared to $8.4 million or 6.4% of net sales in the year-ago period. Adjusted operating income, which excludes the expenses related to the acquisition and restructuring charge in both periods, was $7.7 million or 4.8% of sales compared to adjusted operating income of $13 million or 9.9% of net sales a year ago. For the second quarter, interest expense was $4.3 million compared with $3.4 million in the year-ago period. On a GAAP basis, we reported net income of $0.9 million or $0.12 per diluted share compared to net income of $3.9 million or $0.52 per diluted share in the second quarter of 2021. Adjusted net income for the second quarter of 2022 was $2.5 million or $0.34 per diluted share compared to adjusted net income of $7.4 million or $0.99 per diluted share in the year-ago period. Turning to our balance sheet. At the end of the second quarter, cash and cash equivalents stood at $5.8 million and our debt totaled $284.6 million, consisting of $125.9 million senior secured term loan facility and $158.7 million borrowings under our senior secured asset backed credit facility. As of June 30, 2022, we had $38.2 million of borrowings available on our credit facility. Inventory at the end of the second quarter was $287.8 million compared to $143.5 million a year ago and $289.2 million at March 31, 2022. The increase in inventory was driven by overall cost increases and strong sales growth, combined with additional inventory on hand as a result of increased in-transit times and distribution and fulfillment challenges experienced in the second half of 2021. While inventory at the end of June was higher than we'd like, inventories are down from the end of last quarter slightly, including a $45 million reduction in in-transit inventory as we expect to realign inventory levels with sales growth and inventory purchasing strategies over the coming quarters. With respect to our outlook, based on a more challenging macroeconomic backdrop, we now expect full-year net sales to be toward the low end of our previous range of 21% to 24% growth over 2021. In terms of gross margin, the recent pressures we've discussed today will continue to weigh on wholesale margins in the second half of the year, with some improvement compared to the second quarter as the price increases go into effect and start flowing through the income statement. Based on the outlook for wholesale margins and our projected sales mix by segment, we now expect overall gross margins to be approximately 34% for the fourth quarter this year. With the $3 million to $4 million annualized savings from the cost-saving actions we announced in June kicking in, we will experience significant improvement in leverage compared with the first half of this year, with third and fourth quarter SG&A as a percent of sales dropping down to the mid-20% range. For the full year, we are now targeting achieving approximately 100 basis points in expense leverage over 2021 adjusted levels and making further progress next year. This will help transform our top-line success into stronger earnings, which along with the cash generated by reducing inventories, would put us in a good position to be paying down our debt. That concludes our prepared remarks. Operator, we are now ready for questions.

Our first question comes from Susan Anderson from B. Riley.

I was wondering, Tom, if you could talk maybe a little bit about just the drivers of the gross margin pressure, maybe if you could bucket it a little bit just in terms of magnitude and when you expect that to fall off. And then in terms of the price increases, how much are you expecting them to be in the back half? And was there any in the first half? And do you expect that to fully offset inflationary pressures?

So, as we look at the rest of the year, I guess starting with the first part of your question, second quarter, we would be – as inventory came in, right, and we talked about in-transit inventory at the end of last quarter, as the on-hand inventory kind of swelled, we had to throttle inventory into the distribution centers. And we ended up incurring more logistics costs than anticipated. And so, we've gotten a lot of that through the P&L at this point. But there's still more to flow through up from the balance sheet. And so, we'll see continued pressure really in the third quarter, and then mitigating a little bit in the fourth quarter. The other driver is, as we noted earlier, we've seen price increases from third-party sourcing factories in Asia. And so, we're working to help mitigate those, whether it be pushing back on those partners or even – and the price increase that we've announced today. In the prepared remarks, we stated we anticipate getting to that 34% mark for the fourth quarter, which is down from where we've previously guided. The price increase more specifically probably averages somewhere between $5 and $7 per pair. And really, the effects of that will lag into Q4. And probably, our larger accounts, you have to give them a little bit more notice. So, likely more see the benefit of that as we move into the first quarter of 2023.

I just want to add on there. We did take a price increase at the beginning of the year. Obviously, it was not enough of a price increase. We do believe this one is more appropriate. We will have to reevaluate that as we come in to the end of the year and if there will need to be any more price increases going into 2023.

Maybe if you could just talk about the Wholesale order book, kind of what you're hearing there, from your wholesale partners for the back half. It looks like you're expecting sales to be at the low end now, but then also going into 2023.

I'll start off here. I'm sure Tom will add some color. But we are still going into Q3 and Q4 pretty positive. We saw a little slow at-once business in July, but nothing too alarming. I think we tend to look at our product in its more functional than fashionable, and people are still working, people are still in need of the types of products we have. So we still feel pretty good about Q3 and Q4. And then, to go out into 2023, trying to predict anything right now is really complicated, I think. Are we going to get back to, what is the new normal, and how does that kind of flow through? I think it's got to level off. I think we have to find a new normal here. And hopefully, we can get back to something in 2023.

Just to add on a little bit there. We obviously follow our bookings really closely. We've not seen any significant cancellations. And so, what we're trying to ascertain really is, as Jason alluded to, we saw a little bit of softness in our at-once business, which is a large portion of our business, but nothing too concerning. And so, I think we're being, I'll call it, cautiously optimistic for the last half of the year. That's why we're not really taking down our guidance. We're just kind of going to the lower end of the range we previously provided.

Our next question comes from the line of Camilo Lyon from BTIG.

This is Mackenzie Boydston on for Camilo. My first question is just on supply chain. I know that you said Q2, you saw some higher costs. But I'm just curious, in terms of transit times and freight costs, could you just kind of talk about what you're seeing now versus maybe what you saw earlier this year? Just trying to understand, like if you're seeing anything maybe come down from Q2 into the back half or is understanding when you think transit times and costs might peak for you?

I just want to be clear. We are definitely seeing costs come down. It's not coming down as fast as it went up, but we are seeing costs come down. I think where we talked about the cost in Q2 was we anticipated that may be coming down a little quicker. And so, they stayed up there a little longer than we anticipated. So we are definitely seeing that a little bit. And then, in-transit times are starting to get a little more normalized. I would say 30 to 45-day in-transit times are more common today. And that’s kind of what we used to see really before COVID and all the disruptions. We still have some outliers occasionally where you have a high expense and then maybe a 90-day transit time, but we definitely are seeing it come down a little bit and more normalized, I guess, from a transit time.

I think an important callout here, Mackenzie, some of the transportation costs that were incurred in the second quarter really relate to our inventory position and us having to manage through all the logistics of getting the inventory into the distribution center. And so, the takeaway from that is that some of these costs are really just temporary, right. As this inventory position works its way down, as we're planning for Q3, but really for Q4, we'll see those, we'll call them, extra logistics costs, import costs; we should see those come down. So that's the optimistic point of view on this, is that some of these costs will go away as the inventory position gets better.

Just your brands, both your legacy and your acquired, can you talk about – I know you talked about you continuing to see demand be strong across your brands. But just any noticeable difference or call-outs by income, demographic, customer, product type, just anything you could talk about from a demand perspective across your portfolio would be helpful.

I think this is a great question. Because of the type of products, the demographics of it are pretty consistent, right? These are blue-collar workers; we might have some outliers occasionally here or there. But we sell all of the brands throughout all of the same kind of retail stores. When you look at farm and ranch, you look at work boot stores, you look at outdoor hunting store. So, we really don't see a lot of difference in that area. And I would tell you that our work boot business is still very strong. The western boot businesses are maintaining and doing very well in both Durango and Rocky. There’s been anywhere that we've seen a slight adjustment is XTRATUF. It has a very functional side to it. And then it also has a little bit more of a – I hate to call it fashion, but it has a little bit of a fashion side to it. So, we've seen a little bit there from a slowdown standpoint, but nothing that's too concerning. So the demand for our brands is still pretty strong right now.

Our next question comes from the line of Jonathan Komp from Baird.

Maybe just a follow-up question on the outlook for revenue growth at the low end of the prior range. I think you're implying something close to flattish in the second half to get the 21% growth for the year. So can you maybe just confirm that's what you're thinking and any additional perspective you could add on sort of change versus strong growth you just delivered in Q2?

We're going to the lower range. I think we're relatively flat. There might be some upside there for the second half. I think just from a modeling perspective, John, you've got to remember that last year was a really tough comp. That was kind of the height of our distribution challenges following the integration. So, I think you just need to massage the numbers from there as well. But we don't plan to carry in as much backorders, if you will, into the fourth quarter, either. So, just some noise between quarters, but I think you're correct in your assumptions there.

Maybe a broader question on the revised margin commentary. Guys, it looks like you're pointing closer to 7% for the year in terms of the adjusted operating margin. Could you just share any perspective as we look forward? Is that a new base to grow off of and what are the pieces that – if you could quantify them, sort of that look temporary that's here that maybe we shouldn't factor in going forward?

I think there's a lot of temporary factors going into this year. As we work through this inventory issue, we're going to see efficiencies in several different places, one within the distribution centers themselves. They're jammed pretty tight right now. And so, we'll become more efficient as those inventory levels come down, which, again, we anticipate seeing the inventory come down in the fourth – a little bit in the third, but more in the fourth quarter. Also, there's a significant amount of logistics costs around just trying to move the inventory around between distribution centers, which I don't anticipate having next year. And also, the costs related to transactions that were incurred in the first and second quarters due to inventory swelling that we do not anticipate on a go-forward basis as the inventories are right-sized. So, I'd say a lot of this cost is temporary in nature. Also, the price increases, as we've alluded to, or we've spoken to, I should say, will also drive higher margins. We just have to be patient for that price increase to take effect. We had taken the approach last year of trying to think that the freight was probably going to be a little bit more of a temporary challenge. But when we got price increases for initial costs essentially from Asia, we have to take a more dramatic price increase. And again, our plan is to try to mitigate those initial costs as we move forward as well. So, I would say it's more temporary. And for us to get back to last year's numbers, I would say, which would be a very low goal for us in 2023 from an operating margin standpoint, and I think our expectation would be that we would see some improvements.

Just last question for me. Sorry, if I missed this, but, Tom, is there any way you could give a little more color into the makeup of the inventory? Or just specifically, where you see some of the excesses that you want to work through and sort of the plans – the updated plans to get through that?

It's really clear, if you look inside of the makeup of the inventory. The majority of our excess inventory position is really around the acquired brands, particularly Muck and XTRATUF. Fortunately for us, those brands are performing very well. And so, our plan is to move through that inventory, like I said, in Q3 and Q4, and we'll continue to right-size that. Really optimize it into Q1 and Q2 of next year. We are probably a little bit heavier on inventory in the legacy brands. And that's really been driven by transit times, but also last year with everything going on in our retail. We're up against a really tough operating environment or lean inventory environment for the legacy brands last year. But it's very clear to us, given the distribution challenges we had with the acquired brands in Q3 and Q4 of last year, that that's where the largest inventory position is.

Ladies and gentlemen, our last question comes from the line of Robert Shapiro with Singular Research.

Is there any reason why you're waiting to raise prices until September 1? Is there – you need to have some lag time or why is it a month away?

There's typically a timing around that to make sure that we get it communicated with the accounts. Where we're able to take immediate price increases, we will. But, typically, the key accounts are looking for anywhere from 60 to 90 days' notice and then just trying to make sure that we get it in the systems and processes.

Rob, just to be clear, they've been announced. We've got to give the customer so much notice. And so, we're giving our retail partners 30 days' notice unless their contract or agreement specifies longer.

Are there certain products that you can raise the prices of more than other ones? Or are you raising just a certain amount across the board for the shoes?

We took the approach and looked at all the brands and all the products – and I think Tom mentioned earlier. It's somewhere between like $5 and $7 price increase. There are definitely products that cannot take those kinds of increases. I would tell you that service is one of the brands that when you're talking about a price point type shoe to add $5 to would just kill it. So there might be some styles specific like that that we were only able to take a $1 price increase. But the average for the core brands was $5 to $7.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the call back to Mr. Jason Brooks for closing remarks.

Thank you very much. First, I'd like to just say thanks to all the Rocky Brands employees and the efforts that they've been putting in 2022 to put together a pretty good Q2. I also would like to thank our investors and our analysts. We've got a lot of work to do here and we are focused on it and moving forward. And we look forward to finishing out a good 2022 and then moving on to an excellent 2023. So, thank you for your time, effort, and support here today on the call.

Thank you. The conference of Rocky Brands has now concluded. Thank you for your participation. You may now disconnect your lines.