Greetings and welcome to the Rocky Brands Fourth Quarter Fiscal 2022 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brendon Frey of ICR. Thank you, sir. You may begin.

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

Thank you, Brendon. With me on today's call is Tom Robertson. Throughout 2022, we experienced sustained consumer demand for our portfolio of leading brands that span multiple categories like work, outdoor, and western. Our functional footwear offered an accessible price point, and more needs-based categories have provided a degree of insulation from the inflation-driven pullback in consumer spending that intensified as the year progressed. 2022 was also a year in which we heightened our efforts around efficiencies and profitability. We made important infrastructure investments to support growth in late 2021 and early 2022, most notably the opening of a new distribution and fulfillment center in Reno, Nevada. Following the successful integration of the performance and lifestyle footwear business we acquired from Honeywell, we identified a number of operational synergies and cost-saving opportunities that we acted upon in 2022, which will result in approximately $3 million to $4 million in annualized savings. Finally, we strengthened our organization with some key hires and promotions. As we announced in October, Tom was elevated to the newly created role of Chief Operating Officer and is now overseeing the day-to-day business operations of the company. We recently hired Tom's successor for the CFO and Treasurer role, Sarah O'Connor. Sarah brings a wealth of finance expertise to the team, and her track record of working with public companies in the retail and manufacturing space will be immediately additive to our leadership team. We are thrilled to have Sarah join the Rocky Brands team in the coming weeks, and we look forward to introducing her to our investor community on our next earnings call. We have also hired a new VP of Manufacturing and continue to evaluate ways to further strengthen our organization and leadership team. Shifting to our fourth quarter results. While we expected sales to be down year-over-year due to the difficult comparisons, we were pleased to deliver results that were ahead of expectations. Our ongoing efforts to restructure and refocus our Lehigh B2B channel, combined with the enhancements we've made to our e-commerce sites and digital marketing programs, drove significant outperformance in our retail channel this quarter. Compared to a year ago period, we saw more than a 40% increase in our B2B business and nearly a 46% increase in our direct-to-consumer business. This resulted in a more favorable channel mix that helped drive gross margins higher than planned. The strength in our Retail segment helped partially offset expected softness in wholesale sales following last year's exceptionally strong performance. As a reminder, last year, there was a significant shift in orders out of the third quarter into both the fourth quarter of 2021 and the first quarter of 2022 as a result of temporary logistic challenges we encountered in our distribution center. Before I hand it over to Tom to cover the numbers in more detail, I want to spend a few minutes reviewing some of the drivers of our recent performance, starting with our work category portfolio of brands. Though the broader economy has slowed and the competitive environment is back to pre-pandemic conditions, demand for our work product has been resilient. Overall, work posted modest growth over the fourth quarter of 2021 despite the more challenging operating environment. Work is our largest category, accounting for approximately 42% of annual revenues as we compete in the estimated $20 billion work footwear market with our Georgia, Rocky, Muck, and XTRATUF brands in wholesale as well as our Lehigh B2B business. Georgia had a solid fourth quarter, while some large key account customers slowed orders due to general inventory constraints, new growth with field customers, and further penetration into the farm and ranch segment more than made up for the shortfall. Rocky Work was up nicely, growing strong double digits, driven by key new customer programs and demand for our work product from both e-commerce and traditional retail outlets. Demand for both Muck and XTRATUF continues to be strong, and we are very optimistic about new product ahead as these brands continue to grow into new niches and resonate with customers. While demand was positive, we did see overall mixed results in our rubber work boot segment, largely due to comparability issues stemming from outperformance this time last year. As you recall, the distribution center issues we experienced last year limited our online selection and pushed inventory and sales from the third quarter into the fourth quarter of 2021. From a channel perspective, we were encouraged by very strong full-price selling online, particularly for the Muck product. Our Muck and XTRATUF e-commerce sites both saw mid-double-digit increases in the fourth quarter. Shifting to our Western business, which delivered robust growth in the fourth quarter, retail demand was very strong as the market continues to trend positively in the men's western category, which is a significant portion of our Durango business. The largest piece of our Western business delivered high single-digit growth as our teams maintained a very good inventory position to support retailers' needs throughout the holiday season, allowing us to continue to gain market share. The Rocky Western business was relatively flat compared to the fourth quarter of 2021, driven by solid results with key partners that allowed us to approximate last year's overperformance that resulted from inventory shortages from key competitors. Overall, we spent a large part of the past year taking significant share in the Western category due to competitor supply chain issues resulting in empty shelf space. While the supply chain dynamic has now normalized, we are pleased to have maintained our market share gains with our wholesale partners and core retail customer set. Turning to Outdoor, which includes styles under our Rocky, Muck, and XTRATUF brands, this category faced the most significant headwinds in the fourth quarter. Early shipments in the third quarter of this year, combined with warehouse delays leading to increased product shipments in the fourth quarter of 2021, significantly impacted the comparability to the prior year. Additionally, less than favorable weather conditions across most of the country led to limited fill-ins or new orders for insulated hunting products. With respect to our commercial military and duty footwear, we saw mixed trends in the fourth quarter. Starting with commercial military, we experienced year-over-year order declines largely due to enlistment trends. The military has experienced a 40% decrease in new recruits over the past year, reducing their need for new boot orders. Additionally, an ordering system glitch with the Navy Exchange impacted inbound order rates during the quarter. This issue has been remedied and the volumes have since normalized. Meanwhile, duty sales remained flat as we continue to see the strength of our Code Red program that has delivered important gains in the firefighting footwear space. As I mentioned at the start of the call, Lehigh, our B2B business, had a tremendous quarter. We saw significant growth in both new and existing accounts with significant acceleration as the quarter progressed. This growth was enabled by the restructuring and aligning of our internal sales and service teams that allow us to maintain a greater focus on account retention and growth over the past year. Additionally, we continue to see employers embrace employee PPE such as footwear, orthotics, and compression socks as a method of driving employee retention in this tight labor market. In fact, we continue to see a significant number of customers grow the individual subsidy for each employee, which we believe will drive new opportunities for popular higher-priced products going forward. Though we were tested by inflationary pressure and declining consumer spending throughout 2022, overall, I'm very pleased with the resiliency of the demand we've seen for our portfolio of brands and our ability to meet that demand with excellent supply chain management. As the macroeconomic uncertainty that we've experienced this past year hopefully becomes clearer in 2023, I'm confident that we are well positioned to take advantage of opportunities where we find them and that we will continue to enhance our efficiencies and profitability measures through the areas of our business that are within our control. And finally, I want to thank the entire Rocky Brands, Inc. team for their hard work and dedication over the past year. I'm incredibly proud of what we were able to accomplish this year together, and I look forward to continuing success in 2023. I will now turn the call over to Tom.

Thanks, Jason. As Jason mentioned, while the decline in net sales was expected from the shift in orders into the fourth quarter last year, we were pleased to outperform the projections we had as we entered the quarter. Net sales for the fourth quarter of 2022 were $138.9 million, a decrease of $30.5 million or 18% compared to the year-ago period. By segment, as reported, wholesale sales decreased 26.6% to $98.9 million. Retail sales increased 40.8% to $37.3 million. And contract manufacturing sales decreased 66.6% to $2.7 million. Gross profit in the fourth quarter decreased 10.4% to $56.7 million or 40.8% of sales compared to $63.3 million or 37.3% of sales in the same period last year. The 350-basis-point increase in gross margin was due to three separate factors. A 170-basis-point improvement was due to a net $2.4 million benefit we received in the quarter from a tariff-related reimbursement resulting from an overpayment in early 2022. The remaining improvement was primarily attributable to a higher mix of higher-margin retail segment sales compared with the year-ago period. When normalized for this temporary benefit, fourth quarter gross margins were 39.1%. In addition to increasing adjusted gross margins by 180 basis points year-over-year, they are up 380 basis points from Q3 2022 and 590 basis points from Q2 2022 as price actions we took at September 1 helped offset higher freight and logistics costs. Wholesale gross margins, excluding the net impact of the tariff-related reimbursements, were 34.3% compared with 34.9% in the prior year. Retail gross margins were 53.2% compared to 53.8%. And contract manufacturing gross margins were 22.2% versus 24.8% in the fourth quarter of 2021. Selling, general, and administrative expenses were $43.1 million or 31% of net sales in the fourth quarter of 2022 compared to $45.1 million or 26.6% of net sales last year. Excluding the $1.7 million of acquisition-related amortization and restructuring costs in the fourth quarter of 2022 and $1.6 million in acquisition-related amortization and integration expenses for the fourth quarter of 2021, adjusted operating expenses were $41.4 million in the current year period and $43.5 million in the year-ago period. The decrease in operating expenses was primarily driven by a decrease in discretionary spending and improved distribution center efficiencies compared with the year-ago period. As a percentage of net sales, adjusted operating expenses increased to 29.8% in the fourth quarter of 2022 compared with 25.7% in the year-ago period, driven by a higher mix of retail sales in the current quarter. Income from operations decreased to $13.6 million or 9.8% of net sales compared to $18.2 million or 10.7% of net sales in the year-ago period. On an adjusted basis, operating margins were 11.0% versus 11.7%. For the fourth quarter of this year, interest expense was $5.9 million compared with $3.2 million a year ago. The increase was driven by increased interest rates on interest payments on both our senior term loan and credit facility. On a GAAP basis, net income for the quarter decreased to $6.5 million or $0.89 per diluted share compared to net income of $12.5 million or $1.69 per diluted share in the year-ago period. Adjusted net income for the fourth quarter of this year, which excludes acquisition-related amortization and restructuring costs, was $7.9 million or $1.08 per diluted share compared to adjusted net income of $13.8 million or $1.86 per diluted share in the fourth quarter of 2021. For the full year, 2022 was another solid year for Rocky Brands. Despite the short-term profitability issues stemming from the ramp-up of our Reno distribution facility and higher inbound logistics costs, demand was very strong and we navigated a challenging macroeconomic environment adeptly. For the full year, net sales increased 19.7% to a record $615.5 million or $611.9 million on an adjusted basis, reflecting strong double-digit growth in both our wholesale and retail channels fueled by strong demand. By segment, wholesale sales increased $93.7 million or 24%, retail sales were up $20.7 million or 21.9%, and contract manufacturing decreased by $13.2 million or 46.2%. In terms of profitability, adjusted operating income decreased 5.5% to $48.6 million, adjusted net income decreased 26% to $24.1 million and adjusted EPS declined 25.5% to $3.27. For the full year, interest expense was $18.3 million, an increase of 72.3% compared with $10.6 million in 2021. Our effective tax rate for 2022 increased to 20.6% compared to 19.0% in the prior year. Turning to our balance sheet. At the end of 2022, cash and cash equivalents stood at $5.7 million. Our debt totaled $256.9 million, consisting of our $116 million senior term loan facility and borrowings under our senior secured asset-backed credit facility. During the fourth quarter, we paid down approximately $27.9 million or 9.8% of total debt from September 30, 2022. Inventory at year-end was $235.4 million, relatively flat when compared to $232.5 million a year ago. Compared with June 30, 2022, and September 30, 2022, inventories at December 31 were down 18.2% and 11.2%, respectively, and this was ahead of our stated goal to bring inventories down $40 million from their high at the end of the second quarter. We feel very good about the quality of our inventory, and given the functional nature of our product, we see little risk for above-average markdowns. Moving to our view of 2023. With the outlook for the economy uncertain and consumer discretionary spending still under pressure from inflation, we are approaching the upcoming year cautiously from a demand standpoint. We are forecasting net sales to range from $560 million to $570 million compared to net sales of $615.5 million in 2022 which included approximately $5 million from the one-time sale of NEOS inventory following our sale of the brand in September. It is also important to call out that we currently do not have any committed military contracts in 2023. Therefore, we have included no revenue from our Contract Manufacturing segment in this year's forecast, which compares to $15 million reported in 2022. With respect to the shape of our business, following the impacts of COVID, our acquisition of the Honeywell footwear business, and the disruption in our distribution center late in 2021, we expect a quarterly breakdown of revenue to start to resemble pre-pandemic percentages, meaning we will drive more volume in the second half of the year versus the first half of the year. Based on this, we expect sales to be down year-over-year in the first half as we lap tougher comparisons before returning to growth in the second half. We are optimistic that the price increases we took last fall, combined with current logistics and inbound freight costs, along with a more favorable segment mix, will drive gross margins to approximately 40% for the year compared to adjusted gross margins of 36.6% in 2022. Operating expenses will be fairly consistent with 2022's adjusted levels, so we will see some modest deleverage year-over-year due to lower sales. We anticipate interest expense to be approximately $21 million in 2023 as our actions to pay down a portion of our debt are offset by higher interest rates compared with 2022. Finally, we made good progress over the back half of 2022, bringing inventories down to more normalized levels. We have made further progress thus far in 2023, and we expect to end this year with inventories down approximately $45 million from the end of 2022. This will be a meaningful source of cash generation that we will utilize to repay borrowings on our credit facility. That concludes our prepared remarks. Operator, we are now ready for questions.

Our first question is from Jonathan Komp with Baird.

I want to, first, just to start off with a question about the fourth quarter results in the Retail segment. Could you maybe just highlight how that business performed relative to your expectations? And then of the drivers in the fourth quarter, what do you see as sustaining into 2023, if any, of the growth drivers that you highlighted?

Yes, John, thanks for the question and for being on the call. So I just want to make sure that I'm clear. When you say retail, are you talking about the e-commerce business? Or are you talking about the Lehigh business?

Yes, really both since you report them combined. If you want to talk to both, that would be great but really the segment that you reported.

Got you. So I'll separate them just a little bit. We were really excited about what's happening with Lehigh. We have seen a big change, I think, because of COVID and how that affected businesses. And so our online option, the way we deliver to them has really become more popular. And so we're excited to see that. We think that we can continue to enhance that and make it more popular, adding some of the things. I think you even talked about arch supports and compression socks, along with the footwear. So we're pretty excited about that. The e-commerce business was maybe a pleasant surprise. I mean, we were tracking it and seeing nice increases but it came in pretty significantly ahead of what we anticipated. And so that gives us a lot of confidence that our brands are still in demand, right? Like people still want the product and so they're just buying them direct. So we will continue to drive that business. We think the e-commerce category for us as a total needs to be driven and really more important than we've probably given it in the past. So we're excited about it. I don't know if you had anything to add, Tom.

Yes. I mean just to dive in a little bit on the detail, John, so 40%, 40.8% up in the retail category. The increases between Lehigh and e-commerce were almost the same. So they both grew approximately 40% in Q4. So we're very pleased with that. And then just to kind of reiterate or say a different way Jason's comment on the e-commerce channel, we think that looking at the e-commerce business, that takes out kind of the inventory channel conflict that we have, where the wholesale channel or segment is challenged by retailers in their inventory positions in the fourth quarter and a difficult comparison. And so the e-commerce kind of removes that inventory level at the retailer and speaks to the true demand for the brands. Also important to note that the Muck and XTRATUF e-commerce websites didn't have the full catalog of inventory last year. So we did benefit a little bit from that as we were working through the distribution challenges last year. But really, across all brands, we saw strong growth in our e-commerce business.

Okay. That's really helpful color. And then maybe a follow-up. As you think about 2023, if I exclude the military business from the base year, it looks like you're projecting all other revenue down mid- to high single digits for the year. So could you maybe just elaborate a little bit more on what you're embedding? I assume that's really a decline in the wholesale business. So if you could shape the year a little better for us and then comment on what visibility you have for the second half.

I'll start with that, John, and then Jason can add his insights. As we look ahead to next year, we expect continued growth in the retail category. We believe that Lehigh and the e-commerce business will maintain momentum into 2023. We anticipate growth in the retail category to be in the high single-digit to low double-digit range, while we foresee small mid-single-digit declines in the wholesale segment for 2023. In terms of timing between quarters, during the first half of 2022, we focused on opening the Reno facility, which caused us to catch up in terms of inventory for retailers. For 2023, we think the business will return to our traditional seasonality, though it may be slightly intensified due to tough comparisons from the first half of last year. We expect around 42% to 44% of sales in the first half of the year and 56% to 58% in the second half.

Got it. Understood. And then just maybe two last margin questions for the year. First, just on pricing. I know this year, you priced to offset some of the freight costs. So as the freight goes away and there's still a lot of inventory in the channel, is there any risk of a more promotional environment or even giving some of the pricing back? And then just to clarify, Tom, for the operating expenses or SG&A for the year. Did you say dollars would be about the same year-over-year? I just want to clarify that.

Yes. So on the operating expenses, yes, we think dollars will be relatively flat year-over-year, so some modest deleverage. The contract manufacturing sales carry little to no operating expenses, so we'll delever from that standpoint. And as it relates to what was the first part of the question, John? I want to make sure. Oh, the promotional risk of giving some of it back.

So I don't foresee that happening. I think, as the container prices have changed, we had not taken a lot of price increases before. So we think that where we're at here is probably a place that we're going to see stick. I think we will not see a lot of promotion in our brands. I mean, look, if we have obsolete inventory, we'll work through that and get out of it. But we still look at our product and say it's functional tool-type products, and the consumer is going to buy it when they need it. And so we're going to keep the prices really where they're at. But I think that in 2023, in particular, we won't see any of that or very little.

Just to add on too. We've been able to demonstrate that we can lower our inventory levels without getting promotional, and so I anticipate that trend to continue in 2023. I think the idea of using promotion would probably only happen to thin shelf space with our retailers. And so we monitor that with our peers, and we'll continue to do so in 2023 and act appropriately.

There are no further questions at this time. I would now like to turn the floor back over to Mr. Brooks for closing comments.

Thank you very much. I just want to say thanks to everyone on the call and all our investors, and I once again would like to express my gratitude to the Rocky team. They worked really hard during a challenging year in 2022, and we were able to make it happen, and I really look forward to seeing what we can do in the future. So thank you, Rocky team.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.