Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands First Quarter 2023 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 your questions. I would like to remind everyone that this conference call is being recorded. I will now turn the conference over to Cody McAllister of ICR. Please go ahead.

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, 2022. I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason?

Thank you, Cody. With me on today's call is Chief Operating Officer Tom Robertson and Chief Financial Officer Sarah O'Connor. After Tom and my prepared remarks, we will be happy to take questions. Marketing conditions during the first quarter of this year were much more challenging than at the start of 2022, and more difficult than we anticipated. Despite industry and broader macroeconomic headwinds, and the tough year-over-year comparison we discussed on our last earnings call, consumer demand for our brands remains solid with sales through our direct e-commerce sites nearly in line with year-ago levels, and many of our key accounts reporting positive sell-through. Unfortunately, our wholesale performance didn't translate into increased sell-in as many of our retail partners are in the process of working down elevated inventory levels and have recently adopted a more cautious approach to reorders. While the year has started slower than expected, we are confident that the strength of our brand portfolio puts us in a good position to accelerate growth once the operating environment improves. In the meantime, we think it's prudent to adopt a more conservative outlook for the remainder of the year and are taking actions to reduce expenses and protect profitability. These cost-saving measures are on top of the $2 million in annualized interest expense savings we generated by utilizing the proceeds from our sales of the service brand in March to pay down more than $17 million of our senior term loan. Before I hand it over to Tom to cover the numbers in more detail, I wanted to spend a few minutes reviewing some of the drivers of our recent top-line performance, starting with our work category portfolio of brands. Work is our largest category where we compete with a wide brand portfolio that includes Georgia, Rocky, Muck, and XTRATUF. Together, this segment had a slower than expected first quarter driven by a few factors. While we have retained much of our share gains earned over the past 18 months, when compared to the first quarter of 2022, in which wholesalers over-ordered to accommodate difficulties in securing products, competitors' brands are better able to fill demand today, leading to a more competitive and price-driven marketplace. This, coupled with large inventory positions at some of our key accounts, has led to a lengthened reordering cycle that dampened sales activity in the quarter. Despite this evolving market dynamic, there were a number of bright spots for each of our Work brands in the quarter. Solid consumer demand for our Georgia brand, along with higher bookings compared to a year ago, has the brand positioned to outperform our initial full-year forecast as long as the current environment remains constant. We are very focused on the competitive landscape and have a number of seasonal releases that we believe will trend positively in the coming quarters. We also saw a number of key partners have strong success with our Rocky Work product in the first quarter driving solid volume for our spring '23 product. Pre-books for Rocky Work were very solid in the first quarter as well, and we expect good sell-through due to the strong response our campaigns have generated. Shifting to our rubber-based Work product, despite being down this quarter, the Muck brand saw improving trends with our field accounts in certain key regions and also ended the quarter up year-over-year in the important farm and ranch channel. Despite the slow start and increased focus on new accounts in sporting goods and hardware store channels has us cautiously optimistic for the remainder of the year with Muck. Turning now to our Western business. Demand has been steady at the consumer level, though the inventory build that impacted our Work business also is impacting Western. This led to a sluggish start to the year for the Durango brand. Additionally, sales were challenged due to the tough comparisons to Q1 2022 in which nearly $8 million in holdover products shifted from 2021 into the first quarter of 2022. To help offset some of the intermediate-term wholesale demand pressure, the Durango team has focused on two areas within our control: new business accounts and cost efficiencies. To date, we have added 74 new doors for the Durango brand, and these accounts are off to a great start. On the cost front, the team has identified measurable opportunities with our Durango factories. These efforts have resulted in cost reduction that we plan to pass along to our wholesale partners. We anticipate a more attractive opening price point will help our accounts to drive incremental consumer demand and increase replenishment order frequency. Rocky Western saw similar pressures in the quarter. Though the brand did see solid gains at some key Western retailers across the country, additionally, there were some bright spots from a product perspective, as new color and textured leathers along with new silhouettes added to the women's collection contributed solid sales activity in the quarter. Turning to Outdoor, which includes styles under our Rocky, Muck, and XTRATUF brands. This category was the most impacted segment for the quarter. Not unique to us, the entire Outdoor segment has experienced a slowdown as the pandemic-era trend toward outdoor activity has lost some momentum, which has led to the channel being over-inventoried. Despite the tough conditions, XTRATUF saw improvement as the quarter progressed heading into the peak spring selling season, with retail sales continuing to outpace reorders, which is a strong indicator that the brand demand remains strong. Looking ahead, we are implementing initiatives to help mitigate some of the current headwinds our Outdoor business is facing, including a renewed program with a large online retailer, and anticipating that, once inventory levels normalize, the category will return to growth. With respect to our Commercial Military and duty footwear, we saw positive booking trends in the first quarter. With Commercial Military, we saw increased bid activity along with our retail partner adding new products to stores. Meanwhile, duty sales trended positively on the strength of our police and postal uniforms this quarter. Shifting to our Retail segment, Lehigh, our B2B business was once again the bright spot. Sales continued to improve year-over-year, up 9%, driven by both retention growth and new account additions. Despite some deliveries getting pushed out to the second and third quarters, we continue to see employers embrace employee PPE such as footwear, orthotics, and compression socks as a method for driving employee retention in this tight labor market. Lehigh has been extremely well-positioned to capitalize on this trend, and we expect continued strength in our B2B business in the quarters ahead. As I mentioned at the start of the call, direct-to-consumer sales through our branded e-commerce websites were down just slightly versus a year ago, despite softer spending trends across the category. Finally, with respect to contract manufacturing, there wasn't much activity in the first quarter, but we were pleased to have recently been awarded a new three-year DLA Army Combat Hot Weather contract. We expect to start shipping the first order under this contract in the fourth quarter of this year. With a military manufacturing history that dates to World War II, we are very proud to support our US military. Overall, I am encouraged by the resilient demand we've seen for our portfolio of brands at the consumer level, despite the impact from broader economic factors and the current retail inventory landscape that weighed on our first-quarter results. I'm confident in our ability to manage through this current environment as retailers work through their inventory positions. The coming quarters will remain focused on the factors within our control, including cost, management, and operational efficiencies. Our continued work on these fronts, along with our brand's ability to resonate with consumers, positions our business to reach new heights once wholesale demand returns. I'll now turn the call over to Tom. Tom?

Thanks, Jason. As we outlined on our fourth quarter call in February, we're up against a tough comparison in early 2023 from the delay in fulfilling some shipments in late 2021 due to the disruption in our distribution centers as we pushed sales into the first half of 2022. And as Jason discussed, steady consumer demand for our portfolio of products year-to-date has been overshadowed by inventory-related selling pressure within our wholesale channel this quarter. Reported net sales for the first quarter decreased 33.9% year-over-year to $110.4 million. By segment, on a reported basis, wholesale sales decreased 40.2% to $80.1 million. Retail sales increased 3.1% to $29.5 million, and contract manufacturing sales were $0.9 million. Turning to gross profit for the first quarter, gross profit was $43.8 million, or 39.6% of sales compared to $62.8 million, or 37.6% of sales the same period last year. The 200-basis point increase in gross margin as a percentage of sales was mainly attributable to increased retail and wholesale segment gross margin and an increased mix in retail segment sales, which carry higher gross margins than the wholesale and contract manufacturing segments. Gross margins by segment were as follows: wholesale up 60 basis points to 36.6%, retail up 30 basis points to 48.7%, and contract manufacturing down to 8.1% from 16.2%. Operating expenses were $39.6 million or 35.9% of net sales in the first quarter of 2023 compared to $49.6 million or 29.7% of net sales last year. Excluding $800,000 of acquisition-related amortization, this quarter, and $1 million of acquisition-related amortization and integration expenses from the first quarter of 2022, operating expenses were $38.8 million or 35.2% in the current year period, and $48.6 million or 29.1% of net sales in a year ago period. The decrease in operating expenses was driven by a decrease in variable expenses associated with the lower sales and improved distribution center efficiencies compared with a year-ago period. Income from operations was $4.2 million or 3.8% of net sales compared to $13.2 million or 7.9% of net sales in the year-ago period. Adjusted operating income, which excludes the expenses related to the acquisition in both periods, was $4.9 million or 4.5% of net sales compared to adjusted operating income of $14.2 million or 8.5% of net sales a year ago. For the first quarter of this year, interest expense was $6.1 million compared with $3.9 million in a year-ago period. The increase reflects increased interest rates on the payments on our senior term loan facility and credit facility. On a GAAP basis, we reported a net loss of $0.4 million or $0.05 per diluted share compared to net income of $7.3 million or $0.99 per diluted share in the first quarter of 2022. Adjusted net loss for the first quarter of 2023 was $0.8 million or $0.12 per diluted share compared to adjusted net income of $8.2 million or $1.10 per diluted share a year ago. Turning to our balance sheet. At the end of the first quarter, cash and cash equivalents stood at $4.9 million, and our debt totaled $219.8 million, consisting of $95.8 million in our senior secured term loan facility, and $126.5 million of borrowings under our senior secured asset-backed credit facility. During the first quarter, we paid down $20.5 million in our senior term loan and $16.8 million of borrowings under our credit facility. Inventory at the end of the first quarter was $224.1 million, down 22.5% compared to $289.2 million a year ago, and down 4.8% compared to the end of 2022. With respect to our outlook, based on the first-quarter results, the sale of the service brand in March, and a more cautious view of the remainder of the year, given the current industry and economic headwinds, we are adjusting our guidance. We now expect full-year 2023 net sales to be approximately $500 million compared with our previous outlook of approximately $565 million. The sale of the service brand represents roughly $25 million of our overall reduction, with the remainder coming from lower projected wholesale sales across our categories, partially offset by a modest amount of contract military sales in the fourth quarter. We still expect gross margins to be approximately 40% in 2023 compared to adjusted gross margins of 36.6% in the prior year as the higher projected mix of retail sales is offsetting the cost deleverage from the lower overall sales outlook. With regard to SG&A, we have already made some adjustments to expenses in response to the slower Q1, and we are currently evaluating additional expense savings. That said, we are now expecting some additional deleverage compared to 2022 on top of the modest deleverage we are planning at the start of this year. Finally, interest expenses coming down, thanks to the $37 million of debt reduction we achieved in Q1, including paying down our more expensive senior term loan by $20 million. Interest expense is now projected to be $18.5 million in 2023, down from our prior guidance of $21 million. That concludes our prepared remarks. Operator, we are now ready for questions.

Thank you. The first question is from Jonathan Komp of Baird. Please go ahead.

Thank you. Can you hear me?

Hey, John. Yes, we got you.

Sorry for the delay there. A couple of questions. First, I just maybe ask more about what you are seeing at the consumer level and the way you report your business. It looks like the Retail segment flowed from 40% growth down to 3% growth. So just maybe want to clarify what's driving that change in trend? And then maybe just to reconcile that when you talk about the consumer demand you are seeing and how that's different than that step-down in growth you are seeing in the retail segment?

Yes. I'll start off John, and maybe Tom can add in. When we talk about the wholesale business, we had anticipated that, at the end of 2022, our retail partners would have been able to navigate the over-inventory positions and get back to a regular fill-in kind of cadence into Q1. What we have learned is that that did not happen. The inventory levels were even higher, and they are still working through that really as we speak now. So, if you think about some of the large farm and ranch stores, or maybe some of the large Western retailers, or even outdoor retailers, they are seeing and they are showing us reports where our product is selling well at those locations. But they just have enough inventory that they are not needing to fill back in as they sell through. So that's really what we are talking about from a wholesale standpoint in regards to needing to get that inventory flushed through. Hopefully, they'll get back on a normal cadence of filling in whatever that cadence was from either weekly or biweekly in most cases.

And then John, just to add on, so you had a question around kind of the retail business, particularly, I think, e-commerce. If you think about our e-commerce consumers for our brands, they tend to be much more active in Q3 and Q4, particularly for the outdoor insulated products. Thinking back to Q4 of 2022, we were still working through those distribution challenges that we had, and we were not able to ship our e-commerce orders and execute as well in 2022 as we were in 2021. As we moved into 2023, we're seeing positive sales for our e-commerce websites. They're coming in where we had originally planned them. So, we're optimistic that we will continue to see e-commerce grow here in the last half of the year as well. Additionally, in that retail category, we talk about our Lehigh business and the Lehigh business saw some wins in employee wellness and some additional spending right at the end of the calendar year as people utilized their vouchers. This was bolstered by the new SMS programs and email campaigns that we're doing in that space. That drove some sales at the end of the year as well. And so, we’re going to continue those types of campaigns at the end of 2023 as well.

Okay. That’s really helpful. Thanks. And maybe a follow-up just on the wholesale destocking you're experiencing, any insight you can share from your partners or any of your past experience, how long that might last, and then how should we think about any incremental risk to that timeline if consumer purchasing actually slows?

Great question, Jon. We keep asking this pretty much if not every week, every day. Our initial thought was we were hoping that by the end of last year they would've gotten through it. That has not happened. The communication we've had is that Q2 is probably going to be still a tough comp quarter and maybe Q3 loosens up a little bit. Our bookings going into Q3 and Q4 represent a better view for us, and those are not as concerning. But as indicated in the prepared notes, we are being very cautious. We went into the year with a different opinion and we are mirroring the retailers’ cautiousness in our outlook as well. So, we expect Q2 to be another challenging quarter.

Maybe two last ones for me. But first, just to follow-up on the pricing comment that you made, just want to understand your approach there. Are you value-engineering new products at a lower price point, or are you rolling back any price increases that you had implemented given a different competitive dynamic? And do you have any sense of what other competitor brands might be doing?

What we have found is that if you think back, as COVID hit, everybody stopped producing, and so the factories were starving. Then everybody turned back on and started buying product, and the factories got overwhelmed with orders. So, those factories were able to take price increases that we all really didn't have any option to say no to. Now, we are back into this place where factories around the world, even our own factories are producing at a much lower rate, so they need capacity or orders to fill their capacity. We've been able to go back to those factories and negotiate better prices, better raw materials, and just better overall. Therefore, we've been able to reduce the cost. We have been doing that very targeted and really looking at specific styles that maybe have slowed down more than others and where we feel that it may be a price issue at retail. We've been able to lower those, and we're hoping that we’ll see some pick-up there to help turn some of that inventory and therefore help fill in orders.

No, I think that's generally the gist. We are using the selling data from some of our larger accounts and some of our field accounts. We get that type of information provided to us and we're taking that and going back to our sourcing partners and saying, hey, price is impacting certain styles. We've been able to work down some of the first costs for some styles that aren't meeting our expectations from a sell-through perspective. We've had some success there and adjusting our MAP or MSRP pricing accordingly.

The other part of that question you asked Jon, was regarding competitors. We have seen a couple competitors, much smaller than us, reduce some prices. And if you remember, the Lehigh business does a lot of business with some other brands, so we have seen some price reductions, but again, it's been very pinpointed to specific types of products. Additionally, some wholesalers took their price increases, and we haven't seen any reductions there. Our approach again will be to be strategic around where and how to do that and try to continue to maintain the higher margins that we shared, which were in the 39%, 40%. We want to continue to drive higher margins.

I'm possibly overlooking some mix or product changes due to the acquisition, but I'm trying to understand why the implied wholesale gross margin should remain significantly above pre-pandemic levels considering the dynamics discussed. What do you think is the appropriate gross margin level at the segment level?

Yes, I would say in the wholesale space, post-acquisition, the acquired brands carry a slightly higher gross margin than our legacy brands pre-acquisition. We would like to target long-term and are going to work to get there this year, but could lead into 2024, aiming to achieve wholesale gross margins in the upper 30% range, around 39%. We're guiding those gross margins to 40% for 2023, but believe there will be room for continued expansion as we move through time here. Given the inventory position we got into last year, we are still working through some inventory that came in at higher inbound logistics costs, but we have certainly seen the relief like everybody else has. We need to sell through that inventory that came in last year.

Great. Maybe last one for me if I could sneak it in, and maybe it's for Tom or maybe for Sarah since she'll inherit some of the comments here, I guess. But just thinking through the operating margin. It sounds like the pieces you gave may still close to holding the 8% operating margin for the year, given some of the cost adjustments. So just maybe I don't know if you had any more specificity on the operating margin this year and then how should we think about what's needed to grow that over time?

Yes. I think that's a pretty fair estimate still, John. We are certainly going to try to target coming in above that. As we work through some of these cost-saving measures over the next quarter, if we are able to see positive sell-through or I guess positive sell-in to retailers in Q3 and Q4 as they work through those inventories, I think you are familiar with us and have seen us be able to grow our operating income or operating leverage for some top-line sales growth. We will be waiting to capitalize on that moment.

Okay. Thanks for taking all the questions.

The next question is from Janie Stichter of BCRG. Please go ahead.

Hi, everyone. Good afternoon. First, I want to clarify just on some of the commentary around the large farm and ranch stores in the Western retailers. Is there any change they are seeing based on what you're hearing from them in terms of sell-through, or is it just purely a more conservative posture just based on the environment, the fact they feel like they have enough inventory?

Yes. They are telling us that they have enough inventory going through Q1. We are hoping as we continue to work with them to understand that Q2 may still be a little bit of a challenge. They are being more conservative, and even in some cases, it may not be our inventory that they are concerned with. There could be other brands or other categories that are creating this inventory imbalance issue for them. We had anticipated that we would move through more of that in Q4 of last year and a little into January, but it just has not opened back up. They are being really conservative and selling what they have.

Janie, I think one of the ways we can tell the behavior of the retailer has shifted is that historically, our business would be about 65% to 70% at once. Working through the last couple of years, that number crept down to about 50% to 55%, depending on the brand being at once, meaning they were doing more bookings. In total, they were booking more than in the prior years. As we look at the start of this year, we are seeing that once numbers crept to an 80% mark, which shows you they are ordering more just in time as they need it and replenishing their inventory. This shift will slightly change the burden of having the inventory on our books. They seem to be relying on us to have the inventory as they need to replenish their inventory levels. So, we think their behavior has shifted, and we will be watching the once number very closely as we move through the next couple of quarters.

And then on the Durango business, I think you mentioned going into new doors. Any color you can give there? And then are there similar opportunities at other brands just to offset the more cautious environment that you're seeing?

Absolutely. What we found with Durango is moving more into maybe work stores versus just through Western stores or farm and ranch stores. We've had some success with some new products there in that market. Additionally, the XTRATUF brand has seen new opportunities more inland, right? That brand is really popular along the coasts, which makes sense around water. But we're seeing some success inland and maybe near lakes. So, we're seeing some success there.

Yeah, we run reports around this, and we know that this year alone, we've opened more doors than we're not positive on door counts across all brands. However, to Jason's point, the Durango and XTRATUF brands are leading with respect to door count.

And then a last one for me is just on inventory. I think you had said down $45 million this year. Is that still the plan? And will you put that towards debt paydown?

Yes, we're maintaining our targets to get inventory down to approximately $180 million to $185 million in sales by the end of the year. The plan for that will be to use those proceeds to pay down debt.

Next question from Jeff Lick of B. Riley Financials. Please go ahead.

So, a question: since you last spoke, about 40 days ago, it looks like you took your guidance down by $40 million, excluding service. I'm just curious where’s the biggest hit? Also, within these 40 days, which area surprised you the most to the downside, and which one surprised you the most to the upside, if any?

Hey, Jeff. I think the biggest area for us is the key accounts, right? Not to continue to harp on them moving through their inventory, but from the limited visibility that we have into their data, we can see the inventory levels coming down. I think we anticipated more replenishments and bigger fulfillment orders. As Jason mentioned earlier, we've seen some of those retailers’ inventory come down, but they are still being incredibly conservative. Additionally, as Jason noted, they could be over-inventoried in other categories, which keeps orders for our branded products limited. On the upside, e-commerce did see a bit of a dip in March but has since recovered in April, which was unanticipated in the last 40 days.

Yes. I would add that in general, the rubber boot business has surprised me the most, being down, while on the other hand, the XTRATUF new store openings have surprised me positively. I'm excited to see that as it broadens the horizon for that brand. We just need to navigate this inventory issue right now.

I think once we all get past the inventory issue, we've had a lot of management-to-management meetings with our key partners, and they are being more cautious. We are going to mirror that mindset with our outlook for the year, which is what we have done.

Yes. Just a follow-up, Tom. You alluded to April in e-commerce being a little better. Just kind of curious if you'd characterize as the quarter transpired when you left the quarter in March. Is it fair to say you went out of the quarter on a low note, or is there any indication of a bounce back as we think about going into Q2?

To answer your question correctly, are you referring just to e-commerce, or sales in general in total?

Just in general.

Yes. As we look into Q2, we're going to be cautious. As Jason has said, we probably have sales flattish to down slightly in Q2, but recovering in Q3 and Q4 to get to that $500 million number. It's really just a wait-and-see on when our retail partners start filling in more regularly. We're seeing some of that, but will still be cautious.

There are no further questions at this time. I would now like to hand the call back over to Jason Brooks for closing comments. Please go ahead, sir.

Thank you very much. I just want to thank the entire Rocky team for a challenging Q1, but we have all worked hard to get here, and I am positive that we will continue to fight the fight for 2023 and do the best we can to make this the best year out of 2023 that we can. Thank you very much, and thank you to our investors and analysts on the call today.

That concludes today's conference. Thank you for joining us. You may now disconnect your lines.