Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Second 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 questions. I would like to remind everyone that this conference is being recorded. And now I will turn the conference over to 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, 2022. And 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 Chief Operating Officer, Tom Robertson; and Chief Financial Officer, Sarah O'Connor. After Sarah’s and my prepared remarks, we will be happy to take some questions. Now to our second quarter results, the challenging marketing conditions we experienced during the first quarter continued to pressure our topline, particularly within our wholesale segment. The difficult macroeconomic backdrop, coupled with the overall elevated inventory levels from many of our retail partners led to lower-than-expected sell-in during the quarter despite the fact that our sell-through for our brands remained solid. Notwithstanding the slow start, at-once orders improved month-over-month as the quarter progressed and this trend continued in July, providing a good start to Q3 and leaving us cautiously optimistic that channel inventories are getting properly aligned with demand. While the retail inventory situation weighed on our reported results, consumer demand for our brand portfolio has provided resilience contributing to the progress many of our key partners have made in working down their total on-hand inventory. Importantly, the combination of strong full-price selling and the price actions we took in the second half of 2022 helped drive a 440-basis-point increase in gross margin year-over-year. While the first half of 2023 was more challenging than we expected, we believe the business is positioned for sequential improvements in both the third quarter and fourth quarter based on the sustained consumer demand we continue to experience for our products combined with recent conversations with key wholesale partners. Before I hand it over to Sarah to cover the numbers in more detail, I want to spend a few minutes reviewing some of the drivers of our recent topline performance. Starting with our Work category portfolio of brands. The four brands that represent our Work segment, Georgia, Rocky, Muck and XTRATUF were collectively impacted by slower reorder frequency as retailers worked to correct their inventory levels. While the group was down during the period, we saw the situation improve as the quarter progressed and also observed areas of strength beneath the challenging operating environment. The Georgia brand exited the quarter in a much better position than it started. June was much improved from April and May as we saw mid-single-digit growth with our field accounts, along with the best month of the year with some of our key account base. The majority of the upside in June came from new product orders as the new season of products was well received by retailers. With some of our legacy product, the price decreases we were able to pass through from our efforts to lower manufacturing costs with our factory partners has driven an immediate uptick in sales for the selected amount of styles included in this program. With our Rocky Work segment, we saw a similar story playing out as excess inventory levels continued to stall replenishment orders. Overall, the second quarter didn’t unfold as we had hoped. We are optimistic about the remainder of the year as our retail partners continue to work through their inventory and consumer demand remains strong for our Georgia and Rocky Work brands. Shifting to XTRATUF and Muck, which make up our rubber-based Work product, both brands had very challenging quarters, particularly XTRATUF due to order irregularities in the year-ago period. As you will recall, distribution challenges in 2021 resulted in late delivery of fall 2021 inventory into Q1 and Q2 of 2022, causing a spike in orders in the first half of the year. Additionally, record warm weather and elevated retail inventory levels slowed reordering levels from our partners this quarter. Although inventory positions remain high, the Muck brand continues to provide steady sales for most retailers. In June, we saw significant upticks in our Southeast, Southwest and Rocky Mountain territories and early indications point to success with new products in our spring 2023 collections. In the second quarter, we also made significant headway with securing shelf space for Muck in one of the largest co-op hardware store retailers with an opportunity to open 500 new doors by the end of the year. With XTRATUF, we have seen improvements in partner inventory levels and some regular orders starting to flow. The positive brand sales we are seeing from partners are coming from their on-hand inventory. While the second quarter was difficult, we ended with our best month of the year in June and are focused on maintaining our positive brand momentum into Q3 and Q4 as sales continue to improve. Turning now to our Western business. The inventory situation that impacted our Work business was also a factor for our Western segment. This led to another sluggish quarter for the Durango brand, but we saw steady improvement as the quarter progressed with at-once sales trending above the 2022 period for the last eight weeks of the quarter. As we mentioned in Q1, the Durango team has been focused on cost efficiencies to help offset some of the intermediate demand pressure and these efficiencies helped us lower MAP prices on some products, resulting in a boost in sales late in the quarter. The Durango team also continues to add new doors for the brand, over 80 new doors through the first six months of 2023. These new doors have been immediately impactful from a sales perspective and position us well for reacceleration when market-wide inventory positions moderate. This ongoing door expansion, along with sharper pricing and fresh fall product hitting shelves in the coming months has us optimistic for our flagship Western brand as the year progresses. Our Rocky branded Western products saw similar wholesale pressures in the quarter, though demand for some new product styles helped mitigate a portion of this headwind. Turning to Outdoor, which includes styles under our Rocky, Muck and XTRATUF brands, this category was our most impacted segment again in this quarter. Not unique to us, but a poor 2022 Outdoor season for the industry has created greater carryover inventories and lower new product bookings as we head into the more popular fall outdoor season. On top of this, Muck and XTRATUF also faced difficult year-over-year comparisons from the shipping delays in late 2021, I mentioned a moment ago. While overall, it was a difficult quarter, we saw some positive results with select outlets along with a modest gain in the Outdoor e-commerce sales. Last but not least, within our Wholesale segment, Commercial Military was a bright spot as orders from the U.S. Army and United States Marine Corps drove a strong double-digit sales increase year-over-year. Shifting to our Retail segment, Lehigh, our B2B business continued to expand compared to 2022. Though it slowed its recent trajectory, we saw some key account business push from Q2 to the second half of the year as several accounts adjusted eligibility of employees as they attempt to manage cash flow in the near term. There is no indication these will be lost sales only that they will be delayed until later this year. Additional factors that impacted the quarter stemmed from internal employee additions that resulted in adding training requirements, along with upgrades to our security protocols that require training customers on additional credentials for login. We believe this to be a short-term impact as upgrades have been completed and sales are starting to return to more normalized patterns. We are still very positive about the Lehigh business and the opportunities it provides in 2023 and beyond. Overall, while the second quarter was challenging, I am encouraged by a stronger exit to the quarter and I’m very pleased to see resilient demand for our portfolio of brands at the consumer level. Despite the pressure from the current retail landscape, I am confident in our ability to manage through the current environment as retailers work through their inventory positions in the coming quarters. We expect to be in an excellent position to reaccelerate growth quarter-over-quarter this year and on a year-over-year basis starting in 2024. I will now turn the call over to Sarah.

Thanks, Jason. As Jason discussed, the underlying strength of our brands at the consumer level was overshadowed by inventory-related selling pressure within our wholesale channel this quarter. Reported net sales for the second quarter decreased 38.4% year-over-year to $99.8 million. The year-ago period included approximately $4.3 million in service brand sales, which we divested in the first quarter of this year. All $4.3 million of those sales occurred in our wholesale segment. On an adjusted basis, which includes returns related to a supplier dispute, net sales were $101.4 million for the quarter. By segment, wholesale sales decreased to $71.5 million, retail sales decreased to $25.1 million and contract manufacturing sales were $3.3 million. For the second quarter, gross margin was $37.6 million or 37.6% of sales, compared to $58.3 million or 33.2% of sales in the same period last year. The 440-basis-point increase in gross margin as a percent of net sales was mainly attributable to increased wholesale segment gross margin as we realized the benefit of pricing actions taken in the second half of 2022, as well as lower inbound logistics costs compared with the same period last year. A higher mix of retail segment sales, which carry higher gross margins than the wholesale and contract manufacturing segments also contributed to the expansion in overall gross margins. Gross margins by segment for the quarter were as follows; wholesale gross margin was up 430 basis points to 35.2%, retail gross margin was down 20 basis points to 48.7% and contract manufacturing margin was down to 5.4% from 10.5% the prior year. Operating expenses were $35.4 million or 35.4% of net sales in the second quarter of 2023, compared to $48.2 million or 28.7% of net sales last year. Excluding $1.7 million of acquisition-related amortization and restructuring costs in the second quarter this year and excluding $2.1 million of acquisition-related amortization, integration expenses and restructuring costs in the second quarter of 2022, adjusted operating expenses were $33.6 million or 33.2% in the current period and $46 million or 28.7% of adjusted net sales in the year-ago period. The decrease in operating expenses was driven primarily by a decrease in variable expenses associated with lower sales and improved distribution efficiencies compared with the year ago period. Income from operations was $2.2 million or 2.2% of net sales, compared to $5 million or $3.5 million of net sales in the year-ago period. Adjusted operating income, which excludes the expenses related to the acquisition and restructuring costs in both periods was $5.7 million or 5.6% of adjusted net sales, compared to adjusted operating income of $7.7 million or 4.8% of net sales a year ago. For the second quarter this year, interest expense was $5.6 million, compared with $4.3 million in the year-ago period. The increase reflects increased interest rates on the senior term loan and credit facility. On a GAAP basis, we reported a net loss of $2.7 million or a loss of $0.37 per diluted share, compared to net income of $0.9 million or $0.12 per diluted share in the second quarter of 2022. Adjusted net income for the second quarter of 2023 was essentially breakeven, compared to adjusted net income of $2.5 million or $0.34 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 $3.1 million and our debt totaled $221.7 million. This consisted of our $91.1 million senior term loan and $133 million of borrowings under our senior secured asset-based credit facility. At the end of Q2 last year, our total debt was $284.6 million, including $125.9 million on our senior term loan, underscoring the work that we’ve done paying down our most expensive borrowings. Inventories at the end of the second quarter were $218.3 million, down 24.1%, compared to $287.8 million a year ago and down 7.3% compared to the end of 2022. As a reminder, the second quarter typically represents the highest mark for inventories for the year. We still plan to exit 2023 at the previously guided $185 million level. Now for our outlook. As Jason discussed, inventories in the channel have continued to come down, which, along with sustained consumer demand for our brands, should lead to an improved sell-in in the second half compared to the first half of the year. That said, the return to a more normalized wholesale order pattern will take longer to materialize than we expected on our last earnings call. We expect our third quarter topline will show a nice improvement over the second quarter, with fourth quarter levels being even stronger and similar to the fourth quarter of last year. Based on our updated view of 2023, we now expect full year net sales to be approximately $470 million. With respect to gross margins, we still expect to achieve approximately 40% adjusted gross margin, compared to an adjusted gross margin of 36.6% in 2022. Our adjusted SG&A has come down further and step with the reduction in sales, so we don’t anticipate any further deleveraging compared to our most recent forecast. That concludes our prepared remarks. Operator, we are now ready for questions.

Thank you. Our first question comes from Janine Stichter with BTIG. Please proceed with your question.

Hey. You got Ethan Saghi on for Janine. Can you hear me okay?

Yeah.

Hi, Ethan.

Hi. So first question, I’d just be interested to know more about your conversations with key wholesale partners and what exactly is driving the expectation for improvement in the back half of the year? Thanks.

Thank you for the question. We've had discussions with many of our key retailers and field accounts, and it appears that inventory levels are improving. You can even observe gaps in various sizes and styles at some retailers, which indicates a bit more confidence in that area. In some instances, the excess inventory isn't ours, and we are seeing those stocks adjust accordingly. However, I want to emphasize that everyone we’ve spoken with remains cautious. We expect continued improvement, but it may not reach the same levels as in the past. People are feeling more optimistic, yet they are still careful about the economy and the current market conditions.

I think just to add on there, we have visibility into a handful of 10 to 12 of our larger key accounts and so what we’re able to see in sell-through at retail, it’s meeting our expectations. The retailers seem happy with the sell-through of our product and so we know this is a matter of time until the retailers move through that inventory. We get to see some of the inventory levels of those retailers and we’re seeing them go in the right direction. And just to add on as well, some of the conversations we’ve had with these retail partners is to just elaborate on Jason’s point is that, they’re going to be buying more at-once in Q3 and Q4, given their cautious approach to the last half of this year and so the inventories will normalize I believe in the second half of this year.

Got it. That’s really helpful. And then my last question, I think earlier in your prepared remarks, you talked about the progress you’ve made with some of your manufacturing partners. But I missed exactly what you said. Could you just give a quick update on that?

Yeah. So what we were referencing is we’ve been able to work with our manufacturing partners and even some of our suppliers that we have our manufacturing facilities in the Dominican and Puerto Rico and Mainland China. And we’ve been able to work with them on negotiating better raw material prices or better finished good prices. And so as we took price increases back in 2022, we’re now going back and saying, hey, our sales have slowed on this one style. We really need to get back to this kind of price point on it. Can you guys help us out from a manufacturing standpoint? And they’ve been able to find some savings there for us, and we’ve been able to pass that through to try to get the retail price point at the sweet spot where it’s turning at a faster rate.

Got it. Super helpful. Appreciate you guys taking my questions. Thanks.

Yeah. Absolutely. Thank you.

Thank you. Our next question comes from Jeff Lick with B. Riley Financial. Please proceed with your question.

Good afternoon, everyone. Thank you for taking my question. Jason, I'm curious about the quarter being a bit more challenging than you expected. I would love to hear your thoughts on what the main challenges were, and as you reflect on this now, what aspects are you feeling more optimistic about compared to a month or two ago?

It’s great to talk to you, Jeff. I'm ready for your questions. The biggest surprise for me in Q2 was that the retailers didn’t go through their inventory as quickly as I expected. I thought they would manage it better. While we were aware of their excess inventory, we decided not to engage in heavy promotions since our products are more necessity-driven than luxury items; they function more as tools. Retailers have confirmed in their earnings calls that they aren't being promotional either. So, while our products are selling, they're not being discounted. Customers tend to buy just one pair at a time and then return after several months or even a year for another pair. It simply took longer for the inventory situation to improve than I had anticipated.

And in terms of as you sit here today...

And what was the second question?

As you sit here today, is there anything that kind of stands out as you’re more optimistic about and see your work?

I think I need to be cautious about the remainder of the year. However, I am confident that our brands remain significant in our categories. Consumers are still purchasing them, and retailers are actively selling our products. Our items are moving at retail. I believe our brands continue to resonate with consumers in the market, but we have to navigate this unpredictable environment. Retailers are expressing caution, as Tom mentioned, with less pre-booking. They are indicating they will order from us when necessary, and we have to ensure we have the inventory available. The positive aspect is that we currently have the inventory ready to ship as soon as they place their orders.

Yeah. I think, Jeff, just to add on for optimism besides the fact that what we see at retail is promising. I think we see a very clear path to driving that inventory down. And as we look to the last half of this year, we’re being very cautious with our inventory buys as well and so I see a clear path in the inventory down, which ultimately leads to a pay down of debt. So that’s another bright spot, I think, for the second half of this year.

Great. Thank you very much. I take the rest offline.

Thanks, Jeff.

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

Great. Thank you very much. Thank you, everybody. That was on the call today and all of our investors and I also want to send out a really special thanks to the Rocky Brands team members. We have worked hard the first half of this year through a really difficult six months and I can’t thank you all enough for sticking in there and working so hard to make it the best possible company we can and excited to navigate the rest of this year with you guys in the years to come. So thank you all very much.

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