Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Third 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. I would like to remind everyone that this conference call is being recorded and will now 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. 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. After Tom's and my prepared remarks, we will be happy to take questions. We are pleased with our third quarter results, which were highlighted by a meaningful top-line improvement compared with the second quarter and a significant increase in profitability on both a sequential and year-over-year basis. As we outlined on our Q2 call, we anticipated that our performance would start to rebound beginning in the second half, thanks to the sustained consumer demand we've seen all year for our product offering. It's important to remember that while 2023 got off to a difficult start, much of the top-line pressure was experienced due more to macroeconomic headwinds and industry dynamics, notably excess channel inventory along with tough comparisons versus the strength and desirability of our brands. In fact, our sell-through has held up relatively well despite persistent inflation that has impacted consumer discretionary spending. This performance, combined with early actions by retailers to better align overall inventory levels with the current demand environment, drove an acceleration in at-once orders from many of our key wholesale partners as the third quarter progressed. While third quarter sales did not reach our levels from a year ago, the work we've done enhancing our distribution and fulfillment capabilities, along with lower expense levels, including reduced freight rates, allowed us to translate a 13% decrease in revenue into a 40% increase in operating income on an adjusted basis. Tom will cover the numbers in more detail shortly. But before that, I would like to spend a few minutes reviewing the drivers of our recent top-line performance. Starting with Work. Our four brands that make up this category, Georgia, Rocky, Muck, and XTRATUF, collectively delivered a sequential sales increase in the third quarter after selling-in was severely impacted by high retail inventories in the first half of 2023. On a year-over-year basis, the decline moderated significantly from what we experienced in the first and second quarters. Momentum for Georgia built throughout the quarter with sales turning positive in the month of September as many key customer accounts began returning to more consistent ordering as their inventories further normalize. At the same time, low pricing on certain Georgia styles, which is the result of recently realized cost savings that we passed along to customers, has spurred a notable pickup in demand. Looking ahead, we are optimistic about the brand's growth prospects. Consumer response to Georgia's Fall 2023 line has been very positive, while wholesale bookings for Spring have been much stronger than we've seen in quite some time. Our Rocky Work brand faced a few challenges this quarter, with excess inventory levels continuing to impact replenishment orders; however, there were some bright spots, particularly with strength in our own e-commerce channel, along with solid success with new key independent retailers driven by new product introductions. Shifting to our rubber-based work product, both Muck and XTRATUF brands delivered solid results. While warm weather weighed on category demand and elevated inventories continued to impact sell-in, we saw steady improvement in Q3 compared to the first six months of this year. Of note, Muck's new Fall collection featuring 12 new styles and supported by a new marketing campaign that targets the brand's core consumer is performing well at the gate, setting the stage for continuing success in the months to come. With XTRATUF, shipments were up year-over-year for the first time in 2023 as we deliver the brand's highly anticipated new Fall product. Inventory levels for our key partners have aligned with growing wholesale demand. As we finalize our Spring 2024 booking season, we are seeing continued success for the brand in both existing and new channels and expect this positive trajectory to continue into the fourth quarter and next year. Turning now to our Western business. While inventory levels with some key account partners were again a hurdle, we saw steady sales improvements in the third quarter over the first half of the year. With Durango, strength in our direct-to-consumer channel and increases in our special makeup business helped offset a portion of the lower sell-through compared to a year ago. In terms of sell-through, lower MAP pricing on certain key products, which is the result of the affirmation and cost efficiencies that we were able to pass through to customers, helped drive demand and further reduce on-hand inventory levels for several retailers. We also saw notable improvements with our Rocky-branded Western product driven by new distribution with key Western retailers. Along with these new partnerships, updates to long-standing Rocky Western best sellers drove new interest in the brand this quarter. Looking ahead, the Durango and Rocky Western teams are focused on launching existing new collections in Q4 and ensuring that the right wholesale partners have the right product to meet the needs of our consumers. Outdoor, which includes our Rocky, Muck, and XTRATUF brands, was again the category most impacted by retailer inventory levels in the period. A poor 2022 for the industry created a greater carryover than normal, which led to reduced bookings for new products ahead of this year's primary Fall season. Hunting boots and apparel were most affected by carryover, and this was compounded by one large sporting goods retailer exiting the category altogether. That said, as I mentioned when discussing our Work product, both the XTRATUF and Muck brands delivered a notable improvement in this quarter, driven in part by new penetration of the outdoor product and more outdoor-focused markets. Last but not least, within our Wholesale segment, Commercial Military was a bright spot in the third quarter as orders from several suppliers to the U.S. Army and the United States Marine Corps drove the strongest Q3 in recent memory for the business. Shifting to our Retail segment, where sales were up 5% over last year, thanks to a very solid quarter from our direct e-commerce channel. Each of our branded sites, Rocky, Georgia, Durango, Muck, and XTRATUF, were up double-digits, which more than offset expected declines in marketplace transactions. Through enhanced digital marketing efforts, we've successfully fostered more direct engagement with consumers, and we expect this trend to continue going forward, which should positively impact the segment's growth and margin portfolio. Shifting to our B2B Lehigh business, sales were in line with year-ago levels. The temporary headwind from upgrades to our security protocols that we spoke about on our last earnings call in August is now fully behind us, and based on recent event bookings, we are optimistic about the return to growth in the fourth quarter. We are still very positive about our Lehigh business and the opportunity it provides in 2024 and beyond. While overall market conditions remain challenging, we are confident that our top line is positioned for further improvement on a sequential basis in the fourth quarter, with channel inventories continuing to come down and the demand for our durable, innovative, and accessible priced Work, Western, and Outdoor footwear picking up. The difference between our sell-through and sell-in is nearly at parity. This dynamic, along with an improved balance sheet, sets us up for a good finish to 2023 and a strong start to next year. I'll now turn the call over to Tom.

Thanks, Jason. As Jason shared, an improving wholesale inventory landscape, along with our greater ability to convert sales into year-over-year earnings growth allowed us to deliver better-than-expected results in the third quarter. Net sales for the third quarter decreased 14.8% year-over-year or 12.7% on an adjusted basis to $125.6 million. By segment, on a reported basis, Wholesale sales decreased 17.4% or 14.9% on an adjusted basis to $99.7 million. Retail sales increased 4.7% to $24.5 million and Contract Manufacturing sales were $1.4 million. Turning to gross profit. For the third quarter, gross profit was $46.5 million or 37% of sales compared to adjusted gross margin of $50.8 million or 35.3% of sales in the same period last year. The 170 basis point increase in adjusted gross margin was due to pricing actions taken in 2022 as well as lower inbound logistics costs compared with the same period last year. A higher mix of Retail sales, which carry a higher gross margin than Wholesale and Contract Manufacturing segments, also contributed to the expansion in overall gross margins. During Q3 this year, we capitalized on some strategic opportunities to move certain discontinued products in our inventory. While these sales were dilutive to gross margins versus our plan, this decision puts us on track to come in below our initial year-end inventory target and sets us up to begin 2024 in a much cleaner position. Gross margins by segment were as follows: Wholesale, up 160 basis points to 34.7%, Retail, down 70 basis points to 48.0%, and Contract Manufacturing down 390 basis points to 11.5%. Operating expenses were $32.3 million or 25.7% of net sales in the third quarter of 2023 compared to $40.3 million or 27.3% of net sales last year. On an adjusted basis, operating expenses were $30.7 million this year and $39.5 million a year ago, with the decrease driven primarily by lower outbound freight expense, improved distribution center efficiencies, and other variable expenses associated with lower sales volumes. As a percentage of adjusted net sales, adjusted operating expenses improved 290 basis points to 24.5% in the third quarter of 2023. Income from operations was $14.3 million or 11.4% of net sales compared to $11.6 million or 7.9% of net sales in the year-ago period. Adjusted operating income was $15.8 million or 12.6% of net sales compared to adjusted operating income of $11.3 million or 7.9% of adjusted net sales in the year-ago period. For the third quarter of this year, interest expense was $5.8 million compared with $4.2 million in the year-ago period. The increase reflects increased interest rates on interest payments on our senior term loan and credit facility. On a GAAP basis, we reported net income of $6.8 million or $0.93 per diluted share compared to net income of $5.7 million or $0.77 per diluted share in the third quarter of 2022. Adjusted net income for the third quarter of 2023 was $8 million or $1.09 per diluted share compared to adjusted net income of $5.5 million or $0.74 per diluted share in the year-ago period. Turning to our balance sheet. At the end of the third quarter, cash and cash equivalents stood at $4.2 million, and our debt totaled $213.9 million. We've made good progress in paying down our debt over the last 12 months, with total indebtedness down 24.9% from the end of last September and down 16.7% since the end of 2022. A big part of the debt paydown has been driven by our ability to strategically reduce inventory levels. At the end of the third quarter, inventories were $194.7 million, down 26.5% compared to $265.1 million a year ago, and down 17.3% compared with the end of 2022. Our plan is to now exit 2023 with inventories of approximately $175 million compared with our prior target of $185 million. Now to our outlook. Based on our year-to-date results and current view of the fourth quarter, we are reiterating our guidance for 2023 net sales to be approximately $470 million. This implies fourth quarter sales improved sequentially from Q3 and a decline in Q4 on a year-over-year basis further moderates compared to recent trends. Following the discontinued inventory reduction actions we took in the third quarter and some planned promotions to move certain non-core products in the fourth quarter, we now expect full-year adjusted gross margins to be in the 38% to 39% range compared with 36.6% in 2022. For comparative purposes, it is important to remember that in Q4 of last year, gross margins benefited by 230 basis points from a one-time tariff overpayment recovery. SG&A is now expected to only deleverage approximately 100 basis points from 2022's adjusted level, and interest expense is now projected to be around $23 million due to higher interest rates. All of this implies that the fourth quarter adjusted earnings per share will be similar to both the third quarter of this year and the fourth quarter of 2022. That concludes our prepared remarks. Operator, we are now ready for questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Jeff Lick with B. Riley. Please proceed with your questions.

Hi, guys. Congrats on a great quarter. Jason, I was curious; you mentioned that sell-in and sell-through are now at parity. So I guess the implication there is you're fulfilling kind of one-for-one. I'm curious where the improvement has picked up the most? You also made the comment that the Spring orders were stronger than we've seen in quite some time. So I’m interested in where things have improved the most as we look forward.

Thanks, Jeff. I would say it might be easier to tell you where things are the slowest. The Outdoor category is still our most difficult. So in the Work, in the Work Western, and then really the XTRATUF ankle-deck goods are doing much better. I would tell you though, the retailers are still being very cautious, and they're ordering from us on a little more regular basis, but I don’t see any significant increases coming there, just a return to a more normal pattern. And yes, we are definitely seeing good Spring bookings for all the brands. Outdoor, again, is the smallest among them, and that would probably be pretty normal for Spring product anyway.

Regarding SG&A, Tom, it seems to be a source of some upside. I'm interested to know the different areas contributing to that.

Hey, Jeff, thanks. I would say the two biggest areas are very clearly the freight and handling side. So renegotiation of partial rates, and part of it is us being more effective on where we’re shipping product from. We've talked a lot about getting inventory in the right distribution centers. We've made progress there. We’ve also been smarter in shipping products than we were in the same period last year. Additionally, a lot of work has been done in the distribution centers themselves to reduce costs associated with picking and packing the orders. So we're just being overall more efficient with all the inventory going outbound. Also, we've recognized some synergies from some of the reorganization, too. So we're seeing some benefits from a wage and benefit standpoint as well.

On the Retail side, your direct sites, each of the five were up double-digits. Q4 is your biggest retail component given the holiday season. Anything you could elaborate on there just in terms of what you're seeing and how you feel about the holiday?

Yes, I can start off, and Jason can add in. I think we're feeling very good about our e-commerce business. We think this is, again, the one area that mitigates any inventory challenges we might have in the Wholesale category. An important callout is that we have been much more promotional with our discontinued products online. It's the most profitable way for us to unload our discontinued inventory, and we’ve been more aggressive in marketing that, and we've priced more competitively. Hence, the slight decrease in Retail margins. But we've continued to see a similar trend from a year after the start of Q4 from an e-commerce perspective.

Yes, I would just add, the weather this week on the East Coast is definitely going to help us. Particularly with the Muck brand, when weather affects the East Coast, it really impacts all our brands. If it’s cold and wet outside, people are more likely to buy new boots to keep their feet warm and dry. I will say that I think we are being cautiously optimistic regarding the economy and what might happen from a holiday standpoint. I think most retail partners are taking a similar approach; they want to have the product and they want to have the inventory, but they are proceeding cautiously. I think it's going to be fine, but I don't believe it will be a slam dunk.

To Jason's point, we're seeing that our at-once business compared to bookings as a percent of sales over the last quarter and certainly over the last few quarters has been elevated. That shows you that retailers are buying when they need it versus booking in advance, which reflects a bit of caution in Q4.

Thanks, Jeff.

Thanks, Jeff.

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

Yes, hi, thanks. Good afternoon. Maybe just a follow-up there to start, Tom. I know previously, you were expecting to get back closer to flat year-over-year revenue growth in the fourth quarter. Could you just talk a little bit more about the revised view and what's shaping that? And how much, if any, of the third and fourth quarters are more onetime in nature to clear goods versus what you see for underlying demand signals?

Sure, Jon. I think we are, again, to use Jason's vocabulary, being cautiously optimistic for the fourth quarter while reiterating overall top-line guidance. Q3 was a little better than we anticipated. There’s probably low single-digits in the $1 million range of discontinued product that moved down in the third quarter, and we'll probably continue that into Q4. But I think we’re just going to remain cautious here as we work through the rest of the year, given everything that's happening in the macro environment.

And if I could just ask, looking further ahead, when you think you can return to growth based on your planning and what you’re seeing in the environment?

Yes, it's a great question. We've been trying to dig into this and understand it. I think we are going to take a cautious approach regarding that in 2024. We're coming off what I consider one of the craziest years in 2023, and we're heading into a 2024 election year, which presents another challenge. Our plan will be to focus on operations, maintain operational excellence, manage our SG&A, and find ways to grow the brands where we see opportunities. We're still excited about Lehigh, believing it might present a different kind of opportunity next year. Looking forward to transitioning from 2023 into 2024 and returning to a regular pattern of just slow growth while adding to our bottom line.

This quarter is a good example of how the operations have been rightsized, preparing us for 2024. Retail will do what it will do, and the economy will do what it will do, but we'll be able to take advantage of it if sales come.

That makes sense. And just last one from me, Tom, regarding the CFO transition back to you. How long are you willing to take on this role while you search for the next CFO?

I served as CFO of Rocky for six years before our last CFO joined. The plan and intention is to take our time rehiring to ensure we find the right candidate. I'm fortunate to have done this for so long, and it won't be a significant burden on me to continue in this role while we look for the next CFO.

I would add that we have a great team of people here supporting Tom from the CFO side. The operational side has also been strengthened by a fantastic team, making significant progress in getting us to where we are today through Q3. The culture of our company is crucial to both of us, and we're being cautious to ensure the next fit is right for us.

Thanks again.

Thanks, Jon.

Our next question is from Janine Stichter from BTIG. Please proceed with your questions.

Hey, you got Ethan Saghi on for Janine. I hope you guys are doing well. I just got one on my end. It's regarding SG&A margin. I was wondering if you could provide any color on what that might look like in Q4 and going forward. Should we expect it to stay in the mid-20s range or go back towards the high 20s, low 30s range?

Hey, Ethan, I'll take this one. I think we guided to the deleveraging in the prepared remarks. But it implies essentially in the 25% to 30% range, probably leaning closer to the higher 20s. It's important to note that with the mix of sales in the fourth quarter, there are significantly more e-commerce orders, thereby increasing our freight as a percent of sales and handling as a percent of sales. So I expect it to be in that 27% to 29% range.

Thanks.

Thanks, Ethan.

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

Great. Thank you very much. Just to wrap things up, I'd really like to thank our shareholders, our vendors, and customers as we've navigated a challenging 2023, which has impacted many companies and individuals. And I particularly want to acknowledge the entire Rocky team who has worked tirelessly and diligently to make Rocky Brands the best company it can be. The team's morale is important, and we are excited about the future of this company and look forward to continuing to build Rocky Brands. So thank you all very much, Rocky.

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