Ladies and gentlemen, greetings, and welcome to the Rocky Brands Inc. First quarter Fiscal 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, 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, 2024. And I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands.

Thank you, Cody. With me on today's call is Tom Robertson, our Chief Operating Officer and Chief Financial Officer. After our prepared remarks, we will be happy to take questions. It has been a good start to 2025 despite growing macroeconomic uncertainty. During the first quarter, we experienced healthy demand within our brand portfolio and throughout our distribution channels, led by a 20% top-line growth in our retail segment. Demand was especially strong for our rubber boot business, which includes both XTRATUF and Muck. The XTRATUF brand has been gaining momentum for several quarters, with sell-through online and at wholesale accelerating in Q1 as we increased our inventory position in key styles. With better full-price selling overall and retail increasing meaningfully as a percentage of the total sales, we achieved record first quarter gross margins and our second highest gross margin ever, only behind the fourth quarter of last year. Combined with this significant reduction in interest expense following our refinancing in April of last year and continued debt pay down, we increased adjusted net income 78% year-over-year. Since our last earnings call in February, the world we are operating in has become much more dynamic following higher tariffs imposed by The U.S. on most trade partners, particularly China. While the situation is fluid and the outcome of ongoing negotiations is uncertain, we've moved quickly to mitigate the impact of the higher tariffs and believe we have a sound plan in place to protect our gross profit dollars under multiple scenarios. Based on current tariff rates, we expect to implement price increases on the majority of our footwear styles in early June and will maintain flexibility to adjust prices accordingly based on any future changes as they are announced. We are also accelerating our efforts to reduce the amount of products we source from China. This includes procuring more footwear from partners in Vietnam, Cambodia, India and shifting production to our manufacturing facilities in The Dominican Republic and Puerto Rico. While we anticipate that higher prices will put some pressure on the consumer demand, we believe the strength of our brands and the functionality of our products, along with our diversified sourcing structure, has us well positioned to navigate the current situation and allow us to achieve our financial targets for the year. Before I hand the call over to Tom for a more detailed look at the financials, I'll take a few moments to walk through our quarter brand and channel performance. Starting with XTRATUF, the brand continues its recent momentum and delivered another exceptional quarter with double-digit growth in Q1. Importantly, we have seen the brand continue to expand its reach into new regions and niches, growing in popularity across the Inland U.S. and new demographics outside of its core male consumer. At our spring 2025 deliveries, our most popular new styles are the women's duck camo and ivory colored ankle deck boots. The brand performed strongly across key accounts, including sporting goods retailers, fishing shops and even western stores, with independent customers keeping pace as well. Many retailers saw excellent sell-through on both proven classics and new colors, demonstrating strong retail demand for the brand. We also successfully launched XTRATUF at a key sporting retailer in Q1, leading to added styles, replenishment orders and door expansions. Bookings are up approximately 80% versus last year. And as we move further into the spring season, we have many exciting launches ahead, including a summer delivery of the new Guy Harvey styles, including our first Guy Harvey's kid ankle deck boot, as well as a collaboration with the U.S. rowing team, an online exclusive with pro teamer Andrew Cotton and the launch of our partnership as the official boot sponsor of the Sport Fishing Championship. Overall, there is a lot to be excited about with XTRATUF in the months to come. Muck also started 2025 with better-than-expected growth. Better weather in much of The United States compared to the warm, dry patterns of the previous two years led to a significant uptick in the brand's performance. Our women's business was a surprise standout, delivering a double-digit increase in the period. Additionally, improved inventory positions in key styles contributed to the successful quarter. From a marketing standpoint, our enhanced digital advertising continued to deliver strong results with a focused approach on the work and utility category during cold weather periods. In February, we took steps to consolidate our digital media buying, allowing for more nimble allocation to capitalize on the best ROI. Coming off an exceptional 2024, the Durango brand sell-in to wholesale moderated in the first quarter due in part to difficult comparisons and timing shifts, as some Q1's orders were delivered early in late 2024. That said, we did see some underlying strength, particularly online and with our At Once business, which was positive in the quarter, and we anticipate large volume orders in the back half of 2025 as retailers optimize their inventory levels. Our inventory position in Top Styles remains strong heading into the second quarter. While January and February were positive for Georgia Boot, March was notably softer as the field customer base slowed orders due to the economic uncertainty. Additionally, we saw some sizable orders fall into Q2. Despite the sluggish orders from our retail partners, recent introductions like the Romeo Superlight continue to perform well to the point that we are chasing inventory in the first quarter. Other new offerings that are focused on hitting key price points while maintaining comfort and quality have resonated with retailers and consumers alike, continuing to sell through and being added at several major retailers for later this year. Turning to our Rocky Brand Group, both our work and outdoor categories showed increase compared to last year, with Rocky Work delivering the strongest performance. Work Style saw solid expansion with key national safety shoe distributor partners and regional and local shoe distributors in the period that drove its success. Rocky Outdoor, we were pleased to see a return to growth after a string of consecutive difficult quarters. The brand delivered a single-digit increase over last year through solid distribution with e-commerce partners, national chains and independent retailers across the country. A renewed snake boot program with a prominent national retailer and strong sales on our e-commerce site contributed to the increase. Additionally, a longer winter season in most of the country provided extended opportunities with insulated boots selling, which has not been seen in recent seasons. New additions to our growing rugged casual business contributed to the solid quarter as well. While Rocky Western sales were down in Q1, it was largely due to a tough comparison from elevated off-price sales of discontinued products in Q1 last year. The introduction of a Western Boot to a key farm and ranch multi-store chain in the Northwest, along with solid sales with our e-commerce drop-ship partners, offset this headwind. Lastly, in wholesale, our Commercial Military and Duty segment was down in Q1, largely in line with our projections. The expected decrease was due to the benefit of a year ago from a sizable commercial military blanket purchase agreement that elevated early 2024 sales. Additionally, the order implemented by the Department of Government Efficiency in February, which froze all government purchasing cards, was also a headwind in the first quarter. Shifting to retail, our B2B Lehigh business had a terrific quarter with sales increasing in the high teens, marking the third consecutive quarter of double-digit gains. As the realignment of our sales team reaches its one-year anniversary and new processes are firmly in place, the business is firing on all cylinders. Customer spending continues to be strong with improved subsidy utilization and an increase in average subsidy dollars year-over-year. New customer acquisition remains robust with the addition of 190 new accounts this quarter, with no indication of a market slowdown to date. Our direct-to-consumer business, which consists of our own branded websites and leading third-party marketplaces, grew at an even faster pace than Lehigh, led by marketplace volumes as we cleared out a good deal of discontinued inventory in the quarter. Looking ahead, we acknowledge that there is a higher degree of uncertainty over the remainder of the year, but we will outline our guidance in February. Our confidence in maintaining our outlook stems from our better-than-expected first quarter performance, the positive effect recent sales have had on our future bookings and our ability to mitigate the impact of tariffs through recent inventory investments, pricing actions and our diversified sourcing structure. I look forward to updating you on our progress on our second quarter call in July. I'll now turn the call over to Tom.

Thanks, Jason. Echoing Jason's sentiment, I am very pleased with our start to 2025, especially considering the general uncertainty that has been dominating the headlines. The diversity of our brand portfolio and the appeal of our functional, affordably priced footwear has allowed us to adeptly navigate the current retail environment. Reported net sales for the first quarter increased 1.1% year-over-year to $114.1 million, which was slightly ahead of our expectations. By segment, wholesale sales were down $5 million or 6.3% to $74.8 million, with $3 million of the decrease coming from the planned reduction in commercial military sales. Retail sales increased 20.5% to $36.6 million, and contract manufacturing sales were $2.6 million. Turning to gross profit. For the first quarter, gross profit was $47 million or 41.2% of sales, which is the highest gross margin we've ever reported in Q1 compared to $44.1 million or 39.1% of net sales in the same period last year. The 210 basis point increase was driven by higher wholesale margins that resulted from better full-price selling and favorable product mix, combined with a higher percentage of retail sales, which carry higher gross margins than the wholesale and contract manufacturing segments. Reported gross margins by segments were as follows: wholesale up 390 basis points to 40.3%, retail down 300 basis points to 45.7%, and contract manufacturing margins were 5.8%. Operating expenses were $38.3 million or 33.6% of net sales in the first quarter of 2025, compared to $36.2 million or 32% of net sales last year. Excluding acquisition-related amortization in the first quarter of this year and last year, adjusted operating expenses were $37.6 million and $35.5 million, respectively in Q1 of 2025 and Q1 of 2024. The increase in operating expenses was driven primarily by higher selling and outbound logistics costs associated with the increase in our direct-to-consumer sales compared with the year-ago period. Income from operations was $8.7 million or 7.6% of net sales compared to $8 million or 7.1% of net sales in the year-ago period. Adjusted operating income was $9.4 million or 8.2% of net sales compared to adjusted operating income of $8.7 million or 7.7% of net sales a year ago. For the first quarter of this year, interest expense was $2.4 million compared with $4.5 million in the year-ago period. The decrease reflects lower interest rates as a result of the debt refinancing we completed in April 2024, as well as lower debt levels. On a GAAP basis, we reported net income of $4.9 million or $0.66 per diluted share compared to a net income of $2.6 million or $0.34 per diluted share in the first quarter of 2024. Adjusted net income for the first quarter of 2025 was $5.5 million or $0.73 per diluted share, compared to adjusted net income of $3.1 million or $0.41 per diluted share a year ago. Turning to our balance sheet. At the end of the first quarter, cash and cash equivalents stood at $2.6 million, and our total debt, net of unamortized debt issuance costs, totaled $128.6 million, a decrease of 17.5% since March. Inventories at the end of the first quarter were $175.5 million, up 6.3% compared to $165.1 million a year ago and $166.7 million at the end of 2024. We purposely accelerated receipts in March after an initial round of tariffs were announced and continue to bring product in early to avoid the impact of higher tariffs announced in April. Therefore, we expect to increase borrowings under our credit facility in support of these investments in Q2 before starting to decline in the second half of the year. With respect to our outlook, based on the first quarter performance and inclusive of the tariffs that have been announced this year through today, we are reiterating our prior full year 2025 guidance. Revenue is still expected to increase in the low single-digit range over 2024 levels, with the price increases we're implementing in Q2 to offset lower volumes as a result of the higher prices. As a reminder, our original guidance for the full year gross margins to decline modestly year-over-year, including roughly 110 basis points of headwind from the 10% increase in the Chinese tariffs announced prior to us reporting Q4 results in late February. We are forecasting additional pressure on gross margins from the tariffs announced in March and in April, but expect to hold gross profit dollars consistent with our initial outlook through the actions we've discussed, namely increasing prices. Rounding out our guidance, SG&A is still expected to be up in dollars as an increase in our marketing spend is needed to support growth, along with realizing higher logistics and selling costs associated with the projected increase in retail sales. However, as a percentage of revenue, expenses will be similar to last year. Finally, we still expect 2025 EPS to be just below 2024's adjusted EPS of $2.54. That concludes our prepared remarks. Operator, we are now ready for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. We will wait for a moment while we poll for questions. The first question comes from Janie Stichter from BTIG. Please go ahead.

Hi. Thanks for taking my question. I was hoping you could elaborate a bit on the guidance. Really impressive to see that you were able to reiterate the profit guidance with everything going on with tariffs. Maybe help us understand how much you've been able to migrate out of China? What's going on with the China shipments you had originally planned? Were you able to pause those? Or it sounds like you're able to bring some in early? And then maybe some more color on the magnitude of price increases that you're planning? Thank you.

Yes. I'll start off, and then can certainly chime in. I think one of the things we're recognizing is that we are in a very good inventory position. And so, if you think about the investments we've made in inventory at the beginning of this year and through March, we have about six to seven months on average of products to sell through this year. So, we'll be able to get through the majority of this year without feeling a lot of the pain from the tariffs yet. And it's also going to give us ample time to transition product out of China and into Vietnam, India, Cambodia, and also transition it to our own manufacturing facilities in Dominican Republic and Puerto Rico. So, we will be able to use that inventory as a buffer to allow us to execute on this transition, ahead of schedule, from where we originally anticipated on the last call. We anticipate total volume out of China to be just less than 20% by the end of this year. It's also important to note that not all the product from China will be coming to The U.S., as we also have an international business that we're going to leverage to ship product out of our Chinese facility for the rest of the year. We will continue to do that. From a pricing increase, we are not prepared to share the specifics yet. There's been a lot of analysis on it, and we are still waiting to see if there's any actions taken by the administration around China. Regardless, we will be announcing a price increase here in the coming week to go into effect in June.

Yes. And then just to kind of add on there, I think you'd also asked about what we're doing right now out of China. In some cases, we have paused some shipments, but are doing that very methodically and trying to understand the needs that we have in our consumers and retailers. So, there are some areas that we have paused, and some areas that we have slowed. As Tom indicated, we've been able to move some things around and say, well, this now is not going to come to The U.S. and go to somewhere else in the world.

Got it. That's helpful color. And then maybe just with the wholesale business, it sounds like, based on the color you gave, you haven't really seen any meaningful change to wholesale order books. What are you hearing from your wholesale partners? Would you just love a little bit more color about how they're thinking about the consumer's ability to absorb some of these price increases and just the health of the consumer?

Yes. I'll start this one, and Tom can chime in next. So, just to kind of back up, our bookings going into Q1 were really strong. We have a really nice booking set for fall this year, particularly in XTRATUF and some of the other brands. All the brands did well. We haven't seen anything unusual from our retail partners regarding trying to push to be the first on price or trying to understand where that is. We've had a few conversations where some retailers are saying, 'Well, maybe I'll buy into some, maybe I won't.' A lot of our smaller retailers have talked about just navigating it and seeing when and where they will have to take price increases. Interestingly enough, the consumer doesn't seem to be panicking about this right now. It seems like everyone, including us, is just trying to manage our business, see how things fall out and make the best business decisions we can with the information we have. But at this point, there doesn’t appear to be any panic from the consumer standpoint. Therefore, our retail partners are continuing their status quo while taking advantage of opportunities.

Yes. I think just to add on, one of the things we are monitoring is what our peers are doing. We’ve seen some price increases from peers; however, many seem to be waiting to see what happens with the Chinese tariffs. Several brands have paused inventory coming from China. We speculate whether there will be a scarcity on the shelves later in the year, as inventory is not flowing as usual, particularly when brands are building inventory for fall and holiday. It'll be interesting to see how that plays out. I do think we are in a competitive situation, as we have our facility in the Dominican Republic, which will allow us to ramp production there. It's important to note that we haven't just begun this factory due to the tariff situation; we've been making boots there for over 40 years and will continue to leverage that asset this year.

Super helpful and definitely interesting times. Thanks a lot, and best of luck.

Thank you. The next question comes from the line of Jonathan Komp from Baird. Please go ahead.

Yeah. Hi. Thank you. Good afternoon. Tom, just can I start with a clarification? I might have misheard the guidance for the year. I think you said the unchanged revenue assumption, lower gross margin percentage, but unchanged gross profit dollars. I just want to make sure I heard that correctly.

Yes. Our plan is to implement a price increase. We are likely to slightly raise our top-line growth over what we had originally guided. However, we're tempering that with the expectation that we could see some uncertainty with volume. Our goal is to maintain gross profit dollars, which could result in a lower gross profit percentage for the year, ultimately aiming to maintain our EPS guidance for the year of just under last year's.

Okay. That's helpful. Thanks for clarifying. And then thinking about the timing of some impacts, just specifically on the price increases, will you be only passing along increases you receive from the manufacturers? Or is there any chance to sort of front-run it and price for market conditions?

Yes. As we look to price increases, we are still trying to discern what will happen with tariffs in the future. Our current position is to preserve gross profit dollars. We plan to do a price increase now that will allow us to cost average inventory on hand, as well as inventory coming in at a higher tariff, while executing the sourcing and manufacturing changes we've discussed. We're working on a price increase that won't significantly slow retail, allowing us to keep shelf space and maintain gross profit dollars.

John, to add on, we have to consider our brands and where we source product worldwide. We've had to factor in tariff increases everywhere and our primary focus is to understand how we can manage our business effectively. I wouldn’t say we’re being opportunistic, but if there's a chance to optimize pricing, we would explore it since we can't absorb the high price increase from China.

Great. And just last one, you mentioned shifting to third-party capacity in Vietnam, India, and Cambodia. Could you further quantify how much capacity you are looking to shift? Do you have good insight into those commitments?

Great question. We had been in this process for some time. We were slowly moving products. We have strong relationships with these factories, and we’ve been able to transition some products there. Under the circumstances, we've decided to expedite the process. We believe we have the capacity needed. We are being cautious since it isn't simple to shift manufacturing. We’re moving meticulously but feel confident that we will manage adequately in 2025. Beyond that, we plan to reduce our reliance on China while still using some manufacturing there for international distribution.

John, to quantify, we've found homes for about 90% to 92% of our product. We're focused on getting those facilities operational, which includes our third-party manufacturers and our owned facilities. There’s roughly 8% that we still have in China, and we are diligently working to shift that. We're in a position to track that progress weekly as we identify new options. It's noteworthy that we’re transitioning to Vietnam and Cambodia with suppliers we’ve partnered with for decades. This gives us confidence in our ability to execute these sourcing changes. While we’ll face a ramp-up timeframe of 90 to 120 days, our inventory buffer will help us navigate these challenges effectively and keep product available for shelves, unlike some of our peers that lack the same inventory.

Yeah. That's great. Thanks again for taking all my questions.

Absolutely, John. Thank you.

Thanks, John.

Thank you. Ladies and gentlemen, as there are no further questions, I would now hand the conference over to Jason Brooks for his closing comments.

Great. Thank you. On behalf of Tom and myself, I just wanted to extend my sincere thanks to our shareholders, Board members, and employees for the continued support and dedication. Your trusted guidance and hard work have been instrumental in delivering a strong Q1, and we look forward to a strong 2025. Thank you very much.

Thank you. Ladies and gentlemen, the conference of Rocky Brands has now concluded. Thank you for your participation. You may now disconnect your lines.