Rocky Brands, Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Third Quarter Fiscal 2021 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. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded, and I will now turn the conference call over to Brendan 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, 2020. I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands.

Thank you, Brendan. With me on today's call is Tom Robertson, our Chief Financial Officer. Like we experienced during the first half of the year, demand for our portfolio of leading brands was very strong during the third quarter. Despite the demand and ample inventory, soon after we completed the Boston Group's inventory from Honeywell's Distribution Center to RDC in Ohio in mid-August, which coincided with a record inbound supply deliveries in preparation for a strong finish to the year, we encountered unforeseen issues that have temporarily impacted our ability to fulfill all orders on time. I'm going to walk through the issues and the steps we've taken to improve the situation and a timeline for returning to a steady state environment. Then I'll provide color on our brand and channel performance, which we will give a better idea of the true demand in the quarter. After that, Tom will review the numbers in details and provide an update on our outlook for 2021. When we completed the acquisition of Honeywell's performance and lifestyle footwear business in March, we knew there was heavy lifting to be done in integrating our two organizations before we could leverage the strength of the combined businesses to expand market share and drive enhanced profitability. While we completed the move of the acquired brands inventory on schedule, soon after we ran into obstacles as we started processing a record number of orders in our Ohio DC. For context, we shipped over 50% more orders in the third quarter of 2021 versus Q3 of last year. But at the same time, the amount of product we received at the DC was up nearly 200% year over year. The congestion made it difficult to keep up with the strong demand. Integrating the Boston Group inventory with our distribution systems was not a direct map over due to differences in Honeywell, and our order systems in our fulfillment process. Knowing it would require additional work to align the inventory with our fulfillment systems, we hired more workers and increased the number of shifts at our distribution center. Due to the tight labor market, it took longer than expected to onboard and train new staff, which led to inefficiencies both in getting product in and out of the DC. While these issues are not fully behind us, we have made steady progress over the past 45 days, improving the organization with the D.C. and are in a much better place, operating at a nearly double the capacity we were before the integration. Helping to alleviate some of the pressure, our new D.C. and Reno, Nevada went live on October 8. we currently expect the Reno DC to be fully up and running during the first half of next year. This will give us a combined 655,000 square feet of space and the ability to house approximately 4.5 million pairs of footwear. Despite the impact from the temporary fulfillment challenges, there were a number of positives in the third quarter. Similar to last earnings call, I'm going to discuss our Ohio and Boston groups separately. In addition to sales results, I'm also going to provide some color on orders and sell-through performance, which will give everyone a much better idea of the underlying strength of our business. Starting with our Ohio group, orders for the third quarter were approximately up 26% versus the same period last year. However, sales increased 8%, reflecting the impact from delayed fulfillment. The recent performance of our Ohio group has been driven by strong demand in both our wholesale and retail segments. Beginning with wholesale, our Western business grew 17% year over year as demand for the Durango brand remains at an all-time high. Several key customers across traditional Western and farm and ranch retail contributed to Durango's performance as each posted strong double-digit growth year over year. The brand continues to become more and more meaningful in true Western categories, which has driven strong sell-through and helped secure additional shelf space throughout 2021. With the weather recently starting to turn colder and rodeo season getting into full swing, many of our Western accounts are seeing a nice pickup in boot sales. While logistics and other global supply chain disruptions limited Durango's potential growth in the quarter, we continue to hear that we are navigating the current situation much better than the majority of our peers. Turning to work. Georgia experienced notable growth with farm and ranch stores, driven and large by demand for the brand's AMP LT collection of boots, including the addition of women's products at several accounts. The introduction of the new AMP LT styles contributed to a record-breaking fall booking season and new shelf space for the brand. Based on recent performance, customers' feedback, and consumer ratings, We are confident we'll be able to continue strengthening and broadening disrupt distribution for this comfort based work platform. The Brock, the Rocky brand, which spans work outdoor Western and commercial military had a number of positive wins during the quarter, despite the growth being hampered by disruption and supply chain headwinds, these challenges. probably had the biggest impact on the brand's outdoor businesses, as some of the key products for the fall season, especially new styles, were difficult to procure and deliver on time. Thankfully, we were carrying inventory of many traditional bestsellers, including our very popular Sport Pro and Sport Utility products. The biggest highlight of the season has been the introduction of our new Mountain Stalker Pro Premium Hunting Trekking Boot, which has provided the brand entry into the technical mountaineering category with a great product at a more accessible price point, something our retail partners are very excited about. Rocky Western continued its strong trend upward despite the supply and distribution challenges. Ordering new products early and carrying over additional inventory has allowed Rocky to capitalize on competitor struggles and build on existing programs and gain new shelf space. Those sales were strong with traditional best sellers. It was the new product that primarily drove the increase for Rocky Western. Like Western, Rocky work was able to grow even in the face of the temporary disruption. due in large part to the explosive growth of the industrial athletic program that has brought in a lot of new business. This includes exclusive product for Zappos that we delivered during the third quarter and has been selling through quite well. Turning to our retail segment, following a 50% increase in e-commerce sales in Q3 of 2020, this channel was down low single digits this year. reflecting the combination of a tough comparison and our delay in processing a portion of online orders on time. As comparisons further ease and we return to our normalized shipping state, we expect to see e-commerce sales resume growth fueled by the work we've done enhancing the functionality of our sites and expanding our direct-to-consumer efforts to marketplaces, particularly Amazon, and more recently, Target Plus, and eBay. Meanwhile, Lehigh continues its recovery from the height of the pandemic. Sales increased 23% over last year, driven by both higher account retention and new accounts, including Striker Corporation, Estes Express Lines, and Schnitzer Steel that launched in Q3. The business is still facing some headwinds from COVID-19 related to accessibility issues and now third-party product delays stemming from supply chain challenges. However, our cruise line business, nearly dormant for 18 months, has started to show signs of recovery while our new email and SMS strategy continues to improve account participation rates, driven revenue per account higher. Shifting now to our Boston group, total orders increased 46% as demand for muck and extra tough is high and continues to grow. Unfortunately, the shipment and inventory challenges has disproportionately hampered the group's Q3 success. Resulting sales were down 31%. The positive here is that over vendors, other vendors are having supply chain, which is keeping the likelihood of accepting late shipments high. Customers have not been canceling open orders, which gives us an excellent opportunity to capitalize on replenishment in Q4. To do this, we are focused on alternative shipping options like cross-stocking and container shipment opportunities to drive inventory to account. In terms of the integration, as discussed earlier, we are making good progress toward returning our Ohio, D.C. to its historical state of efficiency. We remain confident that with the investments we've made in technology and people, along with the new Reno, D.C., we'll be able to realize important savings over time by meaningfully lowering fulfillment costs for the Boston Group brands. We are also on track with migrating the acquired business off Honeywell's ERP system and onto Rocky's by the end of this year. This step is critical to providing our newest brands, customers, and consumers with the world-class service we've been executing at Rocky for years. While I'm disappointed in the temporary setback we encountered during the third quarter, I am confident that we are taking the necessary actions to restore our advanced fulfillment capabilities and fully capture the true demand we are experiencing for our portfolio of leading brands. With the significant growth opportunities we are creating for the business, the long-term future for the company has never been brighter. I'll now turn the call over to Tom. Tom?