Rocky Brands, Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brand 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. If anyone has any difficulties hearing the conference, please press star zero for your for operator assistance at any time. I would like to remind everyone that this conference is being recorded, and now I will turn the conference 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 Securities and Exchange Commission including our 10K for the year ended December 31st, 2022. And 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 Chief Operating Officer Tom Robertson and Chief Financial Officer Sarah O'Connor. After Sarah's and my prepared marks, we will be happy to take some questions. Now to our second quarter results. The challenging marketing conditions we experienced during the first quarter continue to pressure our top line, 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 brand portfolio has provided resilience, contributing to the progress many of our key partners have made 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 and fourth quarter Based on sustained consumer demand, we continue to experience for our products combined with the recent conversations with key wholesale partners. Before I hand it over to Sarah to cover the numbers and more details, I want to spend a few minutes reviewing some of the drivers of our recent top-line performance, starting with our work category, Portfolio Brands. The four brands that represent our work segment, Georgia, Rocky, Muck, and Extra Tough, 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 product was well received by retailers. With some of our legacy product, the price decreases we were able to pass through from our efforts to lowering 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 Works 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 Extra Tough and Muck, which make up our rubber-based work product, both brands had very challenging quarters, particularly Extra Tough due to the 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 indication points 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 Extra Tough, 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 Durango brand, but we saw steady improvement as the quarter progressed with at-once sales trending above 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 for the first six months of 2023. These new doors have been immediately impactful from the sales perspective and position us well for re-acceleration 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 Extra Tough 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 headed into the more popular fall outdoor season. On top of this, Muck and Extra Tough 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 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 required 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 am very pleased to see resilient demand for our portfolio of brands at the consumer level. Despite the pressure from the current retail environment 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 re-accelerate 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.