Rocky Brands, Inc.

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Rocky Brands Third Quarter 2025-2024 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 and then zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded and I'll now turn the conference over to Brendan Frey of ICR.

Thank you Claudia and thanks to everyone joining us today. Before we begin please note that today's session including the Q&A period may contain four 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 follow the Securities and Exchange Commission including our 10K for the year ended December 31, 2023. And I'm now turning the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason.

Thank you Brendan. With me on today's call is Tom Robertson, our Chief Operating and Chief Financial Officer. After our prepared remarks we will be happy to take questions. Our third quarter performance does not reflect the underlying strength of our business however it does highlight the benefits of our multi-brand multi-channel operating model. Double digit growth for Durango and Extra Tough in the U.S. as well as our B2B Lehigh custom fit safety footwear platform nearly offset some softness in other areas of our business due to primarily to unfavorable weather, less promotional activity and inventory shortages on certain key styles. A warm dry fall like the one many regions of the U.S. have experienced this year would have severely impacted not only our third quarter but our annual performance 25 years ago when the business was largely just rocky hunting boots. On top of this headwind we were also less promotional than a year ago. In the current environment when consumers have appeared to pull back even further on discretionary spending outside of peak shopping periods this decision hurt sales more than we anticipated but contributed to over a hundred basis points of gross margin improvement. Finally because the delivery delays and stronger than expected demand especially for Extra Tough we left several million dollars in sales on the table during the third quarter. Despite all this sales were only modestly below plan and we delivered adjusted operating margins of nearly nine and a half percent. While we believe it is prudent to be cautious about the remainder of 2024 given the near term macroeconomic environment and the fact that there are five shopping days between Thanksgiving and Christmas this year there are several reasons to be optimistic about our growth prospects heading into 2025. We are working on adding more manufacturing and sourcing capacity to ensure we are properly inventory to full capture future demand. This work will benefit Q4 to some extent but the majority of the upside will come in 2025 given certain product lead times and most importantly our current order book points to a very good spring season. Before I hand over to Tom for more detailed looking at the financials I'll take a few moments to walk through our third quarter brand and channel performance. As I noted Durango continued its recent momentum with notable gains in the third quarter. We again saw strong bookings across key accounts and farm and ranch partners along with further acceleration of at once business. Importantly with the channel now clear of overstock and discontinued styles we've recently sold in more of the brand's top performing in-demand styles setting Durango up for a strong finish to the year equally important spring bookings have been robust pointing to a strong start in 2025. Extra Tough also maintained a strong momentum in the third quarter driven by the positive reception to new product introductions as well as a continued demand for the brand's core styles. Of particular note this summer's collaboration with performance fishing brand Guy Harvey sold through at nearly 100% shortly after hitting shelves which was followed by the fall launch of a small collection of boots in partnership with authentic rugged seas brand that also sold out very quickly. Finally we introduced our tailgate collection of ankle deck boots in sports inspired color exclusively on the extra tough.com in mid-august. We immediately witnessed a big spike in its site traffic and equally strong conversion as we sold thousands of pairs in less than two months. Along with outsized core product and limited edition demand the brand continues to see expansion into niche outdoor verticals such as sport fishing and outdoor recreation

that

are leading to new retail partnerships and door expansions with large existing partners. In the near term the team is focused on securing inventory as the brand carries a lot of positivity into the holiday season. Looking further out into 2025 the team has seen a significant increase in spring bookings compared to a year ago which along with our manufacturing and sourcing expansion positions a brand for both near and long-term success. This year's dry warm fall season has been a headwind for muck whose rubber neoprene product drives the vast majority of its sales. At once orders did trend higher this quarter compared to a year ago however bookings remain sluggish in q3. Even with the lack of adequate weather to drive demand muck units domestically are slightly up this year underscoring the resiliency of the brand and the increased consumer interest in muck's more competitive price points that were introduced earlier this year. Looking ahead we did see sales start to pick up in the final weeks of quarter as parts of the south and southwest were hit with heavy rains and have seen the momentum carrying into the early weeks of the fourth quarter. Turning to the Georgia boots which is as we've discussed in recent earnings calls has experienced some headwinds throughout 2024 including changes in order size and frequency from our large account base and more recently unfavorable weather. This year the Georgia team has focused much of its energy in finding the value sweet spot for our work-based product and has recently seen more of these concepts begin to pay off driving increased volumes at retail. Looking ahead we anticipate that the change in partner buying habits will remain a challenge but we are cautiously optimistic about our new product approach and the reversal of recent weather related headwinds to fuel improved trends. Meanwhile rocky work also were flat to the year ago period which was ahead of first half trends with an uptick in units from increased consumer adoption of our new value focused product driven the sequential improvement. We experienced better results with our independent retailer base as well as our branded websites where we elevated the placement of industrial safety toe product. Sticking with the rocky brand we continued our progress repositioning rocky western with new value driven product at a more competitive price point this quarter. We saw strong reception to our new fall 24 lineup with our new lightweight and flexible options at competitive price points driving stronger gains compared to last year. Looking ahead we are confident that our new value based product positioning will set up rocky western for continued success. With respect to rocky outdoor while we did see a slight uptick at once demand ahead of prime hunting season in late Q3 it was not enough to make up for the shortfall in preseason bookings. The short seasonal window combined with back to back years of mild weather led to an over inventory of hunting footwear and apparel with many of our key retail partners. While the hunting market overall continues to be softer we saw our non-hunting footwear led by rugged casual styles continued to trend positively this year. This is helping the rocky outdoor brand reach a less specialized consumer segment and will act as a broader and more diversified base for the future growth. Lastly in our rocky commercial military and duty segment was down in line with our expectations. We are still up against a sizable military blanket purchase agreement that elevated 2023 sales and Q3 we were also lapping a large USMC boot purchase that did not repeat this year. A delay in military budget release for 2024 is also impacting our sales cadence versus last year. While we expect some offsets to these headwinds primary from the strength of our fire category we anticipate the variability to our outsize 2023 will continue to impact the commercial military and duty segments in the near future. Shifting to retail we saw notable areas of strength this quarter with both our extra tough and Durango sites posting strong double-digit revenue gains due to the growing popularity of these brands and the new push toward having AOV as well interested in exclusive drop like the extra tough tailgate collection in mid-August. Shifting to our B2B business sales were up double digits compared to a year ago period making a welcome shift in recent trends. Over the last two quarters we shared that we implemented a significant realignment of our sales organization to improve our sales pipeline and provide greater continuing to account setup, rollout and implementation. These changes are now driving results with the addition of more than 200 new accounts in the third quarter. Along with these notable sales gains customer spending continues to be strong which leads us to believe Lehigh will continue its momentum into year end and beyond. While we continue to face some near-term challenges I remain encouraged about our progress building a more diversified, more sustainable and more profitable business. We are making strategic investments in Durango and extra tough to capitalize on their momentum and reach a broader consumer audience. At the same time we are leaning into the value proposition for our other brands to drive higher volumes and gain share. We believe this approach positions us to improve our overall top line performance throughout 2025 which combined with our enhanced capital structure will allow us to grow earnings faster than sales. I will now turn the call over to Tom. Tom?

Thanks Jason. We were encouraged by the underlying strength of our business in the third quarter especially from an end demand perspective while acknowledging that certain transitory headwinds kept us from achieving our plan. As a reminder last year's Q3 included sales that would not reoccur in 2024. Excluding these from comparison sales of 114.5 million dollars were down 2.4 percent year over year. By segment wholesale sales were down 9.7 percent to 84 million dollars. Retail sales increased 11.8 percent to 26.8 million dollars and contract manufacturing sales were 3.6 million dollars up 3.4 million from last year. Turning to gross profit for the third quarter, gross profit was 43.6 million dollars or 38.1 percent of sales compared to 46.5 million dollars or 37 percent of sales in the same period last year. The 110 basis point increase in gross margin as a percentage of net sales was attributable to higher wholesale gross margins and higher mix of retail segment sales which carry higher gross margins than the wholesale and contract manufacturing segments. Gross margin by segment were as follows. Wholesale up 280 basis points to 37.5 percent. Retail down 440 basis points to 43.6 percent and contract manufacturing up 50 basis points to 12 percent. The wholesale gross margins in the third quarter of 2024 compared to the third quarter of 2023 can be attributed to the lower promotional activity in the current year period as well as opportunistic purchases by certain international and key wholesale partners in the quarter of 2023 which contributed to lower gross margins in the prior period prior year period. Operating expenses were 33.6 million dollars or 29.3 percent of net sales in the third quarter of 2024 compared to 32.3 million dollars or 25.7 percent of net sales last year. On an adjusted basis operating expenses were 32.9 million dollars this year or 28.7 percent of net sales and 30.7 million or 24.5 percent of net sales a year ago. The increase in expenses was primarily increased brand and marketing investments to support future growth and a higher mix of retail sales in the quarter as these sales carry additional expenses like shipping and handling versus the other two segments. Income from operations was 10.1 million dollars or 8.8 percent of net sales compared to 14.3 million dollars or 11.4 percent of net sales in the year ago period. Adjusted operating income was 10.8 million dollars or 9.4 percent of net sales compared to adjusted operating income of 15.8 million dollars or 12.6 percent of net sales a year ago. For the third quarter of this year interest expense was 3.3 million dollars compared with 5.8 million dollars in the year ago period. The decrease reflects lower debt levels and interest rates as a result of the debt refinancing completed in April 2024. On a gap basis we reported net income of 5.3 million dollars or 70 cents per diluted share compared to net income of 6.8 million dollars or 93 cents per diluted share in the third quarter of 2023. Adjusted net income for the third quarter of 2024 was 5.8 million dollars or 77 cents per diluted share compared to adjusted net income of 8 million dollars or 1.09 cents 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 3.7 million dollars compared to 4.5 million dollars at December 31st and 4.2 million dollars a year ago. Total debt was 153.3 million dollars a decrease of 13.2 from December 31st and a decrease of 29.7 percent since September 30th last year. Inventories at the end of the third quarter were 171.8 million dollars up slightly from 169.2 million at the end of the third quarter. The total debt was 168.3 million dollars compared to the first quarter of 2020 and down 11.8 percent compared to 213.9 million a year ago. Turning now to our outlook. While we were capturing a portion of the extra tough sales missed in Q3 during the fourth quarter we expect to be chasing inventory into 2025 based on current demand for the brand. Taking the student to account combined with our overall third quarter results we now anticipate full use full year sales to be at the low end of our initial range of 450 to 460 million dollars. Nothing has changed with respect to our view on gross margin. We still expect 2024 gross margins to be similar to that of 2023's adjusted gross margins of 38.9 percent. We are spending slightly more as a percentage of sales in 2024 as we invest in additional brand marketing programs to drive long-term growth. However this is being more than offset by a five million dollar reduction in interest expense versus 2023 as a result of our debt pay down over the past 12 months combined with the refinancing we completed in April. With the divestiture of certain lines of our business last year combined with our enhanced capital structure 2024 was about getting more nimble and more profitable. We are pleased with our progress against this goal and we look forward to combining this work to sustain top line growth in 2025. That concludes our prepared remarks.

Operator we are now ready for questions.

Thank you very much. At this time we will be conducting a question and answer session. If you would like to ask a question please press star and then one on your telephone keypad. You may press star and then two if you would like to remove your question from the queue.

Please hold while we pause for questions. The first question comes from Janine from BTIG. Please proceed with

your questions Janine.

I was hoping you could elaborate a little bit on some of the delays you're seeing or the inventory shortages specifically what bottlenecks are driving that and then maybe just some more color around your initiatives to get back in stock in Q4 and in early next year. Thank you.

Yeah hey Janine thanks for being on the call. I'll take this one and Jason feel free to chime in. I think as it relates to the Extra Tough product I mean we really just outpaced the demand outpaced our forecast and what we had purchased or made for this quarter. Wouldn't really say I mean the lead times on the Extra Tough product to the rubber based product are longer than generally speaking our leather product and so we're chasing inventory for the rest of this quarter particularly for Extra Tough and for the beginning of 2025 but it's really just longer lead times and demand outpacing our expectations for that. For the other brands I mean we always end up carrying a little bit of missing inventory over into the following quarter. Durango's demand was high in the third quarter too and we just came up a little short there so nothing glaring just need more capacity and we're working with those source partners and I'm confident we have this figured out. We just need to get caught up.

Okay great and then maybe one more if you could just help square some of the comments around being less promotional but then also a cautious consumer and kind of weak macro. Just curious into your promotional philosophy how do you think about maybe dialing back up the promotions if the consumer remains soft?

Yeah thanks Janine this is Jason. So I think if you think back to where we were last year we were just a lot more aggressive from a promotional standpoint than we felt like we wanted to or needed to be this year and as I stated I think people were being a little more promotional this year even than we anticipated but we were able to you know that 100 basis points be there and so our inventory is in a much better place. We don't have as much of a you know slower moving inventory so we just didn't feel like we needed to be that promotional in Q3 of this year and so I think we've seen the retailers are selling the product pretty well. The key accounts seem to be moving it better than our mom and pops or at least the mom and pops seem to be maybe a little more cautious with their inventory so they're buying a little closer and so I think that was really our thought process around the promotional side of it was just we didn't need to do it as much this year.

Yeah Janine just to add on to that you know if you think about our financing our debt structure last year right we had we were trying to make we were covered there from a covenant perspective and so our thinking last year was was probably generally a little bit more short-term than we would have liked to be to Jason's point and as we've refinanced that debt you know we've taken a different approach and we're taking a longer term view on the business because we're allowed to do so quite frankly so we didn't have to be as promotional. I think you know we've talked a lot about our product being you know essential and need-based and so getting promotional to sell into a retail a little harder in the third quarter just didn't make sense for us when we don't think it was going to change the sell through you know at retail so we're taking a longer perspective you know going forward and we've been able to really since April this year.

Perfect that's great Collier thanks very much.

Yeah thank you.

Thank you the next question comes from Jonathan Combs from Bayard please proceed with your questions Jonathan.

Yeah hi good afternoon thank you. I just want to follow up it's not entirely clear when you look at the second half maybe maybe if you could start by sharing your updated thoughts on wholesale growth for the second half and if you look at the change in plan I guess what's not clear is how much was maybe aggressive assumptions of what you could do versus a change in the marketplace and maybe where any of those changes are concentrated but just just any more Collier there would be helpful.

Yeah so you know I'll start I think as we as we got through the so we had the warmer dry third quarter then then then we anticipated which you impacted the mock brand the most right and and in this quarter we we weren't able to capture all the sales for extra tough to try to to try to catch up or make up for those differences and so as we look to the rest of the year knowing that that we're going to knowing that we're going to be chasing inventory for for the extra tough brand we're looking to you know really come in at the end of the guidance that that we've set out really at the beginning of the year so that that 450 million dollar number I would say from a wholesale retail mix you know I would say that we think that you know the retail sales will probably have a slightly higher growth than then we then then we've gone into the year with just given the recent success of of our Lehigh business following that sales reorg and then in our e-commerce had a really strong last year so even our e-commerce business being up slightly you know over last year will be a win for us but I would say wholesale business probably being relatively flat for you know for the fourth quarter would be our goal there.

Jonathan I would just add to you know we we kind of missed things on on both ends right so we missed the Durango and extra tough upside and then we probably were a little over confident in the muck Georgia and Rocky maybe more so in the muck so we we just kind of missed those those combinations of things and could have made up some of the miss if we would have been a little more aggressive on on buying the inventory for extra tough and then and then maybe expanding quicker and some some other factories and sourcing it but we just kind of missed both sides we missed the upside and we were probably a little over confident in in the other

brands. Yeah John just to just to clarify my comment there the wholesale business will be you know where our goal is to be relatively flat on an on a on an adjusted basis if you're looking at last year's reported numbers we would be slightly down as we don't have those recurring sales that we've been talking about for the last nine months.

Okay great and one one follow-up are you willing to share maybe just the current relative size of a couple of those brands if we're thinking about Durango, extra tough and muck you know within wholesale just trying to make sure we're thinking about that the relative size of those correctly?

I think

yeah I think any of this time we're going to kind of keep that close to our chest what I'll tell you there there's not a vastly difference big difference between all the brands at this point and and so we'll see how how growth for each of those brands goes over the next few years but there's not one that's vastly bigger than the other.

Okay great and then as we think forward to to spring and really maybe first half of 25 what's your current visibility around both you know the brands that are trending well and then correcting some of the the issues for the brands that aren't trending as well?

Yeah so so for a Q1 standpoint we have pretty good visibility and and I think we indicated that the bookings look pretty good particularly for extra tough in Durango so we we see that trend happening and and as we stated we are taking a more aggressive stance on making sure we have that inventory and and we think we'll be in a much better place for those brands in Q1. You know as far as the other three brands go we want to continue to invest in them we want to continue to try to find the right product mix and and make sure that we're getting in front of the consumers and and helping our retail partners out so we're going to continue to drive that and as Tom indicated we're in a much better place where we can think more long term and and continue to build that up as we get into 2025 and and continue to to be a more profitable company.

Yeah just to add on John look we'll give obviously much more thorough guidance for 2025 at the next call but but as we look at 2025 we will have a little bit of comparability issues still with some of you know the big military contract that Jason talked about that hit our commercial military business and the wholesale segment. We'll have a little bit of that at the beginning of 2025 we'll lap that I think at the end of the first quarter but I think big picture right for modeling purposes thinking about the the the low single digit growth rate for the wholesale business and you know maybe a more progressive position you know mid to high single digit growth for for the retail segment is probably what we'll target but again we'll have a lot more color for you at the next call.

Okay great that's really helpful thanks again. Thanks John.

Thanks John. Thank you the final question comes from Bruce Geller from Geller Ventures please proceed with questions Bruce.

Hi good afternoon. Historically the fourth quarter has been pretty good for cash generation. Can you give some insight into where you expect to finish the year in terms of both inventory and debt levels?

Yeah sure thanks Bruce thanks for being on the call. You know the inventory one is dynamic right now and just to paint the picture for you a little bit we've got an inventory decrease meaningfully over last year however our in transit inventory is up as we're trying to rebuild inventory for some of the demand that we're seeing for a couple of the brands and so we will probably be pushing our our factories and our source partners as hard as we can to get inventory. I'm a little hesitant to give you a firm number but I would tell you I think inventory by the end of the year will be down in you know seven figures but you know not the 10 to 15 million that we anticipated more at the beginning of the year just given the the uptick in demand and so we'll be chasing inventory like I said. From a debt perspective the fourth quarter is is a good cash flow quarter for us so if you think about we're collecting a lot of those wholesale sales that we that we saw in in the third quarter and then also our e-commerce business which obviously has a very quick cash conversion cycle so you know we anticipate to continue to pay down debt in in the fourth quarter and I would like to say probably another 10 to 12 million dollars but again I'd like to see you know we're going to push that envelope as hard as we can as we go through the rest of the year.

Okay thank you and good luck. Thanks Bruce.

Thank you ladies and gentlemen we have reached the end of the question and answer session and I'd now like to turn the call back to Mr. Jason Brooks for closing remarks. Thank you sir.

Thank you very much. First I'd like to thank our investors board members and customers for supporting all our brands and the company and secondly I would like to thank the entire Rocky Brands team. I am very proud of the accomplishments that we've been able to do in 2024 and I look forward to finishing a strong year with you and working together to make 2025 and and beyond even better so thank you all very much.

Thank you very much sir. Ladies and gentlemen that does conclude today's call.

Thank you very much for joining us you may now.