Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to Rocky Brands’ Fourth Quarter Fiscal 2018 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. [Operator Instructions] I would like to remind everyone this conference call is being recorded. I will now turn the conference over to Brendon Frey of ICR. Please go ahead, sir..

Thank you, and thanks to everyone for 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, 2017. And I’ll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands.

Jason?.

Thank you, Brandon. With me on today’s call is Tom Robertson, our Chief Financial Officer. Our fourth quarter performance represents a strong finish to a successful year for Rocky Brands.

There were several highlights from our most recent quarter starting with a 15% increase in retail sales, the highest growth rate the division has experiencing quite a while. At the same time, our wholesale channel once again posted a low-single-digit sales gain, which is in line with our previously stated long term target for this business.

The growth of our two highest-margin segments combined with the improved efficiencies we've recently achieved in our company-operated manufacturing facilities fueled by a nice improvement in year-over-year profitability on an adjusted basis.

On our Q4 call this time a year ago, we outlined our growth and profit improvement strategies for 2018, which were a continuation of the plans Tom and I outlined after we assumed our leadership roles the previous year.

From a high level, they included exciting our consumers with great products, increasing brand awareness, and stimulate demand through improved marketing with an emphasis on digital, providing excellent retail support and expand distribution with our key brick and mortars and our e-tail partners, accelerating expansions of our Lehigh CustomFit program through investments in technology and personnel, and utilizing internal production capabilities on growing number of commercial military opportunities and improve the efficiencies of our factories.

I'm very pleased that as an organization, we have successfully executed on each of these fronts and consistently delivered improved results.

While there will always be some movement in how sales flow by quarter from one year to the next due to the nature of some of our businesses on an annual basis, I'm confident we can build on our recent momentum by staying the course we've outlined.

I'm going to review the sales highlights for each of our segment from the past year, and then Tom who will review the financials in more detail and provide some thoughts on 2019 guidance, after which we'll be happy to answer any questions.

Starting with wholesale, our largest segment, sales increased 4% for the year or 7% excluding the Creative Rec brand which you'll recall we sold in late 2017. By brand, Georgia Boot was up mid-single digits in 2018 fueled by new product introductions, investments in new POS materials, and select door and shelf space expansion at existing accounts.

In terms of product, there were several standouts from the past year led by the Carbo-Tec Work Western and our new Logger collection of boots for the farm and ranch channel. Consumers also responded favorably to the new styles within our popular Athens work line and many of these collections include our new easy-on, easy-off technology.

We supported the introductions of these innovative new features with enhanced in-store, point-of-purchase materials, as well as social media programs aimed at driving traffic to our participating retail partners and georgiaboot.com. We were very pleased with the effectiveness of these campaigns.

Moving to Durango, sales for the year were also up mid-single digits as the brand continued to sell through very well in distribution network.

Sales of key collections led by the Rebel series for both men and women, and new styles such as the Maverick Western Work series were up nicely at mid specialty retailers, such as Rural King, Workwear safety shoes, and Tyson Supply, and were even stronger in our smaller field accounts.

And we’ve recently introduced the new Rebel Pro collection at the National Finals Rodeo in December. The response has been very encouraging, leading to incremental shelf space and good momentum at retail to start the New Year. The Rocky brand had an exceptional 2018 with sales up mid-teens.

The business saw a boost from the reconfiguration of the brand sales force, and the establishment of one of the sales reps per account during the first half of the year, which has allowed for better service levels and the opportunity to cross sell across all the categories.

This change combined with some key product introductions such as the rugged yet ultra-comfortable Sport Pro Rubber hunting boot with stretched neoprene and the XO-TOE , the world's most comfortable safety shoe fueled a very strong second half for the brand. The best performing category within wholesale last year was our commercial military business.

This was true for both domestic and international sales, as we recently started to make a bigger push outside our home market by taking advantage of our international manufacturing capabilities to produce and sell boots to military allies of the United States.

Throughout 2018, we invested in building commercial military inventory, particularly our popular S2V Boot, which allowed us to take advantage of the recent surge in demand for tactical equipment. With this global trend expected to continue, we see a nice runway for growth in the years ahead.

Now to retail, which was our largest growth segment in 2018 with sales increase 10% over 2017. This performance was fueled by strong gains in both our Lehigh CustomFit and B2B business and our direct-to-consumer channel.

Starting with Lehigh, our key account growth improved participation and retention rates as existing accounts were the major themes for the year.

The investments we made in personnel and marketing, including social media are allowing us to reach more potential customers, while upgrades to the CustomFit interface, and the addition of new brands to our offering have helped improve user engagement and sell through.

The focus going forward is on continuing to land new key accounts and further building new account relationships we have to drive higher productivity.

Meanwhile, our branded e-commerce websites have been on a great run, benefiting from recent investments to increase traffic and conversion and enhance the consumer experience, the rich content produced by each brand including videos, images, and banners are being utilized to improve the look and feel of our websites as well as part of our social media efforts aimed at directly reaching new and existing consumers and transforming our website from what has historically been information marketing tools to e-commerce growth engines.

We will continue to invest in our direct-to-consumer business with a focus on the latest technologies to drive increased penetration for this high-margin channel. Finally, military segment sales for the year were right on plan at $26 million.

While this was approximately 30% down from a record high in 2017 due to a number of industry headwinds, gross profit dollars for the segment were actually up slightly as we improved gross margins 700 basis points.

This was achieved through increased manufacturing efficiencies as we took advantage of the excess capacity afforded us by the decline in contract military orders to expand our commercial military production. Our facilities at Puerto Rico and the Dominican Republic are both operating exceptionally well.

We view both locations as strategic assets and important to our future growth plans.

As such, we are implementing new technology, technologies like automated cutting machines in Puerto Rico to further increase efficiencies, while in the Dominican Republic, we increased capacity to accommodate the shift in some production from our Far East partners to help protect against the potential threat of an escalating trade war with China.

In closing, our focus going forward is on executing our core strategies and driving operational excellence throughout our organization to achieve sustainable growth and enhance profitability.

With our balance sheet in a strong position, we are reinvesting a portion of our recent earnings and additional marketing programs in grassroots initiatives to fuel increased awareness and demand for our portfolio of authentic brands.

I am confident that we have the right plans in place to build our recent momentum and generate increased value for our shareholders over the long term. I'll now turn the call over to Tom.

Tom?.

Thanks, Jason. Net sales for the fourth quarter were $67.2 million up about 200,000 from a year ago period driven by solid gains in our retail and wholesale segments partially offset by expected declines in our contract military sales. By segment, wholesale sales increased 3.4% to $45.9 million.

Retail sales increased 14.6% to $16.5 million and military sales were $4.8 million versus $8.2 million for the same period in 2017.

Gross profit in the fourth quarter increased 3.4% to $24.1 million or 35.9% of sales compared to $23.3 million or34.8% of sales the same period last year, 110 basis points increase in gross margin was driven by higher military margins as we benefited from improved efficiencies in our Puerto Rican manufacturing facility compared with a year ago period, and a lower percentage of military sales which carry lower gross margins than wholesale and retail.

Selling, general and administrative expenses were $19.3 million in the fourth quarter of 2018 compared to $19.6 million last year. Excluding approximately $300,000 of transaction expenses related to the sale period of Creative Recreation in Q4 of 2017, SG&A was flat year-over-year.

Income from operations was $4.9 million or 7.2% of sales compared to $3.7 million or 5.5% of net sales in a year ago period. On an adjusted basis which excludes the aforementioned transaction expense related to the Creative Recreation sale in Q4 last year, operating income increased 21% and operating margin expanded to 120 basis points.

Net income for the quarter was $3.6 million or $0.48 per diluted share compared to $4.4 million or $0.59 per diluted share in the year ago period.

The fourth quarter of 2017 included a one-time income tax benefit, a $3.2 million due to the enactment of the Tax Cuts and Jobs Act, which lowered the domestic federal tax rate applied to our deferred tax liability position and partially offset and was partially offset by one-time toll charge related to the repatriation of earnings from our Dominican Republic operation.

It also included an after-tax chargeof $1.6 million associated with the loss on the sale of creative recreation, excluding these items adjusted – adjusted net income was $2.8 million or $0.37 per share. We've included a reconciliation table in today's press release. The bridges are GAAP to non-GAAP results.

Turning to the full year, let me quickly summarize the highlights for 2018. Wholesale sales excluding the Creative Rec brand from both years increased 6.6%. Retail sales increased 10.1% to 53.2%. Gross margin increased 210 basis points to 34.4% compared to adjusted gross margins of 32.3%.

Operating margin increased to 190 basis points to 7.1% compared to adjusted operating margins of 5.2% and adjusted EPS improved 62% to a$1.88 from a $1.16 in 2017.

Turning to our balance sheet, which at the end of the year was in a very strong position highlighted by cash and cash equivalents of $10.2 million and no long term debt compared to cash and cash equivalent of $3.7 million and long term debt of $2.2 million at the end of 2017.

We were able to increase our cash position by $6.5 million even as we paid out $3.5 million in quarterly dividends and $1.3 million repurchasing approximately 500 – 55,000 shares of our common stock. With respect to our current year, we are planning for growth.

We anticipate revenues increasing in the low single digit range over 2018 levels led by our retail division followed by our wholesale. Following the industry headwinds our military segment based this past year, the business is stabilized and we expect contract military sales to be flat on a year-over-year basis.

In 2019, we plan to utilize our strong balance sheet and reinvest a portion of our cash position in the business, primarily in additional marketing programs to support our portfolio of authentic brands and their unique B2B direct model and drive sustained growth and increased shareholder value over the long-term. That concludes our prepared remarks.

Operator, we are now ready for questions..

Thank you. [Operator Instructions] We'll take our first question from Jonathan Komp with Baird..

Yeah. Hi. Thank you.

A few questions, maybe I'll start on the wholesale business and when you look at the fourth quarter growth against a tougher comparison in the prior year, can you maybe just talk about what you saw across the businesses, any major variances positive or negative, and then just generally your sense of wholesale which I know you said should grow again in 2019, how you're feeling about that?.

Hi, John. Yeah. Thanks for being on the call. I think we are in the same place that we've really been all of 2018 and starting off into 2019. We are comfortable that our wholesale brands; Rocky, Georgia, and Durango are in this low-single-digit range.

It seems to come at different times in different places, so our outdoor business, as you saw in the fall was very strong and some of the other brands may be not as strong, but we're seeing some things happening in Q1 that are offsetting you outdoor maybe not as strong, but Georgia is stronger.

So I think we're really comfortable again – we're in some pretty basic businesses, and I just don't see a huge increase coming in the high-single to low-double digits. I think it’s going to be in that mid area..

Okay. Great. And any color on the success of – I know you mentioned again some of the newer products that you have in the marketplace or presented to the market. Any additional color on the reception to some of the ones that you mentioned..

Yeah. So, I think the XO-TOE has really revolutionized the safety toe industry. It's a safety toe that's external, so it's – normally your safety toe is going to be inside or underneath the leather. We have designed this boot to be an external safety toe, that one has been received very well.

It's going to be a slow burn because it's very different, but I think we're going to see that one take off in the next you know 12 months to 24 months as people get more into it. From a Durango standpoint, we really have changed the focus of that whole brand from a casual women's fashion brand in the Western market to more traditional Western.

And the new Pro series that has come out late last year, we will start shipping that.

I think at the end the Q1 maybe Q2, a lot more traditional looking and then we have a leather bottom outsole in that one called the Arena Pro, which will I think it rolls out Q3, Q4 this year and then our introduction with Tractor Supply in the new mud dog, that has just been phenomenal.

We've seen a tremendous success in our waterproof one that we do to the wholesale independents, and then we have a special makeup version for Tractor Supply..

Okay. Great.

And then, Jason, I think you mentioned strong trends early on in 2019 for Georgia, but maybe just to broaden the question, what are you hearing from your retail partners just amidst the government shutdown and you have volatility in oil prices, are you seeing any signs that industrial markets or weakening or are just any more color there would be helpful..

Yeah, I think – I think everybody was a little concerned that the government shutdown. If it would’ve continued to go much farther, I think we were all a little worried about that.

We have really not seen anything too drastic, and I'm going to take this one and really give it to our team, I think the reason we didn't see any backwards movement or slowdown is our commitment to our relationship with our retailers has really changed.

And I know we talked about this in 2017 and we talked about it in 2018, but we want to be a good partner, and so I believe we're stealing shelf space from some of the other footwear suppliers in the marketplace, and that's why we're not seeing much change there.

I'm very comfortable that we can continue to do that in 2019 and hopefully in 2020 and 2021..

Okay. Great. And then, if I could ask following up on the Lehigh and retail business, I think you’re implying retail up in the single digits for 2019, and you just grew 10% in 2018.

So, I guess I just want to ask your thoughts on the growth opportunity there, is there is any potential for upside, or how do you kind of cap the outlook as you see for that business?.

Yes. So, I think – this is Tom. From a retail perspective we're going to continue to try to push our consumers to our own e-commerce website, obviously for our own margin expansion, both from a Lehigh standpoint, which is our largest portion of retail sales.

We had a lot of key account wins in 2018, and so we're hopeful that we can get some more large key account wins, the custom fit side of the business was up 13% in 2018. And so, I think that we know that that was really strong growth. Obviously, each year is going to be a little bit harder comparison as we continue to grow that business.

And the other thing to kind of keep in the back of our mind too from a Q1 perspective, we still had some New York City transit in Q1 2018, right, at the anniversary too. So that's going to be a little bit of a headwind as we move forward this year..

Okay. Excellent. Maybe a couple more, Tom if I could, if you don't mind. First, I don't know if you gave the gross margin by segment.

I guess, I'm specifically interested in wholesale, but maybe if you had all of them?.

Yeah. For the quarter, gross margin for wholesale was 33.3%. That was actually down from prior years, a couple of things that led to it.

As Jason talked about, our outdoor business was up strong double digits, and our outdoor – our outdoor categories carries a little bit lower margins than the rest of our traditional wholesale business as well as there was a push from the management team here and the sales team to unload some discontinued inventory which also pressured our margins a little bit.

Moving down to retail, retail margins were 45.5%, pretty much flat with last year. And then our military segment margins were up pretty substantially, 27.7%.

The growth there again, much as we talked about with the increased efficiencies in our Puerto Rican facility with the laser cutting machine and then also I think we’ve talked about on our previous call as the military -- as our commercial military continues to grow at this rate, it's eating up more and more of the production overhead that’s getting assigned to it.

So military is not carrying as much of the overhead burden as it once was, so we've seen the margin expansion there..

Okay, great.

and the last – last two for me if I can, then just in terms of some of the discussion about reinvestment to drive growth, can you give a little more color on specifics what you're planning there in 2019?.

So, I think for us, what we want to do is find ways to drive brand awareness. We are relatively small regional brands, great company altogether, but we've got to find ways to get people to understand who we are.

So you're going to see us spend some dollars and some marketing areas to drive the brands in those areas be it in the southeast or the northwest, but just continue to find ways to do that.

At the end of 2018, we rolled out a small little campaign from our commercial military standpoint where we did some advertising on the Army-Navy game, and we think that really increased some brand awareness for us, got us in front of a lot of people, and so we're going to continue to do some things like that as long as we see the positive results that we're getting right now..

Yes. John, I mean, big picture to, we’ve devoted a lot of our time and energy to some of our new products. Jason has talked about the [indiscernible] Pro, the Arena Pro company now. The Rocky Brands XO-TOE, the Muddog or Athens, the easy-on, easy-off technology for Georgia.

And we really believe in this product, and so we're going to put some money behind it, and try to drive some more sales growth in the future because we think the product is great, we just think we need more people need to know about it..

Yeah. Great. Last one if I could just on the inventory balance that quarter and I know Tom you mentioned some close out sales within wholesale. But the total inventory growth at the end of the quarter if you could just give more color on the composition there and how we should view that..

Yeah. Absolutely. So I think that there's a few things going on here. I think one, we're going to continue to push in Q1 and Q2 this year to unload some discontinued product as well so hopefully we'll see this balance come down.

But there were some investments made in the commercial military and in the duty space from an inventory standpoint some manufacturing efficiencies were picked up because of that. And also in some of these contract or these bids that come out you need to have all the inventory on hand to win the bid. So we made some investments there.

There's also some increases in some special makeup, so we're doing for some of our key accounts to support their forecast and sell-through as well as we’ve increased some raw materials down in Puerto Rico. As you know with the freight and shipping of items to Puerto Rico the lead times have gotten longer.

So we've invested some inventory down there as well and we hope that also will bring in some margin efficiencies or margin improvement there with buying little bit some of those raw materials in bulk..

Okay. Great. I think I've more than exhausted my three question rule, so I will leave it there..

[Operator Instructions] That concludes our question-answer-session at this time. I'll turn the call back over to our presenters for any final or additional remarks..

Just wanted to say thanks for everybody on the phone today. We appreciate it, and we look forward to another successful year in 2019. Thank you very much..

That does conclude our conference call for today, everyone. Thank you all for your participation. You may now disconnect your line..