Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Rocky Brands' First Quarter Fiscal 2019 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. And we'll now turn the conference over to Brendon Frey 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, our reports filed with the Securities and Exchange Commission, including our 10-K for the year ended December 31st, 2018. I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands.

Jason?.

Rocky, Durango, and Georgia Boot. I'll review the first quarter highlights for each of our segments and then Tom will go through the financials in more detail, after which we'll be happy to answer any questions.

Starting with wholesale, our largest segment, sales increased 4.8% fueled by double-digit gains in our Hunting and commercial military categories along with low single-digit growth in Work and Western.

By brand, Georgia had another nice quarter driven by strong replenishment orders for several new styles launched late last year like the new Marshland, Rumbler collection -- and the Rumbler collection.

In fact, sell-through on these products exceeded expectations and we were chasing inventory for much of the first quarter to try and keep pace with demand. We also experienced solid demand for updated versions of our Comfort Core Logger collection along with the brands Carbo-Tec Western line as the Work Western trend continues to gain momentum.

Georgia's growth was also broad-based in terms of retailers as we saw nice gains with many of our top national accounts like Tractor Supply, Zappos and Amazon. Moving to Durango.

While sales were our up modestly in Q1 driven by demand for key assortments at majors such as Cavender's, Boot Barn and Academy Sports, the quarter could have been stronger had it not been for a few temporary headwinds that resulted in some lost sales and some sales being pushed out into Q2.

In hindsight, we were light on inventory of key styles within our Rebel and Maverick collections, which prevented us from capitalizing on demand in March following a strong February. We did receive additional inventory in April and therefore, we don't anticipate this issue reoccurring.

On top of this, the rollout of the new Rebel Pro series was delayed until the second quarter due to manufacturing and transportation congestion. This new collection booked extremely well, so we're very excited about upcoming launch and anticipate strong initial sell-through would generate replenishment orders as we move through the rest of the year.

As part of our reinvestment strategy, we are spending additional marketing dollars in 2019 to help drive increased awareness of Durango's position as a true iconic western brand. You can see on some of these marketing initiatives at durangoboots.com and many more will be rolling out this fall.

The performance of Rocky Brands in the first quarter was shaped by the continued strength of our Hunting and commercial military businesses. Starting with Hunting, the category benefited from an extended winter season for the second year in a row.

While from a product perspective, we've continued to see nice growth of our rubber boot program and line of rugged outdoor casual, both of which nicely complemented our core waterproof camouflage hunting boot offering.

I believe we are also seeing a boost from our recent marketing initiatives aimed at increasing brand awareness and driving traffic to our brand in stores and online.

This has been a focus for the past several quarters and we plan to invest additional funds in programs that allow us to continue taking market share via e-tailers and shelf space in brick-and-mortars.

However, I want to point out that starting in the second quarter, our Hunting business starts to face tougher comparisons, and therefore we do expect the category's growth rate to moderate from recent trends. Meanwhile, the momentum we built in our commercial military business last year carried into the first quarter.

Our go-to market initiatives around paying off – our go-to market initiatives are paying off as consumer's awareness and confidence in our popular S2V styles continue to build.

Domestically, we have witnessed growth across our entire customer base, with particular strength at Atlantic Dive Supply and the Army and Air Force Exchange, both of which experienced high-teen growth over last year.

We also expanded distribution during the first quarter with the addition of several other military uniform exchange including the Navy, the Marine Corps and the Coast Guard. These outlets allow us to reach a larger percentage of enlisted soldiers and provide us with new long-term strategic growth opportunities.

On the international front, the focus is on generating increased awareness for this business and building relationships with U.S. allies such as the Kingdom of Bahrain, where we recently completed a large order. Now to retail, which was once again our fastest-growing division as sales increased 18% compared with the same period last year.

Lehigh continues to demonstrate strong sustainable growth through CustomFit our differentiated safety shoe business model. We are seeing increased retention and productivity at existing customers thanks to an expanded product offering and enhanced operational process introduced to enhance our on-site iFit ordering events.

This includes a new partnership with Aetrex we launched in January to offer orthotics through digital scanning and measurement equipment, we developed – we deployed to all the field teams.

At the same time, new account acquisitions continues at a strong pace after signing up Frito-Lay and Owens-Illinois in 2018, we added National Distributors as a customer in the first quarter and expect to start shipping product to their employees later this year.

We continue to believe there is a great deal of untapped potential for our Lehigh business and we plan to continue investing in resources to ensure we are the best positioned to capitalize on our opportunities this year and long-term. Turning to e-commerce.

Sales from our branded websites collectively increased low-double-digits driven by higher traffic and increased conversion rates. We have and continue to make investments in our e-commerce platform to enhance the shopping experience as we strive to further evolve our sites from informational marketing tools to commercial sales vehicles.

Finally, the military segment sales were up slightly in the first quarter as we started to lap the industry headwinds that affected the business beginning in early 2018.

We also benefited from accelerated shipments that are pulling sales into the first half of the year from the second half as the Department of Defense recently notified us it has decided to end one of our current contracts early.

In terms of prospects for this business, nothing really has changed, but we continue to aggressively bid on all available opportunities that make financial sense for the company.

In the meantime, we are utilizing the current capacity in Puerto Rico and the Dominican Republic manufacturing facilities to expand production of our commercial military product lines, which is helping improve efficiencies and drive gross margins from this segment into the low 20s from their historical range in the low to mid-teens.

In closing, we are staying the course by continuing to focus on executing our core strategies and driving operational excellence throughout our organization to achieve sustainable growth and enhance profitability. I am confident that our plans will allow us to return even greater value to our shareholders in the years ahead.

I'll now turn the call over to Tom.

Tom?.

Thanks, Jason. Net sales for the first quarter were $65.9 million compared to $61.4 million in the corresponding period a year ago, an increase of 7.4%. By segment, wholesale sales for the first quarter increased 4.8%, to $42.4 million, compared to $40.4 million last year.

Retail sales for the first quarter increased 18.2%, to $15.4 million, compared to $13.1 million a year ago. And military sales increased to $8.1 million versus $7.9 million for the same period in 2018.

Gross profit for the first quarter increased to $23 million, or 34.9% of sales, compared to $21 million, or 34.2% of sales in the same period last year.

The 70 basis point increase was driven primarily by higher retail and military margins along with a lower percentage of military sales, which carry lower gross margins than our wholesale and retail segments. Gross margins by segment were as follows; wholesale 33.9%, retail 43.2%, and military 23.8%.

Wholesale margins were down approximately 80 basis points, as we took the opportunity to move some aged inventory through select certain discount channels. Selling, general and administrative expenses increased to $18.5 million, or 28% of sales, for the first quarter of 2019, compared to $16.7 million, or 27.3%, in the period a year ago.

The $1.8 million increase in SG&A expense was driven primarily by increased investments in marketing and personnel to support future growth, as well as higher variable expenses associated with the increase in sales.

Income from operations was $4.5 million, or 6.8% of sales, compared to income from operations of $4.2 million, or 6.9%, in the prior year period. Net income increased to $3.6 million, or $0.48 per diluted share, compared to net income of $3.3 million, or $0.44 per diluted share, in the prior year period. Turning to our balance sheet.

As of March 31, 2019, we had cash and cash equivalents of $17.6 million, an increase of 74.3% compared to March 31, 2018. We had no funded debt at the end of either period. Inventory at the end of Q1, 2019, was $69.9 million, up 7.3%, compared to $65.2 million on the same date a year ago.

With respect to the remainder of the year, we still expect revenue to increase in the low single-digit range over 2018, led by our retail and wholesale divisions. Based on the U.S.

Military's decision to end one of our contracts early -- earlier than planned, we now expect contract military sales to be down approximately $2 million on a year-over-year basis compared to our previous estimate of roughly flat.

As we did in the first quarter, 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 our unique B2B direct model. That concludes our prepared remarks. Operator, we are now ready for questions..

Thank you. [Operator Instructions] And we'll take our first question from Jonathan Komp with Baird. Please go ahead..

To just ask maybe broadly on the top line performance up 7% and that's even with sounded like some inventory constraints that maybe are straightened out now.

I'm curious if you could just talk through in the quarter itself maybe what drove the upside versus your expectations? And then similarly I know you have the military headwind the next few quarters, but maybe why low single-digit total growth guidance still make sense for the year?.

Hey, Jon. How are you doing? So for -- part of the first question was in regards to wholesale. In the total increase I think you kind of cut out on me.

I think where we are standing today, our wholesale business came in in that mid single-digit range, which we're pretty comfortable with, and I think we're still pretty comfortable with for the rest of this year. The Lehigh business had a pretty strong quarter for us. We saw a lot more aggressive buying from some of our new customers.

We typically will see this in Q1, but with some of the new rollouts it was just a little stronger than we anticipated. So we think that's going to come back a little bit in the rest of the year. And so I think between those two, it's still probably reasonable to think that mid single-digit 4%, 5%, I think is still probably reasonable.

The military thing, we were really surprised to hear about them, shortening the contract, but then in the same breath giving us orders earlier to kind of speed up the contract. So we -- our military business is probably the easiest to forecast until they do stuff to us like this, but we've not had an opportunity still to bid at any new contracts.

So, come the end of this year in Q3 and Q4, it's going to fall off pretty substantial..

Yes, John, just to pile on a little bit here.

When we look at our comparison to last year from a wholesale perspective, we had a few really significant wins, whether it was commercial military, the international front, or it was some of our new product launches at Tractor Supply, and we talked about a really big opportunistic buy that we had in the western category in Q2 of last year.

And so while we feel really confident about the new product offerings that we have, we think that it's going to be a little bit of a tough comparison to last year.

And then moving to the retail segments, Lehigh, the seasonality of Lehigh you think about the voucher programs that a lot of folks -- that a lot of companies have, a lot of those start in January 1 on a calendar year. So typically the largest quarter for Lehigh is in the first quarter.

And so we were still forecasting Lehigh to be up that high single, low double digits or retail to be up at high single digits or low double digits for the year. We were just not sure we'll be able to carry that same momentum in Q1 throughout the rest of the year..

Okay. That's helpful. Maybe following up on the wholesale business specifically, I know the revenue for that business the last two quarters it was up 3% and then up almost 5%. I'm just wondering, is there any more of a clearer picture of the underlying growth rate, since it looks like you invest there a little in gross margin.

I'm just curious the underlying performance for that business.

And any more color as you look ahead for wholesale by end market or by brand, whichever, is easiest kind of where you expect the business to come from going forward?.

Yeah. I -- it really is simple at least from our point of view, Jon. We are continuing to invest in those brands from a brand awareness standpoint. So we think we are introducing our brand to new customers and we're doing it in the same channels that we've been doing it in for years. We just believe we're doing a better job of it today.

So we believe we're stealing shelf space in the Boot Barns of the world. We believe that we are getting more people to our websites. We believe we're driving more business through the AAFES stores in the commercial military. So I think all of those areas, we have just had a tremendous amount of focus on, and we think we're seeing some benefits from it.

We think the creative product that we've introduced, the XO-TOE that came out is really being cool. I think they're going to be slow burns. I don't think you're going to see them ever takeoff by 10%, 15% but I think you're going to see well this is starting to build.

And so we're just focused on doing the same things over and over again in the same distribution channels, and I think we are taking some shelf space..

Okay, great. And then I want to follow-up also on the -- just the pace of incremental G&A investments going forward. And I know you had a good top line performance and flat or slightly down margin year-over-year in the first quarter.

How should we think about that going forward? I know you're targeting maybe a lower revenue growth during the balance of 2019.

But what do you expect to see better operating leverage from a margin perspective?.

So, I know Tom's going to want to jump in on this, but we were very aggressive in Q1 of cleaning up some inventory. We took -- we had some customers that were interested in moving some discontinued items. And so during the show season, our sales department took it and ran with it.

So I think our margins will rebound a little bit and then in relationship to where we think our sales are going to be as well.

So Tom you want to add something?.

Yes. From on operating something standpoint Jon, we could think -- I mean you understand pretty clearly how we have some seasonality to our operating expenses because of such strong sales -- such strong wholesale sales in the third quarter and strong retail sales in the fourth quarter.

And so if you think about the investments that we're making during the entire year, we're going to see an uptick in our SG&A spend there. Certainly from a dollar standpoint, the idea, the goal is to get sales to grow at the same rate if not faster than that operating spend.

But the other thing and the thing that really impacted us in the first quarter -- and I think we'll -- you can see it play out historically in our fourth quarter is when you see such a strong sales increase in a retail segment those carry a lot more variable expenses shipping one and two pairs at a time is a lot more expensive than shipping or even containers to some of our wholesale customers.

So that's where the biggest chunks of our increase this quarter was in the retail segment. And so as we continue to see -- if Lehigh and our e-commerce business continue to see such a success rate that they had in the first quarter, we're going to continue to see those operating expenses climb as a percentage of sales.

And so it's something we're definitely keep our eye on. And then on top of that we've got the investments that we talked about for the last few earnings calls..

Okay.

And then maybe as a follow-up is there any results you can share from some of the marketing or other investments you made? Are there any signs that you're seeing the payoff from the sales perspective or just any kind of real evidence behind some of the investments you're making paying off?.

So that's always a big challenge right for management teams Jon. And what I can tell you is where we've probably spent the most money is in commercial military in our outdoor category. And you've seen the largest increases there certainly we did in Q1. It's very difficult. We can track flow and traffic to website.

We can see the traffic is up especially when we're doing e-commerce marketing ads whether it's pay-per-click or Google search optimization, but it's very hard to see an exact relationship. But I will tell you where we've invested our marketing dollars we've seen our most significant increases in sales..

Yes. I mean last year in 2018 -- at the beginning of 2018, we really started the process of getting all of the materials together and it really rolled out in Q3 and Q4 of last year. And so that's where we think we're seeing this increase particularly in outdoor and commercial military. Now the marketing department Jon will tell you that it's 100% then.

We believe that -- we truly believe that we are touching more people. We are educating more people and that is driving the business.

And then we think that the relationship we have with our retailers and what we're doing in-store from a marketing standpoint be it POP, new slot wall shelves or new -- just things that excite people when they walk in the door is definitely changing some of it as well..

Okay. Great. Maybe two last ones if I could. Just first on the inventory, how should we think about the growth going forward? You've had a couple of quarters of higher year-over-year growth, but maybe even have been too wide in some areas.

So how should we plan it in the model going forward?.

Yes. I think when we forecast our inventory levels, I think we've got a little bit of room to whittle down a little bit. Obviously, we tried to do -- take a chunk of that in Q1 with some of our discontinued sales. We've bought a little bit more inventory at our islands to try to give -- expand our margins bigger purchases on raw materials.

Our biggest increase in inventory now is really is in our in-transit category, so that's new product that's coming. So, we obviously feel very good and comfortable about the increase in inventory.

Our goal is going to be to get that number down a little bit, but I do think at the end of the year, at the end of each of the quarter for us, we're going to have inventory up slightly from where it was in 2018..

Yeah. I want to add Jon too. To your point, damn it, we have to do a better job of getting the right boots here and not the wrong boots. Because that's why our inventory is a little bit higher than it should be right now, because we just missed some things.

And we could have had a little higher sales and our inventory could have been a little better if we would have bought the right stuff and not the wrong stuff. So, we're focused on that. And we've talked a lot about operational excellence and this falls in that category and that will not get out of control for us..

Always certainly the challenge. Maybe just the last one then for either of you. Just -- as I look through the model, just maybe to be clear and sorry to be so specific.

But the wholesale business for the second quarter just given the comparison, do you think you can still grow wholesale sales versus the tough comparison from last year? Or how should we think about that piece specifically?.

Yeah. I mean, we don't like to give a very specific guidance. But again, as I alluded to earlier on the call, last year we had a one-time really big opportunistic buy in the western category. We will be pretty happy to kind of comp against last year. We're not expecting -- for Q2 that is.

We're not expecting much of a sales increase in Q2 from a wholesale perspective..

Okay. Great. Make sense. I think that’s about -- that’s it for me and thanks for taking all the questions..

Absolutely, Jon. Thank you..

And there are no further questions. I'll turn the conference back to management for closing remarks..

Great. If there is no other questions, we want to thank everybody. And really appreciate the Rocky Brand team in -- on a great quarter. Thank you much..

And this concludes today's conference. Thank you for your participation. You may now disconnect..