Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands First Quarter Fiscal 2021 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded. I will now turn the call over to Brendon Frey. 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 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..

people, systems and inventory. Starting with people. Our people are the foundation of Rocky Brands, and they are the reason for the success we've achieved over the years. Based on interactions and discussions with the Honeywell throughout the process, the same is true for the people coming over to Rocky as part of the acquisition.

Integrating our 2 great organizations and harnessing the power of the combined teams will be key to our future success. In terms of systems, migrating the acquired business of Honeywell's ERP system on to Rocky's is underway.

This step, which we expect to be completed during the fourth quarter, is critical to providing our newest brands, customers and consumers with the world-class service we've been executing at Rocky for years. Finally, inventory. We have started moving the acquired inventory to our state-of-the-art distribution facility in Ohio.

We expect to have everything under one roof by late Q2 or early Q3. With the investments we've made in technology and people, we are extremely confident we'll be able to realize important savings over time by meaningfully lowering fulfillment costs for the new brands. And this is just the beginning.

After we execute these critical first steps, we'll shift our focus to leveraging our collective strengths across this powerful brand portfolio to create new growth opportunities for all our businesses. I'll now turn the call over to Tom.

Tom?.

wholesale, 37.6%; retail, 48.1%; and military, 29.9%. Operating expenses were $28.6 million or 32.6% of net sales in the first quarter of 2021 compared to $17.8 million or 32% of net sales last year. Included in this year's first quarter were approximately $5.2 million of acquisition-related expenses.

Excluding these expenses, operating expenses as a percent of net sales improved 530 basis points to 26.7% driven by leverage on higher sales. Income from operations increased 335% to $6.6 million or 7.5% of net sales compared to $1.5 million or 2.7% of net sales in the year ago period.

Adjusted operating income, which excludes the inventory purchase accounting adjustment and acquisition-related expenses in Q1 of 2021 and the expenses from the manufacturing facility shutdowns in Q1 of last year were $12.1 Million or 13.8% of net sales versus $2.5 million or 4.5% of net sales, respectively.

Net income for the quarter increased 278.1% to $4.5 million or $0.61 per diluted share compared to net income of $1.2 million or $0.16 per diluted share in the year ago period.

Adjusted net income for the first quarter of the year was $8.7 million or $1.19 per diluted share, an increase of 344% compared to adjusted net income of $2 million or $0.27 per diluted share last year. Turning to our balance sheet. We ended 2020 in a very strong position, highlighted by cash and cash equivalents of $28.4 million and no debt.

During the first quarter, we borrowed approximately $190 million and utilized $20 million in cash to fund the acquisition.

As of March 31, 2021, cash and cash equivalents stood at $8.9 million, and our debt totaled $186.3 million, consisting of our $130 million senior secured term loan facility and borrowings under our $150 million senior secured asset-backed credit facility. With regard to our outlook, we want to provide some updates -- updated thoughts on 2021.

As a reminder, we said in the Q4 call in February that we expected full year revenue for Rocky Brands on a stand-alone basis to increase in the mid-single-digit range.

However, based on the strong first quarter performance, combined with a very good start to the second quarter, we are now expecting Rocky's stand-alone revenue for the full year to increase approximately 20% over 2020.

With respect to the acquired business, as we previously disclosed, collectively, the new brands generated annual revenue of approximately $205 million in 2020. For 2021, we are also forecasting growth of approximately 20%, of which we'll recognize roughly 80% based on when the transaction closed.

In terms of margins, we're expecting consolidated gross margins for 2021 to be approximately 40% as the combined businesses benefit from increased economies of scale and higher gross margins for the acquired brands to help offset headwinds from increased shipping costs. That concludes our prepared remarks. Operator, we are now ready for questions..

[Operator Instructions] Our first question comes from Jonathan Komp with Baird..

Yes. Great. Maybe if I could start. Looking at the base business and the acceleration you've seen in the first quarter, could you maybe just share more where you've been surprised in terms of the sources of the upside? And I know, Tom, it sounds like maybe that's continuing into the second quarter.

But any thoughts on how you expect some of the strong performance at the category level that could play out going forward here?.

Yes. John, thanks for being on the call. I would tell you that all the categories have continued as we came out of Q4 into Q1. I think our expectations were, things would maybe slow down a little bit and the retailers would come out of the holiday time frame and there would be a little bit of a slowdown.

And fortunately, for us, that has just not happened. I think we also can say that the stimulus monies that have been thrown around have definitely helped that.

And I think that we, because of the position we took during the COVID last year, in an inventory position, our inventory going into Q1 was in a really good place, and we were able to fill orders that I'm not sure all of our competitors were able to fill. So we've really seen a nice, steady increase through all the categories and brands.

As I stated, Durango and the western category really is caught on fire. And I would say that's the biggest one, but they're all going pretty good right now..

And when you look forward, just looking at the implied guidance, I know in the first quarter, without the new business, it looks like sales were up kind of 46% versus Q1 of '20. It looks like for the balance of the year, you're embedding more of a mid-teens growth rate versus 2020 for the core business, excluding the acquisition.

So any thoughts on how you came up with those assumptions? I know the comparisons look a lot different Q2 compared to the back half.

So any more thoughts there, especially assuming maybe some of your competitors catch up on the inventory availability, if you expect that to have any impact as well?.

Yes. John, I'll take this one. So obviously, if we look at Q2, we're going to be running up against another pretty easy comparison, given the impact of COVID in Q2 of 2020. And then you kind of hit the nail on the head here. So Q3 and Q4, if you recall, for us, were very strong quarters, which would obviously be harder comps.

But also to your point, we think that some of our peers will have been caught up on inventory and we will be back to fighting for some of that shelf space. And that could have some implications, too, on gross margins. If we had to get promotional again, but we haven't had the need to really get promotional over the last couple of quarters.

So I think if you're trying to model out for the rest of the year, obviously, you're in a much tougher comparisons, particularly in Q4, which was a very strong quarter for us..

Okay. Understood. And do you still think the base business can grow against those comparisons? Or I'm not sure if you're willing to comment. But looking out at the fourth quarter..

Sorry. Yes, I think -- yes, we do..

Okay. Okay. Great. And then just a few on the new business. So a couple of questions.

Just first, the integration, the biggest heavy lifting, curious how you're viewing the work that's needed to bring everything on board? And how you're managing any executional risk there?.

Yes. This -- I would tell you, John, is the biggest -- this is the biggest thing we've ever gone through or meet personally. And I think a lot of the people here would tell you. We have a great team of people. And as I stated, the people that are coming with the new brands are really engaged as well.

And they're excited to be a part of this whole company. And so I think we have a great plan in place. We are meeting daily, if not hourly, to execute on the plan. As I stated, we've started to move some of the inventory into RDC. And we think once we get that in there, we'll be able to do a little better job than maybe in the past.

And then the ERP system and getting off of that, the Honeywell system is going to be really critical. And we are on pace right now to hit somewhere in Q4 and more mindful of that timing because we also want to be careful of the holiday season and what that would look like. So I think we have a great plan in place.

We are going to hit some roadblocks here, and I'm sure make some mistakes along the way. But as long as we can keep those limited, I feel really good about where these first kind of 40, 45 days have come in, so..

Okay, great.

And then on the sales, first, if I could ask about how the first quarter looked for the new brands and any color there? And then as we think about modeling out going forward, any color on the channel split wholesale versus retail? And then any differences to think about in terms of the seasonality as we build out the revenue projection?.

Yes. Great question, John. So as we look at the acquired business, the first quarter results, mind you, which we've only -- we closed on March 15. So we really only owned the brands for 15 days. And given the close and physical inventory accounts and system switchovers, we actually shipped for..

9 days?.

Yes, 7 or 8 days. And so the results we had in the last 15 days were very comparison, kind of flat to the Boston Group's numbers in those last 15 days. But for the overall, for the quarter, mind you, that's had reflected in our numbers. The brands performed well.

As we move into the full year, I'll take the seasonality part first, and so the seasonality of the acquired brands or Boston Group, as we'd coin them, is fairly similar to ours. It would probably weigh a little heavier in the fourth quarter than ours, as I think, just given the nature of the product being rubber boots.

And as we think through the mix between our segments, keep in mind that the acquired brands of -- Boston Group does not do the military business. So obviously, there will be no incremental adds to the military business. And also, the -- they do not have the Lehigh business, which shows up in our retail segment.

So there's going to be an increase in our wholesale segments as a percentage of the total bucket. And round numbers, I would probably peg wholesale in total somewhere between 75% and 80% of the total bucket as we move forward. And we've kind of guided military to being slightly down to flat for last year.

And so I think little later in the season, and a bigger proportion going to wholesale, just given the nature of the brands. But the Boston Group does a strong e-commerce business.

And so we are anxious to see how we can kind of bolt these brands onto the marketplace initiatives that we've done with our own brands or with our historic brands over the past couple of years. And so that could shift some sales from wholesale to retail..

Understood. And maybe last one, if I could, just the 40% gross margin outlook on a consolidated basis. Any way to further break down the base business or organic expansion versus any mix impact from the new business? And then, Tom, I -- unless I missed it, I don't think I heard any comment on overall margin or earnings for the year.

So I wanted to see if you had any comments there..

Yes. So from a gross margin standpoint, we were going to pick up given the demand for where our traditional or Ohio Group business has been. We're going to pick up volume efficiencies in our manufacturing facilities in Puerto Rico and The Dominican. Also, if you think about Q2, we were still working through in 2020.

We're still working through some of the Section 301, that 15% incremental tariff product. So we'll have a little bit easier comp in the second quarter as well. The big question there for us, for both groups, Ohio and Boston, is going to be when do we actually start getting promotional again. And right now, we've not seen that.

So we're hopeful that we will have to get promotional as a lot of our peers get back and stock. As it relates to operating margins, we're -- given the 20% -- approximately 20% sales increase we've talked about for both groups, we're going to leverage -- obviously, we're going to leverage our operating expenses.

However, we're kind of refraining from giving clear guidance here as we're still trying to work through the integration, and there's some significant expenses in there to be dealt with and the timing of those would really impact the operating margin and the earnings for 2021. So we're not really prepared to give much further guidance on that part..

Your next question comes from Susan Anderson with B. Riley..

Nice job on the quarter. I guess just to start out for the Honeywell business, I think you had said you did $6.5 million, maybe just in the half a month of March.

Was that in line with your expectations? And should we think about the cadence similar in second quarter? And then also just from our texts we've noticed definitely a lot of out of stocks in their brands, particularly the Muck Boot.

So I'm just curious how much you think in terms -- from an inventory perspective, revenues being left on the table? And what's the opportunity from a revenue perspective there going forward by having more in-stock inventory, but then also expanding into new wholesalers?.

Yes. Susan, I'll take the first part of this one and give Jason a response, too. But I think our philosophy at Rocky Brands has been to make investments in inventory, that investment -- those investments have paid off for us over the last 12 months.

I think our plan is to make some investments in inventory so that we can catch demand, and we can also meet at-once business. I think we have a good appreciation for how much of the business is at once versus bookings. And so that takes a little bit of investment in inventory to meet the demand that some of these retailers require.

And so that investment in inventory, I think, is baked into the approximate 20% growth that we've kind of guided to for the Boston Group brands for 2021. As it relates to timing, yes, we really own them for 15 days, as we said, and we were down for a little over a week with the transition.

And so there was certainly some pent-up demand that started shipping in April when things got back up and going..

Great. That's helpful. And then just on the retail business. I'm curious, just the trends that you've seen in the Lehigh business. It looks like it's rebounded.

And then also, if you could talk about the e-commerce contribution?.

Yes. I'll start off with the Lehigh. So as you indicated, we've really been focused on the Lehigh business, and we've seen it start to come back pretty nice and we think that, that will continue. COVID really impacted that a lot because of the companies closing themselves.

And now that they're opening back up, letting us communicate with them, it's really driven that business. And I think COVID itself has made our business model even more prevalent right now. So these companies are like, I don't know how many trucks we want coming here. I don't know how many times we want them coming here.

So we're getting a lot more communication from new customers that we think will continue to drive that opportunity for us for the rest of the year. And so we're pretty optimistic about the Lehigh retail side. And then just to touch on our e-com side of it. We're still seeing nice increases there.

I think we are anticipating that to slow a little compared to the triple-digit increases we saw. But we're still investing there and doing a lot of the right things to drive our e-commerce business, and we think it's important to continue that in the future. So I think we'll still see some of that happen.

I think the consumers changed in a lot of ways, and they'll continue to buy online as well..

And then one quick thing to add there, too. We still -- we're still focused on adding third-party brands to our marketplace sales. So continuing to leverage our state-of-the-art distribution center in Logan and sell other third-party brands through Amazon marketplace or eBay marketplaces is another growth area for us in this space.

And so we're hopeful that we'll be able to continue to grow that piece of the business..

Great. That's helpful. And then just really quick on the Work Boot business. I'm curious, it looks like you're pretty much seeing strength across all of your brands.

But I'm just curious how that business is performing? And what are the expectations, I guess, if we do get infrastructure bill passed, do you think that's going to be a longer-term tailwind for the business?.

Yes. So the first part of that, you're right. The Work Boot business really was deemed essential through the whole COVID time here. And so our customer base was really fortunate. And so therefore, we have been and been able to capitalize on that by keeping the shelves full of our Work-type product.

And that really falls under all the brands in Rocky, Georgia and Durango. And so we think that's going to continue. We don't see why that's going to slow down anytime soon. There is this question about our competitors getting back and stock and what that would look like, but we still think there's a good opportunity for there for us.

As for the infrastructure bill, if that happens, there has to be additional upside there for us. And I would say that there's no reason why that wouldn't be a nice tailwind for -- depending on when it goes into effect, could be 2022 into 2023, really depends on when the infrastructure bill happens.

But it would definitely be a positive and tailwind for us..

Great. And then last one. If you can maybe just touch on the orders that you're seeing in the back half of the year? I guess with the tougher compares, it looks like wholesale did rebound quite a bit in the back half.

So I'm just curious what your wholesale partners are talking about or how they're thinking about orders for the back half if you're expecting that strength to continue?.

So I think Tom kind of touched on it a little bit earlier. Q1 and a little bit of COVID helped there. Q2, maybe even a little more. We still had a pretty strong Q3 in 2020. But we feel like the bookings we're seeing are good and that we feel pretty good there. Q4 was a really strong time for our core Rocky, Georgia, Durango business.

But I -- as we said, this 20% increase for the year seems to be a pretty good target for us. And so we still think that the wholesalers and our brands are resonating, and we feel pretty good about the rest of the year..

[Operator Instructions] I would like to turn the floor over to Jason for closing remarks..

Great. Thank you very much. And thank you, Susan and John and anybody else that was on the call today. I also want to give a shout out to the Rocky employees, the OG Group and the BG Group. These guys are really doing a great job. And let's stay focused and continue 2021 positive, and we look forward to next quarter. Thank you much..

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation..