Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Rocky Brands' Second Quarter 2024 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. And I will now turn the conference over to Cody McAlester of ICR.

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, 2023. And I'll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands.

Thank you, Cody. 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 any questions. Our second quarter results modestly exceeded our expectations as we continue to effectively navigate an unprecedented consumer environment. I'll share more detail momentarily, but similar to last quarter, Durango and XTRATUF led the way with double-digit year-over-year gains that offset some anticipated softness in other areas of our business. It is during a less robust macroeconomic backdrops like the present that this benefits of our diversified brand portfolio stands out. Over the past several years, we have taken action to improve the company's financial profile in order to reinvest in growth and drive increased shareholder value. This is evidenced by higher gross margins and lower operating expenses, both of which contributed to the improvements in earnings. We took a significant step forward, further enhancing our earnings power during the second quarter with the refinancing of our debt and simplification of our capital structure. The new credit and term facility we signed with Bank of America in April is projected to generate approximately $4.4 million in annualized interest expense savings starting in 2025. Before I hand it over to Tom for more detail looking at the financials, I'll take a few moments to walk through our second quarter brand and channel performance. Starting with Durango, it continues to be one of the best-performing Western brands in the wholesaler channel, delivering strong double-digit gains this quarter. We experienced continued strength in bookings across key accounts and Farm & Ranch partners, along an acceleration in at-once business. The team is working to supply chain with more of the brand's core in-demand products, which along with a positive response to the fall 2024 line,…

Thanks, Jason. As Jason discussed, we are pleased with our results, as many of the drivers of our positive first quarter performance continued in the second quarter. Reported net sales for the second quarter were $98.3 million, down 1.6% compared to $99.8 million in the year ago period. Excluding certain nonrecurring sales from the year ago period for sales related to the manufacturing of Servus product following the divestiture of the brand in March of 2023, our change to the distributor model in Canada in November of 2023, and temporarily elevated commercial military footwear demand throughout 2023, net sales increased 6.1% year-over-year. Excluding these nonrecurring items, by segment, Wholesale sales were up 2.3% to $68.3 million; Retail sales increased 6.1% to $26.1 million; and Contract Manufacturing sales were up $3.5 million, up $2.6 million from last year. Turning to gross profit. For the second quarter, gross profit was $38 million, or 38.7% of net sales compared to $37.6 million, or 37.6% of sales in the same period last year. The 110 basis point increase was driven by higher Wholesale gross margins as well as higher percentage of Retail net sales, which carry higher gross margins than our Wholesale and Contract Manufacturing segments. Gross margins by segment were as follows: Wholesale, up 200 basis points to 37.2%; Retail, down 180 basis points to 46.9%; and Contract Manufacturing up 420 basis points to 9.6%. Operating expenses were $33.5 million, or 34.1% of net sales in the second quarter of 2024 compared with $35.4 million, or 35.4% of net sales last year. On an adjusted basis, operating expenses were $32.8 million this year, or 33.4% of net sales and $33.6 million, or 33.2% of net sales a year ago. Income from operations was $4.5 million, or 4.6% of net sales compared to $2.2…

[Operator Instructions] The first question is from Janine Stichter from BTIG. Please go ahead.

Hi, good afternoon. I want to ask a bit about supply chain. I think you talked about chasing inventory for Durango and XTRATUF. Maybe if you could just comment on the current state of the supply chain environment, your ability to chase and kind of where we are in terms of bottlenecks or where the -- how the inventory flows stand. And then with that, I would just love a little bit more color on what you're seeing with ocean freight rates, how much you have locked in and how much visibility you have there? Thank you.

Janine, thanks for being on the call. So as we talked about chasing some inventory for Durango and XTRATUF, those -- the sales of those brands have exceeded our expectations a little bit in the first half of this year. We are seeing a little bit of delays from a supply chain perspective. But we feel -- as you can see with our inventory being up, we're -- we've -- a lot of inventory coming our way and manufacture our own inventory to prepare us for Q3 and for Q4. And so we're trying to catch some inventory on those two brands, but I think our inventory is well positioned for the last half of this year. As it relates to container prices, we definitely have seen an increase, particularly in the month of June. They've gotten a little softer in the month of July so far, but we're monitoring that. And that's why we've been a little cautious with our margin guidance for the rest of the year.

All right. And then maybe just one more on the Work brands. It sounds like you're seeing some pressure there, but it's really more on the smaller accounts than the national accounts. Can you just comment on what's going on there? How much of it is the end consumer or general softness in the work market versus the retailers that you're selling into? Would just love to understand the dynamics there.

Yes, absolutely. Thanks for the question, Janine. So what we are finding that we call mom-and-pops, the independents, are just being a little bit more conservative. Our brands are still checking at Retail. As we stated online or on the call here, too, our key account business is actually doing significantly better. And so same kind of product, it's being sold. But what we believe is the mom-and-pops are just being more conservative. So if they have three size 10s and they sell 1, they used to buy back into it. But now they're saying, I'm going to wait, and I'm going to get down to one pair or maybe even zero pair and then I'll buy back into it. So we're not concerned with the brands at all. We're just watching the retailers to be very conservative. I think there's probably a little bit of play here with the election year also. We typically see the mom-and-pops, in particular, get a little antsy around the line here. So we think we're in good shape here, and we just got to kind of move through the cautiousness.

All right. Thanks so much.

Thank you.

The next question is from Jonathan Komp from Baird. Please go ahead.

Hi. Good afternoon. Thank you. Tom, I was hoping you could share a little more as you look to the back half, just what type of underlying Wholesale growth you're expecting? And any more color to the order book support that you have sitting here currently?

Yes. So I think for our Wholesale business, if you're looking at it from a nonrecurring perspective, which is how we're viewing it this year with the changes with the Canadian distributor and the commercial military contracts, we're targeting that mid-single-digit type of growth in Wholesale and then probably a little bit more in that retail area, particularly in the e-commerce channel. So I would say we're still targeting that $450 million to $460 million range, the high end of the range. And so we're not making really any revisions upwards, but the key account growth is certainly going to help us get to that mid-single digit growth that we talked about.

Yes. Great. Thank you. And when you look at the western category specifically, either based on indications you see in your Retail business or sell-through at some of your key partners, what's your best sense of the health of that category? And how are you thinking about sort of the end market rate of sell-through overall?

This is a great question. I think everybody is kind of aware what's kind of happened in the western business or maybe even if you think about the country music business is really kind of spiked some stuff there. So we believe that we are seeing a little bit of that, but not a lot. The single-digit kind of partial growth there from the popularity of what's going on with country music and western boots. But our boots are still just really functional boots. And I think a lot of the people that are buying the other kind of boots, they're just going to Amazon looking for a cheap boot and it looks like they wanted to look, and so they're buying that. So I think it will affect some of those kind of brands more so. But I think the traditional brands like we are, I think we'll be okay. And right now, we don't see it slowing down this year, and we'll keep a close eye on it for next year.

Yes. I think, Jon, we have limited visibility into some of the sales of some of our -- style for our western retail customers. And we're seeing good sell-through there. I think we're seeing a greater Wholesale sell-in as people start to normalize their inventories a little bit as well. That's my take on it.

Yes. Very helpful. Maybe last one just related to the margin. Could you maybe quantify what type of increase you're seeing or building in from a freight perspective in the gross margin update? And then is there any ability or willingness to pull back a little on SG&A? Or are you still expecting to delever slightly based on investments in the incentive comp?

Yes. So look, container prices, we saw container prices almost 2x what they were in June from May, right? Again, they've started to soften a little bit. This is the ocean container [technical difficulty] softened a little bit in July. So we're watching price. We're watching our peers. We haven't really seen anybody take pricing adjustments yet. If I were to kind of quantify, we're probably a couple of hundred basis points difference over LY just on the ocean freight piece of it. But we're continuing to monitor that. And really, that will depend on when and what product sells, as Jon, you know, you followed us a long time, we source a significant amount of our product from the Western Hemisphere. So we're putting a lot of products from Puerto Rico and from the Dominican Republic. So we'll probably be less impacted than some of our peers that source more predominantly or exclusively from Asia. But we're continuing to monitor and it'll certainly have an impact on us, and we're going to try to mitigate that. As it relates to operating expenses, we are still trying to manage through the operating income goals we said at the beginning of the year. So yes, we are looking for areas where we can [technical difficulty] on cost to try to maintain that operating margin. And so that's the goal for the next five months.

Okay. Thanks again.

Thanks Jon.

There are no further questions at this time. I would like to turn the floor back over to Jason Brooks for closing comments.

Great. Thank you. I just want to reiterate one more time, a big thanks to the Rocky team. Everybody is working really hard to navigate this year, a complicated year. And I also want to say thanks to our shareholders and all their support. And we look forward to finishing out a good year in 2024 and continuing to grow these brands in '25 and the future. So thank you very much.

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