Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands First Quarter Fiscal 2020 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 that this conference call is being recorded and I will now turn the conference over to Brendon Frey of ICR. Please go ahead.

Thank you, and thanks 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, 2019. And I’ll now turn the conference over to Jason Brooks, Chief Executive Officer of Rocky Brands. Jason?

Thank you, Brendon. With me on Today's call is Tom Robertson, our Chief Financial Officer. As our 2019 performance indicated, we came into 2020 with good momentum in our business. And while we were facing a few sales and margin headwinds early in the year, we were on track for another year of solid growth and improved profitability. Like many companies, our near-term plans and projections have been significantly interrupted due to the Covid-19 pandemic. First and foremost, our thoughts are with everyone affected by this virus and we salute all those on the frontlines battling this global health emergency. We also want to acknowledge the dedicated employees at essential businesses that continue to show up to work every day including our great teams in our distribution center facilities who haven’t missed a shift since the start with this unprecedented situation. During our quarterly earnings call, I typically review our sales results by brand and segments. In light of the current circumstances, I don’t think that makes sense. To the extent it provides a framework for our current environment, I am going to spend a few moments on our Q1 results and then Tom and I will spend the rest of our time providing an update on the state of our business and review the actions we’ve taken to protect our employees and strengthen our financial liquidity and flexibility. For the first quarter, total net sales were approximately $56 million, compared with approximately $66 million a year ago. We initially anticipated sales to be down slightly to primarily the planned reductions in our military business plus some early softness in the wholesale segment from a pull forward on certain deliveries ahead of price increases that went into effect on January 1. We were also forecasting – we also forecasted pressure…

Thanks, Jason. As Jason mentioned at the start of the call, we are planning our first quarter revenue to be down slightly year-over-year and earnings per share to be down even more due to the pressure on margins from higher tariffs. The added impact of COVID-19 in Q1 revenue ultimately declined 15.5% to $55.7 million, compared with $65.9 million a year ago. By segment, wholesale sales decreased 17.5% to $35 million. Retail sales increased 9.4% to $16.9 million and military sales decreased 4.3% to $3.8 million. Gross profit in the first quarter was $19.3 million or 34.7% of sales compared to $23 million or 34.9% of sales the same period last year. This year's gross margins include approximately $1 million in expenses related to the temporary closure of our manufacturing facilities due to COVID 19. Excluding these expenses, gross margin for the first quarter of 2020 was 36.4%. The 150 basis point increase in adjusted gross margin over the last year were driven primarily by a higher percentage of retail sales, which carry higher gross margins than wholesale and military sales. Adjusted gross margins by segment were as follows: Wholesale, 33.9%, retail, 44.1% and military, 26.5%. Selling, general and administrative expenses were $17.8 million or 32% of net sales in the first quarter of 2020 compared to $18.5 million or 28% of net sales last year. Since the outbreak of COVID-19, we’ve taken steps to reduce our expense structure and today have eliminated approximately $1.5 million from our 2020 budget. For our additional potential savings of approximately $3 million we could realize this year including a reduction in incentive compensation. Income from operations decreased $1.5 million or 2.7% of net sales compared to $4.5 million or 6.8% of net sales in the year ago period. Adjusted operating income, which excludes…

[Operator Instructions] I will go first to Jonathan Komp of Baird.

Yes. Hi. Thank you. I want to just first to start, the GAAP versus the non-GAAP disclosure, could you just share the rationale for excluding the $1 million or so that you called out?

Yes, John. So this is the same treatment that we did in 2017 when we had the hurricane hit Puerto Rico. Effectively, this is not to bore you with the accounting, but effectively, this is just overhead and labor cost that we were not allowed to capitalize under our inventory and we had to go through the quarter. So it's not indicative of the operation moving forward, although I do anticipate because the shutdown leaked into the second quarter, we'll have similar type of adjustment in the second quarter.

Okay. And do you by chance have segment gross margins unadjusted, so if you are not excluding that?

Yes, segment unadjusted – yes, unadjusted gross margins by segment, wholesale will be 31.9%, retail 44.1% that will remain unchanged and military was at 18.1%.

Okay. Thanks. I guess, maybe a broader question, are you seeing lot of uncertainty out there? And I think just given the lack of maybe clarity around the relative size of the few of the businesses that you called out where you are seeing strength. Is there any way you can comment on if you look at the total business or maybe even parts of it for the last six weeks or so, your guide in March and April, the type of trend line that you have seen from a revenue perspective?

Yes. So just to make sure I understand the question, just kind of trends in the last six weeks, is that we are looking forward.

From a total revenue perspective or if you could just share a little bit more. I know you called out some of the areas of relative strength. But you know the relative size of all those pieces. I was just trying to get a better sense where the business stands over the last couple of months here?

Yes. Without giving too specific to you John, I think about – if you think about - start with our wholesale business, Jason alluded to about a third of our wholesales customers are shutdown. They are not essential businesses. And but when you think about that, too, of the two-thirds that are still open, I think they are seeing decreased foot traffic. And then, also I am not certain that footwear purchases to stop line goods are the reason that people are going into the stores, they are looking for what they do need more essential type of products. When we think about the retail business, as Jason said in his prepared remarks as well, just over half of our retail customers are open and so if you look at that segment in total, Lehigh is the biggest proportion of our retail segment. That being said, our retail business, our e-commerce retail business and our marketplace business has significantly increase in sales over the last six weeks and particularly if you look at the last week or so, it’s even stronger growth there. And then from a military segment, we were kind of guiding to that $20 million number for the year. That was going to be relatively even but given the shut down for over the last 30 days or so, we haven’t been able to ship much military. So, what we anticipate getting that business kind of back up to our runrate. But I am not sure we get to the $20 million for the year.

Okay. Understood. And maybe following upon the inventory. Could you just comment that – I know you highlighted the reduction in brand orders, but how do you expect inventory in the end to play out here and when do you think about wholesales business, how are you planning about for the year in terms of the receipts that you still plan on receiving?

Yes. So, obviously, as we talked about, we’ve either delayed or cancelled approximately $50 million in orders right now. We are continuing to monitor the situation. We are having weekly updates. I mean, I think, as everybody right now is having trouble forecasting what does the next three quarters look like, we are kind of applying it by year, we think that given our own manufacturing facilities that gives us more flexibility. We have shorter lead times at the Dominican and Puerto Rico than out of Asia. And so, we so are going to play that to our advantage and as Jason talked about as well, 70% of our products are core products. So, if we get a little over inventory, we'll be able to work through that inventory and adjust our purchases as we move forward. But yes, we are having to guess on demand and as we are too aggressive my guess would be inventory levels creep up. But it doesn’t doesn't have us overly concerned.

Okay. That looks very helpful. And then maybe last one for me. Just more thinking about the cost side of the business, I know you mentioned some additional flexibility if needed to take out operating cost. But any way to frame up how you are planning the business or even the types of range of scenarios that you might be considering from a sales perspective and how that inform what you are doing on the operating cost side?

Yes. So, that’s – it’s a pretty complicated question Jon, but I will give you my two cents now because we are all kind of in the same boat trying to figure out what’s going to happen over the next three quarters. But, as you think about, we think we'll see our biggest sales decline in our wholesale business right, this is the current environment that retail been, we talked about our retail business, we weren’t doing any kind of meaningful Amazon business really until the third quarter of last year. So, we are continuing to see increases there. As Jason talked about our e-commerce business is growing, we hope that that momentum continues. And then with our Lehigh space which is our biggest category again in our retail segment, we believe that there is going to be more pent-up demand. We can kind of feel that a little bit better and give a little bit more clarity on that because of the fitting scheduling that are happening. So, as we get then the last one with military with those sales being down, as the way that flows through the income statement, obviously, from a gross margin standpoint, with the retail sales being up, those are going to be our highest gross margin area. And while with the wholesale business, we think we'll see a little bit – we talked about in the last call, how the incremental 15% tariff was going to bleed through Q1 and Q2 as we worked out our inventory, that may bleed through a little longer now that we’ve seen the sales decline . But we are going to work through that inventory through the first three quarters of this year. From an operating expense standpoint, I don't think we'll see significant changes from a dollar standpoint. That being said, even the savings that we are making up and we talked about it earlier on the call, those will be offset by increases in our retail segment. And so, but we talked the significant increase in operating expenses associated with selling on different marketplaces and the freight cost associated with selling boots and shipping boots one and two pairs at a time. So, while I don't think we'll see increases in our SG&A expense from a dollar standpoint, we’d certainly see us deleverage a little bit as wholesales sales continues to kind of struggle little bit. Hopefully, we’ll see those recover quite nicely here towards second quarter and in the third and fourth quarter.

Yes. And Jon, I think also, as we have gone through this experience, our sales force is really focused on staying communicated with the field accounts and what’s kind of going on there and then from a Lehigh standpoint, when can we expect accounts to open back up is the states are opening up and we actually have, I believe this week we have two iFittings in Texas where they – or next week, where they are going to allow us dock in to hopefully get some things rolling there. And so, I think just the fact that the sales forces have been able to communicate with them and make this thing happen, that will be kind of interesting to see how it changes. And then, there still shows that have not been canceled that we are anticipating that will be cancelled. So there could be some additional SG&A savings there. But we have not made that decision to cancel. We are still waiting for them to roll those out and let us know. So we - still we think there might be some savings there as well and then, kind of walk through the rest of the year.

Yes. I think, Jon, just kind of put a little positive spend on some of the stuff that’s happening here. I think, we are trying to figure out how this is going to change our consumers moving forward. And so, the more consumers we get going through our e-commerce websites, right, the better. And then, also with our Lehigh business, it is particularly set up to have a hands-off or no contact safety shoe solution. And so, we are excited about what we are seeing from an account growth standpoint at Lehigh and we hope that we can continue to catch this momentum or keep this momentum going as consumers may change their buying habits as they move forward.

Okay. And just last follow-up. Just thinking about the modeling and I think of the second quarter, I'm presuming you'll feel more revenue impact from what’s going on and just want to make sure it’s not unreasonable, I think that you might have a negative operating profit quarter?

I am not really ready to talk through that at this point. I mean, I think that second quarter is certainly going to be our toughest quarter, right. And so, there is a lot of variables in that about manufacturing and shutdown and then we are working through that today. So, I’d rather not comment.

Okay. Understood. Thanks for taking all the questions.

Yes. Thanks, Jon.

Thanks, Jon.

And with that, ladies and gentlemen, that does conclude today’s question and answer session. I would like to turn things back to Mr. Brooks for any additional or closing comments.

Great. Thank you very much everybody. I want to again thank the Rocky team. They have done an exceptional job through this entire situation and I want to thank the people in the field that have worked tirelessly to help keep the United States a safe place. And we look forward to moving past this and getting on. Thank you very much.

And with that, ladies and gentlemen, that does conclude today’s call. We thank you for your participation. You may now disconnect.