Rocky Brands Inc (RCKY) 2021 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Rocky Brands Second Quarter Fiscal 2021 Earnings Conference Call. (Operator Instructions) I would like to remind everyone that the conference call is being recorded.

And now I will turn the conference over to Brendon Frey at ICR. Please proceed.

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.

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

Thank you, Brendon. With me on today's call is Tom Robertson, our Chief Financial Officer. We had a fantastic second quarter, which followed a very strong first quarter and second half of 2020. Demand for our brands and products has been growing over the past year and recent trends have been particularly strong. The combination of innovative product introductions, enhance consumer engagement, timely fulfillment and effective inventory management are fueling share gains in our work western and outdoor markets.

Our second quarter 2021 top and bottom line results were also bolstered by the addition of The Original Muck Boot Company, XTRATUF, Servus, NEOs and Ranger brands following our acquisition of the Honeywell's performance and lifestyle footwear business in March. I'll get into more detail in a moment, but collectively, the acquired brands are also performing very well compared with the year ago period.

Adding to our excitement about the growth opportunities for this portfolio, especially once we've completed the full integration of our two organizations, tom will go through the numbers in more detail, but here are just a few of the financial highlights.

Net sales increased 134% to $132 million. Adjusted gross margin was up 270 basis points to 39.1%, and adjusted earnings per share rose 120% to $0.99. Our reported results would have been even better. However, due to very strong demand late in the quarter, we experienced some congestion in our distribution facility which shifted some orders from second quarter in the third quarter.

To better understand the underlying strength of the business, I think, it is important to, one, provide separate color on what we refer to internally as our Ohio and Boston groups, or said another way, are existing and acquired brands. Two, looking at our results against second quarter of 2019, which eliminates the benefit from the easy comparison due to COVID.

Our Ohio Group grew 44% year-over-year and was up 39% compared with 2 years ago. While the Boston Group wasn't included in our prior year results, I'm pleased to share that the business increased 47% and 46% on a 1- and 2-year basis, respectively.

The recent performance of our Ohio Group has been driven by a strong growth in both our wholesale and retail segments. Beginning with wholesale, our Western business maintained its incredible momentum from the first quarter with second quarter sales increasing triple digits. The Durango brand remains on fire, as demand for new product introductions, especially western work product and legacy styles are reaching new highs.

We are experiencing strong gains across our wholesale network including key and field accounts, especially in the farm and ranch channel, along with key e-tail partners. As has been the case since the start of the pandemic, Durango's strong performance at retail has been boosted by much healthier stock positions relative to the many of its industry peers who have struggled with inventory issues. This has led to important shelf space gains and new customer acquisitions for the brand.

Turning to work. Georgia Boot posted another very strong quarter as the economy more broadly reopens and the need for work footwear has surged. In addition, the wholesale channel benefited from the shift back to brick-and-mortar retail as consumers return to in-person shopping compared with a year ago when the buying was more heavily concentrated online due to the pandemic. This provided a strong boost to sales across large retail partners as well as our robust network of smaller independent accounts.

The Rocky Brand, which spans work, outdoor, western and commercial military, had another strong quarter with work in western delivering exceptional growth. The addition of new large programs with key retail partners that included both in-line styles and exclusive new product as well as a new disruptive wins fueled the brand's work business. Similar to Durango, Rocky was able to take advantage of competitor supply chain issues to fulfill strong consumer demand in the western category.

Sales were driven by traditional best sellers plus the delivery of new premium collections that have been very well received. In terms of Rocky outdoors business, second quarter growth was a bit more restrained due to the strong sell-through earlier in the year, which depleted our inventory position in several top styles. The good news is demand for Rocky remains strong, heading into the key outdoor season, including in the nonhunting boot category where we are growing our presence with innovative new product introductions.

With respect to Rocky commercial military division, business is accelerated as retail foot traffic has picked up dramatically across key retailers in this channel. That said, we've had challenged in terms of supply as the sales uptick to outpace the manufacturing and raw material availability. We are making adjustments to put us in a better position to capitalize on the growth prospects for this business over the remainder of the year.

Turning to our retail segment. Following a triple-digit increase in our Ohio Group e-commerce channel in Q2 of 2020 when most of the country was shut down, we are very encouraged that sales remain consistent on a year-over-year basis. As the market environment further normalizes, and comparisons for this channel ease, we expect to see e-commerce sales resume growth fueled by the work we've done, enhancing the functionality of our sites and expanding our direct-to-consumer efforts on marketplaces, particularly Amazon and more recently, Target Plus and eBay.

Meanwhile, our Lehigh Safety Shoe business continues its recovery with Q2 sales increasing 30% year-over-year, up from the 18% gain in Q1. As more and more companies have resumed normalized operations, our activity with existing and new accounts has continued to pick up, led to a record level of on-site iFit events. We expect this trend to continue based on our pipeline of new accounts and the further loosening of on-site restrictions in the coming quarters. Recent momentum is also being driven by the implementation of a new e-mail and SMS strategy, which is improving participation rates across our account base.

Shifting to our Boston Group. The 47% sales increase, I cited earlier, was driven largely by Muck and XTRATUF, the 2 largest and most popular brands in the portfolio, with XTRATUF the standout. Meanwhile, we saw strong demand for Muck products in Europe, which is translating into healthy forward orders for next year. And we are seeing signs of growing traction for XTRATUF in the region as well.

On our last call, I outlined that our primary focus for the acquired business over the remainder of 2021 is on 3 main areas: people, systems and inventory. I'll provide a brief update on each 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 Honeywell through the process, the same is true of the people coming over to Rocky as part of the acquisition. We are fully engaged while integrating our 2 great organizations and are harnessing the power of the combined teams to support and drive our powerhouse brands.

In terms of systems, migrating the acquired business off Honeywell's ERP system and on the Rocky's is underway. This step is critical to providing our newest brands, customers and consumers with the world-class service we've been executing at Rocky for years. We still expect this to be completed in the fourth quarter as we have made significant process over the last couple of months.

Finally, inventory. We started moving the acquired inventory to our state-of-the-art distribution facility in Ohio back in April and expect the process to be completed by mid-August. 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 the fulfillment cost for the new brands.

After we execute these critical first steps, we'll shift our focus to leveraging our collective strengths across the powerful brand portfolios, we've assembled to create new growth opportunities for our business.

I've never been more excited about the future for Rocky Brands. Our results before, during and as we are emerging from this pandemic, underscore that we have the right strategies and the people in place to drive increased profitability and greater shareholder value over the near and long term.

I'll now turn the call over to Tom. Tom?

Thanks, Jason. As Jason outlined, we had another very strong quarter as demand for our brands fueled strong gains compared with the second quarter last year, which was negatively impacted by COVID, especially our wholesale business as most of our retail partners experienced significantly reduced traffic or were forced to temporarily close their doors. Our overall results also reflect the acquisition of the Honeywell's performance and lifestyle footwear business that we completed in March of this year.

Now to the results. Net sales for the second quarter increased 134.2% year-over-year to $131.6 million, with wholesale sales increasing 195% to $101.1 million. Retail sales increased 36.8% to $22.3 million, and contract manufacturing sales were up 45.6% to $8.1 million. The second quarter of this year includes approximately $51 million in sales from the acquired brands or Boston Group, with approximately $47 million found in our wholesale segment and $4 million in retail.

A quick note, we were recently engaged to do some private-label manufacturing for a couple of retail partners, because of the margin profile of these programs is similar to our contract military business, as is the volatility from year-to-year, we made the decision to combine them and rename our third segment contract manufacturing.

Turning to gross profit. For the second quarter, gross profit increased 152.6% to $49.2 million, or 37.4% of sales compared to $19.5 million, or 34.6% of sales for the same period last year. This year's gross margin includes a $2.3 million inventory purchase accounting adjustment, while last year's gross margin includes approximately $1 million in expenses related to the temporary closure of our manufacturing facilities due to COVID 19.

Excluding these items, gross margin for the second quarter of this year and last year were 39.1% or 36.4%, respectively. The 270 basis point increase to adjusted gross margin was primarily attributable to higher margins in all 3 segments with a 480 basis point improvement in wholesale, the largest driver of the year-over-year increase. As we benefited from increased manufacturing synergies and higher volumes, experienced less promotional selling, and we're up against an easier comparison due to higher tariffs in the year ago quarter.

Gross margins by segment were as follows: wholesale, 35.9%; retail, 49.7%; and contract manufacturing, 21.8%. Adjusted gross margins by segment were as follows: wholesale, 38.1%; retail, 49.7%; and contract manufacturing, 21.8%. Operating expenses were $40.7 million, or 30.9% of net sales, in the second quarter of 2021 compared to $16.4 million, or 29.1% of net sales last year.

Included in this year's second quarter, we're approximately $1.3 million of acquisition-related expenses and approximately $900,000 in acquisition-related amortization. Excluding these expenses, operating expenses as a percent of net sales were 29.2%.

The small increase in the adjusted operating expenses was driven primarily by the expenses associated with the brands we acquired in March of this year. Income from operations increased 172.2% to $8.4 million, or 6.4% of net sales, compared to $3.1 million, or 5.5% of net sales, in the year ago period. Adjusted operating income, which excludes the inventory purchase accounting adjustment and the acquisition-related expenses in Q2 of 2021 and the expenses from the manufacturing facility shutdowns in Q2 last year was $13 million, or 9.9% of net sales, and $4.1 million, or 7.3% of net sales, respectively.

For the second quarter of this year, interest expense was $3.5 million compared with essentially no interest expense in a year ago. The increase reflects interest payments on the senior term loan and credit facility we used to fund the Honeywell footwear acquisition. Net income for the quarter increased 59.5% to $3.9 million, or $0.52 per diluted share, compared to net income of $2.4 million, or $0.33 per diluted share, in the year ago period.

Adjusted net income for the second quarter of this year was $7.4 million, or $0.99 per diluted share, an increase of 129% compared to adjusted net income of $3.2 million, or $0.45 per diluted share, last year.

Turning to our balance sheet. At the end of the second quarter, cash and cash equivalents stood at $8.4 million; and our total debt, $187.4 million, consisting of our $130 million senior secured term loan facility and borrowings under our senior secured asset-backed credit facility. As of June 30, 2021, we had $71 million of borrowing available under our credit facility.

With regard to our outlook, we want to provide some updated thoughts on 2021. Based on our strong second quarter performance, combined with a good start to the third quarter, we are now expecting our Ohio Group stand-alone revenue for the full year to increase to approximately 24% over 2020, up from our most recent guidance of 20%.

With respect to the Boston Group, we are still expecting revenues to increase approximately 20%, and over the approximate $205 million in revenue required brands generated in 2020. As a reminder, we will recognize roughly 80% of the 2021 revenues based on when the transaction closed.

Our revised revenue projections incorporate the current disruptions in the global supply chain, particularly in Asia, where we source roughly 65% of our annual inventory. While our own manufacturing facilities in Puerto Rico, Rock Island, Illinois and Dominican Republic provide a clear competitive advantage versus the rest of the industry. If conditions become more challenging, there is some risk that a portion of our projected Q4 revenue would shift into 2022.

In terms of margin, we are now expecting consolidated gross margins for 2021 to be approximately 39%, down slightly from our previous estimate of 40%, reflecting the higher inbound freight costs and logistics costs that have recently emerged.

That concludes the prepared remarks. Operator, we are now ready for questions.

(Operator Instructions) Our first question comes from Camilo Lyon with BTIG.

Good afternoon, everyone. Great results here. I wanted to touch upon a couple of topics. Really as they relate to the gross margin and (inaudible) going to meet that, if you could just give us some puts and takes in the quarter. But more broadly, the supply chain component and the costs around the gross margin. How should we think about what you just told us about incremental costs and impact of that having on the outlook going forward? And also, if there are any offsets, perhaps from the acquisition of the Boston Group brands being laid into the business. I'll start there, and I'll have a follow-up, I see, if I could.

Awesome. Thanks, Camilo. This is Tom. Yes. So to kind of take those two parts. As we think about the business today, post acquisition, the acquired brands, the Boston Group brands, particularly the Muck brand, in particular, carry slightly higher margins than our Ohio Group. And so that will certainly, from a mix perspective, help raise the overall margins.

The other natural mix consideration to consider would be that the contract manufacturing segment of our business, which is a lower margin segment of business, has now become a much smaller piece of the total pie. So the overall margins will benefit from that.

As it relates to the current supply chain and logistics out of Asia, we're certainly seeing significantly higher freight costs, inbound container costs from Asia 2, 3x what we were paying this time last year. And so that's meaningful when you're talking about on a per pair basis. And so we've announced price increase. In -- at the beginning of July of this year that will go into effect during the third quarter. So we'll help to -- help mitigate some of these inbound freight container prices that we're seeing. Particularly see that benefit more in the fourth quarter than the third quarter. But it's definitely a significant issue that I think everybody in the industry is certainly battling.

And I think we do benefit -- as I had in my prepared remarks, we certainly benefit from having a big portion of our business not coming from Asia, the 35% is coming from either the Dominican, Puerto Rico or Rock Island or Illinois, which we're not seeing the same increased freight costs for.

Yes. I think just to add on that, the Muck and XTRATUF brands are -- probably about 90% of those sourced out of the Far East. So the Servus brand is coming out of Rock Island. And so I just wanted to make sure we were clear on -- there's still a lot of product on the Boston Group brands that are coming across the pond. So...

That's great color, Tom and Jason. Following that now, and you kind of got to a couple of other questions I had regarding pricing. It's great to hear that you're taking some pricing. Is there -- how much pricing are you taking? Is that across the board or in select brands and/or new introductions?

And on the supply chain side, seeing new shifts, particularly with Muck and XTRATUF, some of that Asia production to the Dominican or PR or the Rock Island over time?

Yes. So as far as the pricing goes, yes, we were consistent across all brands. And so we took our kids boots up. I think it was a couple of bucks and our adult boots, we took up like $3. There will be incidents in there where we felt it important to increase even more, but very few of those incidents. So we try to keep it pretty level across the board. I think the retail partner appreciates that, and so we wanted to keep it pretty simple.

And then your question about looking at different distribution for the other brands. I think that, that is an idea that we will absolutely be looking at in the future. It is a long process and a complicated process. And if you don't do it well, you will find yourself really damaging that brand and its reputation in the marketplace. But the idea is absolutely correct, and we will be looking at that very hard in 2022 and 2023 as we move forward.

Yes. Just a quick add-on there, too. We -- with relates to the price increase, we took a -- we didn't take an aggressive as a price increase as some of our peers have. And so we think that this will help us -- help continue to drive growth for our brands and maintain or even grow more market share than we've already captured over the last year. So we think that will play to our favor.

As Jason said, we can spread out the price increase across all brands and really, any geography where we produce the boots from. So we think that will continue to play in our favor given our diverse sourcing.

Great. And then one more, if I could. This quarter was a pretty (inaudible) quarter for multiple reasons, not the least of which is getting to a very robust EBIT margin kind of so call it, 10% in the (inaudible) that before. How do you guys think internally or discuss what the long-term opportunity is now that you've got the Boston Group brand and you see -- you're starting to see the synergistic opportunities in front of you?

Yes. Another great question. I think -- so a word we use right now internally a lot is the word patience. Because I think every week, the people in the company, be it the Ohio Group people or the Boston Group people, we are seeing opportunities that are going to be spectacular. It's going to take some time. And as we indicated on the prepared remarks, we're not going to be off the Honeywell ERP system until Q4, and we'll be out of their distribution center here sometime this month.

And once we're able to really get that done and start tweaking and combining and finding those synergies, they're there. And the brands, this group of people that came with the acquisition, they are footwear people, they are really good footwear people. And they understand it. The brands are strong. And so I think there are some really great opportunities in 2022 and 2023 as we move forward to really fine-tune it.

Our next question comes from Jonathan Komp with Baird.

Jonathan, we lost you. Are we still there? or is Jonathan gone?

Jona has gone. So we'll move to the next question. This is Alex Rygiel with B. Riley.

Jason, Tom. Just a question on -- just for the rest of the year, how do you think we should think about the sales mix between wholesale, retail and then the contract manufacturing segments?

Yes. So I think we've talked through kind of overall top line guidance on the call with that 24% from Ohio Group and 20% from Boston Group. We are seeing strong demand in our Lehigh business, which 30% in Q2, which comes through in our retail segment, we expect Lehigh's momentum to carry on for the rest of the year. We are running against very tough comparisons from an e-comm perspective. And so that growth will probably be more restrained than we'll see with the Lehigh business.

From a Boston Group perspective, approximately 10% of that business is in the retail segment as well. The contract manufacturing business, we had given some guidance on the military business prior to this. And so we don't anticipate a significant amount of private label business this year. We're just getting this business started. And so we've kind of given prior guidance to that $16 million to $18 million number for the military business. And so with the addition of the private label, it would just be incrementally a few million dollars more. So I think that will give you kind of a clear picture for the rest of the year.

That definitely helps. And then just on the private label, how big do you think that could be longer term? Or is that not really a key initiative right now?

Yes. I would say it is not a key initiative right now. It is a very interesting proposition for us. We are taking our time with it and being very careful with it. As Tom indicated, I think, in his remarks, it can come and go pretty quick. And so we're going to go through it, but we're going to take our time.

Our main focus is really on building our brands and building our e-commerce and our Lehigh B2B business. And if we're able to help out some of our better retail partners and do some of this for them, we see that as a benefit, and I think they see that as a benefit. So it's not going to be a huge initiative for us.

Okay. That makes sense. And then lastly, I don't know if you've mentioned, but how big of the sales shift of wholesale was into 3Q?

We did not give a specific number.

Yes. We didn't give a specific number on this one. Our thoughts are, we know we left some on the table at the end of the quarter. We're in the process of moving 1.2 million pairs of boots from Honeywell to our distribution center, it has created a lot of congestion. And so we feel like it's really just a shift from Q2 to Q3. But we'll -- we got it already in Q3, and we will -- it's reflective in our overall guidance for the rest of the year.

Okay. And then you mentioned the potential 4Q shift into 2022. Any highlights you can share there on the potential risk of that?

So I think it really depends on the logistic mess that's going on around the world right now for everybody, right? If that gets a little bit better, then we'll feel a little bit better. But I think we were just trying to make the point that there is a potential for it to happen. Because this logistics thing is a logistics nightmare right now, and it's very hard to predict.

I'm pretty sure Tom mentioned we're paying -- we're seeing quotes 2, 3x, maybe even 4x what we were last year and even into 2019, right? So with COVID last year, I think, the logistics thing changed. But it is really a moving target every week that's very frustrating. And I don't want to sound like we're the only -- but this is a -- it's a problem for everybody, but it is just a very frustrating situation.

Yes. I think the key is that the demand is there, right? And so just as we've spoken about, like everybody else in our industry, everybody is chasing inventory at this point and we are, too. And so I think that the demand is there. If we can get the boots here, we'll get them out the door. It's just kind of a wait and see if this gets any better from a logistics standpoint or not.

Yes, we definitely are seeing that. Best of luck the rest of the year.

Great. Thank you.

(Operator Instructions) Our next question is from Jonathan Komp with Baird.

Yes. Sorry about that. Hopefully, I'm coming through okay. The first question I wanted to...

Yes, Jonathan.

That's good. Good start. Okay. First question, just on the Boston business as you work through the integration, any surprises or challenges? Or has that gone smoothly? And how should we think about for that business, the 20% growth rate for the year relative to the mid- to upper 40s, you just saw in the second quarter? Just any thoughts there.

Yes. So as far as the integration goes, absolutely, we've seen some bumps in the road, right? I doubt there's ever been an integration that's ever gone smoothly 100%. I think we have navigated those bumps pretty well. The probably biggest bump that's really surprised me. And maybe our team is the demand that has come with these brands was stronger than we anticipated.

And so the -- getting that inventory, moving that inventory as quickly as possible, and that's what we kind of talked about with the DC getting a little clogged at the end of the quarter. That's been a big surprise because the demand for the XTRATUF brand is just exceptional right now. And we're seeing really good stuff with Muck and Servus.

And so I think those are exciting things. And once we're able to get off of their ERP system and once we're able to get everything in our DC, it's really going to change the dynamics of it. So I'm pretty pleased where we're at from an integration standpoint. And I'm sure we'll see some more bumps here in the next couple of months, but we'll navigate those just fine, too. So...

Real quick, too, on the demand side for the Boston Group. The demand is there in excess of the 20% guidance that we're giving. And I think what's really going on is that when we acquired the brands, I don't -- I think, we take a more aggressive inventory position than maybe Honeywell historically had. And as Jason alluded to earlier in the call, the Muck and XTRATUF product is predominant source of validation.

So the lead times out of Asia, particularly what's going on with the supply chain right now, has certainly kept us from keeping up with total demand. So I'm optimistic that these brands can grow even faster than 20% that we signed up for.

Okay great, very helpful. And then maybe switching to the Ohio brands. In the wholesale business, when you look compared to 2019, correct me if I'm wrong, it looks like the first half is up about 30% for the wholesale business for the Ohio brands. Can you just share a little bit more on what you think is going on with the key categories, what's driving the consumer demand, where are you seeing the strength at retail? Just any more color what you've seen and sort of how we should think about it continuing going forward.

Yes. So as I stated, Jonathan, the Durango brand is really seeing tremendous success right now and has for about almost 4 quarters. Really, if you look at Q3 of 2020, it started and it just continued to grow. And I believe it's really for multiple reasons. One, our product is really great product. We've been able to find new shelf space with that product, and I think the consumer is responding well to it.

Again, I'll go back to the fact that we took a more aggressive position on an inventory stance. And we were able to have inventory to put on those shelves, has really helped us as well. And we've performed. And so the consumer has said, "Oh, I like that product. I'll go back and buy it or I'll recommend it to a friend to buy it." We've just seen a tremendous success there.

The Georgia brand and the Rocky brand has seen really nice success as well. And I think it goes back to our functional-type product, right? It's boots that people need as tools. And the people that we sell to not only didn't get furloughed and didn't lose their jobs, but now that we're coming out of this, they -- we need more people, and they're hiring more people and they're looking for more people.

So I think we were in a really great position from an inventory standpoint. We were in a great position from a product standpoint, good innovation, quality product, comfort product. And so I think we were able to capitalize on an opportunity, and we've taken advantage of it.

Any comments for what channels within your retail subset, you're seeing the best performance or where you're seeing the outsized market share opportunities?

Yes. Absolutely, Jonathan. Sorry about -- I missed the -- forgot that part. So western, key large western retail partners are big. Doing really well there. Farm and ranch category is doing pretty well. Outdoor hunting, we saw a really nice spike, and it seems to have leveled off a little bit. But the outdoor market, and we reference outdoor market more as outdoor hiking, camping, backpacking, and it's a small business for us. But we have introduced some new styles in their -- early in the year that have performed pretty well at some large outdoor retail partners.

And so that's kind of a new category for us. It's not a big number. But it's something that's performing well. And so just to backtrack, the western key retailers are big, and farm and ranch is really strong.

Okay. Great. And then last one, maybe for me, Tom, I know you provided the update on the revenue outlook. You raised the Ohio outlook somewhat for that business. I know you didn't guide to earnings or operating margin previously, but are you willing to comment, given the gross margin pressure you outlined, has your profitability or your earnings outlook changed meaningfully from the update after the last quarter?

Yes. I mean, obviously, we're anticipating selling more than when we were on this call last quarter, but with the margin takedown, down to 39%, that's certainly going to have a negative impact on our earnings. But I think one of the key takeaways that I want to make sure from a model perspective is, we talked about the Boston Group having kind of a higher initial margin -- initial gross margin, but the operating expenses, it carries to higher operating expenses than our Ohio Group traditionally has.

And so as Jason talked about, I think, we will see kind of -- we'll continue to see a lot of our duplicative costs in 2021 from an operating expense standpoint. And then as we get out, get this business fully integrated, in the middle of Q4, we anticipate to start seeing those synergies really get realized in 2022. Hope that helps.

I guess as a follow-up, would you expect operating margin still to grow versus 2020? I know it's a bit apples to oranges, but just trying to gauge where you think operating margin directionally may fall. And then obviously, there may be more expansion in the out years.

Yes. No, I think -- we definitely think that there will be some growth. It's just the growth in our operating margin this year will be smaller than what we anticipated to be in the outbound years.

Our last question comes from Robert Sussman with Bentley Capital.

Looking at the company's inventories, at the end of the second quarter, they were about $143 million versus about $125 million at the end of the first quarter. So it looks like you've been building inventories and not necessarily having trouble sourcing products. Can you discuss that?

Yes. Thanks, Robert. Good to hear from you. Yes. So if you look at the increase in inventory, there's really a couple of drivers there. One is we had a lot of inventory sitting at the doors, ready to ship out at the end of the quarter. Again, we spoke about it earlier. But really, the big increase there is in transit inventory, so boots on the water or -- and trucks coming towards us as well as with the move from the Honeywell distribution center to ours, that slowed down outbound shipments. So I think that's really the big takeaway there.

Also, I think given some of the supply chain concerns that have going on, even product that's produced in the Dominican Republic, some of the raw materials are sourced from China. So I think we're taking a more aggressive inventory position on raw materials at our manufacturing facilities as well.

Okay. Second question is, I've always thought that the Boston Group would be accretive, yet you had the full contribution in the quarter compared to the first quarter and yet earnings were lower in the second quarter than the first, where the unusual operating expenses of Boston Group that held profitability down because I would have thought with the higher margins of Boston Group and their contribution, earnings would have been higher in the second quarter than the first quarter.

Yes. No, fairest question, Robert. I think if we look back in Q2, I think, we certainly -- we're not doing things as efficiently as we would have liked to, particularly as it relates to the distribution of the product and the move of all the inventory, as we said. And so as Jason alluded to earlier in the call, we -- the word on here called patience. And so I can promise you that we'll get that -- those details ironed out here by 2022. But we're still very, very pleased with the results of the second quarter.

Okay. So in the second half, should the acquisition be additive then to what Ohio would have done on its own?

Yes, sir.

Thank you, ladies and gentlemen. At this time, I would like to turn the call back over to management for closing comment.

Great. Thank you very much. Appreciate everybody's interesting questions today. I just want to end the call with a thank you to the Rocky team here in Ohio and the Boston Group team and all their efforts in bringing this acquisition together in a successful Q2. And we look forward to many more great quarters to come. Thank you all so much for your time today.

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.