Q1 2022 Escalade Inc Earnings Call

April 14, 2022

Greetings and welcome to the Escalade first quarter 2022 results conference call.

At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host, Patrick Griffin, Vice President of Investor Relations and Corporate Development. Thank you Patrick, you may begin.

Patrick Griffin: Thank you Operator. I'm Patrick Griffin, Vice President of Investor Relations and Corporate Development.

On behalf of the entire team at Escalade, I'd like to welcome you to our first quarter 2022 results conference call.

Leading the call with me today are president and CEO , Walter Glazer, and Stephen Wawrin, Chief Financial Officer.

Today's discussion contains forward-looking statements about future business and financial expectations.

Actual results may vary significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including risks described in our periodic reports filed with the SEC.

Except as required by law, we undertake no obligation to update our forward-looking statements.

At the conclusion of our prepared remarks, we will hold the line for questions. With that, I'd like to turn over the call to Walter.

And the line for questions.

With that I'd like to turn over the call to wall.

Walter Glazer: Thank you Patrick and welcome to those joining us today for Escalade's first ever quarterly earnings conference call. We appreciate your interest in our company and look forward to providing you with quarterly updates in the years ahead while working hard to create value for our shareholders through our growing portfolio of recreational brands.

Our mission is connecting family and friends, creating memorable moments, and playing life to the fullest.

Before we move into a discussion of our recent operational and financial highlights, I want to begin today's call with a high-level overview of our business along with a summary of our strategic business priorities that we believe will continue to drive profitable growth.

I want to begin today's call with a high level overview of our business along with a summary of our strategic business priorities that we believe will continue to drive profitable growth.

Since our company's inception 100 years ago, Escalade has assembled a portfolio of more than 30 leading sports and recreational brands, serving a diverse loyal base of customers.

Outdoor categories include basketball, where Escalade is leading supplier of high-end residential hoops with our Goalrilla and Goalsetter brands, backyard playground equipment supplied by would play, archery for used to enthusiasts with bear archery. Water sports with our rave brand and outdoor games and licensed tailgating supplied by our victory Tailgate company.

Backyard playground equipment supplied by would play. Archery for used to enthusiasts with bear archery. Water sports with our rave brand in outdoor games and licensed tailgating supplied by our victory Tailgate company. Company.

Archery for used to enthusiasts with bear archery.

Water sports with our rave brand in outdoor games and licensed tailgating supplied by our victory Tailgate company.

Company.

Pickle ball is one of the fastest growing sports in North America, and we were early with our authentic Onyx Enduro Pickle ball brands. Indoor categories include darting with AccuDart, Win Now, and Unicorn. Table tennis, with leading stagger and Ping Pong brands. Game room, with several leading brands, including Brunswick Billiards, American Heritage, and American legend, which cover Billiards' Shuffleboard Foosball, Air Hockey poker tables, and related furniture and accessories. And finally home fitness with our lifeline and the step brands.

Indoor categories include starting with actually Dart win now and Unicorn.

Table tennis, with leading stagger and Ping Pong brands.

Game room, with several leading brands, including Brunswick, Billiards American Heritage and American legend, which cover billiards, Shuffleboard Foosball Air Hockey poker tables and related furniture and accessories.

And finally home fitness with our lifeline and the step brands.

Yeah.

Product innovation remains central to our long-term profitable growth. During the first quarter, our array of sports brand received the Innovative Product of the Year Award from the Water Sports Industry Association for its new big easy [inaudible].

During the first quarter, our array of sports brand received innovative product of the year Award from the water Sports industry Association.

Where its new big easy so terrible.

Bear archery received several readers' choice awards for their compound bows from leading archery publications and our trophy rich brand and received several awards and strong trade acceptance at the 2022 Archery Trade Association show.

For our digital reacts site, a technological advancement in archery sites.

Basketball brands incorporate dozens of patents for technology and enhancements developed by our in-house engineering team.

At Escalade, we employ a hybrid sourcing model, one that leverages both domestic manufacturing facilities and international procurement capabilities. Today, we have three manufacturing facilities in the United States, one plant in Mexico, and a very strong Asia sourcing team.

We balance our in-house production capabilities with imports as market conditions dictate.

Recently, given higher freight costs and supply chain challenges, we've chosen to reassure certain products such as entry level compound bows, umbrella bases, and fitness weight sets. And we are currently evaluating several additional opportunities.

In the current environment, domestic production can be cost-effective, while allowing for vastly improved inventory control and on-time delivery.

Filling for vastly improved inventory control and on time delivery.

During the last year, we've also added warehouse capacity to store additional buffer inventory in support of customer requirements.

Prudent capital allocation is a key focus. Escalade generates healthy free cash flow and we know that our future success is heavily influenced by how well we invest that capital.

Prudent capital allocation is a key focus.

Escalate generates healthy free cash flow and we know that our future success is heavily influenced by how well we invest that capital.

Our first priority is reinvesting in our core businesses to protect and build upon our leading market positions and making sure that we are providing great products at a fair price for our consumers.

We invest in product development as mentioned earlier. We buy tooling and equipment to improve quality, to increase capacity, and to enhance efficiency.

We by tooling and equipment to improve quality to increase capacity and to enhance efficiency.

We've been increasingly investing in digital tools and services to serve our trade partners to create consumer engagement and to provide our employees with the data and information they need to be successful. And we've been investing in our existing and new facilities to support growth.

And we've been investing in our existing and new facilities to support growth.

Our board and management remain firm believers in a robust return of capital program, having returned nearly $45 million to shareholders since 2019, equally split between regular cash dividends and opportunistic share repurchases.

Last month, our board of directors approved a dividend increase to 15 cents per quarter, an increase of 7.1%.

An increase of seven 1%.

Throughout our history, Escalade has been an active acquirer of complementary recreational brands and assets.

During the past decade alone, we've completed 12 acquisitions, including substantial platform companies in new and adjacent markets as well as smaller bolt on acquisitions in existing categories.

We have bought both successful business that would benefit from Escalade's resources, and we bought assets out of bankruptcy.

The common theme is businesses that fit our mission and create shareholder value.

Finally, we've also sold businesses to redeploy capital to where we expected to generate better returns.

Yeah.

We also believe it is critical that the interests of the company, the board, and the management team are aligned with our shareholders.

We think one of the best ways to achieve this alignment is to have officers and directors, who hold a significant equity position at Escalade.

To that end, our officers and directors ownership represents over 20% of the shares outstanding.

The shares outstanding.

Turning now to a discussion of our first-quarter performance, we generated strong Q1 results versus the first quarter of 2021 highlighted by growth in net sales, EBITDA, and net income.

Now to a discussion of our first quarter performance.

We generated strong Q1 results versus the first quarter of 2021 highlighted by growth in net sales EBITDA and net income.

First quarter net sales growth excluding acquisition-related contributions increased 12.2% in the first quarter, driven by strong organic growth across our basketball, archery, pickle ball, and indoor game categories.

It is important to note that some sales from Q2 were pulled forward into Q1, and we experienced a very favorable mix, which enhanced our gross margin in the first quarter.

We anticipate the global supply chain issues to continue for the foreseeable future with the current COVID-19 situation in China, and the West Coast Longshoreman contract coming up for renewal this summer.

We are carefully monitoring point of sale data, along with consumer behavior and sentiment given rising interest rates, inflation, and geopolitical uncertainty.

We serve a broad range of consumers and have performed well in a variety of economic environments over the past century.

We're leaders in a diverse range of categories with a wide range of price points to address consumer needs.

In January, we completed the acquisition of Brunswick Billiards, the largest and oldest provider of billiard tables, game tables, and game room furniture in the United States.

You worry we completed the acquisition of Brunswick failures, the largest and oldest provider one billiard tables game tables and game room furniture in the United States founder.

Founded in 1845, Brunswick is an iconic American brand. An interesting fact is that Abraham Lincoln owned a Brunswick Billiard table.

An interesting fact is that Abraham Lincoln.

Owned at Brunswick Billiard table.

We view ourselves as the steward of this great brand and just like all of our other great brands, we will invest, protect, and build upon its name and reputation.

The Brunswick integration is well underway as we combine our talented teams to create a world class billiards business. We expect the Brunswick acquisition will be accretive to earnings beginning in the second half of 2022.

We expect the Brunswick acquisition will be accretive to earnings beginning in the second half of 2022.

Following our completion of the Brunswick acquisition, along with our share repurchases and intentional purchase of buffer inventory intended to mitigate supply chain disruptions, our net leverage has increased versus historical levels, while remaining manageable.

Our net leverage has increased versus historical levels, while remaining manageable.

At the end of the first quarter, our ratio of net debt to trailing 12 months EBITDA was 2.56.

The remainder of 2022 debt reduction will be a focus and an excellent opportunity to increase shareholder value through deleveraging.

Through deleveraging.

With that, I'll turn the call over to Steven for a review of our recent financial results.

Steven Wawrin: Thanks, Walt and welcome to those joining us on the call today.

For the three months ended March 19, 2022, net sales increased to $72.4 million versus $59.2 million in the first quarter of 2021, an increase of 22%.

Net sales less acquisition-related revenues increased 12.2% on a year-over-year basis in the first quarter of 2022.

Escalade reported net income of $6.7 million or 49 cents per diluted share compared to $5.4 million or 39 cents per diluted share in the first quarter of 2021.

First quarter EBITDA increased 27% versus Q1, 2021 to $10.5 million.

First quarter 2022 results benefited from strong organic sales growth across the basketball, archery, pickle ball, and indoor game category together with contributions from the company's acquisition of Brunswick Billiards given sustained demand from a growing diverse mix of loyal customers.

Or is it worth failures given sustained demand from a growing diverse mix of loyal customers.

Gross profit declined 165 basis points to 27.8% in the first quarter given continued challenges related to the global supply chain, raw materials cost inflation, and labor constraints. In response to these challenges, the company has expanded its sourcing and procurement initiatives as well as invested in new inventory ahead of further anticipated cost increases and supply chain disruptions.

Increases in supply chain disruptions.

We've raised prices where necessary across our portfolio and continue to focus on tight expense management.

Where necessary across our portfolio and continue to focus on tight expense management.

As Walt mentioned, total leverages higher than our historical levels, but still within our comfort zone. Total debt at the end of the quarter was just shy of $100 million and shareholders' equity was $151.6 million.

$45.8 million of our debt is fixed rate of 2.97%, while the remainder is the floating rate line of credit.

With that, we will turn the call over to the operator to begin our question and answer portion of the call.

Operator: Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.

Thank you, our first question comes from Rommel Dionisio with Aegis Capital. Please proceed with your question.

Rommel Dionisio: Thanks, and good morning. A question on the sales breakdown by distribution channel. I noticed that mass merchants, as well as international, were both up about 50% in terms of gross sales compared to the year-ago quarter. I wonder if you could just give a little more color on that. Was that more consumer traffic in stores as a result of recovery from the pandemic or what were some of the factors kind of driving that really strong growth in those two channels? Thanks.

A question on the breakdown of sales breakdown by distribution channel I noticed that masks.

Mass merchants as well as international were both up about 50% in terms of gross sales compared to the year ago quarter I Wonder if you could just give a little more color on that was that you know.

We're consumer traffic in stores. As a result of recovery from the pandemic or what were some of the factors kind of driving that. Strong growth in those two channels. Thanks.

As a result of recovery from the pandemic or what were some of the factors kind of driving that.

Strong growth in those two channels. Thanks.

Walter Glazer: Yes. Thank you Rommel, it's a great question. We've seen good demand kind of across our customer base and part of it revolves around our ability to supply product, so our sourcing teams I think have outperformed the industry and our ability to acquire inventory in and so we were, for the most part well well stocked, and so that certainly contributed.

We've seen good demand kind of across our customer base.

And part.

Part of it revolves around our ability to.

Supply product so our sourcing teams I think have outperformed.

The industry and our ability to acquire inventory in and so we were for.

For the most part well well stocked and so that.

Certainly contributed.

Rommel Dionisio: Okay. And maybe just a follow up. On the pull forward that you noted on Q1 coming in from Q2, was there a particular unusual reason for that? Was that partly from the acquisition? And also is it possible to quantify the magnitude of maybe how much sales were pulled forward from Q2 to Q1? Thanks.

And maybe just a follow up.

On the pull forward that you noticed you noted on Q1 coming in from Q2 was there a particular unusual reason for that was that partly from the acquisition.

And also is it possible to quantify the magnitude of maybe how much sales were pulled forward from Q2 to Q1. Thanks.

Walter Glazer: Yeah. So I think a big part of it is that our customers are concerned about having inventory, so they are buying earlier than they have in the past. And once again, we had good supply and we're able to fill orders and so we had a very strong finish to the quarter. As far as quantifying it, we don't really give forward-looking guidance, so I'll leave it at that.

Once again, we had we had good supply and we're able to to fill orders and so.

Uh huh.

We were we had a very strong finish to the quarter as far as quantifying it.

We don't really give forward looking guidance so.

I'll leave it at that.

Rommel Dionisio: Okay. That's fair enough. Thanks, so much.

Yeah.

Operator: Thank you. Our next question comes from Thomas Madison, Private Investor. Please proceed with your question.

Thomas Madison: Thank you. Great quarter fellows and congratulations for initiating these calls. Walter, I know you said you don't want to talk about forward guidance, but typically, quarter two is about 1.5 times the sales of quarter one. I expect it's going to be less this year. Can you put some bounds on that for us?

Congratulations for initiating these calls.

Walter I know you said you don't want to talk about forward guidance, but typically excuse me.

Quarter, two is about one five times the sales of quarter one.

I expect it's going to be less this year can you.

Put some bounds on that for us.

Walter Glazer: Sure and I can explain it a little bit. We operate on 13 four-week periods, as opposed to the normal calendar schedule. So our first, third, and fourth quarters have three four-week periods and the second quarter has four four-week periods. So that kind of describes or explains that.

That.

So as we mentioned earlier, we pulled some sales out of Q2 into Q1. So I would say that the relationship would be a little bit more muted in 2022 than it has been in the past.

So I would say that the relationship would be a little bit more muted in 2022 than it has been in the past.

Thomas Madison: Okay. Since this is your first public call and a lot of people aren't familiar with the company, could you share the longer-term targets that you have for gross margin and operating margin, say two to three years out?

Walter Glazer: What I can tell you is this, let me start with growth Tom. A lot of our categories are mature. We have some particular categories that are growing much faster, Pickle ball for example. But we look at our mature businesses as being able to grow 2% to 3% units. We've traditionally thought of it as 2% to 3% inflation or pricing that may be higher in the current environment.

Let me start with growth Tom.

You know a lot of our categories are mature we have some particular categories that are growing growing much faster.

Pickle ball for example, but.

You know, we look at our mature businesses is being able to grow 2% to 3% units.

We've traditionally thought of it as you know, 2% to 3% inflation or pricing that may be higher in the current environment.

We also generate free cash flow as I mentioned earlier, so we enhance our growth with acquisitions. And then we also believe that we do have margin improvement opportunities. So that all kind of works its way down to kind of low to mid teens long-term growth rate, that's what we're targeting.

Generate free cash flow as I mentioned earlier, so we enhance our growth with acquisitions.

And then we also believe that we do have margin improvement opportunities. So.

It all kind of.

Works its way down to kind of low to mid teens long term growth rate, that's what we're targeting.

And then as far as the margins go, our internal team knows that we want to achieve a minimum of 10% operating margins and we believe we can continue to do that and enhance those. So I hope that's helpful to you.

As far as the margins go.

We are internal.

Team knows that we we want to achieve a minimum of 10% operating margins and.

We believe we can do we can continue to do that in an enhanced though so.

I hope that's helpful to you.

Thomas Madison: Yes, it is. 10% minimum is kind of low just because if we back out amortization it looks like the margin on the organic sales numbers today was something like 15%. And I know you mentioned favorable mix, but once you integrate Brunswick into the mix, do you think you could do mid-teens?

That's it.

10% minimum.

Kind of low just because.

Yeah.

If we back out amortization it looks like the organic.

The margin on the organic.

Yeah.

Sales numbers today, where something like 15%.

And I know you mentioned favorable mix, but once you integrate Brunswick.

Brunswick into the mix.

Do you think you could do mid teens.

Walter Glazer: So that would be an aspirational goal, Tom and--

Thomas Madison: Alright. Okay, I'll turn it down then. I'm just trying to establish some parameters.

Im just. Trying to establish some parameters.

Trying to establish some parameters.

A couple of questions on the balance sheet. You've mentioned investing in an inventory because of supply chain issues. I know these high shipping costs are also inflating the values there. But the ratios inventory to sales receivables or inventory cost of goods sold, receivables to sales, are quite a bit higher than they were in the pre-Covid years. I wonder if you anticipate getting back to those levels in time, say over the next two years to free up some cash for debt reduction.

I know these high shipping costs are also inflating the values there.

But the ratios.

Inventory to sales receivables or inventory cost of goods sold receivables to sales.

Is it higher than they were in the pre Covid years, I Wonder if you anticipate getting back to those levels.

Yeah, all in time.

Over the next two years.

To free up some cash for debt reduction.

Walter Glazer: Yes, absolutely. I would say in fairness, our asset utilization today is not great. The good side of that is that we do have inventory and we're able to serve our customers. The bad side of that is that we're carrying a lot of debt, relatively speaking we're investing capital in our inventory.

The good side of that is that we do have inventory and we're able to serve our customers are.

The bad side of that is.

We're carrying.

Lot of that a relatively speaking we're investing capital in our inventory.

You know, one of the issues with the supply chain today is that goods arrive late. So we have holiday goods that came in late December and January, all good products, but we're going to carry that till next fall and be in a great position to serve our customers at that point. But to answer your question, inventory control and inventory management is an initiative within the company and we would expect to improve that.

<unk> arrived late so.

We have holiday holiday goods that came in in late December and January so all good product, but we're going to carry that till next fall and being a great position to.

To serve our customers at that point, but.

To answer your question.

Inventory control and inventory management is an initiative within the company and.

We would expect to improve that.

Thomas Madison: Good. And then Brunswick Billiards, it's your largest acquisition by far, at least in the history that I have looked at going back quite a few years. Could you share your expectations for sales and gross margin once you get everything integrated? And also there some material operating synergies that we can expect?

And then Brunswick billiards.

Your largest acquisition by far.

At least in the history that I have looked at going back quite a few years.

Could you share your expectations for sales and gross margin.

Once you get everything integrated and also are there any some material operating synergies that we can expect.

Well, absolutely there operating synergies.

Walter Glazer: Well, absolutely there are operating synergies and you can figure out how much we sold in the two months that we had in Q1 by comparing our organic growth to our total. And so that will give you a good clue on the size of the business.

And so.

That will give you a good clue on the size of the business.

You know, the operational synergies are significant and I would say that our teams have gelled and are really coming together well. We have a significant Billiard business already and then, of course, Brunswick is a very substantial business itself, so those two teams are coming together well. But Brunswick is the leader at the high end, our American legend and American heritage brands have strong positions at the entry-level and in the medium range. Our queue in case business is very, very strong in accessories and Brunswick has never, or at least in recent years, not been strong with accessories. So these teams are working together, they are finding a lot of opportunities on the sales side, on the cost side. So we're quite optimistic about the long-term for Brunswick.

Brunswick.

As the leader at the high end or American legend, an American heritage brands have strong positions at the entry level and in the medium range our.

Our queue in case business is very very strong and accessories and Brunswick has never or at least in recent years not been strong with accessories.

So.

These teams are working together they are finding a lot of opportunities on the sales side on the cost side.

So we're quite optimistic about the long term for Brunswick.

Thomas Madison: Yeah. And on the margin side, is it realistic to think you can get the gross margin up to 25% or so, I would say by the end of next year, maybe sooner?

And on the margin side.

Is it realistic to think you can get the gross margin up to 25% or so.

I would say by the end of next year.

Maybe sooner.

Walter Glazer: For the entire business or just for Brunswick?

Thomas Madison: No, just for Brunswick.

Walter Glazer: Brunswick has and does and should continue to earn good margins, I would say above our fleet average.

Thomas Madison: Oh good. And then is there a seasonality there? The current business prior to Brunswick, Q1 was always the weakest quarter, and this year, it's going to be skewed a little bit for the reasons you elaborated but is Brunswick going to be more of a straight line quarter-to-quarter business, or do they have some seasonality too?

And then is there a seasonality there.

The current business prior to Brunswick.

Q1 was always the weakest quarter and this year, it's going to be skewed a little bit for the reasons you elaborated but.

Brunswick couldn't be more of a straight line quarter to quarter business or do they have some seasonality too.

Walter Glazer: They have some seasonality, it's typically fall and winter business. So last couple of years seasonality has been kind of thrown out the window as product arrives at different times and consumer is buying throughout the year, but I would say fall-winter seasonal.

Business. So last couple of years seasonality has been kind of thrown out the window is.

Product arrives at different times in consumer.

Is buying.

Throughout the year, but.

I would say fall winter seasonal.

Thomas Madison: So the two months that we've seen that are included in the current numbers are maybe on the high-end for a quarterly number. Should we multiply by four or take a little less than that in terms of sales expectations?

Hum.

The two months that we've seen that are included in the current.

Numbers are.

Our.

Maybe on the high end for a quarterly number.

Sure, we multiply by four or take a little less than that in terms of.

Sales expectations.

Walter Glazer: I would say that--

Thomas Madison: I say multiply by four but I mean annualize it. Anyway, you know, adjust it that way.

Walter Glazer: Yeah, we closed at the end of our first period. So we only had periods two and three. I would say those are not peak selling periods.

Right I would say those are not peak.

Peak selling periods.

Thomas Madison: Okay, good. Thank you all, good luck in putting this all together, and I'm very glad you've initiating these calls.

Good.

Thank you well good luck and.

Putting this all together and.

Very glad you are initiating these calls.

Walter Glazer: Well, thank you for your questions and your interest.

Thomas Madison: Sure thing.

Operator: As a reminder, if you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Patrick for any closing comments.

Rick for any closing comments.

Patrick Griffin: Once again, thank you for joining our call. Should you have any questions, please feel free to reach out to contact us at ir@escaladinc.com and a member of our team will follow up with you. This concludes our call today. You may now disconnect.

Contact us at IR Escalate, Inc. Dot com and a member of our team will follow up with you. This concludes our call today you may now disconnect.

Okay.

[music].

Q1 2022 Escalade Inc Earnings Call

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