Q4 2022 Escalade Inc Earnings Call

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Greetings and welcome to escalate incorporated fourth quarter and full year 2022 earnings result conference call at.

At this time all participants are in a listen only mode. A 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.

A reminder, this conference is being recorded.

I would now like to turn the conference over to your host Mr. Patrick Griffin. Thank you you may begin.

Thank you operator on behalf of the entire team at escalate I'd like to welcome you to our fourth quarter and full year 2022 results conference call.

Leading the call with me today are president and CEO Walter Glaser.

Stephen Moore, our Chief Financial Officer, today's discussion contains forward looking statements about future business and financial expectations.

Actual results may vary differ significantly from those projected in today's forward looking statements due to various risks and uncertainties, including the 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 open the line for questions with that I would like to turn the call over to Walt.

Thank you Patrick and welcome to those joining us on the call and.

In 2020 to escalate continued to build leading market positions within our key indoor and outdoor recreation categories, while navigating a challenging operating environment.

Two years of elevated pandemic related consumer demand for sporting goods and recreational equipment.

A man conditions for most of our categories began to return to more normalized levels in 2022 contributing to a 10% year over year decline in organic sales.

From an operations perspective.

<unk> chain related congestion and elevated inventory levels led to higher logistics costs for our business throughout most of last year negatively impacting our profitability.

Demand softened as the year progressed, given elevated channel inventory levels with many of our customers.

Fourth quarter sales declined year over year across most outdoor categories, including archery basketball outdoor games.

Water sports and playground, partially offset by continued strength in pickle ball indoor games table tennis and failures.

However, even during a period of weakening consumer demand, we continue to maintain our price discipline underscoring the resilience of our brands the loyalty of our customers and then generally affluent demographic we serve.

Importantly, we delivered year over year growth in gross margin during the fourth quarter. Despite a seasonally promotional environment, which is an accomplishment for our entire team.

As expected our inventory declined during the fourth quarter due to planned reductions in inbound product flow seasonal demand and selective promotional activities.

We reduced our total inventory by more than $13 million during the fourth quarter, which enabled us to repay nearly 12 million in outstanding debt.

Also during 2022, we continue to build leading positions within our growth categories guided by our continued focus on innovation and new product development.

For example, within Pickle ball, our category, leading Onyx Enduro brands have continued to garner rave reviews and gain additional distribution capitalizing on rapid consumer adoption of America's fastest growing sport.

And more established categories, such as billiards and into a game room, we've worked to build a leading portfolio of brands serving every aspect of the consumer experience from tables in Qs two a full suite of accessories.

We acquired Brunswick billiards and January 'twenty, 'twenty, two our largest acquisition to date.

If it complements our portfolio of beers brands and broader offering offering in the indoor recreation market, including table tennis darting gained tables and licensed games. This past year. We successfully completed the integration of Brunswick, which was accretive to our full year earnings per share consistent with our expectations for the Acura.

Station.

This year, we are capitalizing on the potential provided by Brunswick to leverage our larger presence in the market.

And realize additional revenue opportunities as well as cost savings.

To achieve this goal we are combining our brunswick failures queue in case, an American heritage brands to create a market, leading billiards and game room platform.

During the first quarter of 2023, we are preparing to launch patented innovative pedal technology to further support our market leadership in the fast growing pickle ball category.

<unk> of American corn whole leg licensed products, together with accessory and ancillary products and our other leading categories.

In summary, while last year brought its fair share of challenges, adding temporary yet sizable cost burdens to our business. We continue to advance our strategic priorities driving both market share gains in key product categories together with continued operational execution across our sourcing manufacturing.

Product development e-commerce compliance and manufacturing centers of excellence.

Turning now to our outlook for the business, but.

But we do not provide financial guidance, we want to highlight several noteworthy items that may prove helpful from a modeling perspective.

First based on consumer discussions and recent economic trends, we anticipate difficult year over year comparisons in both the first and second quarters of 2023.

We worked through our high cost inventory.

<unk> managed through continued excess inventory levels in the channel and adjust the softening consumer discretionary spending.

Please also note that we had an unusually strong first quarter last year that benefited from a favorable mix in sales pulled forward from the second quarter of 2022.

Additionally, due to the change in our reporting calendar, our second quarter will span 91 days this year versus the 112 days in last year's 16 week Q2.

Despite near term demand softness and economic headwinds, we do expect our gross margins to improve in the second half of 2023, given lower ocean freight rates and reduce logistics expenses.

These favorable trends could be partially offset by further inflationary pressures.

Our capital allocation priority will continue to be debt reduction consistent with our objective of achieving net leverage ratio in the range of one five to two five times EBITDA, while continuing to support internal growth initiatives.

Stable quarterly cash dividend to <unk>.

Later of which remains an important element of our focus on total shareholder return.

We expect to further reduce inventory levels in 2023 as we seek to lower carrying cost and improve asset utilization at this time, we expect retail inventory levels in the system to return closer to historical levels in the back half of the year, creating the potential for improved channel inventory replenishment later in 2020.

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Given the current macro environment, we believe operational discipline remains of Paramount importance.

The rate of inflation remains elevated interest rates are at multi year highs.

Consumer sentiment has hit a 10 year low.

It will likely lead to continued difficult operating environment, given the multiple headwinds facing consumers.

To that end, we are taking a conservative approach positioning our business to successfully weather the current environment.

We already run lean we are actively evaluating opportunities to further control expenses and to improve our asset utilization without impacting the long term growth of our business.

Part of that evaluation process, we have made the decision to close our manufacturing facility in Rosarito Mexico.

While we expect some near term expenses related to the closure of our facility. We believe this strategic action will drive improved organizational efficiency and enhanced asset utilization.

As escalate completes the celebration of its 100 year anniversary, we are grateful for the ongoing support of our customers employees and our investors and remain steadfast in our focus on delivering exceptional memorable consumer experiences that build brand loyalty, while driving long term value creation for our shareholders.

I would particularly like to thank our talented employees, who responded to the many challenges we faced in 2022.

With that I'll turn the call over to Steven.

Thanks, Paul and welcome to those joining us on the call today for the three months ended December 31, 2020 to escalate and reported net income of $2 $7 million or <unk> 20 per diluted share on net sales of $72 $1 million for the 12 months ended December 31, 2020 to escalate reported net.

Come up $18 million or $1.31 cents per diluted share on net sales of $313.8 million.

For the fourth quarter. The company reported gross margin of 22, 4% compared to 22, 2% in the prior year period.

We realized the 19 basis point increase in margin despite increased logistics expenses, mainly associated with the ongoing inventory handling and storage for the full year of 2022. Our total gross margin was 23, 5% compared to 24, 6% for the full year 'twenty 2020 one.

For the fourth quarter, selling general and administrative expense as a percentage of net sales increased to 15% compared to 12, 9% in the prior year period due to the addition of Brunswick failures for the full year 2022, our SG&A as a percentage of sales was 14, 3% compared to 13, 8%.

For the full year 2020 one.

Earnings before interest taxes, depreciation and amortization declined 21, 5% to $5 $8 million in the fourth quarter of 2022 purchased seven $4 million in the prior year period.

For the full year, 2022, EBITDA decreased 12% to $32 $5 million compared to $36 $9 million in 2020 one.

For the full year 2022, the company generated net cash from operations of $8 $5 million compared to $2 9 million of net cash from operations. During 2021 due to favorable changes in working capital for 2022 our capital expenditures were more normalized that $2.1 million compared to $9 7 million.

During 2021 when we purchase a manufacturing facility and warehousing, the only Illinois completed improvements through our Evansville, Indiana facility.

As of December 31, 2022, the company had total cash and equivalents of $4 million together with $35 million of availability on our senior secured revolving credit facility maturing in 2027.

At the end of the fourth quarter of 2022 net debt outstanding and our total debt less cash was two eight times trailing 12 month EBITDA.

One last important thing to note as we enter 2023 effective this quarter, we are transitioning our physical quiet calendar to a traditional 12 month reporting calendar year. This will create some differences with days as we compare our quarterly results year over year during 2023, but will ultimately help the consistency of our reported and the long term.

Please see our recently filed 8-K with press release announcing our fourth quarter and full year results for a helpful table that shows a quarterly comparison with the days.

With that operator, we will open the call for questions.

Thank you at this time, we'll 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 your line is in the question queue you may have.

Press Star two if you'd 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.

Yeah.

Our first question comes from Rommel Dionisio with agents capital. Please proceed with your question.

Oh good morning, Thanks for taking my question.

The punch to.

Let me just production run Mexico will there be any corresponding exits a particular business lines or products.

And if so I wonder if you could discuss how that might potentially impact the top line or do you just plan to outsource whatever is produced there each other there.

Pardon me providers. Thanks.

Yeah, Rob on good morning, that's a great question, we are not exiting any product lines or dropping any categories are it really is a situation where we feel we can better produce these products in other facilities and as you probably know there's a lot of demand.

For our facilities in Mexico. So we're.

We're able to.

Find a buyer who is.

Fine tune, it's more valuable for them than it is for us. So we're kind of taking advantage of.

The current environment and moved into production to other facilities.

And just to clarify I know.

So it's $2 8 million on the balance sheet for assets held for sale is that mix primarily in Mexico.

Yes.

Okay, great and if I could ask one more follow up if I could just from competitive outlook. I mean, you guys have started some broad macroeconomic pressures, you're certainly not alone in the supply chain challenges and you know difficult consumer spending trends and cause problems.

Kind of standpoint, it sounds like you're you obviously maintained if not continuing to gain market share with some of the new products planned it sounds pretty exciting what are you seeing some real.

Any unusual actions on behalf of your competitors, who are obviously all of them, but with regards to supply chain tough economy with regards to our they've been.

Usually aggressive on the competitive promotional fronts.

Are they seeing even more kind of a distressed situation, where whether it's China.

So austin to push product as quickly as they can.

Yeah. So first of all yes, we do feel like we're gaining market share and we believe that when times are more challenging. That's that's the time when you can do that if you're a strong company with SaaS.

Our strong balance sheet and a great team. So we are pushing hard to gain market share. We believe we are gaining share across.

Most if not all of our categories.

I can't point to any particular situations, where you know competitors are being particularly promotional or have gotten desperate.

But you know clearly everybody is feeling the effects of the consumer the interest rate environment. The return to more normal demand patterns you know after COVID-19.

Okay.

Thanks very much.

We have reached the end of the question and answer session. At this time I'd like to turn the call back over to Walt Glaser for closing comments.

This is Patrick up and once again, thank you for your interest in Escalade and joining our call should you have any questions. Please feel free to contact us at IR, It's escalate, Inc. And a member of our team will follow up with you and this concludes our call today you may now disconnect.

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