Escalade Incorporated Q1 2023 Earnings Call
Hello, and welcome to escalate its first quarter 2023 results conference call all participants will be in listen only mode.
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I would now like to turn the conference over to Patrick Griffin, Vice President Corporate development and Investor Relations. Please go ahead.
Thank you operator on behalf of the entire team at Escalade I'd like to welcome you to our first quarter 2023 results conference call.
Leading the call with me today are president and CEO walk Glaser, and Stephen Warren, Our Chief Financial Officer.
Today's discussion contains forward looking statements about future business and financial expectations.
Actual results may 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 obligations to update our forward looking statements.
Conclusion of our prepared remarks, we will open the line for questions.
With that I'd like to turn the call over to Walt.
Patrick and welcome to those joining us on the call today.
As expected our first quarter results were impacted by anticipated softening in consumer demand that carried over from the fourth quarter.
Early in 2023 elevated channel inventories have weighed on the pace of reordering and retail, particularly with our archery and basketball categories based on recent Pos trends and discussions with our retail partners. We believe this is a dynamic that will normalize for most of our categories as we move further into the year.
Market conditions were further impacted by cooler temperatures across many areas of the country during the first quarter, which curtailed outdoor product demand.
January was particularly weak although we then experienced month over month improvement in demand conditions as we progressed through the first quarter supported by improved orders for our indoor games fitness and safety categories.
While our overall e-commerce sales declined in the quarter due to inventory destocking within our marketplace and that third party reseller customers our own direct to consumer E. Commerce sales increased 44% on a year over year basis in the first quarter, reflecting continued consumer demand for our products and the effect that.
So if our product development marketing and e-commerce teams.
In combination these factors contributed to a year over year decline in both revenue and profitability during the first quarter.
Stance made even more challenging compared to the record performance in the first quarter of 2022.
At an operational level, we continue to face some supply chain headwinds that led us to incur elevated inventory handling and storage costs in the first quarter.
These costs, along with less favorable product mix shutdown and severance expenses lower sales volumes impacted our gross margin in the period.
Despite these challenges we've continued to maintain our price discipline, which has served to partially offset demand softness.
We believe the general stability in pricing speaks to the resilience of our brands and the loyalty of our generally more affluent customer base looking forward, we expect to see our inventory trend down towards more normalized levels as we move throughout the year.
That said, we expect demand in the second quarter will remain challenged, albeit less so than in the first quarter adjusting for the change in our reporting calendar.
We also expect margin pressure from elevated inventory handling and storage costs will decline, while an improved sales mix and lower cost inventory will also result in better margins as we move through the year.
Strategically we continue to focus on investing in innovative product development and consumer engagement to build market leading positions in key growth categories.
For example, we recently introduced technology into the Pickle ball category.
All new malice in May hand pick a ball paddles are the first to be released with our patented thermal fuse technology, which mulch the pickle ball paddle to exact specifications and provides our onyx brand with a robust product development platform.
These new panels feature an all new carbon fiber power frame for greater strength power and better field.
We also launched an expansion of the Evo Premier family with paddles, featuring raw carbon fiber surface texture, which increases traction for maximum spin in control without sacrificing pop in power.
Our champion Pro Pickle ball players, Matt right, Lucy Coe Biloba, Kelly, Joe Smith, as well as many others play tested these panels and provided a key input before their recent release I am happy to report that they are already winning metals and a top tournaments with these new battles.
We're also launching innovative products in several key categories over the coming months stay tuned those exciting new developments.
As we navigate the current challenging demand environment, we understand the importance of maintaining an appropriate cost structure and healthy balance sheet.
We have successfully faced similar challenges over the past century and are responding to this temporary situation by reducing our cost and generating cash to reduce debt.
Did that end, we recently announced our intention to divest our own facility in Rosarito, Mexico as part of an initiative to optimize our manufacturing footprint. We currently expect to close the sale of this facility by year end 2023, and anticipate annualized savings of between half a million.
And $1.5 million.
In the meantime, we will have some costs associated with winding down this facility, including roughly $600000 that we expensed in the first quarter.
In addition to the divestiture of our Mexico operations. We have also initiated a targeted reduction in force during the second quarter 2023 within our domestic operations, we anticipate $2 $3 million in annual savings, resulting from the domestic reductions beginning in the third quarter 2023 between the divestiture.
Here are our Mexico operations and planned reduction in force here domestically, we anticipated total annualized savings, resulting from the recent cost actions to be approximately $2 eight to $3 $8 million annually. We are carefully evaluating additional expense reduction in Cas cash generation opportunities to ensure we maintain.
And appropriate cost structure and healthy balance sheet.
We remain highly disciplined around all discretionary capital allocation as a results have also reduced our planned capital expenditures for the full year 2023.
We successfully amended our credit agreement to address our temporary high higher leverage.
As of the end of the first quarter, our net leverage reached three eight times, which is well above our targeted range of one five to two five times at.
Seasonal demand and normalized channel inventories drive improved cash flows we expect our leverage to trend back toward our targeted range by year end.
Entering the second quarter, our team continues to do an excellent job navigating the current macro environment. While also ensuring that we remain competitively positioned to support our customers.
While the current environment is challenging our category, leading brands and loyal customer base provides some level of insulation from this volatility.
While we continue to see attractive opportunities to expand our.
Portfolio of high quality products, we will prioritize organic growth over acquisitions during what remains of trade it transitional period for the consumer and as we did delever our balance sheet.
I am proud of the hard work and dedication of our team as we continue to focus on delivering exceptional customer experiences that build brand loyalty, all while creating long term shareholder value.
We look forward to updating you with our progress next quarter with that I'll turn the call over to Steven for his prepared remarks.
Three months ended March 31, 2023, escalate reported a net loss of $952000 or a loss of seven cents per diluted share on net sales of $56 $9 million.
For the first quarter the company reported gross margin of 19, 4% compared to 27, 8% in the prior year period.
800 basis point reduction was primarily the result of unfavorable product mix nonrecurring inventory handling and storage costs.
So off of high cost inventory as well as costs associated with the divestiture of our facility in Mexico, selling general and administrative expenses declined two 3% compared to prior year period to $10 $3 million. The decrease in SG&A expense year over year was caused by lower variable selling expenses.
Set by the addition of Brunswick failures severance expenses.
The timing of certain selling expenses.
Earnings before interest taxes, depreciation and amortization declined by $9 million to $1 $6 million in the first quarter of 2023 versus $10 $5 million in the prior year period.
Total cash provided by operations was $4 $5 million for the quarter compared to a use of $2 $9 million in the prior year period. The increase in cash flow from operations reflects cash generated from improvements to working capital as a result of a reduction of receivables through the first quarter of 2023 and stable.
Capital expenditure of approximately seven.
$100000 during the first quarter, which is relatively flat to the first quarter of last year.
As of March 31, 2023, the company had total cash and equivalents of $6 $1 million together with $32 $9 million of availability on our senior secured revolving credit facility maturing in 2027.
At the end of the first quarter of 2023 net debt outstanding or total debt less cash was 3.8 times trailing 12 month EBITDA.
As Walt mentioned after the end of the quarter, we proactively took steps to address our temporarily higher leverage as such we have worked with our banks to amend our credit agreement, which improved our flexibility.
In addition, we announced this morning, a quarterly dividend of <unk> 15 per share to be paid to all shareholders of record on June 12, 2023, and dispersed on June 19th 2023.
One last important thing to remember effective on January 1st we transitioned to a conventional 12 month reporting calendar as a result, the first quarter of 2023 had 90 operating days as opposed to the 84 in the prior year period. This dynamic will continue to have an impact on the comparability of our results throughout the rest of the year.
With that we.
We will open the call for questions.
Thank you very much we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
Today's first question comes from Rommel Dionisio with Aegis capital. Please go ahead.
Oh good morning, Thanks for taking my question.
When you talk about the targeted reductions in the U S.
And I understand if they haven't been made yet the sensitivity.
And as far as people know that but just in general terms is that a lot of corporate is it infrastructure.
Infrastructure marketing could you maybe walk us through the components.
When the organization that might lie thanks.
Sure Rommel.
For your question, it's really we're looking leaving no stone unturned, we're looking everywhere I would say primarily the the employee counts are occurring within our business units.
As we reduce.
Reduced production to work down our inventories we need fewer.
Production employees. So a lot of it is occurring in that area, but as I say you know, we're looking at everything and.
Being very thoughtful in how we address our cost structure going forward.
Okay.
You've gone to a fairly flexible.
Manufacturing fairly lean.
You've been run pretty lean over the last several years.
Do you have the ability to flex up and you know what.
The period of inventory restocking comes back and consumer demand comes back.
Or is it the type of thing where you have you also made acquisitions over the years, we probably have a lot of personnel.
So we need to add back how do you kind of think about that thanks.
Yeah. So you know.
Being able to flex up as important and we won as we make reductions we want to make sure. We keep the key people key skills capabilities.
But I can tell you that we're seeing in certain areas like particularly in fitness, we're seeing a strong increase in demand and you may recall fitness was the first to decline.
We're seeing that it's really the first to come out of the post COVID-19 environment. So in our facility in Illinois, where we produce a lot of the fitness products, we are increasing our head count we're hiring.
I can't tell you that our hiring is still a bit challenging.
Then it was a year ago, but you know, we're able to to increase our workforce, where and when we need it.
Great. Thanks very much.
Okay.
I think I'll add if I may.
If I may just add one last comment and that is.
You know that this sales decline is disappointing, but we believe it's largely the result of destocking in our customer base.
Our Pos at.
Our major retail customers was down low single digits and our wholesale shipments to those customers was down 21%. So we know that the inventory destocking cannot go on forever and that gives us confidence that are there.
It will resolve itself over time and I can also report that you know that.
Our April results were better than March.
Which for better than January so we have some degree of confidence in our plans for the future.
Yeah.
This concludes our question and answer session I would now like to turn the call back over to Patrick Griffin for any closing remarks.
Once again, thank you for your interest in escalate and joining our call should you have any questions. Please feel free to reach out to contact us at IR escalating dot com.
This concludes our call today you may now disconnect.
Yeah.
Okay.
[music].
Uh huh.