Q2 2023 Escalade Incorporated Earnings Call

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Greetings and welcome to the Escalade second quarter 2023 results conference call. At this time, all participants are in a listen only mode.

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 is now my pleasure to introduce your host Patrick Griffin Vice President of Investor Relations. Thank you Sir you may begin.

Thank you operator on behalf of the entire team at escalate I'd like to welcome you to our second quarter 2023 results Conference call.

Leading the call with me today are president and CEO , Walter Glaser, and Stephen Moore, our Chief Financial Officer.

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

<unk> 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 obligation to update our forward looking statements at the conclusion of our prepared remarks, we will open the lines for questions.

That I would like to turn the call over to Walt.

Thank you Patrick and welcome to those joining us on the call today I'm pleased to report that our team did a fantastic job recovering from a difficult first quarter and delivered strong second quarter results highlighted by substantial growth in cash flow from operations significant inventory and long term debt reductions.

EBITDA margin expansion and thoughtful expense reductions these accomplishments.

By our team enabled us to beat the plan in the second quarter.

Sales volumes improved significantly during the second quarter importantly, our results were substantially impacted by 'twenty, one fewer days within our reporting calendar as we move toward traditional reporting calendar on January one 2023.

Previously our second quarter included four four week periods. This.

This year and going forward, well, where we were.

We will report results for the traditional three month April through June calendar quarter.

Excluding the impact of the change in our reporting calendar sales declined nine 5% on a year over year basis, which was an improvement over the prior quarters sales decline of 28, 5%.

During the second quarter, our direct to consumer sales accelerated meaningfully with non licensed DTC sales up more than 60% versus the year ago April through June period drew.

Driven by a combination of effective marketing campaigns and recent new product launches.

Our U S retail sales so sporting goods remains soft and channel inventories are still elevated we are cautiously optimistic about recent increases in housing starts and somewhat improved consumer sentiment driven by stability in the labor markets and a slowdown in inflation.

We believe our diverse portfolio of leading recreational brands will continue to resonate with consumers in this changing environment.

Operationally the supply chain challenges that we faced last year have continued to lessen, particularly with respect to freight expenses.

Improved operating leverage lower cost inventory price discipline expense reductions and a more favorable product mix resulted in a 515 point basis point sequential gross margin improvement between the first and second quarter of 2023.

We anticipate further normalization in wholesale channel inventories as we move into the second half of this year, which should position us to capitalize on restocking opportunities entering the holiday season.

As before we remain highly focused on a combination of cost control and improved working capital management and balance sheet optimization.

Strategically we continue to focus on investing in innovative product development to build market leading positions in key growth categories.

For example, during the second quarter, we launched a range of new carbon based pickle ball battles that improved performance and playability for the fast growing market of pickle ball enthusiasts.

This launch included our evoke premier raw carbon range as well as the malice and man battles, which utilize our patented firm up used technology.

Consumer acceptance of these exciting new panels has exceeded our expectations and quickly sold through initial production runs.

We are accelerating manufacturing to meet the strong demand.

This successful launch also contributed to significant double digit year over year sales growth in our pickle ball category. Despite the shorter second quarter this year.

We are also pleased to announce that our gorilla basketball brand has collaborated with Johnny stuffing the founder of handle life and an M. B a skills coach to launch a range of avoided basketballs designed to improve ball handling efficiency and play making ability.

Johnny Social media accounts have gained over 2 million followers, who are interested in is unique story and amazing ball handling skills.

We are excited about this new handle life collaboration which provides consumers with an effective training tools to improve their game.

We're also launching new products in several other key categories over the coming quarters, particularly in innovative assortment of American Cornhole League licensed cornhole boards in bags, which will launch initially at Academy sports and outdoors.

For some thrilling cornhole competition. Please tune in to the American Cornwall League World Championships, which will be held in Rock Hill, South Carolina from July 29th through August 6th.

Here on E S P N and the CBS Sports network.

As we navigate the challenging demand environment, we know the importance of maintaining an appropriate cost structure and fortified balance sheet.

We continue to focus on optimizing our cost structure.

And maximizing cash flow.

As highlighted by our second quarter results, we have already made great strides in improving our gross margins by reducing fixed cost and through lowering our operational expenses.

We remain on track to achieve $2 3 million in annual cost savings and expect our cost to continue to trend lower through the remainder of the year.

We continue to carry the ongoing expense of our Mexico operations and remain focused on divesting. This facility by the end of 'twenty two 'twenty three.

We have spent approximately $900000 year to date on professional services and severance expenses related to this divestiture.

As previously mentioned, we continue to be sharply focused on cash flow cash conversion during the second quarter exceeded 100%, primarily due to improved working capital management, including more optimal use of our cash on hand.

As we continue through the end of the year, our inventory levels should drive additional cash generation, which we will utilize to further reduce our debt.

At the end of the second quarter, our net leverage was 4.0 times. However, we remain committed to reducing our leverage to our targeted range between one five and two five times.

While we have built our business over the years with a number of value, creating acquisitions, our current capital allocation priorities remain long term debt reduction payment of our dividend.

Along with our focus on lowering net leverage we continue to tightly control discretionary spending including capital expenditures.

Entering the third quarter, our team continues to do a great job navigating the current macro environment. While also ensuring that we remain competitively positioned to support our retail partners and consumers loyal to our brands.

I'm proud of the hard work and dedication of our team in responding to a disappointing first quarter by delivering a good second quarter with improved performance across most key metrics. We will continue to focus on creating exceptional consumer experiences to build brand loyalty, all while creating long term shareholder value.

We look forward to updating you with all our progress next quarter.

With that I'll turn it over the call to Steven for his prepared remarks.

For the three months ended June 32023, escalate reported net income of $3 $6 million or 26 cents per diluted share on net sales of $67 $8 million for.

For the second quarter. The company reported gross margin of 24, 6% compared to 25, 1% in the prior year period.

The 50 basis point decline was primarily the result of higher cost inventory elevated inventory storage and handling costs and lower upper operating leverage on a comparable a lower revenue base, partially offset by improved margins in several categories and expense reductions implemented through the second quarter.

Selling general and administrative expenses declined 33, 5% compared to the prior year period to $9 $8 million.

The decrease in SG&A expense year over year was caused by lower variable selling expenses and initiatives to reduce our fixed cost, which Walt mentioned earlier.

Earnings before interest taxes, depreciation and amortization declined by $2 $7 million to $7 $7 million in the second quarter of 2023 versus $10 $3 million in the prior year period.

Total cash provided by operations was $8 $4 million for the quarter compared to $2 $5 million in the prior year period. The increase in cash flow from operations reflects cash generated from improvement to working capital as a result of a reduction of inventories through the second quarter 2023.

Additionally, capital expenditures during the quarter decreased to approximately $500000 from the prior year period, as we carefully manage our capital spending.

As of June 32023, the company had total cash and equivalents of $577000 together with $42 $4 million of availability on our senior secured revolving credit facility maturing in 2027.

At the end of the second quarter of 2023 net debt outstanding or total debt less cash was four times trailing 12 month EBITDA.

In addition, we announced this morning, a quarterly dividend of 15 cents per share to be paid to all shareholders of record August 29 2020.

Sorry, and dispersed on September five 2023.

One last important thing to remember effective on January one we transitioned to a conventional 12 month reporting calendar.

As a result, the second quarter of 2023 had 91 operating days as opposed to 112 operating days in the prior year period.

This dynamic will have an impact on the comparability of our results for the third quarter.

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

Thank you well now be conducting a question and answer session. If you would 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.

Maybe to start too if you'd like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys, one moment. Please only poll for your questions.

Our first question comes from the line of Royal Mail <unk> with Aegis capital. Please proceed with your question.

Hi, good morning, Thanks, very much for taking my question.

I think you had talked about.

Incurring some severance costs in the second quarter and also honestly.

Realized cost savings as a result of your recent restructuring efforts really this incorrectly but most of.

The the one time costs were incurred in two Q, but maybe you didn't get a full quarter of benefit cost savings and seek useful going forward things should look even better with regards to maybe lower severance expense and higher cost savings.

I'll start getting the full quarter's benefit did I am I reading that correctly. Thanks.

Hi, Good morning, Rommel I I think I understand your question. So you know we have an ongoing cost savings program.

And these are initiatives are generating opportunities there you know coming in.

You know every week from our from our teams and so they're being implemented as a as we receive them at.

At the same time, you know we are shutting down our Mexico operation. So we're incurring the cost of carry of the facility. We're incurring severance cost as we reduce the the payroll there so and both of these things will continue.

Through into the third quarter and to the cost savings most of those will be you know continue to develop and will benefit US Q3, Q4 and into 'twenty 'twenty four.

Yes, that's true.

Yeah, No that's very helpful. Maybe.

Maybe just as a follow up how how should we think about the inventory levels. Now I know you were trying to build some safety stock.

As you are shutting off for us but.

Just how should we think about where that number.

In terms of benchmarking should be at the end of third quarter and fourth quarter relative to where it was in second quarter sure sure. Yeah of course, where we're looking at inventory on two levels, both at our customers and end up on ours, but.

We've made great progress so far this year, we anticipate further progress in the second half of the year, what we're seeing with our customers is a reduction in inventories are coming down they still need to come down further in certain categories.

But what I've observed is that our customers are more conservative than they have been and so they're probably going to carry less inventory, perhaps maybe even though they need going into the holiday season and into 2024. So.

We're monitoring that we're seeing.

Improvement.

But you know as to where how low it goes that that remains to be seen in certain categories. Like pickle ball inventories are short you know where we're chasing to keep up with these these hot new panels that we've just introduced.

Great. Okay, I'll jump back in queue. Thank you very much.

Thank you once again, if you'd like to ask a question. Please press star one on your telephone keypad for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.

One moment, please poll for more questions.

Our next question is a follow up from Rommel to nosy out with Aegis capital. Please proceed with your question.

Oh, great. Okay. Thanks, I'll, just ask one more if I could yeah.

So when when supply chain was kind of turning against the industry last year and the year before that.

Looking to engineer products, a little bit differently to drive additional cost savings I Wonder if you could just update us on the progress you've made there to what extent that's contributing to it.

We're stronger margins than what we were looking forward to Q anyway. Thank you.

Yeah.

Yeah sure. We are you know when the containers were $20000 plus.

You know it was imperative to improve the packaging and the way that we ship the product to take less space and get more more items on the container. So we've we've done that what we've seen this that our freight rates ocean freight rates or are.

You know quite low now and so you know what the impact is not as strong as you know from those reengineering efforts, but we are continuing to benefit from those and you know so we were seeing were seeing lower freight rates, we're seeing better efficiency of the container.

We're seeing better currency exchange and we're seeing lower raw material costs. So those are the things Rommel that are contributing to these higher margins and are.

We anticipate those those effects to continue.

Great Alright, thanks very much.

Thank you.

Thank you there are no further questions at this time I'd 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 contact us at IR at escalate and dotcom.

This concludes our call today you may now disconnect.

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