Q3 2023 Escalade Inc Earnings Call

Good morning, and welcome to the Escalade third quarter 2023 results conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions.

A question you May Press Star then one on your Touchtone phone to withdraw from the question queue. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Patrick Griffin VP Corporate development. Please go ahead.

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

We begin the call with me today are president and CEO walk laser and Stephen Warren Our 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 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'd like to turn the call over to al.

Thank you Patrick and welcome to those joining us on the call. Our teams delivered strong third quarter results highlighted by significant year over year growth in gross margins operating income and operating cash flow, resulting in nearly $12 million of debt reduction in the quarter.

We achieved these results as our team continued to execute diligently on maximizing margins and reducing expenses.

Eroding consumer confidence and ongoing softness in consumer discretionary spending for most goods.

Sales declined versus prior year levels.

In line with the volume trend, we experienced in the second quarter.

As a reminder, our third quarter results benefited from eight additional days within our new reporting cycle as we move to our traditional calendar reporting framework on January 1st 2023, excluding.

The impact of the change in our reporting calendar sales declined 11, 6% on a year over year basis in the third quarter compared to 28, 4% sales decline in the first quarter, which followed a 9.5, which was followed by a nine 5% sales decline in the second quarter.

In recent months, we've seen an encouraging stabilization within our mass merchant channel, which includes our big box and sporting goods retailers. It's a destocking trend evidenced earlier this year lessons for some of our categories improve customer orders for our basketball and pick up all product categories highlighted our third quarter sales.

Furthermore, we continued to see strong growth in direct to consumer sales with non licensed DTC sales up more than 50% year to date driven by a combination of effective marketing campaigns have transitioned to the shopify platform and recent new product launches.

We believe our DTC sales growth indicates that consumer demand remains reasonably healthy for our brand portfolio amid a challenging macroeconomic and retail environment.

We are closely monitoring eroding consumer confidence considering higher interest rates political turmoil and persistent inflation.

Well, we have seen wholesale inventories begin to normalize in several categories.

Retail sales of recreation products remained generally soft.

Believe our retail partners will continue to closely manage their inventory levels and be more promotion in this uncertain environment.

It is incumbent upon us to continue driving innovation and consumer interest across our brand portfolio.

We remain focused on strengthening our market, leading brands and positioning our company for long term success.

Operationally, we continue to see further normalization of the supply chain, which has resulted in lower freight costs and reduced inventory handling and storage expenses lag.

Last year these higher input cost impacted our gross margins.

As we sell through this higher cost inventory. It is replaced with lower cost inventory that generates higher margins. We expect this favorable restocking cycle to continue into next year for most of our categories.

Benefit of lower input cost will compare when combined with a more favorable sales mix drove more than 650 basis points year over year gross margin improvement during the third quarter.

Looking ahead, we believe these favorable input costs combined with lower fixed costs will position us to expand margins in 2024.

As we highlighted last quarter, our team has targeted approximately $2 million in fixed cost savings that we are on track to achieve by year end.

Wind down expenses and estimated under absorption of our Mexico operations, which we are divesting represented a 110 basis point negative impact to EBITDA margin in the third quarter and 140 basis points year to date.

In combination, we see multiple catalysts for improved operating leverage which leads us to believe that our gross margins may further expand in 2024.

As previously mentioned, we have seen the inventory destocking trends normalize in some categories. We still expect some destocking to continue into the next year in certain categories, such as archery water sports and the game room or wholesale inventories remain high.

We also expect that our sales trend from the second and third quarters will continue into the fourth quarter, excluding the impacts of the company's reporting calendar changes.

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

We are very pleased with the launch of our American Cornwell League licensed cornhole boards in bags with our exclusive launch partner Academy sports and outdoors.

We are expanding our ACL sales to several other retail and E Commerce partners base.

Based on strong consumer demand, we are growing our ACL assortment to include two additional pro and comp bags several color ways as well as a new elite corn on board.

We recently launched several new bear archery bows, including a new bear persist compound bow, which has innovative features that create less vibration and noise, our new Behr Alaskan next tea ready to hunt compound bow features an integrated arrow arrest and site, bringing tremendous combination of features and value to the market.

Our little bear used recurrent though it was a compelling new offering hand crafted from April in our Gainesville, Florida manufacturing facility.

We also successfully launched a new bear vertical, though and our ongoing collaboration with the hunting public which is a team of archery influencers with over 500000 subscribers for their videos showcasing tips and strategies for hunters.

The team from hunting public built their dream bow and included several features from some of their favorite bear Boes of the past as well as some new innovations.

The latest results of our collaboration is the bare adapt plus com.

Compound about which features exceptional performance comfort and durability.

Sales of this new belt have exceeded our expectations.

As we navigate this uncertain demand environment, we know the importance of maintaining an appropriate cost structure, a fortified balance sheet.

We continue to focus on optimizing our cost structure and maximizing cash flow to further reduce debt.

Cash conversion during the third quarter exceeded 100% during what is normally a quarter, where we see working capital use.

Strong cash generation in the third quarter was primarily due to a $6 4 million dollar reduction in our inventory and improved working capital management.

As we continue through the end of the year, we are targeting inventory below $100 million, which will further drive cash generation.

We are focused on continuing to utilize free cash flow to reduce our debt.

At the end of the third quarter, our net leverage was three one times EBITDA, we remain committed to further reducing our leverage to our targeted range between one five times to five times EBITDA.

While we have built our businesses over the years with a number of value, creating acquisitions, our current capital allocation priority remains long term debt reduction.

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

I'm proud of the hard work and dedication of our team focusing on disciplined cost management and operational excellence amid this period of challenging demand we.

We will continue to focus on creating exceptional customer experiences and build brand loyalty, all while creating long term shareholder value.

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

That I will turn the call over to Steven for his prepared remarks.

Thank you all for the three months ended September 32023, escalate reported net income of $4 $3 million or 31 cents per diluted share on net sales of $73 $4 million for the third quarter. The company reported gross margins of 24, 7% compared to 18, 2% in the prior year period.

152 basis point improvement was primarily the result of more favorable product sales mix.

Lower inventory storage and handling expenses operating expense reductions, partially offset by the impact of nonrecurring expenses and under absorbed fixed costs associated with our facility in Mexico.

Selling general and administrative expenses increased by 26, 3% compared to the prior year period to $11 $1 million. The increase in SG&A expense year over year was a result of adjustments to accruals for incentive compensation in both the current and prior periods.

In the third quarter of last year lower incentive compensation expense resulted in an SG&A reduction below our normal level.

On our current level of sales and profitability, we expect SG&A, excluding amortization to remain at a normalized level similar to our year to date SG&A percentage of approximately 16%.

Earnings before interest taxes, depreciation and amortization increased by $2 $1 million seven for $9 million in the third quarter of 2023 versus $5 $8 million in the prior year period.

Total cash provided by operations was $14 $8 million for the quarter compared to total cash used in operations of $5 $5 million in the prior year period. The increase in cash flow from operations, primarily reflects cash generated from improvements in working capital as a result of a reduction of inventories through the third quarter of 2023.

Additionally, capital expenditures during the quarter increased modestly year over year, but remained below historical averages.

Average levels as we carefully manage our capital spending.

As of September 32023, the company had total cash and equivalents of $919000.

Together with $47 $5 million of availability on our senior secured revolving credit facility maturing in 2027 at the end of the third quarter of 2023 net debt outstanding and our total debt less cash was 44, one times trailing 12 month EBITDA.

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

As a result, the third quarter of 2023 92 operating days as opposed to the 84 in the prior year period.

This dynamic will have less of an impact on our results for the fourth quarter.

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

We will now begin the question and answer session clocked. A question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

The first question is from Rommel Dionisio with agents. Please go ahead.

Good morning, Thank you.

A question on gross margins, obviously, you guys highlighted the lower input costs.

And others I Wonder if you could talk about labor or are you still seeing a bit of cost pressure in that front. Thanks.

Oh, good morning, Rommel I'm we're.

We're seeing certainly less pressure than we saw a year ago and the environment is getting a little bit better.

We're still seeing some upward movement in some areas, but overall I would say, it's much better than it was a year ago.

Okay. Good.

Any update you could provide this fund me out of Brazil and Mexico.

Divestiture.

I can tell you that we're you know are hard at work on getting it done and we're working with a couple of potential buyers.

They're doing their due diligence and we're providing them the information that they need so.

I'm not I can't predict exactly when we would close but I would say we're hard at work.

To bring this to a conclusion.

Okay, and maybe one last one.

Stupid I think you've talked about having less of an impact from the number of days in Q4. It was supposed to quantify exactly what the what the number is.

In terms of days business days for the fourth quarter.

92 versus 91 I believe.

Uh huh.

Fourth quarter fourth quarter.

Fourth quarter Yao. Please just one day difference in the fourth quarter Okay.

Okay.

Thanks very much.

Yeah, we were all trying to find that page, but I I believe so.

One day difference last year, we had 53 weeks. It ended on December 31st you know this year, we're doing that.

Monthly calendar so.

The second and third quarter wasn't what they were the ones, where we had the biggest impact of the change in the number of days fourth quarter it'd be more of an apples to apples.

Okay perfect.

Thank you.

Okay and if you have a question. Please press Star then one.

There are no questions at this time. This concludes our question and answer session Oh I'm sorry.

Rommel has rejoined the queue. Please go ahead.

Oh, Thanks, maybe just one follow up you know given the you know obviously your commentary on.

I.

Lower piece of.

<unk> taken a conservative inventory management on the retail how do you guys think about the pace of new product introductions going into 'twenty 'twenty four.

You want maybe hold back in her first you know until the environment gets better or are you still kind of going forward with the usual piece of new product intros. Thank you.

Yeah Roma.

New product development is a key part of our strategy and we want to keep our product line fresh and exciting for consumers you know I will say that there was a time when we had a lot of inventory and we thought why would we introduce something new that would just you.

You know just cannibalize the old existing inventory, but we've moved through most of that and so are our pace of new product development is a is moving along at pace and we have again as we described in the commentary you know we have a lot going on at bear we have a lot going on in our games areas. So hum.

You know I think you should expect to see a more exciting new product launches in 2024.

Great I appreciate it thank you again.

Hmm.

This concludes our question and answer session I would like to turn the conference back over to Patrick Griffin for 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 escalating dotcom.

This concludes our call today you may now disconnect.

Okay.

Okay.

Operator: Good morning and welcome to the Escalade 3rd quarter 2023 results conference call. All participants will be in within only mode. Should you need assistance, please signal a conference specialist by pressing the star keys followed by Z-Row.

Operator: After today's presentation there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone. To withdraw from the question, please press star then two. Please note this event is being recorded.

Patrick Griffin: I would now like to turn the conference over to Patrick Griffin, VP Corporate Development. Please go ahead. Thank you operator.

Walter Glazer: On behalf of the entire team at Escalade, I'd like to welcome you to our third quarter 2023 results conference call.

Walter Glazer: Leaving the call with me today, our president and CEO, Walter Glazer and Stephen Wawrin, our 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 to the various risks and uncertainties, including the risk describing our periodic reports filed with the SEC.

Walter Glazer: Except is 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'd like to turn the call over to all.

Walter Glazer: Thank you, Patrick and welcome to those joining us on the call. Our team delivered strong third quarter results highlighted by a significant year over year growth and growth margins, operating income and operating cash flow, resulting in nearly $12 million of debt reduction in the quarter. We achieved these results as our team continued to execute diligently on maximizing margins and reducing expenses amid eroding consumer competence and ongoing softness and consumer discretionary spending for most goods.

Walter Glazer: Wales declined versus prior year levels, but we're in line with the volume trend we experienced in the second quarter. As a reminder, our third quarter results benefited from eight additional days within our new reporting cycle as we move to a traditional calendar reporting framework on January 1, 2023. Excluding the impact of the change on our reporting calendar, sales declined 11.6% on a year over year basis in the third quarter, compared to 28.4% sales declined in the first quarter, which followed a 9.5%, which was followed by a 9.5% sales decline in the second quarter.

Walter Glazer: In recent months, we've seen an encouraging stabilization within our mass merchant channel, which includes our big box and sporting goods retailers as the destocking trend evidence earlier this year lessons for some of our categories, improved customer orders for a basketball and pickable product categories highlighted our third quarter sales. Furthermore, we continue to see strong growth and direct to consumer sales with non-licensed DTC sales up more than 50% year to date driven by a combination of effective marketing campaigns, a transition to the Shopify platform in recent new product launches.

Walter Glazer: We believe our DTC sales growth indicates the consumer demand remains reasonably healthy for our brand portfolio amid a challenging macro economic and retail environment. We are closely monitoring and eroding consumer confidence, considering higher interest rates, political turmoil and persistent inflation, while we have seen wholesale inventories begin to normalize in several categories, retail sales are recreation products remain generally soft. We believe our retail partners will continue to closely manage their inventory levels and be more proportional in this uncertain environment.

Walter Glazer: It is incumbent upon us to continue driving innovation and consumer interest across our brand portfolio. We remain focused on strengthening our marketing brands and positioning our company for long-term success, operationally we continue to see further normalization of supply chain which has resulted in lower freight costs and reduced inventory handling and storage expenses. Last year these higher input costs impacted our gross margins. As we sell through this higher cost inventory it is replaced with lower cost inventory that generates higher margins.

Walter Glazer: We expect this favorable restocking cycle to continue into next year for most of our categories. Then a set of lower input costs when compared we combine with a more favorable sales mix drove more than 650 basis points in year over year gross margin improvement during the third quarter. Looking ahead we believe these favorable input costs combined with lower fixed costs will position us to expand margins in 2024. As we highlighted last quarter our team has targeted approximately two million dollars in fixed cost savings that we are on track to achieve by year end.

Walter Glazer: The one down expenses and estimated underabsorption of our Mexico operations which we are divesting represented a 110 basis point negative impact to EBITDA margin in the third quarter and 140 basis points year to date. In combination we see multiple catalysts for improved operating leverage which leads us to believe that our gross margins may further expand into 2024. As previously mentioned we have seen the inventory destocking trends normalize in some categories but we still expect some destocking to continue into the next year in certain categories such as archery, water sports and the game room where whole failimentaries remain high.

Walter Glazer: We also expect that our sales trend from the second and third quarters will continue into the fourth quarter excluding the impacts of the company's reporting calendar changes. Strategically we continue to focus on investing in innovative product development to build market leading positions in key growth categories. We are very pleased with the launch of our American Cornhole League license cornhole boards and bags with our exclusive launch partner academy sports and outdoors. We are expanding our ACL sales to several other retail and e-commerce partners based on strong consumer demand we are growing our ACL assortment to include two additional pro and comp bags in several colorways as well as a new elite Cornhole board.

Walter Glazer: We recently launched several new bear archery boats including the new bear persist compound bow which has innovative features that create less vibration and noise. Our new bear Alaskan XT ready to hunt compound bow features an integrated arrow rest and fight bringing tremendous combination features and value to the market. Our little bear youth recurpo is a compelling new offering he and crafted from maple and our games full floor to manufacturing. Facility. We also successfully launched a new bear vertical bow in our ongoing collaboration with the Hunting Public, which is a team of archery influencers with over 500,000 subscribers for their videos showcasing tips and strategies for hunters.

Walter Glazer: The team from the Hunting Public built their dream bow and included several features from some of their favorite bear bows of the past as well as some new innovations. The latest result of our collaboration is the Bear Adapt Plus. Compound Bow, which features exceptional performance, comfort, and durability. Sales of this new bow have exceeded our expectations. As we navigate this uncertain demand environment, we know the importance of maintaining an appropriate cost structure and a fortified balance sheet.

Walter Glazer: We continue to focus on optimizing our cost structure and maximizing cash flow to further reduce debt. Cash conversion during the third quarter exceeded 100 percent during what is normally a quarter where we see working capital use. Strong cash generation in the third quarter was primarily due to a $6.4 million reduction in our inventory and improved working capital management. As we continue through the end of the year, we are targeting inventory below $100 million, which will further drive cash generation.

Walter Glazer: We are focused on continuing to utilize free cash flow to reduce our debt. At the end of the third quarter, our net leverage was 3.1 times EBITDA. We remain committed to further reducing our leverage to our targeted range between 1.5 times and 2.5 times EBITDA. While we have built our businesses over the years with a number of value-creating acquisitions, our current capital allocation priority remains long-term debt reduction. Along with our focus on lowering that leverage, we continue to tightly control discretionary spending, including capital expenditures.

Walter Glazer: Proud of the hard work and dedication of our team, focusing on discipline cost management and operational excellence amid this period of challenging demand. We will continue to focus on creating exceptional customer experiences that build brand loyalty all while creating long-term shareholder value.

Walter Glazer: We look forward to updating you with our progress next quarter.

Stephen Wawrin: With that, I'll turn the call over to Stephen for his prepared remarks. Thank you, Walt. For the three months ended September 30, 2023, escalated reported net income of $4.3 million or 31 cents for deluded share on net sales of $73.4 million. For the third quarter, the company reported gross margins of 24.7 percent compared to 18.2 percent in the prior year period. The 652 basis point improvement was primarily the result of more favorable product sales mix, lower inventory storage and handling expenses, operating expense reduction, partially offset by the impact of non-recurrent expenses and under absorbed fixed costs associated with our facility in Mexico.

Stephen Wawrin: Selling general and administrative expenses increased by 26.3 percent compared to the prior year period to $11.1 million. Their increase in SG&A expense year over year was a result of adjustment to accruals for incentive compensation in both the current and prior period. In the third quarter of last year, lower incentive compensation expense resulted in an SG&A reduction below our normal level, on our current level of sales and profitability, we expect S.V.N.A., excluding amortization to remain at a normalized level similar to our year-to-date S.V.N.A, percentage of approximately 16%.

Stephen Wawrin: Earnings before interest tax of depreciation and amortization increased by $2.1 million to $7.9 million in the third quarter of 2023 versus $5.8 million in the prior year period. Total cash provided by operations was $14.8 million for the quarter compared to total cash used in operations of $5.5 million in the prior year period. The increase in cash flow from operations primarily reflects cash generated from improvements to working capital as a result of a reduction of inventory through the third quarter of 2023.

Stephen Wawrin: Additionally, capital expenditures during the quarter increased modestly year-over-year, but remain below historical averages, average levels as we carefully manage our capital spending. As of September 30th, 2023, the company had total cash and equivalent of $919,000 together with $47.5 million of availability on our senior security revolving credit facility mature in in 2027. At the end of the third quarter of 2023, net debt outstanding or total debt less cash was $4.1 times traveling 12-month EBITDA.

Stephen Wawrin: One last important thing to remember, effective on January 1st, we transitioned to a conventional 12-month reporting calendar. As a result, the third quarter of 2023 has 92 operating days as opposed to 84 in the prior year period. This dynamic will have less of an impact on our results for the fourth quarter.

Operator: With that operator, we will open the call for questions. We will now begin the question-and-answer session. To ask a question, you may press star-than-one on your touch tone sound. If you are using a speaker phone, please pick up your hands up before pressing the keys. To withdraw from the question, please press star-than-two. At the time, we will pause momentarily to assemble our roster.

Ramo Diamecio: The first question is from Ramo Diamecio with ages. Please go ahead.

Walter Glazer: Good morning. Thank you. A question on the gross margins. I will see you guys highlighted the lower-in-put costs, freight, and others. I wonder if you could talk about labor. Are you still seeing a bit of cost pressure in that front? Thanks.

Walter Glazer: Good morning, Ramo. We are seeing certainly less pressure than we saw a year ago. The environment is getting a little bit better. We are still seeing some upward movements in some areas. But overall, I would say it's much better than it was a year ago. Okay, good.

Walter Glazer: Any update you could provide us on the Mexico Investiture? I can tell you that we're, you know, hard at work on getting it done. And we're working with a couple of potential buyers. They're doing their due diligence. And we're providing them, you know, the information that they need. So I'm not, I can't predict exactly when we will close. But I would say we're hard at work to bring this to a conclusion. Okay.

Ramo Diamecio: And maybe one last one. Steven, I think he talks about having less of an impact from the number of days in Q4. It's also quantified exactly what the number is. .