Q4 2023 Escalade Inc Earnings Call
Greetings and welcome to the Escalade fourth quarter and full year 2023 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 is now my pleasure to introduce your host Patrick Griffin Vice President corporate development. Thank you you may begin.
Patrick J. Griffin: Thank you operator on behalf of the entire team at Escalade I'd like to welcome you to our fourth quarter and full year 2023 results conference call.
Patrick J. Griffin: Leading the call with me today are president and CEO Walter Glaser.
Patrick J. Griffin: Stephen Moore, our Chief Financial Officer.
Patrick J. Griffin: 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.
Walter P. Glazer: 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 walk.
Walk: Thank you Patrick and welcome to those joining us on the call.
Walk: Our team delivered a strong finish to the year our performance highlighted by improved gross margins robust cash generation and a significant reduction in leverage we generated $26 million of cash from operations in the fourth quarter, which supported $21 $1 million in debt repayments and a one turn decline in our net leverage.
Walk: Ratio at year end.
Walk: The strong cash generation during the quarter was driven by our continued emphasis on improved working capital efficiency, which included our strategic focus on inventory reduction.
Walk: Well, our inventory reduction initiatives drove substantial cash flow in the quarter. Our margins were pressured as a result of those efforts even so our fourth quarter gross margin still improved by more than 190 basis points versus the prior year fourth quarter due to lower freight costs improved sales mix and price discipline on it.
Walk: In line product assortment.
Walk: Our fourth quarter sales declined by nine 2% versus prior year levels or sales benefited from strong growth in our basketball and indoor games categories.
Walk: Set by softness in most other categories.
Exiting the holiday selling season, we believe channel inventories have declined meaningfully as a retail partner successfully drove product sell through.
Walk: This has helped position us for a solid start to 2024 with most retail inventories in good shape.
Walk: We continue to experience strong momentum in our direct to consumer sales, but non license DTC sales up 39% in the fourth quarter versus the prior year driven by growth across most of our product lines.
Walk: Looking ahead, we continue to closely monitor the relative health of household balance sheets, and planting conditions and consumer discretionary spending.
In consumer behavior has pressured discretionary spending in most of our categories. We expect consumer demand to remain relatively soft as these trends continue into 2024.
Walk: Operationally, we realized our goal of reducing costs by $2 million annually as of the end of the fourth quarter.
Walk: These cost reductions are comprised of lower inventory handling and storage costs lower freight costs and operational improvements. We also focused on reducing our fixed and variable operating expenses, which resulted in a 4% reduction in our SG&A expenses during the fourth quarter of 2023.
In combination these actions have positioned us to improve operating leverage and expand gross margins as we move through 'twenty 'twenty four.
Walk: The planned divestiture of our Rosarito, Mexico operations continues to progress as we transition our manufacturing and warehousing and knows the read out at your other facilities in the fourth quarter and reduced operating expenses. We also continue to actively market the facility to prospective buyers.
Walk: While we have successfully reduced our inventory to our goal of less than $100 million at the end of 2023 we still see an opportunity for further inventory reduction as we move through 'twenty 'twenty, four, particularly in our billiards and water sports categories.
Walk: That said, we don't expect these efforts to have the same unfavorable impact on margins.
Walk: <unk> had in the fourth quarter of 2020 three.
Walk: Given the more normalized channel inventory levels to key demand and variable for 'twenty 'twenty four will be the level of consumer spending in our categories.
Walk: Strategically.
Walk: Two investing in innovative product development to build market, leading positions in key growth categories and best position our portfolio for above market growth as we move through the economic cycle.
Walk: As we continue to navigate the current demand environment, we're prioritizing a lean cost structure and further fortifying our balance sheet.
Walk: Just as we have successfully reduced our fixed cost through the year, we also repaid more than $44 million in debt during 2023.
Walk: Cash conversion during the fourth quarter exceeded 100% for the second straight quarter, primarily due to a $12 8 million a reduction in our inventory and a $13 4 million dollar reduction in accounts receivable.
Walk: The 'twenty 'twenty four we will remain focused on maximizing cash generation and repaying our higher interest variable rate debt.
Walk: At the end of the fourth quarter, our net debt leverage was two two times, which is within our target range of one five to two five times.
We believe our diverse portfolio of products continued focus on operational excellence and cost discipline together with a well capitalized balance sheet position us to successfully navigate the transition period for the consumer while continuing to build market leading positions within our established portfolio of indoor and outdoor recreation brands.
Walk: Our team has performed exceptionally well during a period of soft consumer spending on goods positioning us to capitalize on the broader demand recovery.
We believe that our collective focus on cost management and working capital efficiency will support further debt repayment over the coming year.
With channel inventories clearing and consumer demand poised to reaccelerate over time I remain upbeat concerning the outlook for our business and opportunities for value creation in the years ahead.
In the interim we will continue to focus on creating exceptional consumer experiences that build brand loyalty, all while creating long term shareholder value.
We look forward to updating you with our progress next quarter.
Walk: I'll turn the call over to Steven for his prepared remarks. Thank you all for the three months ended December 31, 2023, that's why I reported net income of $2 $9 million or 21 cents per diluted share on net sales of $65 $5 million.
Steven: For the fourth quarter. The company reported gross margins of 24, 3% compared to 22, 4% in the prior year period. The 192 basis point improvement was primarily the result of more favorable product sales mix lower freight costs reduced inventory handling expenses and operating expense reductions, partially offset by the impact of our <unk>.
Steven: Tori reduction initiative and under absorbed fixed costs associated with our facility in Mexico.
Steven: Selling general and administrative expenses during the fourth quarter decreased by 4% compared to the prior year period to $10 $4 million as a percentage of net sales SG&A increased 80 basis points year over year to 15, 8% in the fourth quarter of 2023 compared to 15% in the fourth quarter of 2022.
Steven: The decrease in SG&A expense year over year was a result of overhead cost reductions and lower variable spending including incentive compensation.
Steven: Earnings before interest taxes, depreciation and amortization increased by <unk> $6 million to $6 $4 million in the fourth quarter of 2023 versus $5 $8 million in the prior year period.
Steven: Total cash provided by operations for the fourth quarter of 2023 was $26 million for the quarter compared to $14 $3 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 inventories and accounts payable through the fourth quarter of 2023.
Steven: For the full year capital expenditures were similar to the prior year.
As of December 31st 2023, the company had total cash and equivalents of $16000 together with $66 $8 million of availability on our senior secured revolving credit facility maturing in 2027.
Steven: At the end of the fourth quarter of 2023 net debt outstanding and our total debt less cash was 2.2 times trailing 12 month EBITDA.
Steven: As Walt mentioned earlier, we repaid $21 $1 million of debt during the fourth quarter of 2023, bringing our total debt repayment for the full year 2000 $23 million to $44 million.
Steven: As of December 31st 2023, we had $50 $9 million of total debt outstanding, including $18 $2 million of high insurance variable rate debt.
We will continue to prioritize the repayment of this variable rate debt during 2024, while managing our total net leverage within our long term target range of one five times to two five times EBITDA.
Steven: For the full year of 2023, our total net sales were $263 $6 million, a decrease of 16% compared to the full year 2022.
Steven: Our total gross margin for the year was 23, 4% compared to 23, 5% for the full year 2022.
Steven: Selling general and administrative expense was $41.5 million in 2000, 2030, or 15, 7% of net sales compared to $44.8 million or 14, 3% of net sales in 2022 three.
Steven: The $3 $3 million decrease in our SG&A expenses. During 2023 reflects our efforts to intentionally manage our fixed and variable costs during a period of softening consumer demand.
Steven: As we disclosed in early March our public accounting firm for a us L. L. P has identified certain material weaknesses in our internal financial reporting controls specifically as it relates to our information technology general controls controls over the year end closing process.
Steven: Occupancy patient and design controls related financial statement accounting assertion in the monitoring of the company's internal control framework.
Steven: There are several key takeaways from this disclosure are worth noting.
Steven: First and most importantly, these material weaknesses did not impact the accuracy of our historical consolidated financial statement.
Steven: These material weaknesses did not impact fourth the ability to issue an opinion on the consolidated financial statements for the 2000 2030 10-K.
Third we intend to take decisive remedial action as we continue to develop strong internal controls across the organization.
Steven: Our entire management team intends to resolve this process in a timely and compliant manner and expects the remedial process to conclude this year.
Steven: One last important thing to remember effective on January one 2023 we transitioned to a conventional 12 month reporting calendar.
Steven: There was a relatively minimal impact on our results for the fourth quarter. Because there were 92 operating days in the fourth quarter of 2023 as opposed to 91 in the prior year period for the full year. Our 2023 results now reflect a normal 365 operating days compared to 371 operating days during 2022 as.
Steven: As we move into 2020 four the year over year comparability of our results will no longer be impacted by this change.
None: With that operator, we will open the call for questions.
None: Thank you, we'll now conduct a question and answer session.
None: So you would like to ask a question. Please press star one on your telephone keypad.
None: 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.
None: One moment, please while we poll for questions.
None: Our first question comes from Rommel Dionisio with Aegis Capital Corp. Please state your question.
Rommel Tolentino Dionisio: Hi, good morning, Thanks for taking my question.
Rommel Tolentino Dionisio: Just wanted to ask about just.
Rommel Tolentino Dionisio: Retail inventory situation I think you mentioned that retail inventories have come down or we used to a point now where solid equal sell through or are we still maybe a few months or a couple of quarters away from that thanks very much.
None: Hey, good morning, Rommel and thank you for your question.
None: We're involved in a lot of different categories, and I would say that for the most part.
None: Retail inventories are balanced and in good shape.
None: There are a couple of categories, where are there still some excess inventory in the system and and actually there are a few areas where retail inventories are sort of below normal. So yeah. I guess the answer to your question overall I would say that retail inventories are pretty much in balance and a P O.
None: S should Jenna.
None: Generally reflect you know.
None: The level of factory sales that we're seeing.
None: Okay, and maybe a follow up to that.
None: It's a little towards normalized or you see any sort of moderation in the competitive promotional environment or what was that.
Obviously, it's been.
It was the factor in that as well I Wonder if you could just comment on the competitive promotions across categories. Thanks.
None: Sure you know once again, you know it depends on the category I would say that you know in certain.
High growth categories, we're seeing just a tremendous amount of promotional activity.
None: A lot of money being spent on you know all sorts of programs.
None: Grams.
None: You know we will compete to maintain our.
None: Our market positions, but.
I'd say in certain categories.
None: Been quite strong.
None: And others.
No no real change.
None: Okay, maybe one last follow up question, if I could financial controls.
Literature in the prepared comments, well there'd be a meaningful cost impact you would expect in 2024 is it more just maybe analogy different allocation of.
None: And at current expenditures thanks.
None: Sure Yeah, Rommel Yeah, we do expect that we're budgeting for some higher audit cost and some higher.
Rommel Tolentino Dionisio: You know cost in our I T systems, and you know various controls however.
None: However, you know.
None: That doesn't we don't think it's significant enough to change our outlook.
None: You know we are cautious about the consumer or cautious regarding top line sales, but we do believe we have substantial margin enhancement opportunities.
None: Particularly relative to 2023, when we had some unusual cost around.
None: Storage inventory handling and so forth and then also because I think we alluded to you know.
None: As we were aggressively reducing our inventory and in some cases, we here we're running our facilities you know below optimal levels, which you know that impacts margins are somewhat.
None: And then also we did and get them to do.
None: Do some discounting and some areas.
None: Areas, where we had some excess and some you know inventory that was moving towards obsolete I wouldn't say it was obsolete, but it was you know things that we wanted to to move and so we were willing to discount thousands that loves that would've been lower margin. So.
None:
None: I guess the message I'm trying understand is that.
None: We're cautious about the top line, but they feel good about the margin opportunities.
None: Great. Thanks, so much for taking my questions.
None: Thank you and there are no further questions at this time I'll hand, the floor back to Patrick Griffin for closing remarks.
Patrick J. Griffin: 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 Escalade, Inc. Dot Com that concludes our call today you may now disconnect.
Thank you all parties may disconnect.