Q1 2024 Escalade Inc Earnings Call
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Operator: Good day, and welcome to the Escalade First Quarter 2024 Results Conference Call. All participants are in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions; to ask a question, you may press the star and one on your telephone keypad. To withdraw your question, please press star then 2. Please note that this event is being recorded. I would now like to turn the conference over to Patrick Griffin, Vice President of Corporate Development and Investor Relations. Please go ahead.
Good day and welcome to the first quarter 'twenty 'twenty four results conference call.
Operator: All participants are in listen only mode.
Operator: Should you need assistance please signal.
Operator: All of them specialist by pressing the star he followed by zero.
Operator: After todays presentation, there will be an opportunity to ask questions.
Operator: To ask a question you May press Star then one on your telephone keypad.
Operator: To withdraw your question. Please press Star then two.
Operator: Please note this event is being recorded.
Operator: I would now like to turn the conference over to Patrick Griffin, Vice President Corporate development and Investor Relations. Please go ahead.
Patrick J. Griffin: Thank you, Operator. On behalf of the entire team at Escalade, I'd like to welcome you to our first quarter 2024 results conference call. Leading the call with me today are President and CEO Walt Glazer and Stephen Wawrin, our Chief Financial Officer. Today's discussion includes four 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 those described in our periodic reports filed with the SEC.
Patrick J. Griffin: Operator on behalf of the entire team at escalated I'd like to welcome you to our first quarter 2024 results conference call, leading the call with me today are president and CEO, Rob Glaser, and Stephen Warren, Our Chief Financial Officer.
Patrick J. Griffin: There is discussion contains forward looking statements about future business and financial expectations.
Patrick J. Griffin: 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.
Patrick J. Griffin: Except as required by law, we undertake no obligation to update our forward-looking statement. 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.
Patrick J. Griffin: Except as required by law, we undertake no obligation to update our forward looking statements.
Walt: Inclusion of our prepared remarks, we will open the line for questions.
Patrick J. Griffin: With that I would like to turn the call over to Walt.
Walter P. Glazer: Thank you, Patrick, and welcome to those joining us on the call today. Our first quarter results represent an encouraging start to the year, highlighted by strong gross margin and profitability improvement, supported by normalized operating leverage and stabilization in demand for our product assortment. Our first quarter gross margin reached 25%, an improvement of 560 basis points compared to the prior year and the highest level since the second quarter of 2022. Our first quarter margin profile reflects a normalization in business conditions as we worked through numerous cost headwinds during 2023, including heightened inventory handling costs, shutdown costs in Rosarito, Mexico, and underutilization of our facilities in the U.S. as we slowed production to reduce inventory.
Walt: Thank you Patrick and welcome to those joining us on the call today.
Walter P. Glazer: Our first quarter results represent an encouraging start to the year highlighted by strong gross margin and profitability improvement supported by normalized operating leverage and stabilization in demand for our product assortment.
Walter P. Glazer: Our first quarter gross margin reached 25% an improvement of 560 basis points compared to the prior year and the highest level since the second quarter of 2022.
Walter P. Glazer: Our first quarter margin profile reflects a normalization of business conditions as we worked through numerous cost headwinds during 2023, including heightened inventory handling cost shutdown costs in Rosarito, Mexico, and Underutilization of our facilities in the U S. As we slowed production to reduce inventory.
Walter P. Glazer: We continued to progress with our plans to divest our Rosarito assets and took further steps to reduce fixed costs at that facility during the quarter. We continue to tightly control our expenses there as we work toward divesting the assets.
Walter P. Glazer: We continue to progress with our plans to divest our reservoir Doe assets and took further steps to reduce fixed cost of that facility during the quarter.
Walter P. Glazer: We continue to tightly control our expenses there as we work toward divesting the assets.
Walter P. Glazer: Looking forward, we remain committed to maximizing our return on assets through optimizing our asset base and cost structure, which we believe will position us to enhance our long-term profitability. First quarter net sales increased to 0.7% as consumer demand for our products stabilized. Importantly, we saw a more normal seasonal sales mix during the quarter, and sales of our basketball, table tennis, outdoor games, and archery categories grew year over year. As I mentioned on our last call, our retail partners successfully reduced their inventory levels coming into 2024, so we now believe most channel inventories of our products are relatively light.
Walter P. Glazer: Looking forward, we remain committed to maximizing our return on assets through optimizing our asset base cost structure, which we believe will position us to enhance our long term profitability.
Walter P. Glazer: First quarter net sales increases, 0.7%, that's consumer demand for our products stabilized.
Walter P. Glazer: Importantly, we saw a more normal seasonal sales mix during the quarter.
Walter P. Glazer: Sales of our basketball table tennis outdoor games and archery categories grew year over year.
Walter P. Glazer: As I mentioned on our last call our retail partners successfully reduced their inventory levels coming into 2024. So we now believe most channel inventories of our products are relatively light.
Walter P. Glazer: Our online sales growth remains a key area of opportunity, with our direct-to-consumer, or DTC, sales up 28% on a year-over-year basis in the first quarter. Looking ahead, we continue to closely monitor the health of the consumer.
Walter P. Glazer: Our online sales growth remains a key area of opportunity for us with our direct to consumer or D. T. C sales up 28% on a year over year basis in the first quarter.
Walter P. Glazer: Looking ahead, we continue to closely monitor the health of the consumer are U S.
Walter P. Glazer: While U.S. consumer spending will likely be softer this year in our categories, we believe that our brands position us among a higher-income, more durable segment of consumers who can maintain a base level of spending. As overall demand and gross margins are normalizing, so too is the seasonality of our operating cash generation. During the first quarter, we generated a modest amount of cash from operations as our inventories and accounts receivable both grew late in the quarter ahead of the spring selling season, while inventory levels did increase on a sequential basis.
Walter P. Glazer: [noise] tumor spending will likely be softer this year in our categories. We believe that our brands position us among the higher income more durable segment of consumers, who can maintain a base level of spending.
Walter P. Glazer: As overall demand the gross margins are normalizing so too is the seasonality of our operating cash generation.
Walter P. Glazer: During the first quarter, we generated a modest amount of cash from operations as our inventories and accounts receivable. Both grew late in the quarter ahead of the spring selling season.
Walter P. Glazer: While inventory levels did increase on a sequential basis, we still expect to reduce our inventories as we move through 2024.
Walter P. Glazer: We still expect to reduce our inventories as we move through 2024. When combined with our improved overall operating leverage, we expect to generate ample cash flow this year. As before, we continue to prioritize the repayment of our variable rate debt. At the end of the first quarter, our net debt leverage was 2.0 times EBITDA, which was within our target long-term range of 1.5 to 2.5%. We believe that 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 a period of soft consumer demand while continuing to build market-leading positions with our established portfolio of indoor and outdoor recreational brands.
Walter P. Glazer: When combined with our improved overall operating leverage we expect to generate ample cash flow this year.
Walter P. Glazer: As before we continue to prioritize the repayment of our variable rate debt at the end of the first quarter. Our net debt leverage was two point times, EBITDA, which was within our target long term range of one five to two five times.
Walter P. Glazer: We believe that 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 a period of soft consumer demand, while continuing to build market leading positions with our established portfolio of indoor and outdoor recreational brands.
Walter P. Glazer: In the interim, 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 on all our progress next quarter. With that, I'll turn the call over to Stephen for his prepared remarks.
Walter P. Glazer: In the interim we will continue to focus on creating exceptional consumer experiences they build brand loyalty, all while creating long term shareholder value.
Stephen: We look forward to updating you with our progress next quarter.
Stephen: With that I'll turn the call over to Steven for his prepared remarks.
Stephen Ross Wawrin: Thank you all. For the three months ended March 31st, 2024, Escalade reported net income of $1.8 million, or 13 cents per diluted share on net sales of $57.3 million. For the first quarter, the company reported gross margins of 25% compared to 19.4% in the prior year period. The 560 basis point improvement was primarily the result of more favorable product sales. Lower freight calls, reduced inventory handling expenses, and a reduction in fixed costs associated with our facility in Mexico.
Stephen: Thank you all for the three months ended March 31, 2024, escalate reported net income of $1.8 million or 13 cents per diluted share on net sales of $57 $3 million for.
Stephen Ross Wawrin: For the first quarter the company reported gross margins of 25% compared to 19, 4% in the prior year period.
Stephen Ross Wawrin: 560 basis point improvement was primarily the result of more favorable product sales mix lower freight costs.
Stephen Ross Wawrin: Reduced inventory handling expenses and a reduction in fixed costs associated with our facility in Mexico.
Stephen Ross Wawrin: Selling general and administrative expenses during the first quarter increased by 4% compared to the prior year period to $10.7 million. As a percentage of net sales, SG&A increased by 60 basis points year over year to 18.7% in the first quarter of 2024 compared to 18.1% in the first quarter of 2023. The year-over-year increase was driven by higher professional service expenses and normalized incentive compensation expenses partially offset by lower marketing.
Stephen Ross Wawrin: Selling general and administrative expenses during the first quarter increased by 4% compared to the prior year period to $10 $7 million.
Stephen Ross Wawrin: As a percentage of net sales SG&A increased by 60 basis points year over year to 18, 7% in the first quarter of 'twenty 'twenty four compared to 18, 1% in the first quarter of 2023.
Stephen Ross Wawrin: The year over year increase was driven by higher professional service expenses and normalized incentive compensation expenses, partially offset by lower marketing expenses.
Stephen Ross Wawrin: Earnings before interest, taxes, depreciation, and amortization increased by $2.8 million to $4.4 million in the first quarter of 2024 versus $1.6 million in the prior year period. However, total cash provided by operations for the first quarter of 2024 was $7,000 for the quarter, compared to $4.5 million in the prior year period. The reduction in cash flow from operations primarily reflects a decrease in cash flow generated from net working capital.
Stephen Ross Wawrin: Earnings before interest taxes, depreciation and amortization increased by $2 8 million to $4 $4 million in the first quarter of 'twenty 'twenty four versus $1.6 million in the prior year period.
Stephen Ross Wawrin: Total cash provided by operations for the first quarter of 'twenty 'twenty, four with $7000 for the quarter compared to $4 $5 million in the prior year period. The reduction in cash flow from operations, primarily reflects a decrease in cash flow generated from net working capital due to a normal seasonal increase in inventories and accounts receivable ahead of the spring selling season.
Stephen Ross Wawrin: Due to a normal seasonal increase in inventories and accounts receivable ahead of the spring selling season during the first quarter of 2024, which was not reflected in the prior year period due to our inventory reduction this year, as of March 31, 2024, the company had total cash in equivalence of $283,000, together with $62.4 million of availability on our Senior Secured Revolving Credit Facility maturing in 2027. At the end of the first quarter of 2024, net debt outstanding, or total debt plus cash, was two times trailing 12-month EBITDA.
Stephen Ross Wawrin: During the first quarter of 'twenty, 'twenty, four which was not reflected in the prior year period due to our inventory reduction initiatives as.
Stephen Ross Wawrin: As of March 31, 2024, the company had total cash and equivalents of $283000 together was $62 $4 million of availability on our senior secured revolving credit facility maturing in 2027 at the end of the first quarter of 'twenty 'twenty four net debt outstanding or total debt less cash was two times trailing 12.
Stephen Ross Wawrin: Month EBITDA.
Stephen Ross Wawrin: As of March 31, 2024, we had $53.5 million of total debt outstanding, including $22.6 million of high-interest variable rate debt. We 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 1.5 times to 2.5 times even. As discussed in our prior call, we are focused on resolving several material weaknesses in our internal controls over financial reporting, as well as developing strong internal controls in a timely and compliant manner.
Stephen Ross Wawrin: As of March 31, 2024, we had $53 $5 million of total debt outstanding, including $22 $6 million of high interest variable rate debt.
Stephen Ross Wawrin: We continue to prioritize the repayment of this variable rate debt during 2024, while managing our total net leverage within our long term targeted range of one five times to two five times EBITDA.
Stephen Ross Wawrin: As discussed in our prior call. We are focused on resolving several material weaknesses in our internal controls over financial reporting as well as developing strong internal controls in a timely and compliant manner.
Stephen Ross Wawrin: To that end, we engaged a reputable consulting firm to assist us with our remediation initiative and have started the process. We expect to conclude our remediation this year. With that, Operator, we will open the call to questions.
Stephen Ross Wawrin: To that end, we engaged a reputable consulting firm to assist us with our remediation initiative and have started the process. We expect to conclude our remediation this year with.
Speaker Change: With that operator, we will open the call for questions.
Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star 1 and 2. Our first question today comes from Rommel Dionisio with Aegis Capital. Please go ahead.
Speaker Change: Thank you well now begin the question and answer session.
Rommel Tolentino Dionisio: To ask a question you May press Star then one on your telephone keypad.
Rommel Tolentino Dionisio: If you are using a speaker phone we'd ask you. Please pickup your handset before pressing the keys.
Rommel Tolentino Dionisio: To withdraw your question. Please press Star then two.
Operator: Our first question today comes from Rommel Dionisio with Aegis capital. Please go ahead.
Rommel Tolentino Dionisio: Good morning. Thanks for taking my question and for the really nice progress on the gross margins. You know, you guys have been generating cash flow and paying down debt here successfully over the last few quarters. I wonder if you could just talk about further use of cash or free cash flow going forward. I know you talked about, you know, continued debt repayments, but in this environment, I imagine there are some acquisition targets you're looking at. I wonder if you could just show this. There's some of your strategic thinking without asking for obvious specifics on potential acquisitions, just how you guys think about the use of cash going forward. Thanks.
Rommel Tolentino Dionisio: Hi, Good morning, Thanks for taking my question and a really nice progress on the gross profit the gross margin.
Rommel Tolentino Dionisio: You guys have been generating cash flow and paying down debt here successfully over the last few quarters I Wonder if you could just talk about you know further uses of cash.
Rommel Tolentino Dionisio: Free cash flow going Florida, I know you talked about continued debt repayments, but in this environment I imagine there's some acquisition targets, you're looking at and I Wonder if you could just show that there's something strategic.
Rommel Tolentino Dionisio: He was asking for specifics on potential acquisitions.
Rommel Tolentino Dionisio: How you guys think about use of cash going forward. Thanks.
Walter P. Glazer: Yeah, good morning, Rommel. And thanks for your question. Yes, as you point out, we've been focused on paying down our debt. And, you know, for the near term, we will continue to do that. We have a nice piece of low-cost fixed-rate debt. It's about 30 million, and the rest is, you know, higher cost variable rate debt.
Speaker Change: Yeah, Good morning, Rommel and thanks for your question, Yes, as you pointed out we've been focus on paying down our debt and for the near term. We will continue to do that we have.
Walter P. Glazer: A nice piece of low cost fixed rate debt, that's about $30 million and the rest is a you know has a higher cost variable rate debt. So our focus right now is to pay down that higher cost piece of it to reduce our interest expense.
Walter P. Glazer: So our focus right now is to pay down that higher cost piece to reduce our interest expense. As you know, we've been acquisitive over the years, and we continue to look at various opportunities. I would say that we feel really good about our portfolio today. We don't feel like we have to do anything, but, of course, we're certainly open to looking at any opportunities. We would balance the opportunity of any acquisition against the continued debt repayments. And as you know, we've done share repurchases in the past as well.
Walter P. Glazer: As you know we've been acquisitive over the years and we continue to look at various opportunities I would say that we feel really good with our portfolio. Today, we don't feel like we have to do anything but of course, we're certainly open to look at any opportunities and.
Walter P. Glazer: You know, we would we would balance the opportunity of any acquisition against the continued debt repayments and you know as you know we've done share repurchases in the past as well.
Walter P. Glazer: Okay, and maybe just to follow up, could you just give us an update on the supply chain with regard to, you know, the production you have in Mexico, has that all been shifted over at this point, and where that, the divestiture stands? Thanks.
Speaker Change: Okay, and maybe just a follow up could you just give us an update on the supply chain with regards to our you know the production you have Mexico has that all been shifted over at this point and world that are with it.
Walter P. Glazer: The divestiture.
Walter P. Glazer: Yeah.
Walter P. Glazer: Sure Rommel, so the bigger story in the supply chain is that things are much, much better, so you didn't really ask about China and Ocean Freight, but our costs are much, much lower than they were a couple of years ago. So, we feel good about that. We have moved all of our operations from Mexico to our U.S.-based facilities. We are in the process of selling the property and engaged with a number of potential buyers, but we have nothing to report at this time.
Walter P. Glazer: Sure.
Walter P. Glazer: So you know the bigger story on the supply chain is that things are much much better so.
Walter P. Glazer: You didn't really.
Speaker Change: Ask about the China.
Walter P. Glazer: Situation in ocean freight, but our costs are much much lower than they were a couple of years ago. So we feel we feel good about that.
Walter P. Glazer: We have moved all of our operations from Mexico.
Walter P. Glazer: To our U S based facilities and.
Walter P. Glazer: We are in the process of selling the property and engaged with a number of potential buyers, but nothing to report at this time.
Walter P. Glazer: Uh huh.
Rommel Tolentino Dionisio: Great. Thanks very much. It's very helpful.
Speaker Change: Great. Thanks, very much it's very helpful.
Rommel Tolentino Dionisio: Yeah.
Operator: And that concludes our question and answer session. I'd like to turn the conference back over to Patrick Griffin for closing remarks.
Speaker Change: Thank you.
Rommel Tolentino Dionisio: Question and answer session.
Operator: The conference back over to Patrick Griffin for closing remarks.
Patrick J. Griffin: 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.escaladeinc.com.
Patrick J. Griffin: Once again, thank you for your interest in escalated and joining our call should you have any questions. Please feel free to contact us at IR Escalate, Inc. Dot com and a member of our team will follow up with you.
Operator: And a member of our team will follow up with you. This concludes our call today. You may now disconnect.
Patrick J. Griffin: This concludes our call today you may now disconnect.
Operator: Yeah.
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Operator: Okay.