Q3 2024 Escalade Inc Earnings Call
Good day and welcome to the Escalade third quarter 2024 results conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like.
Speaker Change: To turn the conference over to Mr. Patrick Griffin, Vice President of corporate development. Please go ahead Sir.
Patrick Griffin: Thank you operator on behalf of the entire team at Escalade I'd like to welcome you to our third quarter 2024 results conference call.
Patrick Griffin: Leading the call with me today are president and CEO walk Glaser as Stephen Warren, Our Chief Financial Officer.
Patrick 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.
Patrick Griffin: Sept as required by law, we undertake no obligation to update our forward looking statements.
Patrick Griffin: Inclusive of our prepared remarks, we will open the line for questions.
Speaker Change: With that I would like to turn the call over to Walt.
Walt: Thank you Patrick and welcome to those joining us on the call.
Walt: During the third quarter, we made substantial progress optimizing our asset base and cost structure as we navigate a transitional period in consumer demand.
Walt: Net sales declined seven 7% versus the prior year, we achieved modest gross margin expansion, even while absorbing $1 8 million of nonrecurring business rationalization expense and our cost of goods sold excluding these nonrecurring expenses, our gross margin would've been 27, 4%.
Walt: Representing a 265 basis point improvement over the prior year.
Walt: Our portfolio optimization efforts during the quarter included the sale of our Rosarito, Mexico facility. The cost rationalization that are eagan, Minnesota facility, the wind down of operations in Orlando, Florida, and the consolidation of our high end billiards accessory products into our Bristol, Wisconsin facility.
Walt: Utilization of our operational footprint will largely be complete by year end with the completion of this program, we will reduce our operational footprint by approximately 300000 square feet or 20%.
Walt: The team has done an outstanding job this year re scaling our operations, while still providing ample capacity to support a recovery in consumer demand in.
Walt: In addition, we remain focused on maximizing our cash flow and generated $10 $5 million of cash from operations during the quarter.
Walt: Along with proceeds from the sale of our Rosarito facility, we distributed over $2 million in dividends made capital expenditures to support our operations and repaid nearly $14 million of debt, taking our net leverage ratio to one one times.
Walt: Going forward, we expect these efforts to drive higher gross margins through the end of the year and 2025, despite near term softness in consumer demand.
Walt: As we move into the holiday season, we anticipate a higher level of promotional activity as we believe consumers will be price conscious given the economic environment at.
Walt: At the same time, we anticipate promotional activity will serve to accelerate the inventory destocking efforts already underway at many retailers.
Walt: Despite soft consumer spending for a consumer discretionary goods, we continue to see favorable demand in our archery safety and basketball categories, driven by new product introductions.
Walt: Additionally, our own direct to consumer e-commerce volumes continue to increase up 29% year over year during the quarter.
Walt: We believe consumer loyalty to our market, leading differentiated recreational brands continues to patient position us to deliver above market performance as we move through the next phase of the retail cycle.
Walt: As before we continue to invest in connecting more deeply with consumers through our own e-commerce initiatives marketing programs and corporate partnerships, while continuing to deliver category, leading innovative brands to build loyalty across a diverse base of established and emerging recreational sports.
Walt: Looking ahead, we are encouraged by the federal Reserve's recent monetary easing as well as a resilient job market.
Walt: We continue to closely monitor household balance sheets and consumer sentiment.
Walt: As interest rates likely move lower we expect this will aid our recovery in consumer demand for chicken discretionary recreational goods.
Walt: However, we recognize this cycle will take some time and we do not expect to see materially stronger demand in the near term as we settle into consumer spending patterns more similar to the pre pandemic economy.
Walt: In the meantime, we are committed to improving our financial position through optimizing our cost structure and maximizing our operating leverage these.
Walt: These efforts along with ongoing inventory rationalization will not only position us to navigate the ongoing trough in consumer demand, but also position us for profitable growth and outperformance through the next cycle.
Walt: As we continue to generate strong cash flow. We are prioritizing the continued repayment of our higher cost variable rate debt, which we expect to pay off by the end of the year in.
Walt: In addition, we are continuing to invest in innovation ensuring continued outperformance.
Walt: Yeah.
Walt: A notable example is the bear archery team, which did an amazing job designing manufacturing and marketing a whole new lineup of compound bows saved.
Walt: They've delivered substantial upgrades to five of our top six selling Bose and I brought integrated riser capability to price points never seen before in the industry.
Walt: I'll highlight is the newest version of the adapt though in partnership with the hunting public.
Walt: And Influencer group with online video series and podcast for avid hunters.
Walt: Which has exceeded even our admittedly high expectations.
Walt: We also launched the new Onyx supercell pick about paddle, which introduces cloud control technology to the market to.
Walt: The 22 millimeter proprietary construction of the paddle creates an expansive sweet spot provides outstanding control such empower.
Walt: As recently announced we entered into an exciting new agreement to be the official U S distributor of Adidas fitness accessories.
Walt: The Adidas brand is globally recognized and synonymous with high performance. This new partnership will expand our fitness offering which today includes the step lifeline and U S weight brands.
Walt: Our Adidas fitness accessory offering will be available online and in retail in early 2025.
Walt: Finally during the third quarter, we began consolidation of our queue in case accessories business into the Bristol, Wisconsin headquarters for our Brunswick Billiards group. This allows us to combine dealer shipments Brunswick American heritage Billiards and game room tables, along with a wide range of high quality human case failures accessories.
Walt: Yes.
Walt: Dealers will benefit from the efficiency of the combined shipments further building upon our competitive advantages in this category the.
Walt: The Bristol team did a fantastic job planning and preparing while working hand in hand, with our highly capable Evansville associates to execute this transition which is now complete.
Walt: Our vision is to build and strengthen our brand portfolio centered on helping consumers create great memories, while engaging in healthy activities with their family and friends. 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.
Steven: Thank you all for the three months ended September 32024, escalate reported net income of $5 $7 million or <unk> 40 per diluted share on net sales of $67 $7 million.
Speaker Change: For the third quarter the company reported gross margins of 24, 8% compared to 24, 7% in the prior year period.
Speaker Change: The 10 basis point increase was primarily the result of lower inventory handling costs and a reduction in fixed costs associated with our facility in Mexico.
Speaker Change: Actually offset by lower net sales and a $1.8 million.
Speaker Change: Nonrecurring optimization expenses.
Speaker Change: Selling general and administrative expenses during the third quarter increased by 6% or $6 million compared to the prior year period to $11 $1 million. The third quarter SG&A increase was mainly driven by higher professional fees.
Speaker Change: Earnings before interest taxes, depreciation and amortization increased by $2 million to $9 $9 million in the third quarter of 2024 versus $7 9 million in the prior year period.
Speaker Change: I would also note that in conjunction with the divestiture of our Rosarito, Mexico facility, we recognized a $3 $9 million gain on the sale of assets, which is reflected in our third quarter 2020 for operating income.
Speaker Change: Total cash provided by operations for the third quarter of 2024 was $10 $5 million for the quarter compared to $14 8 million in the prior year period. The decrease in operating cash flows driven by timing of inventory management initiatives in the prior year, which drove strong free cash flow generation in the third quarter of 2023.
Speaker Change: Sure.
Speaker Change: As of September 32024, the company had total cash and equivalents of $426000 at the end of the third quarter of 2024 net debt outstanding our total debt less cash was one one times trailing 12 month EBITDA.
Speaker Change: As of September 32024, we had $29 $5 million of total debt outstanding, including $2 1 million of high interest variable rate debt. We will continue to focus on repaying the remainder of this variable rate debt. This year, while driving our total net leverage below our long term target range of one five times to two five times EBITDA.
Speaker Change: On October 11th we proactively entered into an amendment to our senior secured revolving credit facility, which reduced our borrowing capacity by $15 million or 20%.
Speaker Change: As a result of this amendment, we had total availability of $58 $3 million.
The significant improvement in our working capital position. This past year. We believe this new amendment provides ample availability for our current sales level and for future growth.
Speaker Change: As part of the Amendment, we also exchanged our fixed charge coverage ratio covenant with an interest coverage ratio given us additional operating flexibility with.
Speaker Change: With that operator, we will open the call for questions.
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If you're using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: To withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
Speaker Change: And the first question will come from Rob Mel <unk> with Aegis. Please go ahead.
Speaker Change: Good morning.
Speaker Change: A couple questions on the some of the newer restructuring initiatives.
Speaker Change: Just a question first on the Minnesota.
Speaker Change: Utilization.
Speaker Change: I believe that's water sports dystrophy.
Speaker Change: Distributions. So he is not going to go elsewhere or are you just kind of.
Speaker Change: And maybe turning to the product assortment and Youre able to.
Speaker Change: Generally some coupled with <unk> can you just provide.
Speaker Change: The level of more detail on that please.
Speaker Change: Sure Good morning, Rommel App and thank you for your question.
Speaker Change: So in.
Speaker Change: In Minnesota, and Aegean, we have our water sports business and we've had excess inventory there. So we've reduced our square footage our space. We've also recognized that the.
Speaker Change: The category is temporarily smaller then than it than it was traditionally and so we had to make some tough decisions around staffing.
Speaker Change: Staffing and personnel so.
Speaker Change: Those decisions have been made in the costs had been.
Speaker Change: Cost structure has been corrected and we are prepared to to grow that business when and if the consumer is ready to buy watersports again.
Speaker Change: Okay.
Speaker Change: Switching gears to the Orlando.
Speaker Change: Actually I think you mentioned you want to wind that you're probably going to wind that down by year end.
Speaker Change: So if I remember correctly, that's manufacturing and distribution for cornhole would that be shifted elsewhere or are you thinking maybe.
Speaker Change: John shifting on the business.
Speaker Change: Could you sort of walk us through your thoughts on that thanks sure sure Rommel. Yes, you are correct that was licensed cornhole business and.
Speaker Change: We've done a couple of things one is we're shifting to more of a preprinted important model as opposed to print on demand.
Speaker Change: Orlando So we've made that change and then additionally, we're going to consolidate that inventory into other facilities primarily in Evansville.
Speaker Change: And suddenly in Gainesville, Florida as well so.
Speaker Change: Just.
Once again adjusting the cost structure for the reality of the business today.
Speaker Change: Okay.
Speaker Change: That's great detail. So so there's no there's not.
Speaker Change: Tension.
Speaker Change: Exiting that business or even trigger.
Speaker Change: More cost savings and relocation of the facilities.
Smartphone as well, so I understand that correctly.
Speaker Change: Yes, we're just we just want to make sure that our cost structure is appropriate and that were deliver.
Speaker Change: Delivering great value to our consumers and.
Speaker Change: So that was very difficult to do with all the handling and.
Speaker Change: Labor in Orlando.
Speaker Change: Great. Okay, and then just.
One last housekeeping question, if I could I mean, most of the school.
Speaker Change: Amortization expense was.
Speaker Change: We're about four lets call $400000.
Speaker Change: It's a little higher than what had been proved this quarter was there something nonrecurring or how should we think about that is.
Speaker Change: Ongoing level for quarterly amortization.
Speaker Change: No you're correct from all that was actually part of the restructuring charges surrounding Orlando and writing off some of our intangible assets.
Speaker Change: Facility.
Speaker Change: Okay, So maybe a sofa.
Speaker Change: Hi.
Speaker Change: Higher historical level seems like that should be more of an ongoing level is that kind of what I'm hearing.
Speaker Change: That's correct.
Speaker Change: Okay perfect great. Thanks, so much gentlemen.
Speaker Change: Thank you.
Speaker Change: The next question will come from David Cohen with Minerva. Please go ahead.
Speaker Change: Thanks.
David Cohen: Good morning, guys as always really good job of managing the balance sheet.
Speaker Change: <unk>.
Speaker Change: As you alluded to you know sort of.
Speaker Change: Low your target debt range.
Speaker Change: And I'm wondering whether that occasion any reconsideration of capital allocation priority.
Speaker Change: Or whether you are not going to make any decisions.
Speaker Change: Yes.
Speaker Change: Good luck with whatever quite Maria.
Speaker Change: <unk>.
Speaker Change: Conversations.
Sure Yeah. Good morning, David Thank you for your question.
Speaker Change: Yeah as you point out we are below the range we've described.
Speaker Change: Of one five to two five times, where one one and it's likely going to be lower than that by by year end.
Speaker Change: So we're going to continue to pay down the higher cost variable rate debt, which.
Speaker Change: Which has cost us about 758% so that's a.
Speaker Change: A good use of capital we think.
Speaker Change: As far as the other capital allocation.
Speaker Change: Opportunities.
Speaker Change: We pay a strong cash dividend, we have historically been a share repurchase here when oh, when the opportunity arose and we've been opportunistic acquire as well.
Speaker Change: I would say on the acquisition side, we don't feel like we have to do anything now we don't have any holes that we need to fill.
Speaker Change: But we are active.
Speaker Change: Active in the flow of information, we're aware of businesses that are bad.
Speaker Change: That are for sale are coming for sale. So you.
Speaker Change: We will continue to.
Speaker Change: So you use all the levers of capital allocation.
Speaker Change: Just.
Speaker Change: Depending on the opportunities that we're able to uncover.
Speaker Change: Yeah.
Speaker Change: So that's where we stand today.
Speaker Change: Okay, well, thanks, and best of luck wall.
David Cohen: Thank you David very much I appreciate it.
Again, if you have a question. Please press Star then one.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Mr. Patrick Griffin for any closing remarks. Please go ahead Sir.
Patrick 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 at escalating dot com and a member of our team will follow up with you.
Patrick Griffin: This concludes our call today, you made out disconnect.
Patrick Griffin: Okay.
Patrick Griffin: [music].