Escalade, Incorporated

And welcome to the Escalade, Inc. Third Quarter 2022 Resolve Conference Call. At this time, all participants are in a listen-only mode. Our 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. I would now like to turn the conference over to your host, Patrick Griffin, Vice President, Corporate Development. Please go ahead.

Good morning and welcome to the Escalade Incorporated Third Quarter 2022 Earnings Conference Call. Leading the call with me today are President and CEO Walt Glazer and Stephen Warren, Chief Financial Officer. 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 risk 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 Walt.

Thank you, Patrick, and welcome to those joining us today. During a period of broad-based inflationary pressures and rising interest rates, our third quarter results were impacted by lower customer demand across most product categories as our mass merchant channel partners seek to align elevated inventory levels with a near-term deceleration in consumer discretionary spending. In speaking with our retail partners, we believe the consumer is in a transitional period one where households are seeking to recalibrate how much they have to spend on discretionary categories like ours as the cost to maintain their standard of living continues to rise. Importantly, demand hasn't ground to a halt, but it has slowed. Mass merchants have slowed purchasing in our categories to reduce their total inventory. Importantly, outside of the mass merchant channel, all other sales channels generated year-over-year sales growth in the third quarter. Over the last two years, we've had to do very little in the way of promotional pricing as demand for our products has grown. This year, as we enter the holiday season, we do expect to introduce selective promotions as we seek to reduce our finished goods inventory toward historical levels over the next several quarters. We believe this inventory reduction will also reduce our carrying cost and improve asset utilization to more acceptable levels in the future. In summary, While the near-term decline in sales growth is disappointing, we believe that the strength and diversity of our brands, diverse sourcing capabilities, and lean operating model position us to successfully navigate the current macroeconomic environment. We also believe that our end consumer, which often includes a higher earning, more affluent demographic, is more resilient through economic cycles, which should benefit us. Given the slowing demand environment, we stayed very disciplined in managing controllable expenses and addressing supply chain and logistics challenges while continuing to deliver superior value to our customers. Looking forward, we also believe a potential economic downturn may create additional market share opportunities for the company. Turning now to a discussion of our third quarter performance. Net sales declined 7.9% year over year, and gross margin dropped by 432 basis points. The decline in both sales and margin was primarily driven by softness in demand for our outdoor categories led by archery. This softness was partially offset by sales of our billiards and pickleball products. Elevated freight and logistic expenses more than offset some lower material costs in the third quarter, contributing to the gross profit margin decline. We are beginning to see lower ocean freight rates and improved turnaround times, but inland freight remains challenging due to labor and equipment shortages. Our gross profit margin during the quarter was also adversely impacted by a $1 million accrual related to projected expenses for a product recall. We continue to see sustained demand in some of our categories. Pickleball, in particular, is a category where demand remains strong as broad-based adoption of the sport continues at an accelerated pace. As discussed last quarter, we continue to expand our product assortment of paddles, balls, and accessories with our leading brands, Onyx, Enduro. Our selection of pickleball gear is perfect for any level of player, from beginner to professional. Onyx, as a leading equipment brand in the sport, remains one of the most visible sponsors of the Professional Pickleball Association and top professionals in the sport. Outside of Pickleball, we continue to build our strength in other growing outdoor lifestyle categories. Last month, we announced an exciting new partnership with the American Cornhole League, which provides us the license to make, sell, and distribute American Cornhole League products to our expansive list of retail partners. The ACL is the leading worldwide governing body for professional, competitive, and recreational cornholes. The ACL is also the recognized leader in popularizing cornhole with its pro and amateur events around the country, as well as broadcast deals on ESPN and CBS. With pickleball, cornhole, and other categories, we continue to build strong niche lifestyle brands that in any economic environment tend to have a loyal following of repeat customers that will continue to benefit us over a longer term. While we are not satisfied with the 2022 year-to-date results, we are taking steps to right-size our cost structure and asset base to weather the economic headwinds and position our company for continued growth in the years ahead. Following the end of our third quarter, we exercised an additional $15 million accordion feature under our senior revolving credit facility. We now have nearly $30 million of available liquidity. At the end of the third quarter, Net debt outstanding, or total debt less cash, was three times trailing 12 months EBITDA. Total inventories were $135 million at the end of the third quarter, up from $130 million at the end of the second quarter. The sequential increase in inventory was primarily the result of softening consumer demand and some order cancellation by our customers due to elevated inventory levels in the retail channels. Vendor deposits and inventory and transit were both down meaningfully in the quarter. As we move through the seasonally strong fourth quarter, we expect to see inventory levels begin to decline, which should benefit our cash and liquidity position going into the new year. As before, we remain committed to our capital allocation strategy and disciplined balance sheet management. We continue to target long-term net leverage of one and a half to two times EBITDA along with funding internal growth initiatives and the consistent payment of our quarterly cash dividend. With that, I'll turn the call over to Stephen for a review of our financial results.