Escalade, Incorporated

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 today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. 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, Vice President, Corporate Development and Investor Relations. Please go ahead.

Thank you, Operator. On behalf of the entire team at Escalade, I'd like to welcome you to our first quarter 2023 results conference call. Leading the call with me today are President and CEO Walt Glazer and Stephen Warren, our 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 risks described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligations 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 on the call today. As expected, our first quarter results were impacted by anticipated softening in consumer demand that carried over from the fourth quarter. Early in 2023, elevated channel inventories have weighed on the pace of reordering at retail, particularly with our archery and basketball categories. Based on recent POS trends and discussions with our retail partners, we believe this is a dynamic that will normalize for most of our categories as we move further into the year. Market conditions were further impacted by cooler temperatures across many areas of the country during the first quarter, which curtailed outdoor product demand. January was particularly weak, although we then experienced month-over-month improvement in demand conditions as we progressed through the first quarter, supported by improved orders for our indoor games, fitness, and safety categories. While our overall e-commerce sales declined in the quarter due to inventory destocking within our marketplace and at third-party reseller customers, our owned direct-to-consumer e-commerce sales increased 44% on a year-over-year basis in the first quarter, reflecting continued consumer demand for our products and the effectiveness of our product development, marketing, and e-commerce teams. In combination, These factors contributed to a year over year decline in both revenue and profitability during the first quarter, a circumstance made even more challenging compared to the record performance in the first quarter of 2022. At an operational level, we continue to face some supply chain headwinds that led us to incur elevated inventory handling and storage costs in the first quarter. These costs, along with less favorable product mix, shutdown and severance expenses and lower sales volumes impacted our gross margin in the period. Despite these challenges, we've continued to maintain our price discipline, which has served to partially offset demand softness. We believe the general stability in pricing speaks to the resilience of our brands and the loyalty of our generally more affluent customer base. Looking forward, we expect to see our inventory trend down towards more normalized levels as we move throughout the year. That said, we expect demand in the second quarter will remain challenged, albeit less so than in the first quarter, adjusting for the change in our reporting calendar. We also expect margin pressure from elevated inventory handling and storage costs will decline, while an improved sales mix and lower cost inventory will also result in better margins as we move through the year. Strategically, we will continue to focus on investing in innovative product development and consumer engagement, to build market-leading positions in key growth categories. For example, we recently introduced technology into the pickleball category. The all-new Malus and Mayhem pickleball paddles are the first to be released with our patented ThermoFuse technology, which molds the pickleball paddle to exact specifications and provides our Onyx brand with a robust product development platform. These new paddles feature an all-new carbon fiber power frame for greater strength, power, and better feel. We also launched an expansion of the Evoke Premier family with paddles featuring raw carbon fiber surface texture, which increases traction for maximum spin and control without sacrificing pop and power. Our champion pro pickleball players, Matt Wright, Lucy Kovalova, Kelly Jo Smith, as well as many others, play tested these paddles and provided key input before their recent release. I am happy to report that they are already winning medals in the top tournaments with these new paddles. We are also launching innovative products in several key categories over the coming months. Stay tuned for those exciting new developments. As we navigate the current challenging demand environment, we understand the importance of maintaining an appropriate cost structure and healthy balance sheet. We have successfully faced similar challenges over the past century, and are responding to this temporary situation by reducing our costs and generating cash to reduce debt. To that end, we recently announced our intention to divest our owned facility in Rosarito, Mexico as part of an initiative to optimize our manufacturing footprint. We currently expect to close the sale of this facility by year end 2023 and anticipate annualized savings of between half a million and $1.5 million In the meantime, we will have some costs associated with winding down this facility, including roughly $600,000 that we expensed in the first quarter. In addition to the divestiture of our Mexico operations, we have also initiated a targeted reduction in force during the second quarter of 2023 within our domestic operations. We anticipate $2.3 million in annual savings resulting from the domestic reduction beginning in the third quarter of 2023. Between the divestiture of our Mexico operations and planned reduction in force here domestically, we anticipated total annualized savings resulting from the recent cost action to be approximately $2.8 to $3.8 million annually. We are carefully evaluating additional expense reduction and cash generation opportunities to ensure we maintain an appropriate cost structure and healthy balance sheet. We remain highly disciplined around all discretionary capital allocation and as a result, have also reduced our planned capital expenditures for the full year 2023. We successfully amended our credit agreement to address our temporary higher leverage. As of the end of the first quarter, our net leverage reached 3.8 times, which is well above our targeted range of 1.5 to 2.5 times. As seasonal demand and normalized channel inventories drive improved cash flows, we expect our leverage to trend back toward our targeted range by year end. Entering the second quarter, our team continues to do an excellent job navigating the current macro environment while also ensuring that we remain competitively positioned to support our customers. While the current environment is challenging, our category-leading brands and loyal customer base provide some level of insulation from this volatility. While we continue to see attractive opportunities to expand our portfolio of high-quality products, We will prioritize organic growth over acquisitions during what remains a transitional period for the consumer and as we deliver our balance sheet. I am proud of the hard work and dedication of our team as we continue to focus on delivering exceptional customer experiences that build brand loyalty, all while creating long-term shareholder value. We look forward to updating you with our progress next quarter. With that, I'll turn the call over to Stephen for his prepared remarks.