Escalade, Incorporated

Greetings and welcome to the Escalade second quarter 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 of Investor Relations. Thank you, sir. You may begin.

Thank you, operator. On behalf of the entire team at Escalate, I'd like to welcome you to our second quarter 2023 results conference call. Leading the call to 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 obligation to update our forward-looking statements. At the conclusion of our prepared remarks, we will open the lines for questions. With that, I would like to turn the call over to Walt.

Thank you, Patrick, and welcome to those joining us on the call today. I'm pleased to report that our team did a fantastic job recovering from a difficult first quarter and delivered strong second quarter results highlighted by substantial growth in cash flow from operations, significant inventory and long-term debt reductions, EBITDA margin expansion, and thoughtful expense reductions. These accomplishments by our team enabled us to beat the plan in the second quarter. Sales volumes improved significantly during the second quarter. Importantly, our results were substantially impacted by 21 fewer days within our reporting calendar, as we move to a traditional reporting calendar on January 1, 2023. Previously, our second quarter included four four-week periods. This year and going forward, we will report results for the traditional three-month April through June calendar quarter. Excluding the impact of the change in our reporting calendar, sales declined 9.5% on a year-over-year basis, which was an improvement over the prior quarter's sales decline of 28.5%. During the second quarter, our direct-to-consumer sales accelerated meaningfully, with non-licensed DTC sales up more than 60% versus the year-ago April through June period, driven by a combination of effective marketing campaigns and recent new product launches. While U.S. retail sales of sporting goods remain soft and channel inventories are still elevated, We are cautiously optimistic about recent increases in housing starts and somewhat improved consumer sentiment driven by stability in the labor markets and a slowdown in inflation. We believe our diverse portfolio of leading recreational brands will continue to resonate with consumers in this changing environment. Operationally, the supply chain challenges that we faced last year have continued to lessen, particularly with respect to freight expenses. Improved operating leverage, lower cost inventory, price discipline, expense reductions, and a more favorable product mix resulted in a 515 basis point sequential gross margin improvement between the first and second quarter of 2023. We anticipate further normalization in wholesale channel inventories as we move into the second half of this year, which should position us to capitalize on restocking opportunities entering the holiday season. As before, we remain highly focused on accommodation of cost control, improved working capital management, and balance sheet optimization. Strategically, we continue to focus on investing in innovative product development to build market-leading positions in key growth categories. For example, during the second quarter, we launched a range of new carbon-based pickleball paddles that improve performance and playability for the fast-growing market of pickleball enthusiasts. This launch included our Evoque Premier raw carbon range, as well as the Malus and Mayhem paddles, which utilize our patented ThermoFuse technology. Consumer acceptance of these exciting new paddles has exceeded our expectations and quickly sold through initial production runs. We are accelerating manufacturing to meet the strong demand. This successful launch also contributed to Significant double-digit year-over-year sales growth in our pickleball category, despite the shorter second quarter of this year. We are also pleased to announce that our Gorilla basketball brand has collaborated with Johnny Steffine, the founder of Handle Life and an NBA skills coach, to launch a range of weighted basketballs designed to improve ball handling efficiency and playmaking ability. Johnny's social media accounts have gained over 2 million followers who are interested in his unique story and amazing ball handling skills. We're excited about this new Hand to Life collaboration, which provides consumers with effective training tools to improve their game. We're also launching new products in several other key categories over the coming quarters, particularly an innovative assortment of American Cornhole League licensed cornhole boards and bags, which will launch initially at Academy Sports and Outdoors. For some thrilling cornhole competition, please tune in to the American Cornhole League World Championships, which will be held in Rock Hill, South Carolina, from July 29th through August 6th. It will air on ESPN and the CBS Sports Network. As we navigate the challenging demand environment, We know the importance of maintaining an appropriate cost structure and fortified balance sheet. We continue to focus on optimizing our cost structure and maximizing cash flow. As highlighted by our second quarter results, we have already made great strides in improving our gross margins by reducing fixed costs and through lowering our operational expenses. We remain on track to achieve $2.3 million in annual cost savings and expect our costs to continue to trend lower through the remainder of the year. We continue to carry the ongoing expense of our Mexico operations and remain focused on divesting this facility by the end of 2023. We have spent approximately $900,000 year-to-date on professional services and severance expenses related to this divestiture. As previously mentioned, we continue to be sharply focused on cash flow. Cash conversion during the second quarter exceeded 100%, primarily due to improved working capital management, including the more optimal use of our cash on hand. As we continue through the end of the year, our inventory levels should drive additional cash generation, which we will utilize to further reduce our debt. At the end of the second quarter, our net leverage was 4.0 times. However, we remain committed to reducing our leverage to our targeted range between 1.5 and 2.5 times. While we have built our business over the years with a number of value creating acquisitions, our current capital allocation priorities remain long-term debt reduction, payment of our dividend. Along with our focus on lowering net leverage, we continue to tightly control discretionary spending, including capital expenditures. Entering the third quarter, our team continues to do a great job navigating the current macro environment while also ensuring that we remain competitively positioned to support our retail partners and consumers loyal to our brands. I'm proud of the hard work and dedication of our team in responding to a disappointing first quarter by delivering a good second quarter with improved performance across most key metrics. 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 all our progress next quarter. With that, I'll turn over the call to Stephen for his prepared remarks.