Escalade, Incorporated

Greetings and welcome to the Escalade fourth quarter and full year 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, Corporate Development. Thank you. You may begin.

Thank you, operator. On behalf of the entire team at Escalade, I'd like to welcome you to our fourth quarter and full year 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 rest described in our periodic financial 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 would like to turn the call over to Walt.

Thank you, Patrick, and welcome to those joining us on the call. Our team delivered a strong finish to the year, a performance highlighted by improved gross margins, robust cash generation, and a significant reduction in leverage. We generated $20.6 million of cash from operations in the fourth quarter, which supported $21.1 million in debt repayments and a one-turn decline in our net leverage ratio at year end. The strong cash generation during the quarter was driven by our continued emphasis on improved working capital efficiency, which included a strategic focus on inventory reduction. While our inventory reduction initiatives drove substantial cash flow in the quarter, our margins were pressured as a result of those efforts. Even so, our fourth quarter gross margins still improved by more than 190 basis points versus the prior year fourth quarter due to lower freight costs, improved sales mix, and price discipline on our inline product assortment. While fourth quarter sales declined by 9.2% versus prior year levels, our sales benefited from strong growth in our basketball and indoor games categories offset by softness in most other categories. Exiting the holiday selling season, we believe channel inventories have declined meaningfully as our retail partners successfully drove product sell-through. This has helped position us for a solid start to 2024 with most retail inventories in good shape. We continue to experience strong momentum in our direct-to-consumer sales with non-licensed DTC sales up 39% in the fourth quarter versus the prior year driven by growth across most of our product lines. Looking ahead, we continue to closely monitor the relative health of household balance sheets, employment conditions, and consumer discretionary spending. Changing consumer behavior has pressured discretionary spending in most of our categories. We expect consumer demand to remain relatively soft as these trends continue into 2024. Operationally, we realized our goal of reducing costs by $2 million annually as of the end of the fourth quarter. These cost reductions are comprised of lower inventory handling and storage costs, lower freight costs, and operational improvements. We also focused on reducing our fixed and variable operating expenses, which resulted in a 4% reduction in our SG&A expenses during the fourth quarter of 2023. In combination, these actions have positioned us to improve operating leverage and expand gross margins as we move through 2024. The planned divestiture of our Rosarito, Mexico operations continues to progress. We transitioned our manufacturing and warehousing in Rosarito to other facilities in the fourth quarter and reduced operating expenses. We also continue to actively market the facility to prospective buyers. While we have successfully reduced our inventory to our goal of less than $100 million at the end of 2023, we still see an opportunity for further inventory reduction as we move through 2024. particularly in our billiards and water sports categories. That said, we don't expect these efforts to have the same unfavorable impact on margins as we had in the fourth quarter of 2023. Given the more normalized channel inventory levels, the key demand variable for 2024 will be the level of consumer spending in our categories. Strategically, we remain committed to investing in innovative product development to build market-leading positions in key growth categories and best position our portfolio for above market growth as we move through the economic cycle. As we continue to navigate the current demand environment, we're prioritizing a lean cost structure and further fortifying our balance sheet. Just as we have successfully reduced our fixed costs through the year, we also repaid more than $44 million in debt during 2023. Cash conversion during the fourth quarter exceeded 100% for the second straight quarter. primarily due to a $12.8 million reduction in our inventory and a $13.4 million reduction in accounts receivable. In 2024, we will remain focused on maximizing cash generation and repaying our higher interest variable rate debt. At the end of the fourth quarter, our net debt leverage was 2.2 times, which is within our target range of 1.5 to 2.5 times. We believe 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 the transitional period for the consumer while continuing to build market-leading positions within our established portfolio of indoor and outdoor recreational brands. Our team has performed exceptionally well during a period of soft consumer spending on goods, positioning us to capitalize on a broader demand recovery. We believe that our collective focus on cost management and working capital efficiency will support further debt repayment over the coming year. With channel inventories clearing and consumer demand poised to re-accelerate over time, I remain upbeat concerning the outlook for our business and opportunities for value creation in the years ahead. In the interim, 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 our progress next quarter With that, I'll turn the call over to Steven for his prepared remarks.