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spk00: Good day and welcome to the Escalade first quarter 2024 results conference call. All participants are 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 your question, 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.
spk01: Thank you, Operator. On behalf of the entire team at Escalade, I'd like to welcome you to our first quarter 2024 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 vary 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 line for questions. With that, I would like to turn the call over to Walt.
spk03: Thank you, Patrick, and welcome to those joining us on the call today. Our first quarter results represent an encouraging start to the year, highlighted by strong gross margin and profitability improvement, supported by normalized operating leverage and stabilization in demand for our product assortment. Our first quarter gross margin reached 25%, an improvement of 560 basis points compared to the prior year and the highest level since the second quarter of 2022. First quarter margin profile reflects a normalization in business conditions as we worked through numerous cost headwinds during 2023, including heightened inventory handling costs, shutdown costs in Rosarito, Mexico, and underutilization of our facilities in the U.S. as we slowed production to reduce inventory. We continued to progress with our plans to divest our Rosarito assets and took further steps to reduce fixed costs to that facility during the quarter. We continue to tightly control our expenses there as we work toward divesting the assets. Looking forward, we remain committed to maximizing our return on assets through optimizing our asset base and cost structure, which we believe will position us to enhance our long-term profitability. First quarter net sales increased 0.7% as consumer demand for our products stabilized. Importantly, we saw more normal seasonal sales mix during the quarter as sales of our basketball, table tennis, outdoor games, and archery categories grew year over year. As I mentioned on our last call, our retail partners successfully reduced their inventory levels coming into 2024, so we now believe most channel inventories of our products are relatively light. Our online sales growth remains a key area of opportunity for us, with our direct-to-consumer, or DTC, sales up 28% on a year-over-year basis in the first quarter. Looking ahead, We continue to closely monitor the health of the consumer. While U.S. consumer spending will likely be softer this year in our categories, we believe that our brands position us among a higher income, more durable segment of consumers who can maintain a base level of spending. As overall demand and gross margins are normalizing, so too is the seasonality of our operating cash generation. During the first quarter, we generated a modest amount of cash from operations as our inventories and accounts receivable Both grew late in the quarter ahead of the spring selling season. While inventory levels did increase on a sequential basis, we still expect to reduce our inventories as we move through 2024. When combined with our improved overall operating leverage, we expect to generate ample cash flow this year. As before, we continue to prioritize the repayment of our variable rate debt. At the end of the first quarter, our net debt leverage was 2.0 times EBITDA, which was within our target long-term range of 1.5 to 2.5 times. We believe that 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 a period of soft consumer demand while continuing to build market-leading positions with our established portfolio of indoor and outdoor recreational brands. In the interim, we will continue to focus on creating exceptional consumer experiences to 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 the call over to Stephen for his prepared remarks.
spk04: Thank you, Walt. For the three months ended March 31, 2024, Escalade reported net income of $1.8 million for $0.13 per diluted share on net sales of $57.3 million. For the first quarter, the company reported gross margins of 25% compared to 19.4% in the prior year period. The 560 basis point improvement was primarily the result of more favorable product sales mix, lower freight costs, reduced inventory handling expenses, and a reduction in fixed costs associated with our facility in Mexico. Selling general and administrative expenses during the first quarter increased by 4% compared to the prior year period to $10.7 million. As a percentage of net sales, SG&A increased by 60 basis points year over year to 18.7% in the first quarter of 2024 compared to 18.1% in the first quarter of 2023. The year over year increase was driven by higher professional service expenses and normalized incentive compensation expenses partially offset by lower marketing expenses. Earnings before interest, taxes, depreciation, and amortization increased by $2.8 million to $4.4 million in the first quarter of 2024 versus $1.6 million in the prior year period. Total cash provided by operations for the first quarter of 2024 was $7,000 for the quarter, compared to $4.5 million in the prior year period. The reduction in cash flow from operations primarily reflects a decrease in cash flow generated from net working capital due to a normal seasonal increase in inventories and accounts receivable ahead of the spring selling season during the first quarter of 2024. which was not reflected in the prior year period due to our inventory reduction initiatives. As of March 31st, 2024, the company had total cash and equivalents of $283,000, together with $62.4 million of availability on our senior secured revolving credit facility maturing in 2027. At the end of the first quarter of 2024, net debt outstanding or total debt plus cash was two times trailing 12-month EBITDA, As of March 31st, 2024, we had $53.5 million of total debt outstanding, including $22.6 million of high-interest variable rate debt. We continue to prioritize the repayment of this variable rate debt during 2024, while managing our total net leverage within our long-term target range of 1.5 times to 2.5 times EBITDA. As discussed in our prior call, we are focused on resolving several material weaknesses in our internal controls over financial reporting as well as developing strong internal controls in a timely and compliant manner. To that end, we engaged a reputable consulting firm to assist us with our remediation initiative and have started the process. We expect to conclude our remediation this year. With that, operator, we will open the call for questions.
spk00: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press stars and two. Our first question today comes from Rommel Dionisio with Aegis Capital. Please go ahead.
spk02: Good morning. Thanks for taking my question, and really nice progress on the gross margins. You guys have been generating cash flow and paying down debt here successfully over the last few quarters. I wonder if you could just talk about further uses of cash or free cash flow going forward. I know you talked about continued debt repayments, but in this environment, I imagine there's some acquisition targets you're looking at. I wonder if you could just share with us some of your strategic, without asking for specifics on potential acquisitions, just how you guys think about use of cash going forward? Thanks.
spk03: Yeah, good morning, Rommel, and thanks for your question. Yes, as you point out, we've been focused on paying down our debt and, you know, for the near term, we will continue to do that. We have a nice piece of low cost fixed rate debt. It's about 30 million and the rest is, you know, is a higher cost variable rate debt. So our focus right now is to pay down that higher cost piece to reduce our interest expense. As you know, we've been acquisitive over the years, and we continue to look at various opportunities. I would say that we feel really good with our portfolio today. We don't feel like we have to do anything, but of course, we're certainly open to look at any opportunities. We would balance the opportunity of any acquisition against the continued debt repayments. And, you know, as you know, we've done share repurchases in the past as well.
spk02: Okay, and maybe just a follow-up. Could you just give us an update on the supply chain with regards to, you know, the production you have in Mexico? Has that all been shifted over at this point and where the divestiture stands? Thanks.
spk03: Sure, Rommel. So, you know, the bigger story on the supply chain is that things are much, much better. So you didn't really – ask about the China situation and ocean freight, but our costs are much, much lower than they were a couple of years ago, so we feel good about that. We have moved all of our operations from Mexico to our U.S.-based facilities, and we are in the process of selling the property and engaged with a number of potential buyers, but nothing to report at this time.
spk02: Great. Thanks very much. It's very helpful.
spk00: Thank you. And this concludes our question and answer session. I'd like to turn the conference back over to Patrick Griffin for closing remarks.
spk01: Once again, thank you for your interest in Escalade and joining our call. Should you have any questions, please feel free to contact us at ir.escaladeinc.com, and a member of our team will follow up with you. This concludes our call today. You may now disconnect.
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