Escalade, Incorporated

Good day and welcome to the Escalade third quarter 2024 results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Patrick Griffin, Vice President of Corporate Development. Please go ahead, sir.

Thank you, Operator. On behalf of the entire team at Escalade, I'd like to welcome you to our third 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 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 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. During the third quarter, we made substantial progress optimizing our asset base and cost structure as we navigate a transitional period in consumer demand. While net sales declined 7.7% versus the prior year, we achieved modest gross margin expansion, even while absorbing $1.8 million of non-recurring business rationalization expense in our cost of goods sold. Excluding these non-recurring expenses, our gross margin would have been 27.4%, representing a 265 basis point improvement over the prior year. Our portfolio optimization efforts during the quarter included the sale of our Rosarito, Mexico facility, the cost rationalization at our Eagan, Minnesota facility, the wind down of operations in Orlando, Florida, and the consolidation of our high-end billiards accessory products into our Bristol, Wisconsin facility. The optimization of our operational footprint will largely be complete by year end. With the completion of this program, we will reduce our operational footprint by approximately 300,000 square feet, or 20%. The team has done an outstanding job this year, rescaling our operations while still providing ample capacity to support a recovery in consumer demand. In addition, we remain focused on maximizing our cash flow and generated $10.5 million of cash from operations during the quarter. Along with proceeds from the sale of our Rosarito facility, we distributed over $2 million in dividends, made capital expenditures to support our operations, and repaid nearly $14 million of debt, taking our net leverage ratio to 1.1 times. Going forward, we expect these efforts to drive higher gross margins through the end of the year and 2025, despite near-term softness in consumer demand. As we move into the holiday season, we anticipate a higher level of promotional activity as we believe consumers will be price conscious given the economic environment. At the same time, we anticipate promotional activity will serve to accelerate the inventory destocking efforts already underway at many retailers. Despite soft consumer spending for consumer discretionary goods, we continue to see favorable demand in our archery, safety, and basketball categories driven by new product introductions. Additionally, our own direct-to-consumer e-commerce volumes continue to increase, up 29% year-over-year during the quarter. We believe consumer loyalty to our market-leading differentiated recreational brands continues to position us to deliver above-market performance as we move through the next phase of the retail cycle. As before, we continue to invest in connecting more deeply with consumers through our own e-commerce initiatives marketing programs, and corporate partnerships, while continuing to deliver category-leading innovative brands that build loyalty across a diverse base of established and emerging recreational sports. Looking ahead, we are encouraged by the Federal Reserve's recent monetary easing, as well as a resilient job market. We continue to closely monitor household balance sheets and consumer sentiment. As interest rates likely move lower, We expect this will aid a recovery in consumer demand for discretionary recreational goods. However, we recognize this cycle will take some time, and we do not expect to see materially stronger demand in the near term as we settle into consumer spending patterns more similar to the pre-pandemic economy. In the meantime, we are committed to improving our financial position through optimizing our cost structure and maximizing our operating leverage. These efforts, along with ongoing inventory rationalization, will not only position us to navigate the ongoing trough in consumer demand, but also position us for profitable growth and outperformance through the next cycle. As we continue to generate strong cash flow, we are prioritizing the continued repayment of our higher cost variable rate debt, which we expect to pay off by the end of the year. In addition, we are continuing to invest in innovation, ensuring continued outperformance. A notable example is the Bear Archery Team, which did an amazing job designing, manufacturing, and marketing a whole new lineup of compound bows. They've delivered substantial upgrades to five of our top six selling bows and have brought integrated riser capability to price points never seen before in the industry. A highlight is the newest version of the Adapt bow in partnership with the Hunting Public. an influencer group with online video series and podcasts for avid hunters, which has exceeded even our admittedly high expectations. We also launched the new Onyx Supercell Pickleball Paddle, which introduces cloud-controlled technology to the market. The 22-millimeter proprietary construction of the paddle creates an expansive sweet spot that provides outstanding control, touch, and power. As recently announced, we entered into an exciting new agreement to be the official U.S. distributor of Adidas fitness accessories. The Adidas brand is globally recognized and synonymous with high performance. This new partnership will expand our fitness offering, which today includes the Step, Lifeline, and U.S. Weight brands. Our Adidas fitness accessory offering will be available online and in retail in early 2025. Finally, during the third quarter, We began consolidation of our queue and case accessories business into the Bristol, Wisconsin headquarters for our Brunswick billiards group. This allows us to combine dealer shipments of Brunswick and American Heritage billiards and game room tables, along with a wide range of high-quality queue and case billiards accessories. Dealers will benefit from the efficiency of the combined shipments, further building upon our competitive advantages in this category. The Bristol team did a fantastic job planning and preparing while working hand-in-hand with our highly capable Evansville associates to execute this transition, which is now complete. Our vision is to build and strengthen our brand portfolio centered on helping consumers create great memories while engaging in healthy activities with their family and friends. 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.

Thank you, Walt. For the three months ended September 30th, 2024, Escalade reported net income of $5.7 million or 40 cents per diluted share on net sales of $67.7 million. For the third quarter, the company reported gross margins of 24.8% compared to 24.7% in the prior year period. The 10 basis point increase was primarily the result of lower inventory handling costs and a reduction in fixed costs associated with our facility in Mexico. partially offset by lower net sales and a $1.8 million on non-recurring optimization expenses. Selling general administrative expenses during the third quarter increased by 6% or $0.6 million compared to the prior year period to $11.1 million. The third quarter SG&A increase was mainly driven by higher professional fees. Earnings before interest, taxes, depreciation, and amortization increased by $2 million to $9.9 million in the third quarter of 2024 versus $7.9 million in the prior year period. I would also note that in conjunction with the of our Rosarito, Mexico facility, we recognize a $3.9 million gain on the sale of assets, which is reflected in our third quarter of 2024 operating income. Total cash provided by operations for the third quarter of 2024 was $10.5 million for the quarter. compared to $14.8 million in the prior year period. The decrease in operating cash flow is driven by timing of inventory management initiatives in the prior year, which drove strong free cash flow generation in the third quarter of 2023. As of September 30, 2024, the company had total cash in equivalence of $426,000. At the end of the third quarter of 2024, net debt outstanding or total debt less cash was 1.1 times trailing 12-month EBITDA. As of September 30, 2024, we had $29.5 million of total debt outstanding, including $2.1 million of high-interest variable rate debt. We will continue to focus on repaying the remainder of this variable rate debt this year, while driving our total net leverage below our long-term target range of 1.5 times to 2.5 times EBITDA. On October 11, we proactively entered into an amendment to our Senior Secured Revolving Credit Facility, which reduced our borrowing capacity by $15 million to or 20 percent. As a result of this amendment, we had total availability of $58.3 million. Recognizing the significant improvement in our working capital position this past year, we believe this new amendment provides ample availability for our current sales level and for future growth. As part of the amendment, we also exchanged our fixed charge coverage ratio covenant with an interest coverage ratio, giving us additional operating flexibility. With that, operator, we will open the call for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Rommel, DMCO with Aegis. Please go ahead. Good morning.

A couple of questions on some of the newer restructuring initiatives. Maybe we can just touch base on the Minnesota rationalization. I believe that's water sports and the distribution. So is that going to go elsewhere or are you just kind of maybe trimming the product assortment, and you're able to generate some cost savings that way. Could you just provide a little more detail on that, please?

Sure. Good morning, Rommel, and thank you for your question. Yeah, so in Minnesota and Eagan, we have our water sports business, and we've had excess inventory there, so we've reduced our square footage, our space. We've also recognized that the category is temporarily smaller than it was traditionally, and so we had to make some tough decisions around staffing and personnel. So those decisions have been made, and the cost structure has been corrected, and we are prepared to grow that business when and if the consumer is ready to buy water sports again.

Okay. Okay. And I may be switching gears to the Orlando action. I think you mentioned you want to wind that, you're targeting to wind that down by the year end. So that's, if I remember correctly, that's manufacturing and distribution for cornhole. Will that be shifted elsewhere? Or are you thinking maybe, you know, downshifting on the, on the business overall? Could you sort of walk us through your thoughts on that one? Thanks.

Sure. Sure. Yeah. And you're, you're correct. That was the licensed cornhole business. And yeah, We've done a couple things. One is we're shifting to more of a pre-printed import model as opposed to print on demand in Orlando. So we've made that change. And then additionally, we're going to consolidate that inventory into other facilities, primarily in Evansville and some in Gainesville, Florida as well. So just once again, adjusting the cost structure for the reality of the business today. Okay.

Okay. No, that's fair enough. That's great detail. So there's no intention of exiting that business or even kind of triggering business. It's just more cost savings and relocation and other facilities and sounds like some offshoring as well. Do I understand that correctly, Mark?

Yes. We just want to make sure that our cost structure is appropriate and that we're delivering great value to our consumers. And... So that was very difficult to do with all the handling and labor in Orlando.

Great. Okay. And maybe just one last housekeeping question, if I could. Maybe more for Stephen. Stephen, the amortization expense was, you know, maybe about $400,000. That's a little higher than what had been previous quarters. Is there something non-recurring there, or how should we think about that as kind of an ongoing level for quarterly amortization? Thanks.

No, you're correct, Bramall. That was actually part of the restructuring charges surrounding Orlando and writing off some of our intangible assets in that facility.

Okay. So the prior historical level seems like that should be more of an ongoing level, is that what I'm hearing? That's correct. Okay, perfect. Great. Thanks so much, gentlemen.

Thank you.

The next question will come from David Cohen with Minerva. Please go ahead.

Thanks. Good morning, guys. As always, really good job of managing the balance sheet and paying down debt. As you alluded to, you're now sort of below your target debt ratio. And I'm wondering whether that occasions any reconsideration of capital allocation priorities or whether you're not going to make any decisions until there's a new CEO in place. Could you just give us whatever flavor you can of those conversations?

Sure. Yeah, and good morning, David. Thank you for your question. Yeah, as you point out, we're below the range we've described of 1.5 to 2.5 times. We're at 1.1, and it's likely going to be lower than that by year end. So, you know, we are going to continue to pay down the higher cost variable rate debt, which is costing us about 7.5%, 8%. So that's a good use of capital, we think. As far as the other capital allocation opportunities, we pay a strong cash dividend. We have historically been a share repurchaser when the opportunity arose, and we've been an opportunistic acquirer as well. I would say on the acquisition side, we don't feel like we have to do anything now. We don't have any holes that we need to fill, but we are – active in the flow of information. We're aware of businesses that are for sale or coming for sale. So we will continue to use all the levers of capital allocation, just depending on the opportunities that we're able to uncover. So that's where we stand today.

Okay, well, thanks, and best of luck, Walt.

Thank you, David, very much. I appreciate it.

Again, if you have a question, please press star, then 1. This concludes our question and answer session. I would like to turn the conference back over to Mr. Patrick Griffin for any closing remarks. Please go ahead, sir.

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.