Escalade Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 6 speakers on the call.

Operator

Good morning, and welcome to the Escalade Second Quarter 2024 Results Conference Call. All participants are in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Patrick Griffin, VP, Corporate Development and Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. On behalf of the entire team at Escalade, I'd like to welcome you to our second quarter 2024 results conference call. Leaving the call to me today are President and CEO, Walt Glaser 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.

Speaker 1

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

Speaker 2

to turn the call over to Walt. Thank you, Patrick, and welcome to those joining us on the call today. We demonstrated strong operational discipline in the 2nd quarter as highlighted by our ongoing actions to reduce fixed overhead costs, improve manufacturing efficiency, reduce working capital and further strengthen our balance sheet amid a softer consumer spending environment. While net sales declined 7.7% versus the prior year, we delivered a 24.2 percent gross margin, which was a modest decline versus the prior year period. We continue to focus on operational efficiencies to enhance our margins.

Speaker 2

While we effectively managed fixed overhead costs within our control, these efforts were offset by higher promotional activity with our retail partners together with onetime nonrecurring impacts related to the ongoing rationalization of our existing manufacturing footprint. Importantly, our 2nd quarter cash flow from operations increased nearly 60 percent on a year over year basis in Q2, which allowed us to repay $8,600,000 of high interest variable rate debt in the period. At the end of the second quarter, our net leverage was 1.7x our trailing 12 month EBITDA, which is near the low end of our long term leverage ratio of 1.5x to 2.5x that we have previously discussed. We continue to progress with our plans to divest our Rosarito property and facility. Meanwhile, we have reduced operating costs at this facility and are evaluating other cost rationalization opportunities across our broader corporate footprint as we seek to drive increased operating leverage and profitability.

Speaker 2

As we look to the second half of twenty twenty four, we continue to expect our ongoing cost rationalization and other initiatives will position us to deliver a full year gross margin rate above full year 2023 despite the overall softness in spending for consumer discretionary purchases. Importantly, we have seen continued consumer demand for our leading brand, particularly Stiga Table Tennis, along with Bear Archery and Brunswick Billiards. We believe this reflects the strength of those brands and consumers searching for high quality combined with good value. Additionally, our owned DTC e commerce volumes continue to increase, up 28% year over year during the quarter. We believe consumer loyalty to our market leading differentiated recreational brands continues to position us to deliver market performance as we move through the next phase of the retail cycle.

Speaker 2

As before, we continue to invest in connecting more deeply with consumers through our owned e commerce initiatives, marketing programs, corporate partnerships, while continuing to deliver category leading innovative products to build loyalty across our diverse base of established and emerging recreational sports brands. Looking ahead, we continue to closely monitor consumer discretionary spending, the relative health of household balance sheets and employment conditions. While U. S. Consumer discretionary spending is softening, we believe that our brands position us among a higher income, more durable cohort of consumers capable of maintaining a base level of discretionary spending.

Speaker 2

Given current market conditions, we continue to focus on inventory rationalization, which supports improved cash conversion. Our cash flow seasonality has normalized this year, which was a factor behind our 2nd quarter cash generation. We expect cash generation to be seasonally softer in the 3rd quarter, followed by stronger cash flow in the 4th quarter amid the seasonal holiday demand. As we continue to generate strong cash flow, we are prioritizing the continued repayment of our high interest variable rate debt. As we reduce our leverage, we will evaluate additional opportunities to maximize shareholder value consistent with our long term capital allocation strategy.

Speaker 2

We believe Escalade is well positioned to manage through this current environment of soft consumer discretionary spending, while continuing to invest in our business to drive future growth. Our vision to build and strengthen our brand portfolio centered on helping consumers create great memories while engaging in healthy activities with their family and friends. I believe we have the strongest team in the 100 year history of our company, and we are working together to overcome industry and economic challenges today and to create opportunities for the next 100 years. 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.

Speaker 3

Thank you, Walt. For the 3 months ended June 30, 2024, Escalade reported net income of $2,800,000 or $0.20 per diluted share on net sales of $62,500,000 For the Q2, the company reported gross margins of 24.2% compared to 24.6% in the prior year period. The 40 basis point decrease was primarily the result of lower net sales, higher promotional activity, partly offset by lower inventory handling costs and a reduction in fixed costs associated with our facility in Mexico. Selling, general and administrative expenses during the Q2 increased by 3% compared to the prior year period to $10,100,000 As a percentage of net sales, SG and A increased by 168 basis points year over year to 16.1% in the Q2 of 2024 compared to 14.4% in the Q2 of 2023. 2nd quarter SG and A increase was driven by additional selling and marketing spending in the more promotional retail environment.

Speaker 3

Earnings before interest, taxes, depreciation and amortization decreased by $1,800,000 to $5,800,000 in the Q2 of 2024 versus $7,700,000 in the prior year period. Total cash provided by operations for the Q2 of 2024 was $13,300,000 for the quarter compared to $8,400,000 in the prior year period. The increase in cash flow from operations primarily reflects an increase in cash flow generated from lower net working capital, specifically lower inventory and accounts receivable in the Q2 of 2024 due to our inventory reduction efforts and normalizing sales levels. As of June 30, 2024, the company had total cash and equivalents of $362,000 together with $71,000,000 of availability on our senior secured revolving credit facility maturing in 2027. At the end of the Q2 of 2024, net debt outstanding or total debt less cash was 1.7x trailing 12 month EBITDA.

Speaker 3

As of June 30, 2024, we had $43,200,000 of total debt outstanding, including $14,000,000 of high interest variable rate debt. We will continue to focus on repaying the remainder 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. With that, operator, we will open the call for questions.

Operator

Our first question will come from David Cohen with Minerva. You may now go ahead.

Speaker 4

Good morning, guys. Thanks for sort of carefully stewarding the shift through some choppy waters. And thanks in particular for pointing out that your leverage ratios are now toward the lower end of what you've laid out as target. And then you made some small allusions in the press release to ways you might deploy capital going forward. But could you give us a little more granular look?

Speaker 4

Because obviously if things go as planned by the end of the year you'll be probably butting up right on that 1.5 times leverage ratio. So if you could sort of sort through buyback, acquisition, internal CapEx, dividend policy that would be great? Thanks.

Speaker 2

Yes. Good morning, David, and thanks for your questions. Yes, so as you point out, we do believe we'll be actually below the 1.5 by the end of the year if we don't do something different. We do, as Stephen mentioned, expect to be out of the higher cost variable rate piece of our debt structure. So traditionally we've used all the levers acquisitions, share repurchase, dividends, internal investments.

Speaker 2

We continue for now to focus on the debt repayments. We're paying about 7% on the variable piece and little bit less than 3% on the fixed piece. So we're motivated to pay off that higher cost as part of our debt structure. But I would say our priorities would be 1st, internal investment in our business. Secondly, would be probably the maintaining the dividend of course, share repurchase which we've used in the past and we think it can be an effective tool.

Speaker 2

And then lastly would be acquisitions. We have made a number of acquisitions over the years and it's been an effective strategy for us. I guess David, I would say we feel really good about the portfolio we have today. We don't feel like we have to do anything to round out our portfolio. But of course, we see a lot of deals and I would say the deal activity has picked up some.

Speaker 2

So we would be very selective and cautious on the acquisition front.

Speaker 4

Okay. And if I could ask a follow-up. Could you talk a little about the pickleball opportunity as you see it going forward? Is that an area where you think you need to bolt on other brands, other equipment types or do you think you can sort of address that organically?

Speaker 2

Sure. And pickleball, that's really an interesting area. We've been in that business for about 10 years. We feel like we've got a strong brand in paddles with Onyx, one of the leading brands and a legitimate effective brand in the space. It has been a bit of a gold rush.

Speaker 2

I mean everybody has been trying to get into the pickleball business. There's not much barrier to entry in paddles at the low end. You can buy cheap honeycomb material and cut out a paddle and wrap a handle around it and sell it. At the upper mid and higher end where we play, there's remarkable amount of technology involved. And so we spend a lot of time and energy on technology advances on the paddle front.

Speaker 2

So we like we love our On X brand and think it's well positioned. On the ball side, we have Onyx ball and then the Zura Fast ball, which is the preferred tournament ball for the pros. Here again, there's more technology in making a pickleball than you might imagine. Maybe it looks just like a plastic ball, but is it what type of plastic are you using? Where are those tolerances?

Speaker 2

Is it injection molded? Is it roto molded? How are you processing the ball? So we feel like here again we've got good technology there. And then to your point add on product categories, we've expanded into eye protection, which is increasingly an important area.

Speaker 2

We're getting good uptake there. Nets, we make a variety of nets for people to use at their home or in the German type of environment. So I would say we're probably not going to get into apparel. That's not an area that we're have a particular expertise in, but there are others that are certainly addressing that side of it. Does that answer your question fully?

Speaker 4

Yes. Thanks very much.

Speaker 2

Very welcome.

Operator

Our final question will come from Rommel D'Amosio with Aegis. You may now go ahead.

Speaker 5

Thanks for taking my question and good morning. You alluded to stimuli arising in competitive promotions. Yes, I wonder if you could just give us a little more granularity on that. Obviously, there's some retail inventory destocking, so maybe that will help a little. But Obviously, you guys continue to invest in your brand.

Speaker 5

So, in particular categories where you've seen that those competitive promotions worse than others? And maybe some thoughts going into the holiday season, how you would look to position from a brand perspective? You obviously kept up new product introductions and your marketing efforts, but would you expect to continue to promote to the level of competition? Thank you.

Speaker 2

Sure. Thank you, Rommel, and good morning. Yes, so as we pointed out, we are investing more in advertising and promotion and that kind of fits with both our emphasis on managing our inventory levels and then also the current environment. It's just a little I would say it's a more competitive, more promotional environment and we would expect that to continue. Looking into the holiday season, I would say that our expectations are that inventories are will be in good shape during the holiday season.

Speaker 2

Our POS is better than our factory sales. Many of our retailers are cautious and managing their inventories closely. So if the consumer surprises us and comes back strongly during the holiday season, I think there'll be a big opportunity for much higher factory sales as we refill the channel. So that's we're entering the holiday period cautiously optimistic. Again, we feel like inventories are in decent shape.

Speaker 2

How the consumer behaves is really pretty much anybody's guess.

Speaker 5

Okay. And maybe just a quick follow-up. You mentioned that international sales were a real highlight for you, up 15% in the quarter. I wonder if you could just maybe provide

Operator

a little more detail on that.

Speaker 5

Was there a particular region that was strong or new product or product line that was particularly strong for you there in international? Thanks.

Speaker 2

Yes. And Rommel, I would say that we're coming off a pretty low base there, but it's an area of focus for us. And I would point out basketball, pickleball, I would point out Europe and Australia, New Zealand, those kind of markets have been good for us. We do have a budding effort in China. We're selling some of our branded products in China through our partnership there.

Speaker 2

So again, it's an area of focus. It's coming off a low base and we think it's an opportunity with a long runway for Escalade.

Speaker 5

Great. Thanks very much.

Operator

This concludes our question and answer session.

Speaker 5

I would like to turn

Operator

the conference back over to Patrick Griffin for any closing remarks.

Speaker 1

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 irescalateinc.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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Earnings Conference Call
Escalade Q2 2024
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