Escalade Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 5 speakers on the call.

Operator

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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Patrick Griffin, Vice President of Investor Relations.

Operator

Thank you, sir. You may begin.

Speaker 1

Thank you, operator. On behalf of the entire team at Escalate, I'd like to welcome you to our Q2 2023 results conference call. Leading the call with 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 lines for questions. With that, I would like to turn the call over to Walt.

Speaker 2

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 Q1 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 Q2. 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.

Speaker 2

Previously, our Q2 included 4 4 week periods. This year and going forward, we will report results for the traditional 3 month April through June calendar quarter. Excluding the impact of the change in our reporting calendar, sales 9.5% on a year over year basis, which was an improvement over the prior quarter's sales decline of 28.5%. During the Q2, 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. Our U.

Speaker 2

S. Retail sales of sporting goods remain soft and channel inventories are still elevated. We are cautiously optimistic about recent 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

Speaker 1

And a

Speaker 2

more favorable product mix resulted in a 515 point basis point sequential gross margin improvement between the 1st 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 a combination 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 Q2, we launched a range of new carbon based pickleball paddles that improved performance and playability For the fast growing market of pickleball enthusiasts, this launch included our Evoque Premier Raw Carbon range As well as the Malice and Mayhem paddles, which utilize our patented ThermoFuse technology.

Speaker 2

Consumer acceptance of these exciting new paddles 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 Q2 of this year. We are also pleased to announce that our Gorilla Basketball brand Has collaborated with Johnny Stephan, the founder of Handle Life and an NBA skills coach to launch a range of weighted The ball is designed to improve ball handling efficiency and playmaking ability. Johnny's social media accounts have gained over 2,000,000 followers who are has unique story and amazing ball handling skills.

Speaker 2

We are excited about this new handle life collaboration, which provides consumers with effective training tools to improve their game. We are 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 29 through August 6, we 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 a fortified balance sheet. We continue to focus on optimizing our cost structure and maximizing cash flow.

Speaker 2

As highlighted by our 2nd 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 $2,300,000 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.

Speaker 2

Cash conversion during the Q2 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 Q2, our net leverage was 4.0 times. However, we remain committed to reducing our leverage to our targeted range between 1.5x and 2.5x. 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.

Speaker 2

Along with our focus on lowering net leverage, We continue to tightly control discretionary spending, including capital expenditures. Entering the 3rd 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 Q1 By delivering a good second quarter with improved performance across most key metrics, 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 over the call to Steven for his prepared remarks.

Speaker 3

For the 3 months ended June 30, 2023, Escalade reported net income of $3,600,000 or $0.26 per diluted share on net sales of $67,800,000 For the Q2, the company reported gross margin of 24.6% compared to 25.1% in the prior year period. The 50 basis point decline was primarily the result of higher cost inventory, elevated inventory storage and handling costs, And lower operating leverage on a comparably lower revenue base, partially offset by improved margins in several categories and expense reductions implemented through 2nd quarter. Selling, general and administrative expenses declined 33.5% compared to the prior year period to $9,800,000 The decrease in SG and A expense year over year was caused by lower favorable selling expenses and initiatives to reduce our fixed costs, which Walt mentioned earlier. Earnings before interest, taxes, depreciation and amortization declined by $2,700,000 to $7,700,000 in the Q2 of 2023 versus $10,300,000 in the prior year period. Total cash provided by operations was $8,400,000 for the quarter compared to $2,500,000 in the prior year period.

Speaker 3

The increase in cash flow from operations reflects cash generated from improvement to working capital to approximately $500,000 from the prior year period as we carefully manage our capital spending. As of June 30, 2023, The company had total cash and equivalents of $577,000 together with $42,400,000 of availability on our senior secured revolving credit facility maturing in 2027. At the end of the Q2 of 2023, Net debt outstanding or total debt less cash was 4 times trailing 12 month EBITDA. In addition, we announced this morning a quarterly dividend of $0.15 per share to be paid to all shareholders of record August 29, 2023 and disbursed on September 5, 2023. One last important thing to remember, effective on January 1, we transitioned to a conventional 12 month reporting calendar.

Speaker 3

As a result, the Q2 of 2023 had 91 operating days as opposed to 112 operating days in the prior year period. This dynamic will have an impact on the comparability of our results for the Q3. With that, operator, we will open the call for questions.

Operator

Thank you. We'll now be conducting a question and answer session. A confirmation tone will indicate your line is in the question Our first question comes from the line of Rommel D'Onosio with Aegis Capital. Please proceed with your question.

Speaker 4

Good morning. Thanks very much for taking my question. I think you had talked about Incurring some severance costs in the Q2, and also obviously, you may realize some cost savings as a result of your recent restructuring efforts. May I understand correctly that most of the one time costs were incurred in 2Q, but maybe didn't get a full quarter of benefit cost savings In 2Q, so going forward, things should look even better with regards to maybe lower severance expense and higher cost savings as well as getting the full quarter's benefit. Did I am I reading that correctly?

Speaker 4

Thanks.

Speaker 2

Good morning, Rommel. I think I understand your question. We have an ongoing cost savings program, and these initiatives are generating opportunities that are Coming in every week from our teams and so they're being implemented as we receive them. At the same time, we are shutting down our Mexico operation. So we're incurring the cost to carry the We're incurring severance cost as we reduce the payroll there.

Speaker 2

So both of these things will continue Into the Q3 and the cost savings, most of those will be Continue to develop and will benefit us Q3, Q4 and into 2024. Does that answer your question?

Speaker 4

Yes, sure. It does. Yes, no, it's very helpful. Maybe just as a follow-up, how How should we think about the inventory levels now? I know you were trying to build some safety stock as you're shutting that rosary, but Just how should we think about where that number in terms of benchmarking should be at the end of Q3 and Q4 relative to where it was in Q2?

Speaker 4

Thanks.

Speaker 2

Sure. Sure. Of course, we're looking at inventory on two levels, both at our customers and ours. But We've made great progress so far this year. We anticipate further progress in the second half of the year.

Speaker 2

What we're seeing with our customers is a reduction in inventories. They're coming down. They still need to come down further in certain categories. But what I've observed is that our customers are more conservative than they have been. And so they're probably going to carry less inventory, Perhaps maybe even than they need going into the holiday season and into 2024.

Speaker 2

So we're monitoring that. We're seeing improvement, but as to where how low it goes, That remains to be seen. In certain categories like pickleball, inventories are short. We're chasing to keep up with these It's happy paddles that we've just introduced.

Speaker 4

Great. Okay, I'll jump back in queue. Thank you very much.

Operator

Our next question is a follow-up from Rommel D'annoza with Aegis Capital. Please proceed with your question.

Speaker 4

Great. Okay. Thanks. I'll just ask one more, if I could. The I know when supply chain was kind of against the industry last year and the year before that, you guys were looking to engineer products a little bit differently to drive additional cost savings.

Speaker 4

I wonder if you could just update us On the progress you've made there, to what extent that's contributing to stronger margins than what we were looking for in 2Q anyway?

Speaker 2

Thank you. Yes, sure. We when containers were $20,000 plus, it was imperative to Improve the packaging and the way that we shift the product to take less space and get more items on the container. So we've done that. What we've seen is that freight rates, ocean freight rates are Quite low now.

Speaker 2

And so the impact is not as strong from those Reengineering efforts, but we are continuing to benefit from those. And so We're seeing lower freight rates. We're seeing better efficiency of the container packing. We're seeing better currency exchange, And we're seeing lower raw material costs. So those are the things, Rommel, that are contributing to these higher margins and We anticipate those effects to continue.

Speaker 4

Great. All right. Thanks very much.

Speaker 2

Thank you.

Operator

Thank you. There are no further questions at this time. I'd like to turn the call 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 atescalateinc.com. This concludes our call today. You may now disconnect.

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Key Takeaways

  • The company recovered from Q1 with 9.5% year-over-year sales growth in Q2 (excluding calendar shift) and saw over 60% growth in non-licensed direct-to-consumer sales.
  • Q2 gross margin improved by 50 basis points sequentially and SG&A expenses fell 33.5% year-over-year driven by operating leverage, lower cost inventory, and expense reductions.
  • Cash from operations jumped to $8.4 million in Q2 (versus $2.5 million a year ago), with cash conversion exceeding 100% and net leverage reduced to 4.0x EBITDA, targeting 1.5x-2.5x.
  • New product innovation drove growth, including the launch of carbon-based pickleball paddles (Evoque Premier Raw Carbon, Malice, Mayhem) and a collaboration with NBA coach Johnny Stephan on weighted basketballs, both exceeding expectations.
  • Strategic cost control initiatives are on track to deliver $2.3 million in annual savings, with the divestiture of the Mexico facility underway and $900,000 incurred in related severance and professional fees.
AI Generated. May Contain Errors.
Earnings Conference Call
Escalade Q2 2023
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