Good morning and welcome to Escalade's Second Quarter 2024 Results Conference Call. All participants will be in 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.

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. Leading the call with me today are President and CEO, Walt Glazer; and Stephen Wawrin, 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 today. We demonstrated strong operational discipline in the second quarter, as highlighted by our ongoing actions to reduce fixed overhead costs, improve manufacturing efficiency, and reduce working capital to 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% gross margin, which was a modest decline compared to the prior year period. We continue to focus on operational efficiencies to enhance our margins. While we effectively managed fixed overhead costs within our control, these efforts were offset by higher promotional activity with our retail partners together with one-time non-recurring impacts related to the ongoing rationalization of our existing manufacturing footprint. Importantly, our second quarter cash flow from operations increased nearly 60% on a year-over-year basis in Q2, which allowed us to repay $8.6 million of high-interest variable rate debt in the period. At the end of the second quarter, our net leverage was 1.7 times our trailing 12-month EBITDA, which is near the low end of our long-term leverage ratio of 1.5 times to 2.5 times that we have previously discussed. We continue to progress with our plans to divest our Rosarito property and facility. Meanwhile, we have reduced the operating cost 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. As we look to the second half of 2024, we continue to expect our ongoing cost rationalization and other initiatives will position us to deliver a full-year gross margin rate for our full year 2023, despite the overall softness in spending for consumer discretionary purchases. Importantly, we have seen continued consumer demand for our leading brands, 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 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 owned e-commerce initiatives, marketing programs, and 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. 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 second quarter cash generation. We expect cash generation to be seasonally softer in the third quarter followed by stronger cash flow in the fourth 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. 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 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. 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.

Thank you, Walt. For the three months ended June 30th, 2024, Escalade reported net income of $2.8 million or $0.20 per diluted share on net sales of $62.5 million. For the second quarter, the company reported a gross margin 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 second quarter increased by 40% compared to the prior year period to $10.1 million. As a percentage of net sales, SG&A increased by 168 basis points year-over-year to 16.1% in the second quarter of 2024 compared to 14.4% in the second quarter of 2023. The second quarter SG&A increase was driven by additional selling and marketing spending in a more promotional retail environment. Earnings before interest, taxes, depreciation, and amortization decreased by $1.8 million to $5.8 million in the second quarter of 2024 versus $7.7 million in the prior year period. Total cash provided by operations for the second quarter of 2024 was $13.3 million compared to $8.4 million 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 second quarter of 2024 due to our inventory reduction efforts and normalizing sales levels. As of June 30th, 2024, the company had total cash and equivalents of $362,000, together with $71 million of availability on our senior secured revolving credit facility maturing in 2027. At the end of the second quarter of 2024, net debt outstanding or total debt less cash was 1.7 times trailing 12-month EBITDA. As of June 30th, 2024, we had $43.2 million of total debt outstanding, including $14 million 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.

We will now begin the question-and-answer session. Our first question will come from David Cohen with Minerva. You may now go ahead.

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

David, thanks for your questions. Yes. So, as you point out, we do believe we'll actually be 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. We continue for now to focus on the debt repayments. We're paying about 7% on the variable piece and a 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. I would say our priorities would be, first, internal investment in our business. Secondly, would be probably maintaining the dividend. Share repurchase, which we've used in the past, we think it can be an effective tool. Lastly, 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. So, we would be very selective and cautious on the acquisition front.

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, or do you think you can address that organically?

Sure. It'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 ONIX, one of the leading brands and a legitimate brand in the space. It has been a bit of a gold rush. Everyone 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 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 a remarkable amount of technology involved. We spend a lot of time and energy on technology advancements in the paddle front. We love our ONIX brand, and I think it's well-positioned. On the ball side, we have the ONIX ball and then the DURA Fast ball, which is the preferred tournament ball for the pros. Again, there's more technology in making a pickleball than you might imagine. It may look just like a plastic ball, but it’s about the type of plastic used, the tolerances, and how the ball is processed. We feel like we've got good technology there. To your point, we have expanded into eye protection, which is increasingly important. We're getting good uptake there. Nets, we make a variety of nets for home use or events. I would say we're probably not going to get into apparel. That's not an area that we have particular expertise in, but there are others addressing that side of it. Does that answer your question fully?

Yes. Thanks very much.

You're welcome.

Our final question will come from Rommel Dionisio with Aegis. You may now go ahead.

Thanks for taking my question and good morning. You alluded to a rise in component promotions. 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 you guys continue to invest in your brands. Are there particular categories where you're seeing those competitive promotions worse than others? And maybe some thoughts going into the holiday season on how you'd 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 at the technical level of competition? Thank you.

Sure. Thank you, Rommel, and good morning. Yes, we are investing more in advertising and promotion, fitting with both our emphasis on managing our inventory levels and the current environment. It's a more competitive, promotional atmosphere, and we expect that to continue. Looking into the holiday season, our expectations are that inventories will be in good shape during that time. Our POS is better than our factory sales. Many of our retailers are cautious and managing their inventories closely. If the consumer surprises us and comes back strongly during the holiday season, I think there will be a big opportunity for much higher factory sales as we refill the channel. So, as we enter the holiday period, we are cautiously optimistic. Again, we feel like inventories are in decent shape. How the consumer behaves is pretty much anybody's guess.

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 provide a little more detail on that. Was there a particular region that was strong or a new product line that was particularly strong for you internationally? Thanks.

Yes. Rommel, we are coming off a pretty low base there, but it's an area of focus for us. I would point out basketball and pickleball have been good for us in Europe, Australia, and New Zealand. We do have a budding effort in China, selling some of our branded products there through partnerships. Again, it's an area of focus; it’s coming off a low base, and we think it has great opportunities ahead for Escalade.

Great. Thanks very much.

This concludes our question-and-answer session. I would like to turn the conference back over to Patrick Griffin for any closing remarks.

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 [email protected], and a member of our team will follow up with you. This concludes our call today. You may now disconnect.