ESCALADE INC Q3 FY2024 earnings call

• During Q3, net sales declined 7.7% y-o-y, but gross margin expanded even with $1.8 million nonrecurring expense. Excluding nonrecurring expenses, gross margin would have been 27.4% (265 basis point improvement y-o-y).
• Portfolio optimization efforts included sale of Rosarito, Mexico facility, cost rationalization in Eagan, MN, wind down of Orlando, FL operations, and consolidation of high-end billiards accessories into Bristol, WI facility. Operational footprint reduction of ~300,000 sq ft (20%) nearly complete by year-end.
• Generated $10.5 million cash from operations, distributed over $2 million in dividends, repaid nearly $14 million debt, net leverage ratio 1.1 times.
• Favorable demand in archery safety and basketball categories, direct-to-consumer e-commerce volumes up 29% y-o-y.
• Product innovations: Bear Archery's new compound bows, Onix Supercell Pickleball Paddle with cloud control technology, partnership with Adidas for U.S. distribution of fitness accessories, and consolidation of Cue & Case accessories into Bristol, WI.

For the three months ended September 30, 2024, Escalade reported net sales of $67.7 million. Net income was $5.7 million or $0.40 per diluted share. Gross margins were 24.8% compared to 24.7% in the prior year period, with a 10 basis point increase primarily due to lower inventory handling costs and reduced fixed costs in Mexico, offset by lower net sales and $1.8 million in nonrecurring optimization expenses. Selling, general and administrative expenses increased 6% to $11.1 million. Earnings before interest, taxes, depreciation and amortization increased to $9.9 million from $7.9 million in the prior year. Cash from operations was $10.5 million for the quarter. Net debt outstanding was 1.1x trailing 12-month EBITDA as of September 30, 2024.

• Expect higher gross margins through end of 2024 and 2025 despite near-term consumer demand softness.
• Focus on repaying remaining higher cost variable rate debt by year-end, aiming to get net leverage below 1.5x to 2.5x EBITDA target range.
• Proactively amended senior secured revolving credit facility, reducing borrowing capacity by $15 million (20%), with $58.3 million availability, and changed covenant to interest coverage ratio for operating flexibility.

• Actual results may differ from forward-looking statements due to various risks and uncertainties described in periodic reports filed with the SEC.

Q: Could you provide more detail on Minnesota rationalization, specifically the Eagan facility's water sports business?

A: In Eagan, MN, the water sports business had excess inventory, reduced square footage, adjusted staffing due to temporarily smaller category, with cost structure corrected and prepared to grow when consumer demand returns.

Q: Thoughts on winding down Orlando operations for licensed cornhole business?

A: Shifted to pre-printed import model from print on demand, consolidated inventory into Evansville and Gainesville facilities, adjusting cost structure for current business reality.

Q: Amortization expense details, specifically the $400,000 mentioned?

A: Part of restructuring charges related to Orlando, writing off intangible assets in the facility, with that now being an ongoing level.

Q: Reconsideration of capital allocation priorities given being below debt target range?

A: Will continue repaying higher cost variable rate debt, also consider cash dividend, share repurchase, and opportunistic acquisitions as opportunities arise.