Greetings, and welcome to the Escalade Second Quarter 2023 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Patrick Griffin, Vice President of Investor Relations. Thank you, sir. You may begin.

Thank you, operator. On behalf of the entire team at Escalade, I'd like to welcome you to our second quarter 2023 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 lines 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. I'm pleased to report that our team did a fantastic job recovering from a difficult first quarter 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 made by our team enabled us to beat the plan in the second quarter. Sales volumes improved significantly during the second quarter. Importantly, our results were substantially impacted by 21 fewer days within our reporting calendar as we moved to a traditional reporting calendar on January 1, 2023. Previously, our second quarter included four 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 declined 9.5% on a year-over-year basis, which was an improvement over the prior quarter's sales decline of 28.5%. During the second quarter, 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. While U.S. retail sales and sporting goods remained soft and channel inventories are still elevated, we are cautiously optimistic about recent increases in housing starts and somewhat improved consumer sentiment, driven by stability in the labor markets and a slowdown in inflation. 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 and a more favorable product mix resulted in a…

For the 3 months ended June 30, 2023, Escalade reported net income of $3.6 million or $0.26 per diluted share on net sales of $67.8 million. For the second quarter, 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 the second quarter. Selling, general and administrative expenses declined 33.5% compared to the prior-year period to $9.8 million. The decrease in SG&A expense year-over-year was caused by lower variable selling expenses and initiatives to reduce our fixed costs, which Walt mentioned earlier. Earnings before interest, taxes, depreciation and amortization declined by $2.7 million to $7.7 million in the second quarter of 2023 versus $10.3 million in the prior year period. Total cash provided by operations was $8.4 million for the quarter compared to $2.5 million in the prior year period. The increase in cash flow from operations reflects cash generated from improvement to working capital as a result of a reduction of inventories through the second quarter of 2023. Additionally, capital expenditures during the quarter decreased 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 $42.4 million of availability on our senior secured revolving credit facility maturing in 2027. At the end of the second quarter of 2023, net debt outstanding or total debt less cash was 4x 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. As a result, the second quarter 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 third quarter. With that, operator, we will open the call for questions.

[Operator Instructions] Our first question comes from the line of Rommel Dionisio with Aegis Capital.

I think you had talked about incurring some severance costs in the second quarter. And also, obviously, you realized some cost savings as a result of your recent restructuring efforts. Did I understand correctly that most of the onetime costs were incurred in 2Q, but maybe you 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?

Rommel, I think I understand your question. So 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 facility, we're incurring severance costs as we reduce the payroll there. So both of these things will continue into the third quarter 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?

Yes. No, it's very helpful. Maybe just as a follow-up, how should we think about the inventory levels now? I know you were trying to build some safety stock as you're shutting down Rosarito. But just how should we think about where that number in terms of benchmarking should be at the end of third quarter and fourth quarter relative to where it was in the second quarter?

Sure. Of course, we're looking at inventory on 2 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. 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. 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 hot new paddles that we've just introduced.

[Operator Instructions] Our next question is a follow-up from Rommel Dionisio with Aegis Capital.

Great. Okay. So I'll just ask one more, if I could. I know when supply chain was kind of turning 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. 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.

Yes, sure. We -- when containers were $20,000 plus, it was imperative to improve the packaging and the way that we shipped 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. And so the impact is not as strong from those reengineering efforts, but we're 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.

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