Good morning and welcome to the Escalade's Second Quarter 2024 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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, reduce working capital to further strengthen our balance sheet, and made 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 versus 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 onetime 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,…

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 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. 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 for the [Technical Difficulty] 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. [Operator Instructions] Our first question will come from David Cohen with Minerva. You may now go ahead.

Morning guys. Thanks for sort of 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 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 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.

David, 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. 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. But I would say our priorities would be, first, internal investment in our business. Secondly, would be probably maintaining the dividend, of course, share repurchase, which we've used in the past, and we think it can be an effective tool. 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. So, we would be very selective and cautious on 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, other equipment types? Or do you think you can sort of address that organically?

Sure. And think of all, 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 effective brand in the space, it has been a bit of a gold rush. 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 money go 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. And so we spend a lot of time and energy on technology advances on the paddle front. So, 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. Here again, there's more technology in making a pickleball than you might imagine. It may be looks just like a plastic ball, but -- is it what's the type of plastic are you using, what are the tolerances, 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. We're getting good uptake there. Nets, we make a variety of nets for people to use at their home or the [Indiscernible] 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?

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 similarly a rise in component 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 continues to invest in your brands. So, are there particular categories where you're seeing 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 the technical level of competition? Thank you.

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. 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. How the consumer behaves is really 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 maybe provide a little more detail on that. Was there a particular region that was strong or new product -- or product line that was particularly strong for you there in international? Thanks.

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 going out in Europe and Australia and 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 partnerships there. So, again, it's an area of focus. It's coming off a low base, and we think it's opportunity with a long runway 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 ir@escaladeinc.com and a member of our team will follow-up with you. This concludes our call today. You may now disconnect.