Good morning, everyone, and welcome to the Escalade Fourth Quarter 2024 Results Conference Call. All participants will be in a listen-only mode. If you need assistance, please say no or conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one using a touch-tone telephone. To withdraw your question, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Patrick Griffin, Vice President of 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 fourth quarter and full year 2024 results conference call. Leading the call with me today are President and CEO, Walter 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 Walter Glazer.

Thank you, Patrick, and welcome to those joining us on the call. Throughout 2024, our team successfully navigated a soft period of consumer demand by continuing to prioritize operational discipline, asset optimization, expense reduction, and efficiency gains. These initiatives continued during the fourth quarter, culminating in year-over-year margin expansion and strong cash flow. Fourth quarter sales declined 2% versus the prior year period, we delivered more than 60 basis points of gross margin improvement largely driven by lower manufacturing and logistics costs. Over the last two years, we've reduced our workforce by approximately 23%, while decreasing our owned and leased square footage by nearly 20%. These reductions were driven mainly by the closure of our Rosarito, Mexico facility, the termination of a lease in Orlando, Florida, and operational rightsizing across the remainder of our footprint. While we've experienced significant one-time costs related to our operational rightsizing and facility wind down, we see a pathway for improved operating leverage and margin expansion in the year ahead. Even in an environment where consumer demand for discretionary recreational goods remains soft. Beyond our focus on expense control, we also continue to prioritize working capital efficiency. Since our inventory peaked in the third quarter of 2022 as a result of excess purchases during the pandemic and supply chain disruptions which delayed receipts, we've successfully reduced our inventory levels by 44% in 2024 alone, reduced inventory levels by nearly 20% when compared to year-end 2023. We have largely maintained price discipline with our in-line items. Also moved aggressively when necessary, which negatively impacted gross margins in 2024. Our improved working capital efficiency has favorably impacted our operating cash flow performance. We generated $36 million in operating cash flow in 2024, including more than $12 million during the fourth quarter. Given our strong free cash generation,…

Thank you, Walter. For the three months ended December 31, 2024, Escalade reported net income of $2.7 million or $0.19 per diluted share on net sales of $63.9 million. For the fourth quarter, the company reported a gross margin of 24.9%, compared to 24.3% in the prior year period. The 61 basis point increase was primarily the result of lower operational costs driven by our footprint rationalization and workforce reduction initiatives. Selling, general, and administrative expenses during the fourth quarter increased by 5% or $0.5 million compared to the prior year period to $10.9 million. Earnings before interest, taxes, depreciation, and amortization decreased by $0.5 million to $5.9 million in the fourth quarter of 2024, versus $6.4 million in the prior year period. Total cash provided by operations for the fourth quarter of 2024 was $12.3 million for the quarter compared to $20.6 million in the prior year period. Our inventory reduction initiative contributed less to free cash flow generation in the fourth quarter of 2024 versus the fourth quarter of 2023 as we approached a more optimal inventory level. As Walter mentioned, we expect to further reduce our inventory levels in 2025 as part of our ongoing optimization efforts. As of December 31, 2024, the company had total cash and equivalents of $4.2 million. At the end of the fourth quarter of 2024, net debt outstanding or total debt plus cash was 0.8 times trailing twelve-month EBITDA. As of December 31, 2024, we had $25 million of total debt outstanding. During the fourth quarter, we repaid the remaining balance of our variable interest rate debt. As Walter mentioned, we intend to be mindful of our disciplined approach to the allocation of resources as well as our cost of capital when deploying our cash and pursuing a balanced return of capital program. With that operator, we will open the call for questions.

Ladies and gentlemen, at this time, we'll begin the question and answer session. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Once again, that option is available. Our first question today comes from Rommel Dionisio from Aegis Capital. Please go ahead with your question.

Good morning. Thanks for taking my question. With regards to inventories, Stephen, I know you talked about, well, you two talked about the inventory reduction as being a key metric here over the last several quarters. Made a lot of progress in that, obviously. But as we look forward, you know, with impending potential tariffs, would you think about boosting inventories near term just to make sure you have a safety stock or perhaps purchase at a lower price before tariffs kick in? How do you guys think about that? And how can we benchmark that over the next couple of quarters? Thanks.

Hey. Good morning, Rommel. Yeah. So for sure, we advanced some shipments. We called ahead some business, some inventory. Ahead of the tariffs to sort of beat the price increase. But our goal still remains to be efficient in our use of inventory and working capital. We think there's still room to reduce inventories while maintaining high service levels for our customers. So, you know, we're taking a balanced approach. I would say that we're seeing some opportunities for further reductions as I said.

Sure. Thanks. And also, Jim, not to read too much into what you just said, well, could inventories have been even lower, not taking out some of the safety stock that you mentioned here in the last few months or quarters? Thanks.

We think there's opportunity to bring it down further. Not to the extent we did, you know, over the last two years. Right. Definitely some opportunities.

Okay. Great. And maybe just a follow-up question if I could with regards to gross margin. Could you talk about product mix shift? I know you cited strength in archery and table tennis. When does that come in as somewhat higher margin as well as was that product mix shift a tailwind for you in the quarter?

Yeah. So I would say that, you know, we're running about the fleet average. There's not been a big shift. Due to mix, some puts and some takes, I think the real message we want to deliver is, hey, we absorbed a bunch of costs related to, you know, reducing inventory, related to the reduction of our facilities and our footprint. And we think that our gross margins on balance should be better moving forward.

Great. Thanks very much. It's very helpful.

Once again, if you would like to ask a question, please press star and one. Our next question comes from David Cohen from Minerva Advisors. Please go ahead with your question.

Thanks. Walter, thank you so much for shepherding the Escalade ship of state through some really, really choppy waters. We appreciate the seriousness with which you've embraced the endeavor. And, obviously, the full results don't show with demand sort of muted right now, but a look at the balance sheet is comforting. Much more comforting now than it was a couple of years ago. So thank you. Your text of the release talks about nonrecurring expenses. You have referred to them in this call as significant. Is there some way you can sort of give us a ballpark on what 2023 and 2024 reflect with regard to those expenses? Obviously, we're just trying to normalize what going forward profitability profile might look like.

Yeah. Sure. Sure, David. And thank you for those kind words. You know, it's been a real team effort. I mean, everybody in Escalade has been working hard to accomplish these goals, and we feel like we're in a great position going forward. You know, as far as the impact, you know, without getting too granular, the one thing I can tell you is that the one-time costs we absorbed in 2024 are kind of roughly comparable to the gain on sale that we reported, and that was broken out as about $3.9 million. So I don't know if that's helpful or not, but that should give you some sense of the scale.

Okay. Another question that I had for you is with regard to the balance sheet. Obviously, the leverage has come way down. And I'm wondering whether that changes your perspective on what the balance of capital allocation should look like.

Yeah. So for the last few years, I mean, particularly, you know, 2021, 2022, 2023, we were focused entirely on debt reduction. We reported it in the quarter, we have begun buying back our stock. We've bought back about $2.2 million worth. So that's now available. It's at our disposal, I would say. So, you know, we pay up, as you know, we pay up a significant cash dividend. We want to continue investing in our core businesses. As long as it makes sense, we'll plan to continue to repurchase our shares. And then we're, you know, very selective acquirer. So if the right opportunity came along, we would definitely be interested in that.

Thanks a lot, and best of luck, Walter.

Thank you, David.

And ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to Patrick Griffin for any closing remarks.

Thank you, operator. On behalf of everyone at Escalade, including our board of directors, I want to express our deepest gratitude for Walter's leadership and unwavering dedication to successfully navigating the company through the challenging post-pandemic environment and intentionally setting the stage for our next growth phase driven by consumer-led innovation. We are extremely grateful for Walter's contributions and look forward to building upon those with Arman Bohm as our incoming President and CEO. Once again, thank you for your interest in Escalade and joining our call. If you have any questions, please feel free to contact us at escaladeir@escaladeinc.com, and a member of our team will follow up with you. This concludes our call today. You may now disconnect.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.