Escalade Inc (ESCA) 2022 Q1 法說會逐字稿

Greetings, and welcome to the Escalade First-Quarter 2022 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 and Corporate Development. Thank you, Patrick. You may begin.

Thank you, operator. I'm Patrick Griffin, Vice President of Investor Relations and Corporate Development. On behalf of the entire team at Escalade, I would like to welcome you to our First-Quarter 2022 Results Conference Call. Leading the call with me today are our President and CEO, Walt Glazer; and Stephen Wawrin, Chief Financial Officer.

Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may vary significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including 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 over the call to Walt.

Thank you, Patrick, and welcome to those joining us today for Escalade's first ever quarterly earnings conference call. We appreciate your interest in our company and look forward to providing you with quarterly updates in the years ahead, while working hard to create value for our shareholders through our growing portfolio of recreational brands. Our mission is connecting family and friends, creating memorable moments, and playing life to the fullest.

Before we move into a discussion of our recent operational and financial highlights, I want to begin today's call with a high level overview of our business, along with a summary of our strategic business priorities that we believe will continue to drive profitable growth.

Since our company's inception 100 years ago, Escalade has assembled a portfolio of more than 30 leading sports and recreation brands, serving a diverse loyal base of customers. Outdoor categories include basketball, where Escalade is a leading supplier of high-end residential hoops with our Goalrilla and Goalsetter brands; backyard playground equipment, supplied by Woodplay; archery, for youth to enthusiasts, with Bear Archery; water sports, with our RAVE brand; and outdoor games and licensed tailgating, supplied by our Victory Tailgate company.

Pickleball is one of the fastest growing sports in North America, and we were early with our authentic Onix and DURA Pickleball brands. Indoor categories include darting, with Accudart, Winmau, and Unicorn; table tennis, with the leading STIGA and Ping-Pong brands; game room, with several leading brands, including Brunswick Billiard, American Heritage, and American Legend, which cover billiards, shuffleboard, foosball, air hockey, poker tables, and related furniture and accessories; and finally, home fitness, with our Lifeline and the Step brands.

Product innovation remains central to our long-term profitable growth. During the first quarter, our RAVE sports brand received Innovative Product of the Year Award from the Water Sports Industry Association for its new Big Easy boat towable; Bear Archery received several Reader Choice awards for their compound bows from leading archery publications; and our Trophy Ridge brand received several awards and strong trade acceptance at the 2022 Archery Trade Association Show for our Digital React Sight, a technological advancement in archery sites. Our basketball brands incorporate dozens of patents for technology and enhancements developed by our in-house engineering team.

At Escalade, we employ a hybrid sourcing model, one that leverages both domestic manufacturing facilities and international procurement capabilities. Today, we have three manufacturing facilities in the United States, one plant in Mexico, and a very strong Asia sourcing team.

We balance our in-house production capabilities with imports as market conditions dictate. Recently, given higher freight costs and supply chain challenges, we've chosen to reshore certain products, such as entry-level compound bows, umbrella bases, and fitness weight sets, and we are currently evaluating several additional opportunities. In the current environment, domestic production can be cost effective while allowing for vastly improved inventory control and on-time delivery. During the last year, we've also added warehouse capacity to store additional buffer inventory in support of customer requirements.

Prudent capital allocation is a key focus. Escalade generates healthy free cash flow, and we know that our future success is heavily influenced by how well we invest that capital. Our first priority is reinvesting in our core businesses to protect and build upon our leading market positions and making sure that we are providing great products at a fair price for our consumers. We invest in product development, as mentioned earlier. We buy tooling and equipment to improve quality, to increase capacity, and to enhance efficiency. We've been increasingly investing in digital tools and services to serve our trade partners, to create consumer engagement, and to provide our employees with the data and information they need to be successful. And we've been investing in our existing and new facilities to support growth.

Our Board and management remain firm believers in a robust return of capital program, having returned nearly $45 million to shareholders since 2019, equally split between regular cash dividends and opportunistic share repurchases. Last month, our Board of Directors approved a dividend increase to $0.15 per quarter, an increase of 7.1%.

Throughout our history, Escalade has been an active acquirer of complementary recreation brands and assets. During the past decade alone, we have completed 12 acquisitions, including substantial platform companies in new and adjacent markets, as well as smaller bolt-on acquisitions in existing categories. We have bought both successful business that would benefit from Escalade's resources and we bought assets out of bankruptcy. Common theme is businesses that fit our mission and create shareholder value.

Finally, we've also sold businesses to redeploy capital where we expect it to generate better returns. We also believe it's critical that the interest of the company, the Board, and the management team are aligned with our shareholders. We think one of the best ways to achieve this alignment is to have officers and directors who hold a significant equity position in Escalade. To that end, our officer's and director's ownership represents over 20% of the shares outstanding.

Turning now to discussion of our first-quarter performance. We generated strong Q1 results versus the first quarter of 2021, highlighted by growth in net sales, EBITDA, and net income. First quarter net sales growth, excluding acquisition-related contributions, increased 12.2% in the first quarter, driven by strong organic growth across our basketball, archery, pickleball, and indoor game categories.

It is important to note that some sales from Q2 were pulled forward into Q1, and we experienced a very favorable mix, which enhanced our gross margin in the first quarter. We anticipate the global supply chain issues to continue for the foreseeable future, with the current COVID situation in China and the West Coast Longshoremen contract coming up for renewal this summer. We are carefully monitoring point-of-sale data, along with consumer behavior and sentiment, given rising interest rates, inflation, and geopolitical uncertainty. We serve a broad range of consumers and have performed well in a variety of economic environments over the past century. We're leaders in a diverse range of categories, with a wide range of price points to address consumer needs.

In January, we completed the acquisition of Brunswick Billiards, the largest and oldest provider of billiard tables, game tables, and game room furniture in the United States. Founded in 1845, Brunswick is an iconic American brand. An interesting fact is that Abraham Lincoln owned a Brunswick billiard table. We view ourselves as the steward of this great brand, and, just like all of our other great brands, we will invest, protect, and build upon its name and reputation. The Brunswick integration is well underway as we combine our talented teams to create a world-class billiards business. We expect the Brunswick acquisition will be accretive to earnings beginning in the second half of 2022.

Following our completion of the Brunswick acquisition, along with our share repurchases, an intentional purchase of buffer inventory intended to mitigate supply chain disruptions, our net leverage has increased versus historical levels, while remaining manageable. At the end of the first quarter, our ratio of net debt to trailing 12 months EBITDA was 2.56. The remainder of 2022 debt reduction will be a focus and an excellent opportunity to increase shareholder value through deleveraging.

With that, I'll turn the call over to Stephen for a review of our recent financial results.

Thanks, Walt, and welcome to those joining us on the call today. For the three months ended March 19, 2022, net sales increased to $72.4 million versus $59.2 million in the first quarter 2021, an increase of 22%. Net sales, less acquisition-related revenues, increased 12.2% on a year-over-year basis in the first quarter of 2022. Escalade reported net income of $6.7 million, or $0.49 per diluted share, compared to $5.4 million, or $0.39 per diluted share, in the first quarter of 2021. First-quarter EBITDA increased 27% versus Q1 2021 to $10.5 million.

First-quarter 2022 results benefited from strong organic sales growth across the basketball, archery, pickleball, and indoor game categories, together with contributions from the company's acquisition of Brunswick Billiards, given sustained demand from our growing diverse mix of loyal customers.

Gross profit declined 165 basis points to 27.8% in the first quarter, given continued challenges related to the global supply chain, raw materials cost inflation, and labor constraints. In response to these challenges, the company has expanded its sourcing and procurement initiatives as well as invested in new inventory ahead of further anticipated cost increases and supply chain disruptions.

We've raised prices where necessary across our portfolio and continue to focus on tight expense management. As Walt mentioned, total leverage is higher than our historical levels, but still within our comfort zone. Total debt at the end of the quarter was just shy of $100 million, and shareholder's equity was $151.6 million. $45.8 million of our debt is fixed rate at 2.97%, while the remainder is a floating rate line of credit.

With that, we will turn the call over to the operator to begin our question and answer portion of the call.

(Operator Instructions) Rommel Dionisio, Aegis Capital.

Thanks, and good morning. A question on the sales breakdown by distribution channel. I noticed that mass merchants, as well as international, were both up about 50% in terms of gross sales compared to the year ago quarter. I wonder if you could just give a little more color on that. Was that more consumer traffic in stores as a result of recovery from the pandemic? What were some of the factors kind of driving that really strong growth in those two channels?

Yeah. Thank you, Rommel; it's a great question. We've seen good demand across our customer base, and part of it revolves around our ability to supply product. So our sourcing teams, I think, have outperformed the industry in our ability to acquire inventory. And so we were, for the most part, well stocked. And so that certainly contributed.

Okay. And maybe just a follow-up. On the pull forward that you noted on Q1 coming from Q2, was there a particular unusual reason for that? Was that partly from the acquisition? And also, is it possible to quantify the magnitude of maybe how much sales were pulled forward from Q2 to Q1? Thanks.

Yeah. So I think a big part of it is that our customers are concerned about having inventories, so they're buying earlier than they have in the past. And once again, we had good supply, and we're able to fill orders, and so we had a very strong finish to the quarter. As far as quantifying it, we don't really give forward-looking guidance, so we'll leave it at that.

Okay. That's fair enough. Thanks so much, Walt.

Thomas Matson, Private Investor.

Thank you. Great quarter to all, and congratulations for initiating these calls. Walt, I know you said you don't want to talk about forward guidance. But typically, quarter two is about 1.5x the sales of quarter one. I expect it's going to be less this year. Can you put some bounds on that for us?

Sure. And I can explain it a little bit. We operate on 13 four-week periods as opposed to the normal calendar schedule. So our first, third, and fourth quarters have three four-week periods, and the second quarter has four four-week periods. So that describes or explains that. So as we mentioned earlier, we pulled some sales out of Q2 into Q1. So I would say that the relationship would be a little bit more muted in 2022 than it has been in the past.

Okay. Since this is your first public call and a lot of people aren't familiar with the company, could you share the longer-term targets that you have for gross margin and operating margin? Say, two to three years out?

What I can tell you is this. Let me start with growth, Tom. A lot of our categories are mature. We have some particular categories that are growing much faster; pickleball, for example. But we look at our mature businesses as being able to grow 2% to 3% units. We've traditionally thought of it as 2% to 3% inflation or pricing that may be higher in the current environment.

We also have generated free cash flow, as I mentioned earlier. So we enhanced our growth with acquisitions. And then we also believe that we do have margin improvement opportunities. So that all works its way down to low to mid-teens long-term growth rate. That's what we're targeting.

And then as far as the margins go, our internal team knows that we want to achieve a minimum of 10% operating margins. And we believe we can continue to do that and enhance those. So I hope that's helpful to you.

Yes, it is. 10% minimum is kind of low just because -- if we back out amortization, it looks like the organic margin and the organic sales numbers today were something like 15%. And I know you mentioned favorable mix, but once you integrate Brunswick into the mix, do you think you can do mid-teens?

That would be an aspirational goal, Tom.

All right. Okay, I'll tone it down then. I'm just trying to establish some parameters. A couple of questions on the balance sheet. You mentioned investing in inventory because of supply chain issues, and I know these high shipping costs are also inflating the values there. But the ratios, inventory to sales receivables, or inventory cost of goods sold receivables to sales, are quite higher than they were in the pre-COVID years. Now I'm wondering if you anticipate getting back to those levels in time, say over the next two years, to free up some cash for that reduction.

Yes, absolutely. I would say, in fairness, our asset utilization today is not great. The good side of that is that we do have inventory and we're able to serve our customers. The bad side of that is that we're carrying a lot of debt; relatively speaking, we're investing capital in our inventory. One of the issues with the supply chain today is that goods arrive late, so we have holiday goods that came in in late December and January.

It's all good product, but we're going to carry that until next fall and be in a great position to serve our customers at that point. But to answer your question, inventory control and inventory management is an initiative within the company, and we would expect to improve that.

Good. And then Brunswick Billiards, it's your largest acquisition by far, at least in the history that I've looked at, going back quite a few years. Can you share your expectations for sales and gross margin once you get everything integrated? And also, are there any -- some material operating synergies that we can expect?

Well, absolutely, there are operating synergies, and you can figure out how much we sold in the two months that we had in Q1 by comparing our [organic sales] growth to our total. And so that will give you a good clue on the size of the business. The operational synergies are significant, and I would say that our teams have gelled and are really coming together well. We have a significant billiard business already. And then of course, Brunswick is a very substantial business itself.

So those two teams are coming together well, but Brunswick is the leader at the high end. Our American Legends and American Heritage brands have strong positions at the entry level and in the medium range. Our Cue & Case business is very, very strong in accessories, and Brunswick has never -- or at least in recent years -- not been strong with accessories. So these teams are working together. They're finding a lot of opportunities on the sales side, on the cost side. So we're quite optimistic about the long term for Brunswick.

And on the margin side, is it realistic to think you can get the gross margin up to 25% or so? Say by the end of next year, maybe sooner?

For the entire business or just for the Brunswick?

No, no. Just for Brunswick.

Yeah. Brunswick has, and does, and should continue to earn good margins, I would say, above our fleet average.

Good. And then, is there seasonality there? The current business, prior to Brunswick, Q1 was always the weakest quarter. And this year, it's going to be skewed a little bit for the reasons you elaborated. But is Brunswick going to be more of a straight line quarter-to-quarter business, or do they have some seasonality too?

They have some seasonality. It's typically a fall and winter business. So the last couple of years, seasonality has been thrown out the window as the project thrives at different times and consumer is buying throughout the year. But I would say, fall, winter seasonal.

So the two months that we've seen that are included in the current numbers are maybe on the high end for a quarterly number? Make sure we multiply it by four, or take a little less than that in terms of sales expectations?

I would say that (multiple speakers)

I said multiply it by four, but I mean to annualize it anyway, adjust it that way.

Yeah. We closed at the end of our first period. So we only had periods two and three. I would say those are not peak selling periods.

Okay, good. Thank you all. Good luck in putting this all together, and I'm very glad you've initiated these calls.

Well, thank you for your questions and your interest.

Sure thing. Bye.

(Operator Instructions) Thank you. There are no further questions at this time. I would like to turn the floor back over to Patrick for any closing comments.

Once again, thank you for joining our call. Should you have any questions, please feel free to reach out 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.