Escalade Inc (ESCA) 2026 Q3 法說會逐字稿

Good morning, and welcome to the Escalade third quarter 2026 results conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Wes Smith, Vice President of Financial Reporting 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 third quarter 2026 results conference call. Leading the call with me today are President and CEO, Patrick Griffin; 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 Patrick.

Thank you, Wes, and welcome to everyone joining us on today's call. Our third quarter results demonstrate the effectiveness of our more efficient operating model in generating earnings and cash flow growth even in the face of deteriorating consumer sentiment and a difficult year-over-year comparison. The strength of our innovative product offering, favorable sales and customer mix, disciplined cost management and strong operational execution combined to help us deliver a healthy improvement in gross margin compared to the third quarter of last year.

Net sales declined 3% year-over-year, reflecting softness in our basketball, indoor games and table tennis categories as well as a challenging comparison with last year's third quarter, which benefited from shipments delayed from the second quarter by tariff-related market volatility. Our strategic exit from certain lower-margin product lines also contributed to the net sales decline. The decline was partially offset by growth in archery, driven by strong vertical boat demand and the incremental contribution from our September 2025 acquisition of Gold Tip, along with increased demand in the safety and outdoor games categories.

Gross margin expanded by approximately 123 basis points year-over-year to 29.4%. This expansion was driven by a favorable sales mix, higher fixed cost absorption and strong operational execution. We also continue to make progress improving asset utilization. Despite the additional inventory from the Gold Tip and AllCornhole acquisitions in the second half of last year and the ASL Solutions acquisition during this year's third quarter, total inventory was $2.9 million below the prior year level. This progress reflects our focus on driving working capital efficiency and generating free cash flow. We continue to work towards our longer-term inventory turn target of 3 times.

As we move towards the heart of the holiday season, we continue to collaborate with our retail partners to deliver a more frequent cadence of promotions that highlight newness as well as value and engage consumers to accelerate sell-through. Although inflation and broader economic uncertainty continue to pressure discretionary consumer spending, our more resilient operating model gives us confidence in our ability to manage through these challenging market conditions. We expect recent and upcoming new product introductions to support market share gains across several key categories as we move into 2027.

In pickleball, we had several new paddle launches from ONIX, including the Praxis. The Praxis features an Endurefoam, core designed for durability and a raw carbon fiber surface that enhances spin and control. The new ONIX Aeris offers an accessible entry price, a range of colors and lightweight construction that helps players react quickly and stay comfortable during extended play.

We've also been active in the game room with several new products in both table tennis and billiards. The STIGA ONIX 18 table tennis table features a quick play design that assembles in minutes and has premium features such as integrated ball storage and lock and caster wheels for easy mobility. Our new Pro Carbon Cybershape bracket's unique profile combines a larger optimal hitting area with carbon-powered performance.

Within billiards, we launched the American Heritage Ann Arbor 8-foot table, which features a modern architectural design that makes it a showpiece for the home game room. It's 1-inch three-piece slate delivers exceptional playability and consistent ball roll. These launches illustrate our increased investment in product innovation across our portfolio. We expect our current and ongoing investments in innovation to drive an acceleration in new product introductions as we move into 2027.

Strengthening the balance sheet remains a priority. During the third quarter, we repaid $1.8 million of debt and increased our cash balance by $8.1 million, ending the quarter with a net cash position of $11.4 million. Our low-cost, fixed rate debt and higher cash balances also contributed to increased net interest income. Our consistent free cash flow and strong balance sheet also positions us to invest in innovation, accretive acquisitions and our facilities to improve capacity as well as efficiency to support future growth. We remain focused on strategic accretive acquisitions that enhance our existing platforms, expand our presence in attractive new categories and strengthen our competitive positioning. We are encouraged by our growing pipeline of acquisitions opportunities that meet this criteria.

In closing, our third quarter results demonstrated our ability to improve gross margins and cash generation in a challenging macroeconomic and geopolitical environment that has impacted consumer discretionary spending. We expanded margins, improved working capital efficiency and strengthened our balance sheet. Looking ahead, we believe our more efficient operating model, recent acquisitions, disciplined capital allocation and financial flexibility position us to continue to pursue growth opportunities and create long-term shareholder value.

With that, I will turn the call over to Stephen to walk through our third quarter financial results.

Thank you, Patrick. For the three months ended September 30, 2026, Escalade reported net income of $6.7 million or $0.48 per diluted share on net sales of $65.6 million. Gross margin was 29.4% compared to 28.1% in the prior year period. The 123-basis-point improvement was a result of lower operational costs driven by better absorption and a favorable sales mix. Gold Tip, which we acquired in September 2025, contributed to the favorable mix as we continue to ramp up the business over the past year.

Selling, general and administrative expenses were $11.6 million during the third quarter, a $0.4 million increase compared to the prior year period, largely related to costs associated with the AllCornhole and Gold Tip businesses, acquisition-related professional fees and an increase in advertising expenses. Earnings before interest, taxes, depreciation and amortization increased by $1.4 million to $10 million in the third quarter of 2026 versus $8.6 million in the prior year period. This increase reflects the year-over-year improvement in our gross profit as well as the benefit of recovery for previously paid tariffs received during the quarter of $1.6 million.

Cash flow from operations was $14.9 million in the third quarter compared to cash used of $1 million in the prior year period. The increase primarily reflects our higher net income and lower working capital requirements. As of September 30, 2026, the company had total cash and equivalents of $24.5 million. As of September 30, 2026, we had $13.1 million of total debt outstanding, all of which was classified as current as of the end of the quarter.

With that, operator, we will open the call for questions.

(Operator Instructions) Rommel Dionisio, Aegis Capital.

In your prepared comments, Patrick, you talked about favorable sales mix. Could you just walk us through, is that more consumers moving up to more premium-priced products within specific categories? Or is it that kind of shift from a basketball to archery? How should we think about that?

Rommel, this is Patrick. That's a great question. What we kind of meant by the favorable sales mix is our customer base changed a little bit in the quarter. So we were doing more dealer business and customers that have fewer maybe programs and then also more direct-to-consumer business, which is generally a higher-margin business for us.

Okay. That's very helpful. And just on that theme, you talked about working through the holiday season with exciting promotions. Is that kind of promotional activity focused on kind of gaining market share? Or do you sense that there's any issue on retail inventories that you need to work through that's why you're putting forth promotions? How should we kind of think about that as well?

That's a great question. We're very comfortable with our current inventory levels. For us, I think it's just about having exciting promotions. We know it's going to be a promotional environment. So we want to have regular promotions, more promotions, and we want to get the consumer sooner in that buying cycle for the holidays.

Okay. And maybe just one last one. You have $25 million in cash now. Could you maybe walk us through kind of to the extent that you feel comfortable so your plans with free cash flow. I mean you obviously continue to generate cash. Are you just kind of building more chance for future acquisitions? Or how do you kind of think about paying down debt and all the different levers you can pull there?

Thank you for the question. We're thinking about capital allocation in a couple of different ways. But we're comfortable having -- we've talked about having at least a turn of EBITDA, which is around that number you mentioned on the balance sheet. So we have a pretty active pipeline of acquisition opportunities. So we're continuing to look at that. So we're anticipating that some of that cash could be used towards acquisitions to the extent that we get to the finish line with those.

And then we've also talked about investing more in our businesses. So we've got some capital expenditure projects. You'll see probably a little bit more of that in the fourth quarter and then a little bit more into next year as well. And then we continue to pay a dividend and buy back our shares from time to time when that makes sense for the Board of Directors.

(Operator Instructions) Michael Legg, Ladenburg.

Congratulations on the operational progress. I wanted to ask a couple of questions related to the tariff refund. I think you got roughly $10 million in the second quarter and $9 million of that was receivable that you subsequently received. Does that mean your cash is now the $24 million plus the $9 million over $30 million?

No. No, that is reflective of what you see on the balance sheet includes the tariff refund that we received.

Okay. And did the tariff impact the free cash flow this quarter?

Yes, it did.

This concludes our question-and-answer session. I would like to turn the conference back over to Wes Smith for any closing remarks.

Thank you, operator. Once again, thank you for your interest in Escalade and for 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.