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Greetings, and welcome to the Escalade Second Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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 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 move to a traditional reporting calendar on January 1, 2023. Previously, our second quarter included four four-week periods. This year and going forward, we will report results for the traditional three months, 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.
Our 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 similar 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 515 basis points sequential gross margin improvement between the first and second quarter of 2023. We anticipate further normalization in wholesale channel inventories as we move into the second half of this year, which should position us to capitalize on restocking opportunities entering the holiday season.
As before, we remain highly focused on a combination of cost control, improved working capital management and balance sheet optimization. Strategically, we continue to focus on investing in innovative product development to build market-leading positions in key growth categories. For example, during the second quarter, we launched a range of new carbon-based pickleball panels that improve performance and playability for the fast-growing market of pickleball enthusiasts. This launch included our Evoke Premier Raw Carbon range as well as the Malice and Mayhem paddles, which utilize our patented ThermoFused Technology. Consumer acceptance of these exciting new paddles has exceeded our expectations and quickly sold through initial production runs.
We are accelerating manufacturing to meet the strong demand. This successful launch also contributed to a significant double-digit year-over-year sales growth in our pickleball category despite the shorter second quarter of this year. We are also pleased to announce that our Gorilla basketball brand has collaborated with Johnny Stephene, the Founder of HandleLife and an NBA skills coach to launch a range of weighted basketballs designed to improve ball handling efficiency and play-making ability. Johnny's social media accounts have gained over 2 million followers who are interested in his unique story and amazing ball-handling skills.
We are excited about this new HandleLife collaboration, which provides consumers with effective training tools to improve their game. We're also launching new products in several other key categories over the coming quarters, particularly an innovative assortment of American Cornhole League, licensed cornhole boards and bags, which will launch initially at Academy Sports and Outdoors.
For some thrilling cornhole competition, please tune in to the American Cornhole League World Championships, which will be held in Rock Hill, South Carolina from July 29 through August 6, and will layer on ESPN and the CBS Sports Network. As we navigate the challenging demand environment, we know the importance of maintaining an appropriate cost structure and fortified balance sheet. We continue to focus on optimizing our cost structure and maximizing cash flow.
As highlighted by our second quarter results, we have already made great strides in improving our gross margins by reducing fixed costs and through lowering our operational expenses. We remain on track to achieve $2.3 million in annual cost savings and expect our costs to continue to trend lower through the remainder of the year. We continue to carry the ongoing expense of our Mexico operations and remain focused on divesting this facility by the end of 2023. We have spent approximately $900,000 year-to-date on professional services and severance expenses related to this divestiture.
As previously mentioned, we continue to be sharply focused on cash flow. Cash conversion during the second quarter exceeded 100%, primarily due to improved working capital management, including the more optimal use of our cash on hand. As we [Technical Difficulty], our inventory levels should drive additional cash generation, which we will utilize to further reduce our debt.
At the end of the second quarter, our net leverage was 4.0x. However, we remain committed to reducing our leverage to our targeted range between 1.5x and 2.5x. While we have built our business over the years with a number of value-creating acquisitions, our current capital allocation priorities remain long-term debt reduction and payment of our dividend. Along with our focus on lowering net leverage, we continue to tightly control discretionary spending, including capital expenditures.
Entering the third quarter, our team continues to do a great job navigating the current macro environment, while also ensuring that we remain competitively positioned to support our retail partners and consumers loyal to our brands. I'm proud of the hard work and dedication of our team in responding to a disappointing first quarter by delivering a good second quarter with improved performance across most key metrics. We will continue to focus on creating exceptional consumer experiences that build brand loyalty, all while creating long-term shareholder value. We look forward to updating you with all our progress next quarter.
With that, I'll turn over the call to Stephen for his prepared remarks.
For the three 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.
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Rommel Dionisio with Aegis Capital. Please proceed with your question.
Good morning. Thanks very much for taking my questions. 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 a result of getting the full quarter's benefit Am I reading that correctly? Thanks.
Good morning, 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 that. But just how should we think about where that number in terms of benchmarking, you should be at the end of third quarter and fourth quarter relative to where it was in the second quarter? Thanks.
Sure. Of course, we're looking at inventory on two 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.
Great. Okay, I will jump back into queue. Thank you very much.
Thank you. [Operator Instructions] Our next question is a follow-up from Rommel Dionisio with Aegis Capital. Please proceed with your question.
Great. Okay. Thanks. I'll just ask one more, if I could. I know when supply chain was kind of turning against the industry last year, a 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 are looking for in 2Q anyway? Thank you.
Yes, sure. When containers were $20,000 plus, it was imperative to improve the packaging and the way that we ship 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 are 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.
Great. Thanks very much.
Thank you.
Thank you. 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.