AENT - NASDAQ

Greetings, and welcome to the Alliance Entertainment Fourth Quarter and Fiscal Year 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast may include predictions, estimates or other information that might be considered forward looking. While these forward-looking statements represent the company's current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect the company's opinions only as of the date of this presentation. Please keep in mind that the company is not obligating itself to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Throughout today's discussion, management will attempt to present some important factors relating to the business that may affect predictions. You should also review the company's Form 10-K for a more complete discussion of these factors and other risks, particularly under the heading Risk Factors. During this conference call, management will discuss non-GAAP financial measures, including a discussion of adjusted EBITDA. Management believes non-GAAP disclosures enable investors to better understand Alliance Entertainment's core operating performance. Please refer to the investor presentation for reconciliation of each non-GAAP measure to the most directly comparable GAAP financial measure. A press release detailing these results crossed the wire this afternoon at 4:01 PM Eastern Time and is available in the Investor Relations section of Alliance Entertainment's website at aent.com. Your host today, Bruce Ogilvie, Executive Chairman; and Jeff Walker, Chief Executive Officer and Chief Financial Officer will present the results of operations for the fourth quarter and fiscal year ended June 30, 2024. At this time, I will turn the call over to Alliance Entertainment Executive Chairman, Bruce Ogilvie.

Thank you, operator, and good afternoon, everyone. I'm pleased to welcome you to today's fourth quarter and fiscal year 2024 financial results conference call. For those of you that are new to our story, we bring entertainment to you. We are a category leading direct-to-consumer and e-commerce provider for the entertainment industry, serving as the gateway between brands and retailers. With over 325,000 SKUs in stock, we provide the world's largest selection of music, home video movies, video games, gaming, hardware, arcades, collectibles, toys, and consumer electronics. We are a needed supplier for omni retailers in helping them expand their long tail entertainment selection online and putting them on a level playing field with Amazon. We white label all their direct-to-consumer shipments to look like it was shipped by the omni retailer, but it was really shipped by Alliance. We are a trusted omni-channel supplier to retailers and wholesalers worldwide, including Walmart, Amazon, Best Buy, Costco, Target, Kohls, BJ's, Meyer, plus 2,500 independent music stores and many other retailers. We are a trusted distributor of home entertainment movies for Walt Disney, Paramount, Sony Pictures, Warner Brothers, the Universal Pictures and others. For video games, video game consoles, retro arcades, controllers, and physical software games. We distribute products for Microsoft, Nintendo, Arcade1Up, Activision, Electronic Arts, Sega, Ubisoft, Square Enix, and Take-Two. In music for LPs, CDs and YES cassettes. We are a trusted distributor for Universal Music, Sony Music, Warner Music Group, and every independent music label. For the toys category, for collectibles, we distribute for Funko, Mattel, LEGO, Hasbro, and over 600 other suppliers. Alliance Entertainment is a global leader in the 10 billion physical media industry, and we generate over $1.1 billion in revenue in fiscal 2024 with our team of 654 dedicated employee owners. Our leading position in the industry provides us with unparalleled scale and leveraged and has created significant structural and economic barriers of entry that we believe safeguards our market leadership position. We are a value-added retail distributor with exclusive distribution rights for approximately 150 movie studios and music labels and the film and music industry. Our exclusive distribution licensing deals accounted for over $250 million of our revenue in fiscal 2024. Our extensive portfolio of unique content combined with our deep inventory of long tail selections of the more than 325,000 in stock SKUs enables us to cater to bulk shipments for B2B and direct-to-consumer retailers with a vast selection of products, including a growing number of products unavailable through other distributor competitors. This helps us create sticky relationships with our retailers, and growing these exclusive relationships is a key for us moving forward. We have over 200 online retailers that rely on us to stock the world's largest selection of entertainment products for them, and we shipped to more than 35,000 storefronts reaching 72 countries globally. Importantly, we have a long and proven track record of growth through strategic acquisitions. Over the past 20 years, we successively acquired and integrated a dozen companies allowing us to rapidly enter new markets, expand our product selection, and further diversify our revenue streams. Building Alliance from the ground up into the market leader has provided our team with a deep bench and unrivaled experience, which further strengthens our position as we remain very much aligned with our shareholders, with insiders and employees holding approximately 94% of the outstanding shares of the company. After experiencing a surge in demand during the pandemic, many areas within the physical media market have been normalizing back to the historical growth levels in the high single-digits. Even the CD market has joined the revival with CDs outselling digital albums at a rate of 3 to 1 margin in the first 6 months of the year, according to a mid-year report from the Recording Industry Association of America. As part of our $1.1 billion annual revenue, over $250 million was generated from products for which we are the exclusive distributor. These exclusive deals are managed through our Distribution Solutions, AMPED, Mill Creek and Arcade1Up division, and they have significantly enhanced our market position by providing unique content that deepens relationship with both suppliers and retailers. Distribution Solutions was responsible for $134 million of this revenue in the first fiscal 2024. Distribution Solutions partners with over 60 home video movie studios to manufacture, supply, and market their content. We distribute this exclusive content to major retailers such as Amazon, Walmart, and Target, as well as thousands of other smaller retailers. By leveraging Alliance Entertainment's vast distribution network, this exclusive content creates a strong, sticky relationship with retailers, strengthening ongoing demand. In addition, Distribution Solutions have developed a growing digital distribution business. In fiscal year 2023, we generated $8.4 million in digital revenue, and we have more than doubled that in fiscal 2024 reaching $20 million. On the music side, our AMPED division is a leader in physical distribution of exclusive music content. AMPED works more than 90 exclusive music labels distributing music across major retailers like Amazon, Walmart, Target, as well as over 2,500 independent music stores throughout the U.S. Labels and artists such as Shaboozey, Usher, K-Pop sensation, ATEE

Thank you, Bruce, and thank you all for joining us today. We will now turn to an overview of our financial results for the fourth quarter and fiscal year ended June 30, 2024. We generated $236.9 million in net revenue for the fourth quarter, compared to $247.1 million in the same period last year. While this represents a modest decline, we saw positive shifts in several key areas that position us well for the future. Our gross profit for the fourth quarter was $26.9 million down from $30.2 million in the same quarter last year. This resulted in a gross margin of 11.4%, slightly below the 12.2% achieved in Q4 2023. Although margins tighten, we've taken steps to streamline costs and improve efficiencies, which will be reflected in future quarters. We are pleased to report we delivered net income of $2.5 million for the quarter, a major turnaround from the $4.6 million net loss in the same period last year, an impressive $7.1 million improvement and a clear signal that our focus on operational efficiency is paying off. Adjusted EBITDA for the quarter came in at $2.1 million our fifth consecutive quarter of positive adjusted EBITDA. Moving on to our full year highlights. Net revenues for the fiscal year ended June 30, 2024, were $1.1 billion compared to $1.16 billion for fiscal year 2023. Our shift towards higher margin business, including growth in consumer direct shipments is one factor helping to drive improved margins and profitability. Consumer direct shipments increased to 36% of our gross revenue, up from 31% in fiscal 2023. Gross profit for the fiscal year was $128.9 million compared to $103.9 million in the prior year, an impressive 24% increase. This improvement was driven by the combination of shifting product mix and new operational efficiencies. Gross profit margin also saw a substantial boost rising to 11.7%, up from 9% in fiscal 2023, representing a 270 basis point improvement. In addition to the year-over-year growth in our quarterly gross profit, we achieved a significant $21.9 million reduction in operating expenses. A 16% decrease bringing expenses down from $136.7 million to $114.7 million. This reduction was largely driven by the warehouse efficiencies and new technologies we implemented throughout the year. These improvements are not just one-time gains. They will continue to positively impact our cost structure and overall profitability moving forward. Net income for fiscal 2024 was $4.6 million, a $40 million improvement over the $35.4 million net loss in fiscal 2023, underscoring the effectiveness of our ongoing initiatives to improve margins and manage costs. Our adjusted EBITDA tells a similar story improving by $41.9 million to $24.3 million up from an adjusted EBITDA loss of $17.6 million in fiscal 2023. Net cash provided by operating activities surged to $55.8 million in fiscal 2024, up from $3.4 million in the prior year, a remarkable increase of 1,547%. This cash generation strengthens our ability to reinvest in the business and drive future growth. And just to reiterate something Bruce mentioned earlier, we expect significant cost savings in fiscal 2025 from the closing of our Minnesota facility, which was completed in late May. Over the past year, we've also made significant efforts to strengthen our balance sheet, and those efforts are continuing to bear fruit with both inventory and debt continuing to decline year-over-year. Inventory dropped from $147 million to $97 million as of June 30th, 2024, and debt was reduced from $133 million to $73 million. In conjunction with these initiatives, we've secured a new three-year $120 million senior secured asset-based credit facility with White Oak Commercial Finance earlier this year, the proceeds of which was used to refinance the existing credit facility fund working capital needs, and provide for general corporate purposes. These steps have also positioned us to focus and execute on implementing our acquisition strategy going forward. Taking a broader view of our financial performance over the last five fiscal years. This slide showcases how we've navigated a dynamic environment. In fiscal 2020, we generated $776 million in revenue. Over the next two years, a combination of growth initiatives, strategic acquisitions, and an unprecedented surge in demand during COVID-19 pandemic drove our top line to a peak of $1.4 billion in fiscal 2022. As expected, this demand is normalized with revenues adjusting to around $1.1 billion for fiscal ’23 and ‘24. While adjusted EBITDA in fiscal 2023 was impacted by one time supply chain issues, the significant rebound in fiscal 2024 also reflects the strategic steps we've taken to enhance profitability, including reducing costs and optimizing operations. Our adjusted EBITDA margin was 2.2% for fiscal 2024. Turning to our balance sheet. As mentioned a moment ago, our focus on reducing inventory and debt has paid off with inventory levels dropping to $97 million and debt reduced to $73 million as of June 30, 2024. These reductions have streamlined our operations and improved our financial flexibility. As already mentioned, we also expect further cost savings for fiscal 2025, particularly from the closure of our Minnesota facility in May. Additionally, our $120 million asset based credit facility with White Oak, which was secured to support working capital and refinance existing debt, has positioned us well for continued growth and execution of our acquisition strategy going forward. I will now turn the call back over to Bruce.

Thank you, Jeff. As we look to the future, Alliance Entertainment is poised for continued growth by leveraging our strength as a capital light, low-cost provider with unmatched reach in the industry. Our strategy is clear expand our market share, improve margins, and drive EBITDA growth. First, we see tremendous opportunities to expand into underpenetrated channels, particularly in areas like digital video streaming, where direct vendor selling remains low and cost effective. This is where Alliance can truly shine by offering efficient scalable solution. In fiscal 2024 alone, our exclusive distribution agreement generated over 250 million in sales, and we expect to build on this momentum moving forward. Second, we are investing in automation and restructuring to enhance our operational efficiency. Technologies like AutoStore are already driving significant cost savings, and these improvements will continue to bolster our margins while providing the scalability to capture more market share. Third, mergers and acquisitions remain central to our growth strategy. Through strategic M&A, we plan to rapidly expand our product categories in verticals across music, home video movies, video gaming, toys and collectibles. By doing so, we will not only diversify our offerings, but also strengthen relationships with our major retail partners positioning Alliance for long term success. The opportunities ahead are significant. Family-owned competitors are aging out and large movie studios and companies are looking to sell or license physical media rights. Our capital-light model combined with our proven ability to integrate acquisition sets us apart from the competition. These major movie studios, we lean on Alliance to allow opportunities to license their home video content and allow these major movie studios to focus on their core competency of making movies, exhibiting in theaters, doing premium downloads, and focusing their streaming services. Alliance's core competency is distributing packaged physical media. We are excited about the road ahead, and we're confident that our strategic initiatives will drive future growth and profitability for years to come. With that, I'd like to hand the call back to the operator and begin our question-and-answer session. Operator?

[Operator Instructions] Our first question is from [David Levine] with [Critical Research].

Great results, really impressive, great turnaround, all that stuff. I'm wondering if you would be willing to comment a little bit on, given all the changes that have been made and some of the positive developments that you are seeing in the business, if it's reasonable to expect, say, adjusted EBITDA in the future quarters and coming years to trend something closer to where you were previously, say, in the 4% and 5% range.

Hello, David, this is Jeff Walker. I'll answer that there for you. We definitely see our EBITDA trending upwards, and we do believe that we can get back into that 4% to 5% EBITDA goal or target that we've been focused on. That ‘24 was still a year of some cleanup as well as consolidation. So we should definitely see that improving as we're moving into fiscal ‘25 and ‘26.

Thank you. There are no further questions in the queue at this time. I would like to pass it back to Paul Kuntz for any web questions from the webcast.

Thank you, Paul. Now we are going to turn to the questions coming in from the webcast participants. Our first question was, how will interest rate reductions impact the earnings?

Thank you, Paul. I'll take this one as well here. We expect to see a very big decline in our interest expense for fiscal ‘26 with our continued debt reduction that we are in the process of today, and continuing through fiscal ‘25 and combining that with potential fed interest rate reductions. That should have a pretty significant impact on our interest cost in fiscal ‘25, but a real significant impact for fiscal ‘26 as well.

Thank you. And our next question, what growth initiatives are Alliance is focused on in fiscal 2025?

Thank you, Paul. We're really focused intently right now on increasing our exclusive distribution opportunities and video music and collectibles. We definitely mentioned that quite a bit in this statement in our press release here. It's a very important aspect of our business to have the exclusive distribution of products. It really helps us with sales to our retailers and it really drives our business there. We are looking at including, significant video licensing opportunities with our Mill Creek division, and we currently have a significant conversation happening here because of Alliance's extensive distribution capabilities and being great solutions for our partners. So really, our solution has been very successful for the labels and studios that have come to us for exclusive distribution. And part of that is that we have all their inventory in stock and our sales opportunities and sales channels, not only to the brick-and-mortar, but across all e-commerce, selling media products is really our bread-and-butter there for our exclusive vendors, and it's really driving incremental sales for them.

Thank you. And our next question, collectible sales were down in fiscal 2024. What is the future in them?

Some of you probably know that are on this call, COVID was fantastic for consumer all consumer products and collectibles were definitely super-hot during COVID with, for retailers, wholesalers, manufacturers. We as it was humming along so well, we all really got severely overstocked, and lots of products had to be marked down and sold through with all the major retailers and wholesalers and manufacturers. I think today, the collectible market is in a much better position today. There's just a small amount of excess products still in the pipeline, but nothing like it was a couple of years ago. And when there's a lot of excess product in the pipeline, it really slows down sales for everybody in the category. So, Alliance was not immune to it. We took hits on those that affected our sales and margins, and we've come through this as well. And if you follow Funko, who is definitely a leader in collectibles, they definitely describe the challenges, and going into 2025, the collectible business is definitely normalizing for them and other manufacturers. I will say that the overall collectible industry is very, very robust. Consumers are still loving to collect their favorite products, and so we see we also see more exclusive distribution opportunities for Alliance in collectibles as well as a lot of great acquisition opportunities in the collectibles space that we're in discussions and will be in our acquisition strategy for years to come.

Thanks, Jeff. And we had another question. I know you do not provide guidance, but it sounds as if we should be looking for going forward as perhaps limited revenue growth with better gross margins and net margins. Is that a fair assessment?

Yes, I would say that's a pretty fair assessment. Our overall core business is stable and we might have a small uptick in sales, but really, our growth from overall net revenue is definitely going to come from our acquisition strategy and adding acquisitions to the business. That is how we've grown the company over the last 20 years. And so there's definitely from the acquisition side, we are definitely in some other organic conversations that to bring on some more exclusive distribution, that could drive some growth in our top line revenue. And then, as we mentioned on the call, really continuing to focus on our operational efficiencies will also help to reduce our costs and improve our overall net margins.

Thank you, Jeff. And we have two related questions to what you're just talking about there. The next one is, can you give any clarity on the offering, filing and your intent to raise cash for future acquisitions?

Could you repeat that one for me?

Can you give any clarity on the offering, filing and your intent to raise cash for future acquisitions?

We did put an S1 filing out earlier this year, and with the intent to raise capital for acquisitions. I think, it's dependent on having a significant acquisition queued up and ready to go. But we're trying to prepare ourselves for all the different options and things that might come our way. Last part on that from an acquisition standpoint, we're very diverse business as we just described. From that diversity that gives us a lot of different acquisition opportunities in all the different categories and divisions and sales channels that we mentioned earlier today.

Thank you, Jeff. And looks like we have one more question. What is the expected expense reduction in fiscal 2025 from the closing of the Minnesota warehouse? And is there additional reductions planned?

We acquired COKeM in September of 2020 and we continue to operate their facilities and so forth through there. The lease was coming due in the main warehouse there at the end of May of ‘24 this year. About a year ago, we started our plan to do that consolidation and so in fiscal ‘24, we still ran that warehouse and that operation, so we did not have much savings in fiscal ‘24. The savings is really coming here as we move into fiscal ‘25, and we're forecasting right about $5 million of operational savings for fiscal ‘25. And obviously going forward from that completed consolidation. And a key aspect on it is not just the rent and the payroll, but one of the key aspects is that we were running on COKeM legacy IT system as well. So the company had alliance's system and COKeM system and being able to retire that legacy system at COKeM does save a huge amount of money, not only maintaining systems and as well as IT team and so forth, and compliance issues and all those different things as a public company. So that's where the significant part of that savings is coming from. We do also have a second smaller facility in Minnesota that was across the street from the big one. It's about 30,000 square feet. The lease is up in September of '25, so a year from now, and we will be exiting that one as our lease comes up. So we'll be working on that next summer. It's not as significant of a savings as the big warehouse that we just completed, but it will be some additional savings there.

Thank you, Jeff. And that was the last question we've had come in.

Okay. Thank you, everybody. We're very excited. We had a fantastic fiscal year and we're pretty excited here going into fourth quarter and the holiday season.