Daktronics Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 12, 2023

There are 4 speakers on the call.

Operator

Good day and thank you for standing by and welcome to the Nutronics 4th Quarter and Year End 2023 Financial Results. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will need to press star 1.1 again. Please be advised that today's conference is being recorded.

Operator

I would now like to introduce your host for today's call, Sheila Anderson, Chief Financial Officer. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone. Thank you for participating in our 4th quarter year end earnings conference call. I would like to review our disclosure cautioning investors and participants that in addition to statements of historical facts, we will be discussing forward looking statements reflecting our expectations and plans about our future financial performance and future business opportunities. These forward looking statements reflect the company's expectations or beliefs concerning future events.

Speaker 1

All forward looking statements involve risks and uncertainties, which could cause actual results to differ materially from our expectations. Such risks include, but are not limited to, changes in economic and market conditions, management of growth, timing and magnitude of future contracts and orders, fluctuations in margins, the introduction of new products and technologies, availability of raw materials, components and shipping services and other important factors. These identified factors could cause actual results to differ materially from those disclosed in this call in the company's Q4 2023 earnings release and its most recent annual report on Form 10 ks. Our Q4 2023 earnings release contains certain non GAAP financial measures and was furnished to the Securities and Exchange Commission on Form 8 ks this morning. These documents are available on the Investors section at Daktronics' website at www.dactronics.com.

Speaker 1

I'll now turn the call over to to our CEO, Ries Kurtenbach. One moment for some technical difficulties.

Speaker 2

I think I'm here, Sheila. Sorry for that. Good afternoon. Thank you for joining us today. Tektronix has emerged from the challenges of the last 3 years strategically renewed, operationally focused and financially sound.

Speaker 2

We faced unprecedented business and dynamic operating conditions through the pandemic times. Will pull back in the business, a rapid rebound in the business and supply chain and capacity constraints. Our teams came together to take decisive and deliberate actions to improve our customers' experience, while increasing our profitability and working capital levels. We ended the year with a record sales of $754,000,000 $26,000,000 in adjusted operating income and a strong balance sheet. Fiscal 2023 was an incredibly positive transition year and our successful navigation on multiple fronts positions us for long term success.

Speaker 2

I would like to thank put a thank you out to our teams who demonstrated resiliency, pragmatism and creativity and through their effort we were able to make long lasting improvements throughout our organization. Our performance is also a testimony to the resiliency and strength of our diversified markets and innovation. Thank you to all of our shareholders for your support through this dynamic time. I'll now turn it over to Sheila for some more details on the financial results.

Speaker 1

Thank you, Reese. As mentioned, fiscal 2023 was an incredibly positive transition year. As you may recall, we started the year with a record backlog and a marketplace of high demand. However, we were also facing part shortages, intermittent work stoppages, inflationary pressures and input costs and a tight labor market, all limiting our ability to operate effectively. We adapted and utilized this opportunity to be selective in addressing demand and prioritize our focus on winning only the most profitable opportunities and strategically adapting our pricing.

Speaker 1

Our teams also managed through these dynamic supply chain conditions by redesigning and planning Manufacturing for new designs using available parts, securing and obtaining parts to support manufacturing and adding capacity in people and in machines. These actions made throughout the year, coupled with a more stable operating environment, which started late in our second quarter, led to a positive financial outcome for fiscal 2023. We had record sales of 209 were $900,000 for the Q4 of fiscal 2023 $754,200,000 for the year. This was an increase of 29.4 percent compared to $162,200,000 for the Q4 of fiscal 2022 and for the year it was an increase of 23.4 percent from up from up to from the $611,000,000 sales in fiscal 2022. Sales growth was driven by the conversion of our strong ORP backlog, improved stabilization of supply chains and increased manufacturing capacity.

Speaker 1

Gross profit as a percentage of net sales increased to 24.8% for the Q4 of fiscal 2023 as compared to 18.5% in the Q4 of fiscal 2022. Gross profit as a percentage of net sales increased to 20.1% for the fiscal 2023 as compared to 19.1% for the prior year. The increase in gross profit percentage for both comparative periods was primarily due to strategic pricing actions being realized through sales and due to fewer supply chain disruptions, creating a more stable and predictable operating environment, thus, lowering the cost to deliver on projects. These improvements were partially offset by inflationary pressures and high material components, freight and labor costs throughout fiscal 2023. Operating expenses for the Q4 of fiscal 2023 were $33,900,000 compared to $30,300,000 for the Q4 of fiscal 2022.

Speaker 1

Operating expenses for the year were $130,000,000 compared to $112,700,000 last year. As a percentage of sales, operating expenses for the year declined to 17.2% from 18.4% of sales. Operating income was 18 $300,000 or 8.7 percent of sales during the Q4 of fiscal 2023 $21,300,000 for the year and up from $4,000,000 from a year earlier. The $8,200,000 tax benefit in the 4th quarter was primarily the result of the reversal of $13,000,000 valuation allowance we reversed with the removal of Fiscal 2023 effective income tax rate was 48.7%. This rate was high due primarily to valuation allowances for impairments and foreign losses, provision to return adjustments and the mix of tax rates and the location of income.

Speaker 1

Our balance sheet reflects the change in business levels and strategies we pursued in managing our supply chain and growing our capacity to meet customer commitments while managing our liquidity. We continue to move from a period of cash investments to cash generation, improving our liquidity and better positioning us for profitable growth. Our teams are focused on lowering inventory through increased production and reduction in purchases. We're collecting more deposits and progress payments, ensuring timely billings and collecting accounts receivable and invoice terms. We've completed many capacity additions in our factories and expect reduced capacity spend for fiscal 2024.

Speaker 1

We are now working to add efficiencies to these new capacity additions. And we're carefully analyzing our strategic pricing initiatives to improve profitability and fill capacity effectively. During the Q4 of the year, we generated $24,500,000 $15,000,000 from operations respectively. Inventory dropped from the peak levels at the end of the Q3 of fiscal 2023 and are expected to approach more normalized levels as supply chain disruptions continue to ease and order backlog is fulfilled. Cash restricted cash and marketable securities totaled $25,200,000 as of April 29, 2023 and $17,800,000 was borrowed to fund working capital and capital asset additions.

Speaker 1

At the end of the fiscal year, our working capital ratio was 1.6:one. We used $3,600,000 $25,400,000 for purchase of property and equipment in the Q4 fiscal year respectively and these investments were primarily focused on expanding capacity, automation and productivity in our manufacturing area. As a result of the comprehensive review, financing alternatives led by the Board's Strategy and Financing Review Committee, we closed on a new line of credit, mortgage and convertible notes subsequent to year end. This new structure provides us the financial resources to serve our customers and build long term value for our shareholders. This financing paired with our financial performance resolve our growing concern disclosures.

Speaker 1

Over the long term, we expect to grow revenues and grow profitably. We are starting FY 2024 with a strong backlog of $101,000,000 and expect sales growth next year. We plan to invest less than $19,000,000 in capital assets, primarily in our manufacturing and technology areas, and those investments include digitization to improve customer and employee experiences. With that, I'll turn it back over to Reese.

Speaker 2

Thank you, Sheila. As we look ahead, we expect growth in the global use of audiovisual communication systems in both traditional and in new applications. We are opposed to capitalize on and to capture this growth by continuing to do the things we do well. These things include how we engage in a full range of activities to serve our customers by providing high quality standard display products as well as custom designed integrated systems, both of these with ongoing services and support. We're manufacturing a complete line from small scoreboards and and electronic displays to large multimillion dollar video display systems and the related control and sound systems.

Speaker 2

We developed capabilities to design, manufacture, install and service complete integrated systems and we are recognized as a technical leader in these areas. We generate new leads and serve repeat customers based on our performance, reputation and marketing efforts. We will prioritize our focus in the growing and for profitable segments in the industry which align with these capabilities. We will focus on development of new technologies like narrow pixel pitch to harness the market's potential. Also, our existing markets are growing.

Speaker 2

To highlight, we expect our high school and park and recreation business unit to grow through the adoption of video displays for sporting and educational use. These customers are deploying more Daktronics professional grade technology and sophisticated content, increasing the total addressable market. In the commercial area, we are focused on increasing sales channels with audiovisual integrators for end use in government, military, healthcare and corporate applications, which will create growth in this business area. In addition, customers depending on out of home advertising or self promotion use our products and services as an effective medium for both indoor and outdoor applications. We expect existing and new customers to purchase displays to install in new locations as well as replacement displays for existing locations to capitalize on the effectiveness of digital technologies.

Speaker 2

Transportation demand is strong as project planning and approval activities resume to more pre pandemic levels and our customers move forward in purchasing displays used for intelligent transformation systems and for mass transit venues. Infrastructure spending should continue to benefit this segment as digital signage is often used in these projects and we are qualified to do business in all the U. S. States. In the international business unit, we continue to experience

Speaker 1

I'm sorry, we're having some technical difficulties, I think.

Speaker 2

Am I not there?

Speaker 1

You're back.

Speaker 2

I'm sorry. In the International Business Unit?

Speaker 1

Yes.

Speaker 2

In the International Business Unit, we continue to experience a softer market due to macroeconomic and geopolitical factors. We expect to see these factors to continue to impact sales in the coming year. We are watching developments closely and have and can adjust resources and commitments accordingly. Over the longer term, we expect similar growth trends in the commercial and transportation in the segment and the U. S, we also expect sports venue projects to be a focus in our marketing efforts.

Speaker 2

The Live Events segment outlook remains strong due to large stadium renovations, continued replacement cycles and expansion of sales efforts beyond traditional sport areas. We are the acknowledged market leader in this segment, which allows us to be strategic in our pricing and contract terms, while being very mindful about the profitability of this segment. We continue to closely monitor the ever evolving geopolitical and global economic environment to ensure we are able to quickly adjust our resources and market approaches to maintain profitability through various cycles. In FY 2024, we will make investments in high return projects and technologies to support long term profitability. Our experience in engineering, process design, service design and product development capabilities and investments made in affiliated companies are very important factors in continuing to develop, produce and offer the most up to date digital displays and control system solutions desired by the market.

Speaker 2

We will continue to invest in our development efforts in our affiliated companies to release differentiated product platforms, software offerings and services. We will also advance critical architecture and design, new competitive technology such as narrow pixel pitch and micro LED, sustainable technology, software architecture and other related areas. We also plan to grow our operational efficiency by focusing on retention of our highest performing team members and capitalizing on automation capabilities added over the last year. We will invest in digital transformation projects and other automation that will support improve customer and employee experiences and lower our cost to operate. I again want to thank our Daktronics team for results delivered during FY 2023.

Speaker 2

We appreciate our suppliers and vendors for also helping support us in the past and on into the future. And thank you to our investors for your patience and support as we work through and emerge from these unprecedented times, stronger and better positioned to meet the future. We believe the stage is set for strong fiscal 2024 and we look forward to continued growth of sales and expansion of operating income. With that, I would ask the operator to please open the line for any questions.

Operator

And our first question comes from BJ Cook from Singular Research. Your line is now open.

Speaker 3

Hey, thanks guys. Great quarter. Just a couple of questions for you. You guys have been working pretty diligently over the last year or so to adjust prices. You guys are in a good spot now in pricing in the backlog.

Speaker 3

Is there some work left to be done there?

Speaker 2

No, I believe we're in a good place there, BJ. I believe that the backlog consists mainly of projects using our new pricing methodologies.

Speaker 3

Okay, great. So I understand there's an inflationary element to your price increases, but part of it also is demand for your product. I guess going through this whole process, how do you feel about pricing power? Is there maybe a little bit more than you had thought?

Speaker 2

Maybe to answer that, I think that as we are in a more stable operating environment as we've seen the supply chain, more predictable than it was a year ago that we have a better understanding of what the cost elements would be and can be very strategic in how we price New projects or products.

Speaker 3

Okay. That makes sense. Appreciate it. One more last one. You mentioned some newer opportunities.

Speaker 3

Infrastructure bill has been in place for a while now. Do you expect to or have you seen any benefit to the transportation segment With regard to the bill?

Speaker 2

Yes, we believe that the since the bill is in place and is continuing to Invest in projects that that's not an immediate one quarter sort of event for Daktronics. Those projects go on for months years and in the end we'll continue to provide benefit to Daktronics in that market

Speaker 3

Okay, great. Thanks guys. Appreciate

Speaker 2

it. I appreciate the questions, Peter.

Speaker 1

Thank you.

Operator

And thank you. And one moment please. And I am showing no further questions. I would now like to turn the call back over to Reis Kurtenbach for closing remarks.

Speaker 2

I would just like to thank everybody for attending today's conference. We appreciate your attendance and your questions. And we'll look forward to speaking again after our next conference call at our next conference call, which will be after our Q1 results are released. Thank you, everyone.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

Speaker 2

Thank you.

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Key Takeaways

  • The company achieved record annual sales of $754.2 million (up 23.4% YoY) and Q4 sales of $209.9 million (up 29.4%), with gross margins rising to 24.8% in Q4 from 18.5% a year ago.
  • Strategic pricing actions and fewer supply chain disruptions boosted profitability, lowering delivery costs and driving operating income to $21.3 million for fiscal 2023 (versus $4 million prior year), while operating expenses declined to 17.2% of sales.
  • During Q4, the company generated $24.5 million of operating cash, ended the year with $25.2 million in cash and marketable securities, secured new credit and convertible note facilities, and improved its working capital ratio to 1.6:1.
  • For fiscal 2024, the company starts with a $101 million backlog, expects sales growth, plans to invest less than $19 million in manufacturing and technology capex, and will focus on profitable segments such as narrow pixel pitch, commercial, transportation and live events.
  • Long-term strategy emphasizes a full range of display and integrated system offerings with ongoing service, investment in new technologies (e.g., micro LED, automation, digital transformation) and continued operational efficiency improvements.
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Earnings Conference Call
Daktronics Q4 2023
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