Alliance Entertainment Q4 2024 Earnings Call Transcript

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Provided by Quartr
September 19, 2024

Key Takeaways

  • Alliance reported fiscal 2024 net revenues of $1.1 billion (down from $1.16 billion) but drove gross profit up 24% year-over-year to $128.9 million and swung to a net income of $4.6 million versus a $35.4 million loss last year, with Adjusted EBITDA of $24.3 million.
  • The company generated $55.8 million of operating cash flow, reduced inventory by $50 million to $97 million, cut debt from $133 million to $73 million, and secured a new $120 million asset-based credit facility to fuel growth.
  • Operational efficiencies from automation (AutoStore and SureSort X) enabled headcount reductions, the closure of over 162,000 sq ft in Minnesota, and are expected to deliver $5 million in annual cost savings in fiscal 2025.
  • Exclusive distribution agreements across video, music and collectibles generated over $250 million in revenue, digital distribution more than doubled to $20 million, and consumer direct shipments rose to 36% of gross revenue.
  • M&A remains central to Alliance’s strategy, building on a 20-year track record of accretive acquisitions in media, gaming and collectibles, with several potential transactions in the pipeline to expand market share and lift EBITDA margins toward the 4–5% range.
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Earnings Conference Call
Alliance Entertainment Q4 2024
00:00 / 00:00

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Operator

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.

Operator

Please keep in mind that the company is not obligating itself to re-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.

Operator

A press release detailing these results crossed the wire this afternoon at 4:01 P.M. Eastern Time and is available in the Investor Relations section of the 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 thirtieth, 2024. At this time, I will turn the call over to Alliance Entertainment's Executive Chairman, Bruce Ogilvie.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

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 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.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

We are a trusted omni-channel supplier to retailers and wholesalers worldwide, including Walmart, Amazon, Best Buy, Costco, Target, Kohl's, BJ's, Meijer, 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 Bros., Universal Pictures, and others. For video games, video game consoles, retro arcades, controllers, and physical software games, we distribute products from 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 or collectibles, we distribute for Funko, Mattel, LEGO, Hasbro, and over 600 other suppliers.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

Alliance Entertainment is the 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 leverage 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 in the film and music industry. Our exclusive distribution licensing deals accounted for over $250 million of our revenue in fiscal 2024.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

Our extensive portfolio of unique content, combined with our deep inventory of long-tail selections of the more than three hundred and twenty-five thousand 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 two hundred online retailers that rely on us to stock the world's largest selection of entertainment products for them, and we ship to more than thirty-five thousand storefronts, reaching seventy-two countries globally. Importantly, we have a long and proven track record of growth through strategic acquisitions.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

Over the past twenty years, we successfully 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 an unrivaled experience, with further strengthened 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.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

Even the CD market has joined the revival, with CDs outselling digital albums at a rate of three-to-one margin in the first six months of the year, according to a midyear 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.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

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 has 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 year 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.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

Labels and artists such as Shaboozey, Usher, K-pop sensation ATEEZ can bypass major music suppliers, thus lowering their costs and self-distribute themselves using AMPED for their physical distribution needs, because they control their own digital streaming and social media marketing, while maximizing profitability through our extensive brick-and-mortar and omni-channel relationship. K-pop, in particular, has become a rapidly growing segment for AMPED, contributing significantly to our sales growth. Our Mill Creek division specializes in exclusive video content licensing from major studios, including Disney, Sony Pictures, Universal, Lionsgate, CBS, and others. Mill Creek licenses, manufactures, and distributes DVDs for these leading studios, enhancing our ability to offer exclusive, unique, and in-demand video content that is sought out by consumers and retailers alike. We are also exclusive North American distributor for Arcade1Up, which licenses and manufactures home arcade consoles with significant market share in the retro gaming space.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

These include some of the most well-recognized arcade games like Pac-Man, Ms. Pac-Man, NBA Jam, Mortal Kombat, Golden Tee, and more. The Infinity Game Table even includes a digital version of classic board games, including Hasbro's Monopoly, Scrabble, Trivial Pursuit, Chutes and Ladders, Candy Land, Yahtzee, and many other iconic games. We've had a long history of disciplined, accretive acquisitions, and I want to take a moment to highlight the strategic acquisitions that have been critical to our gaining leadership position in the entertainment space and our growth overall. By 2013, Jeff and I had built up SuperD from 18 million in sales, starting in 2001 to 194 million.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

Then we made the pivotal move of acquiring Alliance Entertainment, our largest competitor, which was doing $725 million in revenue at the time, and significantly expanded our footprint, transforming us overnight into the largest distributor of music and video in the world. This acquisition marked our first major step in consolidating the packaged media categories of music and video. We continued to build on this strategy in 2016 with the acquisition of ANconnect, which gave us exclusive access to sell CDs to Walmart and Best Buy and expanded our important vendor managing inventory capabilities for our portfolio. Our entry into the gaming space came in 2018 through the acquisition of Mecca, enabling us to distribute products from major suppliers like Microsoft, Sony, and Nintendo.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

That same year, we also acquired Distribution Solutions from Sony Pictures, which got us into the exclusive home video distribution relationships with 20 movie studios, further strengthening our position in the industry and giving us another vendor number with Walmart and Best Buy, and enabling us to become the exclusive seller for these movie studios to Walmart, Amazon, Best Buy, Target, Barnes & Noble, and other retailers in the U.S. and Canada. In 2020, we expanded our video gaming presence with the acquisition of Mecca's competitor, Cokem, thus expanding our relationship with Best Buy, Target, Kohl's, Dell, and Verizon. With the acquisition of Cokem, we also started distributing retro arcades from Arcade1Up, and most recently, in 2022, we added collectibles to our portfolio with the acquisition of Think3Fold, a move that further diversified our product offering and gave us another supplier number with Walmart.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

As you can see, we have a proven track record of completing acquisitions, and we will continue with that same strategy to further growth and diversify our company moving forward. While we did put ourselves on hold for acquisitions in 2022 and 2023 for our stack merger and getting our new three-year line of credit in place, we are currently working on four possible future transactions, all in time for our deal pipeline. To better understand what that could mean for Alliance and moving forward, I want to briefly share a case study from our acquisition of Distribution Solutions in 2018. At the time, they were doing around $80 million in revenue, working with eighteen studios.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

Fast forward to today, in fiscal 2024, Distribution Solutions accounted for $134 million in revenue, and we're now working with nearly three times the number of studios. As we look at new deals, we continue to apply the same criteria that's worked for us in the past, and we're confident this strategy will continue to yield great results. Technology is the backbone of our operations and critical drivers of efficiency, cost savings, and growth. In 2023, we began making strategic investments in automation and technical innovation to enhance our ability to serve our customers more effectively. In January 2023, we went live with AutoStore automated storage and retrieval system at our Shepherdsville, Kentucky, warehouse. I call AutoStore the Rubik's Cube of auto storage retrieval systems.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

This state-of-the-art system has greatly improved our Kentucky warehouse operations, allowing us to achieve increased levels of speed, reliability, capability, and precision that result in significant cost savings. With AutoStore, we now process over 2,000 lines per hour with a fraction of the staff. We went from 41 pickers down to seven, and receiving went from 14 associates down to eight. Year-over-year, our fulfillment costs are running 1% lower. Because of AutoStore, we eliminated aisles. It created more storage location capacity, enabling us to consolidate operations and close the larger of two buildings in Shakopee, Minnesota, thus removing 162,000 sq ft of the 192,000 sq ft we had leased there. This closure process, which began in January, was completed on May thirty-first.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

The savings from this consolidation will positively and permanently impact and reduce our cost structure in fiscal year two thousand and twenty-five, further strengthening our ability to operate efficiently and deliver value to our shareholders. In addition, in the third quarter of the fiscal two thousand and twenty-four, we announced the installation of Sure Sort X system from OPEX, a cutting-edge sortation technology that delivered nearly $500,000 in immediate savings by eliminating the need to retrofit older technology, and it's expected to deliver another nearly $400,000 in annual labor cost savings in our Kentucky facility. In addition, the Sure Sort X technology has allowed us to handle larger products, such as toys and electronics, removing the need for manual sorting and driving new levels of efficiency and precision. In the investor presentation, there are hyperlinks to see AutoStore and OPEX and other processes we do in Kentucky.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

I will now hand the call over to Alliance's Chief Executive Officer and Chief Financial Officer, Jeff Walker, my partner.

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

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 thirtieth, 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.

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

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.

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

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.

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

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%.

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

This cash generation strengthens our ability to reinvest in the business and drive future growth. 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.

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

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.

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

As expected, this demand is normalized, with revenues adjusting to around $1.1 billion for fiscal 2023 and 2024. 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.

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

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.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

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 margin, and drive EBITDA growth. First, we see tremendous opportunities to expand into under-penetrated channels, particularly in areas like digital video streaming, where direct vendor selling remains low and cost ineffective. This is where Alliance can truly shine by offering efficient, scalable solutions. 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.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

Technologies like AutoStore are already driving significant cost savings, and these improvements will continue to bolster our margins while providing the scalability we need 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.

Bruce Ogilvie
Bruce Ogilvie
Executive Chairman at Alliance Entertainment

These major movie studios will lean on Alliance to allow opportunities to license their own 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

Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we poll for questions. Thank you. Our first question is from David Lavigne with Trickle Research. Please proceed with your question.

David Lavigne
Analyst at Trickle Research

Hi, guys. 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're 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, you know, 4%-5% range?

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

Hello, David. Hey, 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%-5% EBITDA goal or target that we've been focused on. So, you know, 2024 was still a year of some cleanup as well as consolidation, so we should definitely see that improving as we're moving into fiscal 2025 and 2026.

David Lavigne
Analyst at Trickle Research

Great. Thanks.

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

Thank you, David.

Operator

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.

Paul Kuntz
Paul Kuntz
Investor Relations at Alliance Entertainment

Thank you, Paul. And 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?

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

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 2026, with our continued debt reduction that we're in the process of today, and continuing through fiscal 2025, and combining that with potential Fed interest rate reductions, and that should have a pretty significant impact on our interest cost in fiscal 2025, but a real significant impact for fiscal 2026 as well.

Paul Kuntz
Paul Kuntz
Investor Relations at Alliance Entertainment

Thank you and our next question: What growth initiatives are Alliance focused on in fiscal 2025?

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

Thank you, Paul. We're really focused intently right now on increasing our exclusive distribution opportunities in 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.

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

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.

Paul Kuntz
Paul Kuntz
Investor Relations at Alliance Entertainment

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

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

Some of you probably know that are on this call, you know, COVID was fantastic for 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 product still in the pipeline, but nothing like it was a couple of years ago. When, you know, there's a lot of excess product in the pipeline, it really slows down sales for everybody in the category.

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

So Alliance was not immune to it. We took hits on this that affected our sales and margins, and we've come through this as well. And, you know, 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 collectible space, that we're in discussions, and we'll be in our acquisition strategy for years to come.

Paul Kuntz
Paul Kuntz
Investor Relations at Alliance Entertainment

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?

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

Yes, I would say that's a pretty fair assessment. Our overall core business is stable and, you know, we might have a small uptick in sales, but really our growth from overall net revenue is definitely gonna 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 to bring on some more exclusive distribution that could drive some growth in our top-line revenue, and then, you know, 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.

Paul Kuntz
Paul Kuntz
Investor Relations at Alliance Entertainment

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?

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

Could you repeat that one for me?

Paul Kuntz
Paul Kuntz
Investor Relations at Alliance Entertainment

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

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

Yeah, we did put an S-1 filing out earlier this year, and with the intent to raise capital for acquisitions. I think, you know, it's dependent on having a significant acquisition queued up and ready to go. But, you know, we're trying to prepare ourselves for all the different options and things that might come our way. You know, we're on last part on that, from an acquisition standpoint, we're a very diverse business, as we just described, and 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.

Paul Kuntz
Paul Kuntz
Investor Relations at Alliance Entertainment

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?

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

Yeah, that, you know, we acquired Cokem in September of 2020, and, you know, we continued 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 2024, this year. So, about a year ago, we started our plan to do that consolidation. And, so in fiscal 2024, we still ran that warehouse and that operation, so we did not have much savings in fiscal 2024. The savings is really coming here as we move into fiscal 2025. And we're forecasting right about $5 million of operational savings for fiscal 2025, and obviously going forward, from that completed consolidation.

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

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's legacy IT system as well. So the company had Alliance's system and Cokem's system, and, you know, 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 it's 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 sq ft.

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

The lease is up in September of 2025, 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.

Paul Kuntz
Paul Kuntz
Investor Relations at Alliance Entertainment

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

Jeff Walker
Jeff Walker
CEO and CFO at Alliance Entertainment

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.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Executives
    • Bruce Ogilvie
      Bruce Ogilvie
      Executive Chairman
    • Jeff Walker
      Jeff Walker
      CEO and CFO
    • Paul Kuntz
      Paul Kuntz
      Investor Relations
Analysts
    • David Lavigne
      Analyst at Trickle Research
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