Daktronics Inc (DAKT) 2021 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics Fiscal Year 2021 Fourth Quarter Earnings Results Conference Call. As a reminder, this conference is being recorded today, Wednesday, June 9, 2021, and is available on the company's website at www.daktronics.com. (Operator Instructions)

I would now like to turn the conference call over to Ms. Sheila Anderson, Chief Financial Officer for Daktronics, for some introductory remarks. Please go ahead, Sheila.

Thank you, operator. Good morning, everyone. Thank you for participating in our fiscal year and fourth quarter earnings conference call. I would like to review our disclosures 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.

All forward-looking statements involve risks and uncertainties, which may be out of our control and may cause actual results to differ materially, such risks include changes in economic conditions, changes in the competitive and market landscape, changes -- including impacts of global trade discussions and policies, the impacts of governmental laws, regulations and orders, including those resulting from pandemics, disruptions to our business caused by geopolitical events, military action, work stoppages, natural disasters or international health emergencies such as the COVID-19 pandemic, management of growth, timing and magnitude of future contracts, fluctuations of margins, availability of raw materials and components and shipping services, the introduction of new products and technology and other important risk factors as noted and detailed in our 10-K and 10-Q SEC filings.

With that, let me highlight some of the financials. As a reminder, fiscal 2020 was a 53-week year and fiscal 2021 is -- and was a 52-week year. The extra week of fiscal 2020 fell within the first quarter, resulting in a 53-week fiscal year versus the fiscal '21 being a 52-week fiscal year. Sales orders in all areas of operating expenses were impacted with the additional week in the year-to-date comparisons.

For orders during the fiscal year 2021, we achieved $9.9 million per week average run rate as compared to $11.7 million per week run rate during fiscal 2020, or an approximate 15.4% decrease. For net sales during fiscal 2021, we achieved $9.3 million per week average run rate as compared to an $11.5 million per week run rate during fiscal 2020, or an approximate 19.1% decrease in sales. The change in both orders and sales was caused by the economic impacts of the global COVID-19 pandemic. The pandemic caused various changes in our customers' core businesses, impacting the timing and levels of investments in audiovisual systems in the near term.

For example, venues hosting sports, entertainment and other events saw limitations on the number of people allowed to gather, causing reduced attendance or cancellations. This adversely impacted many sources of in-venue revenue and subsequently delayed expected spending on display projects. This trend impacted our Live Events in International segments, most significantly.

Some customers in the mass transit and airport segments of our Transportation business delayed spending as a result of the limited use of this infrastructure and the impact on their financial stability during the pandemic. Businesses which rely on revenues from out-of-home advertising or who are reliant on customer foot traffic to drive sales were adversely impacted by stay-at-home orders or quarantine orders causing a pullback in advertising spending. This delayed out-of-home advertising discretionary spending until late in our fiscal year. Many businesses using our displays for self promotion or on-premise advertising slightly reduced budgets during their pandemic, but we also saw some businesses choose to utilize displays as part of the recovery to drive increased foot traffic to their location.

Educational campuses using displays for communications with students, parents and other visitors had varied impacts on their investments in AV systems. In the Transportation market, progress on roadway projects flowed as the efficiency of project management and decision-making declined during the pandemic. During the fourth quarter, market activity began increasing in varying degrees across our markets as effective vaccines became available and were utilized allowing people to move freely and safely.

COVID-19 restrictions started to reduce, which improved economic outlook. The improved outlook provided our customers more confidence with -- and are over -- while orders increased 16.3% compared to last year's fourth quarter. And for the year, orders were down 16.9%. While the contraction due to the pandemic caused the decline in orders for the year, we have had customers place multimillion-dollar orders for Live Event venues, Transportation signage and out-of-home advertising in both our domestic and international business units. Our on-premise display business and High School Park and Recreation were down the lease for the year at 5% and 5.8%, respectively. Live Events and Transportation had the most significant order decline for the reasons noted above.

Sales for the fourth quarter of fiscal 2021 decreased 7.3% as compared to the fourth quarter of fiscal 2020 and decreased 20.8% as compared to fiscal 2020. Net sales decreased for all business units for the same reasons causing order booking declines and due to the varied timing in relation to a conversion of sales based on customer needs and the ability to install solutions. The conversion of some orders sales was delayed because of the pandemic's impact on the ability to work on site and other delays.

Gross profit for the quarter as a percentage of net sales was 23.6% as compared to last year's 22.7%, and gross profit for the year was 25% as compared to 22.8% for fiscal '20. The increase in gross profit rates were the result of the change in mix between service agreements and the types of product sales we had, a $2.1 million litigation claim reversal and a reduction in capacity and operations to lower our expenses.

During fiscal '21, all the areas of our businesses, including those aligned with the fulfillment of orders, which impact gross profit, we lowered staffing and benefit levels and temporarily furloughed employees to achieve lower operating costs to align with the uncertainties created by COVID-19. In addition, during fiscal 2020, we experienced additional project delivery costs and higher tariff-related expenses, decreasing the gross profit rates for that period. These factors contributed to the variation of gross profit year-over-year.

Our warranty as a percentage of sales decreased to 1.2% for the quarter as compared to 1.6% in the fiscal -- in the fourth quarter of 2020 and decreased to 1.4% as compared to 1.9% for fiscal 2020. Our company's goal is to have warranty at less than 2% of sales. Improvements in warranty are attributed to our continued robust design and reliability system programs and processes.

Operating expenses for the fourth quarter of fiscal 2021 were $26.4 million compared to $32.1 million for the fourth quarter of fiscal 2020 or a decrease of 17.8%. On a year-to-date basis, operating expenses were $103.5 million compared to $138.9 million or a decrease of 25.5%. These declines are attributed to our focus on managing our expenses to expected order volumes as a result of the economic downturn caused by the pandemic.

Operating expense declines were attributed to lower personnel costs to reduce capacity, lower travel and entertainment activities and lowered marketing and convention events and are focused on reducing spending in all areas. We also reduced our planned investments in our IT and product development areas. Our teams have come together to do a great job at serving customers while reducing capacity and costs. Cost reductions across the company do vary in permanently and some will not be sustainable through fiscal 2022 as our order and sales volumes begin to recover towards pre-pandemic levels. In addition, we expect inflation in raw materials, labor costs and shipping throughout the year with bearing ability to adjust pricing.

The provision for income taxes during the interim reporting period is calculated by applying the estimate of annual effective tax rate to ordinary income or loss for that period adjusted for discrete items. And due to various factors, including our estimate of annual income, operating in multiple state and foreign jurisdictions and tax law changes, our effective rate is subject to fluctuation. The effective tax rate for the fourth quarter was 49.7% as compared to an effective benefit of 66.8% a year earlier.

On a year-to-date basis, we recorded an effective tax rate of 22.3% as compared to our fiscal 2020, where the calculation yielded a meaningless rate because we generated a tax income benefit, which was created by permanent tax credits plus valuation allowances over a minor pretax book loss. Our expected tax rate looking forward is approximately 21%. Our cash position at the end of the year was $80.4 million. During the year, we generated $66.2 million of cash from operations, correlating with the focus on customer collections, decreasing inventory levels, lowering personnel and operating expense outflows as we manage operations to the uncertain COVID times.

We limited capital spending to just under $8 million for selected production and demonstration equipment and building improvements and sold various property and equipment to bring in proceeds of $3 million. We invested $7 million for additional ownership in a strategic investment in affiliates and expended just under $27 million in product development. To conserve cash during the uncertainties of the pandemic and resulting economic changes, we suspended dividends in our share repurchase program. With the cash generation, we paid back our $15 million advance on the line of credit.

As we look into fiscal 2021, we expect some usage of cash for inventory, accounts receivable and contract assets so that business activities begin to grow. We estimate capital expenditures to be approximately $25 million for fiscal '22, which will be primarily used for production equipment, demonstration equipment, manufacturing, facility enhancements, along with investments in our information technology infrastructure systems. We may choose to invest additional funds in our strategic investments and affiliates or conduct other acquisitions to advance technologies to market requirements and trends or to add other capabilities. We will continue to invest in product development initiatives at an increased level from fiscal 2021 to continue to create value for our customers. Focused areas include narrow pixel pitch applications and investments in control systems. Our product backlog is at an all-time high at $251 million, resulting from the increased order activity in our last fourth quarter and some variations in the work we booked earlier in the year and the related conversion to sales as some were delayed because of COVID.

We expect sales for the first quarter of fiscal 2022 to increase over last year's first quarter due to an anticipated gradual return to pre-pandemic levels. But, of course, sales can change pending project bookings, customer schedule changes, the availability of plant capacity and raw materials. We are prudently controlling costs for the time of growth and the reductions created in fiscal '21 vary permanently and some are not sustainable as volumes increase into fiscal 2022.

I'll now turn the call over to Reece Kurtenbach, our Chairman, President and CEO, for a few comments.

Thank you, Sheila. Good morning, everyone. The impact of the pandemic created uncertainty, disruption and volatility in our business during our fiscal '21. To weather this storm, we adjusted our capacity in anticipation of the lower order volumes we expected. These actions allowed us to generate cash, pay back our line of credit and generate a profit. We put a priority on keeping our employees safe, allowing people to work from home when they could and implementing and following safety protocols where this was not possible, such is in our manufacturing operations and for our employees who needed to be on a customer site.

For Daktronics and our investors, I want to thank our employees, our customers, our suppliers and our different communities for your help in managing through this unique and unprecedented time. Even through these challenging times, we focused to strengthen our operations to come out stronger at the end of the pandemic. We continued our investment in development in micro LEDs and other technologies to bring world-leading solutions to our customers. We improved our use of digital technologies to enhance our interactions with our customers, and we enhanced our marketing focus to build new sales channels and relationships to grow our global market share and grow into new markets.

As we look into our fiscal year '22 and beyond, it is encouraging to see the continued global distribution and the effectiveness of vaccines. This creates a safe environment for the reopening of economies and the gathering of people for activities around the world.

We began to see order and quoting activities increased during the last part of our FY '21 and are optimistic about fiscal '22 to return to a more normal time. As activities in our markets increase, we are planning our capacity to maximize production while prudently controlling costs through this time of growth. We will be strategically making investments in capital assets for capacity and product developments to meet the needs of our customers and in technology developments to be a market leader on into the future. We will also continue to invest in improving the strength and expertise of our internal operations to enhance our customers and employee experiences.

As we look out to the longer term, we believe the audiovisual industry fundamentals remain strong and are poised for growth. Our strategy is to provide long-term profitable value propositions for all of our stakeholders include: offering comprehensive product and services to match our customers' needs and expectations; expanding to new markets, often unlocked by the development of advanced technologies such as narrow pixel pitch, micro LED and controlled systems; growing and fostering our direct and indirect sales channels globally; providing more leading solution -- provide world-leading solutions and service to our customers today as well as into the future to make us the obvious choice for replacements and upgrades for their audiovisual systems; and improving the experiences of both our customers and our employees continually developing our internal processes and systems.

Specific strategies in our business units include: continuing to develop and release of innovative solutions and services tailored for different applications for existing and new markets; growing international by using our established localized sales and service channels to focus on growing our market share in sport, out-of-home, spectacular and transportation areas; serving our Live Events businesses with solutions for traditional applications and marketing new technologies for these venues.

We expect some growth in this area, but know this business is lumpy, primarily consisting of larger contracts, which can be highly competitive, creating some variation from year-to-year. We will continue to serve our High School Park and Recreation market. We see opportunity for larger-sized orders due to the adoption of video and sporting applications and the growth in new applications across these campuses.

In our Commercial business unit, we are focused on different strategies to support the expansion of solutions for indoor applications, continued replacement and new investment activity in the out-of-home and retail segments and increasing success in the Spectaculars segment. This segment, in particular, includes multimillion-dollar projects that are discretionary choices by customers, which can cause ups and downs in timing and trends.

Demand in the Transportation business for U.S. and Canada, we believe, will be strong due to continued investment in the Transportation systems, the stability and potential for increases in federal infrastructure funding and increasing advertising and on-premise promotional application needs in mass transit facilities. Our strategies are to continue to build relationships within industry influencers as we tailor products for the different applications in this segment. While optimistic on recovery and growth, we expect headwinds in the availability of material, labor and transport for the foreseeable future. We believe these will create inflationary pressure.

Late in our fiscal '21, supply chain disruptions began to emerge as a result of the pandemic, winter weather and the changes in global demand. Specifically, we were impacted by the global shortage of semiconductors and related electronic components, other materials needed for production, shipping container shortages and freight availability. We expect these factors will cause volatility in our revenue cycles and production costs on into FY '22.

Even with these challenges, we are entering fiscal '22 with a strong backlog and a portfolio of products and services that support the market needs and are matched with our customers' willingness to purchase AV systems. We are optimistic about the pandemic's end and continued growth in our business. Our focus for fiscal '22 and beyond is to grow profitably and improve our operating margins by the development of new solutions, new customers and improved operations. We look forward to serving our new and existing customers as the most experienced provider in the industry with a broad range of solutions.

With that, I would ask the operator to please open the line for any questions.

(Operator Instructions) Our first question comes from the line of Greg Pendy from Sidoti & Company.

First of all, I just want to dig into the backlog. If I'm not mistaken, typically that converts in 6 to 9 months. Is there anything unusual that would maybe change the time frame on that? And how should we be thinking about that?

Thanks, Greg. That's a great question. We expect our backlog to be delivered within this fiscal year, augmented by the order production within the year. We do have some long-term construction contracts that will stretch beyond a fiscal year. I don't have the percentage of long-term versus regular backlog, but we expect the majority of this to clear in this fiscal year.

Right. And then just -- you touched on material, labor and transportation and inflationary pressures. And I was just curious, did you see any of that in this quarter in the gross margins you put up? I know you got the benefit on the warranty side, but have we started to see those pressures or is that something that's probably going to surface in the first quarter?

We started to see those situations magnify in Q4 of FY '21, and we believe that they will continue on throughout this fiscal year.

Okay. Great. And then just one final one, just on the CapEx. It's a pretty big bump up to $25 million and probably above the pre-COVID. So just kind of wondering what some of the puts and takes in that number are? Is some of that a catch-up from the leaner CapEx this year? And just how to think about that, maybe that as a run rate long term?

Yes. I would say that there is some catch up. We really reduced our CapEx spending in FY '21. And so there would be some things that spilled into this fiscal year as well as we see growth within this fiscal year as well. What is the run rate on an ongoing basis? It seems like this might be -- last year was quite low. This year might be high, and we'll see how that will even out in future fiscal years.

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Reece Kurtenbach for any further remarks.

I'd like to thank everybody for joining us on today's call. We'll have our next call in 6 months, and I hope everybody has a great, healthy, pandemic-free summer. Thank you, everyone.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.