Daktronics Inc (DAKT) 2022 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Daktronics Fiscal Year 2022 Fourth Quarter Earnings Results Conference Call. As a reminder, this conference call is being recorded today, Wednesday, June 8, 2022, and is available on the company's website at www.daktronics.com.

I will now turn today's conference over to Ms. Sheila Anderson, Chief Financial Officer of Daktronics, for some introductory remarks. Please go ahead, Sheila.

Thank you, Valerie. Good morning, everyone. Thank you for participating in our fourth quarter and 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.

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 market and landscape, 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 actions, 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, components and shipping services; the introduction of new products and technology; and other important factors as noted in our -- and detailed 10-K and 10-Q SEC filings.

With that, I'll move into some financial comments. Last year at this time, lockdowns were ending and people were -- had begun gathering, renewing our customers' confidence in their business outlook. Our order volume rebounded from the pandemic year lows and to an all-time record of $846 million for the year and $286 million for the fourth quarter.

Part of that record was attributed to being selected for the dynamic video system provider for the LA Clippers and Real Madrid Soccer Club stadiums. Customers also placed their orders earlier than we have previously experienced for future deliveries to secure our manufacturing capacity.

Each business unit orders volume grew through fiscal 2022 due to the pandemic recovery and because new and existing customers choose Daktronics for our industry-leading value provided by our products and solutions.

Live Events business unit orders rebounded during the year as sports and entertainment venues returned to more normal operations and invested in upgrading and renewing their facilities.

High School Park and Recreation business unit growth was driven by the continued adoption for video displays for sporting and educational use. Video displays have a higher average selling price than traditional messaging and scoring equipment.

Commercial business unit orders increase was due to strong demand as out-of-home advertising customers returned to buying after the pandemic-related economic contractions.

Our on-premise business is also strong as customers continued their purchase and use of digital messaging systems.

Transportation order levels increased as project planning and approval activities resumed to more pre-pandemic levels, and our customers move forward in purchasing displays used for intelligent transportation systems and mass transit venues.

The International business unit also increased during the year due to the recovery in the out-of-home and sport venue areas.

Sales for the year rebounded to $611 million from $482 million last year or a 26.7% increase year-over-year. The sales rate was similar to the pre-pandemic level in fiscal 2020 of $609 million. Fiscal year 2022 sales increased as a result of strong demand as noted in the order commentary, yet has been tempered by constraints and sporadic availability in the supply of components, rate and labor through the year.

Recently, our Shanghai production was shuttered for a number of weeks due to China's COVID-19 restrictions. These headwinds are creating an increase in lead times and extending the timing of converting orders to sales in the near term. This and the booking of large projects at the back half of the year has created a larger than typical backlog.

Gross profit as a percentage of net sales was 19.1% for fiscal 2022 as compared to 25% a year earlier. The decline in gross profit percentage in fiscal 2022 is primarily related to the ongoing supply chain disruptions and inflationary challenges in materials, freight and personnel-related costs. The difference is in sales mix between the periods, increases in warranty reserves and other nonrecurring factors experienced during 2021. During that year, we were utilizing furloughs, governmental programs and reductions to adjust capacity and manage expenses during that very uncertain phase of the pandemic.

Since then, we have increased carefully in our capacity and in our operating expenses. Operating expenses were $112.7 million for fiscal 2022 as compared to $103.5 million for fiscal 2021 or an increase of 8.9% and also compared to $138.9 million pre-pandemic in fiscal 2020.

During fiscal 2022, we have adjusted our capacity to support increased demand levels, increased salaries and reinstated benefits.

For a brief view of the fourth quarter results, net sales increased 38.8% to $162.2 million as compared to fourth quarter of fiscal 2021 net sales of $116.9 million. Gross profit was 18.5% for the fourth quarter of fiscal 2022 as compared to 23.6% in Q4 of the year earlier.

Operating expenses were $30.3 million compared to $26.4 million for the fourth quarter of fiscal 2021.

Our balance sheet reflects the change in business levels and strategies in managing the supply chain. As you will recall, during FY '21, we worked to reduce our inventory and receivables to reflect the uncertain market conditions through the pandemic. We also have reduced capital spend and returns to shareholders, all of which these activities generated cash.

Now during fiscal 2022, we used cash to grow working capital and returned to a normalized and growing sales levels and have made significant investments in our capacity. Our cash position was $22 million at the end of the year. And during the fiscal year, we used $26.8 million of cash from operations, correlating with the strategic focus on increasing inventory levels for backlog and obtaining the right materials needed for production as we work through part allocations and other component delays from our suppliers. With the higher sales volumes, we have also had an increase in receivables and projects in process consuming cash.

Capital spend was $20.4 million for the year, and we made investments in production for additional capacity and automation. We invested our loan, $7.9 million, to our strategic affiliated companies through the year to support their business growth initiatives, and the Board reauthorized our share repurchase program in the third quarter of fiscal 2022. We used $3.2 million of cash to repurchase common stock.

As we look into fiscal 2023, we continue to expect volatility in our supply chain and expect cash usage for inventory, accounts receivable and contract assets as our business activities increase. We plan to invest approximately $30 million in capital expenditures for fiscal 2023, which will be used primarily for increasing capacity and further automation in our production areas.

We may choose to invest additional funds into our strategic investments and affiliates or conduct other acquisitions to advance technologies or to add other capabilities. And we will continue to invest in product development initiatives at an increased level to continue to create value for our customers. We will likely use our line of credit during this time.

As we look into FY '23, we are poised to grow due to the record backlog and continued quoting activity. However, conversions of sales can be impacted by the availability of materials, plant capacity, customer schedules and COVID-19 reactions in certain geographies. We expect pressures on gross profit as we balance competitive forces with pricing changes and variability in material and component costs.

We are focused on prudently controlling costs to the organization during this time of growth and selecting continued investments in advancements of leading technologies to foster shareholder value creation.

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

Thank you, Sheila. Good morning, everyone.

Customers continue to choose Daktronics for our industry-leading value as noted by our record order volume. We appreciate our customers' support and thank all of you for your business.

While orders have recovered, the supply chain has not. It has been a difficult year as we have experienced unprecedented headwinds in the availability of material, labor and transport. These factors created inflationary pressures in our cost structure.

Supply chain disruptions began to emerge as a result of the pandemic and changes in global demand. Specifically, we are impacted by the global shortages of semiconductors and related electronic components, other materials needed for production, shipping container shortages and freight availability. These factors injected a level of inefficiency in our organization this past year.

To combat these headwinds and support timely deliveries, we have increased our investment in inventories, adjusted delivery expectations, redesigned product lines for other available materials and increased capacity through automated manufacturing machinery. We expect dynamic and volatile supply chain and labor conditions to persist at least through the calendar year so we continue to work to maximize productivity while balancing constraints. As the environment evolves, we plan to adjust and adapt our pricing and production schedules to best serve our customers.

We responded to inflationary pressures by increasing pricing and implementing additional pricing controls. Pricing increases have been an infrequent activity over the past 54 years of Daktronics' history. Normally, electronic components and processing improve in pricing and efficiency and prices tend to fall over time. However, this past year, we have seen historic price increases across the varying parts and commodities we use as well as have experienced inflationary pressure in personnel costs. We continue to monitor our supply chains and marketplaces and adapt our pricing methodologies accordingly.

We expect the current environment to continue to bring volatility in our revenue cycles and production costs through our fiscal 2023. We continue to focus on the supply chain to reduce our lead time in the short term and improve our ability to deliver over the long term. We are also working to increase capacity through our manufacturing areas.

While we see some challenging times through this year, we're also optimistic about our long-term future and are acutely focused at creating long-term value for our shareholders. We believe the audiovisual industry fundamentals remain strong and are poised for continued growth.

Our strategy is to provide long-term profitable value creation for all of our stakeholders include being a full-service firm through designing, marketing, producing and supplying products and services for our customers today as well as on into the future. We believe this provides a competitive advantage and helps us deliver greater quality, reliability and flexibility to match the evolving customer needs and expectations.

For example, we have invested in new technologies that will open up additional options for low-power display systems aligned with sustainability initiatives. And we have invested in processes and technologies to serve the industry with leading micro LED display systems.

We are preparing for the future by continuing to prospect new markets through direct and indirect sales channels, including growing our international business 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. We're investing in automation and digital technologies to lower the overall cost of operations while enhancing our interactions with customers.

Our strong portfolio of products and services support our market needs today and are well positioned to grow with customers' willingness to purchase AV systems on into the future. We are optimistic about the recovery of the supply chain and continued growth in our business.

I'd like to say thank you to our Daktronics team for increasing our capacity, adjusting to the uncertainty and volatile supply chain conditions and serving our customers as our industry recovers from the pandemic's implications. We appreciate our suppliers and vendors for also helping us through these challenging times and thank you, too, to our investors for your patience and support. We realize these are unprecedented times that we are working through. Our management teams and employees are focused on long-term profitable growth that we believe will create value for our shareholders now and on into the future.

With that, I would like to pass this back to the operator to please open the line for any questions.

(Operator Instructions) Our first question comes from Robert Shapiro of Singular Research.

So last quarter, you mentioned that due to supply chain issues and labor conditions that you plan to adjust pricing and production schedules to improve the situation. Obviously, you mentioned it again this quarter. Is there a lag? Or is there a stickiness to prices that make it difficult to -- like I said, you mentioned it last quarter. So just wondering if there's a lag.

There is a lag. As we go to increase prices, we have quotes that are active and valid that are out there. So it takes some time for the -- for a price increase to be seen in our backlog and our sales and revenue in a period. And also, it continues to be a volatile and dynamic situation. So we are continuing to deal with part shortages and personnel costs as everything -- as the future unfolds.

Okay. So this past quarter, gross margin increased slightly to 18 -- compared to the history. Should we assume it's going to improve slightly again this quarter? Or what do you think? Do you think that's going to happen to the gross margin numbers?

Yes. Predicting the future is always a tricky business, especially in volatile times. But we believe that our -- the processes and systems and the actions we have taken will continue to grow gross margin over time.

(Operator Instructions) I'm showing no further questions at this time. I'd like to turn the call back over to Reece Kurtenbach for any closing remarks.

Well, I'd like to thank everyone for attending today's conference call. As a reminder, we host conference calls 2 times per year, and our next one will be at the conclusion of our second quarter in November of this year.

I hope everybody has a great summer, and we'll talk to you again in the fall. Thank you. Bye-bye.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.