Daktronics Inc (DAKT) Q4 2022 Earnings Call Transcript

Daktronics Inc (NASDAQ:DAKT) Q4 2022 Earnings Call dated Jun. 08, 2022.

Corporate Participants:

Sheila M. Anderson — Chief Financial Officer and Treasurer

Reece A. Kurtenbach — President and Chief Executive Officer

Analysts:

Robert Shapiro — Singular Research — Analyst

Presentation:

Operator

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 in our website at www.daktronics.com.

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

Sheila M. Anderson — Chief Financial Officer and Treasurer

Thank you Valerie. Good morning everyone. Thank you for participating in our fourth quarter and year end conference call.

I would like to review our disclosure cautioning investors and participants that in addition to statement 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 involves risk and uncertainties which maybe 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, including impacts of global trade discussions and policies, the impact of governmental laws, regulations and orders, including those resulting from pandemic. 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 introductions of new product and technology and other important risk factors as noted in our — and detailed in our 10-K and our 10-Q SEC filings.

With that, I’ll move into some financial comments. Last year, this time, lockdowns were ending and people have began gathering renewing our customers’ confidence in their business outlook. Our order volume rebounded from the pandemic year lows into an all-time record of $846 million for the year and $286 million for the fourth quarter. Part of that record was attributed to be inflected 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 a 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 equipments. Commercial business unit orders increased 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 look forward in purchasing ways 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 sports venue areas. Sales for the year rebounded to $611 million from $482 million last year or 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, freight 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 differences in sales mix between the periods increases in warranty reserves and other non-recurring 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 markets 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. 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 and processed 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 loans $7.9 million to our strategic affiliated companies for 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 in 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 to 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 for the organization during this time of growth and selecting continued investments and 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.

Reece A. Kurtenbach — President and Chief Executive Officer

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 the 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 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 the Daktronics system. 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 are also optimistic about our long-term future and are acutely focused on creating long-term value for our shareholders. We believe the audio visual 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 are 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 pandemics 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 realized 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.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Robert Shapiro of Singular Research. Your line is open.

Robert Shapiro — Singular Research — Analyst

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

Reece A. Kurtenbach — President and Chief Executive Officer

There is a lag as we quoted increased 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, in our sales and revenue in a period and also it continues to be a volatile and dynamic situation. So we are — continue to deal with part shortages and personnel costs as everything — as the future unfolds.

Robert Shapiro — Singular Research — Analyst

Okay. So this past quarter, gross margin increased slightly to 18% compared to history. Should we assume its going to improve slightly again this quarter or what do you think — do you think that’s going to happen in the gross margin numbers?

Reece A. Kurtenbach — President and Chief Executive Officer

Predicting the future is always 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.

Robert Shapiro — Singular Research — Analyst

Okay, thank you.

Operator

[Operator Instructions] Thank you. I’m showing no further questions at this time, I like to turn the call back over to Reece Kurtenbach for any closing remarks.

Reece A. Kurtenbach — President and Chief Executive Officer

Well, I’d like to thank everyone for attending today’s conference call. As a reminder, we host conference calls two 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.

Operator

[Operator Closing Remarks]