Alliance Entertainment Holding Corporation (AENT) Earnings Call Transcript & Summary

Yes, you were connecting to audio there for a while. Let me just tell you how things go. By the way, we have people coming on already. Welcome to all of you who have come early to the Alliance Entertainment Webinar. We will be getting started a quarter after the hour, which is in about 5 minutes. Now Bruce, the way these usually work is I'm going to introduce you and anyone else from the team that you would like me to introduce. I've got 4 names here of members of the C-suite who could be on, and I see Amanda is on. Hello, Amanda.

Hi, Craig.

Hi. I hear you loud and clear. Okay. So I'll introduce all of these people, unless you tell me otherwise, Bruce, I'll read your titles as well. I'll say the name of the company and then the ticker you trade on. I'll read the safe harbor statement, and then Alliance will have the floor to walk through the deck, I presume you'll do.

Yes.

And then after that, we'll do Q&A. Okay, great. And then we'll do Q&A. And in almost all cases, we wrap up by the top of the hour. So 45 minutes tops. Optimal time for a presentation, in my opinion, would be 25 minutes for your presentation, followed by about 20 minutes of questions. How does that sound?

Great. I'm sharing my screen. How does that look?

Great. Great. Just perfect. Yes.

I think I was only expecting Jeff to actually be talking today. Amanda, I don't think you were prepared like that, were you?

Okay.

No.

I didn't alert you.

No. No, I'm not prepared.

Yes, sorry.

Do you need me to do -- to say something?

I don't think so. No, unless you feel compelled, you want to say something. You got to fly through this pretty fast.

Okay.

Let me just welcome all the new people coming in. This is the Alliance Entertainment webinar. We'll be getting started at a quarter after the hour. [Operator Instructions] Hello, Jeff. This is Craig from RedChip. Let's do a quick sound check. Can you hear me?

Yes, I can hear you. Can you hear me?

Loud and clear, I see you as well. All is well. We'll be getting started in seconds. At quarter after the hour, I will press record. I will introduce Alliance, read the safe harbor. Of course, I'll introduce the C-suite that is on with us now and read the safe harbor, and then your team will give the presentation. We'll do Q&A after that and wrap up by the top of the hour. How does that sound?

Okay.

Thank you very much. Hi. This is Craig Brelsford with RedChip Companies. Thank you for joining today's event with Alliance Entertainment, which trades on the NASDAQ under the ticker AENT. With us today, we have: Bruce Ogilvie, Executive Chairman of Alliance Entertainment; Jeff Walker, CEO, CFO and Director; Robert Black, the Chief Compliance Officer; and Amanda Gnecco, the Chief Accounting Officer. We will begin with a brief presentation in a moment, and then we will answer your questions. [Operator Instructions] Before we begin, please allow me to read the safe harbor statement. This call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements pertaining to future financial and/or operating results along with other statements about the future expectations, beliefs, goals, plans or prospects expressed by management constitute forward-looking statements. Any statements that are not historical facts should also be considered forward-looking statements. Of course, forward-looking statements involve risks and uncertainties. I now turn this webinar over to the Alliance Entertainment team. Please go ahead.

Thank you, Craig. Hello, everybody. I'm Bruce Ogilvie. I'm Chairman of Alliance Entertainment; and my partner, Jeff Walker is on the phone here with me. I'll tell you about Alliance today, Alliance, we bring entertainment to you. We are a stocking distributor of over 325,000 SKUs. And on the left-hand side of the screen here, you'll see all these tentpole suppliers that we work with. These are the gold standards of entertainment products consisting of movies, music, video games and collectibles. We're a stocking distributor, which means we have this long tail of selection in stock of that 325,000 SKUs. We take this list of SKUs, this huge selection that we have of entertainment products, and we put it in electronic data feed files that we feed to all these omni retailers on the right-hand side of the screen. You see your Walmart, Target, Best Buy, all the usual suspects there. And they want to have -- they have physical brick-and-mortar stores, but at the same time, they would like to be selling online to as many consumers as possible. And that's where we come in, where we can really expand their selection. Their selection online is really going to be what they carry in their stores or their DCs, and that will be very limiting when you're trying to compete against Amazon, which is the king of long tail. We can come in and expand their selection, have all this big, huge selection there of entertainment products that really attract eyeballs and consumers wanting to spend more money in their store or on their sites there. In addition to all these -- now the beauty that we can do here for these retailers is that we help them mitigate any type of inventory risk that they might have because they don't have the expertise in dealing with this big, long selection of what to bring, what to stock or what not to stock. If you went on to one of their websites and you ordered the product there and you couldn't find it in the store, but you went to the -- you wanted to find it online, you would go to their site, look at the item to look for, order it and it arrive in your door within 2 days, and you'll be very happy to open it up and it will look perfectly pristine. And you think it came from walmart.com or target.com or even amazon.com, but it actually came from Alliance. We're that back room that did all this manufacturing -- not manufacturing, distributing and shipping out to you. So when arrived at your doorstep, it looked like it came from that retailer, sold by that retailer, but Alliance was that. Almost 40% of our business is e-commerce fulfillment, where we're shipping direct-to-consumers on behalf of these omni retailers as well as on behalf of the brands that we own. We have our own retail brands, which is close to $100 million worth of business where we ship direct-to-consumers selling on every marketplace in the world for Amazon and eBay as well as any other sites there. On top of all this that we do here, we are a traditional distributor where we sell and wholesale products to brick-and-mortar locations, which we're showing here like over 35,000 storefronts, not to mention the 2,500 independent music stores that are still in business today and doing really, really well, thanks to the vinyl LP that are being revitalized there. So as I mentioned, we bring entertainment to you. We're in a category that's close to $10 billion in revenue. Of our $1.1 billion that we do, over $250 million of it is exclusive distribution, we're really an exclusive distributor. As I said, I mentioned, we have a big, huge product selection. We're -- I'm going to talk more about how we want to do our growth and future growth by doing more acquisitions like we've done in the past, and we have a very experienced team, which I can talk about there. One thing I'd like -- we like to mention everybody is that our float is pretty lightly traded. That's not -- that can be a good thing or a bad thing, depending on your perspective there. But the important thing is that we're fully committed, and our employees also own a part of the company also. So we're employee-owned, and really looking to grow our capital structure in the future there with some type of S3 raise in the future there. I mentioned $10 billion physical market there. You can see the growth areas there are vinyl as well as licensing and video games. They are all 3 growth areas, we're heavily involved in there. We think there's -- our growth areas here is just all these different areas there. We're definitely going to lean in heavier on the collectible side here. Vinyl is still strong. And video games, we are a little constrained as far as software being available there. But in order to -- people still are playing lots of games and to play those games, you need controllers, you need headsets, you need goggles and consoles, and those are all the things we distribute there. That $250 million that I was talking about, it's made kind of 3 little tranches there; Distribution Solutions, AMPED and Mill Creek and then Arcade1Up. So Distribution Solutions is 60 movie studios, where we're the exclusive distributor of that content. We are the only seller of that, and we're talking home entertainment of video movies. And then our AMPED division is CDs. We have 90 music labels. These labels, we're the exclusive seller on that. So anybody that wants a particular mover -- movie or music title physically and we're the exclusive seller, they must buy it from us. There's no other place to get it there. That creates really good sticky relationships with our customers there. Mill Creek is our licensing division. That's a really strong category growth that we're leaning into there. We license content from the movie studios. Once we license that, that's going to be distributed through Distribution Solutions there. But if you -- in the past right now and currently right now, we have Sony, Universal, Lionsgate, CBS, Paramount and other independent studios. About 1.5 years ago, we licensed the bottom 1,800 of the Disney titles. And we were hopeful that we would get on the RFP, all their titles, we did not get it, but that didn't stop us because now we're in the middle of a major RFP with another studio that wants to license their movies to a third-party company like us. And we think that over time there, this will be kind of the direction that all movie studios want to do. No reason the music side wouldn't want to do the same thing. Back in the '80s, the music studios -- not the music studios -- music labels licensed their video content. But just recently, we have these retro arcades, Arcade1Up, $74 million last year in revenue. We just executed an exclusive North American distribution agreement. So pretty excited about that. That's an item. These are retro arcades like Ms. PAC-MAN, NBA Jam, Pong. I'm sure you've seen them out there in the marketplace, and we're doing really well with those, and we expect this Q4 to be very strong in that area there. I was mentioning our acquisition growth. Jeff and I -- I joined Jeff in 2001. Between 2001 and 2013, we did like 4 or 5 different acquisitions there that got us up to $190 million of revenue. In 2013, we acquired our largest competitor, Alliance Entertainment there. And then we just continued on that acquisition strategy there, mainly buying either competitors or go find other companies in areas where the current type of business we were doing is our way of diversifying. I think there's a big picture here is that when we say we want to do acquisitions, we have a good track record of doing acquisitions, and we've done really well in that area there. This is just a little quick case study in Distribution Solutions. We acquired that in 2018 from the previous slide there. We acquired them about $80 million, and they -- and as of 2024, $134 million the year, we just -- we started out with 18 studios and today, we're up to 60 studios there. A lot of times people ask us, what's your strategy for doing any type of M&A acquisition? What do you do? Well, we don't like to overbuy. But basically, we start off is let's figure out what the stand-alone EBITDA is. So after we've calculated that, is there any add-backs or takeaways as a stand-alone there? Any synergies that we do get, we don't want to pay the seller for that. We want to keep those -- that's our set -- for us. It has to be a debt-free transaction there. And the next thing we have to set the working capital or the PEG. And it's pretty simple. We take accounts receivable plus inventory, less accounts payable. And that sets how much working capital business is required. And so once we know that -- what the EBITDA is, we'll come up with some type of multiple, we'll offer them for the business there. It has to be a debt-free transaction, I said there, and then they have to deliver a certain amount of working capital. If working capital exceeds the pay, that will improve the purchase price. If working capital is less, that will lower the price. It needs to be seen some type of seller note or earn-out. And then of course, we have to get bank financing approval. But now we have something new to work with, which is we could actually issue stock or do some type of raise to -- instead of borrowing the money to give shares of stock to save money. That's something we have not had before. It's [ been to ask -- ] could become partners in the business. As a private company, we found that very difficult to do. But as a public company, we're very open to that now. Big turning point for us is our warehouse in Kentucky. We also had another major warehouse in Shakopee, Minnesota there. There we had a total -- in Minnesota, we had a total of 192,000 square feet. And just this year, we were able to lower -- reduce that footprint down. We eliminated 162,000 square feet of warehouse space there. That's going to really improve our earnings for this year, and this all happened on May 31. And how were we able to do that? Well, it was really simple. 3 years ago, we found this company called AutoStore, which is in upper right-hand screen there. I encourage you always to go to our website and get our deck and click on these links, you can see how AutoStore works. But I call it the Rubik's Cube of auto storage retrieval systems, and basically have all these totes or milk crates that stack on top of each other. Think of each one of those as a shelf location. Today, we're using it for vinyl. We have a lot of vinyl in there. And before AutoStore, we had 41 people walking around our mezzanine, going to different locations, walking down the most efficient pick path we could come up with, and then they would pick and process and pull it well, that 41 people would be able to reduce to 7 people. We're very happy with the performance of AutoStore, what it's doing for us. That same efficiency, by eliminating that travel time there, going from 41 to 7, that's causing us payroll savings between $3 million to $3.5 million. And then on top of that, receiving, we're also [ save ] here instead of people receiving the product and walking to a shelf and finding an empty location, now that went down from 14 down to 7 people there. So that was an improvement. The next thing that AutoStore gave us is because it's all packed together and there's no aisles, that eliminate -- that gave us more storage capacity. So as we move the products out of our mezzanine into AutoStore there, that freed up a lot of locations in our mezzanine and then that allowed us to shut down our Minnesota facility there. Because of AutoStore, you look at -- if you look at our 10-K, you'll see that our fulfillment costs we're running over 5%. It's now down to 4.4%. So we've saved over 1% from our financial statements because of AutoStore there. And it allowed us to close that facility, which is going to have more savings that are going to happen this year. Just the top line, you can see the revenue there. We had that big COVID spike there. So we did get a high peak of $1.4 billion there. Right now, we're currently -- we just finished the fiscal year at $1.1 billion versus $1.158 billion there, pretty Steady Eddie, I would call that right now. We're obviously becoming more profitable. We had a supply chain issue with those retro arcades, which I can probably explain later on when we have more time there. So what's our strategy here? Well, we got to grow our market share, continue with automation and restructuring. We want to add new products through verticals through M&A. We're a capital-light model there, working capital improvements, efficiency, scale. And this is a way for us to separate us from our competitors there and create some distance there. Senior management, so Jeff and myself there, our Board of Directors, we have Amanda and Bob on the call today there. And then we have our 4 outside Independent Directors there. This is just a quick little help you out here, how did we get where we were? So June 30, '24, we came in at $24 million EBITDA. And in the previous year, we're at $17.6 million negative -- loss of $17.6 million, and you might be saying, well, what happened? And it really all started with some retro arcades back in 2021. And they got delivered very late. I'm sure a lot of you remember all those cargo ships that could not get unloaded. We had quite a bit of inventory off the port of Long Beach there. Long story short, container costs went from $4,000 to $28,000 in demurrage charges, transportation charges, carrying cost of interest, it all came in. We missed the holiday season. So after we started January 1 there with almost $130 million in inventory there, we had to deal with the fact that we had to discount all that -- discount some of that inventory to move it through, and that's what created that [ delay. ] If we were to add back all the costs associated with that onetime event there, you would add back $35.8 million there, and that would have made our EBITDA more like $18.2 million number instead of a loss of $17.6 million there. But you can see from a cash flow perspective there because we did this great turnaround from where we were, our cash position improved by $55.8 million compared to the previous year there. And mainly what's driving that is we were able to lower our inventory, lower our account -- our line of credit, which -- I'll show you in this slide here. Let's go right here. You could see that right here on our balance sheet here. So inventory went down from $147 million down to $97 million. It was at a peak of $249 million at onetime there. And you'll see our revolving line of credit there went down from $136 million down to $79 million there. So we're definitely making our balance sheet more improved. Probably have a little bit of improvement we can do on our inventory side there, but we're really happy with the progress we've made from where we were. Just to give you an idea of what our sales breakdown is. So $1.1 million in the revenue there, and you can see that gaming is about 31% of our business. It was at a peak of 39%. You can see vinyl and where it's running. So right now, about the 30% range there. It's holding up really well. You take the -- movies, 19%. And then if you add CDs, 12%, you can see music as a category is about 42% of our overall business there. And our consumer products is down as a percentage of our business, and we're taking steps to improve those areas there. If you look here, you'll see that vinyl is going to have continued growth and the collectibles side is also going to have additional growth there. This is just -- you can see our chart here how our quarters are improving there. And so we're happy with that trend we're going in the direction we're going there. And that is it. I'm ready to open it up for questions unless Jeff, you want to throw something in there that I missed.

No, I think let's head the questions.

And Alliance, you are now moving to questions?

Yes, we're ready.

Absolutely. Thank you very much. [Operator Instructions] We've already got a few questions. What does Disney's new distribution deal with Sony mean for Alliance? Are you still distributing content for Disney? Could Sony outsource some distribution to Alliance?

Jeff, do you want to do that? I'm happy to take.

Yes. I'll run with that one. Yes, they -- we are still distributing the Disney product. We purchased it through our Sony account now, the titles that moved over there. But they've also -- they've kind of split it. The main tentpole new releases are going through Disney there -- I mean, are going through Sony. And Disney has moved over some more titles to Alliance under license since they announced that with Sony. You have to realize Sony has got their own core products that they are focused on and so forth. And so we're kind of in a combination there with Disney as well as -- at the end of the day, Alliance is the third largest physical account to all the studios. There's Walmart stores, and then there's Amazon and then Alliance. So we are a significant account for Sony, Disney or any of the other studios.

Hi. Bruce and Jeff, I have been to your facility and the automation is breathtaking. Can you speak to the competitive landscape? I am having a difficult time believing there are many competitors with the same functionality.

Yes. I am on that.

Yes, go ahead, Bruce.

Yes. As far as -- well, from a 3PL perspective, you have Technicolor, which is VANTIVA; and then the other one, Direct Shot. And Direct Shot is not as automated as we are. And the other 2 about the 2 competitors is the competitors as far as fulfilling product and doing it like we're doing, they're not really the seller of record. They're just a fulfiller of record. So they don't have that direct relationship with those retailers that we have there, which is very important to us. As far as Vantiva, Technicolor, they do have an AutoStore piece of equipment now that was put in there by Universal Music, and there's some arrangement going on between them. I don't believe Vantiva finance that, but I think Universal financed 100% of that. And Vantiva does have some type of sortation equipment for sorting different boxes and products. We're really happy with the way our operation is working. And we -- probably because we're so heavy -- well, the collectibles space is a different category from an automation-type perspective, which is currently not being involved in Vantiva or Direct Shot there. As far as like the solutions to go, I've never been in their facility, so I don't know what I could say about them. I suspect they have some automation there. And then AMS is one on the music side there, and I'm not aware of any automation they have there.

Do you anticipate paying off debt at the same rate in the next 12 months as you did in the last 12 months?

Yes, I'll take that one. This is Jeff. In a total dollar amount, I would say probably not as much. A big portion of paying down our debt in the last fiscal year, I mean, June of '24 was a real reduction in inventory that brought -- that helped us as we converted inventory to cash. We will probably end June 30 of '25 with a little bit less inventory than we did in '24, but not a significant number like it was the year before. But on the other side, we are generating increased profits here in fiscal '25. So that should help to contribute to our debt reduction here for fiscal '25. And I guess one bright spot in some of the write-offs that we took in fiscal '23 is, we do have a pretty significant tax loss carry forward. So even though we're booking tax expense, the cash paid on taxes for fiscal '25 I think will be very minimal because of our loss carryforward that we have.

Excluding vinyl.

Yes.