Earnings Call Transcript - DAKT Q2 2022

Operator, Operator

Good day, everyone, and welcome to the Daktronics Fiscal Year 2022 Second Quarter Earnings Results Conference Call. All participants are currently in listen-only mode. This call is being recorded today, Wednesday, December 1, 2021, and can be accessed on the Company's website at www.daktronics.com. I would now like to turn the call over to Ms. Sheila Anderson, Chief Financial Officer for Daktronics, for some opening remarks. Please proceed, Sheila.

Sheila Anderson, CFO

Thank you, Latif. Good morning, everyone. Thank you for joining our second quarter earnings conference call. I'd like to point out that, in addition to discussing historical facts, we will be making forward-looking statements regarding our expectations and plans for future financial performance and business opportunities. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ significantly. Risks include changes in economic conditions, shifts in competitive markets, the effects of global trade discussions and policies, the impact of government laws and regulations due to pandemics, disruptions caused by geopolitical events, military actions, work stoppages, natural disasters, or health emergencies like COVID-19, the management of growth, the timing and size of future contracts, margin fluctuations, availability of raw materials, components, and shipping, the introduction of new products and technology, and other important factors detailed in our 10-K and 10-Q SEC filings. Now, let me highlight some of our financials. In the first half of fiscal 2022, customer activity began to rise across our markets as effective vaccinations became available, which allowed for greater freedom and safety. With the reduction of COVID-19 restrictions, economic outlooks improved and our customers gained more confidence. Customers placed a record $163.7 million in orders for the second quarter of fiscal 2022, bringing the total for the first 6 months to $345.5 million. This represents an increase of 20.7% for the second quarter and a 34% increase year-to-date. Each business unit saw growth in order volume during the first half of fiscal 2022. Demand in the commercial business unit increased due to strong interest in systems for on-premise promotions and out-of-home advertising. Growth in the High School Park and Recreation sector was fueled by the ongoing adoption of video displays for sports and educational purposes. In transportation, order levels rose as project planning returned to pre-pandemic levels and customers moved ahead with purchasing displays for intelligent transportation systems and mass transit venues. International business unit orders for the quarter were down compared to last year but improved throughout the first half of the year. As some countries eased travel restrictions, we saw an increase in business in those areas, while others remained cautious, slowing recovery of orders globally. Live Events business units were similar to last year’s second quarter but showed an increase year-to-date. Net sales rose 29.1% to $164.5 million, compared to $127.4 million in the second quarter of fiscal 2021. Year-to-date comparisons showed an increase from $271 million to $309.2 million, or a 4.1% increase year-over-year. This growth was driven by strong demand and a rise in conversions in Q2, although it was moderated by supply constraints and labor availability issues in the first half of the year. These shortages have resulted in longer lead times and delays in converting some orders to sales in the near term, leading to an atypically large backlog. The gross profit margin for the quarter was 19.6%, down from 26.2% last year, and year-to-date gross profit was 20.8%, compared to 25.5% in the second quarter of fiscal 2021. The drop in gross profit is mainly due to rising costs for inputs and higher personnel expenses compared to the previous year when we were in the pandemic. We've faced inflation in input costs, including raw materials, labor, and shipping throughout the year, with varied success in adjusting our pricing. In Q2, we also had more large project sales, which typically generate lower gross profits because of competition. Last year's situation was different as we implemented furloughs, government programs, and capacity reductions to manage expenses during the pandemic. Operating expenses for the second quarter of fiscal 2022 were $27.9 million, up from $26.7 million in the prior year, marking a 4.5% increase. Year-to-date, operating expenses reached $54.4 million, compared to $52.9 million, reflecting a 2.8% increase. Our operating expenses have risen as we adapt our capacity to meet higher demand levels, primarily driven by personnel costs, with some increases in travel and convention activities. The effective tax rate for the six months ending October 30, 2021, was 27%, consistent with last year's 26.2%. Our balance sheet remains strong, with a cash position of $61.6 million at the end of the quarter. In the first half of the year, we used $8.5 million in cash from operations, focusing on increasing inventory levels for backlog and personnel costs. Capital spending amounted to $4.5 million for production and demonstration equipment and facility improvements, and we generated $800,000 in cash from the sale of various properties and equipment. We invested or loaned $6.1 million in our strategic investments and affiliates and had no advances on our credit lines, unlike last year when we borrowed $15 million at the end of the second quarter. Our Board suspended dividends and share repurchase programs at the pandemic's onset and may reinstate them at their discretion, resulting in no cash usage for these programs in the first half of the year. For the second half of fiscal 2022, we anticipate some cash usage for inventory, accounts receivable, and contract assets as our business continues to grow. We estimate total capital expenditures to be around $25 million for the fiscal year, mostly for increasing capacity and production equipment, with some expenditures potentially moving to the next year based on equipment availability and delivery timelines. We may invest additional funds in our strategic investments and affiliates or pursue acquisitions to enhance our technology and capabilities. We continue to invest in product development initiatives at a higher level than FY '21 to create more value for our customers. Our product backlog stands at an all-time high of $282 million due to increased order activity in the first half of fiscal 2022. We expect sales for the third quarter of fiscal 2022 to exceed those of last year's third quarter, supported by our record product backlog, although sales may vary based on project bookings, customer schedule changes, and the availability of resources. COVID-19 variants and certain geographic restrictions could also affect order levels and sales conversions. We are continuing to adjust our expense levels amidst the pandemic and are now focusing on prudently managing costs during this growth period. I will now hand it over to Reece Kurtenbach, our Chairman, President, and CEO, for a few comments.

Reece Kurtenbach, Chairman, President & CEO

Thank you, Sheila. Good morning to everyone. As activities in our markets increase, we have and are increasing our capacity to maximize production and service capacity while prudently controlling costs through this time of growth. We will be strategically making investments in capital assets for our factories, for product developments to meet the needs of our customers, and for technology developments to be a market leader into the future. We will also continue to invest in improving the strength and expertise of our internal operations and business systems to enhance our customer and employee experiences. During the first half of the year, we have experienced headwinds in the availability of materials, labor, and transport, creating inflationary pressures in our cost structure. These headwinds in supply chain disruptions began to emerge as a result of the pandemic and the changes in global demand. Specifically, we are 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 through the remaining fiscal year and into 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. As we look out to the longer term, we believe the audio-visual industry fundamentals remain strong and are poised for growth. Our strategies to provide long-term profitable value propositions for all of our stakeholders include offering comprehensive products and services that match our customer needs and expectations, expanding to new markets, often unlocked by the development of advanced technologies, such as narrow pixel pitch, micro LED, and control systems, growing and fostering our direct and indirect sales channels globally, providing world-leading solutions and services to our customers today, as well as into the future to make us the obvious choice for new systems and replacement or upgrade of their existing audio-visual systems, and improving the experiences of both our customers and our employees continuously developing our internal processes and systems. Specific strategies in our business units include: continuing to develop and release innovative solutions and services tailored for different applications for existing and new markets, including investment and development in micro LEDs. Investments in increased use of digital technologies to enhance our interactions with our customers, growing internationally by using our established localized sales and service channels to focus on growing our market share in sport, out-of-home, spectaculars, and transportation areas, servicing our Live Events business 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 large contracts, and can be highly competitive, creating some variation from year to year. Continuing to serve our high school and parks and recreation market, we see an opportunity for larger-sized orders due to the adoption of video in sporting applications and growth in new applications across these campuses. In our Commercial business unit, we are focused on 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 the increasing success in the spectacular segment. This segment includes multi-million-dollar projects that are discretionary choices by customers, which can cause ups and downs in timing and trends. Demand in the transportation business for the U.S. and Canada, we believe will be strong due to continued investment in transportation systems. The stability and potential for increases in federal infrastructure spending and increasing advertising and on-premise promotional application needs in mass transit facilities. Our strategies are to continue to build relationships with industry influencers as we tailor products for the different applications in this segment. Our strong portfolio of products and services supports the market needs today and are well-positioned to grow with customers ' willingness to purchase AV systems into the future. We are optimistic about the world's ability to overcome this pandemic and the 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 continually improving operations. We look forward to serving our new and existing customers as the most experienced provider in the industry with the broadest range of solutions. With that, I would like to thank everyone for attending today's conference. Our next conference call will be in late May, after our fourth-quarter completion. I hope you have a wonderful winter season and you stay safe and stay healthy.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.