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Q2 2024 Daktronics Inc Earnings Call

Participants

Sheila Anderson; CFO; Daktronics, Inc.

Reece Kurtenbach; President and CEO; Daktronics, Inc.

BJ Cook; Analyst; Singular Research

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the deck tronic fiscal year 2024 second quarter earnings results conference call. As a reminder, this conference is being recorded today, Tuesday December fifth, 2023, and is available on the Company's website, www.daktronics.com. After the speakers' presentation, there will be a question and answer session to ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message. Advising your hand is raised to withdraw your question, please press star one one. I would now like to turn the conference over to Ms. Sheila Anderson, Chief Financial Officer for Daktronics for some introductory remarks.
Please go ahead. Sheila

Sheila Anderson

Thank you, JG. Good morning, everyone. Thank you for participating in our second quarter 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. These forward-looking statements reflect the Company's expectations or beliefs concerning future events. Call forward looking statements involve risks and uncertainties which could cause actual results to differ materially from our expectations. Such risks include, but are not limited to changes in economic and market conditions, management of growth, timing and magnitude of future contracts and orders, fluctuations and margins, the introductions of new products and technologies, availability of raw materials, components and shipping services and other important factors. These identified factors could cause actual results to differ materially from those discussed in this call in the Company's 2024 quarterly earnings release and its most recent annual report on Form 10 K.
Our second quarter 2024 earnings release contains certain non-GAAP financial measures was furnished to the Securities and Exchange Commission on a Form eight K this morning. These documents are available on the Investors section at Tektronix's website at www.daktronics.com.
I'll turn the call over now to our CYO. Reese curtain.

Reece Kurtenbach

Good morning. Thank you, Sheila, and thanks, everybody out there for joining us today. We have had a record start to fiscal year 2024 in both sales and operating income and had robust operating cash generation for the quarter. All of this is the result of strong execution in our strategic strategies across all our business areas we continued to benefit from our past decisive and deliberate actions to improve our customers' experience while increasing our profitability and working capital levels. Our performance is also a testimony to the resiliency and strength of our teams within Daktronics as well as our strategy of diversified our markets and innovation across technology platforms.
For additional details on the financial results for the quarter, I'll turn it back to Sheila.

Sheila Anderson

Thank you, Reece. As Rick mentioned, we had a record start for orders and operating income and strong operating cash flows. Congratulations to the doctor Onyx team for this great effort for the quarter and year. Orders and demand outlook remained strong in live events, High School Park and Recreation and transportation. As we see customers continue to invest in digital displays to inform entertain and persuade their audiences. International orders have been increasing this year as global economies recover from the pandemic, despite four related events
for fiscal 20204 for commercial areas have been contracted for orders and out-of-home digital billboard and the military areas. As a reminder, given the impact of large tailored projects across our markets, orders can be lumpy.
We reported sales of $199.4 million for the second quarter of fiscal 2024. This was an increase of 6.4% compared to $187.4 million for the second quarter of fiscal 2023. Sales growth was driven by fulfilling orders and backlog. Gross profit as a percentage of net sales increased to 27.2% for the second quarter of fiscal 2024 as compared to 16.9% in the second quarter of fiscal 2023. The over 10-point increase in gross profit percentage is attributable to the increased sales volume over our relatively fixed cost structure, strategic pricing actions and a stable supply chain, causing fewer operational disruptions during the second quarter of fiscal 2024 as compared to a year earlier.
Operating expenses for the second quarter of fiscal 2024 were $34.8 million compared to $30.2 million for the second quarter of fiscal 2023. As a percentage of sales. Operating expenses for the quarter over prior year was 17.4% as compared to 16.1% on a year-to-date basis. Operating expenses as a percent of sales was 15.2% as compared to 17.1%. Both gross profit and operating expenses were impacted $4.8 million of expenses related to the effects of in our employee benefit programs, $3.4 million related to the establishment or estimate of John adjustments for these programs. We believe these programs are valuable and promote higher employee retention.
Operating income was $19.4 million or 9.7% of sales during the second quarter of fiscal 2024 as compared to last year's $1.5 million or 0.8%.
And as a reminder, our business also fluctuates seasonally based on the sports markets and construction cycles and is dependent on the various schedules of our customers' needs. Generally the first half of the year, we have stronger quarters. Q3 is softer because of the seasonality and reduced workdays for the holidays and Q4 starts to ramp back up for the sports and outdoor deliveries below operating income, we accounted for our convertible debt at fair value in accordance with US Generally Accepted Accounting Principles for the second quarter, we recorded a $10.7 million noncash charge as fair value changes primarily caused by the increase in our stock price over the conversion price and the decline in slight decline in market interest rates. Going forward, we will remeasure the fair value of this convertible notes until maturity or conversion happens, which will create this noncash charge below operating income each quarter.
Tax expenses for the second quarter of fiscal 2024 was $4 million with an effective income tax rate of 64.8%. Absent any major tax changes. We expect our full year effective rate to be in the mid 20s before the noncash non-tax impact of the fair value accounting for the convertible debt. Our balance sheet reflects the changes in business levels and strategies we pursued in managing our supply chain and growing our capability to meet our customers' commitments while managing our liquidity at the end of the fiscal 2024 second quarter, our working capital ratio was two to one. Inventory levels dropped slightly since the end of our fiscal year and April 29th of 2023 and are expected to approach more normalized levels as supply chain disruptions continue to ease and our order backlog is fulfilled. Cash, restricted cash and marketable securities totaled $73.5 million, and we had a face value of debt of $39.6 million outstanding. There were no drawdowns on our line of credit, higher income from operations and strong working capital management. We drove second quarter of fiscal 2024 for cash generation to $25.1 million from operations, and we used $4.4 million for the purchase of property and equipment income from operations and working capital managements contributed to that cash generation. Our plans or our plans are to spend approximately $19 million for capital assets, primarily in manufacturing and technology areas in total for fiscal 2024, we also planned investments in digitalization to improve customer and employee experiences, and we'll continue to invest in our affiliates through the year. Over the long term, we remain focused on driving profitable growth. Our backlog at the end of the second quarter of fiscal 2024 is $307 million, which provides a nice base of business to fulfill in the coming quarters. The reduction in backlog from last year and last quarter reflects our focus to reduce lead times with capacity increases we've made over the past year, and it was also aided by the continued stability in the supply chain.
I'll now turn it back over to you, Rich.

Reece Kurtenbach

Thank you, Sheila. As we look ahead, industry research predicts the LED market will achieve an estimated 20% to 25% compounded annual growth rate over the coming years. Depending on the specific end market and geography considered, we are well positioned to continue to capitalize on growth in the global use of audio visual communication systems in both traditional and new applications, and we remain focused on engaging in a full range of activities to serve our customers by providing high quality standard display products as well as custom-designed integrated systems, both with ongoing services and support manufacturing, a complete line of products from small scoreboards and electronic displays to large multimillion dollar video display systems and the related control and sound systems developing capabilities to design, manufacture, install and service complete integrated systems. And we are recognized as a technical leader in these areas, generating new leads and serve repeat customers based on our performance reputation and marketing efforts. As we look ahead to the remainder of the current fiscal year, our attention remains focused on our multiyear journey to capture the market's expected growth and broaden our leading market position by offering best-in-class technologies and services to both our traditional customers as well as new and adjacent markets.
As we look in into the second half of fiscal 2024. We are applying the experience we gained over the last two fiscal years and intend to closely monitor the ever-evolving geopolitical and global economic environment. And as necessary quickly adjust our resources and market approaches so that we can maintain profitability and cash generation throughout various cycles.
In our business areas, we are focused on growth opportunities over the long term These include our High School Park and Recreation business unit to grow through the adoption of video displays for sporting and educational use. These customers are deploying more Daktronics push professional-grade technology and sophisticated content, increasing the total addressable market in the commercial area. While the FY 24 our orders were down because of market conditions, we expect growth over the long term we are focused on increasing sales channels with audiovisual integrators for end use in government, military, healthcare and corporate applications, which will create growth in this business area. In addition, customers depending on out of home advertising for or self-promotion use our products and services as an effective medium for both indoor and outdoor applications. We expect existing and new customers to purchase displays to install the new locations as well as replacement displays for existing locations to capitalize on the effectiveness of digital technologies. Transportation demand is strong as project planning and approval activities resume to more pre-pandemic levels and our customers move forward in purchasing displays used for intelligent transportation systems and for mass transit venues. Infrastructure spending should continue to benefit this segment as digital signage is often used in these projects and we are qualified to do business in all US states.
In the international business unit, we continue to experience a softer market due to macroeconomic and geopolitical factors. We expect to see these factors to continue to impact sales in the coming year. We are closely watching developments and have and can adjust resources and commitments accordingly. Over the longer term, we expect similar growth trends in the commercial and transportation area transportation areas outside the US. We also expect sports venue projects to continue to be a focus in our marketing efforts. The Live Events segment outlook remains strong due to large stadium renovations, continued replacement cycles and expansion of sales efforts beyond the sports competition areas, which we would call in the bowl. We are the acknowledged market leader in this segment, which allows us to be strategic in our pricing and contract terms, while being very mindful about the profitability of this segment in FY 24, we are making investments in high return projects and technologies to support long-term profitability. Our experience and engineering process design, service design and product development capabilities and investments made in affiliated customers are very important factors in continuing to develop, produce and offer the most up-to-date digital displays and control system solutions desired by the market we will continue to invest in our development efforts and our affiliated customers to release differentiated product platforms, software offerings and support services. We will also advance critical architecture and design in the new competitive narrow pixel pitch and micro-LED technologies, sustainable technologies, software architecture and other related areas. We also plan to expand our operational efficiency by focusing on retention of our highest performing team members and capitalizing on automation capabilities added over the last year, we will invest in digital transformation projects and other automation that will support improved customer and employee experiences and lower cost to operate. Our goal is to sustain the improved results and continue to drive profitable growth over the long term.
With that, I would ask the operator to please open the line for any questions.

Question and Answer Session

Operator

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced to withdraw your question, please press star one one. Again, please stand by while we compile the Q&A roster. Our first question comes from the line of code from Singular Research.

BJ Cook

Hey, guys, nice quarter. And just a few quick questions here. Let's say gross margin was down slightly from Q1, I guess does work into some inflationary cost pressures and more of a return to normalized gross margin?

Reece Kurtenbach

Yes, Jaeme, first of all, thanks for joining us this morning as well. Sheila mentioned in her comments, we do have a of a fixed cost infrastructure with our factories in other areas. So as of revenue might fluctuate through the year quarter to quarter, you might see a change in the measured gross profit, even though our pricing and other cost structures have remained similar. And so we think we still have a strong backlog of good orders. And we believe that we are we're set up for success for the rest of the fiscal year over the long term and for the long term with both our backlog as well as the ordering activity that we're seeing. So we're not thinking that's a long, but we're thinking that's part of our business over the long term. That's not some sort of a change in how our market at pricing or order by taking this going

BJ Cook

I think there is one more you mentioned great quarter in terms of cash generation. I've got a healthy amount of cash on the balance sheet. Just wondering if paying down the mortgage is on your radar or if there's other are uses for that cash that you guys are considering?

Reece Kurtenbach

Yes. Certainly, that's always a discussion with our Board, but there's different ways that we could choose to use that cash and paying down debt is one of those. I think we'll see that those strategies become visible here in the coming quarters.

BJ Cook

Okay. Goola appreciate it. Thank you. Appreciate the questions and the participation for.

Operator

Thank you. As a reminder, to ask a question, please press star one one on your telephone. To withdraw your question please press star one one. Again, please Sam by will compile the Q&A roster. I would now like to turn the conference back over to Reece, Kurt and Bob for closing remarks.

Reece Kurtenbach

Thank you, everybody, for attending our conference call today. We are appearing in the NOBLE Capital and singular conferences over the next few days, and we'll host the next conference call when our third quarter results are released later this spring or hope you all have a wonderful holiday season participate or appreciate your participation in today's call, and we'll talk to you in a quarter. Thanks, everyone.

Operator

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

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