Alliance Entertainment Holding Corporation Price & Performance (AENT)

Thank you. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast may include predictions, estimates, and other information that might be considered forward looking.

While these forward looking statements represent the company's current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward looking statements, which reflect company's opinions only as of the date of this presentation. Please keep in mind, the company is not obligating itself to revise or publicly release results of any revision to these forward looking statements in light of new information or future events. Throughout today's discussion, management will attempt to present some important review the company's Form 10 ks for a more complete discussion of these factors and other risks particularly under the heading Risk Factors. During this conference call, management will discuss non GAAP financial measures, including a discussion of adjusted EBITDA. Management believes non GAAP disclosures enable investors to better understand Alliance Entertainment's core operating performance. Please refer to the investor presentation for a reconciliation of each non GAAP measure to the most directly comparable GAAP financial measure. Press release detailing these results crossed the wire this afternoon at 04:01 p. M. Eastern Eastern Time is available in the Investor Relations section of Alliance Entertainment's website at @aent.com.

Your host today, Jeff Walker, Chief Executive Officer and Chief Financial Officer and Amanda Nieto, Chief Accounting Officer will present the results of operation for the fiscal twenty twenty five second quarter ended 12/31/2024. At this time, I will turn the call over to Alliance Entertainment's CEO and CFO, Jeff Walker. Thank you, Paul, and good afternoon, everyone. I'm pleased to welcome you to today's call. For those new to our story, Alliance Entertainment is the entertainment collectible leading direct to consumer e commerce provider and distributor serving the gateway between entertainment brands and retailers. With over 325,000 SKUs in stock, we offer the world's largest selection of music, movies, video games, gaming hardware, arcades, collectibles, [indiscernible] and consumer electronics. We help omnichannel retailers significantly expand their entertainment collectible offerings online. Through our white label direct to consumer fulfillment, we ship orders on behalf of major retailers reinforcing their brand while leveraging our logistics capabilities. We are a trusted partner to leading retailers including Walmart, Amazon, Costco, Target, and Kohl's as well as 2,500 independent music stores and specialty retailers. Our distribution network spans Nature Studios, such as Paramount, Sony, Warner Brothers, Universal, and Alliance as well as top gaming, music and collectible brands including Microsoft, Nintendo, Funko, Mattel and Hasbro.

We are also the exclusive North American distributor for Arcade One Up retro arcade system.

Our extensive supplier relationships and broad product portfolio make us the backbone of entertainment distribution. Ensuring that retailers and consumers have access to the widest select of physical media and collectibles available today.

Alliance Entertainment is a global leader in the $10,000,000,000 physical media industry generating over $1,100,000,000 in revenue in fiscal twenty twenty four with our team of six fifty four dedicated employee owners.

Our scale supplier relationships and distribution expertise creates significant competitive advantages reinforcing our leadership in entertainment distribution. We hold exclusive distribution rights for approximately 150 movie studios and music labels with these partnerships contributing over $250,000,000 in revenue in fiscal twenty twenty four. Our unique content portfolio combined with our deep catalog of 325,000 plus SKUs in stock allows us to serve both bulk B2B orders and direct to consumer shipments strengthening long term relationships with major retailers. With a global reach spanning over 35,000 storefronts across 72 countries, We serve more than 200 online retailers that rely on our inventory and fulfillment capabilities. Strategic acquisitions have played a key role in our expansion allowing us to quickly enter new markets diversify revenue streams and solidify our industry leadership. Over the past two decades, we successfully integrated over a dozen companies expanding our footprint across physical media, gaming and collectibles. Building Alliance from the ground up both organically and through acquisitions, has allowed us to assemble an Allstar team with unparalleled industry expertise. This experience further strengthens our market leading position and our alignment with shareholders remains a key differentiator. With insiders and employees collectively holding over 94% of the company's outstanding shares.

Following a surge in demand during the pandemic, the physical media market has largely returned to a its historical growth trajectory in the high single digits. Notably, the CD market has also seen a revival with CDs outselling digital albums by a three:one margin in the first six months of the year.

According to midyear report, for the Recording Industry Association of America, we now consider physical media of Vinyl, CDs, DVDs, all collectibles and fans continue to build their collections of these formats. Physical collectibles is in high demand today. Nearly a quarter of our annual revenue comes from exclusive distribution agreements strengthening our market position and deepening relationships with both suppliers and retailers. These exclusives are managed through our distribution solutions [indiscernible] Mill Creek, and Arcade 1Up divisions provide a unique content that differentiates Alliance in the market. Distribution Solutions partners with over 60 movie studios to manufacture, supply and market home entertainment content distributing to major retailers such as Amazon, Walmart and Target, as well as thousands of independent and specialty retailers. This segment was further strengthened by our new exclusive home entertainment license agreement with Alliance.

Which took effect January 1, 2025. Under this partnership, Alliance is now the exclusive distributor of Paramount physical media catalog including DVD Blu ray and UHD formats across The U. S. And Canada expanding our leadership in home entertainment distribution On the music side, our AMP division provides exclusive allowing artists and labels to self distribute physical media while leveraging our deep relationships with Amazon, Walmart, Target and 2,500 independent music stores. K pop, has been a particularly strong growth driver with AMP supporting major releases and fueling increased sales. Mill Creek licenses and distributes exclusive video content from major studios including Disney, Sony, Pictures and Universal, enabling us to offer high demand films and TV shows in collectible physical formats. Additionally, we are now the exclusive North American distributor for [indiscernible] Since transitioning from a non exclusive agreement this partnership has already driven meaningful revenue growth reinforcing our leadership in retro gaming distribution. Exclusive content and partnerships remain a core focus for Alliance as we expand our offerings and drive long value for our retail partners and shareholders. Strategic acquisitions have been central to Alliance Entertainment's growth allowing us to expand into new markets diversify our offerings and strengthen our leadership in entertainment distribution.

Our journey began with Super D which Bruce and I grew from $18,000,000 in sales in 02/2001 to $194,000,000 by 2013. The transformative acquisition of Alliance Entertainment our largest competitor at the time, solidified our position as the leading global distributor of music and video. In 2016, we acquired Amconnect, securing vendor managed inventory capabilities and exclusive CD distribution rights with Walmart and Best Buy. In 2018, we entered the gaming sector through MECCA Electronics acquisition followed by Kokam acquisition in 2020. Strengthening our relationships with major gaming brands like Microsoft, Sony and Nintendo. The 2018 acquisition of Distribution Solutions from Sony Pictures significantly expanded our exclusive home video distribution business growing from 18 partners at the time to nearly triple that today. In 2022, we diversified farther by acquiring Think threefold adding collectibles to our portfolio. Most recently, in December 2024, we acquired Handmade by Robots an innovative collectible brand known for its unique vinyl figures designed to replicate the look of a hand knit plush toy.

This acquisition strengthens our presence in high growth collectibles market and expands our portfolio of Alliance products. Featuring major franchises like DC Comics, Harry Potter, Jurassic World, P and S, Sonic the Hedgehog, Star Trek, and many more. With handmade by robots now part of our distribution network, we see significant potential to scale this brand across major retailers and online platforms worldwide. Each acquisition has followed the same disciplined strategy. Enhancing our product selection, improving operational scale, and deepening our retail and supplier partnerships. This approach has established alliance as a premier distributor of physical entertainment products, and positioned us for continued growth. When we acquired Distribution Solutions in 2018, it generated approximately $80,000,000 in revenue and worked with 18 studios. Since then, the business has nearly tripled its studio partnerships and has grown into a key driver of our exclusive content strategy. In fiscal twenty twenty four, Distribution Solutions contributed hundred and $34,000,000 in revenue underscoring the success of our approach to scaling acquisitions. As we further evaluate future opportunities, we will remain committed to the same disciplined strategy. Identifying acquisitions that expand our content portfolio enhance operational efficiencies, and strengthen our relationship with retailers and suppliers. We are confident this approach will continue to drive long term value.

Technology is the back bone of our operations and a critical driver of efficiency, cost savings and growth. Strategic investments in automation, and technological innovation to enhance our ability to serve our customer more effectively. In 2023, we began making strategic investments in automation to enhance our ability to serve customers while improving our financial performance. One of our highest impact initiatives has been the implementation of AutoStore an advanced automated storage and retrieval system at our Shepherdsville, Kentucky warehouse This system has significantly improved our efficiency enabling us to process over 2,000 lines per hour with a leaner workforce. It has also increased storage capacity allowing us to consolidate operations and close a 162,000 square foot facility in Minnesota in May of twenty twenty four reducing cost and optimizing our footprint. Additionally, we installed the SureSort X system from OPEC's further streamlining our fulfillment process. This system has already delivered over $500,000 in savings with an expected $400,000 in additional annual cost reduction It also improves our ability to process larger products such as collectibles and electronics expanding our capabilities in high growth categories. These investments are critical part to our long term strategy to drive profitability and operational excellence.

By leveraging automation and technology we are strengthening our competitive position and reinforcing Alliance as the most efficient scalable distributor in the entertainment industry. I will now hand over the call to Alliance's Chief Accounting Officer, [indiscernible] Thank you, Jeff.

And thank you all for joining us today.

We will now turn to an overview of the company's financial results for the second quarter and six months ended December 31, 2024. Turning to our financial results for Q2 fiscal year twenty twenty five. We generated $393,700,000 in net revenue compared to $425,600,000 in the prior year period.

Vinyl sales grew 12% year over year to $109,000,000 while physical movie sales surged 23% to $86,000,000 driven by strong demand for four ks UHD and collectible steel book additions. Gross margin dollars for the quarter were $42,300,000 with a gross margin percentage of 10.7%, reflecting product mix and promotional activities.

Operating expenses declined 6% year over year to $27,500,000 with distribution and fulfillment costs down 18%. Benefiting from ongoing automation and warehouse consolidation initiatives. Net income for Q2 fiscal year twenty twenty five was 7,100,000.0 compared to $8,900,000 in Q2 fiscal year twenty twenty four. This includes a $2,500,000 non cash charge related to the revaluation of warrant liabilities. Which reduced EPS by $0.05 per share. Excluding this non cash charge, net income would have been $9,600,000 an increase from the prior year. Adjusted EBITDA for the quarter was $16,100,000 compared to $17,900,000 in the prior year period. For the first half of fiscal year twenty twenty five, net revenue totaled $622,700,000 compared to $652,300,000 dollars in the first half of fiscal year 'twenty four.

Physical movie sales increased to $139,000,000 while vinyl sales grew [indiscernible] To $180,000,000 Gross margin percentage for the six month period was 10.9% with operating expenses to $53,500,000 Net income for the first half of fiscal year twenty twenty five was $7,500,000 As mentioned a moment ago, net income was impacted by a $2,500,000 non cash charge during the second quarter. Adding back the $2,500,000 warrant liability, net income for the first half of fiscal year twenty twenty five would have ended at $10,000,000 dollars versus $5,500,000 in the first half of fiscal year twenty twenty four. An increase of 82% year over year. Adjusted EBITDA came in at $19,500,000 an increase from $19,200,000 in the prior year. We also continue to strengthen our balance sheet. Reducing our revolver balance from $101,000,000 to $70,000,000 year over year.

This 31% reduction in debt improved liquidity availability from $90,000,000 to $50,000,000 further enhancing our financial flexibility. This slide compares our trailing twelve month top line and adjusted EBITDA to our financial performance over the last several years, showcasing how we've navigated a Following an unprecedented surge in demand during the COVID-nineteen pandemic that drove our top line to a peak of $1,400,000,000 in fiscal year twenty twenty two. Demand has normalized with revenues adjusting to $1,100,000,000 for fiscal year 'twenty three and 'twenty four. As of the end of the second quarter of fiscal year twenty twenty five, our trailing twelve month revenues are just under $1,100,000,000 and our adjusted EBITDA is trending higher at $24,500,000 with our adjusted EBITDA margin [indiscernible] 2.3%. Turning to our balance sheet.

We've continued to strengthen our financial As of 12/31/2024, we had $2,500,000 in cash and an available credit facility balance of 50,000,000 up from $19,000,000 a year ago.

We reduced our revolver balance by $31,000,000 year over year to 70,000,000 reflecting our ability to convert accounts receivable and inventory into cash. Inventory levels remained stable at $96,300,000 while trade receivables increased to $147,000,000 dollars aligning with our seasonal sales cycles. Our total liabilities stood at $306,200,000 dollars with stockholders' equity improving to $95,600,000 compared to 87,600,000.0 at the end of fiscal year twenty twenty four.

The combination of reduced leverage, increased liquidity and disciplined expense management while maintaining a solid financial foundation. Alliance Entertainment is poised for continued growth by leveraging our strengths as a capital light low cost provider with unmatched reach in the industry. Our strategy remains clear. Expand our market share, improve margins and drive EBITDA growth. First, we are committed to profitability and cash flow generation. Ensuring we remain disciplined in managing expenses while improving operational efficiencies. Second, we continue to expand our exclusive content and product offerings. As demonstrated by the Handmade by Robots acquisition, And the of our exclusive Paramount Home Entertainment partnership. These strategic moves reinforce like collectibles and premium we are focused on strengthening our balance sheet. As evidenced by the $31,000,000 year over year reduction and the 163% increase in availability. This financial flexibility positions us to pursue future growth opportunities. While maintaining a strong foundation. With these priorities in place, we remain confident in our ability to execute our strategy capitalize on new opportunities and deliver long term value for our shareholders. With a stronger balance sheet, key growth catalysts in place, and a continued focus on operational excellence we are well positioned for the sustained profitability and success in the second half of twenty twenty five and beyond.

The opportunities ahead are significant.

Family owned competitors are aging out. And large movie studios and companies are looking to sell or license physical media rights. Our capital light model combined with our proven ability to integrate acquisitions sets us apart from the competition. These major movie studios will be leaning on Alliance. Providing us with opportunities to license their home video and allowing these studios to focus on their core competency of making movies, Exhibit in theaters doing premium downloads and focusing on their streaming services. While we as a company focus on our co competency distributing, packaged physical media. We are excited about the route ahead.

And we're confident that our strategic initiatives will drive future growth and profitability in the quarters and years ahead. With that, I would now like to hand the call back over to the operator to begin our question and answer session. Operator?

Thank you. We will now be conducting a question and answer session. There are no questions over the phone at this moment. I'll hand it back over to to Paul Yes. Thank you. And we do have a few webcast questions.

Our first question, can you elaborate on the expected financial and operational impact of your distribution deal with Paramount out of this partnership position alliance for future growth in the home entertainment space? Okay. Thank you, Paul. This is Jeff Walker.

CEO of Alliance. We're super excited about our new partnership here with Paramount Pictures For Alliance, Alliance are we are the leading distributor and sales and marketing company for physical DVD at this point of time And we're really excited about this new opportunity we have with Paramount where we're licensing all of the Paramount catalog as well as Paramount new releases On the DVD format, which also includes ultra high def and steel book. And for us, this is a perfect partnership because we're focused on physical media and the opportunity is to get physical media in front of consumers not only on the retail store shelves, but on websites throughout The United States and Canada and really try to promote the longevity of having great collectible DVD product for for fans that want to own their their favorite movies at home. And This is really going to extend the life of BBB product by having alliance do this under Alliance and be able to continue to grow the business. It's for Alliance, it's going to be a big opportunity here. One of the first new releases that we have coming up is Gladiator two, which was in the theaters in December.

That has a street date of March 4, which is coming up shortly here. And we have an initial ship forecast here of 150,000 units into the marketplace for Gladiator two, which will significantly impact our our financial profitability here in in Q1 of twenty twenty five. Thank you, Jeff. Another web session we had. The acquisition of Handmade by Robots is exciting. How do you see this brand fitting into your broader collect foresee for cross promotion with your existing entertainment catalog?

Thank you, Paul. Yes, for me, I'm super excited about AMA by robots. It's I love the brand. I love the product. I think the product the originality of the product is Alliance. Having a licensed character that is a vinyl collectible It is designed to look like it's knitted and then they're painted with different colors and we're doing special additions that are [indiscernible] glow in the dark and glitter There's all sorts of different variants that we can do with handmade by robots. The other component that I find fascinating in the brand of it is the name of it. And in today's world, we're robots and everybody is going to have a robot in their house and I look at it and go, this is what a robot would make And we are all over this brand right now. We did launch upon the acquisition the Handmade by Robots website. As well as there's a pretty robust Instagram account for handmade by robots and we are in the process right now of licensing and designing significant amount of new characters here that will start to hit the market mid year twenty twenty five. And it's just a great platform for us.

It fits exactly in what we do We sell movies and I'll give it a good example here There's new movie coming out for Spongebob. In fourth quarter. It's on Paramount.

And we're going to have Spongebob characters with animated by robots to go along with that movie coming out in fourth quarter. So there's a deep connection within that. Within the handmade by robots, it's not just movies, there's video games, We have some animated products that are also coming out later this year. And it's just a really great format and platform We're very excited about the opportunity And then one last part is from the financial aspect, it changes it from where we're a distributor of collectibles to where Alliance licensee and manufacturer and that helps to go towards higher margin product and so forth there, which is a key initiative for us to get more into licensing and higher margin products as we move forward. Over the next few years.

Thanks, Jeff. And we have another question from the webcast. Can you give us a sense of the metrics you are looking for when making an acquisition? Is it multiples of EBITDA for every acquisition has its own story to it, its own opportunity. People who do acquisitions understand that. It's There's a lot of different variables that go into place. Definitely looking at several acquisition opportunities today. [indiscernible] a key component is to to acquire earnings And then also for us as a strategic acquirer, we're always looking for something where we have consolidation opportunities to take out overhead and costs. And we're also looking at new products that we can bring in to sell to our existing customers and or our products selling to the acquiring companies customers as well.

We are very prudent in our use of capital We were able to do a lot of acquisitions over the years without a lot of additional working capital.

So it's a combination of a lot of different things there. The number one thing for us today is to look for an acquisition that's going to be very accretive to the overall enterprise value of of Alliance Alliance will bring good profitability and good channels going forward. So Each one is scrutinized individually and think we have a pretty good formula on that. I will also say on from an acquisition standpoint, we have a fantastic team here at Alliance Alliance has participated in a lot of acquisitions and one aspect is is acquiring the company, but the most important part is the integration of that acquisition after it's acquired everybody working on the same team together and looking at all the the opportunities of two businesses together and what that looks like. Can we have a very experienced team at Alliance that that knows how to do that and that's part of the biggest part of the success of an acquisition. Thank you, Jeff. And our next question is With direct to consumer sales reaching 42% of gross revenue, how do you plan to further optimize this channel? And what efficiencies can be leveraged drive additional margin expansion?

Okay. Direct to consumer That's one of our definite winning formulas here at Alliance Alliance. And the reason I say that is, as many of you know, we stock 325,000 SKUs in in our warehouse, and we have those available on as many websites as possible get those consumer eyeballs to that product. And we've had great success I'll give a good example with the arcade product from Arcade 1UP. [indiscernible] when we acquired the company four years ago, it was selling through Best Buy and as Alliance picked it up, we were able to get our kids that are in our warehouse available for sale on walmart.com, Target, Amazon, Best Buy, Wayfair, Home Depot, Dell, eBay, just go through Kohl's you go through all of the different major retailers And if you search on Google for Pac Man arcade, you'll see all the retailers that sell that That's all coming from Alliance. It's all in our warehouse facility. And all of those retailers love that model. They have no inventory risk, They're getting sales. We drop ship it. With their names on it and so forth. And And that's a big a big winning formula for how we operate on direct to consumer.

I will also say one payment we did with Handmade by Robots is as soon as we acquire that straight down the same path, we have our product that's in stock right now and we're focusing on making sure every SKU that's in the warehouse is available on as many websites out there in the world and And then you do that, you also want to kind of do a store within a store and featured products and so forth and so we're going to drive sales on handmade by robots through e commerce as well. As putting it in brick and mortar stores. Great. Thank you, Jeff.

And another question, you successfully reduced operating expenses by 13% and distribution costs by 18%. How sustainable are these cost reductions and are there further automation initiatives in the pipeline?

First off, we have fantastic [indiscernible] primarily our base facility there in in Shepherdsville, Kentucky led by Warwick, who's our COO and the team there is just fantastic. So that team is instrumental in driving cost and efficiencies and they're constantly working on different ways to improve how we do things. How we're more efficient, all sorts of aspects on that. So We never see an end to that. We have a project list that we continue to add new things to and continue to focus on efficiencies and so forth there. So we did have a pretty big savings as we moved out of our Minnesota warehouse. So that was a significant savings.

But we're going to continue to see operational benefits and things as we go forward in the warehouse. Just because of the way our team is is focused and looking on that. At that all the time.

You, Jeff. And we have we'll take one more question in the queue. Vinyl and physical movie sales have both posted strong year over year gains. What trends are you seeing in consumer demand for physical media? And how do you plan to capitalize on the momentum?

Well, it's a good question. We're very happy that we're seeing vinyl and movies and even CD doing well here. I think what it what it looks points towards is we are in the collectible business. [indiscernible] people have vinyl collections and people have DVD or movie collections and people have handmade by robot collections, people collect things and everyone on this call probably has something that they collect, whatever that that is. And we're seeing a really, really robust consumer buying things that they enjoy and they collect. And we're leaning into all of that and we really we don't see an end to that side of it. So when you talk you look at vinyl in particular, there's a lot of buyers collecting vinyl from even all the new artists and everything there. Vinyl is super hot as a collectible item. And then in the video, We mentioned Amanda mentioned steel book and what that is, is a it's a steel box case that the DVD is in. So it's a more collectible version that people want. And when you look at I'll take Paramount as an example, you look at HopGun or you look at Forrest Gump or you look at [indiscernible] those are people's favorite movies and they want to have those at their house in a steel book format form.

So they they've got their DVD collection of their favorite favorite [indiscernible] [indiscernible] that aspect is where we're heading full steam. And then obviously, we added in handmade by robots that is square in the middle of of collectibles and and physical products We're all about the collectible side right now and I think that's that's what's going to continue to drive us going forward over the next few years.

Excellent. Thank you, Jeff. And that was the last question in the queue. Are there any final comments you want to leave the audience with?

I guess the final thing is I'm super excited about 2025. We've been working on some of these things working on an agreement like this with Paramount doesn't happen overnight. We've been working on that for a long time. The handmade by robots initiative is a huge one for us. And we have some active acquisition conversations we're in today too that that could come to fruition in the first half of this year or so. We're pretty bullish on where we're going and what we're going to be able to accomplish here in 2025 and set this up. Really nicely for end of twenty twenty six as well. So pretty happy with where we're at today. We've We've come a long way and we've done a great job over the over the year of 2024.

This concludes today's teleconference. You may disconnect your lines at this time.