Alliance Entertainment Holding Corporation

Greetings and welcome to the Alliance Entertainment Fiscal 2025 First Quarter Financial Results Conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I will now pass the call over to Paul Kuntz, a member of Alliance Entertainment's IR team at Red Chip. Paul?

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 any reliance on these forward-looking statements, which reflect the company's opinions only at the date of this presentation. Please keep in mind that the company is not obligating itself to revise or publicly release the 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 factors related to business that may affect predictions. You should also review the company's Form 10-K for a more complete discussion of these factors and other risks, particularly under the heading of 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 reconciliation of each non-GAAP measure for the most directly comparable GAAP financial measure. A press release detailing these results crossed the wire this afternoon at 4.01 p.m. Eastern Time and is available in the Investor Relations section of Alliance Entertainment's website at aent.com. Your host today, Bruce Ogilvie, Executive Chairman, and Jeff Walker, Chief Executive Officer and Chief Financial Officer, will present the results of operations for the fiscal 2025 first quarter ended September 30, 2024. At this time, I will turn the call over to Alliance Entertainment Executive Chairman, Bruce Ogilvie.

Thank you, Paul, and good afternoon, everyone. I'm pleased to welcome you to today's call. For those of you that are new to our story, we bring entertainment to you. We are a category-leading direct-to-consumer and e-commerce provider for the entertainment industry, servicing as the gateway between brands and retailers. With over 325,000 SKUs in stock, we provide the world's largest selection of music, home video movies, video games, gaming hardware, arcades, collectibles, toys, and consumer electronics. We are a critical supplier for Omni Retailers, helping them expand their long-tail retail entertainment online selection and putting them on a level playing field with Amazon. We white label all their direct-to-consumer shipments to look like they are shipped by the Omni retailer, but in reality, these are actually shipped by Alliance. We are a trusted partner to retailers and wholesalers worldwide, including Walmart, Amazon, Best Buy, Costco, Target, Kohl's, BJ's, Meijer, plus over 2,500 independent music stores and many other retailers. We are a trusted distributor of home entertainment movies for Paramount, Sony Pictures, Warner Brothers, Universal Pictures, Lionsgate, and others. For video games, video game consoles, retro arcades, controllers, and physical software games, we distribute products for Microsoft, Nintendo, Arcade 1-Up, Activision Electronic Arts, Sega, Ubisoft, Square Enix, Take-Two, and others. And music for vinyl records and CDs We are a trusted distributor for Universal Music, Sony Music, Warner Music Group, and over 90 exclusive independent music labels. For collectibles, we distribute for Funko, Mattel, Lego, Hasbro, and over 50 other suppliers. Alliance is the exclusive North American distributor for arcade one-up retro arcades. Alliance Entertainment is the global leader in the $10 billion physical media industry and we generate over 1.1 billion revenue in fiscal 2024 with our team of 654 dedicated employee owners. Our leading position in the industry provides us with unparalleled scale and leverage and has created significant structural and economic barriers of entry that we believe safeguards our market leadership position. We are a value-added retail distributor with exclusive distribution rights for approximately 150 movie studios and music labels in the film and music industry. Our exclusive distribution and licensing deals accounted for over $250 million of our revenue in fiscal 2024. Our extensive portfolio of unique content combined with our deep inventory of long-tail selections of more than 325,000 in-stock SKUs enables us to cater to bulk shipments for B2B and direct-to-consumer retailers with a vast selection of products. This helps us create sticky relationships with our retailers and growing these exclusive relationships is a key focus for us going forward. We have over 200 online retailers that rely on us to stock the world's largest selection of entertainment products for them, and we ship to more than 35,000 storefronts reaching 72 countries globally. Importantly, we have a long and proven track record of growth through strategic acquisitions over the past 20 years. We successfully acquired and integrated over a dozen companies, allowing us to rapidly enter new markets, expand our product selection, and further diversify our revenue streams. Building alliance from the ground up through acquisitions into the market leader has created an all-star team with an unrivaled experience and further strengthens our industry-leading position has remained very aligned with our shareholders, insiders, and employees holding approximately over 94% of the outstanding shares of the company. After experiencing a surge in demand during the pandemic, many areas within the physical media market have been normalizing back to historical growth levels in the high single digits. Even the CD market has joined the revival with CDs outselling digital albums at a three to one margin in the first six months of the year. according to the mid-year report from the Recording Industry Association of America. Nearly a quarter of our annual revenue is generated from products from which we are the exclusive distributor. These exclusive deals are managed through our distribution solutions, AMPT, Mill Creek, and RK1UP divisions, and they have significantly enhanced our market position by providing unique products that deepen relationships with both suppliers and retailers. Distribution Solutions was responsible for $134 million of this revenue in fiscal 2024. Distribution Solutions partners with over 60 movie studios to manufacture, supply, market their home video content. We distribute this exclusive content to major retailers such as Amazon, Walmart, and Target, as well as thousands of other smaller retailers. By leveraging Alliance Entertainment's vast distribution network, This exclusive content creates a strong, sticky relationship with retailers, strengthening ongoing demand. On the music side, our AMP division is a leader in the distribution of exclusive physical music content. AMP has exclusive relationships with more than 90 music labels distributing music across major retailers like Amazon, Walmart, Target, as well as over 2,500 independent music stores throughout the U.S. Labels and artists, such as Shaboosie, Usher, and K-pop sensation ATEEZ can bypass major music suppliers, thus lowering their cost and self-distribute themselves using AMP for their physical distribution needs. This allows them to focus on their own digital streaming and social media marketing while maximizing profitability through our extensive brick and mortar and omni-retailer relationships. K-pop in particular has become a rapidly growing segment for AMP, contributing significantly to our sales growth. Our Mill Creek division specializes in exclusive video content licensing for major studios, including Disney, Sony Pictures, Universal, Lionsgate, CBS Paramount, and others. Mill Creek licenses, manufactures, and distributes DVDs for these leading studios, enhancing our ability to offer exclusive, unique, in-demand video content that is sought out by consumers and retailers alike. We also became the exclusive North American distributor for Arcade 1UP during this first quarter. We began working with Arcade 1UP on a non-exclusive basis in 2020. Arcade 1UP licenses and manufactures home arcades, consoles with significant market share in the retro gaming space. Prior to entering our exclusive agreement, RK1 up accounted for 74 million of our fiscal 2024 revenue, and in Q1 of our fiscal year 25, we saw revenue from this relationship increase to 12.6 million, up over 20% from 10.2 million in Q1 of fiscal 24. We've had a long history of discipline, strategic acquisitions that have been critical to our leadership in the entertainment space. Starting with Super D, which Jeff and I grew from $18 million in sales in 2001 to $194 million by 2013, we made the transformative acquisition of Alliance Entertainment, our largest competitor at the time, significantly expanding our footprint and establishing us as the largest distributor of the music and video globally. Since then, we've built on this foundation with targeted acquisitions. In 2016, AN Connect strengthened our vendor-managed inventory capabilities, and secured exclusive CD distribution rights with Walmart and Best Buy. In 2018, we entered the gaming space through Mecca and expanded further with the acquisition of its competitor, Kokum, in 2020, solidifying key relationships with major retailers and suppliers, including Microsoft, Sony, and Nintendo. Our exclusive home video distribution business was enhanced with the 2018 acquisition of distribution solutions from Sony Pictures, which grew from working with 18 studios at the time to nearly triple that today. Most recently, in 2022, we added collectibles to our portfolio through the acquisition of Think3Fold, further diversifying our offerings. With each acquisition, we've diversified our offerings and strengthened our position as the premier distributor of physical entertainment products. We approach every deal with the same discipline strategy. To illustrate how we execute and scale these opportunities, let's take a closer look at our acquisition of Distribution Solutions. When we acquired Distribution Solutions in 2018, they were doing approximately 80 million in revenue and working with 18 studios. Fast forward to today, and in fiscal 2024, Distribution Solutions accounted for 134 million in revenue, and we're now working with nearly three times the number of studios. As we look at new deals, we continue to apply the same criteria that worked for us in the past, and we're confident this strategy will continue to yield results in the future. Technology is the backbone of our operations and crucial driver of efficiency, cost savings, and growth. In 2023, we began making strategic investments in automation and technological innovation to enhance our ability to serve our customers more effectively. One of these investments was the implementation of AutoStor automated storage and retrieval system at our Shepherdsville, Kentucky warehouse. This state-of-the-art system has transformed our operations in Kentucky, allowing us to process over 2,000 lines per hour with significantly fewer staff. As a result, year over year, our distribution and fulfillment costs in Q125 were 23% lower than Q124. AutoStor also increased our storage capacity enabling us to consolidate operations and close the larger of our two Shakopee, Minnesota buildings, reducing lease space by 162,000 square feet and permanently lowering cost. Another important efficiency initiative was the installation of ShearSortX system from OPEX in Q3 of fiscal 24. This innovative technology has further advanced our capabilities and has already delivered more than $500,000 in savings, as expected to save an additional $400,000 annually. It also allows us to efficiently handle larger products like collectibles and electronics, further expanding our capabilities and productivity. I will now hand the call over to Alliance's CEO and CFO, Jeff Walker, my partner.