Alliance Entertainment Holding Corporation

Good day and welcome to iAccess Alpha's BuySide Best Ideas Summer Conference 2024. The next presenting company is Alliance Entertainment. If you would like to ask a question during the webcast, you may do so at any point during the presentation by clicking on the Ask Question button on the left of your screen. Type your question into the box and hit the Send button to submit your questions. I'd now like to turn the floor over to today's host Bruce Ogilvie, Chairman of Alliance Entertainment Holding Corporation. Bruce, over to you.

Thank you, operator. My name is Bruce Ogilvie, and yes, thank you for taking the time today. And I'm on the phone today with my partner, Jeff Walker. And what Jeff Walker and I do is we are a distributor of entertainment products consisting of movies, music, video games, toys, collectibles. On the slide, you can see it there on the left-hand side of the screen, These are all the vendors and suppliers that we currently distribute for. We are a stocking distributor of all these entertainment products. If you look on the left-hand side there, these are like what I would call the who's who, the top brands of these major entertainment products that we are a stocking distributor of. We stock over 325,000 SKUs in stock, and being a distributor of these products, content providers and decide there, you have to be fiscally responsible, you have to pay your bills on time, it's not easy to get open with them, and you have to provide good service, no share shifting, which we're able to accommodate and do. Of these 325,000 SKUs that we actually physically stock in our warehouse, we dish these up or sell these to all these online retailers on the right-hand side of the page. These online retailers, what they want to do is they want to be as good as Amazon. They own brick-and-mortar locations. but they also want to offer products to their consumers. We have all this and we're able to package it together and put it together and make it look like it came from these retailers, but yet it came from our warehouse. So if you were to go into like a Barnes & Noble store or a Target store and you went looking for a particular album or some type of entertainment product, and for some reason they were out of it, they would say, hey, please go to our website and you can find it. They don't want you to go to Amazon's website They want you to go to their website, and that's where we step in. So you would go to their site. You would find the items you're looking for. You'd place that order. It would get shipped, and within two days, it would be in your mailbox, and you'd be very happy that it arrived in perfectly good condition. But what you don't know is you think it came from that retailer you ordered from, but it really came from us, Alliance Entertainment, with our ability to ship it directly to the consumer on behalf of those retailers. We have what we call a white label service where it's packaged and made to look like it came from them, but really came from us. And that's the secret sauce to our success there. Now, as good as Amazon is, and they are the gold standard, they are relying on us also to do fulfillment to their customers. If you go into their place and order with them, if there's order now, shifts in three hours to 42 minutes, we're part of that countdown program that Amazon has where you have to ship within six hours or less. So we're able to do all that, provide that good service there, and help these retailers compete with Amazon and make their job very simple there. The retailers have no inventory risk. We can make it very simple for them. We provide a metadata of everything that we have in stock, including the images, the artwork, and we'll basically give them in that file the total quantity on hand, what zip codes we ship it from, and what their price will be. And that makes everybody happy in the process. That's about 40% of our business is e-commerce sales we ship to these consumers. And the other 60% is just traditional wholesale where we wholesale and ship it directly to brick-and-mortar locations. Shipping to those locations there could be as large as Walmart's 3,900 locations or Target's 1,800 locations, as well as your small independent music store which is over 2,500 of them are now in the United States today. The independent music retailer is doing better than they ever have right now Vinyl is really hot right now in that category there, and they're all very profitable, which makes a very large part of our customer base. On the next slide here I'm showing you here, when it comes up there, you're going to see the breakdown of our sales by configuration. We're pretty diversified. We started out primarily as a music company, and we pivoted into movies and into video games, and now into collectibles. And we're also always looking for new products that can fit really well into our ecosystem of our warehouse. Because we have all this setting up with all these retailers we do business with who count on us for these types of services where we can easily add other products and diversify. Pretty good links there if you get a chance to look at our deck there. Talk about the growth of vinyl, there's a hyperlink there. And the other side we have these collectible products also that we're doing. And that's really our next growth area working to add a fifth strong category there. And we have the four strong, three strong categories right now with the collectibles and expanding the data to be so much better there. Next slide here, I'm going to show you here, is we're trying to build a moat around our, I'm sorry, our acquisition history, just a bland slide. We like to, I'm sorry, my slide went out of order here. My bad. What I wanted to talk about is that we're trying to build a moat around our business. $200 million of our $1.1 billion comes from independent products that we're the exclusive distributor of. And the best thing about being an exclusive distributor is we have no competition. It's broken down into two different divisions, distribution solutions and AMP. What these are are independent labels or independent... uh, studios that we are the sole exclusive distributor of the physical product. And this really creates a sticky relationship with all our retailers. And the best thing is we don't have any competition. DS consists of 62 labels, uh, and those 52 labels that makes about 120 million of our 200 million and AMP has 90 labels, which makes up about 80 million to 200 million. The third category that we have there is a Mill Creek. Uh, Mill Creek is our licensing division and where we are is we're licensing the physical content there. And when we say we license it, it's a higher margin area for us if we are the licensor as well as the exclusive distributor, and it just complements what we already have in place there. Currently, you can see there we're doing Disney, Sony, Universal Pictures, Lionsgate, CBS, Paramount, and some other independent studios. You might say, well, why would we want to do this? Well, we really believe that physical product is never going to go away. There's always going to be a need for it. It's a very convenient item there. It has a higher price. higher clarity, which you can see the resolution is better. There's no latency. And as all these big, huge companies that we showed earlier there, the more their business becomes highly digital, their core competency of manufacturing and distributing physical product is not as strong as it used to be. That's where we step in and we can take over all that. And ideally, in the long run, we would be the licensor of all that content there. We could have 100% market share instead of a smaller market share than we have right now. This is really, when we look at this as a growth category for us, where we're just going to expand as the market, as the overall changes in the market place, which everybody is aware of there, we can come in and step in, and we can be, you know, have a greater market share, even though as the market may be declining in some areas there, But overall, our total business will grow because we'll have higher market share.

Real quick, this is Jeff Walker. I just wanted to add to that. That area there of exclusive distribution is a big area where we're in different conversations from an acquisition opportunity. There's definitely a lot of roll-up strategies within that exclusive distribution channel there that we're currently involved in.

And mentioning acquisition opportunities on slide number nine here that I'm on here, this is just a brief history. I joined Jeff in 2001. We were doing about $18 million a year in sales. We've been 20 years since 2001 there, all the way up to 2020. We did over 13 acquisitions. And we'd just like to point out there that we've been able to diversify and grow from $18 million to $1.4 billion by doing acquisitions. The key thing here, the takeaway from this, is that we have a great track record of doing acquisitions We've been very successful in that area there. We've hired a really strong team because of all those acquisitions. So we have a very, very deep bench. We've been on IHATUS for almost three years now in acquisitions. In 2020 was our last major one. There was COCOM there in Minneapolis, which I'll talk more about later. But we got involved with merging with the SPAC. That was in 22. In 23, we did the DSPAC. It didn't quite go the way we wanted it to go, but we worked our way through all that. We had to get new financing in place, which we got that done late in December there. The good news is that we have the merger done with the SPAC. We have all our FDC documents up to date. We're now set for real growth here and doing acquisitions. Currently, Jeff and I have opened about six different opportunities Two of them have an LOI that are out there in place that are being discussed between the parties involved there. The other four, we're still working out the terms of what those might be there. But we're very anxious to get back on the acquisition horse there. And it's pretty easy for us to do this from the standpoint we're at. In the past, we've always borrowed against AR and inventory, convinced the seller to do some of the financing. We were very, very, very careful about what multiple we would pay. We've never, you know, we would never pay more than a multiple of what our current stock is trading at there. Convince the seller to do some type of a carry, carry a note at some degree. But now we have the ability, because we have the ability as a public company to raise capital, could do some type of S1 raise, and if that's what's needed to secure the purchase for, we can issue stock where it makes sense there. Yes, between improving our areas and getting more exclusive distribution, That's going to be a growth opportunity for us and also an acquisition. That'll be our next growth opportunity there where we can get that level there. Our ultimate goal, it took us 20 years to go from $18 million to the $1.4 billion, but if we could get to being able to raise capital and not using private equity, we feel we can grow at a much faster rate than we have in the past there, which would benefit all our future shareholders.

I'm waiting for my slide to come up here.

I wanted to pivot to technology. You say, well, why would we talk technology for a distribution company? Well, we use technology to make us more efficiently, no different than Amazon there. On this page here that I have here that I'm showing you here, we found this company that was called AutoStore. And AutoStore is what I call the Rubik's Cube of auto storage retrieval systems there. And so in a Rubik's Cube, you have a cube, and then a cube is really, in our case, it's going to be a shelf location, like in our warehouse. Instead of the shelf locations being scattered around like it is in our warehouse, it's very efficient in our warehouse. But these are all stacked on top of each other, no higher than a 14 tall. All these cubes stacked on top of each other there are shelf locations, allows us to make our picking even that much more efficient. Before AutoStore, we had 41 employees that were... picking an order and walking to the shelf location and a very efficient pick path there. And then they would move from one location to the next location. With this system now that we have in place, we went from 41 pictures down to seven. That's a savings of over $3 million a year, $3.5 million. So that just turned out to be a fantastic opportunity for us there. We invested in that system. We found it about three years ago. We just started. It got installed on location in January of 2018. and we're on our 18th month of actually operating the system there, and we're seeing fulfillment costs of lowering over 1% of our sales there, which I can show you another slide here. The other thing that AutoStore gave us there is not only saving the labor costs there, it gave us additional storage space. And so now we have additional storage locations in our warehouse, which is really going to benefit us. when I go to our next slide talking about some changes we made there. If you get a chance, there's some great hyperlinks there, and you can see how that all works there, checking on the slide there. So our main location is Shepherdville, Kentucky, at 873,000 square feet, and that's where we have AutoStore located there. And since we put auto store in, they gave us additional storage capacity. In this year, as of May 31st, from our Cochrane acquisition that we did in 2020, there was 190,000. There was a total of 220,000 square feet. 190,000 of that square feet we were able to close down and eliminate there. So no more redundant, no more, I should say, no more lease costs that we were experiencing, no more redundant fees. management personnel, no more security costs and no more IT costs, all the savings of running a warehouse, maintenance, and all those things, that's all going to be eliminated. And that will all show up in our 2025 numbers there. This will be the first month where we – because May 31st is when we shut that down. We made that decision last year, started the process in January, and that's all in place right now. The reason we like Shepherdville so much there, Shepherdville gives us basically next-day air service with two-day air rates. The Minnesota area was not really a very strategic location for us there, so it made sense for us to get out of there. But now, by moving all that operation into Kentucky, and we were able to do that because of auto storage, getting the extra storage locations in our mezzanine, that gives us two other benefits there. We didn't have a lot of automation equipment in Minnesota there, so in Minnesota, with Our cost per order was much higher for order to ship out of Minnesota than it is in Kentucky. So all that business that we're going to ship out and shift away from Minnesota into Kentucky, it will now lower our cost per order. And then the other benefit that it gives us there is that we're going to reduce some of our inventory carrying our inventory that we own. There was redundant inventory between the locations. We're not going to eliminate 100% of the inventory that was in Minnesota. But 50% of the inventory that was carried there, that's also going to improve our balance sheet. By improving our balance sheet like it is, that will also lower our interest costs, which you'll see on other slides there that are important here. I'm on slide 18 here, and this is our comparison for the, oops, jumped on.

This is our nine month numbers here.

And basically you can see here is we went from a negative 21 million to a high of 22.2 million there. It was a $43 million improvement there in our EBITDA there. And on the same slide here, you can also see that our warehousing distribution and fulfillment expenses improved. We went from 5.5 down to 4.3. And that's all because of auto store and savings we're getting there. The other thing you're going to see on here on the same slide here is you're going to see our interest expense is close to over $9 million for the nine months. Annualized, it's about $12 million. You're going to see in our next slide the balance sheet there, how we've greatly improved our balance sheet there and our borrowing cost. We expect next year to be in the $8.4 million range there. If we get some break by the Federal Reserve and they lower the cost, that will benefit us also there. On this income slide here, you can just basically see that 6-30-2023 was our bad year there. I just want to explain that we had that loss of negative $17.6 million, which you saw on the previous slide there also. It was higher there. That was for nine months. This was for 12 months there. And we had all these supply chain issues that happened, one-time supply chain issues with some arcades that we purchased in 2021. Basically, we had all kinds of orders for arcades during the peak of COVID there. Fortunately, they all arrived in the last two weeks of December of 21. We came out of Christmas that year with $130 million of the arcades and all these additional storage costs, transportation costs. I'm sure you all remember all the ships that were all stacked up off the west coast there as well as all the coasts, and we were part of that problem there too. So $35.8 million of extra costs, one-time costs, is what caused that negative $17.6 million. That's all behind us. That problem has been fixed. And now you can see we're running positive for the nine months at $21.2 million. We're forecasted to be coming right around the $27, $28 million for our current fiscal year. And then the following fiscal year, we expect to be in the $37, $38 million in the dollar range there.

This is our balance sheet here.

slide here, and you can see our inventory was a peak of $249 million back on June 30th of 22. That was all because we had that $130 million of excess inventory of Arcade. We have moved down that whole issue that we had there and solved all that problem there. If you look at March 31st of this year, our inventory is down to $108 million. And the Arcade amount of that inventory is right around $10 million. So we just greatly improved our balance sheet. making our inventory turn much more efficiently. And overall, that's going to lower our interest costs because you can see our loan balance has also come down too. And that same peak year of 6-30-22 there, you can see that our loan balance is almost $139 million there. And you see today it's down to about $87 million as of 3-31. Right now, as I talked to you today, it's right around the $75 million range, and we have about $40 million of availability. much stronger position than we were in the past. That $40 million is really our cash in bank. People a lot of ask me how much cash on hand do we have. In our case, because our cash is always swept, it's really we have $40 million available.

That is our cash if we're doing acquisitions there. Go ahead, Jeff. Go ahead, Jeff.

We're probably good for any questions pretty soon here.

Oh, just one last thing. I'll talk about our cap table here. There's 51 million shares outstanding there. Of the 51 million shares outstanding, Jeff and I own 47.8 million of those shares. The original Dara sponsors have 1.5 million of those shares. We did an S1 uplift last year, a $3 raise, and that's about a million shares. and the total shares that are actually in the float today is 2.2 million. The thing that we just want to point out here is that Jeff and I are, you know, fully invested, fully all-in company here. We recognize that we do need to increase the float, and we're taking steps to do that there. You know, sometime when the stock is at the right price there, we will do some type of raise there just to increase the float there and get above the 2.2 million dollars. Operator, I'm ready to open up for questions right now.

I'll take some of the questions here. This is Jeff, CEO. What cost savings in the closing of Minnesota facility is saved in 2025? We're looking at close to about almost a $5 million savings there. Not only labor costs and the rent and property taxes and things like that, but you also, we had the Nordic computer system there. So that system's getting retired, so we don't have a second legacy system in place, which also helps for intercompany transfers and all the accounting aspects of that, as well as any, you know, compliance and SOX compliance and all those different things. So a pretty significant savings going into 2025 on that. And then a question about the gross margins are expected to improve fiscal 25. due to focus on profitable sales and reduced labor. There's, as I mentioned, the Minnesota facility down. And, yes, we are seeing a reduced labor pressure, which is helping us. We just made an adjustment approved yesterday, actually, that should save us about a million dollars in labor in our Kentucky facility over the next 12 months. And then from a margin perspective, a part of our margin has been impacted some from clearing out slower-moving product that we had over the two years. We isolated the arcade problem, but we've really cleaned up our inventory across all the different configurations, so that is helping as far as our margin. As we continue to have more focus on exclusive products and so forth there, collectibles also do have some strong margins, as well as we are selling a significant amount of arcades here this current year and next year in the fiscal 25. So we will see some margin improvement. As Bruce mentioned, our EBITDA here finishing up in January the end of this month for fiscal 24, the approximately $27 million, and we have a projection in the $38 million for fiscal 25. So Q3 revenues were down 7% year over year. When should we expect to see revenues start to grow year over year? Part of our... We were definitely clearing out some overstock inventory that helped our sales. So now we're really to profitable sales level and we're not moving any slow-moving products. So that's part of our sales change there. We are starting to see definitely some new business in some different areas. We've been doing a lot of business recently with Verizon as a new customer. And you know, all the different configurations that we have, some are, are increasing, some are decreasing. We are seeing, uh, some really strong numbers in the music side. Um, music is having a phenomenal year, a lot of great, uh, new releases and music as well as our, we've done some press releases on K-pop. Um, I know that, uh, Our K-pop sales are well over 50 million a year just in K-pop product, and that's growing at a significant pace right now. So it's kind of a balance there. We also do see our business with really our significant growth in the past that's come from different acquisitions. And when we do an acquisition, you know, we can pick up some organic growth out of that as well. us selling to their customers our product, their product to our customers, and things like that that also help our organic sales. Yes, for anybody who has been to our warehouse facility in Shepherdsville, it is a fantastic facility. It's got all the capabilities of any top-of-the-line Amazon facility as well. It's really a good aspect to be able to consolidate operations from acquisitions into that facility. So we can definitely get some synergies in that as well as we move acquisitions into that facility.

Any additional questions?

Jeff, there was one question here. We have not considered a 10b-5 plan, and what would attempt us to sell some shares in an SOS update? It would have to be north of $5 for us to exercise something like that at this time.

Oh, yeah, I didn't see that one.

As far as back to when will sales grow much bigger than what it has been in the past, I feel we're at a steady state right at the moment with $1.1 billion last year, $1.1 billion this year. We're forecasting $1.1 billion next year. It's really going to take us acquisitions, and that's why we're focused on that right now. That's why we have six different conversations going, and that's going to get that top line growing like we're used to in the past.

I think we've answered all the questions that are on there.

There are research reports available on us there. Trickle Research has done one on us there, and I encourage you to read that there, as well as Think Equity has done one also on us there for those who want to search that out and find out.

And I would say we're very excited about our upcoming fiscal year. working hard to come up with some great acquisition opportunities right now.

Okay. Thank you very much. That does conclude Alliance Entertainment's presentation. You may now disconnect. Please consult the conference agenda for the next presenting company.

Thank you, everybody.