Napco Security Technologies, Inc. (NASDAQ:NSSC) Q2 2023 Earnings Call Transcript

Raj Sharma: Got it. Got it. And then, on the inventory increase, the higher-priced inventory, I just wanted to understand, on one hand, the margins €“ our gross margins on equipment are going to be helped because of the higher volumes and the cost absorption. On the other hand, you are going to have higher priced inventory flow through the income statement. I know you just talked about that. Could you help me understand if that is happening? What the cadence of that is happening in the next two quarters or largely the impact of higher-priced inventory on gross margins negative impact? Does that happen in fiscal 2024 or…

Kevin Buchel: That’s going to happen probably in the next two quarters. It’s going to keep our margins in the similar range to where they’ve been in this fiscal year. The fourth quarter is probably going to benefit from a much higher sales level and more overhead absorption. So, last year, as an example, when we had a $30 million hardware quarter, the margins for equipment jumped to 27%. 27% may not sound like a lot, because in the old days, it wasn’t a lot compared to what the rest of last year looked like, that was a significant jump. So we’re going to see a jump probably in the fourth quarter because of that volume overhead absorption from the DR facility, but we won’t feel the back to the good old days yet until we work through this inventory.

We’ll start to feel more of it because we are not buying as much from the brokers. So that helps. We got to work through that inventory that we did buy from the brokers and that will affect Q3, and to some degree for by next year, fiscal 2024, I think we get a lot of this behind us.

Raj Sharma: Got it. And then just lastly, could you give us some more color on the sell-through at the dealers? Are you still seeing, in the top five dealers robust year-on-year increases?

Kevin Buchel: Yeah, the sell-through is still very good. It’s changed. The old sell-through, we wanted the distributors to carry three months supply of everything. And once COVID hit, supply chain crisis, then the distributors became just-in-time distributors. They wanted to carry the bare minimum. We don’t love that. There is a good side to it. Our business €“ our orders come in very steady throughout the quarters. They come in weekly one after the other. We don’t have to wait till the end. I was telling somebody earlier today, I used to sit here in December on New Year’s Eve, because everybody is out celebrating, and I’m waiting for orders to come rolling in. They come in last minute as distributors waited to place their big orders to try to get the best deal they could.