Q2 2022 Snap One Holdings Corp Earnings Call
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Good afternoon and welcome to SNAP-1 Holdings Corp's fiscal second quarter 2022 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. I would now like to turn the call over to SNAP-1 Senior Vice President of Finance Eric Steele. Sir, please proceed.
Great. Thank you. Good afternoon and welcome to SNAP1's fiscal second quarter 2022 earnings conference call. As a reminder, this call is being recorded. Joining us today from SNAP1 are John Heyman, CEO , and Mike Carlett, CFO .
Before we begin, we would like to remind everyone that our prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions, including but not limited to statements of expectations, future events, or future financial performance.
These statements do not guarantee future performance and therefore undue reliance should not be placed upon them.
Although we believe these expectations are reasonable, we undertake no obligation to revise any statements to reflect changes that occur after this call. All events or results could differ materially.
These statements are based on current expectations of the company's management and involve inherent risks and uncertainties, including those identified in the Risk Factors section of our annual report on Form 10-K for the annual period ended December 31, 2021, filed with the SEC. All non-GAAP financial measures referenced in today's call are reconciled in our earnings press release to the most directly comparable GAAP measure.
This call also contains time-sensitive information that is accurate only as of the time and date of this broadcast, August 11, 2022.
Finally, I would like to remind everyone that this conference call is being webcast and a recording will be made available for replay on our Investor Relations website at investors.SNP1.com. In addition to the webcast, we have posted a supplemental earnings presentation accompanying these results, which can also be found on our Investor Relations website.
I will now turn the call over to our CEO , John Heyman. John .
Eric, thank you.
And welcome everyone and we appreciate you spending time with us. This afternoon.
To start today's discussion, I'm going to review our recent highlights and then I'll turn the call over to Mike Carlett, our CFO , who will discuss our financial results for the quarter, as well as provide our outlook for the second half of 2022. We'll then share some closing remarks and open the call for questions.
As background, SnapOne provides a smart living platform that empowers professional integrators to deliver joy, connectivity, and security to discerning end customers on a global scale. As a leading distributor to these integrators, we work with our growing network of approximately 20,000 professional, do it for me integrators to distribute our proprietary and third party products.
through our e-commerce portal and local branches. We further support our integrator partners with our proprietary software platforms and workflow solutions to allow them to successfully serve their residential and commercial customers across the project lifecycle.
Here at SNAP1, we believe it is inarguable that all homes and businesses will become smarter over the next decade. And we're positioning our integrators and our company to capitalize on the tremendous and durable growth opportunity in front of us.
Our competitive differentiation and the demand for smart living experiences.
continues to propel our business forward.
Just over a year ago, we became a public company.
It's been a challenging, yet extremely rewarding year.
Since our IPO, our team has successfully navigated through the ongoing impacts of the global pandemic, supply chain and logistics challenges, and a continued uncertain economic backdrop Okayane is here to talk to you about his Linux
All the while, we have continued to deliver for our integrator partners and on our financial commitments.
I'm extremely proud of our team for their strong execution and accomplishments this past year.
Despite any short-term economic uncertainty, our integrator partners remain busy and carry healthy backlogs of work, sustaining demand for our solutions.
A very small percentage of these integrators carry any meaningful inventory, so backlog for them means future revenues for SNAP-1.
Smart living solutions such as robust Wi-Fi networking, surveillance and security are must-haves for home and business owners.
Further, employees continue to come back to the office, helping drive outsize growth for commercial applications.
Other metrics related to housing permits, starts, and remodeling, even if down modestly on a sequential basis, remain favorable relative to historical averages, and drive sufficient demand to occupy the capacity of our integration partners.
Furthermore, home equity values and the health of the high-end consumer remain constructive and in better shape relative to past cycles.
Specific to our company, unlike some competitors in certain categories, SNAP-1 has inventory to deliver on a timely basis to our integration partners. And regardless of the environment, we believe our unprecedented product innovation and investments in our growing local branch footprint will enable us to gain market share.
Given our strategic execution and the secular trends I just covered, we remain highly confident in a favorable long-term growth outlook.
Let me take a few minutes to reflect on this past quarter. Financially, we continue to build on our consistent results of the past year. In Q2, we generated net sales of 296.9 million, an increase of 17% from the comparable year ago period. We also delivered adjusted EBITDA of 31.7 million, an increase of 8% from the prior year on an as-reported basis.
We have achieved this financial performance despite the many inefficiencies we are absorbing due to supply chain and logistics issues we have cited.
Moving to operational accomplishments, we were proud to be recognized for an Industry Best 48 Brand Leader Award in the recently announced CE Pro 100 Brand Analysis.
These awards span our portfolio of products, platforms, and services.
and further establish our place as a leading innovator in the market.
Thank you to our integration partners for their vote of confidence in SNAP1.
Of course, we are never content with the awards and recognition we receive, and we continue to raise the bar for the products we deliver.
Here are a few of the major enhancements we made in the past quarter to our platform and product suite.
First, we released an important update to the Control 4 operating system.
which includes time-saving shortcuts for efficient installs, enhanced user interface controls, improvements to lighting control, and faster connection speeds.
This release is providing a more enjoyable experience for end users and an easier installation process for our integrators.
We also released Oversea Connect, this new app.
strengthens control of overseas systems for both commercial and residential end-users, and provides integrators with simplified workflow solutions, saving them time while they continue to face their own labor challenges.
In a major evolution of our product set, we recently announced the release of the next generation core series of Control4 controllers.
These controllers are the on-premise brains that power smart living experiences, and they set the foundation for exciting future product releases on the Control4 platform for many years to come. And yes, these controllers are in stock and available today.
Finally, to bolster our entertainment product offering, we launched the Triad PDX Speaker Series.
which pairs Triad's premium audio performance with a simplified installation experience.
We also launched the new Sunbright veranda 3 line of full shade outdoor LED TVs bringing the full quality and features of smart indoor TVs to the outdoors.
In the second quarter, we also executed across a range of strategic initiatives.
including the following key accomplishments.
First, we continued our commitment to growth in adjacent markets with the hiring of a leader focused specifically on the commercial and security markets.
Our Control4 Multi-Display Manager functionality was also recently voted an AV Technology Best of InfoComm 22 Award winner. The Multi-Display Manager enables efficient audio-video deployments in commercial settings like sports bars, restaurants, hotels, and demonstrates our continued progress and recognition in the commercial space.
Second, we continue to build our omni-channel presence with the opening of a new local branch in Orlando, Florida to serve the Central Florida metro area, bringing our domestic footprint to 32 local branches at Quarter End. Our local branches strengthen existing integrator relationships, add incremental purchase opportunities, and expand our integrator network in the local community. We intend to continue investing in the expansion of our local branch network.
Third, we appointed Tom Hendrickson to the board of directors and as chair of the company's audit and risk management committee. Tom is an accomplished executive and financial expert with more than 30 years of experience leading high growth consumer focused public companies. And we're thrilled to welcome him to the team.
Fourth, subsequent to the end of the second quarter, we completed the acquisition of clear controls.
CLAIRE's hybrid automation and security solution addresses the attractive market opportunity between commonly available security systems and luxury-level whole home control systems.
We've been the distributor for the Clair product line since 2019 and are excited about the opportunity that Clair provides and to convert a third-party brand to a higher margin proprietary product.
Fifth, as part of our Best Place to Work tenant, we announced and we paid a one-time stipend to a number of our employees and raised our minimum wage to help a segment of vital team members combat the inflationary forces they see in their own lives.
At SnapOne, we believe investment in our team drives returns for our integrator partners and our shareholders.
As it relates to our future growth strategy, our success in Q2 continues to reflect the strong execution against our proven playbook to drive sustainable long-term growth. As a reminder, our growth strategy remains rooted in five key pillars.
One, increase our wallet share with existing integrators.
to expand our global integrator network.
Three, innovate with new products, software, and tech-enabled workflow solutions.
Four, develop new software services and revenue models. And fifth, execute strategic M&A.
such as stobbed electronics and clear controls.
We continue to make progress on all these fronts as we look to the remainder of 2022 and beyond.
I'm now going to comment briefly on our outlook and then I'll turn the call over to Mike.
We're proud of our performance in our first year as a public company.
We've been working hard to build credibility through strong operational and financial execution despite a volatile market backdrop.
to address the supply chain and inflationary cost pressures that we foresee for the remainder of the year, we successfully implemented a pricing adjustment in June .
Our pricing adjustment and continued execution give us confidence in protecting the profitability of our business and that of our integrators.
Still, while we maintain our optimism around the near and long-term growth in the smart living adoption category, we do have to consider the current economic environment in our planning. And while we have line of sight into supply chain issues easing, they are not yet behind us.
As such, we're prudently managing our costs, including moderating our pace of investment and hiring.
coupled with a continued focus on cashflow and balancing inventory investment.
That said, we remain confident in the resiliency of our integrators and our own business, have high conviction in our long-term growth strategy, and look forward to expanding our share of a rapidly growing market.
So with that, I'm going to turn the call over to Mike Carlett, our CFO , who will discuss our second quarter financial results and updated 2022 outlook in greater detail.
mic?
First, we'll turn to our financial results for the fiscal second quarter into July 1st, 2022.
As John said, net sales in the fiscal second quarter increased 17.2% to $296.9 million, up from $253.3 million in a comparable year-old period.
This growth in net sales during the quarter reflects strong overall demand across geographies, markets, and product categories.
growth was driven by organic growth, including the continued ramp of local branches opened in the past year and the cumulative impact of proprietary product price adjustments taken the past year.
which is offset by a modest FX headwind.
Growth was also driven by the benefit of access networks, which was acquired in May of last year's, and also the incremental sales benefit of SOB, which was acquired in late January of this year.
Overall, we are pleased with the growth experience in the quarter, and on a three-year, pro-forma taker basis, the growth is in line with our consistently communicated long-term growth algorithm.
Contribution margin, which is a non-gap measurement of operating performance.
increased 15.2% to 116.5 million, or 39.2% of net sales in the fiscal second quarter, up from $101.2 million, or 39.9% of net sales.
in a comparable year ago period.
We did see a sequential quarter over quarter increase in contribution margin as a percentage to net sales which I'll discuss in a moment.
As expected, the year-over-year decrease in contribution margin as a percentage of net sales was primarily related to our local branch expansion and growth strategy, which drove a change of product mix.
as our local branch footprint is used for its third-party product sales.
In the fiscal second quarter, third-party product sales represented 29.9% of net sales compared to 28.8% in a comparable year-ago period.
As a reminder, third-party products typically have a lower contribution margin as a percentage than net sales relative to proprietary funds.
The strategic expansion of our local branch footprint.
Currated, BERT-RE product portfolio remains an important part of our value proposition.
as we aspire to be a one-stop shop for our integrator partners.
As referenced on a sequential quarter over quarter basis,
Contribution margin as a percentage of net sales increased from 37.9% in Q1 to 39.2% in Q2.
This approximate 140 basis point increase in contribution margin rate is primarily driven by an increase in proprietary product sales next.
moving from 67.7% of net sales in the first quarter to 70.1% of net sales in the second quarter.
The enhanced proprietary product mix was driven by the seasonal product mix shift we typically observed from Q1 to Q2 and was further bolstered by the proprietary pricing adjustments taken here today.
Furthermore, given the effective timing date, we expect our most recent June pricing adjustment to have a more favorable impact in the second half of the year than has been reflected in our year-to-date results.
Selling general and administrative expenses in fiscal second quarter 2022 increased 21.3% to $95.4 million, or 32.1% of net sales, up from $78.7 million, or 31.1% of net sales in the comparable year-ago period.
This increase in SBA expenses during the quarter is primarily due to a $5.9 million provision for credit losses on those receivable.
This provision was made in connection with the acquisition of Claire subsequent to the quarter end.
Certain credit obligations owed by Claire to third parties were forgiven or settled at the use rates.
The remaining increases in selling, general, and administrative expenses is rated to an increase in equity-based compensation expense of $5.6 million.
Increased costs associated with becoming an operating and public company.
ongoing investments to support strategic growth initiatives.
wage inflation, and the acquired cost of access networks and problems, which we did not own for the full period of the prior fiscal year of 2nd quarter.
Over the long term, we continue to expect to achieve operating expense leverage at business scales and realize the efficiencies of a unified operating platform.
Our net loss holds $1.3 million in the second quarter compared to a net loss of $1.1 million in the comparable yearbook period.
Just that EBITDA, which is a non-GAAP measurement of operating performance, increased 8.1 percent to $31.7 million, or 10.7 percent of net sales, in the second quarter of 2022, compared to $3.3 million, or 11.6 percent of net sales, in the comparable year-ago period.
He adjusted EBITDA growth from the quarter, was primarily attributable to net sales and contribution to market growth, also by the increase in SGA expenses.
The decrease in adjusted EBITDA's percentage of net sales in the quarter is primarily attributable to contribution margin and the percentage of net sales declining year over year, along with those public company related expenses incurred in the quarter that were not occurred in comparable year ago period.
Adjusted net income, a non-GAAP measurement of operating performance, increased 19 percent to $16.5 million, or 5.6 percent of net sales, up from $13.9 million, or 5.5 percent of net sales in the prior year. For more information, visit www.fema.gov
Finally, free tax flow, a non-GAAP measurement of operating performance, totaled negative $26 million in the six months ended July 1, 2022, compared to negative $9 million in the terrible year ago period.
The decrease in free cash flows primarily attributable to net cash and operating activities and an increase in purchases of property and equipment compared to the year ago period.
Next task is an operating activities.
was primarily driven by investments to protect against supply chain uncertainty.
resulting in the use of networking capital, including a significant increase in inventory, which year to date has increased $64 million since the end of 2021.
Approximately $9 million of the increase in inventory is from the acquisitions of access networks and SOB and did not impact actual cash flows.
The remaining increase is related to the ramp of local branches, higher average carrying costs, and improved stocking levels and key skews.
Our proactive measures to support our integrator partners with inventory and strategic product categories such as control and networking have enabled us to drive market share and market share growth.
At this point, we believe that our inventory level is adequate to support existing demand, and going forward we expect inventory investment relative to sales growth to moderate as we drive efficiency across our integrated platform in part to see normalcy in the supply chain.
At the end of the fiscal quarter 2022, we had approximately $79.4 million liquidity.
including cash and cash equivalents of $31.3 million and undrawn revolver capacity of 48.1
million dollars.
Now before I turn this all back over to John , I'll take just a few minutes to provide an update on our financial outlook for the second half of the year.
As a reminder, at SNAP1 we provide annual guidance for net sales as well as adjusted stock identity on the
as we believe these metrics will be key indicators for the overall performance of our business.
Our fiscal 2022 guidance considers our strong fiscal first-pass performance.
Our most recent price adjustment effective in June .
our acquisition of CLARE, which we expect to have a very modest, deluded impact on the results in the short term.
Ongoing effects headwinds.
and are anticipated or ended anticipation of continued market uncertainty.
Considering these factors, we are reaffirming our full year guidance ranges communicated in May in conjunction with our fiscal Q1 2022.
While our business continues to perform well, we acknowledge the uncertain working environment as we look out for the remainder of 2020.
As such, we are taking proactive steps to manage our expense structure to position us to deliver against our adjusted EBITDA goals, even if sales trend for the lower end of our guidance range.
Overall, we remain highly confident in the financial health of our business, as well as our ability to sustainably grow for the foreseeable future.
We expect net sales in the fiscal year ending December 30, 2022 to range between $1.16 billion and $1.18 billion, which would represent an increase of 15% to 17% compared to the prior fiscal year on an as-reported basis.
It's 17% to 19% after adjusting fiscal 2021 to remove the impact of the 53rd week.
We continue to believe that contributing factors for 2022 net sales growth on a 52-week adjusted basis are as follows.
We'll see 12 to 14 percent growth from organic activities, which includes volume, local branch openings, and historical price adjustments.
Net of FX headwinds and supply chain challenges.
We'll also see 5% growth from the impact of recently completed M&As, including access networks and cloud electronics.
Since we already serve as CLARE's distributor, CLARE acquisition doesn't change our net sales output for the year.
On an as-reported basis, the laughing of the 53rd week in 2021 represented 2% net sales growth.
On adjusted EBITDA, we expect a range of between $116 million and $121 million, representing an increase of 5% to 9% compared to the prior fiscal year on an as-reported basis.
One final update before I pass the call back over to you, John . As a reminder, NAP1's Board of Directors approved the stock repurchase program that authorized potential repurchases of up to $25 million dollars of our common stock from the date of approval, which was May 12th, through the end of 2023.
As of July 1, 2022, we have repurchased 94,227 shares of our common stock at an aggregate value of approximately $1 million.
Consistent with our capital allocation policy, we will continue to prioritize first our organic growth investments. We will continue to prioritize our capital allocation policy, we will continue to prioritize our
Next, a creative M&A opportunities, and finally, this opportunistic share repurchase program.
So that completes my summary for Q2. I turn the call back over to you now, John , for additional comments.
Mike, thank you. A few closing thoughts and then we'll hit Q&A.
First, with sustainable industry-wide demand, we continue to focus on our only here strategy. This includes new product launches, software investments and platform developments, new e-comm platforms and our local office expansion.
all in service of supporting our integrators to capitalize on the opportunity in front of us and them. We continue to strive to be the one partner that our integrators trust to support and grow their businesses.
Second, our teams continue to work diligently through a volatile macro environment.
Priority 1 will remain delivering for our integrator partners to ensure they can keep their projects moving, and Priority 1A continues to be protecting our integrator partners and our companies' financial performance using price, MSRP, and other productivity levers.
Third, we're proud of our results to date as a public company.
We believe we've established a track record of consistently delivering on our financial commitments and will continue to focus on driving shareholder value over the long term.
And finally, we remain bullish on our growth aspirations and our longer-term operating model.
I'll reiterate, over the next decade, we believe all homes and all businesses will become smarter, driving demand for experiences we offer today and those we can only imagine in the future. The scale and platforms we are investing in will drive better solutions for the end customer.
more capacity for the integrator, and growth for SNAP-1 in a way that increases operating margin over time. Our actions in the first half of the year have set us up for what we expect to be a successful second half.
exciting times are ahead for our amazing team, integrators, and end consumers. And with that, we will open it up to Q&A.
Thank you. At this time, we will open the line for questions from the company's publishing analysts. The company requests that each participant limit their comments to one question and one follow-up. Ladies and gentlemen, if you have a question or comment at this time, please press star 11 on your touchtone telephone. We'll pause for a moment while we compile our Q&A roster.
Our first question comes from Paul Chung with JP Morgan. Your line is open.
Hi, thanks for taking my questions and a very nice execution here. So just on top line, how do we break down pricing versus volumes and...
You know your expectations as we kind of move into the second half, you know It sounds like your customers are kind of willing to pay for products typically in the higher-end demographic So where are you finding the right balance there and kind of any intentions to raise prices further?
Oh, I notified.
So let me take the last part of that question first.
For right now, we have not planned any further pricing actions. Certainly we'll always look at what's happening out there in the market. We react to that, and as we think about the competitive environment and the cost of pressure that's out there, we'll react accordingly. But right now, we feel well positioned with the pricing actions we've taken to date. We feel good about the margin trends that we're on in preserving our margins, both for ourselves and our integrator partners with our changes in MSRP that we've made to protect our margins as well. We regard And bows our sights toward theilic esteemed
As we think about the actual results and the forecast for the rest of the year, obviously the price increases we've made this year and late last year have had a significant impact on our growth. And that is the majority of the increase in sales that you'll see. We always are taking pricing action as part of our long-term growth algorithm. Price will always be a component of it, but it's more significant this year than in the past. So in the first half of the year, we've seen demand and volume up slightly, with pricing being the more significant impact.
on our growth. In the second half of the year, we've moderated our expectations on demand in volume. Currently, we're still seeing good volume growth. We're trying to be cautiously optimistic as we think about the rest of this year. Our forecast around the rest of this year as soon as we continue to hold the pricing actions that we've taken, which again have been well received by the market and are sustaining. Our expectation on volume is plus or minus flat for the rest of the year as we look at what the economy is doing in the macro.
on cash flow, you know, you're seeing heavy investments in inventory here, probably driving some nice market share gains, but any update on the flow and timing of that. And then where else can we see kind of some efficiencies on working caps to offset some of the inventory levels here? Thank you.
Thanks, Paul. So we don't guide on inventory. What I would say though is with the inventory that we've seen grow, we feel like our overall inventory balance right now is the appropriate balance. We're still not in the perfect situation. We have the right SKUs in the right spot. We still have... Our haven't moved since last year.
a few SKUs and critical SKUs that we are looking to make sure we have the right amount and we're still working with our suppliers to have them. But overall, we think the current inventory balance plus or minus is where we should be for the current buying we have. So we don't expect to see a significant increase in inventory, although it might pick up just slightly in Q3 as we continue to make sure we have the right product. We do expect the harvest cash over the Q3 and Q4. Given our long lead times of inventory.
We're always looking out three, four, five months to make sure we have the right products that are out there. But we do think that inventory piece is out there. By the way, we're also working with our suppliers on payment terms, in times when interest rates are very low. Term is probably on the last list of things you negotiate, but as we think about the economic environment out there and the rising interest rate environment, term is moving up the list of things that we talked about with our inventory suppliers to make sure we're getting the right payment terms, given the long lead time we have. But we feel really good about the inventory levels.
about our network and capital position today and don't expect a lot of significant changes as we move forward.
Great, thank you.
Great, thank you. And one moment for next question.
Our next question comes from Chris Nutter with UBS. Your line is open.
Thank you. I also wanted to ask about the back half revenue guidance. It seems like the company is guiding Q3 and Q4 revenue to kind of largely unchanged versus Q2 levels. But I guess my question is, if we have the June price increase coming through, which I believe was kind of a mid to high single-digit level, and volumes are flattish, wouldn't the back half kind of come in above Q2 levels? Or is there something seasonally maybe that I'm missing in that math?
Hey, Chris. Yeah, there's definitely some seasonality to the business. So Q2 and Q3 are always higher than Q1 and Q4. So there is a little bit of seasonality to it. We do have lower demand and volume expectations in the second half of the year than we saw in the first half of the year. We can take a few more minutes and let our phone communicate a little bit back.
That's a conservative view that we're taking, given the market uncertainty that's out there. But that's where we're managing the business. We're looking at our cost base, we're thinking about the uncertainty that's out there. We are hopeful that the market demand will hold up. We feel great about our ability to continue to win share. We feel great about the platforms that we have in our initiatives. But with the uncertainty that's out there, we're forecasting our demand somewhat below what we saw in the first half of the year, which is why you see that guy in the second half be pretty.
in the first half of the year. I appreciate that. Then I guess if you kind of think about the integrator level and the expectation of maybe moderating volumes off Q2, I guess any color you could provide on the backlog or activity at the integrator level, or is there any sort of inventory headwind at the integrator level that is maybe causing some of these back net volume to come? Just trying to figure out what are you guys seeing in the market that's making you.
and we kind of subscribe to certain buying group surveys around integrator sentiment.
Those have remained largely unchanged as we look at them. There is nothing there that gives us any concern whether it's around their sentiment or their backlog or number of new contracts they're signing up.
And, you know, we're all so cognizant that they're able to go kind of flex kind of their own capacity to the extent they do see anything moving in terms of softness. They've always shown themselves adept at that.
So I think what we're saying right now is, you know, the capacity of our current integrators is generally fixed. As you know, it's hard for all small businesses to hire labor right now.
That integrator capacity has been a governor for us in terms of growth, which is why we're so focused on adding new integrators to our business. It's also been a bit of a floor for us right now. We look at the integrator capacity. They have a lot of demand coming at them, but they can only execute that as a certain pace. And so I think we're just trying to be prudent right now given the macro environment and say,
that we are not expecting a lot of volume growth in the second half of this year. We hope to be positively surprised on the back end.
Thank you.
One moment for our next question.
Our next question comes from Keaton Memtori. With BMO, your line is open.
Thank you. Good afternoon. First question, can you talk a little bit about how you are thinking about your plans to open more branches in the back half of the year in kind of an uncertain and volatile backdrop? Does the
Mike? Sure. So, you know, we're continuing to open stores. We're not going to stop doing that. We think it's an important part of our growth as we look out to the future. And so we're going to continue to make those investments. We would expect the second half of this year to be opening in the midst of those digit stores. There's always a little bit of uncertainty of, you know, contractors and real estate and at least inside and stores built. In fact, year to date, we're probably a sore two behind with our
optimistic plans were in line with what we expected in our guidance, but I think our more aspirational goals, we were trying to get a couple more open. So I think mid-single digits, which is going to be something between four and seven, depending upon the timing of each one. We have line of sight to them, but I couldn't tell you how we're going to get our own open. We're not slowing that down. And remember, our investment in a single store is not all that significant. We put four to five hundred thousand dollars of traffic into that.
we'll put a little bit of additional inventory into it, and we go from there. So they're not overly draining from a working capital standpoint. They are a slight negative EBITDA impact for the first six or 12 months after we open them before they get the break even, but we think that that impact is well worth the investment as we think about our long-term growth.
And then as my follow-up, can you also talk a little bit about just keeping liquidity cushion versus executing on your capital allocation priorities, whether it is branch opening or kind of share repurchases. As you look out M&A opportunities, so how do you kind of balance that?
Yes, I would say, I mentioned our capital allocation strategy, and what I would actually say is the very first thing in our capital allocation strategy is ensuring we have sufficient liquidity. So as we think about managing the business, we'll always make sure we're comfortable with liquidity. We're very comfortable with the current liquidity situation of the company. Clearly, if we did any incremental M&A, as we think about investments, we're going to be making them very prudently in line with ensuring we have the right liquidity as we look out there. Thank you.
We feel great about where we are. We feel like any M&A we do will plug into that liquidity model that we have. One of the reasons, not just because of the EBITDA guidance that would be out there, but also because of liquidity, we'll make sure we're spending and investing widely in the organic growth opportunities that we have in line with the revenue growth expectations that we think.
So we're comfortable where we are, but we're always watching very carefully. Okay, that's helpful. I'll turn it over. Good luck. Thank you.
Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your touch tone phone. One moment for our next question.
Our next question comes from Keith, use the Truist, your line is open.
Thank you. Building on the last question,
What would need to change for cashflow to head towards debt reduction?
If the outlook darkened, or what would there be a trigger that would cause you to kind of reconsider that order of use of cash flow that you mentioned earlier?
I think certainly the outlook would have to change. I think right now, again, we're very comfortable. We always want to look out and say, if we don't do any M&A, can we get debt down to the three times leverage in a 12 to 18 month period from the cash flow to the business? It's sort of always our forward looking view. And then we make decisions off of the investments off of that. Clearly this year has been a big use of cash around inventory. We feel like that's mostly behind us and we can start then.
of forming the results of the company to generate cash. As we do that, we'll evaluate what to use that cash for. The bigger we put that cash push on the balance sheet, whether we use it for M&A opportunities, whether we invest organically, whether we pay down debt or all opportunities in front of us, we'll make them in light of sort of an ongoing, we're comfortable with the liquidity and debt level of the company, because we can always look out for the next 12 and 18 months and see where we would end up. But if we felt like the uncertainty rose.
out there more or other things called the three doesn't have to certainly react quickly. Okay. Yeah, I think just, hey, just real quick, Kate, real quick. This is John .
I think what you also need to understand is
Mike and I are moderating kind of the environment very carefully.
We have a lot of levers at our fingertips.
in terms of the pace of investments we make in the business. As you know, we have operated the business at much higher margins at previous times in our history. And so, that is another lever for us, number one.
Number two, I'll say just because you were building off the previous question, which included M&A.
We're not going to go do an M&A deal that blows through our liquidity. And so, you know, if we did do an M&A deal of any kind of size, we would have to get comfortable that we could use our equity probably in this environment. And it would have to then be a company that understands that valuations out there have changed.
And the private market, of course, takes a little bit of time to catch up to the public market, but that's where we would be comfortable using our equity.
So I just want you to know that we operate both from an operating but also a capital allocation process in a very disciplined way. Okay, thanks for that. And then one final question. You had referred to some surveys being done by buying groups and things like that. In those surveys, are the residentially focused integrators, I know they have a large backlog, are they starting to see the order flow roll over any color on that topic?
Okay, interesting. All right. Thank you very much. Thank you.
One moment for our next question.
Our next question comes from Ryan Merker with William Blair. Your line is open. Your line is open.
Hey, guys, thanks for taking the questions. I wanted to ask about the cost cutting you mentioned. Can you just talk about what you're doing there and possibly quantify it for us if possible?
Just real quick, Ryan, hey, good to hear from you. We're not cutting costs.
I think it's important that people understand what Mike said. We are moderating the pace of investments. So, we don't have a hiring freeze. We're continuing to hire. We're just being more disciplined about the hiring we're doing and specific functions. So, that is driven by our desire to both internally and externally meet our EBITDA commitments.
And so when Mike and I decide that we have to have a bit more conservative tone to the second half of the year on the top line, that means we're going to be a bit more disciplined about kind of where we're spending inside the business. Mike, do you want to add anything to that? That was well said, John . I don't think I have any additional comments.
Okay, thanks for clarifying that John . And then the 2nd question was on supply chain. You mentioned some evening, can you just talk about how things have evolved the past 3 months?
Well, I think there's a few different pieces that go into the supply chain. So one is availability of componentry. The second is the cost of componentry. I think we've seen both. We've seen availability start to free up, not everywhere, but start to free up.
So that drives a much more efficient process for us and our manufacturing partners.
We have seen the cost moderate. We haven't seen it drop, but we haven't seen, what's been driving our price increases is the increases we're seeing from our supply chain partners. So we've seen that moderate. So that's eased, which means we're confident that the price increases we have done will enhance margin that we had previously, frankly, lost in the business. And so that's one piece. The second piece I would say.
folks who this has created a lot of inefficiency for and you know we're really looking forward to over the next you know you know
six to nine months getting back to kind of BAU if you will, business as usual.
But these are meaningful, you know, seven if not eight figure movements.
These are meaningful, you know, seven if not eight figure movements of dollars.
Very helpful, John . Thank you. Thank you. Right.
Thank you. Thank you, Ryan. One moment for our next question.
Our next question comes from Brian Rittenberg with Imperial Capital. Your line is open.
Yes, thank you very much. I was wondering if you could break things down a little bit regionally for us and tell us if you're seeing any pockets of growth or pockets of contraction.
on anything that you're seeing across the US.
Yeah, hey Brian . Regionally, you know, you would expect there's small variances around the country when you think about we're housing a little bit stronger, a little bit weaker, or you kind of look better, but nothing that's meaningful. Clearly in our business right now, international is a little bit of a headwind, and so we're just looking at that. But domestically, nothing meaningful on a regional basis that's worth calling out that gives us any thought that we need to react to......................
As a follow-up, you mentioned harvesting cash in Q3 and Q4. Can you give us some kind of ballpark on what kind of cash generation you will be shooting for in the second half of the year? We don't guide the cash prime, but I do think you will see a meaningful generation of cash in the back half of the year. As a follow-up, you mentioned harvesting cash in Q4.
Thank you. As a follow-up, you mentioned harvesting cash in Q3 and Q4. Can you give us some kind of ballpark on what kind of cash generation you will be shooting for in the second half of the year? We don't guide the cash prime, but I do think it will be a meaningful generation of cash in the back half of the year. Okay, thank you very much.
Hey, real quick, I want to just add to Mike's comment because I think it's again important. When if an area of housing is weaker, let's take a city like Chicago where there's been, you know, supposedly weakness and an outflow of people.
What happens with the integrator there that may have relied more on housing being strong is they start to pivot their resources to serve commercial customers.
That's naturally what our integrators do because our products...
Conserve either sector. So I just that's 1 of the reasons we don't see a difference where somebody who is strictly tied to residential might see something more distinct in their business.
Next question.
Actually, I'm not showing any further questions. I'd like to turn the call back over to management for any closing remarks.
Well, thanks again, everybody for joining us today. It's a volatile time, but it's an exciting time to be with. I especially have to thank our incredibly dedicated team members. For their ongoing contributions and our network of integration partners, and all of their employees. Who continue to do great work creating amazing experiences.
for homes and businesses everywhere. And to our investors, thank you for your support, and we look forward to speaking with you next quarter. Operator? Thank you for joining us today for SNAP-1's fiscal second quarter 2022 earnings conference call. You may now disconnect.
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