Snap One Holdings Corp. Q1 2023 Earnings Call
Good afternoon, welcome to snap on Holdings Corp, 's fiscal first quarter 2023 earnings conference call. At this time all participants are in 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.
We're just not Orange senior Vice President of Finance Eric Sure. Please proceed.
Thank you good afternoon, and welcome to snap ones fiscal first quarter 2023 earnings conference call.
Minder, that's call is being recorded joining us today from snap one are John Hayman, CEO and Mike Carlotti CFO .
Before we begin we'd 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.
Actual 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 latest annual report on Form 10-K 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 bits broadcast may nine 2023.
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 that snap one dot com.
In addition to the webcast. We have also 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 Haven John .
Eric Thank you and thank you to everyone for joining us this afternoon.
To begin todays discussion I'm going to give some quick company background.
Followed by a review of our recent performance I'll turn it over to Mike car, let our CFO and he'll discuss the financial results for the quarter in more depth as well as provide our outlook for the remainder of the year after that I'll share. Some closing remarks, and then well open the call for questions.
Alright, let's get started as a reminder, here at snap one we provide a smart living platform that empowers professional integrators to deliver joy connectivity and security to discerning residential and commercial customers on a global scale.
As a leading distributor of these integrators, we worked with our growing network of approximately 20000 professional do it for me integrators to distribute our proprietary and third party products through our e-commerce portal and local branches.
We call. These integrators partners, because we invest in their success and expect them to invest in ours. So that we can jointly deliver the experiences our customers love.
As part of these investments will support our integrator partners with proprietary software platforms and workflow solutions to allow them to successfully serve the customers across the project life cycle.
We believe the smart living opportunity is large and it is terrible Jackie.
Secular tailwind, including technology adoption software enablement housing construction and small business formation will continue to propel the industry forward. Many end users will seek professional help to install integrate and support the technology they use at.
It's not one we aim to provide our partners with these right products software services and workflow tools to capitalize on the smart living opportunity.
Let me comment just briefly on our recent performance. Our team has delivered strong first quarter results in an uncertain environment, highlighting the resiliency of our business model and that of the partners we serve.
And our first quarter 2023, we generated $252 million in net sales and $22 7 million and adjusted EBITDA.
Overall, the demand environment remained steady our partners continue to stay busy as it works to healthy backlogs in their own businesses, though they do remain cautious as to economic news.
As you May expect in the current macroeconomic climate, we're gaining some cautiousness for more budget conscious and consumers are entry level projects and production building has slowed but we're pleased to report that the high end residential and commercial markets remained resilient our diversified business model.
It'll and product portfolio allow us to serve integrators across a variety of end markets supporting our partners' ability to pivot projects and adapt to the current environment.
Finally, we've also seen a normalization of productivity in the channel after the tremendous project velocity over the last several years. We believe this is a natural rebalancing to sustainable levels.
Last quarter, we noted that inventory in the channel appear to have peaked towards the end of the second quarter of 2022, and we have since seen ongoing signs of destocking.
This channel inventory Destocking continued in the first quarter, although at a slower pace than we expected importantly, while the destocking remains a year over year growth headwind after adjusting for the estimated channel inventory impact we delivered year over year growth of approximately 5% in the first.
We believe this positive adjusted growth rate compares favorably to the broader industry, reflecting our continued market share gains.
As I think about the first quarter performance and look ahead to the remainder of the year. We remain focused on two strategic initiatives for the year, one launching new products and services, along with key sales and marketing initiatives to earn a higher share of <unk>.
Our partners wallets, while improving the end consumer experience and the profitability of our partners and to expanding our operating margins through several key programs centered on our production costs and operating expenses.
Take a few minutes and address both in the context of our first quarter results and the rest of the year outlook.
I'll start with share of wallet, we see significant opportunity to expand our existing partner relationships.
In the coveted supply chain periods of uncertainty. We believe we are well positioned to attack this growth opportunity with a multi pronged approach spanning products and software go to market focus and service excellence.
First products and software, we successfully delivered on new product innovation and enhanced software platform capabilities in the first quarter, including the introduction of exciting new solutions across outdoor audio and lighting.
Troll surveillance and networking.
We're particularly excited about Halo, our new family of control for remotes are retinas wireless access points, which enable enhanced connection speeds with Wi Fi six technology.
<unk> linear lighting, which provides a fully immersive lighting experience the all new <unk> 'twenty family of high quality Luma surveillance solutions, and our 2023 consumer electronic show outdoor living product of the year Warner.
Year Excuse Me award winner episode, Radiance, which builds on our suite of outdoor entertainment solutions basic.
These exciting launches and strengthen our product portfolio and set a strong foundation for a robust pipeline of continued innovation from snap. One importantly, many of these new products will also drive upgrade opportunities for our installed base of end customers.
Shifting to the go to market and complementing our product portfolio. We continue to refine our go to market strategy to drive share of wallet growth. We took several important steps forward.
<unk> in the first quarter, including one we have continued to convert our e-commerce transacting integrators to a single quarter portal in order to drive efficiencies in our business save our partners time and money and allow us to drive marketing programs with higher efficacy while.
<unk> them to better products.
We've leveraged our loyalty program to consolidate our targeted incentive programs for our partners. These programs are designed to drive product category and ecosystem adoption and to strengthen our partners overall relationship with net one.
Three we expanded our strategic Omnichannel presence by opening of Fort Myers, Florida locations, bringing the total number of North American branches to <unk> 41 at the end of the quarter.
We intend to continue opening local branches to serve our partners and their communities and finally, we are.
Reorganized our sales team structure to roughly triple our active partner coverage by moving more towards an inside sales model. We believe this new formation will enable us to drive efficiency focus and results.
And finally, the final pillar is service our compelling value proposition is underpinned by award winning service capabilities in the first quarter. We were humbled to earn 14 2023, CE Pro Quest for quality awards across 22 categories, reflecting.
Our service excellence as voted by professional integrators, we thank our partners for their vote of confidence into that one and to our team members for their exceptional service.
Our second strategic initiative is driving operating margin expansion. The world has been anything but normal in the past three years with the uncertain macro backdrop in mind, we are continuing to review our long term operating plan to prioritize investments in areas that we believe will position us.
For sustained long term growth, while curtailing spend and other places. Therefore, we have constructed an operating plan that strives to optimum optimize our cost structure and reflects a heightened focus on delivering strong profits and expanding operating margins.
A few points here number one our first quarter financial results benefited from the excellent work our supply chain team has done to drive lower supply chain and input cost and strengthen our contribution margin rate.
They have driven improvements in such areas as freight logistics commodities and componentry.
<unk> of our expectations too we are working on several additional initiatives to drive continued upside on contribution margin rate as we move through the year and realize the full benefit of our cost environment that is easing.
Great following a modest workforce reduction of about 3% completed in the first quarter. We remain focused on disciplined cost management, while focusing our investment activity on programs that drive efficiency and optimize productivity.
Collectively we believe our improving contribution margin rate and scaling cost base have us on track with our operating margin expansion plan for the year.
Before I comment on our outlook I want to first comment on <unk> departure from the company Jeff has done some great things for snap won over the past seven years and opportunity came to him to become the CEO of a company outside of our industry.
Thankfully, Jeff has built an amazing team and sales and marketing and that will affect a smooth transition with Jeff's departure, Ryan Marsh. Our EVP of sales will report directly to me as with as well actually <unk>, our SVP of marketing, we have full confidence in our existing leadership's ability.
<unk> to drive our growth strategy in the years ahead.
And now let me comment on our outlook and then turn it over to Mike.
Overall, our full year 2023 outlook remains solid as we seek to move past the channel inventory Destocking headwind drive operating margin expansion and enhanced our liquidity position we.
We are maintaining a pragmatic view of top line performance given the persistent macroeconomic uncertainty and channel inventory destocking headwind in the short term however, our strengthening contribution margin rate and disciplined cost structure management provide us with improved visibility.
<unk> into our profitability outlook for the year with that in mind, we are tightening our net sales and raising our adjusted EBITDA guidance for 2023, which Mike will discuss in further detail.
We believe the smart living adoption.
Industry smartly.
Smart living adoption is going to continue to grow the <unk>.
Central role of the integrator and providing holistic solutions is durable and our competitive differentiation will enable us to continue to prosper in a dynamic macro environment and propel our long term success.
And with that I'll turn it over to Mike car, let our CFO to discuss our first quarter results and 'twenty three outlook in greater detail Mike.
Thanks, John .
We get into the specifics of the financials, let me just start at a high level to provide some context on our financial performance and outlook as.
As we approach 2023, we have a growth mindset and are planning, but we also had a pragmatism around the softer economic environment.
Channel inventory dynamics, and we've factored all of that into our volume assumptions.
Given this mindset, we focused on a variety of actions to drive contribution and operating margin improvement inside the business, especially as the headwinds of Covid and the supply chain have begun to subside.
So notwithstanding the current macroeconomic uncertainty we are continue to invest across the business for growth given the secular tailwind as we continue to see.
These investments spend new products go to market activities and important internal technology investments that will help us help us operate more efficiently.
We're funding these investments by de prioritizing spend in other places.
Our first quarter results validate our approach.
Our team has accelerated some of our cost efficiency initiatives and remains focused on further improvements.
Our new product launches are already paying dividends and we believe they are helping us gain share.
These products and our pricing strategies are adding value to the end consumer, allowing both us and our partners to differentiate on performance rather than price we're pleased.
With the resiliency of our business model and the strong execution of our team in this tough environment.
So now I'll turn to our financial results for the quarter ended March 31 2023.
Net sales in the fiscal first quarter decreased nine 2% to $252 million from $277 4 million in the comparable year ago period.
The anticipated decrease in net sales during the quarter reflects the channel inventory Destocking headwind that John mentioned earlier, we estimate that approximately $30 million of channel inventory sell in occurred in Q1 of 2022 and approximately $10 million destock in Q1, 2023, representing a year over year.
Your top line headwind of approximately $40 million.
After adjusting for this estimated channelled inventory impact we delivered year over year net sales growth of approximately 5% in the first quarter.
Let's talk a bit more about this channel inventory and our expectations.
As discussed last quarter, we believe the channel inventory begin to build in the middle of 2021 and peaked at over $100 million by the middle of 2022 before beginning to unwind.
Inventory Destocking continued in Q1 of 2023.
So at a pace that is a bit slower than we originally anticipated.
At the end of Q1, 'twenty three we estimate approximately $65 million remains of channel inventory over and above our typical carrying levels of our partners.
As we survey our partners, we're hearing that integrators may be adapting to a new normal level of higher inventory on hand, which would decrease both our time to normalization as well as our overall destocking headwind.
With this in mind the range of practical outcomes as broad, especially with the appearance of a slowing rate of destocking over the last three quarters as of now our models and guidance continues to assume the full approximately $65 million Destock will continue this year and then by the end of 2023.
Contribution margin a non-GAAP measurement of operating performance increased one 1% to $106 2 million.
Representing 42, 1% of net sales in the fiscal first quarter.
This was $105 1 million or 37, 9% of net sales in the comparable year ago period.
Contribution margin as a percentage of net sales increased due to the cumulative impact of our price adjustments enacted in response to supply chain and input cost inflation, which has begun to ease both through our efforts and through the general macroeconomic conditions.
Selling general and administrative expenses in our fiscal first quarter increased eight 4% to $93 8 million or 37, 2% of net sales from $86 5 million or 31, 2% of net sales in the comparable year ago period.
The increase in SG&A expenses was primarily attributable to increases in fair value adjustments with some contingent value rights.
Equity based compensation severance cost.
<unk> long term strategic growth investments costs absorbed from recent M&A and new local branch investments.
So all of these increases were partially offset by a continued focus on cost controls and operational efficiency initiatives.
Our net loss totaled $14 5 million in the first quarter compared to a net loss of $2 $3 million in the comparable year ago period.
Adjusted EBITDA, a non-GAAP measurement of operating performance totaled $22 7 million or 9% of net sales in the 'twenty three first quarter compared to $23 6 billion or eight 5% of net sales in the comparable year ago period.
This change in adjusted EBITDA on both the dollars and rate basis was primarily attributable to contribution margin growth offset by those increased SG&A expenses.
Adjusted net income a non-GAAP measurement of operating performance decreased 68, 6% to $3 $4 million or one 3% of net sales from $10 7 million or three 9% of net sales in the year ago period.
Free cash flow another non-GAAP measurement of operating performance totaled negative $11 $8 million in the fiscal first quarter ended March 31, 2023, compared to negative $26 $3 million in the comparable year ago period.
The increase in free cash flow was primarily attributable to a decrease in net cash used in operating activities offset by an increase in capital expenditures.
Capital expenditures increased year over year, primarily attributable to the one time build out of our new corporate office and Lee, how you talk and capitalized costs related to growth initiatives.
Net cash used in operating activities for the fiscal first quarter ended March 31, 23 was negative $2 6 million compared to negative $23 million in the comparable year ago period.
The primary driver of our year over year decrease in net cash used in operating activities was due to a $26 2 million net decrease in cash used for inventory compared to the prior year.
This reflects our continued efforts to rebalance our inventory levels.
At the end of the fiscal first quarter, we had approximately $74 $7 million in total liquidity, including cash and cash equivalents of $34 5 million and undrawn revolver capacity of $40 2 million.
Since the end of Q1, we've continued to see improvement in our liquidity position as anticipated.
We continue to thoughtfully work down our inventory levels and remain on track to reduce inventory to the previously communicated $270 million target level by the end of the year.
Now before I turn the call back over to John I'll take just a few minutes to provide our financial outlook for the rest of fiscal year 2023.
As a reminder, snapple and provides annual guidance for net sales as well as adjusted EBITDA as we believe these metrics to be key indicators for the overall performance of our business.
Our fiscal 'twenty three guidance considers our strong first quarter.
As well as our ongoing expectation that market uncertainty will.
Throughout 2023 as.
As such we are tightening our full year net sales and increasing our full year adjusted EBITDA guidance ranges from our previously published outlook.
We expect net sales in the fiscal year ending December 29, 2023 to range between 1.06 billion and 1.09 billion, which would represent a decrease of five 7% to 3% compared to the prior fiscal year on an as reported basis.
We expect adjusted EBITDA to range between $110 million and 118 billion, representing a decrease of three 6% to an increase of three 4% compared to the prior fiscal year on an as reported basis.
Our adjusted EBITDA guidance reflects our commitment to driving incremental adjusted EBITDA margin expansion in 2023.
We expect to achieve this through contribution margin rate improvement of supply chain and input cost fees as well as through disciplined operating expense management.
As noted previously we are already outpacing our expected contribution margin rate expansion and anticipate continued strength in this area in the coming quarters.
So as we think about our quarterly trending in 'twenty three from a top line perspective, we continue to anticipate a return to positive year over year growth in the second half of the year as we execute our growth strategy and work through the channel inventory Destocking.
Contribution margin rate, we saw better than expected results in the first quarter, while we originally anticipated and acceleration in contribution margin rate over the course of the year. Our team worked diligently to extract costs from the supply chain more quickly to deliver more of that margin expansion in Q1 of 'twenty three.
Therefore, we expect this contribution margin strength to continue with an opportunity for continued outperformance.
From an adjusted EBITDA perspective, we expect Q2 23, adjusted EBITDA margin to trend similar to the comparable prior year period and to modestly improve on a year over year basis through the second half of 'twenty three.
One final update before I pass the call back over to John as a reminder, last year snap ones Board of directors approved a stock repurchase program that authorized potential repurchases of up to $25 million of our common stock for a date of approval, which was may 12 for 'twenty two through the end of 'twenty three.
As of March 31, 2023, we had repurchased approximately 296000 shares of our common stock at an aggregate value of approximately $3 1 million.
With our capital allocation policy, we will continue to prioritize the following in order first our balance sheet strength second our organic growth investments third accretive M&A opportunities that present themselves and fourth our opportunistic share repurchases.
That completes the summary of our financials I will turn the call back over to John for additional commentary John .
Mike Thanks, a few closing thoughts before we.
Q&A number one.
We remain quite bullish around our growth aspirations and longer term operating model and we believe we're making the right decisions to best navigate our current market reality for 2023, we have confidence in our operating margin expansion plan and have already started returning to our favorable.
And margin rate trajectory as costs related to the supply chain continue to alleviate.
Second we remain committed to our overarching strategy. This is founded upon new proprietary product launches growth in adjacent markets, such as commercial and security.
Additional local branch offerings.
Openings software investments all in support of our partners to capitalize on the opportunity in front of us and them even in an uncertain operating environment. We continue to strive to be the one partner that our integrators trust to support and grow their business.
And third as I've said before we believe that all homes in all businesses will become smarter over the next decade driving demand for the types of experiences we offer today and those we can only imagine in the future we've invested in scale and platforms that will drive better.
Solutions for the end customer more capacity for the integrator and growth for snap one in a way that increases operating margins over time.
Overall, we believe our actions.
At the close of last year, and so far this year have prepared us to succeed in the present environment, while also positioning us for longer term sustainable growth and with that we'll open it up for Q&A.
Thank you.
At this time, we will open the line for questions from the company's publishing analysts the company request that each participant limit their comments to one question and one follow up.
In order to ask a question you will need your Crestar one one on your telephone and wait for your needs to be announced to withdraw. Your question. Please press star one again.
Please standby, while we compile the Q&A roster.
And our first question comes from Erik Woodring with Morgan Stanley . Please proceed with your question.
Hey, good afternoon, guys. Thank you for taking my questions. John I wanted to dig into a comment that you made you talked about kind of some.
Some incremental LOE and some incremental weakness at the low end of that market, but resiliency at the higher end.
So I guess my two part question is one does weakness at the lower end is that historically.
An early indicator for anything at the high end or is that reading too much into it and then too.
I know most of your projects are at the higher end, but can you maybe just give us a sense for what kind of exposure you have to any of that low end if at all and then I have a follow up thanks.
Well I think good question Eric.
Good afternoon.
Look I think the.
The exposure we've had on.
The low end side has been more around security and production building.
And we're fortunate that we're.
A fairly recent entrants into that space, but it's something that.
Certainly.
You can see in our numbers as we monitored the business that thats been a bit weaker.
In large part because as we all know production build has slowed and so we have some integrators that focus on that market.
So that's number one number two.
We don't believe in kind of looking at the trends around kind of higher end homes.
That it really creates any sort of issue for us and the reason for that is if you look at the number of homes, even today being built on the higher end.
And if you look at the capabilities of those integrators and their ability to pivot to think to places like commercial establishments, where theyre working with similar technology, and restaurants, and bars and conference rooms, and things like that that's where we see the resiliency of the model because integrator shift there.
<unk> capacity so I.
I don't think its hip.
Leading indicator.
But I think as Mike couched our.
Guidance, we're being watchful about that and we're managing them.
Accordingly from a cost standpoint, Mike would you add anything to that no. John I think those were right on and again I think be the higher end still appears to be very resilient and we feel great about what's happening there, but it's an uncertain world out there and we're trying to be prudent as we think about how do we spend in an uncertain world.
No that totally makes sense I appreciate the color from both of you.
And then Mike maybe to follow up on some of your comments on contribution margin, obviously very strong <unk> last quarter, we talked about sequential improvements in contribution margins from <unk> to <unk>.
<unk> and then into <unk>.
But the comments you alluded to some of the unplanned maybe you pulled forward some of that improvement. So I just wanted to maybe parse out and get a better understanding of maybe how to think about the seasonality of contributions as we move from the strong March quarter into the rest of the year or if we're just seeing it across the board uplift that will be.
Really helpful and that's all for me. Thanks, So much yes, thanks, Erik yes, great Great question.
So we definitely saw some great work for our teams to bring in some of that.
Opportunity that we felt we would see later in the year into the first quarter. So we still expect some improvement off of where we are in Q1, I think Q1. Our contribution margin is just above 42% 42.1, I think it was the number.
And we expect it to go up a little bit in Q2, and Q3 from that number.
Given that we pulled it in quite a bit into Q1 quarter.
Quarter by quarter sequential improvement won't be what we expected, but we still feel great about where we're going to land and it's still in line with expectations and I think as John mentioned.
I think we saw steel like there might be some upside from there that the teams continue to work on and identify opportunities to continue to drive that forward.
Perfect. Thanks, so much for the color guys and congrats on a good quarter. Thanks, Eric.
One moment for your next question.
And your next question comes from the line of Paul Chung with Jpmorgan. Please proceed with your question.
Hi, Thanks for taking the question.
I wanted to ask on the pricing versus.
Versus volume dynamic in the quarter.
How did those variables kind of trend and what are your expectations for the balance of the year.
I know you had some pricing benefits to those kind of ease a bit as we move through the year.
So down a point in the quarter and as we think about our performance for full year as John talked about and I think we mentioned.
We think that that underlying demand a flattish is where we expect the year to remain we're not assuming we're going to get better than that this year. We think secular long term, there's still lots and lots of upside it's about where we think we're going to be from a long term, but as we're taking a prudent view of this year. We're just thinking that's going to remain around the plasma standpoint, obviously that pricing benefit from last year's 6% February .
The increase of 9% unit increase will fall off as we lap those so by the time, we get to Q4, the pricing impacts almost mill, we only did a very small points increase this year.
And so you can just think about that with a flattish organic growth.
And the pricing impacts falling off as well and then the inventory channel clearing as you can see from the chart that we posted.
Gotcha.
And I'd say just to add onto that on the <unk>.
Part of your question.
I think you were at <unk> and you saw a lot of the new products that we're going to be.
Introduced into the channel later in the fourth quarter and early in the first quarter and now.
You've seen those products launched and so cool inside surveillance the combination of the Luma X 20 cameras and the software foundation behind that our new Wi Fi six.
Access points with our readiness.
We are now getting into the outdoor season, so kind of the radiance product the combination of our new core controllers launched last year and the Halo family for modes. This year lighting is a big initiative inside our industry and so vibrant lighting and.
The integrators know what's coming in terms of the future around that I'd say.
Products that are connected to one or both of our software platforms oversee or our control for OS III that is where we're seeing the.
Most momentum and what I would say there is it's just the beginning.
The initial launches of these products will lead to families of products.
In the future that will be long lasting.
Okay, great. Thanks for that and then.
Better free cash flow performance and kind of expected you talked about the.
Inventory dynamics going on there.
And then I think you reiterated the kind of inventory Mark as you exit the year.
How do we think about the overall free cash flow guide for the year.
And then kind of given the better outlook.
<unk> raised profitability.
And cash flow.
Are you looking to open up more stores this year.
You get that incremental revenue boost it looks like you added an additional location in the quarter. Thank you sure. Paul So yeah inventory, we're putting a lot of focus on it and we've started to see the benefit I think our inventory actually dropped.
$1 million, we ended the year to the end of the quarter, which was ahead of our expectations of when we start seeing the benefit of that is down a lot of great work by our supply chain teams to get us where we need to be righted.
Don't guide to free cash flow, but from an expectation standpoint, if we're at.
<unk> $314 million of inventories in the quarter and we're going to get down to 275, clearly that's going to be a source of cash as we go through the year.
Be able to utilize our existing inventory.
Liquidate some of that and monetize it.
So we feel really good about that.
As we go through.
Yeah, and then on the local store openings, we've got a plan for mid single digits opening something between four and six of the rest of the year I think we've got a we're always stores slated to open here in the next few weeks.
Then a couple of more leases opening a store is not a fast activity you got a final location you've got to sign but we should go do the build out. So I think we have pretty good line of sight to what's going to happen in the rest of this year.
So we will certainly be thinking about how we deploy capital as we go forward next year.
As we free up more free cash flow to go do that and we have some yes, there's some M&A opportunities out there small stuff that we're looking at we could deploy into new store openings. We can look at some.
Investments in products that were contemplating so look there is no lack of opportunities for us to invest in the business that we would consider.
Okay, great very nice execution.
Thanks, Paul.
One moment for your next question.
Your next question comes from the line of Chris Snyder with UBS. Please proceed with your question.
Thank you.
I was hoping to get an update or just some more color on activity at the integrator level.
As the customer base being the integrators, they still working with big backlogs heavily working eating into those backlogs at all so just kind of.
Any update on how the integrators doing and kind of how their pipeline of activity looks.
Yeah, Thanks, Chris we watched.
And.
Other demand sensors.
Carefully in the business.
I would say we have seen a <unk>.
Small trend downward.
And integrate our backlog.
Its still if you look at it on a more normal basis at a.
Yeah.
Over 20 years still at a very high level.
Right out of couple of months worth of backlog.
So that's the first comment I would make.
The second comment I'd make.
<unk>.
Above and beyond that.
That speaks to our integrators again ability to.
Go find business is as we survey our integrators.
The vast majority are finding new customers and new leads to feed that backlog.
And I would say after a few months of what I'll call.
A little bit of a downturn of their own optimism in the market that has now taken a turn upward.
And I think that's all good news again I just need to emphasize that there is always been way too much work out there for our integrators to get to.
And so even though as we all view the.
News.
There are some.
Reductions in things like housing starts and housing sales.
Our integrators have.
Plenty of work to get to and so we view the.
We view the fact that there may be some pullback in macro demand sensors.
<unk>.
Things that are integrators can actually work through because they've only had a certain level of capacity.
I appreciate that genre. It really helpful. Then if I could just follow up on the comment you just made around the integrator.
I think maybe their optimism.
Started to kind of pick back up here.
On the leading edge, what do you think striving that thank you.
I think the biggest thing thats driving it is theres been a lot of negative news cycles, yet they still see their businesses performing well, yes, theyre cautious certainly, but now that we've gotten into this cycle over the past three to six months.
Months, they see that okay. There are plenty of homes still being built there is commercial business that is continuing to return since the.
Covid days as people are coming back to work and so I think as they get farther into what was supposed to be a more down cycle, they're seeing their businesses continue to perform and their backlog is holding up quite nicely.
Thank you John I appreciate that.
One moment for your next question.
And your next question comes from the line of Keith Hughes with <unk> Securities. Please proceed with your question.
Thank you.
On the.
Inventory reduction that we've been talking about on this call the remainder of the year do you expect to take.
<unk> hit on that in the second quarter and then it will be more ratable for the rest of the year.
I think right now keep it's more ratable the rest of the year.
I think it's a dynamic that we are still looking to understand.
It's coming out like we know what happens every single month.
Historically as it went in we can go back and look we know what's come out over the last nine months, but as we try to look out there in the future.
I assume you talk about inventory in the channel not our inventory as we talked about that.
And as we look out in the future.
I bought more was going to come out in Q1 based upon the pace that was there.
If I think about that $65 million I would expect more to come out in Q2, and Q3 and Q4 as we sit here today.
That's my best guess, but it's something that I think it's a little bit Crystal ball, which was we tried to guests. We still are predicting it all to come out and again as I said I think we're getting at least some communication from some of our partners that maybe it's not all going to come out they're going to adjust the a higher level of inventory and so maybe the whole 65.
Doesn't come out maybe it's 40 or 50, instead of 65, and I think pro rata lead through.
The next two quarters with a tail in Q4 as it is how we think about it but I think we're pretty confident that wherever we are by the end of the year is going to be the new normal I don't think this is going to drag into next year whatever happens. This year will happen and then it will be pretty clean starting next year.
Okay and given the.
The banking situation on smaller banks, who has acute question on financing for small business and small commercial products.
<unk> Dear integrators do they tend to be financed just by the receivables you give them or do they tend to use at least for working capital jobs any sort of small bank type financing.
That's a great question, Keith I don't want to speak for the entire industry I would tell you generally they operate just on cash flow theyre going out to a project theyre getting a deposit on that project from the end consumer that consumers typically very well off individual or business, who is using cash to pay that deposit, though you've got deposits a byproduct Boeing solve that problem.
There'll be some contingency on the back of it but they typically get progress billings throughout the project. So I've never heard anybody talk significantly about using third party financing as a portion of their business. They do use us theres, a little bit of financing of <unk> projects, but not a lot that's out there John .
No I think I want to emphasize I think they use their customers to finance their business.
And theyre not really dependent on.
Banks for things like.
Our lines of credit like more and revolvers like businesses our size Mike.
Okay and your competitors are smaller they probably do use that that'd be correct.
I would say generally speaking we're on the distribution side, there's one very large public distributor, we compete with who I don't think is dependent on that but I think the.
The charity of other small business distributors are and then most of the product companies. We compete with are smaller companies certainly not the samsung's by the way, but we're more partner with Samsung <unk> competitor and I think they probably are more dependent on more dependent in Prague.
More susceptible to what's going on with banks.
Okay. Thank you.
Yeah.
And again.
To ask a question. Please press star one on your telephone.
That is star one on your telephone.
And our next question.
Comes from the line of.
Yeah.
James <unk> with Raymond James Your line is now open.
Hey, Thanks for taking my question just a couple of quick points for me. So one could you just touch on sort of the demand trends youre seeing in international and just any color on what you saw international over the past couple of months would be helpful.
Okay.
So I.
I think overall, our international business has been a little bit more challenged our domestic business. So international as you know is not one market.
We have distribution centers in Canada, we have been in the UK, we havent been Australia, and we're direct in all those markets and then we go through most of the rest of the world through distribution partners to cover the rest and I think it definitely is up and down.
The APAC region right now interestingly has been a little bit more challenged.
Over the first quarter.
European market, particularly the U K has looked pretty much like the U S. A little bit softer Canada has look almost feels like the U S. In fact might be even a little bit stronger than the U S. So just a little bit regionalisation you'd think about the different markets that are out there, but overall international in total just a little bit softer than in the domestic markets that we're looking at.
Perfect. Thank you.
Okay.
At this time this concludes our question and answer session.
Like to turn the call back over to Mr. Heyman for any closing remarks.
Thank you very much and thank you again, everyone for joining us today.
Huge shout out to our team members too.
Continue to do great work on behalf of our partners and a Pat on the part of our shareholders and we very much look forward to speaking with everyone again at the end of the second quarter.
Have a great evening.
Thank you for joining us today for snap on fiscal first quarter 2023 earnings Conference call you may now disconnect.
Okay.
Hey, Thank you Isabella Pearl and we appreciate your help there or anything else Ross.
Yeah.
[music].
Okay.