Q2 2023 Snap One Holdings Corp Earnings Call

Okay.

Good afternoon, welcome to stop one holdings.

Fiscal second quarter 2023 earnings conference call. At this time, all participants are in listen only mode. After the speaker's presentation there'll be a question and answer session I would now like to turn the call over to stop one senior Vice President of Finance, Eric Steel Sir. Please proceed.

Great. Thank you good afternoon, and welcome to snap ons fiscal second quarter 2023 earnings Conference call. As a reminder, this call is being recorded joining us today from snap one are John Hayman, CEO and Mike Carlos 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.

We believe these expectations are reasonable we undertake no obligation to revise any statements to reflect changes that occur after this call actually.

Actual events or results could differ materially.

Payments are based on current expectations of the company's management and involve inherent risks and uncertainties.

<unk> identified in the risk factors section of our latest annual report on Form 10-K filed with SEC and our most recent quarterly report on Form 10-Q.

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 eight 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 on Dot 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 Haines John .

Thank you, Eric and welcome everyone and thanks for joining us this afternoon.

To begin todays discussion I'm going to give some company background followed by a review of our recent performance and then I'll turn the call over to Mike <unk>, Our CFO , who will discuss our 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 before opening the call.

For questions.

Let's get started.

As a reminder, it's not 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 work with our growing network of approximately 20000 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 customers across the project lifecycle.

We believe the smart living opportunity is large and durable secular tailwind, including technology adoption software enablement housing construction and small business formation will continue to propel the industry and our company forward.

Many end users will seek professional help to select install integrate and support the technology solutions they require.

It's not one we aim to provide our integrator partners with the right products software services and workflow tools to capitalize on the smart living opportunity.

I'll turn now to our recent performance our team delivered solid Q2 results, including $274 4 million in net sales and $31 7 million and adjusted EBITDA, while ongoing channel inventory Destocking impacted top line results as anticipated.

We are executing on our product development go to market and margin enhancement strategies, we drove a sequential quarterly improvement in contribution margin rate from 42, 1% of net sales in Q1 to 42, 7% of net sales in Q2, as we continue to extract costs.

Our supply chain I.

Additionally, our focus on disciplined cost and investment management is expanding operating margins for the business.

We continue to see stability in the demand environment amid the broader macroeconomic uncertainty.

First our partners continue to indicate that they are sustaining healthy backlogs in their own businesses, our diversified business model and product portfolio allow us to serve integrator partners across a variety of residential and commercial end markets, which supports our partner's ability to pivot projects.

And adapt to the current environment.

So while we're hearing some cautiousness for more budget oriented and cost and customers for entry level projects. We believe that the high end residential and growing commercial markets remain resilient.

Second the macroeconomic.

Backdrop, which is pretty volatile in recent quarters showed some sequential improvement across several indicators, including homebuilder confidence luxury home market health and overall U S consumer confidence all signs point to a housing market that notwithstanding shorter term headwinds around interest.

Rates and inventory availability will be quite robust, while we look over the next decade.

As we reflect on our second quarter performance and look ahead to the remainder of the year. We are focused on two key strategic initiatives for twenty-three one driving higher product adoption by our partners and in turn delivering far better end customer experiences.

Two expanding our operating margins through several key programs, which have already yielded very positive results I'll take a few minutes to address each of these in the context of our second quarter results and the rest of the year outlook.

First partner adoption.

During a period of significant supply chain uncertainty. We believe we are well positioned to drive significant adoption of our products with a multi pronged approach that includes both introducing new products and software and refining our go to market strategy.

Coming off a strong first quarter of product launches, we continue delivering new product innovation and enhanced software platform capabilities in the second quarter, including the introduction of exciting new solutions across audio control surveillance and networking a few important highlights include.

One the core light controller, which offers our partners a simple and profitable solution for single room applications, completing what we believe to be the industry's most robust lineup of controllers and makes it an entry level control for ecosystem more accessible.

Two the triad passive sound bars product line, which underscores our continued investments and premium audio solutions for our partners.

And three continued product innovation designed for the commercial market, including multi gig Iraq. This routers and award winning strong carbon series mouse.

Finally, I'd be remiss not to mention our July launch of the flagship Halo touch our latest touch screen remote that also enables voice interaction with our systems together. These exciting launches strengthened our product portfolio and help us set a strong foundation for a robust pipe.

Line of continuous innovation from snap one our partners recognize this innovation by ranking as a top five brand.

45 times across 62 product subcategories in the 2023 CE Pro 100 brand analysis Awards, which represents five times the number of recognitions of the next closest competitor as our product offerings become more software centric we continue to.

Invest in both our oversea and control for software platforms. These platforms provide a.

For our value added services, which we plan to build upon in the near future.

Also we continue to make progress on our go to market strategy as we pursue growth opportunities in new markets.

First we completed the conversion of our legacy snap a date and control for domestic e-commerce portals to a single platform in order to enable our partners to engage with us more efficiently allow us to drive marketing programs with higher efficacy and streamline our internal operations.

Second we continue to leverage our best in class loyalty program to drive product category and ecosystem adoption and to further strengthen product adoption by our partners and finally, we've continued investing in our strategic omni channel presence, including the opening of our new Raleigh location in July .

And several anticipated additional branch openings in the second half of the year.

Our second strategic initiative initiative is driving operating margin expansion.

During COVID-19 and the supply chain crisis, we've made a number of decisions that focused on keeping our partners and business. These ranged from inefficiencies from securing and expediting product and componentry to numerous research and development pivots based on that.

Wrapped changes and chip availability as the supply chain has normalized we are returning to our operational cadence of driving lower unit costs and freeing up our product teams to do what they do best build new products.

We're also driving scale within our operating model integration activity related to previously completed acquisitions as well as investments we've been making within our technology infrastructure are starting to yield results. These investments will support our operating growth operating margin growth expectations throughout the remainder.

Of 2023.

Let me now comment briefly on our outlook before turning the call over to Mike.

With the first half of the year now complete our full year 2023 outlook remains positive as we seek to move past the channel inventory Destocking headwind drive operating margin expansion and enhanced our liquidity position.

Also our continued contribution margin rate expansion and disciplined cost structure management provide us with confidence in our profitability expectations.

Therefore, we are reaffirming our outlook for both net sales and adjusted EBITDA for 2023, which Mike will discuss in further detail.

We believe that growth in smart living adoption, the central role of the integrator and providing holistic solutions, our competitive differentiation and our coming service innovations will enable us to prosper in a dynamic macro environment and welfare Fella propel us.

Propel excuse me propel our long term success with that I'll turn it over to Mike our CFO to introduce to discuss our second quarter financial results and 'twenty three outlook in greater detail.

Mike.

Thanks, Sean.

Turning now to our financial results for the fiscal second quarter ended June 32023.

Net sales in the fiscal second quarter decreased seven 6% $274 4 million down from $296 $9 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 $35 million of channel inventory sell in occurred in Q2 of 2022 and approximately $10 million destock in Q2 of 2023.

Representing a year over year top line headwind of approximately $45 million.

After adjusting for our estimates of the channel inventory Destocking impact, we believe we delivered year over year net sales growth of approximately 8% in the second quarter.

Continuing with the channel inventory topic, our data indicates the integrators have been working through their excess inventory since their levels peaked around mid 2022, and we expect to sell down to continue at a moderate rate through the second half of this year.

As we survey our integrator partners. There is some indication that they may be adapting to a new normal level of higher inventory on hand, we.

We continue to believe that the industry will arrive at this new normal by the end of this year and we will stabilize going forward.

Contribution margin a non-GAAP measurement of operating performance increased 6%.

$117 2 million or 42, 7% of net sales in the fiscal second quarter.

That's up from $116 5 million or <unk> 39, 2% 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 continued to use.

Our selling general and administrative expenses in our fiscal second quarter decreased one 7% to $93 8 million or 30 to 34, 2% of net sales from $95 4 million or 32, 1% of net sales and comparable year ago period.

Decrease in SG&A expense was primarily attributable to lower variable expenses as a result of the lower sales base in Q2 2023 and.

In addition, we incurred lower equity based compensation in 2023.

Our net loss totaled $1 million in the second quarter compared to a net loss of $1 $3 million in the comparable year ago period.

Adjusted EBITDA, a non-GAAP measurement of operating performance totaled $31 7 million or 11, 5% of net sales in the 2023 second quarter.

Hard to $31 7 million or 10, 7% of net sales in the comparable year ago period.

These changes were primarily attributable to contribution margin growth and reduced SG&A expenses offset by lower net sales, including the headwind generated by inventory in the channel Destocking.

Adjusted net income a non-GAAP measurement of operating performance decreased 13, 1% to $14 3 million or five 2% of net sales from $16 5 million or five 6% of net sales in the comparable year ago period.

Free cash flow a non-GAAP measurement of operating performance of $9 7 million in the six months ended June 32023, compared to negative $26 million in the comparable year ago period.

The increase in free cash flow was primarily attributable to the working capital benefit associated with a reduction of inventory levels. We believe that we remain on track to reduce inventory to a previously communicated $275 million target by the end of the year.

At the end of the fiscal second quarter, we had approximately $109 million in total liquidity.

<unk> cash and cash equivalents of $33 $8 million and Undrawn revolver capacity of $67 1 billion.

Now before I turn the call back over to John I will take just a few minutes to provide our financial outlook for the rest of the fiscal year 2023.

As a reminder, snap one provides annual guidance for net sales as well as for adjusted EBITDA as we believe these metrics to be key indicators for the overall performance of our business.

Our fiscal 2023 guidance considers our first half 2023 performance as well as our ongoing expectation that market uncertainty.

Throughout the remainder of the year.

With these factors in mind, we are reaffirming our previously communicated full year outlook.

We continue to 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 also continue to expect adjusted EBITDA to range between $110 million and $180 million, 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 ongoing focus to drive incremental adjusted EBITDA margin expense.

In 2023.

We have already made significant strides in this area and we expect to continue to drive year over year improvement in the coming quarters contribution margin rate improvement, our supply chain and input cost normalize as well as through disciplined operating expense management.

That completes my summary.

Turn the call back over to you John .

Thank you Mike a few closing thoughts before we hit Q&A first.

We are proud of our team's ability to deliver steady EBITDA compared to the same period last year and expand our operating margins. Despite the headwinds that we've referred to and we remain confident in our expectations for consistent long term growth through two quarters, we've made strong gains in our contribution margin.

As costs related to the supply chain continue to alleviate and we believe our operating margin expansion plan is on track.

We remain committed to our overarching strategy. This includes growth via new proprietary product launches and market, leading service growth in new markets, such as commercial and security additional local branch office openings and transformational software investments all with our partners top.

Mind, even in an uncertain operating environment, we continue to strive to be the one partner that are integrators trust to support and grow their businesses.

And as I've said before we believe that all homes and 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 consumer.

More capacity for the integrator and growth for snap one in a way that increases operating margins over time and with that Grace. Please open the call for Q&A.

At this time, we'll 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.

To ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again, please standby, while we compile the Q&A roster.

Our first question comes from the line of Eric Woodring with Morgan Stanley . Your line is now open.

Super. Thank you. Thank you guys for taking my questions nice quarter.

Can you John maybe just elaborate a bit more on your customer conversations is how they've trended in the last 90 days and the reason I ask is we've heard from some other let's call. It integrator excuse me.

Tributaries or smart home vendors that residential demand was maybe a bit weaker in the quarter. Clearly your comments would suggest so so just how have customer conversations trended how are integrators feeling about their business, maybe just a little double clicking on that original comment would be helpful. And then I have a follow up for you. Thank you so much.

Yeah. Thanks, Eric.

Obviously, we speak with our customers quite a bit.

Rather than share kind of anecdotal conversations with you I think what we've learned is to best rely on data and where we get the best data is through our surveys and through other surveys and through visibility into what's happening.

Into.

Proposal work out there and what I'll first say is I think there is a slight decline in backlogs. So that that is that is something thats evident yet it's still very healthy what I would I would I would characterize the decline in backlog.

<unk> as low single digits.

In terms of percentages and so then you have to kind of double click when youre talking about residential as to kind of the segments. So clearly we've seen.

Weakness in what I'll call the general production builder segment.

That's where our security products.

Play more.

On the other side of the coin, what we're seeing and kind of our core residential.

AAV market, where as we as we said and as the backlogs would indicate.

Their capacity has was a limiting factor during our growth. It's also something that I think has protected us from kind of what might be happening in certain end markets and so that.

That would be the second factor and then the third factor I'll cite is our products like we have.

Really amazing products and.

There are only getting better this year.

And I think as the CE Pro 100 survey would say.

We see another data, we're winning share out there and so our products are only available from us they are not available from any other distributor and I think thats.

Eric It's Mike Let me just put one thing on top of that as you talk about other.

I don't want to speak for them, but I'm not sure how they will be considering the channel inventories as they talk about demand being down.

So I think everybody has to think about the impact of channel inventory on their own demand factors and we're talking about excluding the inventory impacts our demand we feel is up a little bit.

Well the channel inventory.

It up against that.

Right right. Okay. No that's very clear very helpful color from both of you guys. So thank you for that.

My second question, maybe maybe for you Mike is key.

Clearly non-GAAP contribution margins saw a nice tailwind from pricing I think it was a four point tailwind year over year in the quarter.

Can you, maybe just remind us exactly when you raise prices historically by how much and then what pricing actions you're taking in the market today, if any and that's it for me. Thanks, So much guys. Thanks, Eric.

The last couple of years I would say we've had a number of pricing actions. If you go all the way back to August of 'twenty one.

<unk> price of about 6%, we raise price another 6% in February of 'twenty two.

About 9% in June and been very minimal activity since then.

So all of that is now sort of behind us and in fact with our last price increase being last June when we get to Q3 on a year over year comparative basis pricing will not be a factor as we think about the.

The sales comparative.

Okay.

Super Thank you very much for the color guys. Thanks.

Appreciate it.

One moment for our next question.

Our next question comes from the line of Jake Nordson with Raymond James Your line is now live.

Hey, guys. Thanks for taking my question.

Double clicking on the integrators I'm wondering if you could provide us any color on the mix of integrator.

Mix of integrator ads and how that's been trending and then more broadly how has integrated churn metrics been looking at backlog has picked up when do those typically get more volatile.

There would be helpful. Thank you.

Hey, Jacob.

<unk> not disclosed integrator counts on a quarterly basis annual you will talk about those numbers once a year, but we don't talk about on a quarterly basis I can tell you that underneath that are integrators, how it's very consistent with historical norms. There is not a lot of.

Fluctuation in it right now I think our industry.

It is not adding tons and tons of integrators, we are winning.

More integrators at the business and we're seeing the normal very low levels of churn one of the great things about our businesses are integrators tend to be pretty profitable. They tend to stay in business for a long time, and so very little churn.

And we're seeing the same consistent sort of integrator comes back that we have historically.

Okay Perfect and then just quickly looking at the rest of 2023, if you could just provide more color on how youre looking at the mix of proprietary and third party playing out.

Specially with the sort of supply chain tailwind as you've talked about.

Yes, one second.

Bearings here.

So sameer.

I think as we sit here today.

Talked about the mix of product or once you guys.

Over the last couple of quarters is that would be.

Kevin.

Got it.

Generally that stays pretty consistent we.

We don't expect to see much movement remember in Q4.

The percentage of three P product pick up a little bit a lot of other consumer products are doing and have your discounting in holiday promotions. So we do see a little bit we continue to look to see on a same store basis, a slight increase in our one P mix. However, as we add more local stores that always drags it down a little bit and so we expect over the next couple.

For years as we continue to grow our store base to see a small decrease in the.

One P mix, but we don't expect that to move dramatically from where it is right now.

Okay. Thank you guys. So much thank you.

One moment for our next question.

As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Please press star one one again.

Please standby, while we compile the roster.

Okay.

As a reminder to ask a question you will need to press star one on your telephone.

Okay.

Okay, great. If there's no more questions I think we are fine to end the call.

Let me just quickly thank everyone actually.

Joining us today.

I want to especially thank our our team members for their ongoing contributions as well as our network of incredible integration partners, who continue to do great work, creating amazing experiences for individuals and businesses everywhere and I'd like to also thank our investors for.

For your continued support.

We'll talk to you next quarter.

Great. Thank you for joining us today for snap ons fiscal second quarter 2023 earnings Conference call you may now disconnect.

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