This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk12: Good afternoon. Welcome to SNAP-1 Holdings Corp Fiscal First Quarter 2022 Earnings Conference Call. At this time, all participants are in 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.
spk11: Great. Thank you, Operator. Good afternoon and welcome to SNAP-1's Fiscal First Quarter 2022 Earnings Conference Call. As a reminder, this call is being recorded. Joining us today from SNAP-1 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. 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 annual report on Form 10-K for the annual period ended December 31st, 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, May 12, 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.snap1.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. With that, I'll now turn the call over to our CEO, John Heyman. John?
spk06: Eric, thank you. Welcome, everyone, and again, thanks for joining us this afternoon. To start today's discussion, I will review recent highlights and updates, and then I'll turn the call over to our CFO, Mike Carlett, who will discuss our financial results for the quarter, as well as provide an update on our outlook for the remainder of 2022. After that, I'll share some closing remarks and then we'll open the call up for questions. As a brief reminder to everyone listening here at SNAP One, we provide a smart living platform that empowers professional integrators to deliver joy, connectivity, and security to end consumers on a global scale. As a leading distributor to this industry, 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 integration partners with our proprietary software platforms and digital workflow solutions to allow them to successfully serve their residential and commercial customers across the project lifecycle. The smart living opportunity is large and mostly untapped. With our entrenched and growing integrator network, we believe we're strategically positioned to power the smart living revolution. As demand for smart living solutions continues to rise, we anticipate an increasing number of end consumers We'll rely on professionals to get the job done. In turn, we're positioning our integrators and our company to capitalize on the tremendous and durable growth opportunity in front of us. It's within this robust secular demand environment for smart living experiences that we see our business continuing to propel forward. Clearly, there's uncertainty that exists in the markets. including inflation, the war in Ukraine, supply chain constraints, and rising interest rates. However, we believe we are still operating in a favorable macro and micro backdrop. Despite the economic uncertainty, our integrator partners remain busy and demand remains strong. Macro indicators such as housing starts, building permits, housing completions, and residential construction backlogs even if down modestly on a sequential basis, are robust and positioned favorably relative to historical averages. Additionally, repair and remodel spend is expected to expand, and the backdrop for housing at the higher end of the market remains more insulated than the broader market. Specifically, the demand for luxury single-family homes remains strong. Inventory remains below traditional levels. and that provides a sustainable runway of homebuyers seeking luxury properties in which our solutions are frequently installed. The secular trends surrounding population movements, housing shortages, and the proliferation of smart living gives us confidence and a favorable long-term growth outlook. Furthermore, commercial business continues to rebound post-COVID, and our integrators have shown the ability over time to successfully pivot their project types in different market environments. With this backdrop, we aim to help these integrators enhance their capacity and to grow profitable businesses. We do this through investing in our business platform, which provides needed infrastructure and otherwise makes life easy for the small businesses we serve. Further, we complement this business platform with a product platform, that supports easier installations, higher profits, improved reliability, and enhanced end consumer satisfaction. We believe that no one is investing in these types of platforms that will drive the future success of this industry like Snap One. Let me now take a minute and reflect on the past quarter. These are indeed unprecedented times, but our unwavering commitment to our integration partners has remained stalwart. Our objective every day is to ensure that our integrator partners have the products they need to be successful as they meet the continued robust demand for smart living solutions. Coming off of Banner 2021, we continue to capitalize on the growth opportunities in front of us this past quarter. Beginning with the top line, we generated over $277 million in net sales during the quarter, an increase of 25.8% from the comparable year-ago period. Our efforts to meet demand have resulted in additional costs to the business, primarily from inflationary pressures and supply chain constraints. However, our skilled execution allowed us to deliver adjusted EBITDA of $23.6 million an increase of just over 1% from the prior year on an as-reported basis. This included approximately $2 million in public company-related expenses that we did not incur in the prior year. Excluding those expenses, adjusted EBITDA increased 10% year over year. We also successfully executed across a range of strategic initiatives, including the following key accomplishments. First, in January, we announced the acquisition of Staub Electronics. As our longtime distribution partner in Canada, the acquisition was a natural way for us to deliver more product choice, faster fulfillment, and superior support for professional integrators across Canada. This strategic acquisition accelerates our penetration of the Canadian market, and it positions us for long-term growth in this important geography. Second, effective January 31st, we launched our all-new partner rewards program, which unifies the previous SNAP-1, Control-4, and local distribution loyalty programs under a single program. We believe the industry's most rewarding program just got even better as SNAP-1 integrators now earn rewards on every purchase. Additionally, the unified points-based program is a critical step forward in enabling us to deploy digitally enabled strategies to expose our integrators to new products and drive wallet share growth. Third, we were humbled to earn 17 awards across 22 categories in the CE Pro 2022 Quest for Quality Awards announced in March. Snap won 17 honors, were more than twice as many as the next most awarded competitor and reflect the outstanding service we deliver. Thank you to our partners for your vote of confidence in SNAP-1 and to our team members for your exceptional service. Fourth, we continue to build our omnichannel presence with the opening of a new local branch to serve the Washington, D.C. metro area, bringing our domestic footprint to 31 local branches. Our local branches strengthen our existing integration relationships They 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. Fifth, we bolstered our senior leadership team through the appointment of our new chief information officer, Manit Singh. Manit will focus on the strategic design and implementation of business infrastructure to enable scalable and efficient growth. We're thrilled to welcome Mindy to our team. Our success in Q1 continues to reflect the strong execution against our proven playbook to drive sustainable long-term growth. As a reminder, this growth strategy remains rooted in five key pillars. Number one, increase our wallet share with existing integrators. Two, 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 five execute on strategic m a we continue to make progress on all these fronts as we look to 23 and beyond let me uh now comment briefly on our outlook for the rest of the year and then i'll turn the call over to mike as i spoke to earlier While supply chain challenges persist, we've strategically deployed our balance sheet and executed well to circumvent these near-term hurdles. Our team has been hard at work optimizing our approaches to component resourcing, inbound logistics, and air freight. Our engineering teams have worked tirelessly to re-engineer products based on component availability. Our sales and support teams work diligently to find available products to quickly and efficiently meet our integrators project needs. Thanks to their efforts and sustained demand from our integrators, we've continued to drive strong performance, positioning us firmly to meet our objectives for the year. Notwithstanding the efforts of these teams, these challenges come with added costs as have been well publicized in the general economy. Fortunately, we've utilized an evolving pricing strategy in a balanced manner as we assess rising costs, competitive forces, and the affordability of solutions the industry offers. Earlier this week, we announced a price adjustment on our proprietary product portfolio to address rising supply chain and inflationary cost pressures and to support our investments to further strengthen our leading supply chain capabilities. The approximate 8% blended price adjustment has an effective date of June 6th and is in line with recent competitive moves. We implemented this price adjustment in a way that protects our partners, including by providing advance notice and by making corresponding adjustments to MSRP. Most importantly, demand for our products and services remains high, and we've entered 2022 with strong momentum. Due to continued healthy trends in smart living adoption and durable residential and commercial uptake, our integrators remain extremely busy, with many booked out months in advance. We remain confident in the resiliency of our integrators and our own business, and we look forward to expanding our share of a rapidly growing market while remaining prudently conservative with our expectations. With that, I will turn the call over to Mike Carlett, our CFO. to discuss our first quarter results and updated 2022 outlook in greater detail. Mike?
spk07: Thanks, John. So now we'll turn to our financial results for the fiscal first quarter, which ended on April 1st of 2022. Net sales in the fiscal first quarter increased 25.8 percent to $277.4 million, up from $220.5 million in the comparable year-ago period. The growth in net sales during the quarter was driven by strong overall demand across geographies, markets, and product categories. Growth was also driven by the benefit of the acquisition of access networks, which was acquired in Q2 last year, the partial quarter benefit of Staub Electronics, which, as John said, was acquired in late January this year, and the continued ramp-up of local branches that were opened in the previous year. Additionally, we benefited from the cumulative impact of price increases taken in the past year, including actions in March and August of 2021, and most recently in February of 2022. While supply chain challenges represented a low single-digits headwind in the quarter, we continue to take proactive measures to mitigate and deliver for our integrators. Contribution margin, which is a non-GAAP measurement of operating performance, increased 14.7 percent to $105.1 million or 37.9 percent of sales in the fiscal first quarter, which is up from 91.6 million or 41.5 percent of net sales in the comparable year-ago period. The increase in contribution margin dollars was primarily due to net sales growth. The decrease in the contribution margin as a percentage of net sales was primarily related to our local branch expansion and growth strategy, which drove a change in product mix as our local branch footprint skews towards third-party product sales. As a reminder, third-party products typically have a lower contribution margin as a percentage of net sales relative to our proprietary products. The strategic expansion of our local branch footprint and curated third-party product portfolio remains an important part of our value proposition. We seek to provide our integrators with a one-stop shop for their product needs, while enhancing integrator loyalty and capturing incremental contribution margin dollars. Contribution margin as a percentage of net sales also declined relative to the comparable year-ago period due to increased componentry and logistics costs related to the broader industry-wide supply chain challenges. These contribution margin rate pressures were partially offset by the pricing actions that have been enacted over the course of the last year. Our selling, general, and administrative expense in fiscal first quarter 2022 increased 14.8 percent to $86.5 million, which is 31.2 percent of net sales, which was up from $75.4 million, or 34.2 percent of net sales in the comparable year-ago period. The increase in SG&A expenses during the quarter was primarily due to increased costs associated with becoming and operating as a public company, as well as ongoing investments to support strategic growth initiatives, the acquired cost of access networks and STAB, which we did not own in the prior year fiscal first quarter, and finally, the recognition of equity-based compensation expenses. Over the long term, we expect to achieve operating expense leverage as the business scales and we realize the efficiencies of a unified operating platform. Our net loss totaled $2.3 million in the first quarter compared to a net loss of $6 million in the comparable year-ago period. Adjusted EBITDA, which is a non-GAAP measurement of operating performance, increased 1.1% to $23.6 million, or 8.5% of net sales, in the first quarter of 2022, compared to $23.3 million, or 10.6% of net sales, in the comparable year-ago period. After normalizing adjusted EBITDA for the approximately $2 million of public company-related expenses that we incurred in the quarter, comparable year-over-year growth in adjusted EBITDA was 10.1%. The adjusted EBITDA growth in the quarter was primarily attributable to net sales and contribution margin growth offset by the increased SG&A expenses. The decrease in adjusted EBITDA as a percentage of net sales in the quarter is primarily attributable to the contribution margin as a percentage of net sales declining on a year-over-year basis. Adjusted net income, a non-GAAP measurement of operating performance, increased 18.6 percent to $10.7 million or 3.9 percent of net sales, up from $9 million, or 4.1 percent of net sales, in the comparable year-ago period. Free cash flow, a non-GAAP measurement of operating performance, totaled negative $26.3 million in the three months ended April 1, 2022, compared to negative $25.9 million in the comparable year-ago period. The decrease in free cash flow was primarily attributable to net cash used in operating activities and an increase in purchases of property and equipment compared to the comparable year-ago period. Net cash used in operating activities was driven by the strategic use of our balance sheet to protect against supply chain uncertainty, resulting in the use of networking capital, including increases in inventory. At the end of the fiscal first quarter of 2022, cash and cash equivalents were $25.1 million. In addition to the financial metrics we've reported to date, we'd like to take this time to formally introduce additional revenue disaggregation disclosures and a few key performance indicators, or KPIs. Our goal with these metrics is to provide investors with enhanced visibility into our performance. Previously, we disaggregated revenue by geography between the United States, or domestic, and international. We are now further expanding our domestic revenue disaggregation to distinguish between domestic integrator revenue and domestic other revenue. Domestic integrator revenue represents the majority of our business today and is transacted on a direct-to-integrator basis, while domestic other revenue reflects recently acquired entities and revenue generated through managed transactions with non-integrator customers, such as national accounts. We're also introducing a new revenue disaggregation to categorize our sales by prototype between proprietary and third-party products. A proprietary product is one where SNAP-1 has developed the products and services internally and is distributed under one of SNAP-1's proprietary brands. A proprietary product typically generates a higher contribution margin rate to SNAP-1 relative to a third-party product. All the revenue disaggregation disclosures will be reported on a quarterly basis going forward. So in Q1 2022, proprietary product represented 67.7% of net sales, down from 69% in Q1 of 2021. The decrease in proprietary sales mix is driven by the growth of third-party product outpacing the growth of proprietary product, primarily related to our strategic efforts to expand our local branch network, where we typically sell more third-party product than proprietary product. In addition, to provide enhanced visibility into key operating metrics, we are introducing new KPIs regarding the count of transacting domestic integrators and the spend per transacting domestic integrator. These metrics will be presented annually on a fiscal year end basis. In fiscal year 2021, we transacted with approximately 20,000 domestic integrators who spent $41,500 on average. On a year-over-year basis, the number of transacting domestic integrators and spend per transacting integrator increased 11.7% and 8.4% respectively. Over time, we have demonstrated a consistent ability to grow both our number of domestic integrators as well as our spend per domestic integrator. Now, before I turn the call back over to John, I'll take just a few minutes to provide an update on our financial outlook for the remainder of the year. As a reminder, Snap-on 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 2022 revised guidance considers our fiscal first quarter outperformance, our recently announced price adjustment, which is effective June 6th, and our anticipation of continued supply chain headwinds and economic uncertainty. Taking these factors into consideration, 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, and an increase of 17% to 19% after adjusting fiscal 21 to remove the impact of the 53rd week. The upwardly revised guidance represents an increase of $20 million and $10 million to the low and high end, respectively, of our initial guidance range that we communicated in March in conjunction with our fiscal 2021 earnings. We believe the contributing factors to our 2022 net sales growth on a 52-week basis are as follows. Twelve percent to 14 percent of our growth will come from organic growth, which includes volume, historical and planned pricing actions, as well as the impact of new local branch openings. 5% of the growth will come from the impact of recently completed M&A, including access networks and style electronics. On an as-reported basis, the lapping of the 53rd week in 2021 represents approximately 2% net sales growth headwind. We expect adjusted EBITDA to range between $116 million and $121 million, representing an increase of 5% to 9% compared to the prior fiscal year on an as-reported basis. Presenting 2021 on a 52-week adjusted basis and annualizing for a full year of public company costs of approximately $8.4 million, our 2022 adjusted EBITDA guidance would represent a year-over increase of 10 percent to 15 percent. This upwardly revised guidance represents an increase of $2 million and $1 million to the low and high end, respectively, of our initial guidance range which we communicated in March in conjunction with our fiscal 2021 earnings. Overall, we remain highly confident in the financial health of our business, as well as our ability to sustainably grow for the foreseeable future. And one final update before I pass the call over to John. As stated in today's earnings press release, we announced that the SNAP-1 Board of Directors has approved a stock repurchase program that authorizes the potential repurchase of up to $25 million of our common stock through the end of 2023. We believe our entrenched relationships and the reoccurring spending patterns of our integrators yields an attractive cash flow generating business model. These dynamics enable us to continue to prioritize reinvestment in the growth of our business, as well as the other areas previously noted as the main drivers of our capital allocation strategy. It is our view that providing our leadership with the additional optionality to maximize returns for shareholders through both our existing operations as well as in the capital markets is a best practice. To the extent we feel that our company's shares present a compelling investment opportunity at their current valuation, we may repurchase our common stock in the open market from time to time in amounts, at prices, and at such times as the company deems appropriate, subject to market conditions as well as federal and state laws governing such transactions. We expect to fund the repurchases from our existing cash balance, including cash generated from operations. That completes my summary. I'd now like to turn the call back over to John for additional comments. John?
spk06: Thanks, Mike. A few closing thoughts, and then we'll take Q&A. Number one, With the strong, sustained industry-wide demand we see, we're continuing to focus on supporting our integrators to capitalize on the opportunity in front of us and them. And that includes new product launches, software investments, and platform developments. That's our growth strategy, and it remains our North Star. Two, our teams continue to work diligently through supply chain and through logistics challenges. And we feel we have the processes in place to handle whatever obstacles might be on the horizon. Priority 1 remains delivering for our integration partners and ensuring they can keep their projects moving, while Priority 1A continues to be doing that in a manner that protects our partners and our company's financial performance using price, MSRP, and key productivity levers. As we implement an additional price adjustment in Q2 of this year, we do so with the ability to deliver on those priorities in mind and with the belief that broader challenges will subside over time. Three, we're proud of our results to date as a public company. We believe we are establishing a track record of consistently delivering on our financial commitments and will continue to focus on driving shareholder value over the short and long term. And finally, we remain bullish around our long-term operating model, notwithstanding the noise of the current macro environment. The scale and the platforms we're investing in will drive better solutions for the end consumer, more capacity for the integrator, and growth for Snap-1 in a way that increases operating margin over time. Our actions in Q1 have set us up for what we expect to be a year of healthy growth for Snap-1, and exciting times are ahead for our amazing team, our integrators, and then consumers. With that, we'll open the call up for Q&A.
spk12: Thank you. At this time, we'll open the line for questions from the company's publishing analyst. The company requests that each participant limit their comments to one question and one follow-up. If you have a question or a comment at this time, please press the one key on your touch-tone telephone. If you wish to be removed from the queue, please press the pound key. Our first question comes from Eric Woodring with Morgan Stanley.
spk10: Hey, guys. Good afternoon. Congrats on the very strong quarter. You know, you guys mentioned the 17 awards you won in the CE ProQuest for Quality Awards. Can you guys just give us some additional detail, maybe some of the categories where you won, maybe some of the categories that you didn't win? Just help us better understand where you're getting recognized. Obviously, two times your nearest competitor, but we'd just love to see or better understand where you're actually winning in those categories. And I have a follow-up.
spk06: Thanks, Eric, and good afternoon. I'd say there's two sets of big awards that the industry offers. One are more product-oriented, and one are more service-oriented. The ones that are more product-oriented go to manufacturers of products. The ones that are more service-oriented go to distributors. So the Quest for Quality awards are traditionally awarded to distributors. There are some manufacturer elements in there, but traditionally distributors. Where we are revered are areas like tech support. Our net promoter score continues to be over 90. I think our team is the finest technical support organization in the world. When a tech's on a ladder and they need support and they call us, we answer the phone and solve their problem the vast majority of the time. I would say our supply chain response has been revered this past year. I'd say that manifests itself primarily in in-stock availability. So those are a couple of big areas, but there's other areas as well with things like our rewards program, best in class, our website, best in class, Brick and mortar distribution, best in class. Our warranty programs, best in class. So these are things that are really important to the integrator and allow them to stand behind the service they provide to the end customer. Areas we didn't win, I actually don't have at the tip of my tongue. Mike, do you have anything to add on that?
spk07: I think a couple around like social media presence, maybe around lead generation for the integrators, which is an area of focus for us that we talk about doing in the future. But I think the ones where we don't win are areas that just haven't been focused for us. Yeah, thank you.
spk10: Okay, that's perfect. I love that color. Thanks. And then maybe just as a follow-up, I love that you guys have belief in this story. You're obviously starting a buyback program. You know, on the other end, you know, you ended the quarter with $25 million of cash and equivalent. So just help us understand how we should think about SnapOne balancing perhaps the desire to buy back stock at attractive levels with the need to utilize cash flow to invest in the business, all while obviously trying to bring your leverage ratio down to kind of the three times target you've communicated in the past.
spk11: Yep, thanks, Eric. This is Eric from the SNAP One team. I think as we think about the repurchase program, I think, number one, we have tremendous amount of confidence in the cash flow generation profile of the business and believe we'll continue to generate sufficient cash flow to execute on the program. I think we also sized it appropriately as we think about kind of execution capabilities here over the balance of 22 into 23. I'd also remind everyone that our capital allocation priorities really first and foremost are continuing to invest in our organic growth of the business, followed by a creative M&A as well, which remains an important part of our story. And then we'll continue to look for opportunities to execute opportunistic share repurchases kind of as our number three. Priority. And so we think overall as stewards of capital, it's prudent to have a share repurchase program in place, but we'll use that judiciously as we look at trading volumes of the stock and stock price levels. Super.
spk10: I appreciate the color, Eric. Thanks, guys.
spk06: Yeah. I think especially when the stock's at somewhat ridiculously low levels.
spk10: Totally understand. Thank you, John.
spk12: Our next question comes from Paul Chung with J.P. Morgan.
spk02: Hey, guys. Thanks for taking my question. So nice to see the KPI disclosure coming back here on, you know, integrator spend and integrator count. You know, how do we think about kind of the relative strength between those two metrics for, you know, kind of the 22 outlook? I assume, you know, with the price increases, maybe the spend is a bit stronger, but You know, if you could also comment on kind of the local branch opening plan, you know, for the second half. You know, it looks like the branch openings obviously drive a nice uptick in contributions. So comments on both those would be great. And then I'll follow up.
spk07: Sure, Paul. So if we think about last year for the numbers that were reported out, and we think about domestic integrator sales growing about 21%, You know, that growth really was split not quite evenly between the growth in both, but domestic integrators grew 11.7%. So, in 2020, we had 17,900 domestic integrators, which was, you know, right around 20,000 in 2021. That's a rounded number, but it was within 30 or 40 of 20,000 in 2021. So, we saw 11.7% growth. And in our spend per integrator, it grew 8.4% last year, obviously a component of that being pricing. As we look at this year with the price actions we took last year and the price actions we're taking this year, we would expect the spend per to be a bit more. You know, we're not disaggregating that in our guidance, and we're not guiding to the specific book numbers. But we think in our long-term growth algorithm, both of those levers are really important. Obviously, in this year with the activity around pricing and the inflationary pressure, we're all feeling that that's going to have some impacts on it. But over the long term, we expect both of those metrics to grow, you know, both be big contributors around 50-50 of how we think about the growth of the business. As far as the store opening plan, you know, we continue on our path of opening around 10 stores this year. You know, there will be a couple at the end of the year. There's a couple of real estate things. So it might be nine. It might be 11 when we get to the end of the year and see how many we actually get open. But somewhere around 10 is our goal for the year. And we think we'll be pretty close to that, you know, a little bit less than one a month. as we look at the openings. And yes, they do clearly drive in those markets, both integrator acquisition and the ability for spend perp, because it creates more buying opportunities for the integrators in those markets.
spk02: Great. And then my follow-up on the pricing adjustments, you know, since you're kind of telegraphing some increases here for early June, are you seeing kind of a pickup here in 2Q to kind of get ahead of some of those increases? You know, I assume the... The loss in the channel is quite high as well.
spk06: Yeah, we just announced the increase on Monday of this week. So we typically won't see the impact of what you would think of as some pull ahead until we get closer to the effective date of that price increase, which is June 6th. Some integrators will take advantage of that and use it to stock. But what I'll remind everyone on the call is, the vast majority of our integrators actually don't have warehouses. So it's hard for them to do anything but a fairly small amount of buying ahead of that. And so we'll expect that to happen in early June. We probably won't get much of the benefit of the price increase at all this quarter, and we'll look to start to see that in the second half of the year.
spk02: Okay, great. Thank you. Thanks, Paul.
spk12: Our next question comes from Stephen Vultman with Jefferies.
spk13: Hi, guys. Thanks for taking my question. Always good to see more things kind of broken out here, but then you get questions on them. So I'm curious, as you show us, you know, the spend per integrator up 8.4%, I may be comparing apples and oranges, but it looks like that was probably almost all price based on the pricing data that you gave. So I'm curious, did the spend per integrator kind of go up on a unit volume basis?
spk07: Yeah, I think, Paul – Steve, I'm sorry. As you look at last year, remember the supply chain challenges that came in the back hats of the year. So you're right that last year I think of that 8.4% spend per integrator. Like three quarters, it would be attributable to the pricing increase we did. But you also have to think about the impact on volume of the supply chain challenges, which we quoted last year as being in the mid-single digits impacts on our top line, which would all go right almost 100% to that volume piece of it. So absolutely spot on with that observation, but very much driven by the supply chain challenges that we have.
spk13: Okay, all right. And actually that was kind of my next question was around the supply chain issues. It looks like some of the West Coast port situation is improving a little bit. Are you seeing some relief on the supply chain side? And do we think that's kind of going to get better over the next two or three quarters?
spk07: Yeah, so I think when we talk about supply chain challenges, it really falls to two buckets. One is the logistics challenges of, you know, the West Coast ports clearing the – clearing out there, the port delays, potential strikes on the west coast that we think won't happen but we keep an eye on. And then the other side of supply chain challenges is componentry and manufacturing, availability and capacity that's out there. What we've seen as a shift last year, most of our challenges across the supply chain were logistics-based. You're absolutely right, most of that has cleared at this point. We don't think we're seeing much at all in the way of supply chain challenges from a logistics standpoint. What we are seeing is a couple dozen SKUs that are impacted by chip shortages, componentry shortages, manufacturing capacity shortage. It doesn't impact a lot. We have over 2,400 proprietary SKUs, and this is impacting dozens, but there are some SKUs that are pretty important and pretty significant volumes. We're managing that closely. We're making sure that we're staying on top of that. That's where we think those challenges will continue through this year. We don't think they're going to get worse. It's a little bit like whack-a-mole. You know, you take care of one, you figure out how to engineer around a chip that we don't have, and then you hear about another chip that impacts three other products that you have to think about how to engineer around or find a replacement for. So our engineering teams, our supply chain teams, paying very close attention to it. We think it's going to continue to be a low single-digit headwind through this year. We think, you know, as we hit the end of this year, we expect it to get better, but obviously there's a lot of uncertainty out there as we look forward. You know, if last year was a mid-single-digit impact, this year we view it as a low single-digit impact, and we think that will continue for most of the year, but not on the logistics side, very much on the sourcing side.
spk13: Got it. Understood. Thank you.
spk07: Thank you.
spk12: Thank you. Our next question comes from Chris Snyder with UBS.
spk03: Thank you. And appreciate all the detail in the slides like everybody else. So obviously a lot of concern in the market around the macro. Can you just provide some color about how the business has performed in prior market downturns or periods of declining or pressure residential new construction?
spk06: Sure. You know, we now have the benefit of going through the 2007, eight, nine cycle, the current cycle, and everything in between. And obviously, there have been really good times during those 15 years and some tougher times, our business. And I would say control force business before the acquisition has grown through every cycle, there might have been a short interruption. with Control 4 that I frankly attribute to product transition, not to the economy. And I think the reason for that, Chris, is the 07, 08, 09 crisis was so severe that it drove integrators to pivot their capabilities to not just residential but commercial projects. And as a reminder, you know, roughly a third of our business, even through our residential integrators, goes into commercial establishments. And so generally speaking, when new construction is going really well, that's easy money. A home or an apartment building is being built, technology has to go in it before the homeowner moves in. And when the money isn't so easy, the integrators have a very large install base. They have a network of homeowners that they've done installs that have businesses that they'll work for, whether it's the lawyer's conference room, the dental office, the restaurant and bar. And they've shown themselves quite adept at pivoting their capacity. Our commercial business, which was really in tough shape during the COVID years, is outpacing the growth of the rest of our business right now. And so to the extent in certain geographies you might see resi slowing down, our integrators show themselves adept at going into commercial enterprises. We feel really good about that. We have over time continued to refine our product portfolio to have more commercial oriented products. That's both on the proprietary side as well as the third party partner side. And so that's why we feel really good even in kind of the current concern around the housing market. Our integrators, just one last comment. Our integrators are incredibly busy right now. We survey them all the time. We subscribe to surveys that third-party companies do. There has been no decline in their outlook or the amount of time they're booked out. And so, you know, I'll pin a counterargument real quick, which is, you know, in this economy, if labor softens up, it might be easier for them to expand their capacity because they're booked out. They're booked out months in advance.
spk03: I appreciate all that, Colin. Really helpful. Thank you. And then I guess for my follow-up on the guidance, you know, if I just look at the back half 8% price increase on the portfolio products, you know, the back end of all math puts me at maybe like a 3% tail end for the full year sales. I would expect some flow through there. I need to talk But when I look at the guidance raise, it's at less than 1% at the midpoint for both sales and EBITDA after a pretty strong key one. And it doesn't seem like the company's view is that supply chains are getting worse. So I guess my question is, you know, is there an offset here? Is it price realization? Is there something I'm missing? Any color here on the moving parts would be helpful.
spk07: Thank you. Joe Nye- Sure. And so, it's definitely price, you know, it's not price realization. We expect to get the price, but our costs continue to rise. And so, while we're raising our price offset, it's not just the costs that we've already incurred that are reflected in the numbers, but also continued costs that we are looking forward, we're hearing from our suppliers that we're going to be impacted going forward. And so, the price adjustment that we're putting in today not only covers, you know, the degradation of margin, contribution margin that we saw in Q1, but also is there for anticipated additional price or cost increases that we know are coming down the pike. So we're trying to be appropriately conservative in our guidance as we look out there. We're trying to think about the uncertainty that's in the market. We're trying to be prudent with the numbers we're putting out there for everyone. We feel really confident with our numbers, but that price increase that we're putting in there is going to be offset by the continued cost pressures that are out there. Thank you.
spk12: Our next question comes from Keaton Mimtor with BMO Capital Markets.
spk04: Thank you, and good afternoon. Hey, Mike, so just on that point, to clarify, the 8% price increase, does it cover the dollar cost and the rate of margin or just the dollar cost?
spk07: We've done it in a way that should protect our contribution margin and our operating margin. So we're anticipating the costs that are out there. We're trying to protect our integrators margin with our MSRP and trying to protect our margins so that we all can continue to invest in this industry. And so it should protect our margin rate. Again, it's an uncertain world we're all in, so I'm not going to promise you it's going to be spot on, but at least based upon what we know today and what we can anticipate happening. we should be able to protect that margin rate. I'll be honest. We thought when we did the one in February, we'd do the same thing. We announced that price increase in December. We basically worked on it in October, and we realized quickly it didn't cover it as the world has continued to evolve and costs have continued to change and the world continues to evolve. So we'll pay a lot of attention to it, and we'll keep adjusting as needed going forward and making sure our integrators can pass that along to their customers as well.
spk06: I think one of the things we learned at the end of the, as we did the last pricing increase at the end of last year for kind of effective date, February 1st, was we thought the supply chain was going to turn around towards the middle of this year as most in the economy did. We did not add a buffer of any kind of magnitude and We've paid the price in the first half of the year a little bit on the cost side. I think as we look at this current price increase that we've just announced, we have added a buffer. And part of the reason for that is our integrators understand what's happening out there, but it's hard for them to continue to absorb a high frequency of price increases. they have to go update their catalogs. They have to go out and revise the proposals they have. And so, the feedback from them has been, you know, less around any kind of price increase itself and just more about don't keep coming back to us if possible. So, the magnitude of this price increase considers a buffer so that we won't have to keep coming back to our integrators. Obviously, if costs continue to rise, we'll have to reconsider that.
spk04: Gotcha. Okay, now that's helpful context. And just as my follow-up, can you talk a little bit on what you all are doing to, you know, kind of diversify the supply base so as to kind of, you know, mitigate kind of, you know, future sort of challenges on the supply chain side?
spk07: Mike?
spk05: Sure.
spk07: And so, you know, I think back a number of years, we had a lot of our spin coming out of China. I would say in our proprietary products, it's still very Asia-based with over 95% of our supply chain of our proprietary products coming out of Asia, but we really have diversified away from that China reliance. So our spend in China is now down to a third of our proprietary products. About 20% of the spend is in Taiwan. And then we flex to a lot of surrounding areas, Vietnam, Malaysia, to diversify away from reliance on one country. It is very reliant on Asia. We have diversified the ports we're coming out of as well, so we're not totally dependent upon Shanghai or other shutdown areas. Only 1% of our containers have been impacted by the Shanghai shutdown, which has been great. We've flipped some shipments to our surrounding ports. We're using other modes of transportation, barges and air, which clearly is one of the costs that we're seeing in our margins is those alternative transportation sources that we're utilizing. You know, listen, for the products we make, Asia is still the place to go manufacture them. We look at alternatives. We've, you know, evaluated Mexico. We brought some things back here domestically. But I think for the near to midterm, we're still going to be looking to that area of the world as the primary area that we source product from. But we continue to diversify away from reliance on any particular country within that region.
spk04: Got it. That's very helpful. I'll turn it over. Good luck for the rest of the year.
spk12: Awesome. Thank you. Our next question comes from Adam Tindall with Raymond James.
spk01: Okay, thanks. Good afternoon. John, I just wanted to start on the partner rewards program that you implemented at the end of June. I think of that as sort of the bucket of wallet share opportunity to consolidate more on the SNAP-1, I would imagine. Just wondering if you may maybe speak to early observations of the first few months and activity you're seeing there. And you alluded to some opportunities moving forward, some digital initiatives that sounded interesting. I wondered if you could
spk06: expand on that as well thanks yeah i think that uh thank you i think um the there were two components of the rewards design component number one was the design of the program itself and how we rewarded purchases based on a variety of uh characteristics of the products and the partner and we spent a couple of years redesigning that um the second part of it was actually um unifying our view of a business partner because control ford did business with 5 000 partners snap did business with well over 10 000 and then our local entities and there were four different companies that made up our local entities they may have done business with that exact same partner And so we had a lot of crossover, so we had to unify the view of that partner and what they were buying, et cetera. So at the end of last year and early this year, we were able to bring the new rewards program together and the unified view of the partner. And in traditional SNAP fashion, remembering that this market is highly fragmented with a lot of small businesses and you can only reach a small portion of the market with conventional sales personnel. We have relied on our website historically to understand purchase behavior by partners and expose them to new products we have and products that we're introducing and get them to try it. So it is inefficient to do that with a traditional feet on the street model. And so now that we've brought that together, we can start to target individual partner behavior and introduce products and run some of the conventional plays that we've run in the past. There is one missing piece to this though, Adam, which is the actual convergence of the website. First and foremost, the Control4 and the SnapAV website. And that will start later this year. um and so as we bring those things together that will be very important in terms of driving kind of wallet share opportunities there's a second component of that in terms of how we've created the uh engine um the rewards engine itself and i don't want to talk to that too much because this is a public call but i think that we can get um uh drive even stronger incentives for our integrators to adopt our products. So, really excited about all of those things starting to come to life. In the early days, we are seeing results as expected. And one thing I want to point out is we're seeing costs as expected. And so when you launch a big new loyalty program, one of the things you're concerned about is not just the revenues you're going to drive, but also the costs that go against those revenues. And so our team had did a great job modeling all of that. And I think we're going to be able to continue to align our partners around higher share of wallet, better economics for them at a cost level that meets our expectations.
spk01: Got it. Makes sense. Looking forward to that. Mike, maybe just as a follow-up on cash flow and capital structure, I think you had a use this quarter just over $20 million and understandably investing to help the supply chain situation. But you've got about $25 million on the balance sheet, a little over $400 million of net debt. Just wondering how we can think about cash flow going forward or how investors can think about cash flow. I presume, based on John's commentary around ridiculous valuation, that raising equity is probably off the table. So just how you're thinking about cash flow and capital structure going forward. Thank you.
spk07: Sure. So we continue to target, you know, like we've always said, that sort of three times leverage in the business. You know, I don't know if we'll ever actually get to three times leverage because as we get close, we're going to sort of take it back up to fund something as we go forward. But, you know, three is our sort of target, you know, outlook as we think about the leverage piece. You know, we did deploy a lot of cash this year, this quarter and this year. If you look, it's not just an inventory. You can see a lot of inventory growth. It's also, as you look to that prepaid and other current assets, you can see a lot of deposits and prepayments and a number of other things that we've had to do to protect the supply chain. So we think that, you know, that piece of it we don't expect to grow. We're managing inventory at about three times turns right now, which is in line with our historical averages. Obviously during COVID, we had some things jump around and we've got back to sort of the normal run rate. The stop acquisition put, you know, four or $5 million of inventory on the books associated with that. In Q1, it's typically our biggest use of cash. We pay the bonus payment in Q1. We have the Chinese New Year that we typically build up inventory for. So generally, our cash flow cycle is going to see the most use of cash in Q1, even during normal times. And then we'll be a much higher cash generation during the rest of the year. And we expect that to continue. So we're very confident in the cash flow of the business. We think inventory is now in the right place. for supporting our integrators, you know, despite the fact that there's a couple dozen SKUs that are driving us all crazy, that we're going to continue to manage. And we think that we'll be generating, you know, the appropriate amounts of cash going forward off of our EBITDA. CapEx is still, you know, for the year going to be in that $15 to $20 million range. I think we mentioned we're moving our headquarters in Salt Lake City to a new location, which will, depending on timing, is, you know, $5 million plus or minus. And we think that'll be this year. It might bleed into next year. But other than that, we feel really good about the cash flow outlook.
spk01: Got it. Very helpful. Thank you.
spk12: Our next question comes from Keith Hughes with Truist.
spk08: Thank you. At the end of the release, you discussed the growth and the number of domestic integrators transacting with you and then the spend. It spends about 8.4%. Is that all driven by inflation, or are you seeing something about the math there that's hiding some growth of realizing integrators increasing spend?
spk07: Yeah. So, hey, Keith, if you think about last year, we did two price increases. One was about 1.2% in March, and one was 5.8% plus or minus right around 6 in August. And so you sort of normalize those two things out. You would say price in last year's numbers, you didn't get a full year impact of all that. is somewhere around 4% or 5%. And so if we think about 8% growth in spend per, you would say somewhere around half of it is probably directly related to price, and the other half is volume associated with the average spend per integrator, which drove that 8.5% increase. And then, again, as you just pointed out, 11.7% growth in the number of transacting integrators. This year is going to be complicated. We have those price increases last year. We have the one we did in February. We'll have the one we did in June. So the numbers will obviously be very price-impacted this year, but for last year, about half of the growth in spend was, we think, price-related.
spk08: Okay. And final question, given the timing of the release in June, I assume there will be still in the second quarter some contribution margin pressure from inflation. Is that correct?
spk07: Yeah, absolutely. We would expect to see maybe a slightly better contribution margin in Q2, but nothing significant. And most of the benefit of that price increase will be kicking in beginning of Q3. Okay. Thank you very much.
spk12: Thanks, Keith. Our next question comes from Ryan Merkle with William Blair.
spk00: Hey, thanks. Just wanted to follow up on that last point on gross margin. So, when do you claw back the full 230 basis points of the negative price cost? Is that 3Q or does it take until 4Q?
spk07: You know, we're not going to guide specifically on it, but I think we would expect to get most of the benefit by the third quarter. I think very little bit in Q2, but we think, you know, Q3 should see a return to those normal levels. Got it. All right. Thank you. Thanks, Rob.
spk12: Our next question comes from Brian Ruttenberg with Imperial Capital.
spk09: Great. Thank you very much. Just real quick, if you could go over any labor issues that you're seeing, given inflationary pressures out there, and more importantly, maybe what your integrators are seeing, because that's an important channel in how they're installing. Is there issues out there on the integrator side that's slowing you guys down?
spk06: Well, let me a couple of things. Labor is very tough. I think the starting point with it all is making sure your own team, your existing people are highly engaged. And I just actually looked at our engagement scores. They're at a record high. We did do a higher than normal wage increase on our own cycle in earlier this year. Our retention has been excellent, even after paying bonuses for last year. So feel good about all that, but we all remain very conscious of that. And integrators have been having a hard time hiring labor. for the past two or three years. It's the number one concern in the industry. And on top of that, they've had to fight COVID in their own businesses because they've had people out on COVID. And so I think that continues to be a struggle in the industry. We're doing a number of things around efficiency of products and in terms of helping our integrators find labor. that we're starting to work with. And so I think part of the number one thing we can do in the short term is to continue to recruit more capacity around our installation capacity for our products. And that's why growing our integrator count has been really important. So all of those things are important. I will say during COVID, you know, a bunch of training things had to be shut down. because people weren't able to get together. And so we're now starting to utilize our local offices and starting to conduct more training sessions for new techs in the field. So that was to my comment earlier. If there is some softening on the labor front, it may actually be an opportunity for our industry that's already operating kind of over capacity.
spk09: Thank you very much. Thank you.
spk12: At this time, this concludes our question and answer session. I'd now like to turn the call back over to Mr. Heyman for closing remarks.
spk06: Thank you very much. I really appreciate everybody joining us today. It's a really exciting time here at SNAP One. Special thanks to our employees who continue to make outstanding contributions and the network of our integration partners who are doing great work in the field. driving exceptional experiences for individuals and businesses everywhere. And finally, thank you to our investors for your continued support. Look forward to speaking with you at the end of Q2. And operator, I'll turn it back over to you.
spk12: Thank you for joining us today for SnapOne's fiscal first quarter 2022 earnings conference call. You may now disconnect and have a wonderful day.
Disclaimer