Snap One Holdings Corp.

Good afternoon. Welcome to SnapOne Holdings Corporation's fiscal third quarter 2022 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. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. I would now like to turn the call over to SnapOne's Senior Vice President of Finance, Eric Steele. Sir, please proceed.

Great, thank you. Good afternoon and welcome to SNAP-1's Fiscal Third 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, November 9th, 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. I will now turn the call over to our CEO, John Heyman. John? Thanks, Eric.

Welcome, everyone, and thanks for joining us this afternoon. Obviously, everyone wants to hear our perspective on results, and we'll get to that quickly. However, to begin today's discussion, I'll give you some company background, review our recent performance, and then turn the call over to Mike Carlett, our CFO, to discuss financial results for the quarter in more depth, as well as to 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. To begin, at SNAP One, we provide a smart living platform that empowers professional integrators to deliver joy, connectivity, and security to discerning end customers on a global scale. As a leading distributor to these integrators, we work with our growing network of approximately 20,000 professional Do It For Me integrators to distribute our proprietary and third-party products through our e-commerce portal and local branches. We further support our integrator partners with our proprietary software platforms and workflow solutions to allow them to successfully serve their residential and commercial customers across the project lifecycle. This is the essence of our only here strategy. Here at Snap One, we're positioning our integrators and our company to capitalize on the tremendous and durable growth opportunity in front of us. We believe it is inarguable that homes and businesses will become smarter over the next decade and require professional help to integrate and support the technology, and that is the number one driver of our long-term growth. No company is better positioned for this future than SNAP1. Turning now to the business update, we acknowledge that our Q3 results were below our expectations. I just want to call out some highlights before we get into it further. Number one, we grew approximately 8% in a tough climate, despite supply chain issues, a softer economy, foreign currency headwinds, and delays in local branch openings. We have successfully managed through the inflationary cost environment as evidenced by sequential contribution margin rate increases, which we expect to sustain in 2023. And finally, we wowed at the recent Cedia Expo, the smart living industry's flagship trade show, with new product launches that positioned us well for the future. During the year, our team has successfully navigated the ongoing impacts of the global pandemic, supply chain and logistics challenges, and an economic backdrop complicated by inflation, the war in Ukraine, and rising interest rates. While some of these challenges have started to subside, the overall market environment has clearly grown more uncertain. While we cannot ignore the impact of these elements on near-term performance, we remain steadfast in our view of our long-term prospects. We continue to believe growth in smart living adoption, the central role of the integrator in providing holistic solutions, and our competitive differentiation positions snap one for long-term success. We will continue to execute against our growth strategy which remains unchanged. So why have we hit a bit of a speed bump? Here's what we are seeing in the current environment. We began to observe a moderated pace of daily sales in the second half of the quarter. We anticipated a normal acceleration at the end of the quarter, but did not see that. And October trends have continued to be a bit softer than previously forecast. Two, as we dug into the underlying demand trends and analyzed feedback from our integration partners, the reality is they remain busy. Their activity levels and near term pipeline visibility remain healthy. However, certain integrators who hold inventory are starting to work through elevated levels of that inventory purchased in response to their own supply chain challenges. Three, it's also important to remember that through our partners, we serve discerning end buyers who are more insulated from economic slowdowns and inflationary cost pressures on a relative basis. While this enhances the resiliency of our end markets, high-end customers are still becoming more cautious. We are starting to observe some changes in their buying behavior, such as project descoping, project delays, and product trade downs to manage the overall cost of an installation. Of course, as you would all expect, we continue to monitor the broader macro uncertainty. As we look ahead to 2023 and beyond, we remain highly convicted in the secular trend of smart living adoption, which will propel our long-term growth. We're also encouraged by a strengthening contribution margin rate due to the benefit of pricing adjustments and input costs beginning to normalize. Together, this gives us confidence that we have a durable business that is poised for sustainable long-term growth. Let me take a few minutes to reflect on the past quarter. As mentioned earlier, net sales were lower than our expectations in September and for the quarter, and this slowing of growth flowed through to our profitability. The pace of this slowdown was faster than what we have experienced previously and is partially attributable to the inventory destocking and project tightening dynamics I spoke to earlier. Demand has stabilized at current levels, but given the macro uncertainty, we are taking a cautious tone to our near-term forecast. Despite the end of the quarter slowdown, we believe our position in the industry remains very strong. In Q3, we delivered on many operational commitments as we continue to enhance the smart living experience by improving both hardware and software for our integrators and end consumers. At the recent Cedia Expo, we announced the upcoming launch of several of those innovative products, which we expect will drive a positive impact on 2023 results, including the following. First, we announced the upcoming 2023 launch of Halo, a new family of Control 4 remotes with an elegant industrial design, a refined user interface, and packed with new features that will enhance the end customer's automation experience. Halo represents a meaningful upgrade opportunity for our installed base. We are also now in market with the new Arachnus wireless access point, which enables enhanced connection speeds with Wi-Fi 6 technology, benefiting both end consumers and our partners. This product will provide improved network efficiency for customers, and due to built-in oversea monitoring and management, will be simple for our integrators to set up and maintain. Everyone wants faster networking. To bolster our lighting portfolio, we announced the upcoming launch of Vibrant Linear Lighting, which integrates color, temperature, and brightness and to personalize automated scenes for a fully immersive lighting experience. Lighting is a big growth category for us. Finally, building on our suite of outdoor entertainment products, we announced the launch of Episode Radiance, a modular, all in a single wire, outdoor audio and lighting system. Radiance is a unique product that will drive new opportunities for our integrators to delight their customers. We changed outdoor audio years ago and with radiance, we are changing it again. In addition to these exciting announcements, we launched the watch box power product internationally and strategically started to merchandise our access networks access points on the SNAP-1 portal so that they can be more easily purchased by integrators. Moving to our strategic initiatives, we had a few key accomplishments in the third quarter. First, as part of our ongoing strategy to grow in security and commercial, we expanded our product offerings across both markets. In security, we announced the upcoming launch of the new Luma X20 IP surveillance solution, which is an NDAA-compliant product that delivers AI-powered security features, providing end customers with greater peace of mind while simplifying installation and long-term maintenance. For commercial, we launched the Carbon Series ceiling mounts, which are designed for commercial applications like menu boards and digital signage. Second, as referenced in last quarter's call, we acquired Clare Controls, a provider of home automation and security products previously distributed by SNAP1. Clare's hybrid automation and security solution addresses the attractive middle market opportunity between lightly featured conventional security systems and luxury level whole home control systems. Third, we continued our strategic omnichannel presence expansion by opening a new domestic local branch in St. Louis, Missouri in July. This branch brings the company's domestic footprint to 33 locations, with two more in Canada as of quarter end. We look forward to further branch openings in the coming quarters to better serve our integrators in additional markets. Following the close of the quarter, we also completed the acquisition of Parasol, a powerful 24 by 7 remote support service based on Oversea, creating new opportunities for our integrator partners to focus on running their business while increasing profitability, productivity, and service levels to their customers. The acquisition builds on our strategic investment in Parasol announced last year and increases our capabilities to provide an RMR service to the industry in addition to our foresight product line and other efforts. I'll now comment briefly on our outlook before turning the call over to Mike. As we prepare for the rest of 2022 and 2023, we are focused on continuing to manage the business to deliver strong profits and drive operating leverage. Considering the challenges referenced earlier, We are reducing both our net sales and adjusted EBITDA guidance for 2022, which Mike will discuss in further detail. As we think about 2023, we expect the operating environment to remain challenging. In response, we are constructing an operating plan that reflects the continued execution of our growth strategy. We remain focused on controllable strategies consistent with our long-term growth algorithm that will enable us to outperform, including the following. One, increasing our share of wallet with existing integrators through the adoption of our ecosystems. Two, continuing to innovate and launch the exciting products I referred to earlier. Three, opening new local branches. Four, adding new partners across our business, including in security and commercial markets. Finally, we will moderate our expenses to drive efficiency and optimize productivity, which will generate enhanced profitability. And of course, we'll endeavor to enhance our balance sheet while doing all this. We believe our resilient integrator partners, our diversified business model, and consistently strong execution positions us to prosper in dynamic macro environments. We are observing an interesting dynamic in our supply chain. Over the past couple of years, we have incurred tens of millions of dollars in additional costs from supply chain inefficiencies. We are now seeing a return to normal in freight, logistics and componentry expenses that we believe will be a material tailwind to our proprietary product margins in 2023. With that, I will turn the call over to Mike Carlett, our CFO, to discuss the quarter's results in more detail, as well as our 2022 outlook.