Snap One Holdings Corp.

Good afternoon. Welcome to SNAP-1 Holdings Corp's Fiscal First Quarter 2023 Earnings Conference Call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question-and-answer session. I would now like to turn the call over to SNAP-1's Senior Vice President of Finance, Eric Steele. Sir, please proceed.

Thank you. Good afternoon, and welcome to SNAP-1's Fiscal First Quarter 2023 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 latest annual report on Form 10-K filed with the SEC. All non-GAAP financial measures referenced in today's call are reconciled in our earnings press release to the most directly comparable GAAP measure. This call also contains time-sensitive information that is accurate only as of the time and date of this broadcast May 9th, 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.snapone.com. In addition to the webcast, we have also posted a supplemental earnings presentation accompanying these results, which can also be found on our investor relations website. I will now turn the call over to our CEO, John Heyman. John.

Eric, thank you, and thank you to everyone for joining us this afternoon. To begin today's discussion, I'm going to give some quick company background. I'll follow that by a review of our recent performance. I'll turn it over to Mike Carlett, our CFO, and he'll discuss the financial results for the quarter in more depth, as well as provide our outlook for the remainder of the year. After that, I'll share some closing remarks, and then we'll open the call for questions. All right, let's get started. As a reminder here at Snap One, we provide a smart living platform that empowers professional integrators to deliver joy, connectivity, and security to discerning residential and commercial customers on a global scale. As a leading distributor 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 call these integrators partners because we invest in their success and expect them to invest in ours so that we can jointly deliver the experiences our customers love. As part of these investments, we support our integrator partners with proprietary software platforms and workflow solutions to allow them to successfully serve the customers across the project lifecycle. We believe the smart living opportunity is large and it is durable. Secular tailwinds, including technology adoption, software enablement, housing construction, and small business formation, will continue to propel the industry forward. Many end users will seek professional help to install, integrate, and support the technology they use. At SNAP One, We aim to provide our partners with these right products, software services, and workflow tools to capitalize on the smart living opportunity. Let me comment just briefly on our recent performance. Our team has delivered strong first quarter results in an uncertain environment, highlighting the resiliency of our business model and that of the partners we serve. In our first quarter, 2023, We generated 252 million in net sales and 22.7 million in adjusted EBITDA. Overall, the demand environment remains steady. Our partners continue to stay busy as they work through healthy backlogs in their own businesses, though they do remain cautious as to economic news. As you may expect in the current macroeconomic climate, we're hearing some cautiousness from more budget conscious end consumers for entry-level projects and production building has slowed. But we're pleased to report that the high-end residential and commercial markets remain resilient. Our diversified business model and product portfolio allow us to serve integrators across a variety of end markets, supporting our partners' ability to pivot projects and adapt to their current environment. Finally, we've also seen the normalization of productivity in the channel after the tremendous project velocity over the last several years. We believe this is a natural rebalancing to sustainable levels. Last quarter, we noted that inventory in the channel appeared to have peaked towards the end of the second quarter of 2022, and we have since seen ongoing signs of destocking. This channel inventory destocking continued in the first quarter, although at a slower pace than we expected. Importantly, While the destocking remains a year-over-year growth headwind, after adjusting for the estimated channel inventory impact, we delivered year-over-year growth of approximately 5% in the first quarter. We believe this positive adjusted growth rate compares favorably to the broader industry, reflecting our continued market share gains. As I think about the first quarter performance and look ahead to the remainder of the year, we remain focused on two strategic initiatives for the year. One, launching new products and services along with key sales and marketing initiatives to earn a higher share of our partners' wallets while improving the end consumer experience and the profitability of our partners. And two, expanding our operating margins through several key programs centered on our production costs and operating expenses. I'll take a few minutes and address both in the context of our first quarter results and the rest of the year outlook. I'll start with Share of Wallet. We see significant opportunity to expand our existing partner relationships following the COVID and supply chain periods of uncertainty. We believe we are well positioned to attack this growth opportunity with a multi-pronged approach, spanning products and software, go-to-market focus, and service excellence. First, products and software. We successfully delivered on new product innovation and enhanced software platform capabilities in the first quarter, including the introductions of exciting new solutions across outdoor audio and lighting, control, surveillance, and networking. We're particularly excited about Halo, our new family of Control 4 remotes, Arachnid wireless access points, which enable enhanced connection speeds with Wi-Fi 6 technology. Vibrant linear lighting, which provides a fully immersive lighting experience. The all-new X20 family of high-quality Luma surveillance solutions. And our 2023 Consumer Electronics Show Outdoor Living Product of the Year award winner, Episode Radiance, which builds on our suite of outdoor entertainment solutions. These exciting launches strengthen our product portfolio and set a strong foundation for a robust pipeline of continued innovation from SNAP1. Importantly, many of these new products will also drive upgrade opportunities for our installed base of end customers. Shifting to the go-to-market, and complementing our product portfolio we continue to refine our go-to-market strategy to drive share of wallet growth we took several important steps forward in the first quarter including one we have continued to convert our e-commerce transacting integrators to a single porter portal in order to drive efficiencies in our business save our partners time and money and allow us to drive marketing programs with higher efficacy while exposing them to better products. Two, we've leveraged our loyalty program to consolidate our targeted incentive programs for our partners. These programs are designed to drive product category and ecosystem adoption and to strengthen our partners' overall relationship with SNAP1. Three, we expanded our strategic omnichannel presence by opening a Fort Myers, Florida location. bringing the total number of North American branches to 41 at the end of the quarter. We intend to continue opening local branches to serve our partners in their communities. And finally, we reorganized our sales team structure to roughly triple our active partner coverage by moving more towards an inside sales model. We believe this new formation will enable us to drive efficiency, focus, and results. And finally, The final pillar is service. Our compelling value proposition is underpinned by award-winning service capabilities. In the first quarter, we were humbled to earn 14 2023 CE ProQuest for Quality awards across 22 categories, reflecting our service excellence as voted by professional integrators. We thank our partners for their vote of confidence in SNAP-1 and to our team members for their exceptional service. Our second strategic initiative is driving operating margin expansion. The world has been anything but normal the past three years. With the uncertain macro backdrop in mind, we are continuing to review our long-term operating plan to prioritize investments in areas that we believe will position us for sustained long-term growth while curtailing spend in other places. We have constructed an operating plan that strives to optimize our cost structure and reflects a heightened focus on delivering strong profits and expanding operating margins. A few points here. Number one, our first quarter financial results benefited from the excellent work our supply chain team has done to drive lower supply chain and input costs and strengthen our contribution margin rate. They have driven improvements in such areas as freight, logistics, commodities, and componentry ahead of our expectations. Two, we are working on several additional initiatives to drive continued upside on contribution margin rates as we move through the year and realize the full benefit of a cost environment that is easing. Following a modest workforce reduction of about 3% completed in the first quarter, we remain focused on disciplined cost management while focusing our investment activity on programs that drive efficiency and optimize productivity. Collectively, we believe our improving contribution margin rate and scaling cost base have us on track with our operating margin expansion plan for the year. Before I comment on our outlook, I want to first comment on Jeff Heinemann's departure from the company. Jeff has done some great things for SnapOne over the past seven years. An opportunity came to him to become the CEO of a company outside of our industry. Thankfully, Jeff has built an amazing team in sales and marketing, and that will affect a smooth transition. With Jeff's departure, Ryan Marsh, our EVP of sales, will report directly to me. as well as Ashley Swenson, our SVP of marketing. We have full confidence in our existing leadership's ability to drive our growth strategy in the years ahead. And now let me comment on our outlook and then turn it over to Mike. Overall, our full year 2023 outlook remains solid as we seek to move past the channel inventory destocking headwind, drive operating margin expansion, and enhance our liquidity position. We are maintaining a pragmatic view of top line performance given the persistent macroeconomic uncertainty and channel inventory destocking headwind in the short term. However, our strengthening contribution margin rate and disciplined cost structure management provide us with improved visibility into our profitability outlook for the year. With that in mind, we are tightening our net sales and raising our adjusted EBITDA guidance for 2023, which Mike will discuss in further detail. We believe the smart living adoption industry, smart living adoption is gonna continue to grow. The central role of the integrator in providing holistic solutions is durable and our competitive differentiation will enable us to continue to prosper in a dynamic macro environment and propel our long-term success. And with that, I'll turn it over to Mike Carlett, our CFO, to discuss the first quarter results and 23 outlook in greater detail. Mike?