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spk09: 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.
spk06: 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.
spk01: 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?
spk04: Thanks, John. Now, before I get into the specifics of the financials, let me just start at a high level, provide some context on our financial performance and outlook. As we approach 2023, we had a growth mindset in our planning. But we also had a pragmatism around the softer economic environment, the channel inventory dynamics, and we factored all that into our volume assumptions. Given this mindset, we focused on a variety of actions to drive contribution and operating margin improvement inside the business, especially as the headwinds of COVID and the supply chain have begun to subside. So notwithstanding the current macroeconomic uncertainty, we have continued to invest across the business for growth. given the secular smart living tailwinds we continue to see. These investments span new products, go-to-market activities, and important internal technology investments that will help us operate more efficiently. We're funding these investments by deprioritizing spend in other places. Our first quarter results validate our approach. Our team has accelerated some of our cost-efficiency initiatives and remains focused on further improvements. Our new product launches are already paying dividends, and we believe they are helping us gain share. These products and our pricing strategies are adding value to the end consumer, allowing both us and our partners to differentiate on performance rather than price. We're pleased with the resiliency of our business model and the strong execution of our team in this tough environment. So now we'll turn to our financial results for the quarter ended March 31st, 2023. Net sales in the fiscal first quarter decreased 9.2% to $252 million from $277.4 million in the comparable year-ago period. The anticipated decrease in net sales during the quarter reflects the channel inventory destocking headwind that John mentioned earlier. We estimate that approximately $30 million of channel inventory sell-in occurred in Q1 of 2022 and approximately $10 million destocked in Q1 2023. Representing a year over year top line headwind of approximately 40M dollars. After adjusting for this estimated channel inventory inventory impact, we delivered year over year net sales growth of approximately 5% in the 1st quarter. Let's talk a bit more about this channel inventory and our expectations as discussed last quarter. We believe that channel inventory began to build in the middle of 2021 and peaked at over 100M dollars by the middle of 2022 before beginning to unwind. Inventory de-stocking continued in Q1 of 2023, although at a pace that's a bit slower than we originally anticipated. At the end of Q1 23, we estimate approximately 65M dollars remains of channel inventory over and above our typical carrying levels of our partners. As we survey our partners, we're hearing that integrators may be adapting to a new normal level of higher inventory on hand, which would decrease both our time to normalization as well as our overall de-stocking headwind. With this in mind, the range of practical outcomes is broad, especially with the appearance of a slowing rate of de-stocking over the last three quarters. As of now, our models and guidance continue to assume The full approximately $65 million D stock will continue this year and end by the end of 2023. Contribution margin, a non-GAAP measurement of operating performance, increased 1.1% to $106.2 million, representing 42.1% of net sales in the fiscal first quarter. This was $105.1 million, or 37.9% of net sales in the comparable year-ago period. Contribution margin as a percentage of net sales increased due to the cumulative impact of our price adjustments enacted in response to supply chain and input cost inflation, which has begun to ease both through our efforts and through the general macroeconomic conditions. Selling general and administrative expenses in our fiscal first quarter increased 8.4% to $93.8M, or 37.2% of net sales. from 86.5 million or 31.2% of net sales in the comparable year-ago period. The increase in SG&A expenses was primarily attributable to increases in fair value adjustments from contingent value rights, equity-based compensation, severance costs, continued long-term strategic growth investments, costs absorbed from recent M&A, and new local branch investments. So all these increases were partially offset by a continued focus on cost controls and operational efficiency initiatives. Our net loss totaled $14.5 million in the first quarter compared to a net loss of $2.3 million in the comparable year-ago period. Adjusted EBITDA, a non-GAAP measurement of operating performance, totaled $22.7 million or 9% of net sales in the 23 first quarter compared to $23.6M or 8.5% of net sales in the comparable year-ago period. This change in adjusted EBITDA on both the dollars and rate basis was primarily attributable to contribution margin growth offset by those increased SG&A expenses. Adjusted net income, a non-GAAP measurement of operating performance, decreased 68.6% to $3.4M or 1.3% of net sales from 10.7 million or 3.9% of net sales in the year-ago period. Free cash flow, another non-GAAP measurement of operating performance, totaled negative $11.8 million in the fiscal first quarter ended March 31, 2023, compared to negative 26.3 million in the comparable year-ago period. The increase in free cash flow was primarily attributable to a decrease in net cash used in operating activities offset by an increase in capital expenditures. Capital expenditures increased year-over-year, primarily attributable to the one-time build-out of our new corporate office in Lehigh, Utah, and capitalized costs related to growth initiatives. Net cash used in operating activities for the fiscal first quarter ended March 31, 23, was negative $2.6 million, compared to negative $23 million in the comparable year-ago period. The primary driver of our year-over-year decrease in net cash use and operating activities was due to a $26.2 million net decrease in cash use for inventory compared to the prior year. This reflects our continued efforts to rebalance our inventory levels. At the end of the fiscal first quarter, we had approximately $74.7 million in total liquidity, including cash and cash equivalents of $34.5 million and undrawn revolver capacity of $40.2 million. Since the end of Q1, we've continued to see improvement in our liquidity position as anticipated. We continue to thoughtfully work down our inventory levels and remain on track to reduce inventory to the previously communicated $270 million target level by the end of the year. Now, before I turn the call back over to John, I'll take just a few minutes to provide our financial outlook for the rest of fiscal year 2023. As a reminder, 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 23 guidance considers our strong first quarter as well as our ongoing expectation that market uncertainty will persist throughout 2023. As such, we are tightening our full-year net sales and increasing our full-year adjusted EBITDA guidance ranges from our previously published outlook. We expect net sales in the fiscal year ending December 29th, 2023 to range between 1.06B and 1.09B, which would represent a decrease of 5.7 to 3% compared to the prior fiscal year on an as reported basis. We expect adjusted EBITDA to range between $110 million and $118 million, representing a decrease of 3.6% to an increase of 3.4% compared to the prior fiscal year on an as reported basis. Our adjusted EBITDA guidance reflects our commitment to driving incremental adjusted EBITDA margin expansion in 2023. We expect to achieve this through contribution margin rate improvement, a supply chain and input cost ease, as well as through disciplined operating expense management. As noted previously, we are already outpacing our expected contribution margin rate expansion and anticipate continued strength in this area in the coming quarters. So as we think about our quarterly trending in 23, from a top line perspective, we continue to anticipate a return to positive year-over-year growth in the second half of the year as we execute our growth strategy and work through the channeled inventory destocking. On contribution margin rate, we saw better than expected results in the first quarter. While we originally anticipated an acceleration and contribution margin rate over the course of the year, our team worked diligently to extract costs from the supply chain more quickly to deliver more of that margin expansion in Q1 of 23. Therefore, we expect this contribution margin strength to continue with an opportunity for continued outperformance. From an adjusted EBITDA perspective, we expect Q2-23 adjusted EBITDA margin to trend similar to the comparable prior year period and to modestly improve on a year-over-year basis through the second half of 23. One final update before I pass the call back over to John. As a reminder, last year, SNAP1's Board of Directors approved a stock repurchase program that authorized potential repurchases of up to $25 million of our common stock from the date of approval, which was May 12th of 22 through the end of 23. As of March 31st, 2023, we had repurchased approximately 296,000 shares of our common stock at an aggregate value of approximately $3.1 million. Consistent with our capital allocation policy, we will continue to prioritize the following in order. First, our balance sheet strength. Second, our organic growth investments. Third, accretive M&A opportunities that present themselves. And fourth, our opportunistic share repurchases. That completes the summary of our financials. I'll turn the call back over to John for additional commentary. John?
spk01: Mike, thanks. A few closing thoughts before we hit Q&A. Number one, we remain quite bullish around our growth aspirations and longer-term operating model. and we believe we're making the right decisions to best navigate our current market reality. For 2023, we have confidence in our operating margin expansion plan and have already started returning to our favorable contribution margin rate trajectory as costs related to the supply chain continue to alleviate. Second, we remain committed to our overarching strategy. This is founded upon new proprietary product launches growth in adjacent markets such as commercial and security, additional local branch offerings, openings, software investments, all in support of our partners to capitalize on the opportunity in front of us and them. Even in an uncertain operating environment, we continue to strive to be the one partner that our integrators trust to support and grow their business. And third, as I've said before, We believe that all homes 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 end customer, more capacity for the integrator, and growth for SNAP-1 in a way that increases operating margins over time. Overall, we believe our actions at the close of last year and so far this year have prepared us to succeed in the present environment while also positioning us for longer-term sustainable growth. And with that, we'll open it up for Q&A.
spk09: Thank you. 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. In order to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And our first question comes from the line of Eric Woodring with Morgan Stanley. Please proceed with your question.
spk07: Hey, good afternoon guys. Thank you for taking my questions. John, I wanted to dig into a comment that you made and you talked about kind of some, some incremental low end or some incremental weakness at the low end of the market, but resiliency at the higher end. And so I guess my two part question is one, does weakness at the lower end, is that historically an early indicator for anything at the high end or is that reading too much into it? And then two, you know, I know most of your projects are at the higher end, but can you maybe just give us a sense for what kind of exposure you have to any of that low end, if at all? And then I have a follow up. Thanks.
spk01: Well, I think good question, Eric. Good afternoon. I think look, I think the the exposure we've had on the low end side has been more around security and production building. Um, and we're fortunate that we're, you know, a fairly recent entrance into that space, but it's something that, um, certainly, uh, you can see in our numbers as we monitor the business, that that's been a bit weaker in, in large part, because as we all know, production build has slowed. And so we have some integrators that focus on that market. So that's number one. Number two, we don't believe in kind of looking at the trends around kind of higher end homes that it really creates any sort of issue for us. And the reason for that is if you look at the number of homes even today being built on the higher end and if you look at the capabilities of those integrators and their ability to pivot to think to places like commercial establishments where they're working with similar technology and restaurants and bars and conference rooms and things like that that's where we see the resiliency of the model because integrators shift their capacity So I don't think it's a leading indicator, but I think as Mike couched our guidance, we're being watchful about that and we're managing accordingly from a cost standpoint. Mike, would you add anything to that?
spk04: No, John, I think those were right on. And again, I think the higher end still appears to be very resilient and we feel great about what's happening there, but it's an uncertain world out there and we're trying to be prudent as we think about how do we spend in an uncertain world.
spk07: No, that totally makes sense. I appreciate the color from both of you. And then, Mike, maybe to follow up on some of your comments on contribution margin. Obviously, Very strong 1Q. I think last quarter we talked about sequential improvements and contribution margins from 2Q into 2Q and then into 3Q. But, you know, the comments you alluded to somewhat imply maybe you pulled forward some of that improvement. So I just wanted to maybe parse out and get a better understanding of maybe how to think about the seasonality of contributions as we move from the strong March quarter into the rest of the year, or if we're just seeing an across-the-board up list. That would be really helpful. And that's all for me. Thanks so much, guys.
spk04: Thanks, Eric. Yeah, great question. So we definitely saw some great work for our teams to bring in some of that opportunity that we thought we'd see later in the year into the first quarter. So we still expect some improvement off of where we are in Q1. I think Q1, our contribution margin is just above 42%, 42.1, I think is the number. And we expect it to go up a little bit in Q2 and Q3 from that number. But given that we pulled it in quite a bit into Q1, the quarter-by-quarter sequential improvement won't be what we expected, but we still feel great about where we're going to land, and it's still good. align with our expectations. And I think as John mentioned, I think we still feel like there might be some upside from there that the teams continue to work on and identify opportunities to continue to drive that forward. Perfect.
spk07: Thank you so much for the cover, guys. Congratulations. Thanks, Eric. Thanks.
spk09: One moment for your next question. And your next question comes from the line of Paul Cheung with JP Morgan. Please proceed with your question.
spk08: Hi. Thanks for taking the question. So I wanted to ask on the, you know, pricing kind of versus volume dynamic in the quarter. You know, how did those variables kind of trend and what are your expectations for the balance of the year? I know you had some pricing benefits. Do those kind of ease a bit as we move through the year? And then across products, were you seeing some nice demand momentum for the full year? And I would follow up.
spk04: Sure. I'll take the first part of it, John. And if you want to take where we're seeing momentum from a product standpoint, feel free to jump onto that one. um yeah great great question paul i think we think about q1 um you know as expected the first thing is the inventory in the channel edwin you know that was almost 14 when you think about that 40 million dollar um swing between 30 million dollar in last year and 10 million out this year so if you think about a nine percent year over year sales decrease the first thing we look at and say well about 40 percent of that is just the math around about 40 million dollars coming out And then as we disclose, you know, we did price increases of 6% last year in February and 9% last year in June. And so you sort of take those, look at the quarterly impact, and that's about a 7% impact in the quarter from pricing. And so everything else is, you know, volume. There's some smaller bits and pieces, but generally everything else we say is the organic volume underneath it. And it's flattish to, you know, down a point in the quarter. And as we think about our performance for a full year, as John talked about, and I think we mentioned, we think that that underlying demand of flattish is where we expect the year to remain. We're not assuming we're going to get better than that this year. We think specularly long term, there's still lots and lots of upside. It's not where we think we're going to be from a long term, but as we're taking a prudent view this year, we're just thinking that's going to remain around the flat standpoint. Obviously, that pricing benefit from last year's 6% February increase and 9% June increase will fall off as we lap those. So by the time we get to, you know, Q4, the pricing impact's almost nil. We only did a very small price increase this year. And so you can just think about that, you know, with a flattish organic growth and a, you know, the pricing impact's falling off as well. And then the inventory channel clearing, as you can see from the chart that we posted. Gotcha.
spk01: And I'd say just to add on to that on the second part of your question, I'd say, you know, I think you were at Cedia and you saw a lot of the new products that were going to be introduced into the channel later in the fourth quarter and early in the first quarter. And now you've seen those products launched. And so Insight Surveillance, the combination of the Luma X20 cameras, and the software foundation behind that. Our new Wi-Fi 6 access points with Arachnus. We are now getting into the outdoor season, so kind of the Radiance product. The combination of our new core controllers launched last year and the Halo family of remotes this year. Lighting is a big initiative inside our industry, and so vibrant lighting and and integrators know what's coming in terms of the future around that. I'd say, you know, those products that are connected to one or both of our software platforms, Oversea or our Control4 OS3, that is where we're seeing the most momentum. And what I would say there is it's just the beginning. The initial launches of these products will lead to families of products in the future that will be long lasting.
spk08: Okay, great. Thanks for that. And then, you know, much better free cash flow performance than kind of expected. You talked about the inventory dynamics going on there. And then I think you reiterated the kind of inventory mark as we exit the year. So how do we think about the overall free cash flow guide for the year? And then kind of given the better outlook, raised profitability and cash flow, you know, are you looking to open up more stores this year and get that incremental revenue boost? You know, it looks like you added an additional location in the quarter. Thank you. Sure, Paul.
spk04: So, yeah, inventory, you know, we're putting a lot of focus on it and we've started to see the benefit. I think our inventory actually dropped a million dollars from the end of the year to the end of the quarter, which was ahead of our expectations of when we would start seeing the benefit of that. Again, a lot of great work by our supply chain teams to get us where we need to be righted. We don't guide to free cash flow, but, you know, from an expectation standpoint, if we're at You know, $314 million of inventory in the quarter, and we're going to get down to 275. Clearly, that's going to be a source of cash as we go through the year and be able to utilize our inventory and liquidate some of that and monetize it. So we feel really good about that as we go through. Yeah, and then on the local store openings, you know, we've got a plan for mid single digits opening something between 4 and 6 for the rest of the year. I think we've got a Raleigh store slated to open here in the next few weeks. And then a couple more leases opening a store is not a fast activity. You got to find the location. You got to sign the lease. You got to do the build out. So I think we have pretty good line of sight for what's going to happen the rest of this year. And so we will certainly be thinking about how we. uh deploy capital as we go forward next year um as we free up more free cash flow to go do that and we have some you know there's some m a opportunities out there small stuff that we're looking at we could deploy into new store openings we can look at some investments and products that we're contemplating so lots there's no lack of opportunities for us to invest in the business that we would consider okay great very nice execution thanks paul
spk09: One moment for your next question. Your next question comes from the line of Chris Snyder with UBS. Please proceed with your question.
spk05: Thank you. You know, I was hoping to get an update or just some more color on activity at the integrator level. You know, is the customer base being the integrators? You know, are they still working with big backlogs? Have they worked in, you know, eaten into those backlogs at all? So just kind of You know, any update on how the integrator is doing and kind of how their pipeline of activity looks?
spk01: Yeah, thanks, Chris. We watched that and, you know, other demand sensors very carefully in the business. I would say we have seen a small trend downward in integrator backlog. It's still, if you look at it on a more normal basis, at a, you know, over 20 years, still at a very high level, you know, right at a couple of months' worth of backlog. So that's the first comment I'd make. The second comment I'd make above and beyond that, that speaks to our integrators, again, ability to, uh, go find business is, um, as we survey our integrators, uh, the vast majority are finding new customers and new leads to feed that backlog. And I would say after a few months of what I'll call, um, you know, a little bit of downturn of their own optimism in the market that has now taken a turn upward. And, you know, I think that's all good news. Again, I just need to emphasize that there's always been way too much work out there for our integrators to get to. And so even though as we all view the news that, you know, there are some reductions in things like housing starts and housing sales, our integrators have plenty of work to get to. And so we view the fact that there may be some pullback in macro demand sensors as things that our integrators can actually work through, because they've only had a certain level of capacity.
spk05: Appreciate that, John. Really helpful. And can you just follow up on the comment you just made around the integrator? I think maybe their optimism has started to kind of pick back up here on the leading edge. What do you think is driving that? Thank you.
spk01: I think the biggest thing that's driving it is there's been a lot of negative news cycles, yet they still see their businesses performing well. Yes, they're cautious, certainly, but now that we've gotten into this cycle over the past three to six months, they see that, okay, there are plenty of homes still being built. There's commercial business that is continuing to return since the COVID days as people are coming back to work. And so, you know, I think as they get farther into what was supposed to be a more down cycle, they're seeing their businesses continue to perform and their backlog's holding up quite nicely.
spk10: Thank you, John. I appreciate that.
spk09: One moment for your next question. And your next question comes from the line of KPUs with Truist Securities. Please proceed with your question.
spk03: Thank you. On the inventory reduction that we've been talking about in this call, The remainder of the year, do you expect to take a big hit on that? The 2nd, quarter a minute tail off will be more radical for the rest of the year.
spk04: I think right now, Keith, it's more radical the rest of the year. I think it's a dynamic that we are still looking to understand as it's coming out. Like, we know what happens every single month. um historically as it as it went in we can go back and look we know what's come out over the last nine months but as we try to look out there in the future and just i assume we talk about inventory in the channel not our inventory as we talk about this yeah exactly and as we look out in the future you know i thought more was going to come out in q1 based upon the pace that was there um i think if i think about that 65 million dollars i would expect more to come out in q2 and q3 than q4 as we sit here today um That's my best guess, but it's something that, you know, I think it's a little bit crystal ball as we try to guess we still are predicting it all to come out. And again, as I said, I think we're getting. At least some communication from some of our partners that maybe it's not all going to come out. They're going to adjust to a higher level of inventory. And so maybe the whole 65 doesn't come out. Maybe it's 40 or 50 instead of 65. And I think pro radically through the next 2 quarters with a tail and Q4 is how I think about it. But I think we're pretty confident that. Wherever we are by the end of the year is going to be the new normal. I don't think this is going to drag into next year. Whatever happens this year will happen, and then I think we'll be pretty clean starting next year.
spk03: Okay. And given the banking situation on smaller banks, there's a huge question on financing for small businesses, small commercial projects. Do your integrators, do they tend to be financed just by the receivables you give them, or do they tend to use, at least for working capital or jobs, any sort of small bank type financing?
spk04: That's a great question, Keith. I don't want to speak for the entire industry. I will tell you, generally, they operate just on cash flow. They're going out to a project. They're getting a deposit on that project from the end consumer. That consumer is typically a very well-off individual or business who is using cash to pay that deposit. They'll use that deposit to buy products. They'll install that product. There'll be some contingency on the back of it. But they typically get progress billings throughout the project. So I have never heard anybody talk significantly about using third-party financing as a portion of their business. They do use us. There's a little bit of financing of end projects, but not a lot that's out there. John, do you hear anything differently?
spk01: No, I think I want to emphasize, I think they use their customers to finance their business. And they're not really dependent on banks for things like, you know, lines of credit, like, you know, more and revolvers like businesses our size might,
spk03: Okay, and your competitors are smaller. They probably do use that. Would that be correct?
spk01: I would say, generally speaking, we're on the distribution side. There's one very large public distributor we compete with who I don't think is dependent on that, but I think the majority of other small business distributors are. And then most of the product companies we compete with are smaller companies, certainly not the Samsungs, by the way, but we're more a partner with Samsung than a competitor. And I think they probably are more dependent on, more dependent and probably more susceptible to what's going on with banks.
spk03: Okay, thank you.
spk09: And again, in order to ask a question, please press star 11 on your telephone. That is star 11 on your telephone. And our next question comes from the line of Jake Morrison with Raymond James. Your line is now open.
spk00: Hey, thanks for taking my question. Just a couple quick points from me. So one, could you just touch on sort of the demand trends you're seeing in international and just any color on what you saw international over the past couple months would be helpful.
spk04: So thanks. I think overall our international business has been a little bit more challenged than our domestic business. So international, as you know, is not one market. We have distribution centers in Canada. We have them in the UK. We have them in Australia. And we're direct in all those markets. And then we go through most of the rest of the world through distribution partners to cover the rest. And I think it definitely is up and down. I think the APAC region right now, interestingly, has been a little bit more challenged over the first quarter. The European market, particularly the U.K., has looked pretty much like the U.S., a little bit softer. Canada has looked almost just like the U.S., in fact, might be even a little bit stronger than the U.S. So definitely a little bit regionality as you think about the different markets that are out there. But overall, international and total, just a little bit softer than domestic markets that we're looking at. Perfect. Thank you.
spk09: At this time, this concludes our question and answer session. I would now like to turn the call back over to Mr. Heyman for his closing remarks.
spk01: Thank you very much, and thank you again, everyone, for joining us today. Huge shout out to our team members who continue to do great work on behalf of our partners and on the part of our shareholders, and we very much look forward to speaking with everyone again at the end of the second quarter. Have a great evening.
spk09: Thank you for joining us today for SNAP One's fiscal first quarter 2023 earnings conference call. You may now disconnect.
spk10: Hey, thank you, Isabella. We appreciate your help there. Anything else from us?
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