Snap One Holdings Corp. (NASDAQ:SNPO) Q4 2023 Earnings Call Transcript

Snap One Holdings Corp. (NASDAQ:SNPO) Q4 2023 Earnings Call Transcript March 7, 2024

Snap One Holdings Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. Welcome to Snap One Holdings Corporation’s Fiscal Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to turn the call over to Snap One’s Senior Vice President of Finance, Hayley Pierce. Hayley, please proceed.

Hayley Pierce: Thank you. Good afternoon, and welcome to Snap One’s fiscal fourth quarter and full-year 2023 earnings conference call. As a reminder, this call is being recorded. Joining us today from Snap One are John Heyman, CEO; and Mike Carlet, 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 expectation 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, March 7, 2024. 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’ve 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?

John Heyman: Thank you, Hayley, and welcome everyone, and I appreciate you joining us this afternoon. To begin today’s discussion, I’ll give some Company background followed by a review of our performance for the quarter the year, and then I’ll turn the call over to Mike Carlet, our CFO. He will discuss our financial results in more depth and provide an outlook for 2024. After that, I’ll share some closing remarks before we open the call for questions. Let’s get started. As a reminder, at Snap One, we develop and distribute smart-living platforms that empower professional integrators to deliver joy, connectivity and security to discerning residential and commercial customers worldwide. We work with our 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, service offerings and workflow solutions to allow them to successfully serve their customers throughout the project lifecycle. We believe the smart-living opportunity is large and it is durable and that long-term secular tailwinds including technology adoption, software enablement, housing construction and small business formation will continue to propel the industry and our Company forward. Many end users will seek professional help to select, install, integrate and support the technology solutions they require. Here at Snap One, we aim to provide our integrator partners with the right tools to capitalize on this opportunity. While we have strong conviction in the United States housing market over the mid-to-long-term, we are operating in a tough housing environment.

Nonetheless, our strong fourth quarter and full-year results highlight the resiliency of our business model and scrappiness of our integration partners. Our team delivered year-over-year profitability growth despite topline headwinds including global macroeconomic uncertainty, channel inventory destocking and inflation. Our focus on extracting supply chain costs to increase contribution margin as well as our operating expense discipline enabled us to generate 2023 adjusted EBITDA of $117.2 million. Importantly, this reflects an expanded operating margin of 11%, a 90 basis point year-over-year improvement. We are positioning ourselves for a turnaround in housing and are ready to build on our profitability momentum as we drive further operating leverage with expanded scale.

As we reflect on the operational highlights of 2023, there is no better recognition than the vote of confidence we receive from professional integrators. We were humbled by numerous industry awards, including: Number 1, 45 top five-brand rankings across 62 product sub-categories in the 2023 CE Pro 100 Brand Analysis Awards, representing approximately five times the number of recognition of the next closest competitor included within the analysis. Number 2, 14 2023 CE Pro Quest for Quality Service Awards across the 22 categories included in CE Pro’s survey of professional integrators. Number 3, Best New Hardware for Residential Tech Today Innovation and CEDIA Hall of Fame Awards at the 2023 CEDIA Expo. And fourth and finally, two ISE 2024 Top New Technology Awards.

We don’t take these awards lightly. We recognize that to sustain and enhance our competitive position, we must continue to listen to our integration partners, develop innovative products, invest in our software platforms and enhance end customer satisfaction with the smart-living experience. In January of this year, we officially announced the launch of Control4 Connect and a Control4 Assist. As a reminder, Control4 Assist is an optional service program for integrators to offer support to their customers, while Control4 Connect will be a mandatory software subscription on all domestic installs starting in late April. Since acquiring Control4 in August of 2019, a major focus for us has been on improving our software and support offerings for both our partners and the end customer.

After years of extensive development, market testing and integrator feedback, we have built a new software and support portfolio that we believe will transform this industry. Control4 Connect and Control4 Assist were designed to enhance the end customer experience, build recurring revenues and incremental profitability for our partners and for Snap One and ultimately align the industry in a way that benefits and delights the end customer and improve the system they acquire over time through valuable software updates and amazing service. These two services establish us and our integration partners as the clear leaders in an industry that must evolve to manage increasingly complex technology and more demanding customer expectations. So far, the overall post launch reception has been positive.

We are seeing customers come online now and we are excited for our partners and end customers to benefit from the value of these offerings in 2024 and beyond. Over the course of 2023, we outlined two key strategic initiatives. First, driving higher platform and product adoption by our partners and in turn delivering far better end consumer experiences. And second, expanding our operating margins through several key programs, which have already yielded positive results. From a platform adoption perspective, our continued innovation in our products, solutions and service models enhances our relationships with our partners, delivers a better end customer experience and drives market share gains for Snap One. With this in mind, we launched a large number of innovative new products throughout the year across many of our categories with new launches planned for 2024.

Complementing our product portfolio, we continue to optimize our go-to-market strategy to drive ecosystem adoption and we are pleased with all that we’ve accomplished this year as part of this initiative, including leveraging our best-in-class loyalty platform to drive product category and ecosystem adoption and strengthen our relationships with partners. We’re also converging our Snap One and Control 4 portals in the United States, further enhancing our omni-channel initiative and finally bringing together a unified experience for our partners. And finally, we’re expanding our strategic omni-channel presence by opening four net new local branches in 2023, including two in the fourth quarter. This brings the total number of North American branches to 45 as of year-end and continuing with this momentum, we have another branch slated to open in the coming weeks.

We intend to continue opening more locations in 2024 to serve our partners and their communities, though we plan to briefly pause additional openings during the first half of this year, as we wrap up our efforts to migrate our branches to a single operating system. While we continue to try to drive growth in our business, our second strategic initiative is achieving operating margin expansion. Through COVID and the recent supply chain challenges, we prioritized keeping our partners in business. This created near-term inefficiencies for Snap One. The supply chain is now largely normalized and our team has successfully extracted those cost inefficiencies, driving sustained contribution margin expansion this year. We’re also driving scale within our operating model.

Integration activity related to previously completed acquisitions, as well as investments within our technology infrastructure have continued to yield results. These investments will support our operating leverage and growth expectations going forward and are evident in this year’s results. Let me now comment briefly on our outlook and then I’ll turn the call over to, Mike. While we hold a high-level of conviction around our growth algorithm, we also think it’s prudent to maintain a pragmatic view of the current operating environment. Several of the factors that have applied modest pressure on our demand over the last few quarters all remain in the short-term. However, as we projected last quarter, we now believe that the industry is arriving at its new normal level of inventory that we estimate.

Additionally, while spending has declined a bit, our integration partners continue to report relatively healthy backlogs and remain optimistic about the future. They are highly adaptable and have a proven ability to pivot to a variety of projects to remain successful in changing market conditions. These can include upgrading their installed base with new products or pursuing commercial projects. We have a unique ability to support this flexibility with our diversified business model and product portfolio, which allows us to serve integration partners across a wide variety of price points and end markets. While we’re seeing some softness from more budget conscious end customers for entry level projects, we believe that high-end residential housing remains resilient and our commercial pipeline is growing.

We expect some demand headwinds to continue into 2024, but we’re confident that we’re winning share and will emerge as an even stronger company as the operating environment bounces back. As we look to the rest of 2024, we expect the operating environment to remain uncertain, but we plan to achieve growth nonetheless. Accordingly, we have constructed a strategy to not only drive expansion in 2024, but to position Snap One to transform the industry and win market share in the years to come. To achieve this, we’re executing on several strategies, including: we’re expanding our share of wallet with existing integrators through the further adoption of our ecosystems and product categories, the introduction of innovative new products and the expansion of our local branch footprint.

We’re elevating the end consumer experience by offering cutting edge support services, such as Control4 Connect and Control4 Assist that will align the industry in a way that benefits the end consumer and ultimately increases the demand for our products. We’re growing beyond our core business, especially in commercial markets, as we work to drive outsized growth by introducing new products and solutions in the near-term. We’re driving operational efficiency and scale by expanding our profitability, continuing to optimize our inventory position and investing in our infrastructure. And finally, we’re bolstering our own foundation by maintaining a strong employee engagement with the best team in the industry and making it easy for our integrators to buy from us week-after-week through whatever channel they prefer.

With that, I’ll turn the call over to Mike Carlet, our CFO, to discuss the fourth quarter and full-year results and 2024 outlook in greater detail. Mike?

Mike Carlet: Thanks, John. I’ll start with talking about our financial results for the fourth quarter and the full-year ended December 29, 2023. Net sales in the fiscal fourth quarter decreased 1.4% to $264.4 million down from $268.2 million comparable year ago period. For the full-year ended December 29, 2023, net sales decreased 5.6% to $1.06 billion from $1.12 billion in the year ago period. As John alluded to earlier, our data shows that integrators have been working through their elevated inventory since their levels peaked around mid-2022. And our data now indicates that our partners’ inventory levels largely flattened in Q4. Even though channel inventory remains slightly elevated from the pre-2022 levels, our data suggests we have reached a new normal.

And while destocking did serve as a notable headwind to sales in 2023, we do not expect to see major stocking or destocking activity going forward. Our selling, general and administrative expenses in our fiscal fourth quarter increased 6.2% to $88.2 million or 33.4% of net sales from $83 million or 31% of net sales in the comparable year ago period. The increase in SG&A expenses was primarily attributable to our long-term strategic growth investments, costs associated with local branch openings in the past year and a change in fair value adjustment to contingent consideration. This was partially offset by a decrease in acquisition and integration related costs. For the full-year 2023, SG&A expenses increased 1.6% to $359.8 million or 33.9% of net sales, up from $354.3 million or 31.5% of net sales in the comparable year ago period.

The increase in SG&A expenses was attributable in part to a change in fair value adjustments to contingent value rights and the costs associated with opening local branches in the past year, again partially offset by a decrease in provisions for credit losses on notes receivable. Our net loss of $5.8 million in the fourth quarter compared to a net loss of $4.1 million in the comparable year ago period. And for the full-year, our net loss totaled $21.4 million compared to a net loss of $8.7 million in the comparable year ago period. Contribution margin, a non-GAAP measurement of operating performance, increased 4.3% to $110.3 million or 41.7% of net sales in the fiscal fourth quarter, up from $105.8 million or 39.4% of net sales in the comparable year ago period.

Contribution margin as a percentage of net sales increased largely due to continued momentum from our supply chain cost management initiatives driven by our teams as well as a modest impact from cumulative price adjustments we took in the last 12 months. This was partially offset by a lower proprietary product mix, which was largely driven by new local branch openings and incremental brand assortment of third-party products. For the full-year 2023, contribution margin increased 1.4% to $447.3 million or 42.2% of net sales from $441.2 million or 39.3% of net sales in the comparable year ago period. Contribution margin as a percentage of net sales increased largely due to the cumulative impact of price adjustments taken in the last 12 months, as well as the execution of the supply chain cost management initiatives, which drove input cost efficiencies.

Again, this was partially offset by lower proprietary product mix. For the full-year 2023, third-party product sales represented 34.1% of net sales compared to 32.2% in the comparable year ago period. Adjusted EBITDA, a non-GAAP measurement of operating performance increased 10.7% to $29.8 million or 11.3% of net sales in the fourth quarter compared to $26.9 million or 10% of net sales in the comparable year ago period. And adjusted EBITDA for the full-year 2023 increased 2.7% to $117.2 million or 11% of net sales compared to a $114.1 million or 10.2% of net sales in the comparable year ago period. These increases were primarily attributable to the strong contribution margin rate expansion, partially offset by the net sales decline and the increase in SG&A expenses.

Adjusted net income, a non-GAAP measurement of operating performance increased to $11.2 million or 4.3% of net sales in the fourth quarter from $10.5 million or 3.9% of net sales in the comparable year ago period. Adjusted net income, a non GAAP measurement of operating performance decreased to $40.3 million or 3.8% of net sales in the full-year 2023 from $52.6 million or 4.7% of net sales in the year ago period. Free cash flow, a non-GAAP measurement of operating performance, totaled $66.5 million in the full-year ended December 29, 2023, compared to a negative $44.6 million in the comparable year ago period. This year-over-year significant increase in free cash flow is primarily attributable to the progress we made towards reducing our inventory levels.

We ended the year with $268.8 million in inventory, which overachieved against our stated inventory goal of $275 million. This contributed to our ability to fully pay down our revolver and build a $156 million in total liquidity at the end of 2023, including cash and cash equivalents of $61 million and undrawn revolver capacity of $95 million. As a reminder, a portion of this excess liquidity will be utilized in Q1 for annual payments related to the TRA, the employee incentive plan and for the general seasonality of the business. But overall, we are pleased with the current liquidity position of the Company and the operational flexibility that it provides. As mentioned last quarter, in the context of our capital allocation policy, our Board extended the current share repurchase program by one year to December 31, 2024.

As a reminder, the Board previously authorized up to $25 million of share repurchases, of which the Company has executed approximately $3.1 million to-date. With this extension, we will continue to evaluate share repurchases in-line with our capital allocation strategy. In addition to the financial metrics that we’ve reported to-date, we have a few key performance indicators that are intended to provide enhanced visibility into key operating metrics. These KPIs are related to the count of transacting domestic integrators and the spend per transacting domestic integrator. We will continue to present these metrics annually on a fiscal year basis. In fiscal year 2023, we transacted with approximately 19.7 thousand domestic integrators, who on average spent $45.9 thousand.

On a year-over-year basis, the number of transaction domestic integrators increased by 0.5%, while spend per transacting integrator decreased 4.4% as integrators destock their inventory position. Finally, before I turn the call back over to John, I’ll take just a few minutes to provide our financial outlook for fiscal 2024. As a reminder, Snap One provides annual guidance for net sales as well as adjusted EBITDA, as we believe these metrics to be key indicators to the overall performance of our business. Our 2024 guidance considers our full 2023 performance and our conviction in the multifaceted growth strategy we have built, while also confronting the continued market uncertainty that we believe will persist for much of 2024. We expect net sales in the fiscal year ending December 27, 2024, to range between $1.06 billion $1.13 billion which would represent a range of flat year-over-year performance to an increase of 6.5% on an as reported basis.

We believe the primary factors contributing to this ‘24 sales change to be: A, excluding the impacts of channel inventory, we expect net sales to range from a decrease of 0.5% to an increase of 2%. This performance reflects a market driven change in sales volume, partially offset by growth from continued ramp of local branches over the past year as well as very modest pricing actions. And, B, we expect a 4% to 5% tailwind from channel inventory as we lap the channel destocking that occurred over the previous year. We expect adjusted EBITDA in 2024 to range between a $120 million and a $128 million representing an increase of 2.4% to 9.2% compared to the prior fiscal year on an as reported basis. Our adjusted EBITDA guidance reflects our ongoing commitment to drive additional adjusted EBITDA margin expansion.

We expect to achieve this both through continued contribution margin momentum stemming from our supply chain efficiencies, as well as continued disciplined operating expense management. Finally, as we think about our 2024 seasonal trends, when we look at the external demand factors, prevailing data continues to indicate slow activity across the housing industry. It appears that this dynamic will likely continue at least through the first half of 2024, with some reports indicating a return to growth in the second half of the year. Based on this sentiment as well as some of our own internal information, we would expect to see sales trending more strongly in the back half of the year. And as previously mentioned, we believe our integrator customers have reached a new steady state level of inventory, do not expect changes in inventory carried by our customers to have a material impact on our 2024 results.

But, as our 2023 results include the headwinds of destocking activity this serves as a source of year-over-year growth in 2024. More specifically, we believe the bulk of the sell down occurred in the middle of 2023 with the majority of this benefit to be seen in second quarter and third quarter of 2024. That completes my summary. I’ll now turn the call back over to John, for a few more comments. John?

John Heyman: Thanks, Mike. A few closing thoughts before we hit Q&A. First, we are really proud of our team’s ability to grow adjusted EBITDA compared to last year and expand our operating margins despite the headwinds the industry faced. And we remain confident in our expectations for consistent long-term growth. This year, we made strong gains in our contribution margin as costs related to the supply chain alleviated and additionally, we executed on our operating margin expansion plan and we intend to make more progress in the coming year. Second, we remain committed to our overarching strategy. This includes growth via new proprietary product launches, market leading service, expansion in our growth markets such as commercial and additional local branch openings.

As I mentioned previously, we’re also very excited about our transformational software investments as seen through our Control4 Connect and Control4 Assist offerings. Even in an uncertain operating environment, we continue to strive to be the one partner that our integrators trust to support and grow their businesses. And third, and finally, as I’ve said before, we believe that all homes and businesses will become smarter over the next decade, driving for 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 One in a way that increases operating margins over time.

We remain highly confident in our operating model and believe that our resilient integration partners, our diversified business model and consistently strong execution position us to prosper in a dynamic macro environment. At Snap One, we believe that our time is now and we are excited to implement our vision for 2024 and beyond. And with that, Norma, please open the call for Q&A.

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Q&A Session

Operator: Thank you. At this time, we’ll open the line for questions from the Company’s publishing analysts. The company requested each participant limit their comments to one question and one follow-up. [Operator Instructions] Our first question comes from the line of Erik Woodring with Morgan Stanley. Your line is now open.

Erik Woodring: Hey, guys. Thank you very much for taking my questions. I just have two. Maybe just on the, maybe the first one is just kind of high-level. We went through how you were, how many integrators and spend per integrator trended in 2023. Can you just give us a bit of detail on how you expect that to trend in 2024? And how you expect that to compare to the broader industry, meaning how much share do you expect to gain or lose and why that might be? And then I have a follow-up, please. Thank you.

Mike Carlet: Sure, Eric. I’ll jump on that. How are you doing? I think as we think about our guidance for this year and the components of it, we would expect our integrated account in 2024 to be relatively consistent with 2023. Our focus is to go into 2024 is on, the launch of Control4 Connect and Assist, as John talked about. It’s on the platform adoption activities that we have. We obviously are continuing to add integrators all the time, but obviously some folks who are out of business, every year there’s some, turnaround that generally when people start buying from us, we retain them for the life of their business. But right now, we would expect, the majority of our growth come more from share of wallet activities and the platform adoption activities that we’re driving.

So, if we really think about our guidance for next, there’s really three components of it. There’s what’s the market going to do, what is the platform adoption chart? What we’re going to do? And what’s the channel inventory impacts? Channel inventory is 4% to 5%. Again, as we think about what happened last year, that’s a pretty notable number to us. We’re guessing what the market is going to do. And right now, the market looks like, it’s a bit challenging. And so, we’re predicting the market to be, for the year, anywhere from, flattish to down 5% is our best guess. But the further out you go, the more we’re guessing about as we think about the end of the year and trying to predict the housing market and the remodel market. And then, we think we have confidence in our opportunity to grow share of wallet and market share.

The data that we get from talking to industry buying groups, from interacting with our customers, from thinking about whole new information and how we show up on that continues to indicate that we are growing share, and so we continue to expect to see that happen. But we’re not talking about significant share gains that’s a couple of points of growth, which drives the spread of performance that we’re forecasting for next year.

John Heyman: Hey, Mike, let me just add to that before Eric asks his follow-up question. Eric, we came out of a period of time where we were significantly constrained on certain products from an inventory standpoint as you know. And, I think that at the same time, we were delivering a lot of product innovation, especially during 2024 or 2023 as componentry eased up. And one of the things we are very focused on now is we have 20,000 integration partners, but there is a segment of them who are fully adopted in our ecosystems and understand how that drives more profitability for them and a better experience for the end customer. And so, to the number of integrators we’re looking to add this year, we’re certainly continuing to add integrators.

But, I would say our focus has shifted to with the products we now have and the inventory availability easing up to driving share of wallet. And we’re doing that in a number of ways and we’re starting to see some success. So, that will be something we continue to talk about this year with you all.

Erik Woodring: Okay. Thanks.

John Heyman: Thank you and take your follow-up.

Erik Woodring: No, that’s very fair. Thank you for all that detail. I guess the second question was just on some of the drivers of your contribution margin. Obviously, this year, some really nice improvements that you made on supply chain, cost management initiatives, Obviously, pricing actions had a pretty significant contribution margins in 2023. Can you just help us understand some of those factors and how they relate to contribution margins in 2024 just so we can kind of understand the shape of the curve between operating leverage and contribution margin expansion as you get to that EBITDA guidance that you provided for us? And that’s it for me. Thank you so much.

John Heyman: Mike?

Mike Carlet: Thanks, Eric. Yes, we don’t guide to the contribution numbers specifically. If you think about last year, pricing was an overall 3% growth last year. Year-over-year, we actually have done very little pricing in ‘23. Most of the pricing impacts in ‘23 were actually carryover from late ‘22 pricing action, and we expect minimal pricing action in ‘24. We announced about 1% blended price change at some SKUs that went up, some SKUs that went down, but overall went into 1%, which went into effect in January. And as of now, we’re not thinking about additional pricing actions this year. We’ll always be thinking about it based on market conditions that are out there. So, pricing is a small component of it. Really having said all that, we do expect contribution margin to continue to grow.

Our team has been doing lots of work from a sourcing standpoint with our suppliers, driving cost down, driving efficiency across the supply chain and we do expect to see continued contribution margin expansion as we go forward.

Erik Woodring: Great. Thank you so much for the color guys.

John Heyman: Thanks, Eric.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Cory Carpenter with JPMorgan. Your line is now open.