Traeger, Inc.

Good afternoon. Thank you for attending the Traeger second quarter fiscal 2021 earnings conference call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Tom Burton with Traeger. Thank you. You may proceed, Mr. Burton.

Good afternoon, everyone. Thank you for joining Traeger's call to discuss its second quarter results, which we released this afternoon and can be found on our website at investors.traeger.com. Hosting the call are Jeremy Andrus, Chief Executive Officer of Traeger, and Dom Vossel, Chief Financial Officer. Before we get started, I want to remind everyone that management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on current management expectations. These may include, without limitations, predictions, expectations, targets, or estimates, including regarding our anticipated financial performance and actual results could differ materially from those mentioned. These forward-looking statements also involve substantial risks and uncertainties, some of which may be outside of our control that could cause actual results to differ materially from those expressed in or implied by such statements. These factors and uncertainties, among others, are discussed in our filings at the SEC. We encourage you to review these filings for a discussion of these factors, including our quarterly report on Form 10Q filed today, which is also available on the investor portion of our website at ir.traeger.com. You should not place undue reliance on these forward-looking statements. We speak only as of today, and we undertake no obligation to update or revise them for any new information. This call will also contain certain non-GAAP financial measures, including net income as adjusted, diluted EPS as adjusted EBITDA, and adjusted EBITDA margin, which we believe are useful supplemental measures that assist in evaluating our ability to generate earnings, provide consistency and comparability with our past performance, and facilitate period-to-period comparison of our core operating results and the results of peer companies. Reconciliation of these non-GAAP measures to the most comparable GAAP measures and definitions of these indicators are included in our quarterly report on Form 10-Q and in our earnings release, both of which are available on the investor portion of our website at ir.traeger.com. Now, I would like to turn the call over to Jeremy Andrews, Chief Executive Officer of Traeger.

Thank you, Tom. And thank you, everyone, for joining us for our first earnings call as a public company. I'm incredibly excited to be here today to share our story and talk about our journey ahead. First, I'd like to say how proud I am of what we have accomplished to date as a team in terms of driving our growth strategies, completing exciting acquisitions, and launching our successful IPO. Today, I will share why Traeger represents a unique and compelling growth opportunity. Later during the call, Don will discuss the details of our second quarter financial performance and provide our outlook for 2021 and longer term. We are pleased with the momentum in our business. For the second quarter, revenue grew 39%, reflecting ongoing strength in consumer demand across product segments, including grills, consumables, and accessories. We are excited to see growing brand awareness and extraordinary customer engagement with strong performance across regions. Customers enter the funnel as they recognize Traeger as a pioneer in outdoor cooking, and we drive lifetime customer value with our consumables and accessory categories. At the heart of our brand is a passionate and engaged community called the Traegerhood, which is comprised of everyone from casual grillers to competitive pitmasters and professional chefs. The strength of the Traegerhood is reflected in our strong top-line performance and our growing loyal following. We have over 1.6 million followers on social media that create hundreds of thousands of user-generated posts across various social media platforms. demonstrating our engaged and supportive fan base. For those of you less familiar with us, Traeger is the creator and category leader of the wood pellet grill and a disruptor in outdoor cooking. Our outdoor cooking system ignites all natural hardwoods to grill, smoke, bake, roast, braise, and barbecue. Versatile and easy to use, our grills empower cooks of all skill sets to create delicious meals with wood-fired flavor so that it's always exciting to fire up the Traeger. So let me dive in and share the key attributes of our business model that have been and will continue to be pivotal to the growth and success of our company. First, we are the pioneering brand of wood-fired cooking. Our differentiated cooking platform enables Traeger users to create memorable cooking experiences. This has cultivated a brand that we believe is category defining, aspirational, and extensible, ultimately creating strong brand equity and community. We believe that our outdoor cooking platform provides meaningful opportunities to drive household penetration for many years to come. Second, we offer an accessible user experience. Our automated control system maintains a set temperature, enabling Traeger owners to control their grill from their smartphone or smartwatch. Using our app, they can automate entire recipes and pre-programmed cooking cycles, allowing for fantastic and consistent results for everyone from first-time cooks to seasoned chefs. We have created an extensive digital library of 1,500 original recipes, that owners can access through our app, website, and other digital marketing channels. I'm especially proud of our unique content available through Traeger Kitchen Live, which receives more than 100,000 views weekly, driving increased grill usage and customer lifetime value. Illustrating this, in 2020, the average Traeger owner used their grill 56 times. Additionally, we offer high-quality consumables, We are a vertically integrated wood pellet manufacturer so we can ensure that the highest quality ingredients in manufacturing processes are used, leading to a superior cooking experience. Our wood pellets combined with our rubs and sauces deliver recurring purchases. Over 92% of Traeger owners purchased Traeger-branded wood pellets in the last year. Third, we have engaged in vocal advocates. Our Traderhood is a powerful, vocal, and engaged global community that is hungry to share experiences and encourage other members to try recipes and cooking styles. We have over 1,400 valued community ambassadors that range from micro-influencers to well-known ambassadors, including Joe Rogan and Dan Patrick. Finally, we continuously invest in disruptive innovation. We use data from Wi-Fi-enabled grills to better understand our users' cooking habits, including which recipes are used, how long cook cycles last, the grill temperature, and what time of day the grill is active or in standby. This information guides recipe and product development. With tremendous opportunity in front of us, we continue to disrupt outdoor cooking industry We remain focused on executing our growth strategies to drive profitable and sustainable long-term growth. First, we plan to drive brand awareness. Of the 75 million households that own grills, we are only 3% penetrated, and our unaided awareness nationwide is 10%. Clearly, our market opportunity is significant. Our strategy is to ensure that consumers think of Woodpilot first and when purchasing or replacing a grill, and we are focusing on marketing campaigns to scale unaided brand awareness and accelerate household penetration. Our marketing strategies have enabled us to reach more than 10% penetration in heritage markets, which, incidentally, are some of our fastest growing markets, and we will deploy marketing campaigns to drive awareness outside of these markets. These top-of-funnel have proven successful in the past, and we know we can build lifetime value once we get consumers engaged with the brand. These additional marketing programs that extend across multiple channels, including TV and connected TV, digital and social media, and through retail partners. As we build our presence, our powerful word of mouth helps to fuel additional growth. One step that I'm particularly proud of is that 80% of Traeger owners have recommended our grills to an average of six people. Our latest Traeger day on May 15th was our largest to date. We saw 16,000 user-generated posts, as well as record number of cooks, more than the big grilling holidays 4th of July, Memorial Day, Thanksgiving, and Labor Day. Second, we will optimize our omni-channel distribution strategy. by primarily focusing on enhancing retail distribution. We are building top-tier retail relationships and investing to deliver authentic in-store brand experiences that are optimized for conversion. Although we have a significant retail white space, we believe that we have a large opportunity to further develop deep and strong relationships that will increase our penetration with existing retailers. In addition to further optimizing our distribution strategy, we are seeking to maximize retail productivity by growing our DTC channel to complement retail sales. Through our DTC channel, we have established technology and operations at scale. We believe we have everything in place to acquire customers potentially provide subscription opportunities, curate third-party brands, and provide bundle offers. As we look to advance our DTC growth, we recently hired a new VP of digital marketing e-commerce, Jake McLiverty, who formerly headed e-commerce and performance marketing at Yeti. Third, we plan on growing our recurring revenue. The more we increase household penetration, the more opportunities we have to build brand awareness and sell consumables. We believe Traeger owners already prefer our wood pellets, and we plan to leverage that loyalty to build a preference for Traeger branded rubs and sauces as well. Just like our wood pellets, our other consumables promise quality and dependability for our owners. In order to continue consumable sales growth, We plan to expand the accessibility of our wood pellets and other consumables through new distribution and easy DTC purchase experiences, inspire Trader users to cook more at home through our unique and growing digital content, and lastly, grow our portfolio of consumables, including new flavors of wood pellets, rubs, and sauces. As we execute on these strategies, we believe we can significantly grow our recurring revenue. Fourth, beyond North America, which accounts for roughly half of the worldwide outdoor cooking market, we plan to export our brand globally. We plan to deploy our omnichannel distribution strategy and brand awareness playbook to key markets that have a culture of outdoor cooking but have only experienced gas and charcoal. In North America, we are driving significant market share gains from multinational gas and charcoal brands, and we believe we are positioned to do the same internationally. Lastly, we plan to continue to offer innovative, superior home cooking experiences. While we are already disrupting outdoor cooking, we believe that we can replicate this experience with other cooking modalities. We plan to target categories where consumer demand is strong, but innovation has been lacking. Through product innovation, authentic branding, a passionate community, and strong partnerships, We believe over the long term we can introduce the Traeger experience into other categories in the food at home market. Including our business strategy, we have considered a wide array of potential strategic transactions, including acquisitions and strategic investments of businesses, new technologies, services, and other assets that complement our business. On July 1st, 2021, we acquired all of the equity interests of Action Labs, creator of Meter, a wireless smart thermometer that provides users the ability to monitor the status of a cook cycle with their connected devices through the Meter app using Wi-Fi and Bluetooth technology. This acquisition will help facilitate our entry into the adjacent accessories market with a highly complimentary product. We believe this will bolster our existing offering, create efficiencies for our consumers, and expose us to new growth channels. Furthermore, acquiring Action continues our digital evolution to create a premier connected, user-friendly, and rewarding cooking experience. Before turning over to Don, I want to address the supply chain headwinds that we continue to see across several industries. While there is no question that consumer demand for Traeger remains strong, supply chain issues are persisting into the second half of the year, which is creating additional pressure on our margins. These challenges are transitory in nature, and we remain confident that our competitive strengths and loyal community will remain tailwinds to our business long term as we expand our disruptive cooking solutions globally. We have a significant runway ahead of us, and we could not be more excited about our future. I will now turn the call over to Dom to discuss our second quarter financial performance in greater detail. Dom.

Thanks, Jeremy, and good afternoon, everyone. As Jeremy mentioned, we are very excited to share our second quarter momentum and our outlook for the future of Traeger Financial. Our business has experienced rapid growth, and we are building on this momentum through strategic investments in product innovation, brand awareness, and global expansion. Looking back at the second quarter, we exceeded our expectations in revenue and profitability. For the second quarter, total revenue increased 39% to $213 million compared to the second quarter last year, driven by strength across product segments. Grill revenue increased 40% to $156 million, attributable to growth in both volume and ASP. Growth in ASP was driven by product mix toward premium offerings, including our Ironwood and Timberline series. We also experienced an increase in our installed base of grills, which in turn drives recurring consumables revenue. This consumables revenue grew 28% to $41 million compared to the second quarter of last year. Lastly, accessories revenue increased 65% to approximately $16 million, reflecting strong consumer demand and growth in ASP. We are pleased with the revenue growth in our core channels and saw strong gains in national and specialty retail and in our direct-to-consumer channel. Looking at our performance by market, we continue to see great momentum in the U.S. as well as exceptional growth in Canada and the rest of the world. We remain in the early stages of our international expansion, and we are highly encouraged by the strong acceptance of the Traeger brand outside of the U.S. Gross profit for the quarter increased $80 million compared to $67 million in the second quarter of last year. Gross profit margin was 39.1% in the second quarter, decreasing 440 basis points from the same period last year. The decrease in gross margin was largely due to increased inbound transportation costs inflationary pressures on commodities, and appreciation of the Chinese renminbi relative to the U.S. dollar. We view many of these headwinds and gross margin as transitory, and we are implementing measures to navigate these global supply chain challenges, which I will speak to shortly. Despite these measures to navigate these global supply chain challenges, I'm sorry, despite these unprecedented macroeconomic challenges, the fundamentals of our business are strong. Consumer demand is growing. Customer engagement remains high and we are driving higher ASP and customer and lifetime value. Sales and marketing expense increased by 125% to $47 million compared to $21 million in the second quarter of last year. The increase was primarily due to higher advertising spend as we amplify our top of funnel demand creation to build brand awareness. We also reinstated our Costco Roadshow program, which was paused last year due to COVID, which resulted in higher commissions and travel related expenses. Last, there was an increase in professional services primarily related to consulting and third-party customer service support. G&A expenses increased by 167% to $25 million compared to $9 million in the second quarter of last year. As a percentage of revenue, G&A expense increased to 11.6% for the quarter as compared to 6.1% in Q2 of last year. This was largely due to an increase of $10 million in professional services in connection with the refinancing of our long-term debt, consulting services, and legal services. The increase also reflects investment in growth-related infrastructure. As a result of these factors, net loss for the second quarter was $4.9 million as compared to net income of $18.9 million in the second quarter of last year. Net loss per diluted unit was $0.05 compared to net income per diluted unit of $0.17 in the second quarter last year. Adjusted EBITDA and adjusted net income are both used by our management team as additional measures of our performance for purposes of business making decisions. decisions, including managing expenditures and evaluating potential acquisitions. They help to identify additional trends in our financial results that may not be shown solely by period-to-period comparisons of net income or income from continuing operations. Adjusted net income for the quarter was $16.5 million, or 15 cents per diluted share, as compared to $27.8 million, or 26 cents per diluted unit, in the same period last year. Adjusted EBITDA was $27 million in the second quarter as compared to $39 million in the same period last year. Now turning to the balance sheet. At the end of the second quarter, cash and cash equivalents totaled $75 million compared to $12 million at the end of the second quarter last year. This reflects the $62 million paid for the acquisition of Action Labs. We ended the quarter with total principal amount outstanding under our new first lien term loan facility of $510 million. On June 29th, 2021, we refinanced our existing credit facilities and entered into a new first lien credit agreement under which we replaced our existing first and second lien term loans. This includes a delayed draw of $50 million. and increased the capacity on our revolving credit facility from $67 million to $125 million. We also increased the capacity under our receivables financing agreement to $100 million. Inventory at the end of the second quarter was $86 million compared to $69 million at the end of the second quarter last year. We continue to work to maintain an inventory balance that represents the right product mix to meet expected demand, and we are investing in higher levels of safety stock in response to the supply chain challenges related to the pandemic. We are comfortable with the level and quality of our inventory to meet strong demand as we look ahead. Turning to our guidance, we continue to see strong momentum in the Traeger brand across regions and across product categories, following better than expected growth in the second quarter. As Jeremy discussed, we completed the acquisition of METR in early July. METR expands our connected platform with unique technology that enhances the cooking experience. METR generated roughly $60 million in revenue on a TTM basis as of June and is a profitable business. We see meaningful synergies that we plan to unlock as part of our integration strategy, and we are excited to see revenue tracking ahead of our expectations. In addition to this acquisition, we plan to launch a new product offering, which we will announce in early Q4. A majority of the investments related to startup costs were incurred during our second quarter, and the remainder of these costs will be reflected in the back half of the year. Turning to the supply chain, as you have heard from many other consumer companies, the macro supply chain challenges have persisted, including higher inflation, manufacturing constraints, and port congestion. Our number one focus is getting our product to our consumers while mitigating cost pressures wherever possible. We are implementing various near-term and long-term measures to help mitigate the accelerating costs, ranging from previously mentioned price increases, warehousing product in Asia to smooth production and manage the volatility in vessel capacity constraints, and diversifying our manufacturing base. Our adjusted EBITDA outlook reflects continued gross margin pressures in the back half of the year due to supply chain challenges that I outlined, as well as ongoing investment across sales and marketing and public company costs. Our guidance reflects the impact of these costs based on the visibility we have today. For fiscal year end 2021, we expect revenue to be between $760 million and $770 million, and we expect fiscal 2021 adjusted EBITDA to be between $103 million and $108 million. Over the long term, we believe we can drive annual revenue growth of approximately 20% as we execute on our growth strategy. We will continue to build brand awareness, drive product innovation, and expand our presence both in the U.S. and internationally. We believe we can reach 45% gross margins long term through sourcing initiatives, including diversification of our manufacturing base, delivering on product cost savings, enhancing our product assortment, and increasing supply chain efficiencies. We believe that our strong top-line growth and gross margin expansion coupled with continued reinvestment in our business will yield adjusted EBITDA margin of roughly 20% over the long term. In conclusion, we are extremely confident about our future as we continue to disrupt the grilling industry by bringing product innovation to consumers through a powerful go-to-market strategy. With that, we will now open up the call for questions. Operator?

Certainly. We will now begin the QA session. If you would like to ask a question, please press star followed by 1 on your touchtone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly to allow questions to generate in queue. The first question is from Randy Connick with Jefferies. Please proceed.

Hey, guys. Good afternoon. You can hear me, right? Yes. All right, great. So I guess, Jeremy, maybe give us some perspective on the consumables distribution. Give us some perspective of where it is now and then basically how you're thinking about expanding that footprint with partners across the country over the next, let's say, 12 to 24 months? How should we think about, you know, the expansion of that? Should it be regionalized? Is it nationalized? Just give us some perspective how you're thinking about that part of the business.

Yeah, it's a great question, Randy. So, first of all, I would say that, you know, it's only been the last – 12 months that we have been meaningfully expanding distribution of pellets. Pellets have traditionally been sold where the grills are sold. One of the things that we learned in consumer research is that while the grills are a considered purchase and they need their own dedicated point of sale and deep education, the consumables need to be in convenient locations where consumers shop regularly. And so we really focused initially on pellet distribution. We've begun to expand it to places where a consumer would naturally expect to buy them. So I would say grocery is probably the most meaningful distribution channel expansion that we've undertaken. We've opened meaningful new doors during this calendar year. They're national chains, although we're always focused on distribution first and foremost in the markets that have the greatest penetration. We ultimately believe that grocery represents an important channel that we've learned in our consumer research. They want to find pilots. And then I would move to rubs and sauces. You know, the rubs and sauces component of our consumable business is traditionally have been more about the recipe creation, ensuring that there's an easy guide to helping consumers create a great home cooking experience. And it's only been recently that as we've seen traction in our core channels, and I would say notably in specialty retail, especially barbecue, specialty hardware, we've seen nice sell-through. And so we've been testing outside of our core channels, and we've seen actually very significant traction, and we believe it's suggesting, well, it's clear it's suggesting we have permission to play in more traditional consumables channels. So, again, grocery would be a natural. My expectation is that over the next 12 months or so, you'll see the consumables distribution increase within our core channels, And as we're building an enhanced consumable line with a price pack architecture that's appropriate for grocery, back half of 22, first half of 23, you'll start to see the rubs and sauces in more traditional consumable channels.

Super helpful. And just one more question. I want to get your perspective on how you're thinking about Technology, obviously, you know, one of the great things about the brand is the connection it has through technology. You know, when I think about the Traeger app, for example, it's saying to me right now my grill has 60% pellets, right? So how are you guys thinking about the next level or the next, you know, leg of technology implementation to kind of further enhance technology? As you put it before, you want to increase the ability or reduce the friction point for consumers to buy and do things with your – interact with the brand. So just give us some perspective on maybe your wish list of technology that's going to be happening over the coming quarters and years.

Yeah, so I would say, you know, for us, everything really fundamentally begins with a great cooking experience. And ultimately, it's a very seamless cooking experience and an equally seamless purchasing experience, really optimizing an omnichannel distribution strategy, but certainly using technology via our app and the website to remove friction from that purchase experience. You know, we're very early innings in really understanding the value of this one-to-one connection with our consumer, understanding what they're cooking, when they're cooking, and really using that data to deliver a personalized experience. And we're actually in the process, we spend a lot of time in habitat with our consumers, and I think we're making some very significant progress currently that over the next couple of quarters you'll see in a greatly enhanced digital experience. And it really boils down to owning the moment from the moment a consumer decides they're going to cook at home all the way through the inspiration of what they're going to cook, the recipe, how and where they're going to procure ingredients, how they're going to cook it, whether it be video, short-form recipe content, long-form recipe content. And so the technology is there. It's about us really intimately understanding our consumer and how they want to use it. And you're going to see very significant advancements. I would even suggest that over the next six to 12 months, you will see more evolution and innovation in the digital experience than you've seen in the last four or five years of Traeger. We are that committed to making the cooking experience much better and certainly all of the components of purchasing and ingredient procurement and easy recipe content are components of that. So, you know, the technology is there, and we're finding ways to make a very elegant cooking experience, and we really like the progress that's on its way to market.

Very helpful. Thanks, guys.

Thanks, Randy.

Thank you, Mr. Connick. The next question is from John Glass with Morgan Stanley. Please proceed.

Thanks very much. First, Jeremy, I wanted you to just talk a little bit about the go-to-market strategy you employed this summer. You have events to create demand in some new markets. Maybe kind of recap what you did there and maybe some of the results. And then if you think about the next couple of quarters, how do you think about the next markets you're going to approach? What are they, for example, and what sort of sequence of events as we think about the brand moving east?

Yeah, so this is a really important part of the acceleration of our unaided brand awareness. And there's a lot of history in how we've arrived where we are. I would say that the first handful of years under this management team, our real focus was building an authentic brand platform. Long before we were investing in customer acquisition, we were thinking about what are the tenets of a brand, that creates real emotion with our consumer? How do we authentically tell a cooking experience that gets people excited? And the reality is most people are not excited to cook. Trader owners are. And that really starts with the foundation of brand. So all the things that we've done are with community ambassadors, grassroots marketing, which has always been an important part of our business model. social media, cooking classes, all of these sorts of things, that's been the foundation of the brand. The last couple of years, we've really been honing in our marketing execution model to ensure that we get a return on our brand platform. And so we've tested many markets. We've seen great success. Salt Lake City is the market that we have the most history in as a management team. And so, you know, we've been able to refine a marketing model that's increased our household penetration from very low single digits to 15% household penetration in six years since we've been here. And all of the elements of that model have been testing and measuring and refining and And we call this our market assault program. And so we rolled this out beginning the back half of last year into 14 markets around the U.S., strategically chosen, one of them being Salt Lake City. which will continue to scale. We are monitoring those activities and the results of those activities weekly and monthly. We look at sell-through in these markets maniacally. Every week we are measuring sell-through. Every month we are measuring unaided brand awareness in these markets. And we're really focusing all of our discretionary sales and marketing resources into a narrow set of markets. And we believe this is what gives us the ability to amplify our marketing spend and create a groundswell the way that we have in Salt Lake City. Actually, just yesterday, I was with our sales and marketing team reviewing the success of what we know of these markets. and looking at the analytics behind the markets that we will begin to launch in the fourth quarter of this year, really with a focus of driving meaningful, unaided awareness next year, particularly in the key selling season. There's a long tail effect to these activities. We will continue to invest in the markets that we're in, but we're learning a lot from this process. And so on the sales side, you know, it's alignment of our in-store merchandising, having the right assortment at the point of sale and deeper investment in visual merchandising, retail training, more boots on the ground so that we can service retail, really educate at the point of sale. And then it's all of the top of funnel activities on the marketing side, advanced TV, broadcast TV, radio advertising. digital advertising, all of these things that then drive consumers into retail. We know that a grill buyer looks at or evaluates about 1.6 brands, Those are the brands in the initial consideration set. And then 70% of purchases happen within that initial consideration set. At 10% unaided awareness, we're simply not well enough. We need to be better known. We need to be in that initial consideration set more often. So I think we're getting good at creating top of funnel awareness, leading to mid-funnel marketing activities and converting at the point of sale. So we feel really good about these investments. We like the returns. There's no question it's never perfect. And so we're always refining. And, you know, we will, of those 14 markets that we're in this year, you know, we'll probably cull two or three of them. We'll keep 10 or 11 of them. and we'll add another six or eight strategically chosen markets next year. And, again, we'll continue to grow across all of the geographies that we invest in, but the expectation is that we grow exponentially and really create this meaningful groundswell in the markets that we're investing in.

Thanks for that. Dom, I just wanted to follow up on your supply chain commentary. I think it's gotten worse maybe since we last chatted a month ago. I think there was some disruption in Vietnam. I don't know if that's recurring now. Maybe some contextualization around is this what you expected or is it maybe worse than you expected, and what specifically, whether it's manufacturing capabilities or is it supply-issued components or is it shipping? Which of the pieces are more greater or lesser pressure than maybe expected even a short time ago?

Yeah, that's a great question, and I would say that the answer to your first question is yes. We are seeing some of these challenges worsen as we head into the back half of the year. And, you know, we certainly took a fairly conservative viewpoint on kind of where we were kind of June-July timeframe as we looked ahead and just based on kind of the known factors that we were experiencing at the time. And ultimately, you know, some of the headwinds that we felt in gross margin in Q2, inbound transportation rates, FX, these are actually trending in a slightly worse direction currently. And so that's one sort of factor that we're seeing emerge, growing headwinds just really related to inbound transportation. And that's something that our products are fairly sensitive to just given the size of our products and sort of the loadability per container. I'd say the second piece that I think is emerging as slightly newer in terms of a headwind is steel. You know, we've seen just as you look at kind of the indexes on cold-rolled steel in China, that's sort of increased 30% to 40%. And that's beginning to have an impact on our cost of goods as well. That's one that we also believe will be transitory over time. And we're sort of evaluating what China is doing as they look at some of these inflationary pressures and maybe ways to sort of offset the impact either in the near or longer term. And so something that we're watching closely here. And I'd say that, you know, at the end of the day, the biggest component right now that we're really focused on more than anything else is the impact that we're seeing and sort of the growing pressures that we're feeling in inbound transportation. And so, you know, I think our strategy is really consistent with, you know, where we've been all along this year. And I think first and foremost we're focused on protecting revenue. And that means that, you know, we want to position ourselves such that, you know, we're able to stay nimble in terms of accessing vessel capacity, container capacity in China such that we can bring inventory into the U.S. to fill demand. And, you know, we have a few levers in place to do that, one of which is a recent decision to stand up origin warehousing, so on-site warehousing in China and not only to keep kind of production at smooth levels with our factories, but also to ensure that we can stay nimble and effectively control the outcome that at the end of the day is having an impact on flow of goods. So the second piece is we are investing more in inventory. And so we're making a conscious decision to carry more inventory and higher lead times. I'm sorry, higher safety stocks in the U.S. just to build more cushion into our supply chain so that we're able to manage some of the volatility and ultimately keep demand moving forward. And I think the second piece to that is just how we manage rate volatility. This is certainly a focus, and we have key levers in place that allow us to a degree to manage what we're seeing as a growing, again, headwind in costs. We do have fixed rates that we've locked in, and one of the benefits of having on-site warehousing in Asia that we can draw from is it allows us to stay nimble and in terms of the mix of fixed-rate containers that we can procure and ship to the U.S. You know, this change is quarter to quarter, depending on availability and where our inventory position lies. And, for example, in Q3, we are seeing a shift. away from fixed rate to premium and spot rate, but could see that shift back in our favor in Q4. So again, something that we're watching closely, and managing rate volatility is important, but it certainly comes second to just ensuring that we're able to protect revenue. And I think the positive here is we've been focused on this now for a handful of months. The supply chain team has done a fantastic job of managing our freight partners, as well as just managing the complexities that come with navigating the constraints with vessel capacity. And I would say that our inventory position today is where we think it should be in order to meet demand in the back half of the year. And we're continuing to ensure that we're navigating these challenges and getting ahead of any future potential risks that emerge that we can't foresee. so that we can absorb those and ensure that we still have revenue to fill demand here in the US.

Great. Thank you very much.

Thank you, Mr. Glass. The next question is from with BMO Capital Markets. Please proceed.

Thanks. Hey, guys. Good afternoon. Jeremy, can you talk about the supply chain from the other side, so maybe the impact on revenue, if there is any? How do you think about supply constraints versus demand? You've highlighted marketing. Maybe speak to the way you approach transactional marketing versus brand building. And then, Dom, just to kind of circle back on that point you just brought up, any way to quantify the transitory costs that you think you would see? Yeah, thanks, guys.

Sure. First of all, on the supply side, I would say we are in a reasonably good position for the first time in a long time. Certainly since early first quarter of 2020 when the pandemic hit. We've been very, very diligent around expanding capacity within our existing manufacturing facilities in both China and in Vietnam. We've been working very carefully with them, even remotely. We've got an office in Shanghai to manage manufacturing, but also a team here that interacts daily with these facilities. to drive efficient production and high utilization rates. And so we made a strategic decision over a year ago, number one, to increase capacity, number two, to start to carry more inventory as we got cut up. And so we're finally taking time to both add the capacity and to feel the impact of more production coming off the line But I would say in the quarter we're feeling like we're not leaving much demand on the table. We did a little bit in the second quarter, but we feel like we're caught up now. And so, you know, my expectation is that in steady state, steady state is in this environment that may be a bold prediction, but even in this environment that we have the mechanisms and the processes in place to keep supply running smoothly. Dom described some of the things that we're doing in terms of running at high utilization rates, increasing the safety stock in the U.S. in our multiple VCs, increasing safety stock in Asia, and bringing it over as cost-effectively as we can. And so I feel pretty good about where we are in the third quarter and going forward from the supply perspective. Switching to the marketing side, that's an interesting question, building brand versus sort of the more transactional customer acquisition component. I would say we always lead with brand, and that's what we do best. And our capability around cost-effectively driving top-of-funnel awareness and really moving that consumer mid-funnel into conversion, that's something that we're getting better at. And so it's certainly a capability that we've been focused on. We do those marketing activities, of course, very differently. And we also view the needs very differently in terms of where the consumer is in their purchasing decision journey. And so, for example, in markets like Utah or Oregon, where we have much higher unaided awareness, we're going to invest more of our marketing spend in mid-funnel activities, looking to convert a customer that's had multiple touch points and they've done their research. We find on average that a trade or consumer does a lot more research than a traditional grill. Consumer, about twice as much research, about six hours of research. And so we track them through the funnel and where there's higher unaided awareness and we invest a lot more in that transactional piece. But really with, always with the intent of building a brand that has a long tail, that is that is sustainable and repeatable revenue. And I think this capability around converting the consumer that's been exposed to the brand is something that we're getting much better at, and it's a place where we plan to invest a lot more as we develop some of these markets with higher brand awareness.

Cool. Yeah, and I'll jump in. I think first, Simeon, I appreciate the question. I think at this point, we aren't going to provide direct guidance on gross margin in the back half of the year. I think what I will say is that we do expect gross margin pressures in the back half and particularly in Q3 to be fairly outsized relative to where we were trending in Q2. And I would say that Ultimately, this is a gross margin story, which is almost entirely driven by these macroinflationary pressures, which we believe are transitory. And EBITDA is reflecting that, even though we continue to see strong demand on top line and certainly the right controls. in spend as well as conviction and where we need to continue to invest to drive growth in the brand. I think that the other point here that I would make is although there may be a lag to some of the strategies that we're implementing to offset these pressures, that the price increase is an important one that will ultimately influence the later half of H2 in terms of offsetting these growing macro pressures. And we're also exploring a few other avenues which we believe could be meaningful levers to further offset these pressures. And so I think at this point we just don't have enough visibility, aside from what we know today, to communicate anything on gross margin other than it is a growing pressure in the business. But certainly that's really the main theme as we think about, you know, performance for full-year businesses.

Thank you, Mr. Siegel. The next question is from Peter Keith with Piper Sandler. Please proceed.

Hey, thanks. Good afternoon, everyone. Congrats on your first quarter out of the gate here. Dom, maybe just to follow up, when you talk about exploring other avenues to offset pressures, I know you have commented on pricing potentially coming down the pipe in Q4 with an increase. Are you at a point now where you think you've finalized that? Or conversely, maybe just to provide perspective, do you have a sense on maybe how much the grill market has increased in price with some of your main competitors?

Yeah, sure. So we have finalized that. We feel really, really good about where we landed on our strategy, and it has been communicated. And so that will take effect and be fully realized in Q4. So that's a great win, and kudos to our sales team for executing on that, and obviously great partners in ensuring that we're aligned on that strategy. In terms of competition, yeah, we don't know exactly what the internal makings of their strategy is, but we are seeing price increases from our competitors, both our larger and smaller competitors, And so they're clearly feeling some of the same pain points that we are in terms of inflationary pressures, inbound transportation costs, et cetera, and are addressing this through price increases as well.

Thank you, Mr. T. The next question is from Sharon Zaksla with William Blair. Please proceed.

Hi, good afternoon. I guess to follow up on that comment on your pricing philosophy, given that a lot of what you are seeing appears to be transitory or thought to be transitory, I mean, how did you land on that number? I mean, are you seeking to offset, you know, a third, a half, three quarters? I mean, how much of the pressure are you looking to offset there? And just to clarify as well, are all of your suppliers up and running at this point, or are you facing kind of any shutdowns at all in Asia?

Yeah, so great question on pricing philosophy. So we clearly, you know, evaluated the pressures that we're feeling and the impact on gross margin, and certainly that was the guiding force in evaluating a price increase this year. However, you know, we were fairly methodical in our approach to our price increases, and it wasn't, you know, set prices at levels to fully offset any headwind that we feel. I think we want to still ensure that we're balanced in our strategy to how we think about pricing, which is why we were very methodical in the analysis that went into which products we were raising price on. and ultimately where we felt we had permission to make certain adjustments on price such that there wasn't a corresponding impact to gross profits as a result of slower volumes across those SKUs. And I think the good news is that there is precedent here, and I think we've proven that there's a relative degree of built-in inelasticity in our products, and so there's permission to raise price. But it's fairly complex, and we want to ensure that that's a balanced approach versus just simply trying to solve for gross margin percent. And so I think that's the first comment I would make. The second comment I would make here is that you know, it's not set up to fully offset rising pressures that may come as a surprise, which, you know, we're certainly seeing in inbound transportation. And so it will be a meaningful component of or a meaningful offset to the pressures that we're feeling, but it won't necessarily offset entirely those pressures. However, we are exploring other avenues that may be even more temporary in nature, but where we have permission to make certain adjustments to be slightly more reactive to some of the changing dynamics that we're facing day-to-day, week-to-week, month-to-month, and that's something that we'll likewise evaluate and potentially execute on in Q4 in addition to the price increase that's going into effect here shortly. Remind me, the second question?

facilities oh facilities yeah yeah we're up and running across um all three of our our main factories in asia thank you ms zaxla the next question is from peter benedict with rw baird please proceed all right guys uh good afternoon just um first just a clarification it sounds like you've got visibility into the product flow to kind of support this second half revenue outlook. Is that, Jeremy, what you're trying to kind of imply, I guess, with those comments on you feel good about where you are with inventory? That's my first question. Yeah, we do.

Production's been smooth. We like our inventory position. As I said, we're being fairly methodical around inventory. How we move inventory from Asia to the U.S., just trying to balance cost as much as possible in this environment, but we feel good about the inventory position. Our expectation is that it will satisfy demand in the back half of the year.

Yeah. Oh, thank you. And just good to hear that the meter business seems to be doing well here. I know it's still early with you guys, but maybe can you talk a little bit more about your plans to leverage that? Is there anything you're going to be able to do to influence kind of the back half of the year, or is this something that's more of a 22 event where we should see maybe meter more integrated with the core brand?

You know, there's certainly some activities that could have some I would say that some nominal incremental upside this year. Of course, it's new, and we're really taking a long view on this acquisition. We actually had a partnership with Meter 18 months ago in integrating their product and their technology into a new innovation that we're launching next year. And so we know the product well. We understand its capability. We like how it fits into not only our brand from an accessory perspective, but into our core product line. And so there were already plans in place. Some of those will be leveraging our retail distribution capabilities. That will mostly happen next year. We want to make sure that we're thoughtful around where we launch it, meaning that this is a premium product. It's expensive. It's new innovation. It requires merchandising at the point of sale. It requires education. And so I would say we are mostly building our strategy for next year and leveraging the right trigger points of distribution and beginning to connect customers the brands in the marketplace. But there'll be some upside in the fourth quarter, mostly through e-commerce partners, just given the time to bring it to channel. But we'll also be testing it in some of our sort of premier specialty distribution retailers, just so that we can start to really test and understand what is the right way to scale the go-to-market.

Thank you, Mr. Benedict. The next question is from Jim Duffy with Steeple. Please proceed.

Thank you. Hi, Jeremy. Hi, Dom. Nice work with your first call. I wanted to ask, I know there's no end to the outdoor cooking season, but as we move past Labor Day, are there any metrics you can share about the state of channel inventories? And then can you speak to the mechanics of the channel strategy to manage the pricing transition? have you seen any pull forward of orders to get ahead of pricing increases?

Yeah, I can jump in. That's a good question on the channel inventory levels. And I would say that, you know, compared to, you know, where we were in 2020 as we were navigating the pandemic and, you know, certainly the very robust demand and pull through at point of sale, inventory levels in-channel are much improved. Not to say that it's perfect, but we're in a fairly good spot now, and that's really been a very focused effort from the beginning of the year to where we are now to ensure that, one, we are improving in-channel inventory levels so that we're not seeing out-of-stocks the way we did last year. and two, to ensure that we remain balanced in how we manage the collaborative planning process with our retail partners to ensure that they're also not over-inventory. We have seen a dynamic, at least earlier in the year, where just given the disruption that COVID has had on product flows, inventory, there has been an appetite for more. And Jeremy mentioned earlier that we are methodically – or really obsessed with evaluating sell-throughs as well as on-hand levels on a weekly basis. And we have real infrastructure in place to manage that as a partnership with our retail partners. And that also allows us to pull back when we believe that there may be an overappetite for inventory when it's not needed. And so, you know, fundamentally our strategy hasn't changed other than just trying to get to the point where in-channel inventory levels are at the right spot and we feel like we're in a pretty good position there. I think on your second question, I would say no. We really haven't seen anything that would indicate behavioral shifts in trying to bring in more inventory prior to the price increase.

Thank you, Mr. Duffy. The next question is from Joe Feldman with Telsey Advisory Group. Please proceed.

Hey, guys, congrats on the start to being public. I had a question. Related to the Home Depot, I know you guys have been working on more shopping shops and rolling that out. Can you give us an update on where you are with that and, you know, the level of upgrades and what you're seeing from those upgrades?

Yeah, absolutely. Look, first of all, I would say, you know, You know, Home Depot is the largest grill reseller in the world, and we have a tremendous partnership with them. I think they really value having a differentiated brand that's focused on experience and premium and innovation. And they've really been a great partner since the earliest days, which I think is phenomenal given the size of of their business. You know, it's one of the things that we've been talking about for many years, and I feel like we are making progress. We have certainly pushed Home Depot on how our brand looks in retail. We think it's incredibly important that inventory isn't just sitting there with a price tag on it, but when a consumer approaches our brand, she or he has an experience where they're able to understand that this is a brand that's meaningful. It's not just a grill. It's an experience. And all of the components of the digital, the recipes, all of these things are integrated into that experience. I would say early on, as we pushed Home Depot on some of the ways that we wanted to express our brand at retail, there was an alignment. It's taken time for us to really align on what a great representation of the Traeger brand looks like. We've made a lot of progress this year. We've launched about 50 locations of this beautiful premium fixture and brand experience. We've been tracking sell-through. We're seeing a lift in sell-through, and there's alignment to begin to roll that out. I expect that next year we'll see a very significant increase in the number of doors that will have this premium brand experience. What we know is that when a consumer walks into a specialty retailer and they're greeted by a sales associate saying, who oftentimes knows them by name, they know what they're looking for, they understand the trade or brand and the attributes in the product, our conversion is really, really high. And we've measured that conversion through various studies that we've done. We know that at Home Depot, the traffic is really high and the conversion is really low. To some extent, that's frustrating. To another, we sit down and we view it as an opportunity. The way that we speak to a customer is very different than Home Depot, than a specialty retailer, because you've got to catch a consumer as they're racing down the aisles in a less assisted environment, we need to create an environment that's friendly for the brand. And I think we've got a great partnership with Home Depot and a willingness to begin to really invest much more next year than we have in any of the six years that we've been in Home Depot.

Thank you so much, Aaron.

Thank you.

Thank you, Mr. Feldman. There are no additional questions waiting at this time. I'm going to pass it back to Jeremy for closing remarks.

Well, we appreciate, thank you for listening in. It's exciting for us to announce our first quarter as a public company. We've got an engaged team. We're fired up. We think this is a ton of fun. We appreciate the great questions that have come in. We certainly appreciate our fiduciary obligation to our shareholders and the confidence that you've placed in us as you've recently become owners of Traeger stock. We are incredibly optimistic about the future. We could not be more excited about it. We could not be more confident in it. And we're looking forward to furthering our relationship going forward. So thank you so much. Take care.

That concludes the Traeger Second Quarter Fiscal 2021 Earnings Conference Call. Enjoy the rest of your day.