Traeger, Inc.

Good afternoon. Thank you for attending today's Traeger first quarter fiscal 2022 earnings conference call. My name is Hannah and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to our host, Nick Baucus, Vice President of Investor Relations of Traeger Grills. Please go ahead.

Good afternoon, everyone. Thank you for joining Traeger's call to discuss its first quarter 2022 results, which were released this afternoon and could be found on our website at investors.traeger.com. I'm Nick Backus, Vice President of Investor Relations at Traeger. With me on the call today are Jeremy Andrus, our Chief Executive Officer, and Don Blossel, our Chief Financial Officer. Before we get started, I want to remind everyone that management's remarks on this call may contain forward-looking statements that are based on current expectations but are subject to substantial risks and uncertainties that could cause actual results to differ materially from those expressed or implied herein. We encourage you to review our annual report on Form 10-K for the year ended December 31st, 2021, and our other SEC filings for discussion of these factors and uncertainties, which are also available on the investor relations portion of our website. You should not take under 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, which we believe are useful supplemental measures. The most comparable GAAP financial measures and reconciliations of the non-GAAP measures contained herein to such GAAP measures are included in our earnings release, which is available on the investor relations portion of our website at investors.trigger.com. Now, I'd like to turn the call over to Jeremy Andrus, Chief Executive Officer of Trigger.

Thank you, Nick. Thank you for joining our first quarter earnings call. Today we'll discuss highlights for our first quarter results and share our progress in executing our long-term growth strategies. I will then turn the call over to Dom to discuss details on our quarterly financial performance and to provide an update on our fiscal 2022 guidance. The Traeger team continues to work relentlessly to deliver an incredible experience to our consumers and to drive forward our key long-term growth initiatives. In the first quarter, While we face several near-term headwinds, including continued inflationary pressures and supply chain challenges, a highly dynamic consumer backdrop, and tough year-over-year comparisons, we are pleased with our execution. Our first quarter sales of $224 million were down 5% versus prior year, with particular softness in our grill business, with revenues down 16%. First quarter year-over-year growth was negatively impacted, by lapping a period where our retail partners were aggressively restocking channeled inventory and consumer demand was enhanced by government stimulus. Looking at first quarter's three-year CAGR of 32% and grill revenue CAGR of 27% demonstrates the strong gains that Traeger has experienced since 2019. We are pleased to have exceeded our first quarter guidance, which we provided in March, despite beating our quarterly guidance we are maintaining our full year 2022 sales and EBITDA outlook there are three central factors i'll touch on as it relates to our reiteration of guidance first our beat relative to guidance in the first quarter was largely driven by timing of shipments of grills and was not based on a change in underlying demand relative to our assumptions when we shared our outlook second We remain cautious on the macro environment with continued pressures on the consumer and tightening financial conditions, as well as a shift in consumer spending away from durables towards services. Lastly, we are in the beginning of our seasonally strongest selling period with our most important weeks at retail ahead of us. Therefore, it is early in the year to adjust our outlook. Despite near-term headwinds, our brand health has never been stronger. Our consumer continues to increase engagement with Traeger, with connected cooks continuing to grow in the first quarter, led by an incredible 55% increase in connected cooks on Super Bowl 2022. Moreover, our customers continue to tell their friends and family that they love their Traeger, and our NPS score is now at an all-time high, well above other players in the outdoor cooking category. and in line with great consumer brands like Starbucks, Airbnb, and Netflix. The excitement and passion around the Traeger brand continue to build momentum as we approach our summer selling season. In March, we launched our new Timberline Grill, which is Traeger's most innovative product since I've been with the company and is truly a game changer in outdoor cooking. The launch's reception for our consumers, our retail partners, and outdoor cooking influencers has been incredible and cements traeger's status as a disruptive force in the grilling category looking forward we are optimistic about our plans as we head into the summer grilling season whether smoking a 15 pound brisket overnight for a block party or using one of our fast and easy dinner recipe ideas for a weeknight meal to be enjoyed outdoors with the family our wood pellet grills versatility consistency and ease of use made Traeger the go-to grill for the summer. Similar to last year, we kicked off the beginning of the season with a promotion, this year setting around Mother's Day, with $150 off select grills and $2 off pellets and sauces. The promotion was a great gift-giving opportunity and directly addressed consumers looking to buy a Traeger grill or consumable ahead of the summer. On May 14th, we will be celebrating our fifth annual Traeger Day. Traeger Day is dedicated to bringing the global Traeger community together to cook outdoors and to share wood fire foods with friends and family as they celebrate the start of the growing season. Consumers and influencers share pictures and videos of their meals on social media and can win prizes based on their spread. We expect significant growth in consumer engagement, especially after two years of virtual Traeger days. We remain highly enthusiastic about the enormous upside potential for the Traeger brand and are confident in our growth strategy. Having said that, as we discussed in March on our fourth quarter earnings call, the near-term environment remains highly dynamic. We are seeing numerous companies across multiple parts of the consumer sector speak to a less favorable backdrop for the consumer, with inflation and geopolitical turmoil impacting consumer confidence. Furthermore, as the pandemic subsides, it is becoming evident that the consumer is shifting spend away from durable, home-related goods towards leisure and travel, which is also negatively impacting the grill category. On our fourth quarter call, we discussed having seen a deviation from our forecast in sell-through trends at retail in March, which coincided with worsening geopolitical headlines and a sharp rise in prices at the pump. Since then, sell-through trends have remained volatile, but are trending in line with the expectations we provided when we gave our 2022 guidance. It is important to note that it's still very early in the year, with our highest volume sales weeks at retail ahead of us. In fact, in a typical year, we would expect retail sell through volumes between now and Labor Day to make up nearly 50% of our yearly sell through. In terms of supply chain dynamics, as we have discussed on previous calls, given the size and weight of our product, Traeger is especially sensitive to the cost increases in freight and transportation that many companies are facing today. While we do expect that increased freight costs will normalize to some extent over time, our team remains hyper-focused on driving costs out of logistics, supply chain, and manufacturing. Specifically, earlier this year, we formed a gross margin task force led by our chief supply chain officer, Jim Hardy, to identify and execute on cost savings initiatives across the supply chain. While it is early in the process, we are encouraged by some initial learnings and wins and we expect to leverage efficiencies driven by this team over the medium to long term. Critically, while the team is focused on driving cost savings, we are committed to doing so without compromising the quality of our products or our consumer experience. Furthermore, given cost increases and the uncertain consumer backdrop, we are managing our expenses to better align the cost structure to the current environment. This includes reexamining our investment spend for the year and reducing, deferring, and reprioritizing certain expenses. We remain committed to fueling our long-term growth and continually improving our product and consumer experience. However, we believe that thoughtful cost discipline is appropriate given the highly dynamic backdrop. I want to shift my discussion to progress on our key strategic growth pillars, accelerating brand awareness and penetration in the United States, disrupting outdoor cooking through product innovation, driving recurring revenue through our consumables business, and expanding the Traeger brand globally. Increasing brand awareness and penetration in the United States remains our largest single growth driver. It is important to note that while door growth in the U.S. is a long-term opportunity for Traeger, increasing penetration in our existing retail footprint is at the core of our growth strategy. In the first quarter, we reset roughly 350 stores at the Home Depot with an expanded assortment of Traeger products and improving signage and fixturing. As we have noted, these locations have a larger assortment with more than double the number of Traeger SKUs and a significantly improved brand presence, which allows these locations to drive more than twice the sales productivity for Traeger products compared to the average Home Depot door. We will continue to drive future growth in Home Depot by increasing the product assortment across stores, particularly those with minimal brand presence in sales, and by investing in visual merchandising, fixtures, and retail training. On the marketing side, in the first quarter, we launched a new brand campaign, the Traeger Hood Tales, featured in TV spots and digital ads. The campaign focuses on funny family moments with a Traeger spin. and I would encourage everyone to watch these entertaining commercials on our YouTube channel. Going into the summer season, we'll focus our media efforts in the social, digital, and connected TV channels. Lastly, our DTC business continues to gain momentum, and in the first quarter, Traeger.com US saw solid growth with increases in both returning customer transactions as well as new customer transactions. We launched several new products across pellets, consumables, and apparel in our DTC channel, including Meat Sweats, a limited edition run of Traeger branded joggers that are the perfect pants to wear when grilling on a Traeger. Our consumers love the idea and Meat Sweats sold out in eight hours. These types of creative and limited run offerings bring significant energy to the Traeger brand. Our next growth pillar is product innovation. The launch of the new Timberline and Timberline Excel in March was an enormous occasion in the history of the company. Our new Timberline brings incredible innovation to the market, offering consumers an unparalleled level of consistency, convenience, and versatility. Full stainless steel insulation and a redesigned heat delivery system allow for hotter temperatures and improved searing. The grill includes the first outdoor-certified induction cooktop, which provides fast heating for sauteing, simmering sauces or searing, as well as a proprietary grease and ash keg system for easy cleanup, a new Wi-Fi-enabled controller for precision temperature control, and two wireless meter probes for easy monitoring of internal temperature, among other innovations. There is nothing else in the space that has all the innovative features that are included in this new Timberline. The excitement around the launch of the new Timberline was palpable, with 1.2 billion press coverage impressions and 70 million influencer-driven impressions in the first week post-launch. The reception of the new Timberline has been fantastic, with significant excitement from retail partners who have sent Timberline hero moment fixtures in over 1,000 doors as well as strong advocacy from influencers like Sam the Cooking Guy, Matt Didman at Meat Church, and How to Barbecue Rites Malcolm Reed. Importantly, we expect the innovations introduced in this product will power several years of upgrades and newness as technologies and features cascade through the rest of the Traeger product assortment. Shifting to our consumables business, we remain focused on driving recurring revenues through expanded distribution and new product introductions. In the first quarter, we added 2,200 grocery doors where Traeger rubs and sauces are being sold, led by our rollout at Kroger. We saw strong growth in our rubs and sauces business in Q1, driven by this increased distribution. We are also increasing distribution in our pellet business and added 600 additional grocery doors where pellets are sold. It is early in our consumables expansion at grocery. However, we are encouraged by early results and continue to believe that the consumer wants to buy our consumables where they shop every week, not just where they're buying their grill. In addition to distribution growth, we continue to expand our consumables assortment with new innovation. In February, we launched two new rubs, the Anything Rub and the Perfect Pork Rub, and two new sauces, Liquid Gold and Show Me the Honey. Moving to our final growth pillar, expanding the Traeger brand globally. Our international business had a strong first quarter with healthy growth both in Canada and Europe. The quarter benefited from strong pre-book and early season loadings, and our team did a great job delivering product on time and in full, to our international retailers and distributors. In the first quarter, we saw a deceleration in sell-through in our international markets, as we believe consumer sentiment in global geographies is being negatively impacted by the war in Ukraine and inflation. Similar to the US, we've planned our international business more conservatively for fiscal 22, based on the macro backdrop. We would note we have no direct exposure to Russia or Ukraine, and the European market makes up well below 5% of our total sales. We continue to see a significant long-term opportunity to grow the Traeger brand globally. In summary, the Traeger team continues to execute on our growth strategy, which we believe will drive meaningful value for our shareholders, consumers, and retail partners. In the first quarter, we launched our most innovative product in the company's history, which we believe sets the stage for a multi-year innovation cycle. and puts us significantly ahead of the competition. Despite facing near-term challenges, Traeger continues to be strongly positioned for long-term growth as a disruptor in the outdoor cooking sector. Before I pass it over to Dom, I'd like to thank the entire Traeger team for their hard work and passion in executing on our vision to bring people together to create a more flavorful world. And with that, I'll turn it over to Dom. Dom?

Thanks, Jeremy, and good afternoon, everyone. As Jeremy discussed, in the first quarter we faced several headwinds which negatively impacted our year-over-year growth rates and margins. These pressures include comparing against the period when sell-in materially outpaced sell-through as retailers restocked low-channel inventories in the first quarter of last year, lapping stimulus-driven retail demand, an uncertain consumer environment, and continued inflationary pressures on our supply chains. Despite these headwinds, We are pleased with our first quarter execution as we move into our strongest seasonal period. While the near-term environment remains highly fluid, we are focused on the things that we can control, as well as maintaining an appropriate balance of short-term and long-term investment. I will start by reviewing our first quarter results, and then we'll provide an update on our 2022 outlook. First quarter revenues declined 5% to $224 million, driven primarily by a decline in grill revenues. Grills revenues declined 16% to $150 million, with revenues impacted by lower unit volumes partially offset by higher average selling prices, driven by price increases taken in the second half of 2021, as well as the first quarter of 2022. First quarter unit volumes were impacted by the anniversary of difficult unit comparisons as retailers were restocking grill inventories in the first quarter last year, and sell-through benefited from government stimulus. Consumables revenues declined 3% to $40 million, reflecting the lapping of a strong 72% increase in the first quarter of last year, with a decline in our pellet business somewhat offset by growth in our rubs and sauces business. We note that the decline in first quarter consumables revenues of 3% represents an acceleration from our fourth quarter's 19% consumables decline. Finally, accessories revenues increased 109%, driven by incremental revenue from the acquisition of meter and continued strong growth in Traeger accessories. First quarter revenues beat the high end of our guidance by $12 million. The upside in sales was largely driven by timing of shipments of grills relative to our plan when we guided in March as we released orders for certain accounts earlier than expected to ensure on-time delivery given continued constraints and domestic carrier capacity as well as earlier loading of our new Timberline XL to certain accounts. Geographically, in the first quarter, we saw strong growth in Canada and the rest of the world, while growth in the U.S. was impacted by the aforementioned headwinds. We remain highly optimistic about the long-term opportunity to grow Trader globally. We are, however, planning our international business more conservatively this year, given the growing macroeconomic pressures the consumer is facing in many of our international markets. Gross profit for the first quarter decreased to $84 million from $101 million last year. Gross profit margin was 37.4%, down 530 basis points to last year. Higher inbound freight costs continue to be the largest pressure on our gross margin and contributed 870 basis points of negative margin impact. Amortization of intangible assets related to the meter acquisition was also diluted in margin. Offsetting these pressures was margin favorability of 370 basis points, driven by our pricing actions, as well as favorability driven by a higher mix of customer orders fulfilled via our direct import program. First quarter gross margin was modestly better than our expectations, driven by slightly lower inbound freight expense compared to our forecast. Sales and marketing expenses were $33 million compared to $31 million in the first quarter of last year. The increase was primarily driven by advertising costs related to meter, which is not a component of the 2021 comparable period. The increase was also driven by higher equity-based compensation expense of $2 million due to the restricted stock units issued under the Traeger 2021 incentive award plan. General and administrative expenses were $43 million compared to $14 million in the first quarter of last year. The increase in general and administrative expense was driven primarily by higher equity-based compensation expense due to the restricted stock units issued under the Traeger 2021 Incentive Award Plan, higher personnel-related costs, and increased professional services. As a result of these factors, net loss for the first quarter was $8 million as compared to net income of $39 million in the first quarter of last year. Net loss per diluted share was 7 cents compared to net income per diluted share of 36 cents in the first quarter of last year. Adjusted net income for the quarter was $20 million, or 17 cents per diluted share as compared to adjusted net income of $45 million, or 41 cents per diluted share in the same period last year. Adjusted EBITDA was $31 million in the first quarter as compared to $64 million in the same period last year. Now turning to the balance sheet. At the end of the first quarter, cash and cash equivalents total $11 million, compared to $17 million at the end of the previous fiscal year. We ended the quarter with $379 million of long-term debt. Additionally, as of the end of the first quarter, the company had drawn down $47 million on its revolving credit facility and $49 million under its receivable financing agreement, resulting in total net debt of $464 million and a net leverage ratio of 6.2. It's important to note that our first quarter is typically our peak leverage point, given elevated working capital needs ahead of our strongest seasonal selling period, with debt levels historically coming down thereafter. Inventory at the end of the first quarter was $164 million, compared to $76 million at the end of the first quarter last year. As we have discussed previously, the increase in inventory was driven by three factors. First, given supply chain constraints, We have intentionally leaned into inventory to ensure we have adequate supply. We believe this strategy is the right one, given the supply chain environment remains highly fluid, as evidenced by recent warehouse and port shutdowns in Shanghai. Second, inventory costs are higher versus last year, driven by increased freight and input costs. Finally, about $18 million of the inventory increase was due to meter, which is not in the comparable inventory base last year. We remain comfortable with our inventory levels and balance. We are closely monitoring the supply chain environment and will be managing our level of safety stock based on how the landscape evolves over the balance of the year. Turning to our guidance for fiscal year 2022, we are reiterating our full year revenue guidance of $800 million to $850 million and our adjusted EBITDA guidance of $70 million to $80 million. Given that the upside in first quarter revenues was largely based on timing, we are not following through the beat to our full year outlook. Furthermore, we remain cautious given the uncertain macro environment and its impact on consumer behavior and competence, as well as shifting consumer spending patterns towards services and away from durable and discretionary goods. We continue to expect grill revenues to be down double digits in the first half of the year. With declining grill revenue growth for the full year, and sequential improvement in the second half of the year relative to the first half as comparisons normalized. On our fourth quarter earnings call, we discussed having seen a deviation in sell-through in March relative to our forecast. Since that time, sell-through trends have remained volatile, but are generally in line with the expectations embedded into our guidance. As Jeremy spoke to, it's important to note that our business is fairly seasonal with the next 18 weeks of sell-through typically representing nearly half of our yearly sales at retail. We are early in our key selling season and therefore will be reading and reacting to sell-through trends during the summer. In terms of gross margin, we are reiterating our prior guidance for full year gross margins of 34 to 35%. Despite modestly better than expected first quarter gross margin, The supply chain environment remains highly fluid, and we believe it is prudent to maintain our prior margin outlook. We continue to expect gross margin the first half of 2022 to be higher than the full year. Next, I'd like to give an update on our gross margin drivers. We expect that inbound container rates will continue to track above $10,000 through 2022, which will continue to put pressure on gross margin rates. We continue to be focused on working to offset these cost pressures. As Jeremy mentioned, we have formed a task force which is charged with evaluating changes in design, manufacturing, and supply chain processes to drive higher product margins and lower costs. We are encouraged by the team's initial findings in these areas and expect that we will begin to realize savings in 2023. In terms of SG&A, we will continue to right-size our expense structure to help offset near-term top-line and gross margin headwinds. Given the current macro backdrop, We will delay certain investments that have a less quantifiable in-year return profile. And further, we'll be nimble in our approach to managing the P&L. Our focus is to balance investing behind growth while protecting profitability and acknowledging the uncertain macro environment. We continue to feel extremely optimistic about Trigger's long-term growth as we disrupt the outdoor cooking industry as evidenced by the successful launch of our new product innovation. Furthermore, I remain highly encouraged by the long-term opportunity to gain market share by increasing penetration within the U.S. And with that, we will open the call to questions. Operator?

Certainly. If you would like to ask a question, please press star followed by 1 on your telephone 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. We kindly ask that participants limit themselves to one question with one follow-up today before reentering the queue. 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 as questions are registered. The first question is from the line of Simon Siegel with BMO. Please proceed.

Thanks. Hey, guys. Hope you're having a good afternoon. So, Jeremy, maybe it's early, but anything you can speak to on that sales uplift you're seeing with the 350 Home Depots that get expanded, so maybe just giving some color around what you're seeing with those. And then how are you guys thinking about the sell-in versus sell-through dynamics for Pellets? Basically, how are you thinking about when consumer goals should return to growth and just any help there? Thank you.

Hey, Timmy. So, look, we track sell-through weekly weekly. And we cut it by customer, by door, by region. And no question, we're seeing a lift in those 350 doors. And by the way, we've been seeing this for years. I mean, every time we grow assortment, we improve merchandising, we see a lift in sell-through. So it's fortunately a fairly predictable formula to drive growth. And we are seeing that lift and it will continue to drive our strategy with Home Depot. One of the things that we talked about in addition to increasing assortment has been the testing and I would say now investment of sort of store in store fixtures within Home Depot. We tested about 35 stores last year, really liked the return that we saw. both in terms of lifting sales as well as return on investment, on the investment in those fixtures that has continued to roll out. There are a couple hundred in market now and will be sort of 500 by end of year. And that's our strategy. I think it's marked in Home Depot because there's so much traffic and there's such a conversion opportunity. But it's foundational to our brand in terms of building a branded presence in retail and really capturing the opportunity to speak to the foot traffic walking through the retail. In terms of, Dom, do you want to hit on the public question?

Yes, we have. So I'll speak in terms of consumables. I would say that the first half of this year is a challenging comp. you know, across our different categories, save where we're seeing, you know, nice momentum on the accessory side in addition to required revenue with meter. You know, as we look ahead, I think you start to see some normalizing comps in the back half of the year. And, you know, we won't go into detail around guidance, but, you know, I guess I would say two things. First, we expect to see some normalization of, of consumer or consumption of pellets as we measure attachment in the back half of the year. We're lapping two years of elevated attach just given the dynamics around the pandemic and cooking behaviors as consumers shift to a more normal world where some of that discretionary spend as well as their discretionary time is moving to services. We think that will continue to put a little bit of pressure on the comps. But again, in the back half, we think those will normalize. On the food consumables side, I think one of the tailwinds that we expect to see over the course of the year is just the growing penetration within retail and more specifically Kroger and our grocery strategy, which will buoy up our consumables business through the course of the year.

Great. Thanks, Lockheed. Best of luck for the year ahead. Thanks, Damian.

Thank you, Mr. Siegel. The next question is from the line of John Glass with Morgan Stanley. Please proceed.

Thanks very much. You talked about the still volatile consumer environment generally on trend, but you're reading and going to react to those. What does react mean, I guess, in your minds? What levers do you have if we start to see slippage again in consumption of grills, whether it's promotional activity or re-examining some price points. What are the levers you think you have to stimulate demand if needed?

Yeah, I mean, I think just stepping back, like the growth thesis hasn't changed. We still feel highly confident in the thesis. And it's a long-term thesis. I think the in-year dynamic will require a shift in strategy. That's not necessarily a signal for how we'll manage the business long term. But when you think about and something we talked about on the last call, we experienced some acceleration in unit growth on the grill side. And ultimately that correlates to the installed base of grills. The household penetration that we sort of measure on a quarterly basis continues to reinforce the opportunity. You know, we'll be lapping some challenging comps over the course of this year, and obviously we're changing our in-year strategy around how we manage the P&L, and more specifically within SG&A, which in part requires a renewed focus on kind of middle and bottom funnel investments on the demand creation side. And that's to really ensure that where we make investments, we have a high degree of confidence, and to the extent that there's excess capacity within the P&L will look to continue to kind of build top of funnel and or rebuild top of funnel given some of the acceleration we've seen over the last two years. And so ultimately what I would say is in-year the strategy will be slightly different than longer term. In-year will be focused more on performance marketing where we see high kind of one-to-one conversion. You know, price is always something that we evaluate. We've really configured a fairly sophisticated pricing strategy internally where we can simulate, you know, based on historical moves, based on the price increases we've made, how that could, in theory, impact both demand as well as, you know, mix shift across our products and then in turn how that impacts the profits, our products, and then in turn how that impacts profits generally. And so I'd say the in-year lever is really, you know, doubling down on how we sort of shift spend to performance marketing, as well as where we're seeing highest returns there. And then we'll always evaluate price. I think we feel pretty good about our price, how we've configured our price this year, but something that we'll continue to look at. You know, on the last call, we spoke to, you know, kind of the, maybe the more pressure on the consumer sub $1,000 versus above. where we have probably more inelasticity. So it's something that we'll continue to evaluate as a potential in-year lever. But ultimately, it's the long-term focus that I think will guide our strategy. And coming out of some of the in-year challenges, we'll sort of reconfigure our top-of-funnel strategy, build that funnel, and continue to execute on the formula that we believe works and ultimately aligns to our growth algorithm long term.

Thank you for that. And just a quick follow-up. You mentioned timing of shipments, which was a benefit to the first quarter. What was the amount of that? Was that just the overage versus your guidance? Or could you quantify what that timing difference was?

Yeah, it's effectively the overage. Yeah, that's right. It's really a shift between Q1 and Q2. And as we said, it's tied to orders that had ship dates in kind of early Q2. that we chose to move late Q1. They were sort of on the cusp of the two quarters, and that's really an effort to ensure we're taking advantage of capacity, which is constrained among our carriers as it becomes available. That was the primary driver. Thank you.

Thank you, Mr. Glass. The next question is from the line of Peter Keith with Piper Sandler. Please proceed.

Hey, thanks. Good afternoon, everyone. So understanding there's a lot of business to be done in the next 18 weeks, I guess I'm curious, just if things don't go well, how you work with retailers on their inventory levels. So if you have some of your big box players with a lot of excess grills, is there any markdown risk? Do you enforce map pricing? Or is it just simply just you'd stop shipments and just kind of let the inventory levels bleed down into the holiday season?

yeah so one of our core principles is not to be promotional right and we've been very disciplined to that it's evolved between kind of two to four promotional periods per year and of our biggest promotional periods we're not going to deviate from that we think that drives healthy brand long term, which is why our collaborative planning process which we've configured internally. as we work with our retail partners in lockstep to ensure that in-channel inventory levels don't exceed a certain range that we're uncomfortable with, that holds true. And so the goal for us is always to ensure that we don't find ourselves in a position where we're too heavy on inventory in-channel and one quarter at the sacrifice of another. Now, as we look at the data that comes out of our collaborative planning process, as well as sell-through trends and in-channel inventory. We're within a band that we're comfortable with, but we are heavier than what you see historically. And that's in part driven by our retailer strategy, which has also been to lean more into inventory, given the fact that over the last two years, they've found themselves in some challenging positions with lack of inventory, missed turns, etc., And so, you know, we watch this closely. We're a bit heavy, but we're also ahead of our peak selling season. And by no means is it a manageable position, even if the trend deviates from expectations in Q2, it's still something that we can manage within an appropriate sort of band of weeks on hand within channel and believe that it's really a specific issue to 2022 versus something that would linger or persist

Okay, that's helpful. Maybe pivoting over to freight, so you did give the comment that you're factoring in container costs running above $10,000 for the year. What are you seeing as of late with your container costs? Has there been any near-term relief, or are you still above that level?

No near-term relief, but near-term stabilization. I think where we're building confidence is that the problem isn't becoming worse. It's stabilized, which leads us to believe that, you know, 2023 and beyond, we may start to see some building tailwinds on the container side. But in this year, we're holding guidance where it is on gross margin because, you know, one, we're sort of locked in, not contractually, but effectively locked into kind of these elevated rates, which are holding. A little bit of volatility from kind of week to week, month to month, but we expect the trend to hold through full year. And to the extent that we see some tailwinds build, those will likely be captured in 2023. So the good news is there's some stabilization within some of these inflationary pressures and transportation in particular. And that, at minimum, provides for some additional predictability within the year, but nothing that would necessarily lead us to believe that there's incremental benefit to gross margin just based on what we know today.

Okay. Sounds good. Thanks so much and good luck. Thanks.

Thank you, Mr. Keith. The next question is from the line of Sharon Zekvia with William Blair. Please proceed.

Yeah, hey guys, this is Alex on for Sharon. Just a quick one for me. So based on the sell-through that you guys are seeing now, could you maybe just qualify any of that, any improvements that you're seeing with the sub-1000 category? Have you seen anything coming out of that that's improved?

Look, I would say from a sell-through perspective, You know, the data points remain mixed, as we discussed on the last earnings call. And, you know, we're still early in the season. Our sell-through is predominantly still in front of us, but no clear direction that's deviated from what we reported on the last call. Still within the range of guidance that we've provided.

Okay. Got it. Thanks. It's helpful. I'll pass it on. Thanks.

Thank you. The next question is from the line of Anna Gleisman with Jefferies. Please proceed.

Hi. Good afternoon. Thanks for taking our questions. I guess appreciate the color on the pellets attached rate. Could you give some color on what you're seeing on the rubs and sauces side of the consumable segment in terms of repurchase behavior and attach as well?

I would say it's early days, but we're feeling really confident in our food consumable strategy. roll out more product within grocery and expand those doors. We think that this is a growing tailwind for the business. There's a real appetite for food consumables, especially Traeger-branded food consumables. So this is an exciting component of our strategy that is beginning to mature from the standpoint of how we believe the strategy should be configured and how we will ultimately execute on that strategy to continue to drive growth, which, you know, ultimately is, you know, part of kind of our long-term growth algorithm. And I think we're early days in terms of this strategy in particular.

Makes sense. And could you remind us what, you know, the average queue count is in the grocery channel for Dora and potentially where that could see upside?

Yeah, we don't have the specific data in front of us, but, you know, I think ultimately the strategy will evolve over time where we'll set probably our most important kind of highest moving SKUs and then sort of build the strategy from there, whether it be, you know, adding kind of linear square footage, you know, linear fee within retail where it makes sense or, you know, updating based on, you know, seasonal offerings, things like that. So, I would say, you know, the core set is established, and that will evolve over time based on, you know, how we measure, you know, turns within grocery in particular and where we see success across the portfolio.

Got it. Thanks. Thank you. The next question is from the line of Colmill Gajrawala with Credit Suisse. Please proceed.

Hi, thanks for having me on. Is there a way for you guys to kind of normalize sell-through versus sell-through? I think some of what you talked about was you have this difficult comp because retailers were replenishing last year, but on kind of a sell-through versus sell-through basis, are you able to give us an indication on what volumes we're doing for grills?

So what do you mean by sell-through versus sell-through?

Well, it sounds like replenishing inventory at retail last year. And that's part of the difficult comp for the store. Are you, are you trying to, you're trying to come through that, right?

So you're comparing sell in versus sell through. Is that right? That's your question.

Yeah. I'm just trying to clean them.

Okay. Got it. Got it. Yeah. I mean, ultimately I think about it, right. I would think about it in terms of, you know, you know, seasonality within kind of our gap financials. Right. So Q1, Q2, our largest quarters, Q3 tends to be our lowest, and then there's an uptick in Q4. This brand benefits from a fairly consistent seasonal curve over the course of the year versus where maybe you see other brands have a massive load in early in the year, and then their seasonality drops fairly consistently. So we see nice replenishment as well as high usage across the year, which we benefit from. But Q1 is our load-in season, right? So it's one of our biggest quarters because we're loading in meaningfully ahead of our peak season, which is Q2. Q2 is equally as a meaningful quarter from a seasonal standpoint. And to your point, that's driven mostly by replenishment. And so when you think about marrying sell-in versus sell-through, you're not necessarily going to see the same seasonal pattern take shape in Q1, right? Because we're loading in product. Whereas in Q2, we're replenishing what is ultimately higher velocity at point of sale where you're seeing kind of the peaks, you know, the peak season from a sell-through standpoint as you measure seasonality. And that kind of normalizes over the course of the remainder of the year. But ultimately, you know, 50% or so of sell-through typically happens kind of in Q2 during those summer periods. So definitely weighted more heavily to... to Q2 from a sell-through standpoint.

Okay, got it. Maybe I'll follow up to try to make sure I'm understanding properly. On inventory, are you able to talk about how much, like what your inventory volume looks like? Because obviously the freight figures have inflated the dollar amount, but how do you feel about the actual units or volume of inventory at the moment?

We feel good about our inventory position. We definitely have higher inventory than what you would typically see historically, just given the environment. We've talked in the past about leaning into inventory. There's also a higher cost to purchase inventory given the inflationary pressures we're facing and obviously capitalizing in the higher cost of transportation. I would also add that there's a decent component of of the inventory increase in Q1 based on the Action Labs acquisition, you know, which added, you know, a meaningful component to the growth. So as you kind of break down inventory in Q1, you need to account for the, you know, the meter piece. You know, what we've kind of leaned into or, you know, how we've built safety stock in excess of what we normally would would kind of account for the second later. And as you kind of normalized then the inflationary pressures, so those kind of three components were really in line with, if not slightly better, on a normalized inventory basis compared to last year from a turn standpoint. And so I'd say that all in, we're feeling pretty good about our inventory position. It's a deliberate strategy. We don't have obsolescence risk. And to the extent that we see improving macro trends, whether it be reduced risk out of Asia to just a more fluid environment as we kind of move product from point A to point B across the value chain, we'll begin to work those inventory levels down by year end. If for some reason that does not happen, then we think it's prudent to continue to maintain a higher balance of inventory It comes at the cost of cash and some of our liquidity, but it's the right place to put resources right now in an effort to just navigate the unknowns throughout the remainder of the year. But at this point, our goal is really to begin to work those inventory levels down as we are seeing some stabilization, at least within the value chain.

Excellent. Thank you.

Thank you. The next question is from the line of Joe Feldman with Telsey Advisory Group. Please proceed.

Yeah, hey, good afternoon, guys. Thanks for taking my questions. You had mentioned that with some of the investment spending, you're going to defer some of it. I apologize if I missed, but could you share, you know, what some of those deferments are or maybe the amount of deferments or both, if you could?

We can't share the amount, but I'll just kind of give you, I'll provide you with our strategy. So first it starts with our core principles and what we're going to protect. And that's really the growth engine, right? And that starts with product and R&D. We don't want to, you know, sacrifice the long term, you know, by cutting too deep into product development, R&D, et cetera. That's core to our business long term. That's something that we want to protect and prioritize. I'd say second, marketing and demand creation are critical to the growth thesis as well as the long term growth of the business. However, top of funnel and sort of the market assaults that are core to our strategy long term as we build top of funnel, we'll shift to performance-based marketing where there's just a higher return, a higher measurable return. And it's a more immediate return where top of funnel tends to be oriented more toward prospecting. So there's a longer tail to the value of the brand awareness that you're building. So that's the kind of the second layer. I'd say third, because we're in our peak season, we're being very cautious in where we invest on the fixed side. And we've really slowed the pace of those investments. And if we learn that you know, throughout the course of Q2, we see nice growth either in line with our guidance model or in excess of. You know, that will set us up nicely in the back half of the year to begin to make decisions on, you know, fixed investment or otherwise ahead of 2023. But until, you know, we have, you know, better line of sight coming out of Q2, we're really kind of hitting pause on a lot of these fixed investments as well as, like I said, redirecting top of funnel into kind of middle and bottom funnel to ensure that, you know, where we're investing is highly predictable and we have real confidence in those investments.

Got it. No, that's helpful. Thank you. And then the other one for me, I wanted to ask, are you seeing anything new from a competitive standpoint, you know, with some of the other players out there for, you know, we are I'm sure there's the typical Memorial Day sales and such, but, you know, anything deeper than you've seen in the past or different than you've seen in the past?

We're not, you know, I'd say generally not seeing new innovation from a product perspective and no visibility into deeper discounting or general shifts in pricing strategy other than some of the price increases that we've seen over the last 12 months.

Got it. Thanks, guys. Good luck with this quarter. Thank you.

Thank you. The next question is from the line of Jim Duffy with Steeple. Please proceed.

Thank you. Good afternoon. I have two questions for me on working capital and cash flow management. On DSOs meaningfully, is that simply a function of the late quarter shipments? I believe in the past you've used an AR facility to factor some of the receivables. Is that an opportunity from here?

Yeah, so on your first question, you know, DSOs are up, you know, our measure of DSOs, they're up about 18, call it, you know, 18 days over Q4. But they're actually down, you know, as per our measurements year over year. Ultimately, our AR is incredibly healthy. We have a strong landscape of distribution and retail partners with strong balance sheets, and we've never had an issue with on-time payments or the ability to collect cash. I just want to make sure that that's clear. I'd say, too, AR tends to grow in accordance with revenue. It's certainly a little bit higher than... TAB, Then, then our you know our growth rate and in Q1 but you know we're comfortable with where the DS those are through Q1 and ultimately you'll expect we expect to see some meaningful cash generation over the course of Q2 and then into the part in the part of Q3. TAB, And on your question we don't we. TAB, Go ahead.

TAB, Oh God you were answering the question go ahead.

Yeah, so we don't factor receivables. We have an AR credit facility. And so effectively, our receivables, it sets kind of the borrowing base. And it moves based on the growth and or contraction in AR. And that ultimately dictates the availability in our AR facility. So it's really kind of like a revolver or an asset-based facility that we have access to. based on that borrowing base and how it evolves over the course of the year. So really, it's set up to support higher working capital needs in peak season. And then we obviously pay that down over the course of the year as AR comes down. And it's lower cost debt than what we have with our revolver. And so that's typically what we tend to lean into for working capital.

OK. Thanks for that clarification. And then I wanted to follow up on your comments on inventory management strategies. I know you're at a seasonal working capital peak here. The comments make it seem like the strategy is still offense. And I'm curious, are you doing anything to manage working capital as contingency, you know, just in case sales get worse or in a dynamic environment and there's a lot of uncertainty? Is the, you know, what I'm curious is if sales fall short, TAB, Mark McIntyre, Does your leverage just blow out further or is there working capital offsets you can use to bring that down.

TAB, Mark McIntyre, And there'll be working capital offsets most definitely we're mean we're at a point in the season, where we will begin to reduce our inventory levels, you know we'll probably maintain some higher. higher component of safety stock, but it won't be to the extent that we've kind of built up inventory levels through Q1. So we are focused on bringing those down. And as we learn, as we sort of watch signals coming out of Asia in particular, if for some reason they get worse, I still think we're in a position to bleed down inventory, thereby driving you know, cash from lower working capital. But we may, you know, right now we're probably pumping the brakes a little bit given some growing confidence. We may be tapping the brakes if for some reason something gets worse. And to the extent that things continue to get better, then we'll really, you know, focus on bringing those inventory levels down more aggressively by year end. But either way, we expect that to be a source of cash throughout the year.

Understood. Thank you. Yep.

Thank you. The next question is from the line of Justin Clever with Baird. Please proceed. Yeah.

Hey, guys. It's Justin Clever. Thank you for taking the question. Was hoping to get an update on your Mexico production facility, when that goes live, and then just how long does it take for that facility to materially change your sourcing mix for grills?

That's a great question. We'll start to have production come off the line in third, fourth quarter timeframe. Look, in terms of how fast we can scale it, it's a function of how quickly we can get to efficiency from a process perspective. Our belief is that it will have some nominal impact to 23 and that we should expect a much more meaningful, positive impact to the business in 24 and beyond.

Okay. Thanks for that, Jeremy. somewhat related, you discussed the gross margin task force and the early learnings and wins you're seeing from that initiative. I'm trying to understand as we look out over the next few years, I mean, do you think you guys can get gross margins like back to, you know, the 2019, 2020 levels in that low 40% range? I mean, is that reasonable or has the cost environment just changed so dramatically, you know, the past few years that that's not a reasonable assumption? Thank you.

Yeah, yeah, no, it's a reasonable assumption, independent of the provision side of the business, which is an early days. But in terms of, you know, the core business, which I would include meter in that that equation, we still think that, you know, pre pandemic gross margin levels make sense. And that's something that we're targeting. I would say that, you know, we can't really pinpoint whether that's a 23 rebound or 24 rebound. I think it requires a few sort of exogenous tailwinds as well as the things we're doing internally to execute to ensure that we're making progress toward our internal targets on gross margin. And the things that we can control really tie back to the gross margin task force TAB, Mark McIntyre, As well as just some strategic initiatives that we have in place as we think about. TAB, Mark McIntyre, You know gross margin levers, you know, one of which is just continuing to drive operational efficiency, which includes you know, removing you know touches from the supply chain it's about assortment so as you think about. TAB, Mark McIntyre, The the the work that Jim and team are doing around you know design for manufacturability and things that we can do to unlock. you know, greater margin either through how we design the product and how it's built for manufacturability to how we transport that product more efficiently, you know, knowing that to a certain extent we will experience elevated container rates, at least above pre-pandemic levels. We don't think that those are necessarily going to revert back to pre-pandemic levels. And so I think that's an important unlock. independent of where container rates go. But, you know, we have meaningful levers in addition to just, you know, continuous improvement across kind of sourcing, global diversification of our manufacturing base. These are consistent with, you know, how we've thought about gross margin and kind of how we unlock future expansion. But we also, you know, would rely to a degree on improving macro trends, whether that be in FX, which we're actually seeing currently and could, you know, create a nice 2023 tailwind and you know hopefully container costs come down somewhat which would also provide for a nice tailwind in the future and so it's really a combination of the controllables and the uncontrollables and with the controllables we have a high degree of confidence the uncontrollables TBD but you know in summary we do believe we can get back to those pre-pandemic levels it's just a question of when based on the macro environment as well as just kind of how these initiatives internally mature as they do take some time to come together.

Okay, great color. Thanks for that, Dom, and best of luck, guys, for the rest of the year.

Thanks. Thanks. Thank you. That concludes the question and answer session, so I will turn the call over to Jeremy Andrus for closing remarks.

Great. Thanks for participating in today's call and for the robust conversation. We appreciate your trust in us. We continue to work hard to build a great business. And have a great day. Thanks.

That concludes today's call. Thank you for your participation. You may now disconnect your lines.