Traeger, Inc.

Good afternoon, and thank you for attending today's Traeger second quarter earnings call. My name is Jason, and I'll be the 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 Backus with Traeger. Please go ahead.

Good afternoon, everyone. Thank you for joining Traeger's call to discuss its second quarter 2022 results, which were released this afternoon and can 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, our quarterly report on Form 10-Q for the quarter ended June 30th, 2022, once filed, and our other SEC filings for a discussion of these factors and uncertainties, which are also available on the investor relations portion of our website. You should not take 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, which we believe are useful supplemental measures. The most comparable GAAP financial measures and reconciliation 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. Jeremy?

Thank you, Nick. Thank you for joining our second quarter earnings call. Today, I will discuss our second quarter results and our near term strategic priorities. 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. During the second quarter, our business was negatively impacted by several macro related headwinds, which drove materially lower than anticipated top line results for the quarter. These pressures and other headwinds are negatively impacting our outlook for the balance of the year. Despite a very challenging backdrop, I remain confident in the positioning of the Traeger brand as a disruptor and innovator in the grilling category and in our ability to navigate current challenges. Our long-term business thesis has not changed. We continue to believe the Traeger brand is an incredible one and that we have a large opportunity to meaningfully grow our household penetration. However, We are also fully aware that our near-term trajectory has changed and that it will take us longer to achieve our previous goals. As such, we are taking decisive action with a high level of urgency in order to position the company for future growth, profitability, and to drive long-term shareholder value. On the last two earnings conference calls, I reviewed our progress on each of our four strategic growth pillars. Given the rapidly evolving backdrop and the change in our outlook for the year, I would like to instead focus on our assessment of the near-term dynamics that are pressuring the business and the actions and strategies we have implemented to navigate the environment. Then, I will discuss why I continue to be confident in Traeger's long-term growth opportunity. In the second quarter, our sales were $200 million, down 6%, the prior year with particular weakness in our grill business, which was down 25%. While we expected moderated growth in grills in the quarter, given we were lapping a 40% increase from the prior year, results were lower than anticipated. As we noted earlier in the year, we began to see a deviation from our previously forecasted sell through starting in March. In order to arrive at our prior full year sales guidance of 800 to $850 million, We assume the continuation of this softer sell-through trend for the balance of the year. However, as we move through the second quarter, which includes some of our most important retail sales weeks of the year, sell-through trends deviated even more than what guidance assumed. We believe there are a few factors that are contributing to softer sell-through trends. First, we believe that after a two-year period of accelerated spending in home-related and durable goods, the consumer is shifting discretionary expenditures towards experiences. This shift is driving strong growth and demand in sectors such as hospitality and travel at the expense of goods like grills, appliances, and furniture. This shift in consumer behavior is occurring at a time when we were lapping abnormally strong sell-through trends from the second quarter of 2021 when consumer spending greatly benefited from government stimulus. Furthermore, consumer sentiment declined in the quarter to record lows as elevated inflation and talk of a looming recession weighed on consumer psychology. While we understood these factors were likely to continue to pressure our sell-through earlier this year, their impact deepened as we moved through the second quarter. The combination of declining consumer sentiment and the spending shift away from durables in the face of heightened comparisons is driving an unprecedented decline in the GRIL category. To put this into perspective, during the 2008 to 2009 great financial recession, the GRIL category was down in the low double-digit range. We believe the GRIL category is down in the low 20% range year-to-date through May on a revenue basis and down in the 30% range on a unit basis. This is the largest decline in the GRIL category that we have seen in our datasets. In particular, grills under $1,000 are seeing immense pressure industry-wide and are down significantly more than the category average year to date. We believe that this likely reflects greater sensitivity to macro pressures and inflation amongst consumers that are shopping at this sub-$1,000 price point. Compounding the issue of lower-than-planned sell-through are heightened levels of inventory at retail. In an effort to ensure adequate stock, given the volatility in the supply chain environment over the last two years, our retail partners have been replenishing product more aggressively and holding more inventory than is typical. As sell-through of our grills missed forecast in the peak selling season, in-channel inventories increased to levels greater than we target. Higher inventories in combination with a slowing macroeconomic backdrop and the spectral recession have led to a sharp shift retailers ordering behavior often referred to as a bowl of effect our retail partners are now heavy on inventory in our product category which is negatively impacting our replenishment order activity for the second half of the year these factors are driving a substantial reduction in our revenue outlet for the balance of the year and in particular will pressure third quarter sales which tends to be a replenishment based quarter We are keenly aware that the consumer and the macroeconomic backdrop are in the process of recalibrating after a two-year period of outsized growth. And while we hope for stabilization, we are focused on positioning the business for this environment. This includes resizing our cost structure for the current revenue run rate, right-sizing inventories, and doubling down on our efforts to drive gross margin. Let me walk through our key tactical priorities as we navigate the near-term environment. Our first near-term priority is to reduce our cost structure. Earlier this year, we discussed strategically reducing and deferring certain non-essential expenses and reprioritizing SG&A to manage the P&L. Given the low revenue run rate we experienced in the second quarter, and in an effort to protect profitability and drive efficiencies in the business, we implemented a broader cost reduction and streamlining plan in late July. We believe these actions will drive operational efficiencies and will allow the organization to focus on initiatives that are best positioned to drive the highest return on investment and the best experience for our consumers. As Don will discuss, we expect to realize meaningful cost savings from these actions. First, we have aggressively reduced certain discretionary expenses across the organization. This includes reductions in travel and entertainment, non-critical professional services, and top of funnel marketing. Second, we initiated a reduction in workforce in late July, which impacted approximately 14% of the global full-time salary workforce. While this was a very difficult decision, we believe this was the right thing to do for our business. Our process focused on identifying roles that could be consolidated, reductions in areas of the business that are lower priority, as well as the removal of headcount in the provisions business. Over the last several quarters, we have added a significant amount of talent across all departments of the company, and we move forward with an incredibly strong team. We value the dedication of our impacted colleagues, and I would like to thank these team members for their contributions to the business. Finally, we decided to suspend operations of Traeger Provisions. While customers have been delighted with the provisions offering since its launch in November of last year, the business would have required significant continuing investment and internal resources in order to scale. Despite its potential, provisions was unprofitable, and given the current constraints on the P&L, we believe this is not the appropriate moment for us to be incubating new business, given the large runway of profitable growth in our core business. Our next strategic priority is to right-size inventories, including both our balance sheet inventory as well as in-channel inventories. As we have discussed, over the last several quarters, we have leaned into inventory given supply chain constraints and volatility. Given the lower sales forecast, we are working to aggressively reduce our balance sheet inventories. This includes materially lowering production volumes in our Asian manufacturing facilities as we work through existing inventory. While our grill inventory carries very little obsolescence risk, it is critical that we align working capital with the current revenue picture. As part of this effort to align supply and demand, we also decided to postpone our nearshoring efforts and to halt plans for production in Mexico. While we believe manufacturing closer to our core U.S. market remains a long-term strategic objective, current supply and demand dynamics diminish the benefits of production of what would initially have been only a couple of grill skews in Mexico. In terms of channel inventories, we are working in partnership with our retailers to actively manage days on hand, including selectively using promotional efforts to drive sell-through. It is important to note that we will use promotions thoughtfully and strategically, with the priority of not compromising the health of the brand. We will continue to collaborate with our retail partners on the goal of right-sizing inventories in channel, such that our retailers are positioned to return to a more normalized replenishment cadence versus the current destocking. Finally, we remain focused on driving improvement to gross margin. Our gross margin task force continues to identify and execute on cost savings across the supply chain. Opportunities for cost reductions have been identified in areas including product input costs, packaging, logistics, and warehousing. This cross-functional collaboration is an ongoing effort and we expect that the team will continue to identify new savings and efficiencies as we move forward. Furthermore, we are seeing favorability in spot container rates as well as in currency. While we expect that these favorable cost dynamics as well as our gross margin initiatives will not materially impact 2022 margins as we first must work through higher cost inventory We do see building tailwinds for 2023 and beyond. Overall, I believe we are taking the right steps to position Traeger to best navigate the unprecedented macroeconomic challenges that we face. Despite these challenges, my confidence in the Traeger story remains incredibly strong. Let me walk through some of the factors that are driving my confidence. First, the energy around the Traeger brand remains extremely strong. In May, we held our fifth annual Traeger Day, a holiday which is dedicated to bringing the global Traeger community together to cook outdoors and to share wood-fired food with friends and family to kick off the grilling season. Traeger Day 2022 was the highest single day for user-generated content in the history of the brand. Overall for the second quarter, user-generated content posts and organic video views were both up significantly versus last year. indicating that consumer engagement with the brand on social media is stronger than ever. Moreover, our consumers continue to love using their Traeger and act as evangelists for the brand. Our NPS score leads the industry and remains at an all-time high. We continue to delight consumers with the innovation we are bringing to market, with our new Timberline grill having some of the highest NPS scores in our entire assortment. Importantly, awareness of the Traeger brand continues to grow in core markets despite the tough backdrop for grills this year. For example, brand awareness in the West is up over 30% versus last year, despite this geography including some of our most penetrated markets. Increasing awareness is the largest driver of growing our household penetration and remains a meaningful long-term opportunity. Furthermore, our key merchandising efforts at our most important retail partners continue to drive our brand presence and increase penetration and productivity. For example, after resetting 350 stores at the Home Depot earlier this year, we now have nearly 900 Home Depot locations with a broader and higher-end Traeger grill assortment, including double the number of grill SKUs and an expanded assortment of accessories. In the third quarter, we will be adding over 300 additional Home Depot doors with high-end fixturing. These fixtures elevate our brand at the Home Depot. They sit above the floor on wooden decking, have prominent signage and brand messaging, and include up to six grill SKUs, as well as an assortment of Traeger accessories and consumables. Next, I'm as excited as I have ever been about our product pipeline. The recent launch of our game-changing Timberline has been well received and has brought significant energy to the brand. This model is a halo product, which brings innovation to the market at a much higher than average price point. As we have mentioned, we will look to cascade innovation from this recent launch across our grill assortment in the coming years. While it is too early to discuss details, I'm extremely bullish on our product roadmap for both 2023 and 2024, and I look forward to providing an update on upcoming launches over the next few quarters. Considering the challenging backdrop, I am encouraged by the trends in the consumable side of the product portfolio. Our pellet sell-through is trending close to 2021 levels and maintaining strong growth over 2020. This performance speaks to the resiliency of the pellet business and its recurring revenue nature. Sales of our sauces and rubs benefited in the second quarter from increased distribution and consumer acceptance in the grocery channel, subsequent to our rollout at Kroger. We continue to believe our consumables business is a strong complement to our core grill business, which drives recurring revenues and consumer engagement with the Traeger brand. Lastly, I remain confident in the secular growth of the outdoor cooking category. The grill category has proven to be resilient over time, and data shows that Americans love to cook outdoors and are cooking more at home, even as the world has normalized after the height of COVID. In fact, our connected cooking data shows that Krager owners are growing at a similar pace to last year, implying that our consumers remain highly engaged with our product. In summary, we are not satisfied with our near-term financial results, and we are acting decisively and swiftly to position ourselves for the challenging backdrop and to emerge stronger when the environment normalizes. We are taking proactive steps to put Traeger back on its historic path of growth and profitability and to drive shareholder value. Despite facing challenges, the Traeger brand will continue to disrupt the outdoor cooking sector. And with that, I'll turn it over to Dom. Dom?