Traeger, Inc.

Hello and welcome to today's Traeger third quarter fiscal 2022 earnings conference call. My name is Bailey and I'll 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 followed by one on your telephone keypad. I would now like to pass the conference over to our host, Nick Backus, Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone. Thank you for joining Traeger's call to discuss its third quarter 2022 results, which are 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 Blasso, our Chief Financial Officer. Before I 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 September 30th, 2022, once filed, 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 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 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.traeger.com. Now I'd like to turn the call over to Jeremy Andrus, Chief Executive Officer of Traeger. Jeremy? Thank you, Nick.

Thank you for joining our third quarter earnings call. Today we'll discuss our third quarter results, our near-term strategic priorities, and our progress on our key growth pillars. I will then turn the call over to Don to discuss details on our quarterly financial performance and to provide an update on our fiscal 2022 guidance. As we anticipated, third quarter was a highly challenging period. After two years of record growth in 2020 and 2021, The grill industry is contracting in 2022. Consumers are shifting expenditures towards services and leisure away from discretionary big-ticket goods, and decades-high inflation and ongoing geopolitical uncertainty are negatively impacting sentiment. Moreover, retailers are increasingly cautious in their ordering behavior given heightened levels of channel inventories as well as the risk of a recessionary slowdown. These factors drove a 42% decline in our third quarter sales, with particular softness in our grill sales, which were down 64% versus last year. Despite these challenges, we are making progress on our near-term priorities as we navigate the current environment. We believe that our ongoing efforts to rationalize inventory, reduce costs, and to bolster our balance sheet and liquidity profile will allow Traeger to navigate the current operating environment, and position the company for strong improvement as the macroeconomic pressures subside. Having said that, we acknowledge that the pace at which we can drive certain of these improvements will be influenced by the broader economic environment, which remains highly volatile. The third quarter largely played out as we anticipated. Sell-through of our grills and retail was lower than last year, but consumer demand was roughly in line with our forecasts. coming into the quarter. While demand was lowered in 2021, the year-over-year decline in sell-through during the quarter moderated from the declines we experienced in the first half of the year and grew to a strong three-year tater. We continue to view near-term sell-through trends as challenging. However, we are seeing a modestly higher level of predictability in terms of consumer demand relative to earlier in the year. Sell-through in the quarter benefited from our strategy to drive incremental consumer demand with strategic promotions. The consumer responded favorably to promotional discounts with both our smoke in summer and Labor Day promotions driving healthy consumer demand, allowing our retail partners to further work through on-hand inventory. Despite sell-through trends that were in line with our projections in Q3, excess inventories across both the grill category and other product categories, as well as cautious sentiment around the consumer and the macroeconomic environment, are causing our retail partners to be highly conservative in their ordering behavior. This is impacting our fourth quarter, and we now expect our four-year results to come in at or slightly below the low end of our prior guidance at $635 to $640 million in sales and $33 to $35 million in leave of death. It is important to understand the magnitude of retailer destocking, which is the largest driver of the decline in our grill sales in the second half of 2022. We believe that more than two-thirds of the anticipated decline in grill sales in the second half of the year can be attributed to retailer destocking as opposed to lower levels of consumer demand. Despite this near-term rebalancing of supply and demand, we do not believe retailers are retrenching from the grill category or from Traeger. The outdoor cooking category is resilient and historically has experienced fairly predictable growth. We believe our retail partners remain committed to outdoor cooking, and in particular to our brand, as we are long-term caretakers and drive premiumization of the grill category. The Traeger organization is committed to ensuring that the company is positioned for long-term profitable growth. At the same time, we are keenly aware of the near-term challenges that face our industry, as well as the overall economy, and therefore our focus on executing on our key tactical priorities. These near-term priorities will preserve profitability and cash flow while also creating a healthier marketplace. Specifically, as we discussed last quarter, our key near-term priorities are reducing our cost structure, right-sizing inventories, and driving improvement in gross margin. In July, we implemented a restructuring plan in an effort to both drive operational efficiencies and to streamline organizational focus on our highest return initiatives. These actions included the closure of Traeger provisions, as well as a reduction in force. We realized meaningful savings from these actions in the third quarter. and are reiterating our target of run rate annualized savings of $20 million. We are aggressively managing our expenses and will continue to stay highly disciplined as we move into 2023. Additionally, we have also taken steps to reduce our near-term outlay for capital expenditures as we look to enhance cash flow and liquidity. Our next near-term priority is right-sizing inventories which remain elevated both in-channel and on our balance sheet. In terms of in-channel inventory, in the third quarter we strategically increased our promotional cadence by adding two promotional periods with a focus on discounts for SKUs with excess channel inventory. In terms of inventory on our balance sheet, we have materially lowered production in Asia to give us the opportunity to work through our on-hand inventory. These actions, combined with our retailers' destocking efforts, resulted in some progress on our inventories. However, this remains an ongoing effort, which we expect to continue into the first half of 2023. Our next strategic priority is to drive gross margins. Recapturing gross margins is a key focus across the organization. Our Gross Margin Task Force continued to work to identify and execute on cost savings across the supply chain. notably the team's efforts have led to expected improvements in product packaging and transportation costs in 2023 across our grill assortment as well as additional cost savings associated with lower pallet and packing costs in our pellet business we are also seeing substantial reductions in certain input costs including inbound freight rates and commodities like steel we are optimistic that our cost savings efforts and lower input costs should be margin tailings in 2023. However, it is important to note that we do not expect to see a material impact flowing through our income statement until we've worked through our higher cost inventory in mid-2023. Moreover, we expect we will look to strategically and selectively reinvest some of these input cost improvements back into product and into pricing as we move into 2023. Our tactical priorities are of critical importance. However, we remain committed to our long-term strategic growth pillars. Let me discuss the progress we've made in each of these areas. Driving awareness of the Traeger brand remains our largest long-term growth opportunity. At 3.5% household penetration across the U.S. and mid-teens penetration in our most mature markets, we believe there is substantial upside to be realized in driving brand awareness. It is a testament to the momentum of our brand that we continue to make strong inroads in driving awareness despite a highly challenging market backdrop and lower top of funnel marketing investment capacity. In fact, our unaided brand awareness hit an all-time high in the third quarter, improving by 15% versus the beginning of this year and up 50% versus two years ago. The continued growth and awareness of the Traeger brand in one of the most difficult periods in grilling history, speaks to the energy behind the brand and the strong connection we have with our user base. Our grill owners are passionate about Traeger and act as evangelists, organically driving brand recognition. This is evident when we look at our social media KPIs in the third quarter, with our user-generated content posts up nearly 50% and video views more than tripling year over year across social platforms. We also continue to drive awareness of the Traeger brand through enhanced merchandising and product presentation at retail. In September, we rolled out a new merchandising treatment called FlexWall across 871 Home Depot doors. FlexWall is a Traeger branded in-bay backing that allows for branding, shelving, and hanging space for our products and is featured in Home Depot doors with premium Traeger merchandising. Additionally, we added 314 Traeger islands at Home Depot doors in the third quarter. These new merchandising enhancements further add to Traeger's visibility on Home Depot floors. Now on to product innovation, our next growth pillar. In the third quarter, we had significant innovation on the consumable side. In late September, Traeger partnered with Whistlepig to collaborate on new products at the intersection of smoke and whiskey. Whistlepig Whiskey is one of the most awarded craft distilleries in the U.S., and so we were thrilled to launch our Whiskey Barrel Pellet Blend, Whiskey Hot Barbecue Sauce, and Whiskey Dust Rub in collaboration with Whistlepig. DTC orders have had good momentum, and the launch has picked up positive PR in Men's Journal, Burn Blog, and Food Sighted. In terms of grill innovation, we are extremely excited about the new product pipeline as we move into 2023. We expect to launch two new grills next year, both of which are planned to be on retail floors in the first quarter. We have shown these new grills to some of our key retail partners, and the early response has been fantastic. It is too early to discuss these new products. However, we will be able to provide more details when we report fourth quarter in March next year. Suffice it to say, we expect Traeger to continue to deliver game-changing innovation in 2023 and beyond. Our next growth pillar is in driving recurring revenues. While our consumables business was down versus prior year in the third quarter, sell-through work pellets was only slightly below prior year and in line with 2020 levels. As we look at connected cook data, the number of cooks continues to increase strongly as we grow our installed base of grills. In fact, there were over 1 million more cooks in the third quarter versus prior year, and almost 3 million more cooks versus the third quarter in 2020. This gives us confidence in the long-term recurring revenue nature of the consumables business. In the third quarter, we continue to expand our pellet offering with the introduction of 30-pound value-sized bags. Furthermore, we continue to expand distribution of our pellets into the grocery channel, and remain on track to gain 600 additional grocery doors for the year as we sell into grocers like Meijer, Giant Eagle, Harris Teeter, and Albertsons. Our fourth growth pillar is to expand the Traeger brand globally. Similar to the U.S., our international markets faced challenges in the third quarter as geopolitical turmoil and inflation negatively impacted consumer sentiment. Despite these near-term challenges, we continue to see evidence that the Traeger brand has meaningful upside outside of our core U.S. market. For example, we are seeing Traeger's success with the Home Depot in the U.S. translate to the Canadian market as well. The Home Depot candidate has leaned into the wood pellet grilling category, allowing Traeger to increase sell-through by strong double digits in the third quarter. Contributing to increased sell-through was an increase in the assortment and floor space of Traeger products and marketing investments behind the brand. In summary, we are highly focused on executing upon our near-term strategic priorities as we navigate the current environment while remaining committed to our key long-term growth pillars. As a disruptor in outdoor cooking, we are positioned extremely well for long-term success and I remain highly confident in the growth thesis for Traeger. In the near term, we will focus on the variables that are within our control, and we will remain agile given a volatile environment. With that, I'd like to turn the call over to Dom. Dom?