Traeger, Inc.

Good afternoon. Thank you for attending today's Traeger fourth quarter and fiscal 2022 earnings conference call. My name is Megan 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 one on your telephone keypad. I would now like to pass the conference over to Nick Backus with Traeger. Nick, please go ahead.

Good afternoon, everyone. Thank you for joining Traeger's call to discuss its fourth 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 Blossel, our Chief Financial Officer. Before we get started, I want to remind everyone that management's remarks in 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, 2022, once filed, and our other SEC filings for discussion of these factors and uncertainties, which are available on the investor relations portion of our website. 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, including adjusted EBITDA and adjusted EBITDA margin. 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. Thanks, Nick.

Thank you for joining our fourth quarter earnings call. Today, I will discuss our fourth quarter results and provide an update on our strategic priorities as well as our outlook for 2023. I will then turn the call over to Dom to discuss our quarterly financial performance and to provide further details on our fiscal 2023 guidance. 2022 was a challenging year for Traeger. After two years of outsized growth, the dramatic shift in consumer spending patterns away from big-ticket durable goods to travel and leisure, along with lower consumer confidence caused by inflation and geopolitical turmoil, led to unprecedented pressure on demand in the grill category. In the face of a deteriorating backdrop, We took swift and decisive action during the year to position Traeger for enhanced financial flexibility and to lower costs. I am pleased with our team's execution of our near-term tactical priorities, and I believe we have made demonstrable progress, positioning us to successfully navigate what likely will be a continued volatile environment in 2023 and to emerge a more efficient company. It is important to note that we feel strongly that the current environment does not impact our long-term opportunity to significantly grow the Traeger brand globally. Our brand is healthier than ever, and despite a tough backdrop in 2022, we successfully launched our new Timberline Grill, grew our brand awareness to an all-time high, saw meaningful growth in social media engagement, drove an industry-leading net promoter score, and realized strong growth in our meter business. We ended 2022 with fourth quarter results that were better than anticipated, which allowed us to exceed our annual guidance. Fourth quarter sales were $138 million, putting full year revenue $16 million higher than the upper end of our guidance range, while fourth quarter adjusted EBITDA was $7 million, putting the year $7 million ahead of the high end of our annual range. During the quarter, we strategically increased our promotional cadence, extending our holiday promotional period. As we discussed previously, we leaned into promotions to activate consumer demand in an effort to accelerate the reduction of our retail partners' inventories. Our approach was strategic and targeted, with a particular focus on promoting grill SKUs where inventory imbalances were greatest. Our strategy was successful and contributed to better-than-expected sell-through of grills in the quarter, which drove upside-in replenishment activity. Selfier grills significantly outpaced selling in the fourth quarter as retailers continued to aggressively destock, resulting in materially improved inventory levels in the channel at year end. Additionally, we saw upside in our direct-to-consumer business through the holiday period. Finally, our accessories business outperformed, driven by a very strong performance at Meter. Meter is a holiday-driven business, and the Meter team delivered outstanding results in the fourth quarter. closing off a great first full year under trader ownership with strong double-digit growth and solid margin performance. Over the last two quarters, we have discussed our key near-term priorities to position Traeger for the current environment. These initiatives are right-sizing inventories, reducing our cost structure, and driving improvement in gross margins. The organization's universal focus on these tactical priorities in the fourth quarter allows to make significant progress in these areas. In terms of right-sizing inventories, better-than-expected sell-through of grills in the quarter, as well as continued destocking by our retail partners, drove meaningful improvement in weeks of supply in the channel. Furthermore, lower production levels in Asia, combined with improved replenishment activity, drove a reduction in our balance sheet inventories, with grill inventories in particular declining meaningfully versus the third quarter. In terms of our cost structure, our actions in 2022, as well as ongoing expense discipline, contributed to our ability to drive EBITDA upside in the fourth quarter. As we look to 2023, we will continue to be highly focused on managing expenses. In addition to the $20 million in annualized cost savings measures we have already implemented, we have identified additional savings opportunities for 2023. The team is hyper-focused on driving efficiencies in the business, and we will stay highly disciplined as we move through the year. Our final near-term strategic priority is to drive gross margin. Over the last year, our gross margin task force has evaluated and implemented over 75 initiatives across product, packaging, transportation, logistics, and design. As Don will discuss, We are anticipating gross margin expansion in 2023. We expect this expansion to be driven by both internal initiatives as well as a benefit of lower input costs, including materially lower inbound freight rates. As we've noted previously, we expect that we won't see the full benefit of lower input costs until after we work through the higher cost inventory on our balance sheet, which we believe should be in the second half of 2023. While we are encouraged by the progress we made in the fourth quarter, we are taking a cautious approach to our 2023 planning. Our sales guidance of $560 to $590 million implies a 10% to 15% decline versus 2022. There are several factors driving our cautious top line outlook. First, it is unclear when consumer spending patterns will normalize and when the outdoor cooking category will return to sustained growth. Second, the outlook for the macroeconomic environment remains highly uncertain, with the full impact of the Federal Reserve's monetary tightening policies yet to be felt, inflation still elevated, and the housing market showing deteriorating fundamentals. Finally, as we discussed last quarter, retail destocking will continue to pressure our sell-in in the first half of the year as our retail partners continue to reduce inventories. We expect that 2023 will be a tale of two halves for Traeger, and we are planning to return to top-line growth in the second half of the year. It is important to note that the expected growth in the second half is not predicated on an improvement in the macro environment, but is a reflection of our expectation for more normalized channel inventories, as well as lapping the large top-line declines we experienced in the second half of 2022 due to retailer destocking. Despite forecasting a decline in sales for the year, we are guiding to an increase in EBITDA. In the current environment, we are focused on efficiency, profitability, and cash flow, and our ability to drive this improvement is a direct result of our cost and gross margin initiatives, as well as a more favorable input cost environment. Thus far, I have discussed our progress on our tactical initiatives, which will allow us to navigate the current environment. However, we also remain committed to executing against our long-term opportunity, and this ties back to our strategic growth pillars. Our first growth pillar is to accelerate brand awareness and penetration in the United States. We ended 2022 with 3.5% penetration of the 76 million grill-owning households in the U.S., with our most penetrated markets in the mid-teens. Despite a softer marketplace and reduced capacity for top-of-funnel marketing, Our brand awareness continues to grow, and we believe that the energy around Traeger is stronger than ever. Engaging our community is one of our most effective tools to drive awareness, as we know that Traeger owners are vocal advocates for our brand. In the fourth quarter, community engagement and the Traegerhood's passion for the brand was particularly evident during Thanksgiving. While not traditionally thought of as an important grilling day, Thanksgiving is one of our largest cook days of the year, with members of the Traderhood across the country delighting their friends and family with Traeger smoked turkey insides. This year, we created unique content with our Traeger Thanksgiving cooking series featuring Matt Pittman and Chef Timothy Hollingsworth with recipes and techniques focused on perfecting Thanksgiving on your Traeger. The Traderhood was at full force on Thanksgiving and engagement on social networks was strong with video views up 80% year over year across social platforms, and influencer impressions up 25% the last year. Fourth quarter capped a phenomenal year in terms of engagement, and we saw impressive growth in our social KPIs with 18% growth in followers across platforms, user-generated content posts up nearly 50%, impressions up 33%, and video views more than doubling for the year. We continue to drive awareness and penetration through enhancing our in-store merchandising with key retail partners. At the Home Depot, we made serious inroads in elevating the retail experience for Traeger customers in 2022. We ended the year with 500 Traeger Island doors, which prominently display Traeger product on an elevated fixture, and we now have 900 two-bay pellet cluster doors with FlexWall, our Traeger-branded bay experience. Our merchandising strategies are not only elevating the Traeger brand to the consumer, but they are driving sales productivity as Home Depot doors with these merchandising enhancements materially outperform standard doors in the fourth quarter. Moreover, in the fourth quarter, we launched a national merchandising program for Meter at the Home Depot with Meter's best-selling SKU, Meter Plus, now available in Home Depot stores across the country. Our next growth pillar is to disrupt outdoor cooking through product innovation. After a big year for innovation at Traeger in 2022, with the introduction of our new timber line, we have kicked off another year of meaningful innovation with two new grill launches in 2023. First, on February 15th, we launched our new Ironwood grill. Our new Ironwood features several key innovations that have been cascaded down from the new timber line at an affordable price. This includes our smart combustion technology, the integration of the pop and lock accessory rail, and the easy clean grease and ash keg. The new iron would bring significant innovation and technological advancements at an attractive price. Next, on February 22nd, we launched the new Traeger Flat Rock, our premium flat top grill. The griddle segment has been growing very strongly in the last several years. However, our flat rock is like nothing else in the marketplace and solves several consumer pain points. Our griddle features are in-house designed true zone cooking areas, which allow for greater precision across separate temperature zones. A system of stainless steel U-burns, which eliminates hot and cold spots. And our flame lock construction, which recesses a cooktop inside the cooking cavity, locking in heat and blocking out wind. We believe our Flat Rock is the best and most innovative griddle on the market. Early reception of the product has been fantastic, and the buzz generated on social media has been greater than any other launch in our history. We have taken a disciplined approach to launching Flat Rock with a limited launch at the start. We see significant runway in terms of expanded distribution going forward. Our next strategic pillar is driving recurring revenues. In the fourth quarter, our consumables business modestly outperformed our expectations. Sell-through of pellets remained stable, and sales at retail were in line with prior year in the fourth quarter, which demonstrates the resiliency of this product segment. Further, our line of sauces and rubs continues to see strong growth thanks to new flavor additions and growing distribution in Kroger and other grocery accounts. In the fourth quarter, we launched two new hot sauces, Carolina Reaper and Garlic, and Jalapeno and Lime. In 2023, we expect that distribution will continue to build for rubs and sauces in the grocery channel as Traeger seeks to grow brand awareness and ensure consumables products are always convenient to purchase. Our last strategic pillar is to expand the Traeger brand globally. In the fourth quarter, we were encouraged to see sell-through of our grills and our retail partners in Canada and Europe. That was ahead of expectations. which allowed for an improvement in in-channel inventories in these markets. While we believe the macroeconomic environment in our international markets will remain challenging in the near term, we are excited about our 2023 initiatives to drive awareness and growth of the Traeger brand abroad. We continue to add points of distribution in key international markets, but remain highly focused on driving same-store sales growth in 2023 and beyond. We are driving productivity through several key initiatives, First, we are bringing innovation to our overseas markets. In January, we launched our new Timberline in European markets. In February, we launched our new Ironwood in Europe and Canada. Next, we are empowering our international sales team to focus on in-store growth drivers, including merchandising, demos, and retail associate training. Last, we are segmenting our international retailer base to incentivize increased investment into the Traeger brand from our most productive retail partners. Overall, we remain incredibly excited about the long-term opportunity for Traeger. As we move into 2023, we are focused on executing against our near-term strategy, which will drive efficiencies in our business and position the company for growth in the second half of the year and beyond. I remain as confident as ever in the Traeger brand, and I believe we have the right plans in place to position the company for both near and long-term success. And with that, I'll turn it over to Dom. Dom?

Thanks, Jeremy, and good afternoon, everyone. Today I will review our fourth quarter performance before providing an update on our outlook for fiscal year 2023. Fourth quarter revenue declined 21% to $138 million. Grill revenue declined 52% to $48 million. Grill revenue was negatively impacted by lower unit volumes as our retail partners destocked in an effort to lower in-channel inventories. This decline was partially offset by higher average selling prices. Consumables revenues were $24 million, down 7% the prior year due to lower pellet volumes offset by increased volume of food consumables. Accessories revenue increased 36% to $65 million, driven by strong growth at meter. Fourth quarter revenues were ahead of our expectations, which allowed us to exceed the high end of our full year of guidance range by $16 million. Upside was driven by better than expected revenue growth at meter, stronger replenishment sales in our grill business as our holiday promotion drove improved sell-through, as well as better than expected sales in our digital channel. Geographically, North American revenues were down 22%, while rest of world revenues were down 14%. Gross profit for the fourth quarter decreased to $48 million from $65 million in 2021. Gross profit margin was 34.5%, down 250 basis points to 2021. Excluding $600,000 of costs related to restructuring actions, gross margin would have been 34.9%. The declining gross margin was primarily driven by, one, higher logistics costs due to deleverage and increased freight costs, which resulted in 530 basis points of margin pressure. Two, a true-up related to our warranty reserve, which negatively impacted gross margin by 130 basis points. And three, restructuring costs of 40 basis points. These pressures were offset by, one, pricing and mixed benefit of 230 basis points, two, 110 basis points of favorability related to meter, which generated a higher than company average gross margin in the fourth quarter. And three, currency favorability of 110 basis points due to the strengthening of the U.S. dollar versus the renminbi. Sales and marketing expenses were $28 million compared to $39 million in the fourth quarter of 2021. The decrease was driven primarily by lower stock-based compensation, lower professional fees, and reduced employee costs. General and administrative expenses were $24 million compared to $44 million in the fourth quarter of 2021. The decrease in general and administrative expense was driven primarily by lower equity-based compensation, lower professional service fees, and reduced employee costs. Fourth quarter operating expenses benefited from the restructuring and cost savings actions taken in early third quarter of 2022, and we are on track to achieve more than $20 million in annualized run rate cost savings. As a result of these factors, net loss for the fourth quarter was $29 million as compared to net loss of $34 million in the fourth quarter of 2021. Net loss per diluted share was 24 cents compared to a loss of 29 cents in the fourth quarter of 2021. Adjusted net loss for the quarter was $8 million, or 7 cents per diluted share of compared to adjusted net income of $3 million, or 2 cents per diluted share in the same period in 2021. Adjusted EBITDA was $7 million in the fourth quarter as compared to $13 million in the same period of 2021. Fourth quarter adjusted EBITDA was better than our expectations, which allowed us to exceed the high end of our annual guidance by $7 million. Adjusted EBITDA upside was driven by outperformance in fourth quarter sales relative to what was implied in guidance, as well as gross margin upside relative to our expectations. Now turning to the balance sheet. At the end of the fourth quarter, cash equivalents and restricted cash totaled $52 million, compared to $17 million at the end of the previous fiscal year. We ended the quarter with $404 million of long-term debt. In December, the company drew down $12.5 million from a delayed draw credit facility, which is expected to be used in the second quarter of 2023 to fund the payment of the meter earn out relating to 2022 performance. Additionally, as of the end of the quarter, the company had drawn down $12 million under its receivable financing agreement and $72 million under its revolving credit facility. resulting in total net debt of $436 million. From a liquidity perspective, we ended the fourth quarter with total liquidity of $95 million. Inventory at the end of the fourth quarter was $153 million, compared to $142 million at the end of the fourth quarter of 2021, and $156 million at the end of the third quarter of 2022. While we expect that the process of inventory optimization will continue in the first half of 2023, we are pleased with the progress we made in the fourth quarter, as grill inventory declined substantially versus the third quarter, and the year-over-year increase in total inventory moderated to 8% from 40% in the third quarter. We are also encouraged by the progress we made in terms of channel inventory in the fourth quarter, as our strategies to drive consumer demand, combined with our retail partners' destocking efforts resulted in a meaningful improvement in weeks of supply. During the quarter, sell-through of grills outpaced our plan, which allowed retailers to work down existing inventory on hand. While improved, inventories in the channel remain above target levels. We therefore are planning for continued retailer destocking in the first half of 2023. While this will negatively impact our sell-in during this period, we believe that it will allow for a healthier retail channel and set the company up for growth in the second half of the year and beyond. Next, let me discuss our guidance for full year 2023. For the year, we expect revenues to be between $560 million and $590 million, implying a year-over-year decline of 10% to 15%. This outlook is being driven by several factors. First, we expect that retailers will continue to normalize grill inventories in the first half of 2023, which will pressure our sell-in. Second, our assumptions around sell-through reflect ongoing macroeconomic risks to the consumer and uncertainty around spending patterns for goods versus services and experiences. Last, we are expecting our consumables business to decline in 2023, primarily driven by an expected sales decline at a large customer who introduced a private label pellet offering in the second half of 2022, as well as the lapping of load-in into the growth food channel due to new distribution in 2022. We expect that we will see a sales decline in the first half of the year, followed by sales growth in the second half. Our assumption for growth in the second half of the year is being driven by our expectation that channel inventories and retail replenishment activity will return to normalized levels. We will also be lapping the substantial negative impact to our top line due to retailer destocking in the second half of 2022. We're not assuming a materially different macro or consumer environment in the second half of the year as compared to the first half. Gross margin for the year is expected to be 36% to 37%, which represents 80 to 180 basis points of improvement relative to our fiscal year 2022 adjusted gross margin of 35.2%. We expect to see the largest year-over-year growth in gross margin in the third quarter, given the expected improvement in fixed cost leverage as we lap the large sales decline we experienced in the third quarter of 2022. The largest driver of forecast expansion in gross margin for the year is the decline in inbound transportation rates, which have applied significant pressure on our gross margin over the last few years. We expect adjusted EBITDA for the year of $45 million to $55 million. This represents adjusted EBITDA growth of 8% to 32% compared to our 2022 adjusted EBITDA of $41.5 million. From the margin perspective, our guidance implies an adjusted EBITDA margin of 8% to 9.3%, as compared to our 2022 adjusted EBITDA margin of 6.3%. The improvement in EBITDA is being driven by the anticipated expansion in gross margin, as well as our focus on expense control. Given the lower revenue outlook for 2023, We are aggressively managing expenses, and we have identified opportunities for further efficiencies beyond the $20 million in annualized savings we've already discussed. We expect the first quarter will be our most challenging quarter of the year. For Q1, we are anticipating sales of $145 million to $155 million, which represents a decline of 31% to 35% versus Q1 of 2022. First quarter top line will be particularly pressured by continued retailer destocking against a very strong multi-year comparison. We are anticipating first quarter adjusted EBITDA of $16 million to $20 million. Looking at the balance of the year, we anticipate that the second quarter will also be challenging from a top line perspective and believe sales could decline in excess of 20% versus prior year. We expect double digit sales growth in the second half of the year. From a balance sheet perspective, we expect to meaningfully work down inventory levels in the first half of the year, with the largest decline expected to occur in the second quarter, which is our largest selling period at retail. Overall, in the face of significant headwinds in 2022, we took swift action to position the company to navigate a challenging environment. I am pleased with the progress we've made to improve the financial flexibility and efficiency of the business, and I believe we will continue to see improvements in these areas as we move through 2023. With forecasted improvements in gross margin and the benefit of our cost discipline, we expect to drive growth in EBITDA this year, and we look forward to the second half of the year when we expect to return to positive top-line growth. I remain highly confident in the opportunity for the Traeger brand and believe we have the right strategies in place to position this business for long-term success. And with that, I'll turn it over to the operator for Q&A. Operator?

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. We do ask that you limit yourself to asking one question and one follow-up only. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from the line of Simeon Siegel with BMO. Your line is now open.

Thanks. Hey, guys. Good afternoon.

Jeremy, with Flat Rocks, you've now introduced a propane product. Pretty big deal. Any general thoughts on product expansion from here? And then, Dom, can you just speak to the increased logistics and warehousing costs? How should we be thinking about those going forward? And then maybe can you just remind us the margin differential between grills, consumables, and accessories?

Thanks, guys.

So I would start by saying the Wood Pellet Grill continues to be the center of our universe. That is, we have a meaningful advantage there from both a brand, a product perspective, and a product development capability perspective. As we look at the space and we think about what a Traeger cooking experience really might be, we believe that not only are we seeing a trend in in flat-top or griddle cooking. Excuse me. But we think it's a great complement to a wood pellet grill. Wood pellet grill is low and slow. It is fired by wood pellets. It's convection cooking. And a flat-top or a griddle is hot and fast. And we believe cooking either the same meal across both products or cooking different types of foods just offers more brand flexibility, cooking flexibility. And we did a lot of research before we got in the category on not only what that product might mean to a Traeger consumer's cooking experience, but really what are the opportunities to innovate and bring a better experience to market. You know, interestingly, there really hasn't been any notable pushback on expanding, not only to a new category, but a new fuel source. My expectation is that we will be very focused going forward. Again, most of our innovation around wood pellet grills and the associated cooking experience, but the Flat Rock really is a great accessory to a Traeger. I would just add, you know, return from a trade show this week of one of our largest customers, Had hundreds, actually north of 1,000 retail managers in attendance. And the Flat Rock has been very well received. We're early innings. We launched it a month ago. But, you know, we clearly, we came at it from a constrained, a channel constrained environment, just wanting to ensure that as we launch something new outside of our core category that it turns, that it's well-received. And I think anecdotally, that is certainly the case. Although it's too early to speak to sell through, the energy on social was high at launch. And in talking to dozens of store managers who brought it in, they really like what they're seeing thus far.

And I think jumping into your second question, I mean, it's really kind of a simple question. mix between what has largely been the biggest driver of gross margin erosion, which is inbound transportation. There's still a long tail to that that we're working through as rates improve. So that was one key component. The other is just deleverage on the fixed cost structure within cost of sales, namely warehousing. That's largely fixed, and so when volumes come down, that puts pressure on gross margin percentage. I would just note or add that although in 2022 and to a certain extent in the first half of 2023, inbound transportation will continue to be a driver of gross margin erosion, it's an improving picture over the course of 2023 as the capitalized higher cost baked into inventory for historical inbound transportation rates that we've paid for as procured by historical containers, as that bleeds through inventory, we'll start to capture those improvements based on the improvements we're seeing in the spot prices in the back half of 2023.

Awesome. Thank you. And then, Don, anything on just the mix, generally, margin differential between grills, consumables, and accessories?

In terms of margin, nothing noteworthy. I mean, again, I think the biggest driver stems from the grill side of our category mix. Otherwise, I think margin structure is fairly balanced and sort of consistent or stable within consumables and accessories, and in particular, meter has actually been a driver of expansion and gross margin. And when you look at the B in Q4, part of that is a function of outperformance on the meter side specific to gross margin.

Great. Sounds great, guys. Best of luck for the year. Thanks, Amy.

Thank you. Our next question comes from the line of Peter Benedict with Baird. Your line is now open.

Hey, good afternoon, guys. Thanks for taking the question. First one, just appreciate the thought on the year not expecting the macro to get any better. How do you think about the P&L if demand or sell through increases? is actually tougher in the back half of the year than it is in the first half, either because the consumer gets a lot weaker, you'll start to cycle some of the promo activity that maybe helped in the back part of this year. Just trying to think about how or your view on your ability to deliver the EBITDA in the event that maybe sell through is less than you think in the back half of the year. That's my first question.

Yeah, it's a great one. And it's something that we're definitely considering as we stress test our internal view of or forecast over the four quarters of 2023. And I think it's really a formula that we've applied to the last couple of years, which is a real focus on leading indicators that could suggest a weakness of consumer or a shift in demand. And so I think at the end of the day, what we'll do is, you know, we'll watch fairly closely between now and the end of Q2. The way we built our operating plan for 2023 takes that into consideration as well. And so effectively what we've done is we've said, let's be more conservative in how we pace certain critical initiatives and or initiatives that will impact outer years. And we want to make in this year But let's maybe hold on that until we have better line of sight into that specific picture around consumer health and any macro hiccups that may emerge as we track through the first half of this year. And so what that allows us to do is stay reactive and nimble to those trends before we get ahead of ourselves from a spend standpoint. And so that allows for some cushion and we'll roll that forward to the extent that there's a downward trend or a negative picture emerging as we track through Q2 and or we see a disruption from a demand standpoint in Q2 in particular, which is a great leading indicator then for replenishment in the back half of the year. And so that's probably the biggest piece that I think we're managing and is top of mind for this team. But certainly, to the extent that we need to react in other areas, we have levers to do that and constantly manage a dynamic sort of risk and opportunities component to how we forecast this business weekly and monthly. And we know exactly which levers we can pull if we need to manage that risk in the back half of the year.

I would just add one quick thing to that, Peter, which is, we were more promotional last year than we typically are. And we use promotions thoughtfully, both in terms of the level of promotional activity as well as where we promoted and which SKUs in an effort to really use them to drive inventory levels down. And our desire is to be less promotional. That's always our disposition from a brand perspective. And we've built a plan that contemplates a more normal promotional cadence. But it's something where we have flexibility to the extent that demand doesn't trend to plan. We certainly have experience being opportunistic and working collaboratively with our retailers where necessary.

That's helpful, Collar. Thank you. I guess related to that, any thoughts on, and you mentioned the liquidity at the end of the quarter, just how you're planning leverage, liquidity, any latest updates on covenants, things like that. How does your plan envision those trending? And then my follow-up would be around grill usage. You guys have the connected grills, a lot of data. What have you seen in terms of just the usage of grills that are out there in the marketplace. Thank you.

Yeah. So, you know, I think we spoke to our list of priorities, um, I don't know, in Q3, Q4 last year, right. It all starts with liquidity and, you know, we've been hyper focused on liquidity over the last, you know, two and a half quarters, and that will continue through the remainder of the year. Um, and we're actually feeling much better about our liquidity position. And so, you know, I think from a liquidity standpoint, Q1 will be the trough. We saw a nice improvement in liquidity from Q3 to Q4 based on, you know, active management of, you know, working capital, you know, using promotion as a lever to clear inventory and draw down on inventory to just driving more efficiency top line as well as the promotion that drove out performance from a top line standpoint. And that carries forward into this year, right? So we'll continue to actively manage working capital and we'll see a nice drawdown on inventory, you know, between now and let's say Q3, which will be a nice tailwind from a cash flow standpoint. You know, we'll stay disciplined to OPEX, all of those different components of liquidity that, you know, are important and we'll continue to stay focused on those. But we're feeling better about the trend and believe that although Q1 is sort of the the low watermark will stay above a healthy level through the remainder of the year. So we can, in essence, check that box, but obviously we're staying focused on it in the event that something changes. On leverage, I would say that as of today, we really don't anticipate having an issue with our ability to maintain compliance with our covenants. We're clearly trending in leverage levels that are uncomfortable but manageable. I would just highlight a few nuances there that I think are particularly important as you think about this dynamic and what it means in terms of how we manage our credit agreement given the amount of debt we have on the balance sheet. The first thing I would say, and I think we've spoken to this in the past, but I think it's important to reaffirm, the definition of EBITDA as per our credit agreement is calculated very differently than the adjusted EBITDA figure that we report to in our public filings. And this definition effectively allows for one-time adjustments, other pro forma add-backs that we wouldn't include in reported adjusted EBITDA. So I think one example I would give you is the actions that we took in Q3 around restructuring and some other cost improvements. On a TTM basis, we can actually take those as if they were in place over a 12-month period. and add those back into the current period EBITDA as for the definition of our credit agreement, right? So that's a nice component to how we manage leverage because it gives us credit for actions that we're taking to improve the run rate, but we get full benefit of that over an annualized or TTM period. And so I think that's kind of the first piece is the definition is different. And those aren't components that we would ever add back into our adjusted EBITDA that we report. think the second layer to that is you know the definition of first lien net leverage per the credit agreement is a little bit different than maybe what you would calculate um you know from off of our balance sheet for for your leverage purposes and specifically we exclude and are permitted to exclude the ar facility so anything that's drawn on the ar facility we can exclude from the numerator of that calculation and as an example there in q4 we would effectively exclude $12 million of what was drawn down on the AR facility. And so again, how we manage leverage as per the credit agreement is a function of those components. And it gives us some latitude to navigate these challenges and also get credit for actions we're taking to improve the run rate view of leverage in the immediate period. So again, to summarize, we don't anticipate an issue here in terms of maintaining compliance with the covenant. and believe that at this point in time, we're comfortable with where we are. And then I guess the last question that you had, assuming that answers your question on leverage, is around the performance of connected grills. And I would say that at this point, based on what we see through the end of 2022, there's really no outlier that would suggest a meaningful shift in the behavior of our consumers and or the engagement they have with the connected grills. I'd say first and foremost, we've seen an uptick in that year around the connected grills that are active as sort of we define as active. And I think second to that, as you sort of measure activity or average cooks per week or total cooks per year, it stayed fairly consistent. from 2020, right? There's probably some marginal shifts as the installed base of connected grills grows, but otherwise I'd say that the activity per grill as measured on a yearly basis is staying pretty steady between 2020 and 2022, which I think is a real positive as we measure the activity of our grills and how the consumers are effectively using the grills.

That's very helpful. Thanks so much for the perspective. Good luck.

Thank you.

Our next question comes from a line of Brian Harbor with Morgan Stanley. Your line is now open.

Yeah, thank you. Good afternoon, guys. Maybe just to follow up on those comments you were just making, and specific to the consumables segment, I assume that there's kind of been growth on the food side, and so therefore probably the pellet side has been down a little bit more. And so could you address, you know, is that mainly driven by just the new private label pellets that are in the market? Or has there been a change in kind of attach of, you know, your customers buying those pellets? What's kind of driven that side of it? And, you know, how do you think that'll trend in 23?

Yeah, great question. And as a caveat, you know, the way we measure attach outside of the connected data that we gather is a sell-in metric. So it's not perfect, but I think it gives us good directionality in terms of, you know, consumption of these consumables. And so your first statement is accurate. We have seen growth in the food consumables side of consumables. And that's partly a function of what Jeremy spoke to in his opening remarks around some load-in in grocery and some nice demand for sauces, rubs, et cetera. On the pellet side, what we did know, and I think what we saw over the course of the pandemic, was a fairly dramatic spike in attach. And we've talked in the past that that's partially a function likely of, you know, consumers stocking up in 2020 due to scarcity, as well as being, you know, nested at home and probably cooking more than they normally would. And so we knew that at some point consumables attached in particular pellets would normalize likely back to pre-pandemic levels, which we're seeing. And so I would say that in terms of the consistency and or steadiness of demand and consumption of pellets it's trending roughly in line with what we've seen pre-pandemic save there has been a little bit of incremental pressure on that given the fact that what you mentioned earlier this this large customer offering private label which is eating into some sell-through just based on the candle cannibalization of our current offering there we don't believe that's necessarily um permanent you know and and so we have some strategies in place to try to offset some of that cannibalization and kind of bring that attach rate back up to what we believe is a normal level but otherwise it's holding pretty steady we're happy with what you know the the attach rate looks like and it's actually providing nice stability from from a revenue standpoint given that it's just this predictable recurring revenue stream independent of the fact that grill sales have been down. I think the last point I would make there is there always is a component of correlation between pellet sales and grill sales. And so when grill sales are down, you do expect to see some impact to pellet sales, only because there's an initial purchase of pellets when they buy a grill, right? And so that component moves. but the embedded component tied to our installed base is holding pretty steady relative to pre-pandemic levels. So no surprises there.

Okay. Got it. Thanks. And then maybe could you talk about the accessory side as well? It sounds like, you know, adding meter to Home Depot doors was a significant driver of that. Was there anything else in terms of new products or any sort of promotions? And, you know, I guess the same question, would you expect that segment to, grow in 2023 or perhaps not?

Yeah, so I guess I'll answer that second question. I'll let Jeremy hit the first. But I think ultimately we're not guiding to category level growth in 2023. But from an accessory standpoint, it's segmented obviously between Traeger accessories and meter. And, you know, Meter's been a nice grower in this business. And, you know, if you look at accessories growth in Q4, for example, of 2022 relative to, say, 2019, pre the acquisition of Meter, there's been a substantial increase, or the Kager's fairly robust, right? But independent of that, we've actually seen growth on the Traeger accessory side as well. And so I think we're really happy with kind of the portfolio of accessories and how those are performing and particularly excited about, you know, the addition of meter and what that could mean as part of kind of our long-term, you know, growth algorithm in the future.

Yeah, I would add we've got a great business. It's a great product. It's a phenomenal team. I was in our UK office about a month ago and continue to believe more in that opportunity and really the thesis behind why we acquired it. You know, meter is mostly a, most of their revenue is digital in the nature of e-commerce. And that hasn't changed much since we bought it. We are undoubtedly, given our capabilities in traditional retail, managing accounts from specialty up through large accounts such as Ace and Home Depot, We have a capability there that we're beginning to bring to bear, but it's early. And so most of Meter's growth is really driven by the channels that it has been in for a number of years. And it's not yet driven by the synergies that we have in our retail footprint, but those are coming. And we've got a lot of confidence in our ability to bring that product to retail the same way that we did A wood pellet grill innovation, which is, you know, it's premium, it's innovative, it requires training at retail, it requires education from retail associate all the way to consumer. So we think there's a lot to unlock still in front of us, but that's really not what's been driving the growth.

Thank you.

Thank you.

Our next question comes from the line of Randy Connick with Jefferies. Your line is now open.

Hey, guys. Thanks for taking my questions. I guess first on back, just quickly back to the balance sheet. Can you just remind us any kind of payments or anything you need to kind of get done in 2023 and any kind of availability under the existing credit facility? Just curious there. And then I guess on the – remember when you guys announced you're postponing nearshoring with Mexico. How do you think about when to reconsider or potentially reconsider Mexico once again? Is that something a couple years away? Just curious there. And then just finally on inventory, do you anticipate inventory growth matching up with sales growth by the second half of –

the year or more like the end of of 2023 thanks for the help guys yeah um so first question was around any obligations or payments um the only one the only kind of meaningful one is the payment of meter earn out right so that's structured in a way such that there's you know a component of of of 21 that they're able to catch up in 22. So they were able to achieve that. So that's one component of the payment. And so we've drawn partially down on our delay draw facility, which has subsequently expired in order to fund that payment, which would probably happen in around April timeframe. So that's one. And then And then to your last question on inventory growth, I mean, I think what we expect in ultimately over the course of 2023 is that it's growing or it's declining relative to the base, right? So I'd say that it's sort of a moderate percent decrease in Q1, and then it's a fairly sizable double-digit decrease between Q2 and Q4. So it wouldn't necessarily track with inventory, if that makes sense. Because, again, we're still sort of cleaning up the balances and driving to what we look at internally, which is sort of a days in inventory on a forward kind of three-month basis to ensure that we're covered over, say, a 90-day period, which we feel comfortable with, but nothing more, right? And we're not there yet. But we think by Q3 we'll be in kind of that position where, you know, our inventory levels are at a point where we're comfortable with both the composition and the quantum of inventory. But you'll see ultimately a fairly decent size decrease year over year on a quarterly basis between Q2 and Q4.

Great. And just on the nearshoring with Mexico?

Yeah, the Mexico production. Sorry.

Yeah, so the answer is, you know, we think nearshoring is absolutely a strategy long term, not just in Mexico, but as we see our base of business grow, both here and in Europe, we will evaluate opportunities for more efficient sourcing, closer to consumer, but certainly with cost and margin in mind. So next is something that we continue to evaluate. We have a very good base of sourcing currently between China and Vietnam, and as you know, container rates have declined meaningfully. So it takes some pressure off time, but we do

Great. Thanks, guys. Thanks, Randy.

Thank you.

Our next question comes from the line of Peter Keith with Piper Sandler. Your line is now open.

Hey, thanks. Good afternoon, guys. I appreciate you taking the question. I wanted to explore the topic of the ocean freight costs. I actually can't think of anyone that I researched has been more negatively impacted from ocean freight. I was wondering if you could frame up two things. Number one, when you look back over the last two years, what you think the impact has been, maybe on a dollar basis or gross margin basis. And then looking forward, how much recovery do you have from lower ocean freight costs baked into the 2023 outlook?

Yeah, good questions. I'd say on the first one, I don't have kind of orders of magnitude in front of me, the kind of the dollar amount that ultimately put pressure on our business. I think we've referenced numbers in the past that we can certainly share offline if need be, but it's been fairly substantial, right? And I guess if I were to recall back to Q4 when this really kicked in, I mean, I think we alluded to like 800 or 900 basis points of impact, right? So it's been a fairly meaningful, if not the biggest driver of gross margin erosion over the last 18 months, as you mentioned. I'd say that going forward, what we're seeing is, again, kind of this tale of two halves around gross margin, where we're still locked in and or have higher inbound transportation costs capitalized in our inventory. And so we're still carrying a higher basis from that standpoint in our inventory. But as we work through those heavier levels and that bleeds off, we'll begin to capture these fairly, I would say, favorable spot rates that have emerged. And in certain cases, we're seeing spot trend back to kind of pre-pandemic levels. It's a slightly more complicated picture because we did lock in some fixed component of our allocation of containers and you know that was an effort to hedge risk against the unknown of can we even access or procure containers it was a small you know there's a small percentage but we do fact that into the into the kind of run rate over over the course of 2023 but you know based on that mix we don't expect to be necessarily paying at spot markets at least based on what we're seeing today but they'll be dramatically better than what we've experienced over the last 18 months or so. On the gross margin front, we're not going to share specific numbers, especially around the quarters, but if you look at our guidance range of 36 to 37%, you can bet that a majority of the gross margin expansion year over year is tied to inbound transportation improving.

Okay. Yeah, fair enough. Maybe we can talk more offline because it seems like, I'm guessing you're probably going to see continued benefits into 2024 that we want to think about. Maybe a separate question for you would be on, you feel good about sell-through at retail. I guess, simplistically, is sell-through up year-on-year? And how were we thinking about sell-through year-on-year in the context of your full-year guidance for 2023?

Yeah, good question. So I'd say that in 2020, in 2022, you know, we weren't, you know, we were definitely comping slightly down relative to the prior year. That I think peaked in Q3, but sequentially improved in Q4 in part due to our promotion, our extended promotion, that holiday promotion. And I guess the only other layer I would add to that is even though there was a negative comp year over year, it was really not that dramatic, especially as you compare it to the decline in grill sales on a sell-in basis. You can also see it in the market share data where Traeger was certainly down in conjunction with a decline in the market, but it's fairly disconnected from what you're seeing in sell-through. which just reinforces the point that this is more of a destocking issue than it is a demand issue. And I think that because, you know, our market share effectively held steady, you know, we're sort of moving in accordance with the market and there's still healthy demand for our brand, all things considered. In terms of moving, you know, shifting forward to our outlook for 2023, I think the first thing I would say is, you know, we're not necessarily forecasting industry growth We want to remain cautious there, but we do hope and sort of have a belief that there will be a rebound of growth in 24 and beyond. And I think from a sell-through standpoint, we're being conservative here, but it will still be disconnected from first half of year performance on grills, which will continue to be impacted by de-stocking, even though we believe that sell-through trends will hold fairly steady and will continue to signal nice demand from the consumer, at least at retail.

Okay, that's helpful. I guess just to clarify, the sell-through holding steady, is that just kind of you're thinking about a sort of flattish year-on-year for the better part of 2023?

Yeah, we're not guiding the sell-through. I think what I would just say there is that, yeah, I think steady is probably the word we want to use

Okay, fair enough. Thanks so much for the insights.

Thank you. Our next question comes from the line of Joe Feldman with Telsey Advisory Group. Your line is now open.

Great. Thanks for taking the question, guys. So I apologize if I missed it with all the information you've given tonight, but with regard to the cost savings you said you've identified for 2023, I'm wondering if you could share a little more color on maybe where that would be, and would it be to the same magnitude that we saw in 2022, that 20 million, or maybe a little lower than that?

I won't speak to the specific magnitude, but there are a variety of areas that we've evaluated as part of our budgeting process for 23, and I think I'll just say that if you recall back to some of our comments in kind of Q3, Q4, there was a moment in time in the back half of last year where we made swift actions via restructuring and kind of right-sizing capacity, unwinding the Mexico relationship, et cetera, that are baked into that kind of run rate $20 million, as well as some incremental actions we took that are probably more temporary in nature. with the second layer being, okay, this helps kind of bridge between now and when we start to plan for 2023, which will give us the opportunity to further explore areas in a more deliberate way versus a reactive way to drive efficiency across the P&L and really across the entire operation. And so if I were to give you examples of things that we've evaluated and that we define as sort of core principles for how we're you know, budgeting and defining our operating plan for the year. You know, it's everything from kind of tightening, you know, gross to net dilution to how we rebalance capacity across the supply chain to ensure that, you know, capacity, whether it be on the manufacturing side or in other areas of the business, is balanced with kind of the demand that we're seeing and forecasting to just continued efforts on the gross margin side with a task force that's hyper-focused on driving expansion opportunities, both near-term, long-term, reshaping OpEx to ensure that it's moving more closely in line with our long-term financial model and core principles there. There's some delayed initiatives I mentioned earlier where, to the extent that we unlock incremental SG&A capacity based on revenue performance, we'll look to fund but right now they're paused. I think the biggest one there as an example would be top of funnel. Again, we're continuing to be focused more on middle and lower funnel and ultimately just general efficiency across kind of our fixed cost structure. I would just add, though, that it's not all about driving efficiency and sort of cost reductions. There are also key principles that we're focused on to protect the long term. And I'd say two to three examples of that are one, ensuring that meter is properly funded and that our product growth engine is properly funded, right? We don't want to starve or hinder growth in 24 and beyond. A lot of the actions that we're taking this year are intended to, you know, set the right base that we can build on in 24. And ultimately, we believe are necessary just given some of the dynamics and sort of right sizing of demand trends and sort of sell-in based on this destocking effort. So, again, those are a handful of examples, but we have four principles that are ultimately guiding this and are baked into our current operating plan, which does contribute to incremental savings on top of the $20 million that we spoke to early on.

That's really helpful. Thank you so much, Don. And maybe just one more follow-up I could ask. With regard to the consumer demand, which I know we all, you know, understand the environment, especially on big ticket. I was just curious, like, as you talk to kind of some of your retail partners, maybe some of the more specialty oriented ones where, you know, are they seeing any kind of green shoots or maybe it's like a good response to some of the new grill lines that you've just put out or anything that, you know, gets you a little excited about that maybe things could come back towards the second half of this year?

Yeah, absolutely. I would say, first of all, 12 months ago when we started to feel demand start to soften, it took a while to unpack what was driving that. There are a number of negative forces. There were a number of negative forces on the consumer then as well as there are now. I think as the consumer weakens, there is a a bit of a tailwind in terms of consumers and pent-up travel needs, which we certainly felt last year. We feel that trend start to decline a little bit, but again, in a tough environment. I think what we see that we like, first of all, is that the sell-through is more predictable. First eight, nine months of last year, It bounced around a lot. It was really, really hard to forecast the business. We feel better about the predictability of sell-through. We launched two new products last month, and we were really excited about the timber line that we launched 12 months ago, last spring. But clearly, we were launching something with a lot of energy, but at a very high price point. And so the ability to, with the ironwood, cascade down some of those features, technology, sort of ID language to a more affordable price point, down to $2,000, albeit accessible but still premium, the response has been very positive to that growth. Again, we're four weeks into it. Flat Rock, as I said in my prepared remarks, more social engagement, more energy around that launch than any launch that we've done. And again, premium to the griddle category, $900, but certainly accessible from our consumer perspective. And so I would say that we like the energy we see there. Our retailers, notably our specialty retailers, are really excited about it. And are there upside opportunities? There certainly could be. But as we see the macro environment now, we just think it's prudent to be cautious in how we think about it. But we have levers to drive growth around some of these products, some incremental investment to drive near-term demand to the extent that the year paces as we would like it to. So plenty to be excited about in those new products. But I would say, you know, I would step back and say what we really get excited about is what this business is built for. We like our position in the market. We like the long term. You know, we like our brand position. There is no more passionate consumer than a trader consumer that I've ever seen as a consumer of many brands. You know, we like the outdoor cooking category. It is going to grow. We're in trough. but it is going to grow. This is a long-term trend that's not going away. And we feel like we have team and capability to really build the right product and innovation to fuel growth. So, you know, we're in an interesting environment where we've got to balance meeting near-term needs of the macro environment, but feeling a lot of optimism over medium to long-term.

Thank you.

That concludes the Q&A session. I will now pass the conference back over to the management team for closing remarks.

Thanks so much.

We appreciate your time and look forward to being in touch. Bye.

That concludes the Traeger fourth quarter and fiscal 2022 earnings conference call.

Thank you for your participation. I hope you have a wonderful day.