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?