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spk02: Backus, Vice President of the Investor Relations to begin. Nick, please go ahead.
spk05: Good afternoon, everyone. Thank you for joining Traeger's call to discuss the second quarter 2024 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 certain 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 31, 2023, our quarterly report on Form 10-Q for the quarter ended June 30, 2024, 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, including adjusted EBITDA, adjusted net income, adjusted net income per share, and adjusted EBITDA margin, which we believe are useful supplemental measures. 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. Please note that our definition of these measures may differ from similarly titled metrics presented by other companies. I'll now turn the call over to our Chief Executive Officer, Jeremy Andrus.
spk06: Thanks, Nick. Thank you for participating in today's call to review our second quarter performance and discuss our business outlook. I am very pleased with our second quarter results. Our performance underscores the hard work our entire organization has put into driving increased efficiencies in our business over the last two years and further demonstrates our team's ability to execute in what remains a challenging consumer environment. While our second quarter sales of $168 million represents a 2% decline versus last year, our grills business was up 2% year over year, a significant improvement from the 14% decline we saw in the first quarter. Moreover, we delivered a very strong second quarter gross margin of 42.9%, up 600 basis points compared to the prior year. This resulted in adjusted EBITDA of $27 million, a 25% improvement from second quarter last year. Our better than expected results give us confidence in our outlook for the balance of fiscal 2024. Today, we are updating our fiscal year 2024 revenue guidance to a range of $590 to $605 million, and I am pleased to say that we are increasing our adjusted EBITDA guidance to $74 to $79 million, an increase of 15% at the midpoint of the range as compared to prior guidance. Our improved adjusted EBITDA guidance as being driven by an increase in our gross margin outlook to 40.5 to 41.5%, up from the prior range of 39 to 40%. As an outdoor cooking company, the second quarter is our most important selling period at retail as consumers buy ahead of the summer grilling season. Coming into the quarter, we are anticipating that ongoing weakness in industry demand would continue to pressure our grills revenue. As we noted on our first quarter earnings call, sell-through trends for grills remained negative in the early part of the year. The second quarter is typically a promotional period for our industry. Given the soft demand backdrop, this year we strategically leaned into promotions and offered incremental savings to the consumer. Consumers reacted favorably, and we saw a marked inflection point in sell-through trends as we kicked off the season with our Memorial Day promotion. Demand for our grills meaningfully improved as we moved through the second quarter and exceeded our expectations. I'm very encouraged by the strong consumer demand for our grills in the second quarter. In an economic environment that remains challenging for many consumers who are feeling pressures from inflation and with continued headwinds for big ticket home related purchases, our consumer came out in full force in our peak season. I believe there are a couple of key learnings here. First, notwithstanding the pressure we have faced in the last two years as consumers shifted to a post-pandemic and inflationary environment, there continues to be a large and growing appetite for Traeger products. The strong demand in Q2 not only speaks to the strength of the Traeger brand but ultimately points to the long-term opportunity for Traeger as brand awareness expands over time. Next, it is clear that the consumer is currently very price conscious, and we saw particular strength in our lower price point grills, a continuation of a trend we have seen for several quarters now. Long term, we view this as a positive development as consumers that come into the Traderhood exhibit high levels of retention, purchase our consumables over their lifetime as users, and oftentimes trade up to higher price point grills. Furthermore, it's important to note that Traeger remains positioned as a premium brand. For example, our opening price point grill is still at a materially higher price point versus the industry average selling price. Sell-through strength in grills during the quarter was further supported by our ground game initiatives. One of our long-term strategic pillars is driving increased brand awareness. which remains our largest opportunity to expand household penetration over time. Brand awareness and perception are clearly tied to the consumer's experience of our branded retail. And during the second quarter, we focused on driving excitement and engagement with consumers in collaboration with our retail partners. This included completing over 4,000 weekend selling events at retail partner locations where retail sales specialists train store associates for product demonstrations featuring Traeger grills and food cooked on the Traeger. The ability for consumers to see our product in action and to taste the flavor of wood-fired food makes all the difference in driving conversion at retail. We also partner with key retailers in certain must-win markets to drive boots on the ground activation, more targeted marketing efforts, and sales initiatives in store. These efforts not only provide important learnings for scalable ground game and marketing activation strategies going forward, but drove meaningful sell-through upside in these markets relative to control markets in the second quarter. From a selling perspective, better than anticipated consumer demand drove growth in grill revenues in the second quarter and is fueling an improved outlook for our grills business for the year. We now expect grill revenues to be approximately flat versus our prior outlook for a negative high single to low double digit percentage decline. As channel inventories were very clean coming out of Q2 and with the inventory wind down with end of life skews tracking ahead of schedule, our outlook for replenishment sales in the second half has improved. We also expect to benefit from initial load in of new product in the fourth quarter. Importantly, despite improved trends in the second quarter, we continue to plan the balance of the year prudently with respect to sell-through of grills, as we expect that consumer demand in seasonally slower periods could decelerate and acknowledge that the economic backdrop remains highly dynamic. The improved outlook in our grills business is being partially offset by reduced expectations for accessories revenues driven by meter. In the second quarter, meter experienced lower than anticipated sales in its e-commerce channels, which make up a majority of its revenue base. We believe that meter is being impacted by changes in our demand creation strategy implemented earlier this year, which proved ineffective in driving top line. The good news is that we believe we have diagnosed the issues impacting the business and have implemented strategies to drive improvement going forward. This includes adjusting our demand creation strategy as well as driving new product innovation in the second half of the year. Also, we are doubling down on expanding Meters wholesale distribution and will be relaunching our retail offering with improved packaging and in-store fixtures ahead of holiday. We remain confident in the long-term opportunity for METR and believe the changes we are making position the business for improvement. It is important to note that the majority of METR's year is in front of us with more than two thirds of full year revenues occurring in the second half. And so there's ample time to pivot effectively. Moving on to consumables. Second quarter consumables revenues were largely in line with our plan and were impacted by a timing shift into the first quarter. Looking at first half consumable sales to normalize for this timing shift, revenues were up 2% versus prior year, which speaks to the recurring and stable nature of our consumables revenues. We continue to expand distribution of the consumables into the grocery channel, and we believe this is a natural extension of our current distribution footprint which drives convenience for consumers to purchase our pellets, rubs, and sauces. In the second quarter, we added distribution of pellets, rubs, and sauces to 200 associated food stores. We also added additional pellet SKUs at Lund's and Byerly's, Market of Choice, and Hy-Vee. We continue to see meaningful opportunities to grow share via increased distribution and share of shelf. Turning to international, our international business remains a meaningful long-term opportunity for us. In the second quarter, international results at Traeger were heavily dependent on region and channel of distribution. For example, in Canada, we saw a significant acceleration in sell-through trends in our big box channels as consumers responded favorably to our summer promotions. The specialty channel in Canada, by contrast, saw challenging results in the quarter with pressure on grills north of $1,500. In Europe, sell through was softer versus last year, and our distributors continued to work through excess inventories. The consumer environment in many of our international markets continues to be challenging. However, we remain focused on the long-term opportunity to drive awareness and penetration of the Traeger brand by replicating many of the strategies that have been successful in the U.S. This includes implementing ground game strategies like in-store product demos and increasing brand presence with elevated merchandising and by activating the brand on social media. In closing, I'm incredibly proud of our organization's ability to execute and to deliver strong results against a challenging backdrop. Our second quarter results demonstrate our commitment to delivering continued improvements to our business. My confidence in the long-term opportunity for Traeger remains very high, and our business is well positioned for long-term success. And with that, I'll turn it over to Dom to provide more detail on our second quarter performance and our updated outlook for fiscal 2024. Dom?
spk01: Thanks, Jeremy, and good afternoon, everyone. Today I will review our second quarter performance and discuss our updated outlook for fiscal year 2024. Second quarter revenues declined 2% to $168 million. Grill revenues increased 2% to $95 million. Grill revenue benefited from better than expected sell through during the quarter as consumers responded favorably to our promotional strategy. Consumables revenues were $34 million. down 3% to second quarter last year. Pellet revenues were negatively impacted in the quarter due to a timing shift which benefited the first quarter, partially offset by growth in food consumables in the quarter. When looking at the first half overall to adjust for the pacing shift in pellets, consumable sales were up 2% versus the first half of 2023. Accessories revenues decreased 9% to $40 million, largely driven by lower sales at meter. Geographically, North America revenues were down 5%, while rest of world revenues were up 32%. Gross profit for the first quarter increased $72 million from $63 million in the second quarter of 2023. Gross profit margin was 42.9%, up 600 basis points versus the second quarter of 2023. I am pleased with our strong gross margin performance in the second quarter. which is being driven by both lower supply chain costs in addition to our margin enhancement initiatives. The increase in gross margin was driven by one, lower freight and logistics costs, which drove 320 basis points of favorability. Two, optimization of operations, which drove 170 basis points of margin. Three, FX favorability, which positively impacted margin by 70 basis points, and four, Other favorable items worth 90 basis points. This was partially offset by increased dilution of 50 basis points related to promotional activity. Sales and marketing expenses were $28.2 million compared to $27.9 million in the second quarter of 2023. During the quarter, increased investment in brand awareness and employee related costs were partially offset by reduced professional fees. General and administrative expenses were $30 million compared to $52 million in the second quarter of 2023. The decrease in G&A expense was driven by lower stock-based compensation expense, partially offset by higher costs related to legal matters. Net loss for the second quarter was $3 million as compared to net loss of $30 million in the second quarter of 2023. Net loss per diluted share was 2 cents compared to a loss of 25 cents in the second quarter of 2023. Adjusted net income for the quarter was $7 million, or 6 cents per diluted share, as compared to adjusted net loss of $4 million, or 4 cents per diluted share in the same period in 2023. Adjusted EBITDA was $27 million in the second quarter, as compared to $21 million in the same period of 2023. Let me now discuss the balance sheet. At the end of the second quarter, cash and cash equivalents totaled $18 million compared to $30 million at the end of the previous fiscal year. We ended the quarter with $427 million of short and long-term debt, resulting in total net debt of $409 million. From a liquidity perspective, we ended the second quarter with total liquidity of $175 million. Inventory at the end of the second quarter was $91 million, compared to $96 million at the end of the fourth quarter of 2023 and $98 million at the end of the second quarter of 2023. We believe inventories on our balance sheet are appropriately positioned for our current demand outlook. Additionally, channel inventories were healthy exiting the second quarter, even better than anticipated sell-through of grills. Taking a step back, I am very pleased with the progress the organization has made in improving balance sheet health over the last two years. Since Q2 2022, balance sheet inventories are down more than 40% and liquidity is up nearly 30%. Furthermore, the growth in adjusted EBITDA we have realized over the last four quarters has resulted in a reduction in our leverage ratio as defined by net debt to TTM adjusted EBITDA of more than five turns compared to a year ago. Our organizational focus on driving continued improvements to our business positions as well to continue to drive deleverage over time. Now turning to our updated outlook for fiscal year 2024. For revenues, we are updating our range to $590 million to $605 million. The narrowing of our revenue outlook reflects our first half performance as well as our updated view on the second half. For GRIL revenues, we are now forecasting approximately flat revenues compared to 2023, which is up substantially from our prior guidance for a high single digit to low double digit decline. Our improved outlook for grill revenues is being driven by our better than expected performance in Q2, as well as an improved outlook for the second half, as strong Q2 sell-through was driving improved replenishment. The improvement in our outlook for our grills business is being partially offset by a reduction in our accessories revenues, driven by meter. As Jeremy discussed, meter's performance missed our expectation in the second quarter, and our more conservative outlook is driving our view for negative accessory revenues growth in the second half of the year. In terms of gross margin, we are increasing our full year 2024 guidance to 40.5% to 41.5%, which implies growth of 360 to 460 basis points. I've been very pleased with our gross margin performance over the last two quarters, and our year-to-date gross margins have been ahead of our expectations. Our outlook continues to assume that our margin will benefit from lower realized supply chain costs, as well as internal margin improvement initiatives. We are seeing a greater than anticipated benefit from certain factors, including expected transportation costs and a higher mix of sales from our direct import program, which have contributed to upside in the first half of the year. Furthermore, the improved outlook for our grills business is driving lower than expected deleverage. We expect to see greater gross margin growth in the fourth quarter as compared to the third quarter. For adjusted EBITDA, we are increasing our guidance to a range of $74 million to $79 million, up from our prior outlook of $62 million to $71 million. This represents a 15% increase versus our prior year outlook at the midpoint of the range and implies 21% to 29% growth in adjusted EBITDA compared to full year 2023. Overall, I am very pleased with our team's strong execution in the second quarter and with our ability to substantially increase our adjusted EBITDA outlook for 2024. We have continued to make significant progress on driving efficiencies in our business, which I strongly believe positioned Traeger for long-term success. I will now turn the call over to the operator for questions. Operator?
spk02: We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If you have to change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Anna Glasgen from B Reilly.
spk10: Hey, good afternoon, guys. Thanks for taking the questions. I guess first, thanks for the detail around, you know, you saw a meaningful inflection around the promotions. Just want to clarify, did you actually see positive sell-through or did you just see a sequential improvement versus what you had expected?
spk06: Yes, we did see positive sell-through and, you know, again, It's a trend of consumer price sensitivity that we've seen in our business that we've known in the past in terms of mix. We're certainly seeing that as headline commentary from other consumer brands. So we chose to lean into promotions, and it was well-received. And I would say the positive signal that we take away from this is certainly that There's meaningful demand for the Traeger brand. When great brands go on sale, consumers react, and that's what we saw.
spk05: Anna, did you have another question?
spk10: Oops, sorry. I was muted talking to myself. I wanted to touch on meter. uh expanding a little bit more on the demand creation issues was it marketing in the wrong place just not getting the roi or maybe expanding on what was going on earlier in the year and now what you're changing as we approach the back off yeah so so first of all uh meter is uh largely uh an online business uh we are certainly in the process of of um
spk06: leveraging our channel synergies, Traeger being heavily a traditional retail business. But we came into the year with a hypothesis that we could more efficiently drive sell-through, focusing more on sort of lower funnel conversion and less on upper funnel prospect marketing. I think that strategy just didn't play out as expected. You know, we certainly have plenty of history with the brand in investing more, prospecting in advance of key selling seasons, and we'll probably be back into that strategy that's been effective for us in the past.
spk02: Great. Thanks, guys. Thanks. Our next question comes from Samuel Diego from BMO Capital Markets.
spk04: Hey, good afternoon, guys. It's Dan here on Persimmon. So just two from us. First, we just wanted to see if there's anything you could share in terms of new grill customers purchasing versus replenishment grill purchases. So anything there, maybe how it was in the quarter or just how it's trended recently. And then curious on usage patterns pre-COVID cohort versus more of the newly acquired customers. Thanks.
spk01: Yeah, sure.
spk03: Yeah, I'd say that, you know, fairly consistent. You'd expect, given our low household penetration in the U.S., that a lion's share of, you know, consumers of the brand are new consumers. You know, we understand that there is a growing component of our installed base that sort of represents the loyalty loop back to the brand, and it's something that we're focused on, especially long term. But, you know, given the lifecycle that we're in, a lot of the new grill sales are new consumers that we're acquiring, which we certainly view as positive as we reinforce the loyalty loop on the other end of the funnel. With respect to your second question around, you know, consumer engagement, I'd say that it's consistent in a couple of different measures. one being in the connected data that we evaluate you know month to month quarter to quarter the trends that we're seeing in connected cooks are actually growing they grew in the in q2 which we see as positive and then i think i think the second element to that is as we evaluate attach rates for consumables they're trending consistently with pre-pandemic levels we've talked on previous calls that during the pandemic, there was a fairly dramatic spike in attach rates. Obviously, we've come back down to earth post-COVID. And when you sort of normalize for the private label customer that introduced a private label pellet, the attach rates are consistent with pre-pandemic. So we, again, view that as positive, and it's been a consistent theme from quarter to quarter.
spk04: Thanks a lot. Best of luck for the rest of the year, guys. Thanks.
spk02: Our next question comes from Megan Alexander from Morgan Stanley.
spk00: Hey, thanks. Good afternoon. Thanks for taking our question. Wanted to just start with, was wondering, sorry if I missed it, if you could just tell us what units and ASPs were you know, in the quarter on a year-over-year basis, and then just a follow-up to that, grills now flat, that really seems to be driven, I guess, by volumes. Is that fair? And so would that suggest that you're actually expecting volumes to now be up in 2024?
spk03: So to answer your first question, yes, so grills, grill sales grew slightly, 2%. You know, the volume, you know, grill volumes did increase kind of high double digits. The offset was ASP, which declined kind of mid double digits. And, you know, we understood that dynamic going into the quarter. It's how we sort of designed our promotional strategy. We want to ensure that we're focusing and strategically planning our promotion around where, you know, consumer appetite is. There's pressure on high ticket durables. We've seen a trend toward you know, lower and opening price point grills for our brands of $1,000, and we leaned into that, and that, you know, proved to be, you know, an effective strategy, which drove a fairly nice lift to volumes, albeit offset by the decline in ASPs, given that mixed shift.
spk00: Okay. That's helpful. And then I guess, you know, you kind of touched on it there, and you did in the prepared remarks as well, but Just bigger picture, I guess, how are you thinking about, you know, maintaining that premium, you know, position and while, you know, leaning into clearly what's selling is lower price points and driving promotions to, you know, increase that awareness. I imagine it's a pretty fine balance, so I would just be curious if you could expand a bit on how you're thinking about that.
spk06: Yeah, it definitely is a fine balance. We have a fairly traditional promotional calendar and we were largely in line with that. We had a longer promotion as opposed to two shorter promotions in the second quarter. We talk a lot about how we continue to maintain a premium position. and also be sort of thoughtful to the environment that we're selling in. And we feel like we have the ability to thread that needle in the near term, in part given the consumer environment and the competitive environment for grills. But I'd also say it's important to note that where we were more aggressive In promotion, we are also approaching end of life of product, which tends to be an even more appropriate time to be promotional. You know, we get an opportunity to reset both as the environment improves, but also as we launch new product, new innovation. and sort of ensure that we're always coming back to those important price points that we view as premium but accessible to a broader consumer. You know, our promotional strategy really hasn't deviated from our historical strategy. A little bit more aggressive on opening price point, but not meaningfully different. You know, let me add just one other comment. Hey, sorry, Megan, just one other comment, which I think is relevant just for context setting. You know, our opening price point product, even on promotion, is meaningfully higher than the average selling price of a grill in the industry. So I think the context of where our brand still sits, even on promotion, is important to consider.
spk00: Got it. That's helpful. Thank you.
spk06: Thanks.
spk02: Our next question comes from Philip Lee from William Blair.
spk08: Can you maybe speak a bit more about the trends you've seen in the third quarter to date and then how we should think about then subsequent growth during the fourth quarter and holiday driven by some of the newness you spoke about earlier versus maybe some expected volatility around the election and some multi-year choppy comparisons?
spk03: TAB, Mark McIntyre, yeah I mean we can't speak to the Q3 trend, certainly, and I don't know that we are going to be spending you know airtime on on Q4 either it's sort of baked into to our guidance, and so you can. TAB, Mark McIntyre, sort of back into what that may look like based on how we performed a year to date, but there are three components that I think are worth noting in terms of what informed. an update to our guidance, a raise to our guidance this year, and the first being the fact that sell-through did outperform expectations in Q2, which lends itself to an improvement in sell-in. The second element to that is the fact that it should stimulate greater replenishment in Q3 as we rebuild inventory levels off of what was more robust sell-through in Q2. And then the third piece that we referenced is just a catalyst that we have now baked into our plan in Q4, which is a load-in of some product ahead of our 2025 launch of new product. You know, this is sort of normal course where sometimes we load in some revenue for a new product launch in the following year in late Q4, and that's sort of a new development that we've included in the plan as you think about, you know, some of the catalysts in the back half of the year building on what was a solid, you know, first half of the year.
spk08: Okay, great. Yeah, that's really helpful. And then just, you know, a little bit switching gears here, but You've done a lot to minimize some of the overhead and improve the efficiency of operations over the past couple of years. But as we think about maybe a more meaningful recovery in grills now on the horizon, are there areas in the business that maybe you've underinvested in that will need to ramp up? Or is there a pretty clean fixed cost structure going forward that we can bank on some sales faltering against? Thank you.
spk03: TAB, Mark McIntyre, yeah I'd say that the cost structures is pretty clean, you know we spent the last 1218 months. TAB, Mark McIntyre, really focused on sort of right sizing our cost structure, focusing on driving gross margin improvements benefiting from macro trends and I would say that how we've shaped the p&l over the course of you know this this period of time. puts us in a really good spot to now focus on a better cadence in terms of driving top line growth and consistent leverage through the P&L and the profitability. And I think we've talked on past calls about how we've focused on right-sizing our cost structure without forsaking certain investments in the long term demand creation, some prospecting, although there's been some shifts across the funnel, as well as our product development engine, right? So we feel pretty good in how we've positioned that, how our OpEx is oriented. And I think that, you know, from this point forward, there should be better consistency across the P&L as we drive, you know, leverage through that cost structure and ensure that, you know, we continue to maintain the right resource allocation against our long-term plan.
spk07: Excellent. Great. Best of luck. Thanks.
spk02: Our next question comes from Ryan McNamara from Kennel Core Generates.
spk07: TAB, Mark McIntyre:" hey thanks guys for taking the question I wanted to clarify your new outlook for grills, particularly as it relates to getting through the sunsetting of products a bit maybe a bit faster than you initially thought and the initial loading of the new product in Q4. TAB, Mark McIntyre:" Is this just a function of promotions kind of driving the delta here, and are you pulling some of those plans 2025 innovations forward.
spk03: So definitely sell through in Q2, you know, greatly influenced a shift in our our forecast for grills in the year. You know, I would, you know, as I mentioned on a previous comment on my in my previous comment, Q3 is also benefiting from some of that replenishment, you know, with an offset to the fact that we are seeing some pressure in accessories mainly driven by meter. And then in terms of your question regarding the load in of new product in Q4, it's not necessarily pulling from 2025. It's more just a function of how timing works out in relation to when we're able to ship product from China when we're ready to do so. And also to ensure that to the extent that it's possible, we're loading certain channels as early as possible, such that when we're ready to launch new product in the following year, there are SKUs on the floor that align with that marketing strategy and that launch strategy.
spk07: Got it. Understood there. And then on your revised gross margin guidance, I think it implies roughly a 400 basis point step down in H2 versus H1. What's driving that apart from some seasonal elements? I think you guys did 43% gross margin in 2020, and we've had a bunch of noise in the market since. So how should investors be thinking about a sustainable gross margin rate in the business moving forward?
spk03: Hey, good question. So in the back half of the year, it's Yeah, I think it's consistent with what we spoke to on the last call, which is Q3 gross margin is the trough for the year. Just given the lower sales volume in the quarter, we see some deep leverage within COGS and that pressures gross margin. Q4 is also sequentially lower than the first half of the year, mainly connected to the fact that we are more promotional in Q4. Um, I would say to your latter question, um, we are seeing sustainability and gross margin. Um, you know, structurally there have been shifts that we're benefiting from, and we view those structural shifts as, you know, sort of permanent, you know, barring a surprise, which I think is a real positive for the brand. Um, you know, that's the macro side that has really moved in our favor. especially when you compare to some of the pandemic pressure that we felt. We're also benefiting from structural changes that we've driven and controlled through operational efficiencies. And that's still a focus for the brand to continue to drive improvements across our supply chain within our product development process that should hopefully drive incrementality and gross margin. The only comment I would make is year to year we are still subject to, you know, and sensitive to, you know, macro shifts, right? So where FX may move, where inbound rates may move, you know, we are sensitive to that from year to year. But the underlying theme is the structural changes that we've seen from pandemic to now we believe will persist. And we view that as both structural and sustainable, on top of the fact that we continue to focus on gross margin improvements as a key pillar of our long-term strategy. Great. Thanks a lot.
spk04: Thank you.
spk02: As a reminder, to ask a question, please press star followed by 1 on your telephone keypad. And our next question comes from Justin Kebler from Baird.
spk09: Yeah, good afternoon, guys. Thanks for taking the questions. Just to follow up down to the gross margin question, you talked about the macro moving in your favor, but obviously being subject to shifts. I guess based on what you know today, would you expect freight logistics costs to remain a gross margin tailwind as we move into 25?
spk03: It's a little early to speak to 25. I mean, I think the one point I would make is TAB, Mark McIntyre, And we baked this into our plan, I think we talked about this on our last call is. TAB, Mark McIntyre, We did see some we have seen some some increase in the spot market for inbound transportation, but we've captured that so hard to say where that moves in 2025 we actually think that more capacity will come online so tbd. TAB, Mark McIntyre, But otherwise I don't know that we're in a position to start speculating on 25 but feel good with the momentum that. we've driven this year and certainly have a different viewpoint on what long-term gross margin looks like relative to where we've been the last couple of years.
spk09: That makes sense. Thank you for that. Two questions kind of related to innovation. I guess the first one would be on your 25 innovation pipeline. Just given the consumers feel cautious and they're gravitating toward lower price points, I'm curious if those macro trends have influenced your innovation in any way as we think about next year?
spk06: Yes, so a couple of thoughts. One is, as we have articulated in past calls, we have been investing deeply in product development, innovation being a component of that over the last couple of years, notably as the consumer environment became difficult. We believe in steady investment in product. And I think the result of that is that products are concepted and launched in very different cycles. And we don't build in the world of durables, just given what it takes to engineer and the time it takes to go to market. it would be difficult to react to market cycles. And so, no, we don't change our product roadmap relative to the cycle. We believe that, you know, number one, given the price points we're launching, that we have the ability to sell those price points that are very appropriate for the brand, what's coming to market. The second is that, you know, it's been a a contracting industry for multiple years. And at some point we get beyond that, the consumer strengthens, and that'll happen over the course of many years of this product platform that we're launching. So we feel good about the price points, the position for the consumer, the value. We're getting better every year at product development, but we take a fairly consistent steady point of view on the development timeline. You know, to the extent that the environment's soft, that may influence how we forecast inventory at different price points. It may influence, it would influence mix, and it could influence promotion strategy, but it doesn't change how we think about the process and timing for bringing new product to market.
spk09: Okay, thanks for all that, Jeremy. I'll just leave it there. Thank you, guys. Okay, thanks.
spk02: Our next question comes from Peter Keith from Piper Sandler.
spk05: Hey, thanks. Good afternoon. Nice results, guys. It's pleasing to see the race, the EBITDA guide. Maybe we'll just pick on the updated guide. I mean, the grill outlook for FLAT for the year is, is impressive i guess it implies 10 uh grill revenue growth in the back half and i'm i'm wondering what kind of visibility you have to that are you thinking sell through uh it continues to remain positive or is it really just visibility around the replenishment and this this early q4 load in it's the latter yeah there's a bit of beyond visibility around replenishment and and and then the load in in q4 right So if sell-through were to remain positive in the back half, then there potentially could be some upside to that real revenue outlook.
spk03: Yeah, but we're sort of maintaining caution there. We are not extrapolating the sell-through performance in Q2 out through the remainder of the year. I think right now the going assumption is sell-through will sort of revert back to how we were thinking about it as we built the plan early in the year. And we wouldn't necessarily expect positive comps in the back half of the year. So really it's more driven by those two catalysts, the replenishment and the product load-in.
spk05: Okay, and the ability to drive the positive sell-through with promotions, I guess you're striking when the iron's hot, and that would be in Q2 around key holidays. Is it fair to think about Q2's got some key holidays, and there's a little bit of a lull with Q3, and then maybe you could strike again with the iron's hot in Q4 around the Christmas holidays?
spk06: Yeah, Peter, we generally have a promotion around the holidays built around Cyber 5, and so that is planned, that has been planned, and I would say that, you know, consistent with sort of the type of promotion that we ran in the second quarter, we believe that continues to be appropriate for the environment that we're in, and that's that is also baked into the guidance that we provided.
spk05: Okay, great. And then just a big picture question. As we think about the impact of lower interest rates on your business, I guess, how do you guys think about it? Are there direct benefits regarding financing? Or do you think about it just more indirect as consumer gets healthier and maybe housing improves, just framing up a lower interest rate environment and its impact on trigger would be helpful.
spk06: Yes, so I'll share a couple of thoughts on that. The first is yes, there are absolutely direct, you know, direct sort of correlations between interest rates and grill demand. One is certainly consumer financing. Americans finance just about everything in some way. You know, from low price points all the way up to up to houses and you know, $1000 purchase often is financed either on our website through a financing partner at retail through financing programs that they offer. And there's no question that headline news would suggest American consumers have spent their cash, they are meaningfully in debt, and financing costs do matter. There's also correlation between housing transactions and new grill purchases. And while that doesn't drive most of our business, it certainly influences you know, 15 to 20% of the business. And given where interest rates have been, housing transactions are very low. But I think the, and so certainly some direct impact from a broader consumer health perspective, I think that's where we see lower interest rates. You know, we begin a new cycle where interest rates come down, the consumer gets healthy, their debt is more manageable and consumers begin to buy again. And I would say notably in durables, which tend to have some cyclicality around interest rates and health of the consumer, oftentimes when interest rates are high and consumer is relatively weak, purchases are pushed out unless they're absolutely necessary. And so, you know, we expect to benefit from that. And I think the combination of a healthier consumer, but also as investments that we've been making in product and increased investments in brand and top of funnel that we plan, we believe that we'll take share. And I think the combination of the two will be meaningful for our business. The last thing I would say is just in – sort of zooming out and thinking about where the industry is from a unit volume perspective relative to where it's been historically, unit volumes are still meaningfully below pre-pandemic levels, you know, somewhere in the 20 plus percent range. And that's simply a function of pull forward demand, which is probably now intersecting with a weakened consumer. But if you look at the decade of industry data prior to the pandemic, this is a really resilient industry that just chugs along and grows at low single digits. And we expect that the industry will rebound and it will ultimately be larger than it was in 2019 simply because of the adoption of outdoor cooking that happened during the pandemic. So I think there are multiple industry and macro drivers that will work in our favor. They have been headwinds, but those headwinds will ultimately turn to tailwinds. And it will be good for the business when they intersect with the investments that we've been making to bring new product to market.
spk05: Okay. I appreciate the thoughtful answer.
spk06: Thank you, Peter.
spk02: Our next question comes from Brian McNamara from Panacor Generate.
spk07: Thanks for taking the follow up, guys. Just a quick one on the replacement cycle of Traeger grills versus, I guess, the industry. Is it still five years for the Traeger and maybe seven to eight for the industry? And presumably with, you know, we'll be five years from the early days of the pandemic in Q1 of next year. Should we expect any kind of replacement tailwind there if this plays out next year?
spk03: Yeah, you're you're right in that we know what we've we've continued to validate that about five. There's about a five year replacement cycle for for Traeger and for consumer and it's you know 78 years for the broader industry. And yes, we are, you know, looking at as as part of our strategy heading into the next couple of years is how do we capitalize on what could be a wave of. You know consumers who purchased you know four or five years ago that are looking to upgrade and that lines up nicely with our innovation cycles that presents a nice opportunity to convert people on a new product that you know may have have a legacy product and certainly speaks to the benefit of having a more condensed innovation cycle within what is largely a slow moving category. Um, and, and something that we do value, uh, that loyalty loop is certainly something that we, we care about, and we want to ensure that we're designing strategies around how we unlock that, that growing base of consumers that are ready to upgrade and something that we're most definitely focused on and, and, and have looked at it the same way as you and that, you know, Those, those, those pandemic purchases are coming up on a period of time where they may be looking to upgrade. And, you know, as our installed base grows, as, you know, consumers age out, as that installed base grows, that represents a larger and larger opportunity over time.
spk08: Great. Thanks.
spk02: And a final reminder, if you would like to ask a question, please press star followed by 1 on your telephone keypad. So that does conclude the question and answer session and the conference call as well. Thank you for joining. You may now disconnect from the call.
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