Weber Inc. Class A

Hello and welcome to the WebR Inc. Third Quarter 2021 Earnings Conference Call. My name is Charlie and I will be coordinating your call today. If you would like to ask a question during the presentation, you may register to do so by pressing star followed by 1 on your telephone keypad. I will now hand you over to your host, Brian Enkelop, to begin. Brian, please go ahead.

Good morning and thank you for joining us today for our Third Quarter 2021 Earnings Call. I'm joined this morning by Chris Herzinger, our Chief Executive Officer, and Bill Horton, our Chief Financial Officer. I'll start with our forward-looking statements disclaimer. As you are aware, certain statements made today, such as projections for Weber's future performance, are forward-looking statements. Actual results could be materially different from those projected. For further information concerning factors that could cause results to differ, please refer to our public 10-Q SEC filing our earnings release, and our FPP filings, all of which are available on the company's website. This is of particular note during the current COVID-19 pandemic, when the length and the severity of the crisis and economic and business impacts are so difficult to predict. A recording of today's webcast and supporting documents will be archived for at least 90 days on Weber's Investor Relations website. During the call today, the company may also discuss certain non-GAAP financial measures. For reconciliation of these measures to GAAP reporting, please refer to the company's earnings announcement, which has been posted on the company's website at investors at Weber.com and can be found on the company's SEC filings. And now I'd like to turn the call over to Chris. Hello, everyone. I'm excited to be with you this morning, and I want to welcome you to Weber's first earnings call at the public company. Before Bill and I comment on the outstanding results for our fiscal third quarter, I'd like to start by thanking our Weber team members all around the world for their hard work this quarter and this year and their commitment to making the very best grills and accessories and delivering the very best customer service to our Weber fans around the world. We wouldn't be here today having this conversation as a public company were it not for your efforts. I'd also like to thank our founding family, the Stephens, and BBT Capital Partners for their support over so many years and during our IPO process. The IPO certainly represents a capstone moment in our remarkable 70-year company history, but it's even more so a launching pad for future opportunities. Today, we're extremely proud to report a record fiscal third quarter. Our first quarter is a public company. Our fiscal year end is September 30th, so this quarter's results represent our third fiscal quarter that ended June 30th. Bill will go through the entire quarter in more detail, but in summary, our third quarter sales were up 19% versus the same period last year, reaching a record $669 million. This marks the fifth straight quarter of record sales, and compared to the third quarter in 2019, our net sales in the quarter this year were up 51%. On a fiscal year-to-date basis, net sales were up $475 million, or 41%, to $1.6 billion. For the quarter, every region experienced strong growth rates, with the Maya leading the charge up 35%, Asia Pacific up 25%, and the Americas up 8%. Countries experiencing the most significant growth in the quarter were Canada, the U.K., the Nordics, and several emerging markets around the world. For reported earnings, net income was $18 million, or 2.7% of net sales, and adjusted EBITDA was $134 million, or 20.1% of net sales, despite distribution, inbound freight, and commodity cost inflation headwinds. Our quarterly gross margin improvement and strong EBITDA performance is attributable to our multi-continent manufacturing footprint, particularly with our U.S. plant here in Chicago, as well as proactive pricing and mix management early in 2021 when we foresaw the rising challenges. These are unique strengths for Weber and delivered reliable earnings for our shareholders, while also allowing us to fund investment in future growth initiatives like new product development, new technology platforms, digital marketing, and geographic expansion. For those of you who are new to Weber and the outdoor cooking category, I want to spend a few minutes introducing you to the iconic Weber brand and our truly unique global business model that's driving this outstanding performance. Unlike other outdoor cooking companies, we are a true global business, selling in 78 countries around the world, driving approximately half of our revenue outside the U.S. Weber is the clear market share leader in key grilling markets globally, with a wide margin over the number two player. And notably, the number two player is different in each market, reinforcing that Weber is the only truly global outdoor cooking brand. And it's not just global presence, it's global fandom. We have an installed base of over 50 million households across those 78 countries. We win on brand awareness, net promoter score, customer satisfaction, and loyalty. In fact, 96% of Weber owners globally recommend Weber grills to friends and family, to 10 people on average. Weber owners grill about 80 times a year, which is around 15% to 30% more than other brand owners. We have over 3 million social followers, about two times the closest competitive brand, and that lead is growing. Our category leadership and our strong momentum position us to capture an even greater leadership share of the estimated $49 billion global outdoor cooking pan for Frost & Sullivan. In addition, Weber is the only brand that plays in all the product segments within the outdoor cooking category, gas, charcoal, smokers, electric, wood pellets, portables, and accessories. At price points ranging from $50 for a Smokey Joe to $4,000 for a Summit Gas Grilling Center, there is a Weber grill for everyone, no matter where you live, where or what you want to grill, or what fuel preference you may have. Having access to all consumers globally and across all product segments gives us an opportunity to innovate broadly. Weber is a company of inventors. We invented modern charcoal grilling in 1952 and gas in 1985, and our inventions in electric pellets and smart grilling in recent years have driven category and market share growth for Weber in all the key markets around the world. Today, Weber holds over 1,000 patents and pending patents globally. So invention is not only a key strategic growth platform for Weber, it's also built into our DNA. We partnered with June Life a couple years ago to invent Weber Connect, our smart grilling technology platform that won the Consumer Electronics Show Award for Best Connected Home Product last year. And when we acquired 100% of June earlier this year, we added more inventors to our family. The June Oven just won the Best Smart Oven Award from America's Test Kitchen. We bring that attitude of invention to the largest community of owners and fans worldwide, and it's been a successful driver of revenue and market share growth for us in 2021, as you see in our third quarter results. Before Bill drives more deeply into those Q3 numbers, I want to provide an update on progress against our five key strategic growth priorities. First, to introduce disruptive new products. Second, to accelerate our direct-to-consumer and e-commerce business. Third, to expand customers and consumer revenue streams. Fourth, to expand in emerging geographies. And fifth and finally, to execute value-creating operational initiatives. In the quarters and years to come, I'll continue to frame our operating results against these five strategic growth priorities. First up is disruptive new product innovation. This year, we launched the Genesis EX and Spirit EX smart gas grill lines, as well as the Weber Traveler portable grill for camping and tailgating. Both watches have been extremely well-received, averaging 4.8 stars out of 5 in consumer ratings. We also upgraded the SmokeFire wood pellet grill with a new second-generation launch, and we've launched several enhancements to our Weber Connect smart grilling platform, which is available both on the standalone Weber Connect smart hub device that can turn any grill into a smart grill, and also embedded into the SmokeFire and EX gas grills. The EX smart grills recently won several key awards, Best Overall Grill for 2021, awarded by Good Housekeeping. The Food Network's Best New Grill for 2021. Best Gas Grill for 2021 by Rolling Stone. And Best Smart Grill by NBC News. And the Travelogist won Best Portable Grill on Wheels from Wired Magazine and Best Travel Grill from The Manual. We're very excited about the marketplace response to our 2021 innovations. Our second key growth strategy is to accelerate direct-to-consumer and e-commerce sales growth, which includes Webber.com as well as our global network of Webber stores and grill academies. Webber.com growth has been strong in 2021, with year-to-date sales up 54% versus the same period last year. Increased media investment across connected TV, social media, influencer programming, and online video and search contributed to revenue gains in general and Webber.com specifically. Our third strategic priority, expanding our retail customer base and new consumer revenue streams, also continue to drive strong results. From 2018 to 2020, we added over $200 million in revenue at retail customers who were completely new to Weber, and we continued to see that incremental growth in 2021 from the likes of Costco globally, Best Buy, REI, Canadian Tire, Sodomac, and other new partners internationally, offering consumers more access points to the Weber experience. We've also continued to invest in our core retail partners, and we continue to outpace market growth in their stores as well. Our fourth key growth strategy is expanding and deepening our presence in emerging geographies, a short list of markets with high PAMs, but relatively underdeveloped retail categories. A key market development lever here are our Weber stores and grill academies, of which we now have 179 globally. We've seen disproportionate growth in these outlets in 2021, as you'll hear from Bill shortly, and we continue to expand. Fifth and finally is our strategy around value-creating operational initiatives. We're making significant progress against our make where we sell strategy and delivering on market improvement initiatives, even as our teams manage through what continues to be a very challenging commodity and global logistics environment. During Q3, we set a new output record in our U.S. manufacturing facility, which produced 20% more output versus the same period last year, setting a productivity record. In addition, we've made great progress in construction of our new manufacturing facility in Europe, where we're on track to a fall production startup. This new Breen-certified facility will provide us with cost reduction and speed our responsiveness to customer demands in our important EMEA market. So overall, we're very happy with the progress being made and our ability to convert our strategic priorities into strong results, both in sales growth and margin performance. Finally, before I hand it over to Bill, I'd like to recognize our recently appointed non-executive chair of the board, Kelly Rengo. She's been fantastic and a valuable board member at Weber for many years, and she now steps into our chair role. And I'd like to welcome two new board members, Melinda Rich from Rich Foods and Saran Saranjan from Procter & Gamble. It's great to have you on the Weber team. With that, I'll now pass it over to Bill Horton, our CFO, to review the third quarter financial results. Over to you, Bill. Thanks, Chris, and good morning, everyone. Before I get into the details, I wanted to summarize some guidelines we'll follow as we share our financial results every quarter. We'll report our results by operating segment, which lines up for us as our three primary regions, the Americas, which includes the U.S., Canada, and Latin America, EMEA, which includes all of Europe, the Middle East, and Africa, and APAC, which consists of Australia, New Zealand, and the balance of the countries we operate in throughout Asia. As a reminder, we'll present our financial results on both a GAAP and a non-GAAP basis. Along with reporting our GAAP financials every quarter, we'll also disclose several non-GAAP reporting metrics that we believe provide a better representation of the underlying operating results of the consolidated Weber business and our operating segments. As we call out in our earnings release, and in our public filings, our non-GAAP results exclude non-cash, stock-based compensation, and other non-recurring costs we detail out, such as business transformation costs, operational transformation costs, and COVID-19 costs that were especially impactful in 2020. For the consolidated Webber business, the primary GAAP metrics we'll speak to will be net sales, gross margin, income from operations, net income, and operating cash flow. and our non-GAAP reporting metrics will be adjusted income from operations, adjusted net income, EBITDA, and adjusted EBITDA. For each of these non-GAAP measures, we will provide a walk from GAAP to non-GAAP reporting in our public filers. At an operating segment level, we'll report net sales and adjusted income from operations. At times, we will also discuss other metrics that provide our stakeholders with status updates against our five key strategic growth priorities. Finally, with every quarterly earnings call, we intend to provide updated fiscal year guidance for net sales and adjusted EBITDA. Today will be the first time we'll be providing guidance as a public company for our 2021 fiscal year, and we'll then follow up in November with our first outlook for fiscal 2022. Now, I'd like to share our financial results from our third quarter, followed by our year-to-date financials. For the third quarter, net sales increased 19% to $669 million from $561 million in the prior year quarter, and up 51% versus the third quarter of 2019, setting a fifth straight year-over-year quarterly sales record. Third quarter sales growth was driven by strong consumer demand, particularly in Europe and APEC. Core growth, which represents business growth excluding the impact of foreign exchange, accounted for 69 million, or plus 12% year over year. The impact of favorable exchange rates, primarily the Euro, Canadian dollar, and Aussie dollar, contributed 39 million, or a 7% lift in the quarter. Net sales growth in the third quarter was broad-based across all of our operating segments, with the Americas up 8%, EMEA up 35%, and APAC up 25%. Turning to the Americas, net sales increased 8% to $339 million from $315 million in the prior year quarter. Sales growth began to normalize in Q3, following an exceptionally strong first half of 2021. where the business was up 65% year-on-year. This strong performance in the first half, which continued into the third quarter, was driven by strong supply chain execution to proactively meet customer and consumer demand in advance of the season, resulting in fiscal year-to-date third quarter sales growth of plus 37% versus 2020. Bottom line, we put ourselves in a position to win early in advance of and during the third quarter selling season, and this has worked well for us. Of note, Canada's results were exceptionally strong, up 90%, and our focus on new customer acquisition, such as Canadian Tire, continues to deliver positive results. Overall, core growth represented 18 million, or 6% growth, and favorable foreign exchange rates, primarily the Canadian dollar, represented 6 million, or 2% of the increase. In Europe, net sales increased 35% to $307 million from $228 million in the prior year quarter. Every country in the region showed solid growth. However, our strongest results came from the UK and the Nordic countries that include Denmark, Norway, Sweden, and Finland, which all outpaced the overall regional growth rate. Core growth accounted for $49 million, or a 22% year-over-year increase. And favorable foreign exchange, primarily the euro, provided a 30 million or a 13% lift in the quarter. Finally, our APAC region also completed a strong quarter as net sales increased 25% to 23 million from 18 million in the prior year quarter. Core sales were up 2 million or 10%. And foreign exchange, primarily the Australian dollar, contributed 3 million or a 15% lift. Australia and New Zealand continue to benefit from Weber Drill Academies and Weber store sales. This quarter, we added another five Weber stores, bringing our store count in Australia and New Zealand to 31. Now I'd like to transition from net sales to our other key financial results for the quarter. Consolidated gross profit increased 29% to $299 million, or 44.7% of net sales, compared to $232 million, or 41.3% of net sales, in the prior year quarter. The 340 basis point year-over-year gross margin improvement was driven primarily by pricing actions offsetting cost inflation, a favorable mixed shift towards EMEA, our highest margin operating segment, and reduced COVID-19 costs. Net income declined 78% to $18 million from $79 million in the prior year quarter. The decrease was primarily driven by $62 million of non-cash, unit-based compensation expense, primarily driven by valuation methodology changes as a result of the recent IPO. Lower net income compared to our expectations relates to the timing related to the release of reserves against our net operating losses and research and development credit carry-forwards from the acquisition of June Light Inc. in January. We had anticipated a $13 million one-time benefit would be realized in Q3, but are confident now that it will be in Q4, so there is no impact to our anticipated full year 2021. The non-cash compensation expense charges and shifting the tax benefits from the June live transaction to Q4 were partially offset by strong gross margin performance during the quarter. Adjusted net income declined 6% to $85 million, from $91 million in the prior year quarter, primarily driven by increased interest expense in the quarter. Adjusted EBITDA increased 10% to $134 million, or 20.1% of net sales, compared to $122 million, or 21.7% of net sales, in the prior quarter. This was primarily driven by sales and margin growth partially offset by higher year-over-year SG&A spending, including increased distribution costs on higher volumes and strategic investments in advertising, marketing, and R&D to drive current and future results. And it's consistent with the growth priorities outlined earlier by Chris. Operating cash flow for the third quarter was down $44 million to $289 million, primarily driven by a $96 million increase in year-over-year inventories. In the same period last year, strong operating income results combined with low levels of inventory during the early stages of the pandemic drove the best operating cash flow quarter in Weber's history. With strong POS trends in mid to late Q3 last year, inventory levels dropped to extremely low levels, which continued through the first quarter of fiscal 2021 when trade inventory started to normalize. Now, turning to our fiscal year-to-date results, net sales increased 41% to $1.632 billion from $1.157 billion in the prior fiscal year-to-date period, Core growth represented $401 million, a 35% increase versus last year, and foreign exchange accounted for $74 million. We continue to see progress towards our key strategic growth priorities, with direct-to-consumer sales up 54% versus the same nine-month period last year. In addition, emerging geographies were up 59% versus the same period last year, representing 11% of total revenues up from 9% last year. On a year-to-date basis, net sales growth is consistently strong across all of our operating segments, with the Americas up 37%, EMEA up 42%, and APAC up 69%. For the Americas, Net sales increased 37% to $892 million, from $650 million in the prior year. All channels continued to deliver strong year-over-year sales growth, with online sales at Weber.com outpacing the overall region, up 72% versus the prior year. Core growth represented a $233 million increase, or a 36% increase year-on-year, while foreign exchange contributed $9 million of the revenue increase. Our EMEA region net sales increased by 42% to $618 million from $435 million in the prior year. Core sales growth was $129 million, up 30%, while foreign exchange represented $54 million of the sales increase. Strong consumer demand for rubber outdoor cooking products impacted all countries, and every country across Europe has delivered strong year-over-year comps here today. For the APAC region, net sales increased by 69% to $123 million from $73 million in the prior year. Core growth represented $39 million, or a 54% increase, and was primarily driven by Australia and New Zealand. while foreign exchange represented $11 million of the year-to-date growth. Turning now to our key financial results on a fiscal year-to-date basis, consolidated gross profit increased 53% to $720 million, or 44.1% of net sales, compared to $470 million, or 40.6% of net sales, in the prior year. The 350 basis point year-over-year expansion of gross margins were driven by pricing actions to offset cost inflation, favorable mix towards EMEA, reduced COVID-19 costs, and favorable FX movement. Net income declined 11% to $92 million from $103 million in the prior year-to-date period. The decrease was primarily driven by $94 million of non-cash unit-based compensation expense. primarily driven by valuation methodology changes as a result of the recent IPO. Lower net income compared to our expectations relates to the same June life NOL and R&D tax credit timing issue I discussed earlier. So again, no impact to our anticipated full year 2021. The non-cash compensation expense charges and shifting of tax benefits from the June life transaction to Q4 partially offset by strong gross margin performance and revenue growth. Adjusted net income increased 62% to $196 million from $121 million in the prior year-to-date period, driven by strong top-line growth and gross margin improvement. Adjusted EBITDA increased 62% to $321 million, or 19.7% of net sales, compared to $199 billion, or 17.2% of net sales in the prior year. This 250 basis point improvement was primarily driven by top-line growth and margin initiatives across the business, partially offset by increased investments to support our five key strategic growth priorities in areas like brand advertising, marketing, and R&D. Operating cash flow for the first nine months of fiscal 2021 was down $47 million, driven primarily by a $69 million increase in year-over-year inventories. I would like to wrap up my prepared remarks by providing guidance for the 2021 fiscal year. Clearly, the third quarter of fiscal 2021 was a record quarter for Weber by nearly all key financial measures. We drove strong financial results throughout our P&L, Our entire organization is making great strides against our key growth initiatives, and we're leveraging our world-class supply chain and operations organization to successfully navigate the tight supply chain in this environment of heightened consumer demand. We anticipate closing out our fiscal 2021 with full-year net sales between $1.96 billion and $1.97 billion, up 28% to 29% versus the prior year. Adjusted EBITDA is expected to be between $305 million and $310 million, up 35% to 37% versus the fiscal year ended September 30, 2020. When we report our Q4 and full-year fiscal 2021 financials, I will at that time provide guidance for our fiscal year 2022. I will also at that time provide our EPS outlook, and we will detail our recurring dividend plans. I will now turn it back to Chris to close out our prepared comments. Thanks, Bill. In closing, I'd like to again thank our Weber team members for delivering outstanding results in the quarter during the challenges of lockdowns across offices and facilities around the world and still supplying and satisfying our customers when many others could not. And I'd like to thank our new shareholders for joining us today. I'm extremely excited for all that is in front of Weber and the opportunities that lie ahead of us as a public company. We won't let up on our passion for inventing groundbreaking new products that continue to redefine all the segments of the outdoor cooking category, and we look forward to adding to our loyal community of Weber fans in the process. Now I'd like to open up the call for questions.

If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, it's star followed by two. Our first question comes from Robbie Owens of Bank of America. Your line is open. Please go ahead.