Weber Inc. Class A

Good morning and welcome to today's WebAIR Inc. first quarter 2022 earnings conference call. My name is Gemma and I'll be the operator for today. If you'd like to ask a question for the Q&A session, please press star followed by one and a telephone keypad. And if you change your mind, it's star followed by two. I'll now hand over to the team. Please begin.

Good morning and thank you for joining us today for our first quarter fiscal 2022 earnings call. I'm joined this morning by Chris Scherzinger, 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 SEC filings, all of which are available on the company's website. During the call today, the company may also discuss certain non-GAAP financial information. For a 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.weber.com and can be found in the company's SEC filings. The recording of today's webcast will be archived for at least 90 days on Weber's investor relations website. And now I'd like to turn the call over to Chris.

Thank you, Brian, and good morning, everyone. This morning, I'll touch on three major themes from our first quarter. First is our solid sales performance, generally on track to our broader objectives leading into the 2022 season, particularly in the face of acute logistics and supply chain challenges in the quarter. Second is our progress in proactively navigating these inflationary and disruptive market dynamics with a leadership mentality. And third is strong momentum and progress on our five key growth strategies, particularly the exciting new product innovations recently announced for the 2022 season. First, let me talk about Q1 performance. The Weber team worked tirelessly to meet the needs of our customers amid continued strong demand for our products. We generated net sales of $283 million, a decrease of 8% from the prior year period, but on a two-year stack basis, up 74.6%. Recall that the first fiscal quarter last year, which was the fourth calendar quarter of 2020, we saw unprecedented retailer restocking of depleted inventory coming out of the first COVID summer when shelves were bare. This year's Q1 results show strong, sustaining demand in the face of healthier retailer inventories and represent a two-year compounded annual growth rate of about 30%. As you know, Weber is a seasonal business, and our first quarter historically has been a low-volume off-season quarter. we do believe we're now seeing a return to normal outdoor cooking seasonality patterns and retailer order timing, with fiscal Q2 and Q3 being our peak sales quarters. Like many organizations, our results were negatively impacted by the generational inflation headwind, including raw material commodity costs, extreme inbound freight cost increases, and unfavorable foreign exchange movements. These pressures impacted first quarter margins, and led to an adjusted EBITDA loss of $36 million. Since we last spoke to you, the operating environment has become more challenging and costly for our entire industry, and we believe these challenges will persist through the remainder of the year. Bill will cover this in greater detail shortly, as well as the positive financial impact of the significant proactive actions we're taking to mitigate the drag on near-term financial results, while also maintaining investment for future growth. Second, I'd like to talk about how we're navigating this very challenging operating environment. As I shared with you last quarter, we are intently focused on managing today's costs and logistics challenges with agility and a leadership mindset. And I'm confident that when conditions eventually normalize, which they will, that Weber will come out stronger than ever. We have the strongest brand in the industry. We have a uniquely diversified global manufacturing footprint, and we have a world-class team bringing leadership, innovation, and value to our consumers worldwide. Current container cost inflation, even at 10 times historic rates, cannot and will not derail our long-term growth vision and success. That said, in this moment, we are taking significant actions to combat the inflationary pressures. First, we're driving numerous activities in our manufacturing, sourcing, and transportation operations to manage costs down, including shifting manufacturing for certain product lines to different sites in our network, driving mid-season supplier negotiations and cross-improvement initiatives, shifting transportation tactics at both the volume and mix level, and implementing commodity and currency financial management instruments. We also just recently introduced a second 2022 price increase in most key markets in order to address the even higher inflationary cost pressures than we saw six months ago when we took the first 2022 increase. We expect to see the impact of these combined pricing actions across the second and third quarters. Whoever is a premium brand that does have pricing power in the marketplace on a global basis, that this still requires great partnership with our retail customers to execute given the difficult timing relative to the season. We are committed to delivering maximum value to our consumers and to building our business and our retail partners business collaboratively. In addition to cost reductions in pricing, We're also aggressively pulling back SG&A expenses in areas that do not impact our demand generation for future growth levers. Combined, these three action plans will produce substantial offsets to the unprecedented inflation that 2022 is throwing at us. That brings me to my third and final topic today before I toss it to Bill, which is the exciting progress we're making on the five key growth strategies for Weber, many of which are set to take great leaps forward in the 2022 season. At the risk of being redundant, long-term thinking has always been one of Weber's most defining characteristics, and it's one of the key reasons we've succeeded consistently over the past 70 years in good economic cycles and bad. So in the face of today's challenges, it's in our DNA to keep an eye on the future and deliver the strategies and initiatives that will create shareholder value for many years to come. You've heard about these five key strategies from me in all of our communications to date. So today, let me focus on how they're coming to life in this moment to drive 2022 growth for Weber. First is introducing market-disruptive new products. In January, we announced our new products for the 2022 season, really breakthrough products that reimagine outdoor cooking and the experience for consumers. Our all-new 2022 Genesis line, including smart Genesis gas grills with Weber Connect built in, the new Stealth Edition of our SmokeFire smart wood pellet grill, Weber crafted a new outdoor kitchen collection of attachments and grillware accessories that unlock new food discoveries and cooking methods on your patio to transform your Weber grill into a full-blown, multifaceted outdoor kitchen. And lastly, a special 70th anniversary new product to be unveiled later this month, a pretty cool retro throwback to celebrate our heritage and our invention of modern grilling back in 1952. We are fired up about these products. And the Genesis innovation on our flagship line, well, it's the most significant gas grilling innovation in 15 years. Here's a quick rundown on the new Genesis. To start, it's just larger. Dramatically larger cook surface area, food prep area, and built-in storage with the largest high heat fear zone in the history of the Genesis. It has a proprietary lighting system called Night Vision that changes grilling after sunset forever. and a proprietary burner design called Pure Blue that delivers best-in-class high heat, even flame, and maximum fuel efficiency. Plus, integrated Weber Connect technology for real-time food monitoring and step-by-step cooking instructions on your grill and on your phone, and the built-in framework to turn that one single Genesis into a flat-top grill, a pizza oven, a rotisserie pit, a stir-fry station, and more with the Weber-crafted line of grillware. Just a few examples of how we're setting a new bar in outdoor cooking and taking our consumers' experiences to new heights. Early consumer response has been extremely strong, piquing the interest of current Weber owners ready to trade up, as well as owners of other lesser grills ready to move to a Weber experience. The second key strategy is to accelerate our direct-to-consumer and e-commerce revenue. Our Weber stores and grill academies internationally And our Weber.com business across all regions showed strong performance in Q1, representing 12% of sales. And we have strong expansion initiatives in place for the 2022 season. We opened seven new Weber stores in the first quarter alone, bringing our total store count to 200 globally. And we're on track to launch substantial Weber.com site upgrades, as well as new social influencer programming in all global markets in Q2. Third is expanding our retail customer base and new consumer revenue streams, We continue to deliver increased Weber presence across retail footprints in all regions globally, building on successes like REI and Best Buy in the US, Canadian Tire in Canada, Costco and Amazon in multiple regions around the world, and many more. We value building strong partnerships with retailers who can bring the Weber brand to life in their footprint. In addition, we have a number of exciting consumer programs going live or being piloted in 2022 to deepen user engagement and drive new recurring revenue streams, such as instructional video classes, drill training events across Australia, as well as warranty and maintenance service programs. Fourth is expanding and deepening our presence in emerging markets. We are seeing great performance from our emerging geographies, where Q1 sales were up 13% versus the prior year quarter. This growth is coming from developing countries in all regions, with our most significant growth in the quarter coming from Mexico, Chile, Italy, Eastern Europe, and China. And speaking of China, although it represents only a small part of our business today, we continue to see exciting investment opportunities building on the upcoming opening of our first Weber store in Shanghai for the 2022 season. Fifth and finally is executing on value-enhancing operational initiatives. While it may seem a paradox to talk about great progress operationally in the face of the current headwinds I discussed earlier, we continue to see great evidence that our multi-continent infrastructure is a productivity engine, however. This is a key competitive differentiator for us and a driver of long-term value. Our new plant in Poland is yielding outstanding results and exceeding throughput and cost expectations. In fact, given our early success there, we're already leaning in to add further capacity at the site. Looking ahead, Both in the face of temporary but trying near-term challenges and with a view to long-term growth and category leadership, Weber remains exceptionally well positioned with the best brand, the largest geographic and consumer footprint, the best innovation engine, the best global operation, and the best team in the industry. I would like to take a moment to thank our team members around the world for their continued resilience, their passion, and their commitment to our consumers in order to deliver maximum value to our shareholders. With that, I'll pass it over to Bill Horton, our Chief Financial Officer, to discuss the first quarter financials and guidance in greater detail. Over to you, Bill.

Thanks, Chris, and thank you, everyone, for attending our call today. As Chris mentioned, Weber is a seasonal business, and our first and fourth quarters historically represent our lowest sales quarters of the year, with only the Australia and New Zealand business being in season for the quarter. Overall, in the first quarter, we saw strong demand But due to product availability issues caused by shipping delays, port congestion, and China power supply limitations, we shifted some of our early season trade sell-in to the second quarter. As discussed, Q1 fiscal 2022 net sales decreased 8% or $26 million to $283 million from $309 million last year, though they were up 75% on a two-year stack basis. For the Americas, net sales decreased 13%, or $23 million, to $156 million from $179 million last year. On a two-year staff basis, net sales increased 67% versus Q1 of 2020. America's net sales this quarter were negatively impacted by supply chain-related shortages of certain components, grills, and accessories. We expect to make up this sales shortfall in Q2 and Q3. And as we prepare for our selling season, we've progressed on several initiatives, including increasing aisle space for our new product launches at key retailers, adding digital content in-store, and enrolling new influencers and ambassadors to our team. For EMEA, net sales decreased 4% or $3 million to $63 million from $66 million last year. On a two-year stack basis, net sales increased 126% compared to Q1 of 2020. Our ability to expand the Weber brand into developing European markets has allowed us to continue to achieve strong growth in the region. We are structurally improving our business and expanding Weber stores in all major growth markets, targeting 20 to 50% more stores in all markets by the end of next year. We are also driving broad scale distribution up in several developing countries by more than 50% versus the beginning of 2021. Additionally, we are expanding our regional coverage in currently underserved emerging countries, such as the Basque and Andalusia areas in Spain and the Campania area in Italy, to get more payback on our national advertising spend. Both examples have focused metropolitan areas of more than 1 million people. In Asia Pacific, Net sales were $64 million, which were in line with last year's sales. On a two-year stack basis, net sales increased 57%. As I mentioned, Australia and New Zealand, our two largest markets in the region, are now in their core selling season and see very strong overall demand. Our Asia-Pacific team remains focused on brand and channel growth. with investment in advertising and partnerships to engage, acquire, and retain new generations of levered consumers. Now, turning to our gross margin results. For the quarter, we faced unprecedented cost challenges with supply chain and material cost inflation and tariffs at historically high levels. Gross profit decreased $71 million, or 53%, to $64 million. from 135 million last year and gross margins decreased 2100 basis points to 22.6 percent from 43.6 percent last year it is worth noting that although not a year-on-year call out we continue to be burdened with more than 50 million dollars of negative impacts from tariffs despite being the only major grill manufacturer with a significant domestic manufacturing presence We've talked about macro environmental factors impacting our business, and I'd like to share some examples of what we are seeing today, specifically for inbound freight. Although we realize continued commodity and purchase goods cost inflation in the quarter, the most significant driver of our gross margin rate declines was the result of record spot market pricing for export containers from China. For perspective, in Q1 2021, our global blended inbound cost of container was in the $3,500 to $4,500 range. Today, we are paying between $14,000 and $16,000 on average per container, a year-over-year cost escalation of three to four times. In Q1, we shipped nearly 3,500 containers as we prepared for the coming grilling season. the negative impact of gross margin in the quarter was $31 million, an 11% impact on our gross margin rate, or 52% of our year-over-year margin rate decline. The current situation is driven by multiple factors, including congestion of outbound shipping capacity in China, following the power restrictions imposed by the government during our first quarter, continued high demand for shipping during the Christmas season, in the shipping push leading up to the lunar new year we are not expecting conditions to normalize during this fiscal year and our projections currently have inbound freight representing 16 percent of our full year cost of goods sold increasing more than three times from two years ago on a percent of sales basis from three percent to ten percent of sales This surge in freight creates a $150 million plus headwind on the business that is difficult to overcome in the short term. In terms of our approach to responding to inflationary pressures, we recently took our third price increase of the past 12 months in most regions, one in fiscal 2021 and two in fiscal 2022. And the impact will improve gross margins sequentially over the next several quarters. For example, in Q1, we realized 530 basis points of pricing impact, which we expect to grow to 1,240 basis points in Q2. Selling general administrative costs for Q1 of 2022 increased by $34 million, or 30%, to $148 million year-over-year and increased 1,540 basis points to 52.3%, from 36.9% of sales last year. This increase was primarily driven by non-cash, stock-based compensation expense of $21 million, higher one-time business and transformational costs of $6 million related primarily to our global SAP project, and $5 million in additional costs related to the 2021 June life acquisition. Excluding the impact of non-cash, stock-based compensation, and other non-recurring costs, SG&A as a percent of sales was 39.9% versus 34.4% last year. For the quarter, net income decreased by $79 million for 1,626 basis points to a net loss of $75 million from net income of $5 million in the prior year. As previously discussed, the decrease was primarily driven by $21 million of higher non-cash stock-based compensation expense and $71 million of lower gross profit as a result of higher costs and inflation and lower sales over the prior year. Adjusted EBITDA decreased 196% to a loss of $36 million, or 12.7% of net sales, compared to $38 million or 12.2% of net sales last year. Again, the variance was primarily driven by higher cost of goods sold for the quarter and a return to normalized seasonality patterns. For Q1 of 2022, net cash used in operating activities increased to $188 million from $161 million for the three months ended December 31st, 2020. an increase of $27 million, or 17%. The increased usage was driven by global supply chain challenges leading to increased inventory levels, inflationary cost increases in raw materials and inbound freight, and an unfavorable impact of higher prepaid expenses and other current assets, primarily for income taxes. This would partially offset favorable timing of payments impacting accounts payable. As you are aware, our credit facility includes a revolving credit facility and a term loan. As of December 31st, 2021, we had $132 million of available borrowing capacity under the revolver, and our last 12 months average net debt leverage ratio was 4.2 times and is compliant with our credit agreement. Keep in mind that we look at our leverage on an average basis, given our usage of the revolver to fund working capital during Q1 and Q4. which also happen to be our lowest cash flow in EBITDA quarters due to the seasonality of our largest markets. Based on our growth plan, we believe our cash and cash equivalent position, net cash provided by operating activities and availability under our secured credit facility, are currently adequate to finance our working capital requirements, plan capital expenditures, and debt service. in the future we may allocate additional capital towards strategic acquisitions and we may opportunistically assess options to strengthen our balance sheet and ensure the most efficient capital structure these may include additional debt financing vaccine facilities and other potential financing options i'd like to wrap up my prepared remarks by providing updated guidance for fiscal year 2022 We previously guided net sales in the 6% to 8% range above 2021 and continue to anticipate sales within that range on a constant currency basis. However, when taking into account the negative headwinds on foreign exchange rates, particularly with the strength in the U.S. dollar against the Euro, we now expect net sales to increase 4% to 8% on an actual currency basis for fiscal year 2022. While we are aggressively pursuing cost savings opportunities and substantial price increases to offset inflationary challenges and will continue to do so, we no longer have certainty that those initiatives can fully offset the inflation headwinds, particularly in the first half of the year before all the pricing actions take hold in full. In view of the continued external headwinds and our updated cost assumptions, we are now lowering our full-year adjusted EBITDA expectations to be between $275 million and $325 million. Nevertheless, we remain highly confident in the long-term outlook for Weber and remain laser-focused on executing on our five key strategic initiatives, which will yield both short-term and long-term benefits for our stakeholders. And with that, I'd like to open up the call for questions.

Thank you very much. And as a reminder, if you would like to ask a question, please press star followed by one in a telephone keypad. And then if you change your mind, please press star followed by two. We have our first question in from Simon Segal of BMO Capital Markets. Please go ahead.

Hey, good morning. This is Dan Stroller on Persimian. Thanks for your time here. And Bill, thanks for the specifics on the fair payment tax. That was very helpful. Chris, on the call today you mentioned the capabilities in Poland starting to really come to fruition. I think previously we were expecting to start impacting the P&L in either late 2Q or sort of the back house. Just wondering if those impacts may start to be realized earlier now or anything. And then I had one on inventory. Thanks.

Sure. Thanks, Dan. Poland is going really well, as I mentioned in the remarks. I would say we started up in October, and so we have a full quarter under our belt, and we continue to expand different product lines over time. And so I don't think it'll be fully maximized in terms of its impact on the P&L until the Q4 timeframe, to be honest, in full, but it's sort of growing linearly from here until there. And so generally things are going really well, and because of the dynamics that I talked about relative to the freight markets in particular, but commodities as well, we do see advantages to accelerating our investment there and to increase and shift more volume into that facility as it's able to handle it and as we're able to qualify new lines and new product SKUs to be produced there. So I don't know, Bill, if you want to add anything in terms of when you would see that hit the income statement and the margin line, but from an operational standpoint, it's going extremely well. Yeah, Chris, I think you hit it.

I think, Dan, that we're certainly seeing the benefits on the P&L today because that plant is producing product that is, from a margin standpoint, accretive versus kind of old world, if you will. But certainly, as Chris mentioned, it will sequentially improve and be more significant as we get into kind of the meat of the season. So like Chris said, by Q4, you'll get full one rate on Poland, and as he mentioned, we'll be adding the additional lines in Poland that also brings more scale and productivity to that facility.

Got it. Thanks. On inventory, anything you could give in terms of composition of either in transit or what the growth looks like on a unit basis versus cost? Thanks.

There's a number of factors in play, but certainly our increased inventory was as you saw in the financials, a driver of our operating cash flow in the quarter. Q1 inventory was in 2020. One thing you have to remember, it was abnormally low, if you will, given the strong POS season last year and low retail inventory. So you definitely see that dynamic as we're now replenishing. Last year, we were replenishing well in the Q1 and Q2, and I think you're seeing now a return to more normalized inventory levels. A second significant factor in our inventory is capitalized variances on higher cost of goods from Q4. So obviously, if your inventory is more expensive, if you will, given what we're seeing in inflation right now, you've got that. variance that was sitting in q4 that's now being rolled off but that's that's sitting on the balance sheet right now and as you mentioned the longer transit times that we're seeing you know generally two times from a from color two years ago what we're seeing in transit times is having impact on And then another part of the excess inventory is a conscious buildup of product coming into the season. So we're seeing, as Chris mentioned, still really strong demand for product globally. So we're protecting against the upside in sales. We're bringing that product in. So that's on our balance sheet as well. And then finally, as Chris mentioned, the Poland plant, we have a full raw material investment in finished goods built in Poland in parallel with our existing facilities. So as this dual supply of U.S.-built EMEA grills and the Poland plant started, you have a bit of a double count in there on inventory because we're starting up the Poland plant. And just from a safety stock level, we wanted to make sure the Poland plant was executing on plan. So I'll kind of pause and see if that helps with your question.

That's great. Thank you, boss. Appreciate it.

Thanks, Tim.

Thanks, Tim.

Our next question on the line comes from Megan Alexander of JP Morgan. Please go ahead with your question, Megan.

Hi, thanks very much. You know, I was hoping to talk about, you know, how your forecast is built out for the rest of the year in the Americas. You know, absent the shift you talked about to Q, are you assuming, you know, normal seasonality going forward? And if so, does that kind of mean we should cut our sales estimates given the base of 1Q did come in a bit below?

No, I think, great question. You know, I wouldn't recommend cutting your forecast. Certainly, you know, we've provided our guidance both on net sales and there's no dynamic within region, you know, that we've purposely widened the range on guidance for a few reasons. First of all, as we've discussed, you know, Q1 is, is by far the lowest quarter of the fiscal year. And given the uncertainty in the supply chain and some of the things that you've heard about, whether it be transit time increases, et cetera, we've got now 65 to 70% of our full year sales volume still in front of us. So it just dimensionalizes even through Q1 into January that we still have the biggest part of our season, POS season, still in front of us. So we've decided that until we get into our POS season, we're going to hold a wider range on the sales outlook. The other piece in the Americas, your question might relate to this Q1, Q2 dynamic. We talked about on the last call that with the complexity in the supply chain and with the load of our new Genesis product line launch, there could be some shifting between Q1 and Q2 because of trade load for our new Genesis line. So you might be seeing some of that in our actuals. Does that help?

Yeah, that's really helpful. Just as a follow-up, in the prior guidance, you were, I think, assuming 80% of that 68% growth was coming from price and the rest from units. Can you just talk about how that maybe has changed, given you are taking an additional price increase this year?

Yeah, so let me give you my perspective on the full year pricing. We expect pricing to be in the low double digit from a year-on-year growth standpoint. We expect full exchange, as we mentioned in our press release and in our prepared remarks. low single-digit impact with foreign exchange. And so, therefore, if you kind of back into the 4% to 8% guidance range on the top line, volume would be flat to down, low-mid single digits. That's our current range guidance as we see it right now. But, again, as we head into our PLS season, we're going to get much more insight into consumer demand once we get into the peak season.

Got it. Thank you.

Thanks for the question.

Robbie Oms from Bank of America Global Research. Your line is now open. Please go ahead with your question.

Well, good morning. A couple of follow-ups on that. With the wholesale growth that you talked about, Best Buy and REI, can you give us any kind of update on how things look from your accounts regionally? And do you see any cannibalization or pushback from your wholesale partners when you're opening up these new accounts?

Hey Robbie, it's Chris. Thanks for the question. We haven't seen that. I think it's always going to be a tense moment when you expand distribution. But we've been partnering very closely with our core distribution partners as well. And I think our business is really healthy there. In fact, if you take a customer like Ace Hardware in the co-op and hardware channel, they've been one of our top performing customers. And so I think there's room for us to grow with new points of distribution that reach different consumers and different geographies that don't cannibalize the core. If you think about The entry into REI, as an example, that's primarily focused on our portable grills and specifically the Weber Traveler. And so that's a little bit of a different type of shopping experience, a different use occasion for the consumer. And so it can be complementary to what goes on in our core channels. But we certainly want to drive strategies with our core retailers as well as new retail partners. to grow uh to grow business for them and for us in a partnership in a collaborative way and that's that's been successful for us um in recent years and it's still successful this year sorry robbie this is bill the only thing i'd add is you know if you go back to

Back to 2018 when Chris and I started, you know, this business was a $1.3 billion business. We'd grown it north of $2 billion. And candidly, when you look across, $250 million of that growth has come from new customers. Whether it be Costco, if you go back a few years, and then you go into, you know, when we launched Weber.com, Canadian Tire in Canada, and now what you just mentioned with Best Buy and others. So we feel like we can manage through the complexities well and have done so, and we'll continue to do that.

That's really helpful. And maybe this is for Chris as well. Chris, can you remind us the acquisition strategy and what you're working on or looking at these days? Sure.

Thanks, Robbie. We did create a new entity, subsidiary entity within Weber called 1952 Ventures that's named for our founding year when George Stephen founded Weber in 1952 and with the spirit of sort of reinventing the barbecue category. or frankly inventing the barbecue category. And that's the strategic mindset that we go into with 1952 Ventures. We named Troy Shea, who's our chief growth officer, also the CEO of 1952 Ventures. And Troy is... currently focused on and in the process of evaluating a lot of different opportunities. And so, you know, as it speaks to either capital allocation strategy or the strategic intent behind different places where we would look to invest for disruptive and inorganic innovation, we would bring to bear the same strategies that we have for the core business, where we want to drive growth by extending into new segments. We want to drive growth by by dialing up technology as a lever for the business, much like we did with the June life acquisition a year ago, which has been really, really exciting for us. And then there are other high margin initiatives, like let's say accessories as an example, where we can drive favorable gross margin mix and incremental consumer engagement in terms of purchase frequency and purchases and engagement with the brand in between grill purchases sequentially. And those are kind of the strategic pillars. I would say we looked very diligently at potential candidates and are looking at potential candidates. They have to be accretive out of the gate, and they need to be attractive from a mixed standpoint. And then I would add we also like the idea of candidates that would benefit from the great infrastructure that we built at Weber, particularly around a global footprint. And so with the presence in 78 markets around the world, doing more than half of our business outside the U.S., and particularly now with a network of 200 Weber stores and grill academies around the world, we've paved a pretty exciting road to drive additional cars down. And so we're not going to do anything – anything rash or foolish. We tend to be disciplined and very, very financially minded in terms of return on invested capital. But we do think there are opportunities for us to grow. And I'll be, you know, one of our first phone calls when we nail down something.

That sounds great. Thanks so much.

Our next question on the line comes from Artie in Cochrane of UBS. Please go ahead with your question, Artina. Thank you.

Hi, thanks. This is Artina. I was wondering if you could talk about demand. I think in the release you highlight sustained high consumer demand. I was wondering if you have any POS commentary. I understand you aren't in high season POS yet, but anything you could share. And then my quick follow-up, could you give us some detail on what the retailer inventory situation is in terms of weeks of inventory? That would be helpful. Thank you.

Chris, I'll comment first, and then Bill, if there's anything, chime in to follow me up. Generally speaking, one of the concepts we talked about even back during the IPO, but over the last couple of quarters, is this idea that the pandemic in the outdoor cooking category and the behaviors that fell out of the pandemic, particularly around We call them lockdown behaviors or work-from-home behaviors. Those home-oriented behaviors, we felt like, based on all the tea leaves, we felt like that had a good chance to last and sustain over time. And as consumers are more oriented around their homes and spending more time at home, even if work-from-home is not working all five days from home during the week but working – two or three days from home during the week, which I think is a social dynamic that's even still playing. It does create more engagement with cooking at home and more engagement with grilling, and that's been generally a positive tailwind. And the way that I characterized it, you know, over the last couple of cycles is it creates a new floor for the category. And so as you think about, you know, I mentioned in the remarks, we were down in Q1 8% for the quarter from a demand standpoint, but the two-year stack was plus 75%. and so what what we feel great about is the higher level of consumer engagement with grilling does appear to be sustaining and it's been you know we're coming up on now two years break of the pandemic And that sustained sort of new floor, if you follow me down that pathway, does continue to be holding. And that bears out in our Q1 results. It bears out in the point of sale that we're seeing. I would say Q1 point of sale was like single digit soft, but up, you know, uh mid double digits i don't know the right way to put it but uh you know up you know up on the you know on the order of 50 over a two-year basis and so even though that that first quarter that that october through december period is a really low point of sale quarter and the peak season for us has always been and will continue to be uh in the northern hemisphere at least when warm weather hits As I mentioned, we see a return to more traditional seasonality, and I think that the favorable dynamics around staying at home, both related to the inflationary impact on eating out, and some of those dynamics historically forever over our 70 years have driven a more home-oriented cooking behavior among consumers. There's a lot of positive factors there that give us reason to believe that the trends that we're seeing now can continue. The other thing I would add is one market that's in season during that first quarter is our Australian New Zealand business, which is a really healthy and attractive business for us. And because it's in the southern hemisphere, their peak season tends to be in Q1. That business was up significantly for the quarter and even from a point of sale standpoint was growing year on year. low to mid single digits without any pricing benefit. So from a volume standpoint, a positive volume quarter in that market, and that would suggest that that probably portends well for Northern Hemisphere markets going into the Northern Hemisphere season in Q2 and Q3.

Thank you for all that detail. And really quick on weeks of inventory at retailer, do you have that color?

Yeah, I don't have the weeks in front of me, but what I can tell you is generally, and I'll speak to both the Americas or the U.S. in particular, and then I'll give you some color around Europe. But generally, in Q1, we were up about 22%. at our five major retailers where we actually can get you know inventory uh on-hand data and that was up 22 versus last year at the end of q1 our target was to be up about 40 percent so we came out of q1 a little bit lighter on trade inventory just driven by the supply chain challenges that i referenced so as we work through q2 we feel really confident and maybe a little bit more delayed versus where we expected to be. But once we get all the containers in and out the door, we should be close to about 30% up year on year now that's you know both just laughing last year where you were still at low inventory levels and additionally got higher facings with our new product launches this year that gives us just you know the ability to kind of have more inventory at shell if you will from a european standpoint um i would say generally what we're hearing from our retailers again we don't necessarily get you know hard and fast data but generally trade inventory is where we want it to be or quote you know normal if you will With the exception of, again, similar to the comments on supply chain, you know, one example would be just at the end of Q1, we had $30 million of in-train inventory for Europe that was waiting, you know, literally on the water to be shipped out to the trade. So you'll see that course correct as well in our inventory in Q2. So that's just what I would add there.

Thank you very much.

Thank you.

Our final question on the line comes from Chris Carey of Wells Fargo. Please go ahead, Will.

Hi, good morning. It's a wide EBITDA range. I know you've kind of talked to various puts and takes, but can you just maybe help us understand what might get you to the high end versus the low end?

Yeah, thanks, Chris. So on that, as we discussed, Q1 is our lowest quarter of the fiscal year. I mentioned that it also happens to be bearing a much higher percentage of the inbound freight cost headwinds that came out of Q4 and certainly into Q1. But given the uncertainty in the supply chain at this moment in time, and the reality that, as I mentioned earlier, 65% to 70% of our annual sales are yet to be booked from February through September, and the inflationary impact that are really impacting every consumer category out there, not just in our space, we've decided that until we get well into our POS season, we're going to hold a wider range on both our top line and our bottom line impact. Obviously, the top line results in third quarter will drive us, you know, towards the higher end of that range, assuming all of our sell through, you know, a new product, et cetera. So that's why we chose to go with a wider range at this time.

I think I can just add, Chris, I would – It's partially related to Bill's comment around just having our lowest quarter behind us and having so much in front of us for the year. I think we felt like when we saw container rates at this, I think, maybe highest cost ever in October, at least from my recollection over my 30 years, container costs, we didn't think could go up from there, and they went up from there. And they went up from there like almost 50% in December, January. And so the container costs... you know a crystal ball on container costs where I might have felt like as a business leader how could it possibly get any worse than this and then it gets worse than that it's just difficult to pin that down and so you know I don't know exactly what's going to happen with container costs post Lunar New Year my hope is that they'll course correct and modulate or to moderate rather but But rather than hanging our hat on that, so to speak, we're taking the approach of covering a range of options here. And so I think what you could expect is, I mentioned in my remarks, we're taking very proactive actions on literally every front of the business to course correct this. And so within that window of range, the more that we can impact our freight tactics, the more that we can impact our supplier negotiations and cost improvement initiatives with our suppliers, the more that we can, I mentioned earlier, shifting more manufacturing into Poland, the more that we can get the price increases sort of accepted and out into the marketplace and producing the way that we would forecast those to produce, those things increase our certainty and reduce the variability. And that would be the kind of action that would narrow in that range as we get more months under our belt, I think. So I would expect us to have a much higher level of certainty a quarter down the road from where we are today based on just living through the post-Lunar New Year container dynamics and also implementing a lot of the actions that we've called out in today's call to go after improving the situation. And that's the kind of thing that will steer us in a good direction.

Very helpful. Quick follow-up just on the outlook for cost. I think containers, you may have said, is half of the COGS inflation that you're expecting for the full year. Please correct me if that's not the case. Can you just provide some perspective on what else you're factoring into the inflation outlook as far as the COGS go and what you're going to be pricing against? Thanks so much.

Generally, in the first quarter, Chris, you're correct that freight was more than 50% of the headwinds on COGS. It represented probably 54% of our inflationary challenges on cost of goods. and then the bulk of the rest of the inflationary headed commodity and purchase grill costs. So collectively, those combine to be almost 24 percentage points and drag on margin. Where we see that progressing throughout the year, again, I mentioned that inbound freight represented more than its, quote, fair share, you know, if you will, of cost impact in Q1 because you're bringing in all this freight It sits on the balance sheet in Q4 and into Q1 and gets rolled off to the P&L. And the bulk of that hits in Q1 when it's also your, as Chris mentioned, your lowest selling season. So we expect that to normalize, not because we're being overly aggressive on rates. We're actually assuming that that the high freight rates that we're seeing in the market that are four times historical averages essentially stay where they are today. So we're not being optimistic in our outlook on where container rates are going to go. But across the year, we would expect that about roughly 40% of your gross margin impact is coming from inbound freight and closer to 60, 65% coming from commodities and purchase grill costs being inflated. Okay, thanks so much.

As a reminder, if you would like to ask a question, please press star followed by one in a telephone keypad. As we have no further questions registered, I'll hand back over to the team.

So thank you all for joining us today. We continue to be very optimistic about the business and the long-term prospects. We're very excited about the innovation that I mentioned earlier and the advancement of our of our direct business, our Weber stores and grill academies, and certainly our progress in emerging markets, which we didn't talk about a lot in the Q&A here, but that's all going very well also. So there's a lot of positive positive infrastructure being built and a lot of great opportunities for us going forward. The strategies that we have in place are working. We're going to battle our way through this, I would use the word generational headwind from a transportation cost and commodity cost standpoint. And I'm confident that we'll come out strong on the back end of that. So thank you for your time today and look forward to speaking with you again soon.

Thank you very much for joining us today, ladies and gentlemen. You may now disconnect your lines. Have a good afternoon.