Traeger, Inc. Q4 FY2021 Earnings Call

Thank you for joining us for the Traeger Fourth Quarter and Full Year 2021 Earnings Conference Call. All participants are currently in a listen-only mode. We will have a question-and-answer session at the end. I would now like to turn the call over to Nick Bacchus, Vice President of Investor Relations. Please proceed.

Good afternoon, everyone. Thank you for joining Traeger's call to discuss its fourth quarter and full year 2021 results which releases this afternoon and can be found on our website at investors.traeger.com. I'm Nick Bacchus, Vice President of Investor Relations at Traeger. With me on the call today are Jeremy Andrus, our Chief Executive Officer; and Dom Blosil, our Chief Financial Officer. Before we get started, I want to remind everyone that management's remarks on this call may contain forward-looking statements that are based on current expectations but are subject to substantial risks and uncertainties that could cause actual results to differ materially from those expressed or implied herein. We encourage you to review our SEC filings for a 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 which we believe are useful supplemental measures. The most comparable GAAP financial measures and reconciliations of the non-GAAP measures contained herein to such GAAP measures are included in our earnings release which is available on the Investor Relations portion of our website at investors.traeger.com. This call will also include estimates regarding market and industry data that we prepared based on management's knowledge and experience in the markets in which we operate, together with information obtained from various sources, including publicly available information released by independent industry analysts and third-party sources as well as data from our internal research. Now, I'd like to turn the call over to Jeremy Andrus, Chief Executive Officer of Traeger.

Thank you, Nick. Thank you for joining us for our fourth quarter earnings call. Today, I will discuss highlights from our full year and quarterly results and share our progress in executing our long-term growth strategies. I will then turn the call over to Dom to discuss details on our fourth quarter financial performance and to provide an outlook for fiscal 2022. 2021 was a pivotal year for Traeger and we are pleased to have capped it off with a strong fourth quarter performance. We reached several milestones during the year and I'm exceptionally proud of our team for driving the company to the next level as we continue to transform the way people cook at home. An important milestone in the history of Traeger was our successful IPO in July 2021. We also delivered record sales in 2021 and grew the top line by 44% on top of 50% growth in 2020, with grill revenues up 85% on a two-year stacked basis. We finished the year with strong momentum and grew fourth quarter sales by 31%, exceeding the high end of our sales guidance for the year. This growth came despite the significant challenges we faced in the global supply chain. We estimate that in 2021, we grew our sales faster than the category and our market share at the end of the year increased by more than 50% relative to 2018. We also believe we are effectively increasing the grill industry's total addressable market as Traeger's premiumization of the category continues to drive industry average selling prices. Furthermore, in 2021, we expanded our offering by launching our direct-to-consumer business concept, Traeger Provisions, and by acquiring MEATER, a highly innovative player in the wireless smart thermometer category. We believe these new business lines will enhance our relationship with our existing customer installed base and drive incremental lifetime value and increase engagement beyond our core grill and consumables business. Looking beyond the incredible progress we made in 2021, I remain as excited as ever about the future of Traeger. We are still in the early stages of growth and we have just scratched the surface in terms of our plans to penetrate the global outdoor cooking market. Before Dom discusses our fourth quarter results and our outlook for 2022, I want to spend some time reviewing our progress on our key strategic initiatives. As we continue to drive towards our long-term objectives, our growth strategy remains centered around four strategic pillars. I will briefly touch on each of these pillars. Our first strategic growth pillar is to accelerate brand awareness and penetration in the United States. We believe driving penetration in the U.S. with an estimated total addressable market of 75 million grill-owning households is our largest growth opportunity. We ended 2021 with an installed base of 2.5 million grills, up from 2 million in 2020. Our 3.5% household penetration in the U.S. implies that we have a long runway ahead of us as evidenced by the mid-teens penetration rates we have achieved in some of our heritage markets. And what's more, in 2021, growth continued to be strong in our most penetrated markets, indicating that we haven't yet come close to hitting the ceiling in these markets. The momentum behind the Traeger brand is evidenced by the growth in unaided awareness which increased meaningfully to 13% in 2021, up from 11% in 2020 and 7% in 2019. Our increasing share has been driven by our significant brand-building efforts with a large emphasis on social. Our top-of-funnel efforts are working. In 2021, we added 138,000 Instagram followers and 67,000 Facebook followers, an increase of 14% and 16%, respectively. At more than one million people, our Instagram follower base is the largest in the outdoor cooking sector and outpaces our largest competitor by 2.5 times. Engagement on our social channels remains very healthy. In the fourth quarter, Traeger had its most successful Thanksgiving campaign in brand history which resulted in seven million video views, more than double Thanksgiving 2020 and a mid-teens percentage increase in user-generated content submissions. Our market assault strategy continues to drive strong results and legitimizes our view of material upside opportunity awareness and market growth. Despite pulling back on incremental marketing spend as we entered a seasonally slower period during the fourth quarter, we continue to see awareness and demand in our assault markets well in excess of the company average and we are pleased with the lift in sales we saw in the quarter relative to control markets. In 2022, we intend to expand our market assault program to additional geographies, including eastward expansion to markets in the Midwest and Southeast where we see tremendous upside opportunity and awareness of the Traeger brand. Our efforts to increase awareness are bearing fruit as our most important retail partners continue to allocate more floor space to the Traeger brand. Traeger continues to focus on driving productivity in the grilling category at retail and we are not only selling more SKUs for our largest retailers but our partners are investing alongside us in premium merchandising of our brand. For example, at the Home Depot, we are materially increasing our SKU count across 350 doors in 2022. These doors will have a more expansive merchandising assortment which historically has driven twice the productivity versus Home Depot doors with a more limited assortment. Furthermore, we are quadrupling the number of Home Depot doors with high-end fixturing, prominently displaying the Traeger assortment in a Traeger island. These premium doors are significantly more productive than average with materially higher conversion and a better brand presence. Our retail partnerships continue to strengthen and we have significant runway in front of us to expand our penetration. Moreover, we are also adding new channels of distribution. We recently launched at Best Buy in the fourth quarter and are encouraged by early results. Our next growth pillar is to disrupt outdoor cooking through game-changing product innovation. Innovation is in our DNA and we have a demonstrated track record of continually bringing innovation to the market. We expect that 2022 will be an inflection point in our innovation cycle as next week, we will be launching a new grill platform which we believe will be one of the most important launches in the company's 35-year history. We are extremely excited about this new grill launch as it truly represents the innovation leadership of Traeger. This new grill line incorporates attributes from years of investment into consumer research and customer feedback. To put it simply, we listen to what our customer wants from a Traeger and we are delivering. Our confidence in this strategy is reflected in the fact that our consumers replace their Traeger grill at a 20% faster rate than the overall grill industry average. We believe this is largely driven by our history of innovating the grill category and continually improving the consumer experience, thus setting the company up well for a strong multiyear replacement cycle. It's important to note that this launch will be a driver of innovation and newness in our grill assortment for several years, not just 2022. As in the past, Traeger's strategy is to launch powerful innovations with a select number of premium SKUs initially and to cascade new features through the rest of the assortment over the next few years. In the fourth quarter, we launched Traeger Provisions and activated influencers and social media as well as email campaigns to drive awareness. We continue to be optimistic around the long-term growth potential for Traeger Provisions and we will continue to refine the offering as we move through 2022. We aim to grow our Provisions business in a thoughtful manner, focusing on perfecting the consumer experience and the unit economics before scaling and investing into the business more aggressively. We are also driving innovation in the connected cooking space through our MEATER acquisition. Much like Traeger, MEATER is a disruptive and premium player that is using technology to enhance both the outdoor and indoor cooking experience. MEATER has seen strong growth since our acquisition and this growth will continue in 2022 as we expand distribution in the sum of Traeger's best retailer doors. Furthermore, in 2022, our new grill line will incorporate elements of MEATER's technology into the Traeger app and ecosystem. The third pillar of our growth strategy is to drive recurring revenue through our consumables business. Based on continued success, we are increasing distribution of our consumables offering in the grocery channel. Our research shows that the Traeger community wants consumables available where they shop every week, not just where grills are sold. In 2021, we doubled the number of grocery doors where Traeger sauces and rubs are sold. We are excited to share that their distribution into the grocery channel is planned to increase this year driven by the launch of sauces and rubs in Kroger in March of 2022. We are extremely excited to partner with Kroger and see tremendous opportunity to grow our consumables penetration and drive brand awareness beyond our existing retail footprint. As evidenced by this expansion in consumables distribution, Traeger’s innovation extends across all our product categories, not just grills. We launched a number of successful consumables in the fourth quarter. These include two premium-priced, limited edition pellet offerings in the fall, followed by our launch of two more this quarter, a bold blend and a brisket blend. Traeger also entered into the hot sauce category with Traeger Original Hot Sauce and launched two new sauces: Show Me The Honey and Liquid Gold; plus two new rubs: Anything Rub and Perfect Pork Rub. Our fourth growth pillar is to expand the Traeger brand globally. 2021 was a banner year for our international business which made up more than 10% of revenues for the year. We see a large opportunity to use the playbook that has been so successful in the U.S. to capture share abroad. In the fourth quarter, our international business continued its strong growth and more than doubled year-over-year. Our Canadian business, which is our largest market outside the U.S., is showing extremely strong momentum with sales more than tripling versus prior year in the fourth quarter. Our European business also continued to see strong growth in the fourth quarter. In 2022, we plan to continue driving awareness and penetration of the Traeger brand across international markets through targeted marketing and localized social campaigns. We remain highly enthusiastic about the opportunity to grow Traeger across the globe. While I'm very confident in our long-term prospects and our ability to execute on the strategic growth pillars, we are more cautious in how we are guiding our full year due to emerging macro headwinds facing the consumer. These include higher inflation, the conflict in Ukraine, and asset price volatility. These headwinds are coming at a time when our business is comparing to a two-year period that saw accelerated demand which benefited from government stimulus and COVID restrictions. Despite the near-term headwinds, our three-year revenue compound annual growth rate remains very healthy and significantly above industry trends. I'd like to now discuss a topic that is impacting many companies: global supply chain and inflationary pressures. As we discussed during last quarter's call, we faced significant supply chain challenges and inflationary pressures related to our supply chain in the second half of 2021. I am proud of how well our team has navigated these unprecedented challenges. We have continued to prioritize delivery of product to ensure that we can adequately fulfill strong demand by increasing production and warehousing product in Asia. This has been a winning strategy as evidenced not only by our fourth quarter top line growth but also by the record level of on-time, in-full shipments we experienced during the quarter. As Dom will discuss, we are not building in any improvement in the supply chain environment or related cost pressures in 2022 into our outlook. At the same time, we are not standing still. Rather, we are focusing on driving forward our key long-term growth strategies while simultaneously managing the business for the new near-term reality. We are actively implementing cost-mitigation strategies to help bolster our short- and medium-term gross margin profile. These strategies include price increases which are our most immediate mitigation tool; as well as improvements in manufacturing, logistics, warehousing, and product design efficiencies which will benefit margins over the medium to long term. We plan to open our new Mexico facility for mass production at the end of this year and are evaluating long-term opportunities to bring more of our manufacturing closer to our core market in the U.S. Further, our product team is bringing innovation to our production model with a focus on creating game-changing products more efficiently. The organization is hyper-focused on identifying and executing on gross margin-enhancing initiatives. Additionally, in the face of increased costs and an uncertain macro environment, we are aggressively managing our cost structure. We are strategically reducing and deferring certain nonessential expenses and are thoughtfully reprioritizing near-term selling, general and administrative demands and profit and loss. We believe this discipline is prudent given the environment. It is critical to note that we are focused on protecting the core drivers of our brand health and are not compromising in any way our customer experience or product innovation engine. Stepping back, we hit several major milestones in 2021 and ended the year with strong growth in the fourth quarter, allowing us to exceed our full year revenue and EBITDA guidance. We are making significant progress on our key strategic growth pillars yet remain in the early stages of achieving our potential. Despite near-term challenges, I am extremely bullish on our business and on our ability to capitalize on our tremendous long-term growth opportunity. With that, I'll turn the call over to Dom.

Thanks, Jeremy and good afternoon, everyone. As Jeremy noted, we are pleased with our performance in the fourth quarter and remain confident in the long-term growth opportunity for Traeger. As an organization, we are focused on driving towards our long-term goals while also navigating a highly fluid near-term environment. I will start by reviewing our fourth quarter results and then we'll discuss our 2022 outlook as well as provide an update on our first quarter trends. Fourth quarter revenues increased 31% to $175 million driven primarily by growth in grills and accessories. Grill revenue was up 9% to $101 million, following a 70% increase in the fourth quarter last year. Growth was attributable to a higher average selling price driven by price increases taken in the second half of 2021, partially offset by slightly lower unit volumes. Fourth quarter unit volumes were impacted by the exit of an unprofitable distribution channel and would have been up low double digits excluding prior year sales to this channel. Consumables revenues declined 19% to $26 million compared to the fourth quarter of last year, reflecting a normalization of seasonal ordering patterns against a very strong fourth quarter 2020 when our consumables revenue was up 121%. Finally, accessories revenues increased 425% driven by incremental revenue from the acquisition of MEATER and strong growth in Traeger accessories. Looking at performance by market. We continue to see strong momentum in the U.S. as well as exceptional growth in Canada and the rest of the world. We are in the early stages of growth abroad and we remain highly optimistic about the opportunity to grow globally. Gross profit for the fourth quarter increased to $65 million from $51 million last year. Gross profit margin was 37.4%, down 80 basis points from last year. As we have discussed previously, inbound freight rates spiked to unprecedented levels in the second half of 2021 and continue to be our largest year-over-year margin headwind in the fourth quarter. Higher inbound freight costs negatively impacted gross profit by over 550 basis points in the fourth quarter. Amortization of intangible assets related to the MEATER acquisition and increased warehousing expense driven by investments in additional capacity were also dilutive to margin. Offsetting these pressures was margin favorability of 380 basis points driven by our pricing actions and grill mix. Other positive drivers of gross margin include lower outbound freight driven by the exit of a higher-cost sales channel, a higher mix of customer orders fulfilled via our direct import program; and favorability in WiFIRE connectivity costs per grill, largely due to a one-time accrual true-up. Sales and marketing expenses were $39 million compared to $29 million in the fourth quarter of last year. The increase was primarily driven by advertising costs related to MEATER which is not a component of the 2020 comparable period. The increase was also driven by higher equity-based compensation expense of $3 million due to the restricted stock units issued under the Traeger 2021 incentive award plan, as well as higher personnel-related expenses associated with an increase in headcount in our marketing, customer experience, and sales functions. General and administrative expenses were $44 million compared to $15 million in the fourth quarter of last year. The increase in general and administrative expenses was driven primarily by higher equity-based compensation expense of $16 million due to the restricted stock units issued under the Traeger 2021 incentive award plan, higher personnel-related expenses, increased professional service fees related to nonroutine costs for our Traeger Provisions platform and nonroutine legal expenses. As a result of these factors, the net loss for the fourth quarter was $34 million as compared to a net loss of $3 million in the fourth quarter of last year. Net loss per diluted share was $0.29 compared to $0.03 in the fourth quarter of last year. Adjusted net income for the quarter was $4 million or $0.03 per diluted share as compared to adjusted net income of $4 million or $0.03 per diluted share in the same period last year. Adjusted EBITDA was $14 million in the fourth quarter as compared to $14 million in the same period last year. Adjusted EBITDA for fiscal year 2021 was $109 million, above the high end of our prior guidance range of $103 million to $108 million. Now, turning to the balance sheet. At the end of the fourth quarter, cash and cash equivalents totaled $17 million compared to $12 million at the end of the previous fiscal year. We ended the year with $379 million of long-term debt. Additionally, at the end of the year, the company had drawn down $9 million on its revolving credit facility and $41 million under its receivables financing agreement, resulting in total net debt of $413 million and a net leverage ratio of 3.8%. Inventory at the end of the fourth quarter was $145 million compared to $69 million at the end of the previous fiscal year. The increase in inventory was driven by three factors. First, we have made a deliberate decision to lean into higher inventory levels to ensure adequate supply for demand due to supply chain constraints. Second, the cost of inventories increased due to certain macro pressures I referenced earlier, largely driven by higher inbound transportation expenses and higher input costs. Lastly, approximately $12 million of the inventory increase is related to MEATER, which was not in the inventory base in 2020. We remain confident that we have the right inventory balance to meet expected demand and we continue to invest into higher levels of safety stock in response to persistent supply chain challenges. Turning to our guidance for fiscal year 2022. For the year, we expect revenues of $800 million to $850 million, implying a year-over-year increase of 2% to 8%. We expect adjusted EBITDA of $70 million to $80 million. Let me provide additional color around our operating assumptions. In terms of sales, we are guiding to top line growth that is below our historical growth rate but that implies growth that is well in excess of our long-term targets on a multiyear basis. There are two central factors that are influencing our 2022 sales guidance. Firstly, we are comparing against a two-year period of extremely strong growth and therefore, expect some normalization in our multiyear growth rate. This is reflected both in sell-through which benefited from government stimulus and accelerated materially in the first half of 2021 as well as sell-in which outpaced sell-through in the first half of 2021 as retailers restocked low-channel inventories. Secondly, we are taking a more cautious approach relative to consumer behavior in our 2022 planning, given emerging pressures on consumer confidence. These include broad-based inflationary pressures and growing geopolitical risks. Looking at current trends, we have seen a deceleration in sell-through at retail over the last several weeks, coinciding with these growing pressures on the consumer, and are assuming a continuation of these trends in our 2022 revenue guidance. These dynamics will disproportionately impact first-quarter revenue growth which was our strongest growth quarter last year. We expect that quarterly revenue seasonality after the first quarter in 2022 will look similar to 2019, with lower seasonality in Q2 versus 2019 and higher seasonality in Q4 which is MEATER's largest quarter. Specifically for grills, the midpoint of our full year guidance assumes that grill revenues in the first half of 2022 are down double digits as we lap the strong sell-in experience in the first half of 2021. We expect sequential improvement in grill revenue growth in the back half of the year relative to the first half. However, we are assuming negative grill revenue growth for the full year. We know our grill business has delivered strong multiyear growth. And even with this decline, 2022 grill revenues are expected to have grown at a three-year compound annual growth rate in the low to mid-20% range. In terms of gross margin, we are expecting continued pressure versus 2021's full year growth rate and are modeling a full year gross margin range of 34% to 35%. In order of magnitude, we expect the annualization of higher inbound freight rates and increased input costs to be the largest drags on our gross margin. We expect these pressures to be partially offset by pricing actions taken in the second half of 2021 and the first quarter of 2022. From a pacing perspective, we expect gross margin in the first half of 2022 to be higher than our full year rate. I'd like to spend a moment putting inbound freight costs into perspective as this is the largest driver of gross margin decline relative to our 2020 gross margin rate of 43.1%. Compared to pre-pandemic levels, container costs have increased by a factor of three to four times, and we are seeing increases in excess of $10,000 per container. Having shipped over 6,000 containers in 2021, the cost of inbound transportation materially impacted both gross margin and EBITDA. We expect that inbound container rates will track above $10,000 through 2022 which will continue to pressure gross margin. In terms of selling, general and administrative expenses, we are tightly managing expenses to help offset the continued margin headwinds. And we'll continue to invest in the core growth engine but we'll delay other investments as we navigate a highly fluid macro environment. Note that SG&A in the first half of 2022 will be compared to the period before MEATER was in our expense base. While we typically do not give quarterly projections, we are providing first quarter guidance as we are 11 weeks into the quarter. We're expecting first quarter revenues to be between $208 million and $212 million, implying a decline of between 10% and 12%, with grill revenues expected to decline in the low to mid-20% range, offset by materially higher accessories revenue driven by MEATER. We expect first quarter gross margins to decline sequentially compared to fourth quarter's rate and expect EBITDA in the range of $22 million to $24 million. Looking beyond 2022, I want to touch on some of the medium- to long-term gross margin drivers we have in place. Firstly, price is a key lever that we will continue to evaluate to manage margins. We implemented two price increases in the back half of last year and raised price again on certain grills and accessories and on pellets in early 2022. Secondly, we are thinking transformationally around design and production. We are working together to drive changes in design, manufacturing and supply chain processes which we believe will result in higher product margins and lower costs. Further, we will look to optimize the assortment over the medium to long term, launching products that are accretive to our overall margin profile. Overall, we continue to feel extremely optimistic about Traeger's long-term growth path as we continue to disrupt the outdoor cooking industry with new product innovation, grow the Traeger community, increase brand awareness and penetration, and expand Traeger abroad. And with that, we'll open the call to questions.

We have our first question on the phone line from Randy Konik of Jefferies. Sir Randy, your line is open.

Yes, thank you. Dom, could you provide us with more insights on how much sell-through has decreased and how that has impacted sell-in? I'm also interested in the trend from last quarter regarding average selling prices due to mix shifts. Is the mix shift indicating that consumers are becoming more price-sensitive, which is leading you to be more cautious about the macro environment? I'm trying to understand whether this revenue caution is mainly due to a genuine change in consumer purchasing behavior towards being more price-sensitive, as opposed to it being influenced by lingering COVID demand effects or similar factors.

Yes, definitely. In response to the first question regarding sell-through, we model demand by fitting the relationship between sell-in and sell-through trends to forecast sell-through. We have been closely monitoring this since Jeremy and I started. After implementing price increases starting in late Q3 and continuing into Q4 and early Q1 of this year, I can say that there were no significant outliers indicating any mistakes with our pricing strategy. We were aware of the trade-offs between volume and price, and these decisions have helped us mitigate cost pressures. Sell-through trends were largely aligning with our expectations until about three weeks ago, when we noted a significant deviation from our forecast. We are responding to this, although it's based on limited data, including a recent positive trend. We're aiming to become more informed while remaining agile throughout the year in case sell-through trends continue to decline unexpectedly. Additionally, we believe these recent trends correlate with macro economic factors impacting consumers. Regarding channel mix, I should note that our price increase above $1,000 demonstrated some inelasticity at those levels. We've observed increased price sensitivity below $1,000, which is something we're considering as the year progresses. We will continue to assess this. There are several elements influencing these trends that we believe require both patience and caution in managing our profits and losses, potentially adjusting our strategies in light of new market conditions in 2022. Importantly, even though we acknowledge there was a pandemic-related demand surge, sell-through trends over two and three-year periods remain strong. We're facing a tough Q1 comparison for sell-through, but the performance watermark for the business has been elevated. This won't change the fact that Q1 comparisons will be challenging, and we do expect some acceleration of these challenges. We will keep a close eye on this dynamic.

Got it. My last question is about the expected decline in year-over-year EBITDA. Is that primarily due to increases in freight costs contributing to that lower figure? I would like to explore this further. There seem to be lower sales expectations, and I suspect there is also an issue with margin compression. So I'm interested in understanding that better.

Yes. There definitely is. So as we think about gross margin for the full year, we're sort of pegging a range of between 34% and 35%. It's really a tale of two halves, right? I think when you look back to 2021, H2 was when we really felt and were somewhat surprised by the dramatic increase in inbound transportation costs. That clearly is annualizing for full year 2022 which is placing extra pressure on the first half of this year. And that certainly is one of the larger factors. I'd say the second factor that we're anticipating which isn't fully reflected in what we're seeing in Q1 per se but just based on where oil prices have gone and the fact that we have seen steady increases in outbound transportation costs, we're anticipating in our model that that becomes a somewhat more substantial headwind in 2022. So those are two factors that we're watching closely. Clearly, there are other components to the gross margin pressure as we annualize some of the input costs or commodity costs tied to our grills specifically, where we felt more of that in the back half of last year which is now annualizing this year. And so fortunately, the price offsets are a nice addition to how we sort of manage through this period of volatility. But there are pressures persisting on the transportation side that we don't anticipate will alleviate this year. And in fact, there are signals that they may increase relative to what we were seeing last year, especially on the fixed side of contracts.

Understood. Thank you so much.

Thank you, Randy. We now have the next question on the phone lines from Peter Benedict of Baird. Sir Peter, please go ahead.

Hey guys, thanks for the question. So, I guess two questions. One, I'm curious if you have any stats to share around grill usage trends, maybe what you saw last year, how that's compared, has that kind of topped out? Is it continuing to improve? Is it slowing? And a read on consumables from that. And then can you give us more color on what channel you exited? I think, Dom, you had mentioned that as a factor in Q4. That's my first question.

Yes, we haven't observed any trends regarding grill usage that contradict what we've seen over the past 18 to 24 months. The trends remain positive, and consumers continue to engage with the product. Based on the IoT-connected grills that we can measure, usage is also positive, which makes us happy. The broader macro dynamics do not seem to impact consumer engagement with our product after purchase. Regarding consumables, we expected some normalization in the attachment rates. Comparing 2019 to 2020, and considering the surge in 2021, we see that attach rates are normalizing as we move through the latter half of 2021. We anticipate that this will stabilize in 2022, and we never expected the 2020 levels to continue indefinitely. We're satisfied with the performance of our consumables business, attachment rates, and grill usage across our connected products.

I would just add one other data point that I think is relevant. Super Bowl of this year was our largest cooking day, a brand engagement day ever. Connected cooks were up 55% year-over-year from the prior year's Super Bowl. So I shared some of the brand engagement statistics on social. We're seeing it validated from a cooking behavior perspective as well.

And then, can you repeat the second question?

Yes, I was just curious on the unprofitable channel that you exited.

Oh, yes, yes, sorry. Yes. We won't give specifics on the channel. It's been a great channel for the brand for a number of years. Unfortunately, the way the program is configured, it just doesn't work in this macro environment from a transportation cost standpoint. And so it became unprofitable. And we made a decision to shutter that business. And so when you normalize for that component, both on a full year basis as well as in Q4 specifically, there's actually a fairly meaningful return to growth on the Traeger side of the business both from a unit and a revenue standpoint. It was definitely the right decision, especially in this environment. We don't want to operate in channels that are dragging profitability and/or operating at a loss. And that was the genesis of the decision to pull away.

Yes. I would just add, it was not a core channel to our business and it was not a growing channel.

Thank you. We now have another question from Simeon Siegel of BMO Capital Markets. Simeon, please go ahead. I’ll open your line.

Great, thanks. I have a couple of quick questions. Do you have any insights on the latest sell-through data? Is it specific to Traeger or the industry as a whole? I’d love to hear your thoughts on that. Secondly, you mentioned pricing regarding the pellets. What trends are you observing following that test or price adjustment? Lastly, Jeremy, your comments about the upcoming year sound very promising. As you consider that guidance, I appreciate the cautious approach. Dom, could you elaborate on how you’re balancing unit sales versus pricing in your grill revenue?

Yes. So Simeon, let me hit the first one. We do track market share and we will know more when we see the first quarter market share. I can say a couple of things qualitatively. What we hear from our retail partners is that the category is down and that Traeger is down less than the category. So our expectation is that we will continue to take share as we have done historically. The other piece I would add, and again, this is anecdotal, I have been to two trade shows over the last three weeks. And we've spoken to hundreds of retail partners and shop owners, shop managers, and the brand energy is as strong as it's ever been. So our belief is that the position is exactly what it has been, that it's growing and that we will fare better than the category in 2022.

Yes. When we decided to raise prices, it was clearly to manage the increased costs of selling our product, and we knew this would likely affect our unit volume. This was a deliberate choice. Looking ahead to 2022, we will analyze our pricing strategy, particularly for products under $1,000, and determine if adjustments are necessary based on the data we gather. While we don't plan to make immediate changes, we will consider it in the near future and over the medium to long term. In terms of average selling prices, we are seeing significant growth in 2022, primarily due to the price increases we've implemented, as well as the launch of new innovations, which will also help boost average selling prices through improved channel mix.

Yes. And I would just add our expectation is that units will be up double digits on a three-year compound annual growth rate in 2022 based on the guidance that we've shared.

Great. And Dom, did I mishear? Did you talk about taking pricing on pellets as well?

Oh, yes. We did take price on pellets, yes. Yes.

And any early signals on that?

I don't see any signs that it has had any real impact. I believe it remains a strong embedded revenue stream for the brand. We feel justified in taking a price increase partly because of the enhancements in our price pack architecture and the premiumization of our pellet experience, including quality and packaging. Our investment in that product leads us to believe that we can increase prices. When considering an average price increase for the 2022 period, it’s likely around $1.50 to $2, and this has not affected unit volumes based on our measurements.

Great. Thanks, guys. Best of luck for the year. And thanks for the color.

The next question comes from John Glass of Morgan Stanley. Sir, please go ahead when you’re ready, John.

Thank you. Good afternoon. First, Jeremy, on the new grill that you're launching next week, can you maybe provide what the average selling price is? Like what is that relative to your baseline high-end growth? And how meaningful is that in your forecast, the sales forecast for '22? Is that a meaningful contributor this year? Or do you think this is your investment; you sort of get ahead of it and talk about the grill from a marketing perspective, that you think the impact is more in '23 from a sales perspective?

So first of all, I would love to tell you much more about it. What I can tell you is that it is premium. It is meaningfully premium to the top end of our line right now. And again, as I said, if you look at our history of cash-grade innovation, we launched Timberline in 2017. We brought all of that technology plus additional technology in the direct drive all the way down to our Pro 575 which was priced at $799 at the time. So this is premium. It will contribute to sales. We believe those sales will come mostly from specialty given that's where it's going to be largely distributed. And it's not a meaningful driver of sales in the year but we expect that the platform will create very meaningful sales in '23 and beyond.

That's helpful. Could you also remind us, what proportion of your sales are in that sub-$1,000 category where you're seeing price sensitivity? And Dom, did you, for conservatism's sake, bake in into the forecast if there is going to be maybe pricing actions? I'm assuming you're thinking reductions to stimulate sales. Did you forecast that in your gross margin forecast to be conservative? Or would we have to rethink gross margin if you were to do some pricing actions in the sub-$1,000 grills?

Yes. So I'd say on the first question, no, that is not in the model. Again, this is sort of a reaction to a couple of weeks of sell-through data. So it's something that we'll watch. There are other ways to manage margin to the extent that we do lower price on entry-level grills, where we're learning that our consumers are more sensitive which I think is also compounded by the fact that we're in this period of record inflation, at least over the last 30-plus years as well as just maybe some of the other aspects to the macros that are putting pressure on consumers. And so again, it's something on the table. And to the extent that we lower price and believe that's the right decision, it may come with some offsets that allow us to sort of manage the margin impact accordingly. And then obviously, from a unit volume standpoint, as you sort of look at the spread across our various price points, we certainly do a lion's share of the volume below $1,000. And I would say that it's probably weighted slightly higher to products below $1,000 on a revenue basis and maybe slightly less, above $1,000 but there's more parity between the two price bands on a dollar basis than on a unit basis.

Okay, got it. Thank you.

Thank you. We now have Peter Keith of Piper Sandler. Sir, please go ahead when you’re ready, Peter. Your line is now open.

Hi guys, this is Matt on for Peter. Just two quick ones for me, kind of both related to gross margin. I think the trajectory of your input costs, we're kind of just curious on what we should be monitoring and maybe what are the main components in your overall steel. And then also kind of in regards to freight, can you remind us of your exposure in terms of your contract versus spot market exposures? And I guess, will there be a difference in 2022 versus last year?

Yes. On the commodity front, steel is a significant part of the total material cost of our grills, and we are attentive to that. Rising component costs, particularly for electronics and chipsets, will add some pressure on margins this year. As for inbound transportation, we are entering a phase where we will start securing more fixed rates, which will be higher than what we locked in back in 2021. We are also experiencing pressure as many carriers are seeking longer-term contracts, indicating that they might be anticipating challenges to their pricing power, especially if a recession occurs and demand decreases, which could lower prices and benefit consumer goods manufacturers. We are carefully navigating a complex environment, weighing the decision to commit to rates that are relatively high for two to three years against the possibility that rates might decrease due to fluctuating demand, all while ensuring we maintain our capacity, as that has been a risk. We are currently inclined to keep a greater portion of our container mix flexible rather than committing to elevated rates long-term. While this approach carries some risks, we believe being in a good inventory position allows us to do so for the time being. We want to avoid locking ourselves into high container rates for the next three years if those rates go down. We are securing some fixed contracts at higher rates to maintain a baseline of predictable container availability. An advantageous aspect is our direct import program launched with Home Depot, which simplifies our supply chain. We are assessing opportunities with other key partners to leverage their volume and pricing power to mitigate risk for Traeger. Overall, we are being patient as we doubt that these high rates will last for three years, and the carriers seeking long-term contracts reflect that uncertainty. We are managing acceptable risks while ensuring we have enough capacity to benefit from any future price reductions.

Thank you. We now have Sharon Zackfia from William Blair. Sir, please go ahead when you’re ready, Sharon.

Hi, good afternoon. Not a sir yet, but you’re still young. So on the door count, you talked about entering Kroger in March and Best Buy in the fourth quarter. Can you talk about, as we think about grills and accessories and consumables, how much you expect the door count to increase in 2022 for those categories relative to '21 when all is said and done? And then on the Mexico facility, just assuming things are where they are as it relates to freight and so on, how much benefit would you see to gross margin from Mexico in '23? And how much of your production can you actually flow through Mexico?

Sharon, those are excellent questions. Over the past couple of years, we've concentrated on getting our pellets into grocery stores, driven by convenience and insights from our consumer research. As for the rubs and sauces, we haven't made significant sales outside of our primary channels, but we anticipate a substantial increase in distribution and store presence. Regarding Mexico, it's important to note that opening a facility, refining processes, achieving efficiency, and scaling volume takes time. I expect that as macro conditions, especially around transportation, improve, we'll see these factors first contribute positively to costs. There is, however, a silver lining to our current challenges; we are actively considering a different long-term configuration for our business, with a more strategic approach to manufacturing from a product standpoint. We're reevaluating where and how we manufacture and assemble. These changes won't affect 2023 but we strongly believe they will have a significant impact in 2024 and beyond. We're innovating in our manufacturing processes, though 2023's performance will largely be influenced by the macro environment. We'll have a clearer picture as the year unfolds.

I want to emphasize that our long-term objective is to diversify our sourcing base. If we have developed Mexico effectively for scaling, we can envision balancing manufacturing volumes across various locations. Additionally, I want to support Jeremy's point that this is not just about reducing the material costs of the grill, excluding transportation burdens. That aspect, prior to the pandemic, was a manageable part of landed costs, but it remains significant. If there are structural changes to inbound transportation costs, with prices potentially dropping from $10,000 to $15,000 to around $5,000 depending on shipping ports, this presents a major opportunity related to what Jeremy mentioned about designing for manufacturability. We are also exploring ways to increase loading capacity in containers, which could yield valuable insights to significantly enhance our cost structure and help mitigate both medium- and long-term risks associated with container rates potentially becoming structural. We have several promising strategies stemming from this environment that necessitate a new approach. I believe we can achieve noteworthy margin improvements as we move forward with these initiatives.

Can I ask one quick follow-up? Are there any provision start-up costs that we should expect bleeding into '22?

Yes, that's a great question. As we evaluate 2022, we are definitely reconfiguring our selling, general, and administrative expenses to align with our long-term financial model. This is essential for managing our investment capacity. With an expected margin compression of 800 basis points from 2020 to 2022, it necessitates a reset of our selling, general, and administrative expenses to match our long-term financial outlook. Our primary goal is to achieve this, while also focusing on core areas. We want to concentrate on high-return investments for the current year and may defer some longer-term investments because some initiatives can wait. The first priority is to navigate the challenging environment of 2022, and we will remain adaptable to increase investment capacity if trends improve, which might allow us to accelerate previously delayed investments. In the current landscape, it's difficult to maintain the pace of new initiatives or business units as originally planned, but given the size of the total addressable market and our belief in its long-term potential, we feel it's acceptable to adopt a patient approach. Therefore, we will significantly scale back and focus on testing product markets that enhance unit economics while keeping overhead low and effectively managing our burn rate, ensuring it does not impact our selling, general, and administrative expenses. This is part of our strategy for reshaping those expenses this year.

Great.

Thank you. We now have our final question on the line from Joe Feldman of Telsey Advisory Group. Sir, please go ahead, Joe.

Great. Thanks for taking the question, guys. Wanted to ask on the inventory; you did a great job explaining why it's elevated. But I guess I was curious, have you leaned in a little too much at this point, considering the sell-through that you're forecasting for this year? And maybe how should we think about the inventory level through the year? Like what would end more at a flattish level just given the big increase we just saw this quarter? Or how should we think about that?

Yes, that's a great question. I would say no, we haven't overcommitted. Given the uncertainty in the macro environment and the ongoing COVID-19 situation in Asia, particularly in China, where restrictions can be very strict with any reported cases leading to shut downs and port closures, it makes sense to maintain a higher inventory balance. This is a significant advantage for us right now. We have made investments and are currently carrying the highest inventory levels we've ever had. There have been some changes in our forecasts this year based on sell-through trends, which we will continue to monitor. To address your question, first, we do not have issues with obsolescence, as our inventory is full price and healthy, just at higher levels. Second, we are adjusting our inventory levels based on the continuation of current sell-through trends, and we expect to reduce these levels by year-end. Last year, we had around 111 days in sales outstanding annually; we aim to target closer to four turns by the end of the year to ensure positive cash flow from working capital. We will adjust inventory as we progress through the year and gather more insights. Our demand planning team works closely with the sales team and our factories in China, managing our inventory on a weekly basis with flexibility to fine-tune our position based on sell-through trends. We feel confident in our inventory stance, but given the pressure that gross margin is placing on cash flows and EBITDA, we will focus on optimizing working capital in light of these dynamics.

Got it. That's really helpful. And then just the follow-up I had was I know you guys talked a lot about new doors both for grills, for consumables. Can you quantify like just the number of new doors you're thinking this year or roughly? It just might be helpful for us.

Yes. I mean, I think where you'll see the largest increase in doors would be on the consumables side, so the relationship with Kroger. I wouldn't anticipate significant door increases on the grill side. I think our point of distribution for grills are largely locked in. And we continue to explore new opportunities, but in 2022, you won't see much retail expansion on the grill side.

Thank you.

I'd like to hand it back to the team for some closing remarks.

I want to express my gratitude. First of all, I appreciate the thoughtful questions and conversation. I want to emphasize that we have strong confidence in the long-term position of this business and brand, but even more confidence in the quality of our team. This team is committed, energized, and prepared to not only tackle the current challenges but also to build something significantly more compelling for the future. We are excited about it and look forward to staying in touch in the coming weeks.

Thank you for joining. This does conclude today's call. You may now disconnect your lines.