Traeger, Inc. Q1 FY2022 Earnings Call

Good afternoon. Thank you for joining today's Traeger First Quarter Fiscal 2022 Earnings Conference Call. My name is Anna and I will be your moderator. I will now turn the call over to our host, Nick Bacchus, Vice President of Investor Relations at Traeger. Please proceed.

Good afternoon, everyone. Thank you for joining Traeger's call to discuss its first quarter 2022 results, which were released 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 annual report on Form 10-K for the year ended December 31, 2021, and our other 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 that 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. Now, I'd like to turn the call over to Jeremy Andrus, Chief Executive Officer of Traeger.

Thank you, Nick. Thank you for joining our first quarter earnings call. Today, we will discuss highlights from our first quarter results, and share progress in executing our long-term growth strategies. I will then turn the call over to Dom to discuss details on our quarterly financial performance and to provide an update on our fiscal 2022 guidance. The Traeger team continues to work relentlessly to deliver an incredible experience to our consumers and to drive forward our key long-term growth initiatives. In the first quarter, while we face several near-term headwinds, including continued inflationary pressures and supply chain challenges, a highly dynamic consumer backdrop, and tough year-over-year comparisons, we are pleased with our execution. Our first quarter sales of $224 million were down 5% versus the prior year, with particular softness in our growth business with revenues down 16%. First quarter year-over-year growth was negatively impacted by a period where our retail partners were aggressively restocking channel inventory, and consumer demand was enhanced by government stimulus. Looking at first quarter's three-year CAGR of 32% and growth revenue CAGR of 27% demonstrates the strong gains that Traeger has experienced since 2019. We are pleased to have exceeded our first quarter guidance, which we provided in March. Despite beating our quarterly guidance, we are maintaining our full year 2022 sales and EBITDA outlook. There are three central factors I will touch on as it relates to our reiteration of guidance. First, our performance relative to guidance in the first quarter was largely driven by the timing of shipments of growth and was not based on a change in underlying demand relative to our assumptions when we shared our outlook. Second, we remain cautious on the macro environment with continued pressures on the consumer and tightening financial conditions, as well as a shift in consumer spending away from durables towards services. Lastly, we are at the beginning of our seasonally strongest selling period, with our most important weeks at retail ahead of us, therefore, it is early in the year to adjust our outlook. Despite near-term headwinds, our brand health has never been stronger. Our consumers continue to increase engagement with Traeger, with connected cooks continuing to grow in the first quarter, led by an incredible 55% increase in connected cooks on Super Bowl 2022. Moreover, our customers continue to tell their friends and family that they love their Traeger and our NPS score is now at an all-time high, well above other players in the outdoor cooking category, and in line with great consumer brands like Starbucks, Airbnb, and Netflix. The excitement and passion around the Traeger brand continue to build momentum as we approach our summer selling season. In March, we launched our new Timberline grill, which is Traeger's most innovative product since I've been with the company, and it's truly a game changer in outdoor cooking. The launch's reception from our consumers, retail partners, and outdoor cooking influencers has been incredible and cements Traeger's status as a disruptive force in the grilling category. Looking forward, we are optimistic about our plans as we head into the summer grilling season. Whether smoking a 15 pound brisket overnight for a block party, or using one of our fast and easy dinner recipe ideas for a weeknight meal to be enjoyed outdoors with family, our wood pellet grill's versatility, consistency, and ease of use make Traeger the go-to grill for the summer. Similar to last year, we kicked off the beginning of the season with a promotion this year selling around Mother's Day with $150 off select grills and $2 off pellets and sauces. The promotion was a great gift-giving opportunity and directly addressed consumers looking to buy a Traeger grill or consumables ahead of summer. On May 14, we will be celebrating our fifth annual Traeger day. Traeger day is dedicated to bringing the global Traeger community together to cook outdoors and to share woodfire foods with friends and family as they celebrate the start of the grilling season. Consumers and influencers share pictures and videos of their meals on social media and can win prizes based on their spread. We expect significant growth in consumer engagement, especially after two years of virtual Traeger days. We remain highly enthusiastic about the enormous upside potential for the Traeger brand and are confident in our growth strategy. Having said that, as we discussed in March on our fourth quarter earnings call, the near-term environment remains highly dynamic. We are seeing numerous companies across multiple parts of the consumer sector speak to a less favorable backdrop for the consumer, with inflation and geopolitical turmoil impacting consumer confidence. Furthermore, as the pandemic subsides, it is becoming evident that the consumer is shifting spending away from durable, home-related goods towards leisure and travel, which is also negatively impacting the grill category. On our fourth quarter call, we discussed having seen a deviation from our forecasts and sell-through trends at retail in March, which coincided with worsening geopolitical headlines and a sharp rise in prices at the pump. Since then, sell-through trends have remained volatile, but are trending in line with the expectations we provided when we gave our 2022 guidance. It is important to note that it's still very early in the year, with our highest volume sales weeks at retail ahead of us. In fact, in a typical year, we would expect retail sell-through volumes between now and Labor Day to make up nearly 50% of our yearly sell-through. In terms of supply chain dynamics, as we have discussed on previous calls, given the size and weight of our product, Traeger is especially sensitive to the cost increases in freight and transportation that many companies are facing today. While we do expect that increased freight costs will normalize to some extent over time, our team remains hyper-focused on driving costs out of logistics, supply chain, and manufacturing. Specifically, earlier this year, we formed the gross margin task force led by our Chief Supply Chain Officer Jim Hardy to identify and execute on cost savings initiatives across the supply chain. While it is early in the process, we are encouraged by some initial learnings and wins. And we expect to leverage efficiencies driven by this team over the medium to long term. Critically, while the team is focused on driving cost savings, we are committed to doing so without compromising the quality of our products or our consumer experience. Furthermore, given cost increases and the uncertain consumer backdrop, we're managing expenses to better align the cost structure to the current environment. This includes re-examining our investment spending for the year and reducing, deferring, and reprioritizing certain expenses. We remain committed to fueling our long-term growth and continually improving our product and consumer experience. However, we believe that thoughtful cost discipline is appropriate given the highly dynamic backdrop. I want to shift my discussion to progress on our key strategic growth pillars: accelerating brand awareness and penetration in the United States, disrupting outdoor cooking through product innovation, driving recurring revenue through our consumables business, and expanding the Traeger brand globally. Increasing brand awareness and penetration in the United States remains our largest single growth driver. It is important to note that outdoor growth in the U.S. is a long-term opportunity for Traeger; increasing penetration of our existing retail footprint is at the core of our growth strategy. In the first quarter, we reset roughly 350 stores at Home Depot with an expanded assortment of Traeger products and improved signage and fixturing. As we have noted, these locations having a larger assortment, with more than double the number of Traeger skews and a significantly improved brand presence, which allows these locations to drive more than twice the sales productivity for Traeger products compared to the average Home Depot door. We're continuing to drive future growth in Home Depot by increasing the product assortment across stores, particularly those with minimal brand presence and sales, and by investing in visual merchandising fixtures and retail training. On the marketing side, in the first quarter, we launched a new brand campaign, Traeger Wood Tales, featured in TV spots and digital ads. That campaign focuses on funny family moments with a Traeger spin. But I would encourage everyone to watch these entertaining commercials on our YouTube channel. Going into the summer season, we will focus our media efforts on social, digital, and connected TV channels. Lastly, our DTC business continues to gain momentum, and in the first quarter, Traeger.com U.S. saw solid growth with increases in both returning customer transactions as well as new customer transactions. We launched several new products including trust pallets, consumables, and apparel in our DTC channel, including limited edition run of Traeger branded joggers that are the perfect chance to wear when grilling out on a Traeger. Our consumers love the idea, and the SWAG sold out in eight hours. These types of creative and limited-run offerings bring significant energy to the Traeger brand. Our next growth pillar is product innovation. The launch of the new Timberline and Timberline XL in March was an enormous occasion in the history of the company. Our new Timberline brings incredible innovation to the market, offering consumers an unparalleled level of consistency, convenience, and versatility. Full stainless steel insulation and a redesigned heat delivery system allow for hotter temperatures and improved searing. The grill includes the first outdoor certified induction cook top, which provides fast heating for sautéing, simmering sauces or searing, as well as a proprietary grease and ash keg system for easy cleanup. A new WiFi enabled controller for precision temperature control, and two wireless meter probes for easy monitoring of internal temperatures, among other innovations. There is nothing else in this space that has all the innovative features included in this new Timberline. The excitement around the launch of the new Timberline was palpable with 1.2 billion press coverage impressions and 70 million influencer-driven impressions in the first week post-launch. The reception of the new Timberline has been fantastic, with significant excitement from our retail partners who have sent Timberline moment fixtures in over 1000 doors, as well as strong advocacy from influencers like Sam, the cooking guy, last ten-minute new church, and how to barbecue rights. Importantly, we expect the innovations introduced in this product will power several years of upgrades and newness as technologies and features cascade through the rest of the Traeger product assortment. Shifting to our consumables business, we remain focused on driving recurring revenues through expanded distribution and new product introductions. In the first quarter, we added 2,200 grocery doors where Traeger rubs and sauces are being sold, led by our rollout at Traeger. We saw strong growth in our rubs and sauces business in Q1 driven by this increased distribution. We are also increasing distribution of our pellet business and added 600 additional grocery doors where pellets are sold. It is early in our consumables expansion at grocery. However, we are encouraged by early results and continue to believe that consumers want to buy consumables where they shop every week, not just where they're buying their grill. In addition to distribution growth, we continue to expand our consumables assortment with new innovations. In February, we launched two new rubs, Anything rub and the Perfect pork rub, and two new sauces, Liquid Gold and Show Me the Honey. Moving to our final growth pillar, expanding the Traeger brand globally, our international business had a strong first quarter with healthy growth both in Canada and Europe. The quarter benefited from strong pre-book in early season loadings, and our team did a great job delivering product on time and in full to our international retailers and distributors. In the first quarter, we saw deceleration in sell-through in our international markets, as we believe consumer sentiment in global geographies has been negatively impacted by the war in Ukraine and inflation. Similar to the U.S., we found our international business more conservatively for fiscal 22. Based on a macro backdrop, we would note we have no direct exposure to Russia or Ukraine, and the European market makes up well below 5% of our total sales. We continue to see a significant long-term opportunity to grow the Traeger brand globally. In summary, the Traeger team continues to execute on our growth strategy, which we believe will drive meaningful value for our shareholders, consumers, and retail partners. In the first quarter, we launched our most innovative product in the company's history, which we believe sets the stage for a multiyear innovation cycle and puts us significantly ahead of the competition. Despite facing near-term challenges, Traeger continues to be strongly positioned for long-term growth as a disruptor in the outdoor cooking sector. Before I pass it over to Dom, I'd like to thank the entire Traeger team for their hard work and passion in executing on our vision to bring people together to create a more flavorful world. And with that, I'll turn it over to Dom.

Thanks Jeremy and good afternoon everyone. As Jeremy discussed in the first quarter, we faced several headwinds that negatively impacted our year-over-year growth rates and margins. These pressures include comparing against the period when sell-in materially outpaced sell-through as retailers restocked their channel inventories in the first quarter of last year, lapping stimulus-driven retail demand, an uncertain consumer environment, and continued inflationary pressures on our supply chains. Despite these headwinds, we are pleased with our first quarter execution as we move into our strongest seasonal period. While the near-term environment remains highly fluid, we are focused on the things that we can control as well as maintaining an appropriate balance of short-term and long-term investment. I will start by reviewing our first quarter results, and then we'll provide an update on our 2022 outlook. First quarter revenues declined 5% to $224 million, driven primarily by a decline in grill revenues. Grills revenue declined 16% to $150 million, with revenues impacted by lower unit volumes partially offset by higher average selling prices driven by price increases taken in the second half of 2021, as well as the first quarter of 2022. First quarter unit volumes were impacted by the anniversary of difficult unit comparisons as retailers were restocking grill inventories in the first quarter last year, and sell-through benefited from government stimulus. Consumables revenue declined 3% to $40 million, reflecting the lapping of the strong 72% increase in the first quarter of last year, with a decline in our pellet business somewhat offset by growth in our rubs and sauces business. We note that the decline in first quarter consumables revenues of 3% represents acceleration from our fourth quarter's 19% consumables decline. Finally, accessories revenues increased 109% driven by incremental revenue from the acquisition of Meter and continued strong growth and Traeger accessories. First quarter revenues beat the high end of our guidance by $12 million. The upside in sales was largely driven by timing of shipments of grills relative to our plans and the guidance in March, as we released orders for certain accounts earlier than expected to ensure on-time delivery given continued constraints in domestic carrier capacity, as well as earlier loading of our new Timberline XL to certain accounts. Geographically in the first quarter, we saw strong growth in Canada and elsewhere while growth in the U.S. was impacted by the aforementioned headwinds. We remain highly optimistic about the long-term opportunity to grow Traeger globally. We are, however, planning our international business more conservatively this year given the growing macroeconomic pressures that consumers are facing in many of our international markets. Gross profits for the first quarter decreased to $84 million from $101 million last year. Gross profit margin was 37.4%, down 530 basis points compared to last year. Higher inbound freight costs continue to be the largest pressure on our gross margin and contributed 870 basis points of negative margin impact. Amortization of intangible assets related to the Meter acquisition also diluted in March, and offsetting these pressures was margin favorability of 370 basis points driven by our pricing actions, as well as favorability driven by a higher mix of customer orders fulfilled via our direct import program. First quarter gross margin was modestly better than our expectations driven by slightly lower inbound freight expense compared to our forecast. Sales and marketing expenses were $33 million, compared to $31 million in the first quarter of last year. The increase was primarily driven by advertising costs related to Meter, which is not a component of the 2021 comparable period. The increase was also driven by higher equity-based compensation expense of $2 million due to the restricted stock units issued under the Traeger 2021 incentive award plan. General and administrative expenses were $43 million, compared to $14 million in the first quarter of last year. The increase in general and administrative expense was driven primarily by higher equity-based compensation expense due to the restricted stock units issued under the Traeger 2021 incentive award plan, higher personnel-related costs, and increased professional services. As a result of these factors, net loss for the first quarter was $8 million compared to net income of $39 million in the first quarter of last year. Net loss per diluted share was $0.07 compared to net income per diluted share of $0.36 in the first quarter of last year. Adjusted net income for the quarter was $20 million or $0.17 per diluted share compared to adjusted net income of $45 million or $0.41 per diluted share in the same period last year. Adjusted EBITDA was $31 million in the first quarter compared to $64 million in the same period last year. Now turning to the balance sheet, at the end of the first quarter cash and cash equivalents total $11 million, compared to $17 million at the end of the previous fiscal year. We ended the quarter with $379 million of long-term debt. Additionally, as of the end of the first quarter, the company had drawn down $47 million on its revolving credit facility and $49 million under its receivable financing agreement, resulting in total net debt of $464 million and a net leverage ratio of 6.2. It's important to note that our first quarter is typically our peak leverage point, given elevated working capital needs ahead of our strongest seasonal selling period, with that level historically coming down thereafter. Inventory at the end of the first quarter was $164 million, compared to $76 million at the end of the first quarter last year. As we have discussed previously, the increase in inventory was driven by three factors. First, given supply chain constraints, we have intentionally leaned into inventory to ensure we have adequate supply. We believe this strategy is the right one given the supply chain environment remains highly fluid, as evidenced by recent warehouse imports shut down in Shanghai. Second, inventory costs are higher versus last year driven by increased freight and input costs. Finally, about $18 million of the inventory increase was due to Meter, which is not in the comparable inventory base last year. We remain comfortable with our inventory levels. We are closely monitoring the supply chain environment and will be managing our level of safety stock based on how the landscape evolves over the balance of the year. Turning to our guidance for fiscal year 2022, we are reiterating our full year revenue guidance of $800 million to $850 million and our adjusted EBIT guidance of $70 million to $80 million. Even at the upside in first quarter revenues was largely based on timing; we're not falling through the beat to our full year outlook. Furthermore, we remain cautious given the uncertain macro environment and its impact on consumer behavior and confidence, as well as shifting consumer spending patterns towards services and away from durable and discretionary goods. We continue to expect grill revenues to be down double digits in the first half of the year, with declining grill revenue growth for the full year and sequential improvement in the second half of the year relative to the first half as comparisons normalize. On our fourth quarter earnings call, we discussed having seen a deviation in sell-through in March relative to our forecast; since that time, sell-through trends have remained volatile but are generally in line with the expectations embedded into our guidance. As Jeremy spoke to, it's important to note that our business is fairly seasonal, with the next 18 weeks of sell-through typically representing nearly half of our yearly sales at retail. We're early in our key selling season, and therefore we'll be reading and reacting to sell-through trends during the summer. In terms of gross margin, we are reiterating our prior guidance for full year gross margins of 34% to 35%. Despite modestly better than expected first quarter gross margin, the supply chain environment remains highly fluid, and we believe it is prudent to maintain our prior margin outlook. We continue to expect gross margin in the first half of 2022 to be higher than the full year. Next, I'd like to give an update on our gross margin drivers. We expect that inbound container rates will continue to track above $10,000 in 2022, which will continue to put pressure on gross margin rates. We continue to be focused on working to offset these cost pressures. As Jeremy mentioned, we have formed a task force which is charged with evaluating changes in design, manufacturing, and supply chain processes to drive higher product margins and lower costs. We are encouraged by the team's initial findings in these areas and expect that we will begin to realize savings in 2023. In terms of G&A, we will continue to right-size our expense structure to help offset near-term top-line and gross margin headwinds. Given the current macro backdrop, we will delay certain investments that have been less quantifiable in near-term profiles and further will be nimble in our approach to managing the P&L. Our focus is to balance investing behind growth while protecting profitability and acknowledging the uncertain macro environment. We continue to feel extremely optimistic about Traeger's long-term growth as we disrupt the outdoor cooking industry, as evidenced by the successful launch of our new product innovation. Furthermore, I remain highly encouraged by the long-term opportunity to gain market share by increasing penetration within the U.S. And with that, we will open the call to questions.

Thanks guys. Good afternoon. So Jeremy, maybe it's early but anything you can speak to on that sales uplift you're seeing with the 350 Home Depots that get expanded, so maybe just getting some color around what you're seeing with those? And then how are you guys thinking about the sell-in versus sell-through dynamics for pellets? Basically, how are you thinking about when consumables should return to growth? And just any help there? Thank you.

So look, we track sell-through weekly. And we cut by customer, by door, by region, and no question we're seeing a lift in those 350 doors. By the way, we've been seeing this for years; I mean, every time we grow assortment and improve merchandising, we see the lift and sell-through. So it's fortunately a fairly predictable formula to drive growth, and we are seeing that lift, and it will continue to drive our strategy with Home Depot. One of the things that we talked about, in addition to increasing assortment, has been the testing and I would say now investment of sort of store-in-store fixtures within Home Depot. We tested about 35 stores last year, really liked the return that we saw, both in terms of lift in sales as well as return on investment in those fixtures. That has continued to roll out—there are a couple of hundred in market now and will be sort of 500 by the end of the year. That's our strategy. I mean, that is, I think it's marked in Home Depot because there's so much traffic and there's such a conversion opportunity. But it's foundational to our brand in terms of building a branded presence in retail and really capturing the opportunity to speak to the foot traffic that walks into retail.

Yes, I'll speak in terms of consumables. I would say that the first half of this year is a challenging comp across our different categories, say where we're seeing nice momentum on the accessory side, in addition to acquired revenue with Meter. As we look ahead, I think you start to see some normalizing comps from the back half of the year. And we won't go into detail around guidance. But I would say two things. First, we expect to see some normalization of consumer or consumption of pellets as we measure attachment in the back half of the year. We are lapping two years of elevated patch, just given the dynamics around the pandemic and cooking behaviors, as consumers shift to a more normal world where some of that discretionary spend, as well as their discretionary time, is moving to services. We think that will continue to put a little bit of pressure on the comps. But again, in the back half, we think those will normalize. On the food consumable side, I think one of the tailwinds that we expect to see over the course of the year is just the growing penetration within retail and more specifically Traeger and our grocery strategy, which will support our consumable business throughout the year.

Thanks very much. You talked about the still volatile consumer environment generally on trend, but you're reading and going to react to those; what does 'react' mean? I guess in your minds, what levers do you have if we start to see slippage again in consumption of grills, whether it's promotional activity or reexamining some price points? What are the levers you think you have to stimulate demand if needed?

Yes, I mean, I think I'll just step back; like the growth thesis hasn't changed; we still feel highly confident in the thesis, and it's a long-term thesis. I think the in-year dynamic will require a shift in strategy. That’s not necessarily a signal for how we’ll manage the business long term. But when you think about—and something we talked about on the last call—we experienced some acceleration in unit growth on the grill side, and ultimately, that correlates with the installed base of grills. The household penetration that we sort of measure on a quarterly basis continues to reinforce the opportunity. We'll be lapping some challenging comps over the course of this year. And obviously, we're changing our in-year strategy around how we manage the P&L, and more specifically, within SG&A, which in part requires a renewed focus on kind of middle and bottom funnel investments on the demand creation side. And that's to really ensure that where we make investments, we have a high degree of confidence. To the extent that there's excess capacity within the P&L, we will look to continue to kind of build top of funnel or rebuild top of funnel, given some of the acceleration we've seen over the last two years. And so, ultimately, what I would say is in-year, the strategy will be slightly different than longer term, and in-year will be focused more on performance marketing, where we see high sort of one-to-one conversion. Price is always something that we evaluate. We really configured a fairly sophisticated pricing strategy internally, where we can simulate based on historical moves, based on the price increases we've made, how that could in theory impact both demand as well as mix shift across our products, and then in turn, how that impacts profits generally. And so I'd say the in-year lever is really doubling down on how we sort of shift to performance marketing, as well as overseeing the highest returns there. And then we'll always evaluate price. I think we feel pretty good about our price and how we've configured that this year. But something that we'll continue to look at; on the last call, we spoke to maybe more pressure on the consumer. So the $1,000 versus above, where we have probably more inelasticity. So it’s something that we’ll continue to evaluate as a potential in-year lever. But ultimately, it's the long-term focus that I think will guide our strategy. And coming out of some of the challenges, we'll sort of reconfigure our top-of-funnel strategy, build that funnel, and continue to execute on the formula that we believe works and ultimately aligns with our growth algorithm long term.

Thank you for that. And just a quick follow up. You mentioned a time in your shift shipments, which was a benefit to the first quarter. Was that the—what was the amount of that? Was that just the overage versus your guidance or how do you quantify what that timing?

Yes, it's effectively the overage; yep, that's right. It's really a shift between Q1 and Q2 and as we said, it's tied to orders that had ship dates in kind of early Q2 that we chose to move to late Q1; they were sort of on the cusp of the two quarters. And that's really an effort to ensure we're taking advantage of capacity, which is constrained among our carriers as it becomes available. That was the primary driver.

Hey, thanks. Good afternoon, everyone. So understanding there's a lot of business to be done the next 18 weeks, I've got some curiosity. It just if things don't go well, how you work with retailers on their inventory levels. So if you have some of your big box players with a lot of excess grills, is there any marked down risk? Do you enforce MAP pricing? Or is it just simply viewed stop shipments and just kind of let the inventory levels bleed down into the holiday season?

Yes, so one of our core principles is not to be promotional, and we've been very disciplined to that. It's evolved between kind of two to four promotional periods per year; and of our biggest promotional periods, we're not going to deviate from that. We think that drives healthy brand long term, which is why our collaborative planning process, which we've configured internally, works with our retail partners in lockstep to ensure that in-channel inventory levels don't exceed a certain range that we're uncomfortable with. That holds true. And so the goal for us is always to ensure that we don't find ourselves in a position where we're too heavy on inventory and channel in one quarter at the sacrifice of another. Now, as we look at the data that comes out of our collaborative planning process, as well as sell-through trends and in-channel inventory, we're within a band that we're comfortable with, but we are heavier than what you see historically. And that's important, driven by our retailer strategy, which has also been to lean more into inventory, given the fact that over the last few years, they've found themselves in some challenging positions due to lack of inventory, etc. And so we watch this closely; we're a bit heavy, but we're also ahead of our peak selling season. And by no means is it an unmanageable position, even if the trend deviates from expectations. In Q2, it's still something that we can manage within an appropriate sort of band of weeks on hand within channel, and we believe that it's really a specific issue to 2022 versus something that would linger or persists.

Okay, that's helpful. Maybe pivoting over to freight, so you did give the comment that you're factoring in container costs running above $10,000 for the year. What are you seeing as of late with your container costs? Has there been any near-term relief? Are you still above that level?

No near-term relief, but near-term stabilization. I think where we're building confidence is that the problem isn't becoming worse. It's stabilized, which leads us to believe that in 2023 and beyond, we may start to see some building tailwinds on the container side. But in this year, we're holding guidance where it is on gross margin because one, we're sort of locked in—not contractually, but effectively locked into kind of these elevated rates, which are holding a little bit of volatility from kind of week to week, month to month, but we expect the trend to hold through the full year, and to the extent that we see some tailwinds building, that will likely be captured in 2023. So the good news is there's some stabilization within some of the inflationary pressures and transportation in particular; and that, at minimum, provides for some additional predictability within the year, but nothing that would necessarily lead us to believe that there's incremental benefit to gross margin just based on what we know today.

Yes. Hey, guys, this is Alex on for Sharon. Just a quick one for me. So based on the sell-through that you guys are seeing now, could you maybe just qualify any of that any improvements that you're seeing with the sub-$1000 category? Have you seen anything coming out of that that's improved?

Look, I would say from a sell-through perspective, the data points remain mixed, as we discussed on the last earnings call. And we're still early in the season. Our sell-through is predominantly still in front of this. But no clear direction that's deviated from what we reported on the last call, still within the range of guidance that we've provided.

I mean, I would say it's early days, but we are feeling really confident in our food consumable strategy. And as we roll out more products within grocery and expand kind of those doors, we think that this is kind of a growing tailwind for the business. There is a real appetite for kind of food consumables, especially Traeger branded food consumables. So this is an exciting component of our strategy that is beginning to mature from the standpoint of how we believe the strategy should be configured and how we will ultimately execute on that strategy to continue to drive growth, which ultimately is part of our long-term growth algorithm, and I think we're early days in terms of this strategy in particular.

Thanks for having me on. Is there a way for you guys to kind of normalize sell-through versus sell-in? I think some of what you talked about was you have this difficult comp because retailers were replenishing last year, but I'm trying to speak to sell-through or sell-in basis. Are you able to give us an indication on what volumes are doing for grills?

Yes, I would think about it in terms of seasonality within kind of our GAAP financials. So, Q1, Q2 are our largest quarters, Q3 tends to be our lowest, and then there's an uptick in Q4. This brand benefits from a fairly consistent seasonal curve over the course of the year, whereas with other brands you may see a massive load in early in the year and then their seasonality drops fairly consistently. So we see nice replenishment as well as high usage across the year, which we benefit from. But Q1 is our loading season; right? So, it's one of our biggest quarters because we're loading in meaningfully ahead of our peak season, which is Q2. Q2 is equally meaningful from a seasonal standpoint, and to your point, that's driven mostly by replenishment. And so when you think about marrying sell-in versus sell-through, you're not necessarily going to see the same seasonal pattern take shape in Q1 because we're loading in products, whereas in Q2 we're replenishing what is ultimately higher velocity at the point of sale, where you're seeing kind of the peak season from a sell-through standpoint.

Yes. Hey, guys, it's Justin Kleber; thank you for taking the question. I was hoping to get an update on your Mexico production facility when that goes live. And then just how long does it take for that facility to materially change your sourcing mix for grills?

It's a great question; we'll start to have production come off the line in the third or fourth quarter timeframe. Look, in terms of how fast we can scale it, it's a function of how quickly we can get to efficiency from a process perspective. Our belief is that it will have some nominal impact in '23, and that we should expect a much more meaningful, positive impact to the business in '24 beyond.

Yes, no, it's a reasonable assumption independent of the provision side of the business, which is in early days. But in terms of the core business, which I would include Meter in that equation, we still think that pre-pandemic gross margin levels make sense, and that's something that we're targeting. I would say that we can't really pinpoint whether that's 22, '23 rebound, or '24 rebound. I think it requires a few sort of exogenous tailwinds, as well as the things we're doing internally to execute to ensure that we're making progress toward our internal targets on gross margin and the things that we can control. Really tie back to the gross margin task force, as well as just some strategic initiatives that we have in place as we think about gross margin levers, one of which is just continuing to drive operational efficiencies which includes removing touches from the supply chain, it's about assortment as you think about. The work that Jim and team are doing around designing for manufacturability, and things that we can do to unlock greater margin, either through how we design the product and how it's built for manufacturability, to how we transport that product more efficiently, knowing that, to a certain extent, we will experience elevated container rates at least above pre-pandemic levels. We don't think that those are necessarily going to revert back to pre-pandemic levels. And so I think that that’s an important unlock, independent of where container rates go. But we have meaningful levers, in addition to just continuous improvement across kind of sourcing. Global diversification of our manufacturing bases are consistent with how we thought about gross margin and kind of how we unlock future expansion. But we also hope to rely to a degree on improving macro trends, whether that be an FX, which we're actually seeing currently creating a nice 2023 tailwind. And hopefully container costs come down somewhat, which would also provide for a nice tailwind in the future. And so it's really a combination of the controllables and the uncontrollables. And with the controllables, we have a high degree of confidence, the uncontrollables TBD. But in summary, we do believe we can get back to those pre-pandemic levels; it's just a question of when based on the macro environment as well as just kind of how these initiatives internally mature as they do take some time to come together.

Great, thanks for participating in today's call and for the robust conversation. We appreciate your trust in us. We continue to work hard to build a great business, and have a great day. Thanks.

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