Hello, and welcome to the Traeger Second Quarter Fiscal 2023 Earnings Conference Call. My name is Lauren, and I'll be coordinating your call today. I will now hand you over to your host, Nick Bacchus, to begin. Nick, please go ahead.

Good afternoon, everyone. Thank you for joining Traeger’s call to discuss its second quarter 2023 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 and are subject to substantial risks and uncertainties, which 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, 2022, our quarterly report on Form 10-Q for the quarter ended June 30, 2023, once filed, 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 to revise them for any new information. This call will also contain certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income, adjusted net income per share, adjusted EBITDA margin and adjusted net income margin, 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. Please note that our definition of these measures may differ from similarly titled metrics presented by other companies. Now I'd like to turn the call over to Jeremy Andrus, Chief Executive Officer of Traeger.

Thank you for joining our second quarter earnings call. Today, we will discuss our second quarter results and our progress on our key long-term strategies. I will then turn the call over to Dom to go over details on our financial performance and provide an update on our fiscal year 2023 guidance. I’m pleased to announce that our results for the second quarter exceeded expectations. As anticipated, our top line results were lower than the previous year due to our retail partners continuing to destock grill inventories. However, our performance was better than expected, driven by higher revenues from grill and consumable sales. The outperformance in our quarterly sales, along with our cost efficiency measures, led to better-than-anticipated adjusted EBITDA of $21 million, up from $17 million last year. I believe these results show our strong focus on positioning Traeger for improved profitability and financial health. The second quarter is a crucial selling period in the outdoor cooking industry as consumers buy grills for the summer grilling season. Our organization remains focused on sell-through in Q2 since it is the key indicator of consumer demand for our products. We were pleased to see sell-through results that slightly exceeded our expectations during some of the most important weeks at retail in the second quarter. As we have noted over the last several quarters, following significant growth in big-ticket, home-related durables during the pandemic, consumers shifted their disposable spending toward travel and services, which resulted in one of the largest declines in grill industry sales last year. While we believe this shift remains in effect and grill sell-through continues to be negative, we began to see stabilization in sell-through trends in the second quarter, with year-over-year growth in certain key weeks. Improved sell-through, coupled with our retail partners' destocking efforts, resulted in a much healthier inventory position in the channel at the end of the quarter. We believe that inventory levels are now well-balanced with demand, and we anticipate that replenishment rates in the second half will return to more normalized levels following a period of aggressive destocking. Rightsizing inventories has been a key focus, allowing us to enter the second half of 2023 in a much stronger position. Based on our stronger-than-expected results in the first half of the year, we are raising our full year guidance to $585 million to $600 million in sales from a range of $560 million to $590 million, and to $55 million to $59 million in adjusted EBITDA from $45 million to $55 million. Dom will provide further details on our updated financial guidance for the year. However, I want to highlight a few points. First, while we are raising our guidance, we remain mindful of the fluid macroeconomic environment and consumer backdrop. We will manage the business with a disciplined approach. Next, our guidance assumes a return to top line growth in the second half of the year, although we are not anticipating any significant improvement in consumer demand; rather, we expect that our sales will benefit from more normalized replenishment rates. Now, I'd like to discuss our strategic growth pillars. Our first pillar is to accelerate brand awareness and penetration in the United States. We ended 2022 with 3.5% penetration of the 76 million grill-only households in the U.S. We believe there is still a significant growth opportunity in household penetration, as shown by the mid-teens penetration we have in more mature markets. In the second quarter, excitement around the Traeger brand grew. We kicked off the grilling season with our Annual Mother's Day promotion offering savings across our grill assortment and giftable items, along with content featuring top brunch and breakfast recipes. On May 20, we celebrated our sixth annual Traeger Day, a day dedicated to bringing our community together to cook outdoors and share food made on the Traeger. Engagement from our community was strong, with nearly 18,000 user-generated content posts and video views more than doubling compared to last year's event. In June, we celebrated Father's Day with discounts on select grills and a gift guide for dads. Our influencer network drove over 6 million impressions on social media, and our sell-through trends exceeded expectations during this important retail selling period. Additionally, our brand ambassadors conducted live demonstrations of our grills nationwide, contributing to sales in locations that might not have otherwise reached consumers. In the second quarter, we experienced significant growth in sales generated from these special events, especially for our higher-end grill models. Our brand has also received considerable positive media coverage, which helps raise awareness. Total media impressions in the second quarter more than tripled compared to last year, featuring articles and product reviews in major publications. Our next growth pillar is disrupting outdoor cooking through product innovation. A key achievement in the second quarter was winning a prestigious Red Dot Product Design Award for our Timberline Excel Grill, recognized for its design and innovation. This accolade reflects the high level of innovation that Traeger brings to the industry. Earlier this year, we launched two new grills—the Ironwood and the premium Flatrock griddle—both of which have received strong consumer reception. The Ironwood has performed well at retail, having received positive media attention, including a review from Rolling Stone. It exemplifies our strategy to cascade innovation throughout our product line. Although we initially limited distribution of the Flatrock, we plan to ramp up production in the second half to meet demand and expect volumes to grow as production increases into next year. In May, we made an important addition to our innovation and design team by hiring Brendan Welch as EVP of Engineering. Brendan's experience in bringing innovative products to market from companies like Sonos and Bose will be invaluable to our team. Our next strategic pillar focuses on driving recurring revenues through our consumables business. In the second quarter, our consumables category faced some pressure compared to last year due to a customer's introduction of a private label pellet offering. However, sell-through, excluding this customer, remained healthy and trended positively. We launched a new state blend pellet kit in June, which has been well-received by consumers. We're also increasing distribution of consumables in the grocery channel, launching our new barbecue sauces in Kroger with improved formulas and a competitive price point. Our sauces were packaged in new, easy-to-use squeeze bottles and rolled out in around 2,200 Kroger locations, while we also expanded distribution of pellet flavors in several grocery chains. Our last strategic growth pillar is expanding the Traeger brand internationally. In the second quarter, our international markets were under pressure, but dealer inventories ended the quarter in a more balanced position, which should lead to more normalized replenishment activity in the second half. Despite the challenging environment, excitement around the Traeger brand continues to grow. We are focusing on increasing productivity and awareness through in-store marketing and product demonstrations. We refreshed over 1,000 distribution points across Europe and expanded our regional demo teams to drive brand awareness in key international markets. Overall, I am very pleased with the progress we have made over the past several quarters. Our efforts have resulted in a significantly improved position, with our balance sheet and channel inventories more aligned with demand, leading to better margins and an anticipated improvement in EBITDA for fiscal 2023. Despite the progress made, we recognize that the macroeconomic environment remains uncertain. We will continue to navigate the near-term challenges while investing in long-term growth. Now, I'll turn the call over to Dom.

Thanks, Jeremy, and good afternoon, everyone. I’m pleased with our second quarter performance and with the progress we made over the last several quarters on our initiatives to improve the financial positioning of the Company. Today, I will begin by reviewing our second quarter results and then comment on our updated fiscal 2023 guidance. Second quarter revenues declined 14% to $172 million. Grill revenues declined 21% to $93 million. Grill revenue was negatively impacted by lower unit volumes as our retail partners continue to destock in an effort to lower in-channel inventories, as well as a lower average selling price as we lowered pricing on end-of-life and legacy models. Despite lower year-over-year revenue, grill revenue performance was ahead of our expectations in the quarter. Consumables revenues were $35 million, down 17% compared to the second quarter of last year, driven by lower sales of pellets. Our consumables business continued to be negatively impacted by the loss of volume with a customer who introduced private label pellets last year. Excluding this customer, the sell-through of pellets was healthy and up over the prior year. Additionally, in Q2, we lapped last year’s large load-in of food consumables into our grocery channel. Consumables sales were modestly ahead of our expectations in the second quarter. Accessories revenues increased 7% to $43 million, driven by growth of Traeger accessories as well as MEATER. Geographically, North American revenues were down 16%, while Rest of World revenues were up 3%. Gross profit for the second quarter decreased to $63 million from $73 million in the second quarter of 2022. Gross profit margin was 36.9%, up 25 basis points versus the second quarter of 2022. The increase in gross margin was primarily driven by: one, lower transportation costs, which drove 170 basis points of margin benefit; and two, FX favorability of 120 basis points. Offsetting these margin drivers were increased dilution of 220 basis points and other negative drivers worth approximately 40 basis points. Total marketing expenses were $28 million compared to $42 million in the second quarter of 2022. The decrease was driven primarily by lower marketing expense and employee costs. General and administrative expenses were $52 million compared to $31 million in the second quarter of 2022. The increase in G&A was driven by higher equity-based compensation expense, partially offset by reduced employee expense. Second quarter operating expenses continued to benefit from the restructuring and cost savings actions taken last year in addition to a highly disciplined approach to operating expense planning as we entered 2023. Second quarter operating expenses also benefited from a shift in the timing of certain expenses for the second half of the year. Net loss for the second quarter was $33 million as compared to a net loss of $133 million in the second quarter of 2022. Net loss per diluted share was $0.27 compared to a loss of $1.13 in the second quarter of 2022. Adjusted net income for the quarter was $4 million or $0.04 per diluted share, as compared to adjusted net income of $4 million or $0.03 per diluted share in the same period of 2022. Adjusted EBITDA was $21 million in the second quarter as compared to $17 million in the same period of 2022. Second quarter adjusted EBITDA was ahead of our expectations driven by better-than-expected grill and consumable sales, as well as a shift in the timing of expenses out of Q2 into the second half of the year. Next, I’ll review our balance sheet highlights. At the end of the second quarter, cash and cash equivalents totaled $14 million compared to $39 million at the end of the previous fiscal year. We ended the second quarter with $404 million of long-term debt. At the end of the quarter, the Company had drawn down $40 million under its receivables financing agreement, resulting in total net debt of $429 million. In terms of liquidity, we ended the second quarter with total liquidity of $155 million, up from $98 million at the end of the first quarter. The sequential increase in liquidity was driven by the benefit of cash flow generated in the second quarter as we sold through inventories and collected receivables in our peak selling season. Inventory at the end of the second quarter was $98 million, compared to $153 million at the end of the fourth quarter of 2022. I am pleased with the continued progress we have made in rightsizing balance sheet inventories and believe we are appropriately positioned for the current demand outlook. Importantly, in-channel inventories ended the second quarter in a materially improved position, and weeks of supply at retail are now in line with our target range. As we enter the second half of the year, we believe that channel inventories are more balanced and that retailer destocking is largely behind us. Next, I’ll discuss our updated outlook for fiscal year 2023. Given our better-than-anticipated results in the first half of 2023, we are increasing our guidance for the year. For revenues, we are now guiding to a range of $585 million to $600 million, down 9% to 11% compared to 2022, as compared to our prior revenue guidance of $560 million to $590 million. On adjusted EBITDA, we are guiding to $55 million to $59 million, up from our prior guidance of $45 million to $55 million and up from $42 million in fiscal year 2022. Our guidance continues to assume a return to growth in the second half of the year, driven by normalized replenishment rates as channel inventories are now in a substantially more balanced position and as we lap the large impact to our business caused by destocking in the back half of last year. We are reiterating our outlook for full year gross margins of 36% to 37%, which represents 80 to 180 basis points of improvement relative to our fiscal year-end 2022 adjusted gross margin of 35.2%. We expect to see the largest year-over-year gain in gross margin in the third quarter given the expected improvement in fixed cost leverage as we lap the large sales decline we experienced in the third quarter of 2022. Furthermore, we are expecting that approximately $4 million of expenses that shifted out of the first half of the year will fall into the second half of the year. Overall, I am pleased with the progress we have made on our initiatives to increase our financial flexibility and to position the Company for a return to growth in the second half of the year and beyond. As our increased outlook indicates, we have growing confidence in our near-term strategy. We will continue to manage the business with a high level of discipline and agility as we navigate the current environment and look forward to continuing to execute against our long-term strategy. I’ll now turn the call over to the operator for questions.

Our first question comes from Simeon Siegel from BMO Capital Markets.

Thanks, guys. Good afternoon. Nice job on the progress. You guys call out performance of DTC versus wholesale domestically. Could you elaborate a little more on the lower Grill ASP you mentioned in the press release, maybe the same question for lower consumables ASP and then how you're thinking about ASP for both maybe for the next several quarters, sorry about my choking.

Yes, on the Grill side, with respect to ASP, we took fairly aggressive pricing over the course of the pandemic to offset inbound transportation costs as we emerged from that environment and began to see macro tailwinds in inbound transportation that are now reflecting in our P&L. Obviously, fully, but in dribs and drabs, it's driving some margin expansion. We subsequently decided to begin taking price back down on most of our grills to effectively pre-pandemic levels, save one or two outliers. One example of that being the fact that we're moving through end-of-life product on our previous generation Ironwood and Timberline with the new products that replace those. Those will sit in market for a period of time at a fairly lower price point than is normal. So that's kind of one-time, but the remainder of it really is bringing pricing back to what we believe are more appropriate levels to stimulate the right level of volume but nothing abnormal relative to where we were pre-pandemic. And I think on the pellet front, it's probably more just a nuance of dynamics around channel mix and nothing signaling any changes in pricing strategy.

Awesome. And then lastly, nice job on the gross margin. Could you just elaborate on the gross margin dilution comment you referenced? And then maybe how to think about the drivers going forward?

The dilution is related to two main factors. First, there is a channel mix where we observe cooperative dollars being higher relative to other channels. The second factor is the promotions we ran in Q2, which are typical for this time of year, performed far better than we expected, leading to greater sell-through than anticipated. This, in turn, results in higher gross-to-net dilution on the profit and loss statement. Overall, this is not indicative of any issues; rather, our promotions worked as we needed them to and even exceeded our expectations.

Perfect. Again, nice job on the progress, guys. Best of luck for the rest of the year.

Our next question comes from Peter Benedict from Baird.

First of all, just on the guidance for the year, you took it up clearly the first half was better than you thought. How was the second half relative to maybe what you were thinking at the beginning of the year just in terms of revenue and process? Is it kind of consistent? Or is what you're seeing here having you embrace a bit more of a positive view on the second half?

No, it's consistent. I would like to highlight a few points. First, as we exceeded our internal forecast in the first half of the year, we are integrating that overall performance into our projections moving forward. I want to emphasize that we anticipate the same rebound in growth for the second half of the year. Previously, we mentioned this concept of two halves, and that still holds true. Additionally, we remain cautious as we progress through the year. One key aspect of our forecast for the latter half of the year, which aligns with what we discussed on the previous call, is that our results are not primarily driven by sell-through growth but rather by the comparable sales from last year when we began to act decisively on inventory reduction. We are seeing benefits from that comparison. So that’s an important point to remember as we head into the second half of the year. However, we are balancing our confidence with cautious optimism as we take into account the macroeconomic factors that are still influencing us and the fact that our performance is more linked to comparables than to other factors. On the EBITDA side, it's crucial to note the $4 million timing expense I mentioned earlier. From an EBITDA perspective, we did surpass our internal expectations for the first half of the year and particularly in Q2. Nevertheless, we are not applying the entire surplus to our forecasts due to this $4 million expense timing adjustment. This is something to bear in mind as you consider projections for the latter half of the year.

That's helpful. Regarding inventory, we have a strong level at several hundred million. How should we approach this as we progress through the year? I believe Q3 is expected to mirror Q2, as you indicated 90 days ago. Is that still accurate? Did we begin increasing inventory, and is there a chance to reduce it further? How should we view the inventory situation for the remainder of the year?

Yes, this is a significant achievement. Over the past year, we have concentrated on managing our inventory levels, which peaked in the second quarter last year. We're pleased to share that our inventory position in the channel is mostly where we want it to be. Our target weeks of inventory on hand are in line with our expectations, and may even be slightly lower, presenting us with some opportunities. We observed a more normalized replenishment rate in the second quarter. Looking ahead to the third and fourth quarters, you can anticipate some inventory build in the third quarter in preparation for the holiday season in the fourth quarter. Additionally, MEATER experiences greater seasonality in the fourth quarter. Therefore, we expect to see a moderate reduction in inventory in the fourth quarter as we sell through it, finishing the year strong as we anticipate unlocking working capital between 22% and 23% in terms of inventory.

And our next question comes from Joseph Feldman from Telsey Advisory Group.

I wanted to ask you with regard to the replenishment cycle returning to more normal demand levels. I guess I just wanted to square that with your comment that you said that you're not expecting consumer demand to necessarily pick up. So I guess I'm curious, is it because you think the inventory is just too lean in the channel at this point at retail and so they need to bring back goods? But maybe you could square those two comments.

Certainly. Let me provide some context about the current state of the industry. In 2022, sell-through was significantly lower, in the mid to high teens percentage range. So far this year, it's also down, but at a considerably reduced rate, approximately in the low single digits. The market for high-ticket durable discretionary items remains tough, and this sentiment is echoed across various product categories. It appears we are approaching a low point. Regarding the recovery, it's a valid question. We are actively working to comprehend the current landscape and to forecast replacement rates. However, it seems we may be nearing the conclusion of the pull-forward phase we've experienced over the last 18 months. The strength of the recovery remains uncertain and depends on numerous factors. Right now, we are benefiting from several elements. First, sell-through has stabilized after a prolonged period of instability. Second, we have seen a destocking effect, which had negatively impacted our top line; the latter half of last year was particularly challenging for that reason. Thankfully, that situation is mostly resolved now. Inventory levels in the channels are healthy, and we are satisfied with our balance sheet inventories. This combination of market conditions, while lacking a supportive trend in the high-ticket durable sector or the broader economy, alongside our controlled inventory and lean expense management, is contributing to improved performance. However, it’s important to note that this growth isn’t being driven by broader industry trends.

That's very helpful, Jeremy. If I could ask one more follow-up, the rollout of consumables to Kroger was excellent. As always, we'd love to see that expanded more quickly. Can you share your thoughts on the strategy for rolling out consumables in the next 6 to 12 months?

Absolutely. First, let me address pellets. We mentioned that pellet sell-through has been strong. We have been actively targeting the grocery channel for pellets, and we are experiencing good growth there. We believe that although grills are a significant investment, consumers tend to seek out specific destinations after their research, while pellets and other consumables should be easily accessible purchases. Thus, we are witnessing solid sell-through in grocery. Regarding other consumables, we have introduced sauces in improved packaging and at a more suitable price point for grocery stores. This change has been well received in the market. Previously, much of our consumables business primarily focused on specialty retail, where higher price points were common, but grocery has proven to be more competitive. We are optimistic about the initial response to the new packaging and plan to roll it out systematically over time in grocery, with early signs being very encouraging.

Great. And good luck with the third quarter.

Our next question comes from Randy Konik from Jefferies.

I joined the call a bit late, so Jeremy, could you share some insights? I know the Flatrock product has performed well. If you haven't already discussed this, could you provide some more perspective on how your customer base, particularly your wholesale accounts, has reacted? Given this success, are they requesting you to produce other types of gas products? I'm looking for insight into your future plans regarding product categories.

Yes, Randy, it’s a great question. Recently, a few of us visited the market. We spent a couple of days in Seattle visiting various retailers that carry Flatrock. There’s good and bad news. The good news is that it's selling well. The bad news is that inventory is quite low. This wasn't unexpected as we intended for the launch to be limited, especially since we are selling a product outside of the core wood pellet grill category. When we began developing these products, we were cautious about inventory. We have implemented a disciplined and constrained launch, which has significantly exceeded our expectations. For instance, I was at a specialty retailer last week that received three units, which sold out in 24 hours, and they are still waiting for more stock. They purchase through a distribution center. I also visited another retailer that pre-booked a significant number of units and sold over 30, managing their inventory effectively. The good news is there's substantial demand, and I prefer to address a supply issue over a demand issue. We are increasing production and should catch up with our existing channel by the fourth quarter. Our goal is to expand distribution next year. Regarding your question about broader category demand, retailers are currently just asking for more Flatrocks. We see an opportunity to first establish ourselves with the Flatrock in the griddle category, and there are other products in that category under consideration. However, we believe there’s a balance between introducing new products and focusing deeply on what we excel at. For now, we’re hearing support for the brand and retail positioning, with a request for more griddles, providing us with plenty of opportunities for growth in the next couple of years.

Can you provide some perspective on how the pellet grills or Traeger compare to the broader grill category, specifically regarding gas grills? What trends are you seeing in the U.S. versus international markets? I'm trying to understand where we currently stand in the bottoming process for both pellet and gas grills.

If we take a step back to examine the overall outdoor cooking market, it appears that charcoal sales are steady, while pellet grills are experiencing modest growth. Griddles have seen significant gains, and gas grills are on the decline. The surge in the griddle category can be attributed to its novelty and the excitement it generated. I believe the future growth will be driven by griddles and wood pellet grills, which will come at the expense of gas grills. Regarding charcoal, it can be divided into two groups: those purchasing low-cost, almost disposable grills for briquettes, and enthusiasts opting for higher-end models. The charcoal market has remained largely flat over the last couple of decades and is likely to stay that way. Gas grills, however, still represent over 50% of the dollar market share, with wood pellets climbing to around 20% and continuing to grow. In terms of unit share, wood pellets are considerably lower, particularly for Traeger, due to our higher average selling price compared to gas. Additionally, it's important to note that this market has always shown resilience; it recovers over time. Currently, there are 76 million households with grills, and I anticipate that number will increase in the next two to three years. The key question is about the duration and timing of this downturn before recovery begins. All historical data indicates we may be nearing a bottoming out in the broader market. Our aim is to stabilize the business, operate efficiently to maximize our returns, enhance our gross margin, and then reinvest in marketing to capture market share as the category is expected to grow again soon.

Well put. Thank you so much, Jeremy.

Our final question comes from Brian McNamara from Canaccord Genuity.

Congratulations on the improved results. I wanted to explore the dynamics of your channels, specifically regarding your competitors' channel inventories. Is there anything noteworthy in that area? Have there been any notable improvements, whether by fuel type or otherwise? Given that Traeger has a small unit share, it presumably wasn't the source of the initial problem. Did you feel constrained while waiting for your retail partners to clear their existing stock before your growth could continue?

There’s no doubt that in the latter part of last year, it was not only a challenge for Traeger but also across the category due to inventory issues that affected every retailer. We encountered times when our inventory levels were low at various points, including at the SKU level and within distribution centers, which required us to strongly encourage retailers to replenish to appropriate levels. However, I would emphasize that this has been more of a broader category challenge rather than a specific problem related to getting inventory into retail. Our focus has been on normalizing inventory levels, and fortunately, all retailers have followed suit, becoming healthier in the process. We are pleased with the moderation in declines we are seeing. If you examine the trailing 12 months of unit sales, they are significantly lower than pre-pandemic levels, indicating that as we catch up with replacement cycles, the category is poised for growth. In response to your original question about any marginal impact on getting inventory into retail, there might have been some effect, but it was not primarily driving revenue; it was more about general destocking.

Thank you. We have no further questions. So this concludes today’s call. Thank you for joining, everybody. You may now disconnect your lines.