Traeger, Inc. Q3 FY2023 Earnings Call

Hello, everyone, and thank you for joining us today. Welcome to the Traeger Third Quarter Fiscal 2023 Earnings Conference Call. My name is Emily, and I'll be coordinating your call today. I will now turn the call over to our host, Nick Bacchus. Please go ahead.

Good afternoon, everyone. Thank you for joining Traeger's call to discuss its third quarter 2023 results, which we released this afternoon and can be found on our website at investors.traeger.com. 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. We encourage you to review our annual report on Form 10-K for the year ended December 31, 2022, quarterly report on Form 10-Q for the quarter ended September 30, 2023, and our other SEC filings for a discussion of these factors and uncertainties. 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. Most comparable GAAP financial measures and reconciliations of the non-GAAP measures contained herein are included in our earnings release. 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, Nick. Thank you for joining our third quarter earnings call. Today, we'll be discussing our third quarter results as well as reviewing our progress on our long-term strategic initiatives. I will then turn the call over to Dom to further discuss details on our quarterly financial performance and to provide an update on our fiscal year 2023 guidance. I am pleased with our results for the third quarter, which exceeded our internal expectations. The third quarter marks a return to year-over-year top line growth with sales improving 26% versus the third quarter of last year. Moreover, we delivered more than 1,000 basis points of gross margin expansion, which combined with expense discipline drove materially improved EBITDA as compared to the prior year. Our near-term strategic priorities over the last year have been centered around improving the financial health and profitability of the company in a highly challenging demand environment. Since the end of the second quarter of 2022, we have taken out over $20 million in expenses from the business, reduced balance sheet inventories by more than one-third, driven in-channel inventories to targeted levels, and established a gross margin task force, which has implemented a number of near- and long-term margin-enhancing initiatives. This is in addition to launching two new grills earlier this year. The team's efforts have resulted in a substantially improved position for the company and our better-than-expected third quarter results. The growth in sales in the third quarter translated to a significant improvement in EBITDA, benefiting from expansion in our gross margin, as well as continued efficiencies from our cost reduction efforts. Consumer demand for grills remained soft in the third quarter and sell-through was down from the prior year. We believe that the pressures impacting consumers over the past year, including the shift away from spending on big ticket discretionary goods, the impact of higher inflation, and lower consumer confidence remain firmly in place. Our sell-through trends this year indicate that consumers are often willing to spend when there is a catalyst to purchase a grill, but are less likely to spend when there isn't a catalyst. During seasonally stronger periods, such as holidays and promotional events, we have seen relatively better demand with positive growth and sell-through during certain periods. In contrast, during seasonally slower periods or in between holidays or promotional events, we have generally experienced Softer sell-through. On a year-to-date basis, sell-through remains largely in line with our plan; however, volatility in consumer demand persists and sell-through continues to be lower than last year. I am pleased with how the Traeger team is navigating the challenging macroeconomic backdrop and executing on our strategic plan. Given the stronger-than-expected third quarter performance, we are increasing the midpoint of our fiscal year 2023 guidance. Our updated guidance is for sales of $590 million to $600 million and adjusted EBITDA of $57 million to $59 million, compared to the prior range for sales of $585 million to $600 million and EBITDA of $55 million to $59 million. Moving on to our strategic growth pillars. In the third quarter, we continue to execute against our long-term growth strategy. Our first growth pillar is accelerating brand awareness and penetration in the United States. Increasing awareness of the Traeger brand is key to driving consumer adoption and household penetration, which is our largest long-term opportunity. In the third quarter, we continued to execute against this opportunity with brand-building efforts in our social channels and among our key retail partners. In August, we kicked off the start of the football season with Traeger Game Day. This social campaign activated and engaged our community over a four-week period with challenges, content, and recipes to ensure members of the Traeger community delivered epic game day barbecues for their friends and family using their Traeger. This year's Game Day content included Los Angeles Chargers quarterback Justin Herbert and Traeger's Chad Ward, who cooked Justin's victory brisket recipe in his backyard on the Timberline Excel. In the video, Chad walks through the steps to cook an amazing brisket while Justin shares insights on his introduction to the Traeger community. Traeger has always run weekly cooking challenges during Game Day, including wings and dips contests with members posting their game day food on social media for a chance to win prizes. Game Day 2023 was a big success and drove energy and awareness to our brand, with social participation and engagement up 228% compared to last year's Game Day. The promotion of the Traeger brand continues to be driven by our community of users and ambassadors in social media, which remains an important medium for our brand advocates to discuss Traeger and share their experiences. In the third quarter, we hit a major milestone and surpassed 2.5 million followers across social channels, with total followers up over 20% compared to the prior year. We continue to lead the outdoor grilling industry in social media, with over 1 million more followers than our largest competitor in this growing category. Our ability to drive awareness and penetration of the Traeger brand is closely tied to our retail execution and the presentation of Traeger products on retail floors. At Home Depot, we made meaningful progress on our initiatives to elevate our merchandise in the third quarter. In the quarter, we added over 300 Traeger Islands at Home Depot locations across the country and finished with over 800 Traeger Islands. These islands are elevated fixtures that prominently feature Traeger grills, consumables, and accessories, providing a more premium shopping experience. Home Depot locations with a Traeger Island are significantly more productive for our brand compared to the chain average. In the third quarter, Home Depot also added our Traeger branded Bay experience to an extra 300 locations and relocated Traeger Bays to be more optimally positioned adjacent to our grills in an additional 300 locations. Together, we believe that these merchandising initiatives will materially improve the visibility and positioning of Traeger at Home Depot. Our next growth pillar is disrupting outdoor cooking with product innovation. In the third quarter, under the leadership of our recently hired EVP of Engineering, we focused on investing in our product development capabilities and building on the strength of our innovation engine. This includes adding resources to our testing and engineering capacity and our sustaining engineering team, which looks for ways to innovate our product and manufacturing processes to drive efficiency and cost savings. We're also establishing a new R&D team, whose mission is to drive innovation through consumer insights. Innovation is core to the long-term success of Traeger, and we are committed to investing in our capabilities in R&D, product development, and engineering to ensure that we continue to lead as a disruptor in the outdoor cooking industry. This week, we launched a transformational next generation of MEATER product, the MEATER 2 Plus. The MEATER 2 Plus marks a significant advancement in smart thermometer technology, with many innovations and upgraded features that will allow users to achieve perfect results every time. The MEATER 2 Plus is equipped with five internal temperature sensors and an ambient sensor to detect the core temperature of the meat, reducing human error in probe placement. It has an impressively high ambient temperature max of 932 degrees Fahrenheit, and an internal temperature max of 221 degrees Fahrenheit, significantly higher than other smart thermometers on the market, allowing for cooking meat over the direct heat of an open grill. Other innovations include enhanced wireless connectivity, faster charging, and a 100% waterproof design, enabling deep frying and sous vide cooking. The MEATER team has been diligently designing this state-of-the-art product since the launch of our original MEATER in 2015, and we believe this new thermometer is game-changing. Initial distribution of the MEATER 2 Plus will be on meater.com and distribution will broaden next year. Let's now provide an update on our consumables business. In the third quarter, we achieved slight growth in consumables compared to the prior year, an improvement from the 21% sales decline we experienced in the first half of 2023. While our consumables revenue continues to be impacted by a large customer's launch of private label pellets, sell-through of pellets, excluding this customer, was up in the third quarter, and sales were modestly ahead of our plan for the quarter. This performance, in what remains a challenging demand backdrop, demonstrates the recurring revenue nature and resiliency of our pellet business. Ahead of Thanksgiving, we began shipping our limited edition Turkey blend pellets in September. This artisanal mix of all-natural hardwood features maple, hickory, and rosemary to elevate the flavor of your turkey, whether roasted or slow smoked. This bag also includes our brine kit to ensure users cook a juicy and flavorful bird for their family and friends. We will feature our Turkey blend pellets in our Thanksgiving social campaign, along with tutorials on how to smoke a turkey on a Traeger. Earlier this year, we announced our strategic decision to optimize our pellet manufacturing footprint by consolidating our mill portfolio from seven mills to five. Our pellet business is starting to benefit from these actions. By divesting two high-cost mills and increasing capacity at our remaining mills, we have seen a material improvement in capacity utilization, with utilization rates up across our facilities since earlier this year. We are pleased with our ability to drive efficiency in our pellets business and continue to see our vertical integration as a key long-term competitive advantage, as well as a way to provide the highest quality pellets to our consumers. On the Traeger sauces and rubs front, our food consumables business continues to grow, benefitting from increased distribution into the grocery channel. As we mentioned last quarter, we relaunched our new barbecue sauce portfolio at Kroger in around 2,200 Kroger locations. Sell-through following this relaunch has been solid, and turns for the soft line at Kroger are up significantly. Overall, our sauces and rubs business continues to be a nice and growing addition to our product lineup, and we are pleased with recent performance. Our final strategic growth pillar is expanding the Traeger brand internationally. Similar to the U.S., in the third quarter, we saw sequentially improved results and a return to top line growth in many of our international markets, including Canada and Germany. In Germany, we had particularly strong results with sales up significantly, aided by focused efforts on demonstrations and events where Pitmasters serve up food cooked on Traeger grills outside retail locations. We also continue to see healthy sell-throughs in our new Timberline and Ironwood grills, which launched in Europe and Canada earlier this year. Consumer demand in many of our international markets remains challenged as consumers are cautious due to pressures on discretionary spend from inflation, lower confidence, and ongoing geopolitical tensions. However, we remain confident in our long-term strategy to grow the Traeger brand and continue to see a large opportunity going forward. Overall, I am pleased with our results for the third quarter. As demonstrated by our improved outlook for the year, our intense focus on enhancing Traeger’s financial positioning and flexibility over the last year has positioned the company well to navigate a challenging environment. We anticipate continued macroeconomic volatility going forward and will take a prudent approach to managing the business while remaining committed to our long-term growth opportunities, which I believe remain extremely robust. And with that, I'll turn the call over to Dom to provide more details on the quarter and our updated outlook.

Thanks, Jeremy, and good afternoon, everyone. I will begin by reviewing our third quarter results and then comment on our updated fiscal 2023 guidance as well as provide some initial thoughts on 2024. Third quarter revenues increased 26% to $118 million. Grill revenue increased 45% to $57 million. This increase compared to the prior year as volumes benefited from a recently launched product, while we lapped a substantial negative impact on grill volumes as retailers aggressively destocked in the third quarter of last year. Growth in volume was partially offset by lower average selling prices, driven by strategic pricing actions. Consumables revenues were $25 million, up 1% from the third quarter of last year. While our consumables business continued to be impacted by the loss of volume from a customer who introduced private label pellets last year, sales of pellets at retail remain resilient, and sell-through, excluding this customer, was up year-over-year. Our food consumables business contributed to growth in the third quarter, driven by strong orders for Traeger rubs and sauces. Consumables sales exceeded our expectations in the third quarter. Accessories revenues increased 21% to $36 million, driven by growth in leadership as well as growth in Traeger branded accessories. Geographically, North American revenues were up 24%, while Rest of World revenues increased 40%. Gross profit for the third quarter increased to $45 million from $25 million in the third quarter of 2022. Gross profit margin was 37.9%, up 1,120 basis points versus the third quarter of 2022. When adjusting last year's gross margin for restructuring costs, gross margin increased by 950 basis points compared to the third quarter of 2022. The increase in gross margin was primarily driven by lower supply chain costs, which contributed 590 basis points of margin benefit; favorability in MEATER gross margin contributed 250 basis points; 170 basis points of favorability were related to the lapping of costs associated with last year's restructuring; 70 basis points came from not having the Traeger provisions business in the current period; and finally, forex favorability contributed 80 basis points. Offsetting these margin drivers were 40 basis points of negative impact from pricing actions. Sales and marketing expenses were $26 million compared to $25 million in the third quarter of 2022. Higher employee costs and stock-based compensation expenses were largely offset by a reduction in variable costs. As a percentage of sales, sales and marketing expense declined as we leveraged investments due to the substantial increase in sales in the quarter. General and administrative expenses were $25 million compared to $70 million in the third quarter of 2022. The decrease in G&A was largely driven by a decrease in stock-based compensation. While we began to lap some of the cost reductions from restructuring actions implemented last year in the third quarter, we continue to benefit from expense discipline. Excluding stock-based compensation and nonrecurring expenses, third quarter operating expenses were up approximately 1% compared to the third quarter of 2022, despite the 26% sales increase. Our net loss for the third quarter was $19 million as compared to a net loss of $211 million in the third quarter of 2022. Net loss per diluted share was $0.16 compared to a net loss of $1.76 in the third quarter of 2022. Adjusted net loss for the quarter was $14 million or $0.12 per diluted share compared to an adjusted net loss of $74 million or $0.61 per diluted share in the same period in 2022. Adjusted EBITDA was $5 million in the third quarter compared to a loss of $13 million in the same period of 2022. Adjusted EBITDA margin improved by 1,790 basis points driven by gross margin expansion and expense leverage. Third quarter adjusted EBITDA was ahead of our expectations, driven by the outperformance in sales partially due to the timing of shipments as well as a modestly better-than-anticipated gross margin. Let me now review balance sheet highlights. At the end of the third quarter, cash and cash equivalents totaled $11 million compared to $39 million at the end of the previous fiscal year. We ended the third quarter with $404 million of long-term debt, and at the end of the quarter, the company had drawn down $25 million under its receivables financing agreement, resulting in total net debt of $418 million. In terms of liquidity, we ended the quarter with total liquidity of $142 million, modestly down from $155 million at the end of the second quarter but up significantly from $95 million of liquidity that we had at the end of last year. We feel comfortable with our liquidity position. Inventory at the end of the third quarter was $102 million compared to $153 million at the end of the fourth quarter of 2022. We have made significant progress in rightsizing our balance sheet inventories, which are down by more than one-third from the peak in the first quarter of last year. Furthermore, in-channel inventories remain on target. Following a period of aggressive retailer destocking in the second half of last year and the first half of 2023, channel inventories are now appropriately positioned for our current demand outlook and retail replenishment rates have normalized. Next, I'll provide an update on our outlook for fiscal year 2023. Given better-than-expected results in the third quarter, we are increasing the midpoint of our guidance range for the year. For revenue, we are updating the full-year range to $590 million to $600 million, down 8.5% to 10% compared to 2022. This compares to our prior revenue guidance of $585 million to $600 million. On adjusted EBITDA, we are increasing our guidance range to $57 million to $59 million versus our prior range of $55 million to $59 million. Also, given year-to-date margin performance, we are increasing the low end of our gross margin guidance range for the fiscal year with a new guidance range of 36.5% to 37% compared to the prior range of 36% to 37%. Recall, we started this year with guidance for sales of $560 million to $590 million and EBITDA of $45 million to $55 million. I am pleased with our ability to effectively manage the business and increase our outlook in what remains a challenging environment. Finally, while it is too early to discuss any specific guidance on 2024, I'd like to provide some initial high-level thoughts as we plan for next year. As we look at the macroeconomic and consumer environment heading into 2024, we see significant pressures that are well-documented, including higher interest rates, lower consumer confidence, geopolitical headlines, and a slowing housing market. Moreover, we do not see signs that the shift in consumer spending away from big ticket items will normalize in the near term. Therefore, we are taking a cautious approach to forecasting consumer demand for next year and planning for the grill industry to be down. While we hope the industry will return to growth, we believe the prudent approach is to plan around a conservative top-line scenario to ensure we maintain financial flexibility. Despite this challenging backdrop, we are successfully executing against our near-term strategic priorities. Over the last four quarters, we have been relentlessly focused on improving the financial positioning of the company, resulting in a more efficient cost structure, appropriate inventories, both on balance sheet and in channel, and a return to sales and EBITDA growth in the third quarter, as evidenced by our ability to increase the midpoint of our full-year guidance. We are managing the business appropriately and balancing near-term profitability with long-term investment in a dynamic environment. We remain confident that we are well positioned to create significant value for both shareholders and consumers in the long term as we continue to execute our growth strategy. I will now turn the call over to the operator for questions.

Thank you. Our first question comes from Peter Benedict with Baird. Please go ahead, your line is open.

Hi, guys. Thanks for taking the question. Dom, I guess just leveraging off the final comments that you had on the view of a down grill market next year. Is that reflective of how you're seeing these retailers start to order ahead of next year? Just curious about how they're behaving. I know that the inventories are rightsized, but is the replenishment still remaining somewhat conservative? Related to that, in a down grill market, is there still opportunity to continue migrating the gross margin higher given some of the transportation savings that you would see? That's my first question.

Yes, good questions. With respect to your first question, because we're now in this mode of normal replenishment in conjunction with healthy balance sheet inventory levels, the dynamic underpinning how we think about prudence in our forecast is really driven by macro environment changes rather than retailer ordering habits. Therefore, our replenishment will match accordingly with the ordering behaviors of our retail partners. This is more a conversation about what we're seeing in the macro, and we believe that the prudent approach is to reflect that in our thinking for Q4. In terms of gross margin, while it’s early to speak about it for '24, we do not view gross margin directly connected to our demand thinking or category performance expectations.

Got it. No, that's helpful. And my next question is just to clarify on the $2 million EBITDA benefit or the timing of shipments that $2 million of EBITDA in the 3Q and out of 4Q, was there a revenue impact from that? Or maybe you can just clarify that.

Yes, that's driven off of the revenue component. We saw some orders shift from Q4 into Q3, and that flow-through is what's driving the EBITDA pacing.

Yes.

Next questions?

Our next question comes from Simeon Siegel with BMO Capital Markets. Please go ahead, your line is open.

Thanks. Hey, guys. Good afternoon. Jeremy, helpful color on your view on the retail replenishment cycle. Any help on what about where you are on the consumer level replenishment cycle? And then Jeremy or Dom, any thoughts on when you'd expect ASP to normalize? I know we had the strategic actions now, but how are you thinking about that going forward?

So Simeon, good question on consumer replenishment. This is something we've spent a fair bit of time discussing and analyzing from a quantitative perspective and thinking about the math behind replenishment. The reality is that the replenishment cycle declined during the pandemic due to pull-forward demand. We expect it will normalize, though it's hard to determine when. We're observing broader trends across consumers about big-ticket items shifting towards necessity rather than upgrade and discretionary spending; we believe that trend may continue in this economy with higher interest rates and consumer finance issues.

In terms of the normalization of ASPs, you should expect to see that normalize throughout next year as the comparison aligns.

Okay. That's great. Finally, could you talk about the frequency of use, how that's changing or if it has at all? And as we work through the customer you're referring to with the pellets, how should we think about the reported relationship between grill and pellet growth going forward?

No significant changes to usage. Both attach rates we measure, as well as sell-through performance for consumables, remain positive. Consumables sell-through was slightly positive in Q3, and we delivered outsized growth relative to our internal expectations. We are pleased with the performance of our consumables business.

Sounds great guys. Thanks. Best of luck for the rest of the year and holiday.

Thank you.

Our next question comes from Peter Keith with Piper Sandler. Please go ahead, your line is open.

Hi, thanks. Good afternoon, everyone. Thanks for taking the questions. Just following up on the ASP dynamics. Can you address the sell-through rates kind of by mix? Are you seeing any strength at the high end versus the low end? And on a related note, you took some pricing at the beginning of the year. Do you feel like the pricing is set, or could you be opportunistic going into next year to potentially take a little bit more and drive more demand?

In terms of the second question, we're open to adjustments, but we feel comfortable with our pricing strategy as it currently is set. Regarding the dynamic between price points, we’ve seen a shift below $1,000 with an increase in volumes, especially in the sub-$1,000 price band.

We've highlighted Home Depot because it's the largest grill reseller in the world and we are still relatively underpenetrated there. However, our approach to every retail partner remains the same regarding acquiring additional space, merchandising, and driving sell-through.

Okay, great. As for the puts and takes to gross margin as we enter 2024, can you layout some key drivers? I would think supply chain costs continue to be a benefit, FX may also help, and MEATER likely contributes. Should we think about you lapping that at some point in early 2024?

Yes, you're correct in identifying supply chain cost benefits and other factors contributing to gross margin. The uncontrollables are working in our favor right now, and we are seeing structural changes that support confidence in gross margin moving forward.

We continue to drive retail productivity using the same strategy we have applied across our retail partners. We are exploring distribution opportunities to fill in geographic gaps and drive growth where applicable. In particular, we're expanding pellet distribution within grocery channels.

All right. Thank you very much, guys, and good luck with the holiday season.

Thanks, Peter.

Our next question comes from Joe Feldman with Telsey Advisory Group. Please go ahead, Joe, your line is open.

Great. Thank you. Hi guys. I had a question about innovation. You guys are bringing a lot of innovation to the category, and it seems to be happening rapidly. I’m wondering how you balance that in this market where appetite for big ticket discretionary items is still low? Do you delay some innovations until the environment is more conducive, or are you pushing forward?

We believe in leading with great product. We have made significant investments in our team, and we consistently see a great return on new products. While we have to take a long view, we will continue launching new products regardless of macro cycles because delaying current generations will only impact future product releases.

Okay. That's really helpful. With regard to cost savings, I know you guys have done a lot over the past year. Is there more room to flex if the environment remains challenging in '24?

Yes, there’s always flexibility. We plan conservatively for 2024 while remaining ready to adjust if necessary. We're performance managing the P&L monthly to react to trends as needed, ensuring we protect profitability while navigating challenges.

That's great, thanks guys. Good luck with this quarter.

Thanks, Joe.

Our next question comes from Brian McNamara with Canaccord Genuity. Please go ahead, Brian, your line is open.

Good afternoon, guys. Thanks for taking the questions. Another publicly traded company in the grill business reported earlier today and pushed out an inflection for the grill business another quarter or two. So can you provide some color on the competitive dynamics you're seeing given retailers' hesitancy on restocking some recently destocked discretionary consumer durables?

It benefits no one for channel-level inventories to be high, and we strategized on fulfillment, driving promotions. While we have visibility into our own inventory levels, we believe we’ve been ahead of our competition in this matter. Retailer sells a unit, replenishes a unit; our channel inventories feel good for the season.

Great. And can you talk about what you're seeing in terms of elasticity at price points? I believe when the destocking trend started, you mentioned pressure in the sub-$1,000 price point. Is that still the case, or has that moved materially upmarket?

We've offset some pressures with pricing adjustments, and the resulting uplift in volumes validates that. The macro pressures broadly affect demand trends rather than our price points. We're comfortable with our pricing strategy across the portfolio.

Great. Thanks for the call, guys. Appreciate it. Best of luck.

Thanks, Brian.

Those were all the questions we have. So this concludes today's call. Thank you for your participation, and you may now disconnect your lines.