Operator: 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. [Operator Instructions] I will now turn the call over to our host, Nick Bacchus. Please go ahead.

Nick Bacchus: Good afternoon, everyone. Thank you for joining Traeger’s call to discuss its third quarter 2023 results, which we released this afternoon can be found on our website at investors.sager.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 here — . 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, was 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 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 usual supplemental measures. Most comparable GAAP financial measures and reconciliations of the non-GAAP measures contained herein 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.

Jeremy Andrus: 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 help and profitability of the company to a highly challenging demand environment. Since the end of the second quarter of 2022, we have taken out in excess of $20 million of expenses from the business, reduced balance sheet inventories by more than one-third driven in-channel inventories to targeted levels and have stood up 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. But the team’s efforts have resulted in a substantially improved position for the company and our better-than-expected third quarter results as well as our ability to increase the midpoint of our financial outlook for the year or the direct outcome of these efforts.

In the third quarter, we delivered strong year-over-year sales growth as our retail partners entered into the quarter with inventories appropriately positioned and as we lap the large declines in volume we experienced in the third quarter last year, aligning channel inventories to current demand over the last several quarters allowed for a return to more normalized replenishment rates as compared to last year when retailers were aggressively destocking and lowering inventories. The growth in sales in the third quarter translated to a significant improvement in EBITDA, which benefited 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 to the prior year.

We believe that the pressures that have impacted our consumer over the past year, including the shift away from spending on big ticket discretionary goods as well as the impact of higher inflation and lower consumer confidence remain firmly in place. Our sell-through trends this year indicate that the consumer is often willing to spend when there’s a catalyst to purchase a grill, but is less likely to spend when there isn’t a catalyst. So during seasonally stronger periods, holidays and promotional events, we have seen relatively better demand with positive growth and grow sell-through in certain of these periods. Whereas in seasonally slower periods in between holidays or promotional events, we have generally seen softer sell-through. Sell-through on a year-to-date basis remains largely in line with our plan, however, volatility in consumer demand persists and sell-through continues to be lower than last year.

In the face of a difficult macroeconomic backdrop, I am pleased with how the Traeger team is navigating the environment and executing on our strategic plan. Given 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. Let me now review our strategic pillars and provide an update on each. 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 of our brand, 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 as well as our key retail partners. In August, we kicked off the start of the football season with Traeger Game day. This social campaign activates and engages our community over a four-week period with challenges, content and recipes to ensure members of the Traeger, who deliver 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, Cooking Justin’s Victory brisk at Recipe in his backyard on the Timberline Excel.

In the video, Chad walks through the steps to cooking an amazing brisket and Justin shares insight on his introduction to the Traegerhood. Traeger has always run weekly cooking challenges during Game Day including a wings in a dips contest with members of the Traegerhood posting their game day food on social media to win prices. Gameday 2023 was a big success and drove energy and awareness to our brand with social participation engagement up a strong 228% as compared to last year’s game day. Promotion of the Traeger brand continues to be driven by our community of users and ambassadors, the Traegerhood, and social media remains an important meeting for our brand, Evangelist, to talk about Traeger and to share their experiences. In the third quarter, we hit a major milestone and surpassed 2.5 million followers across social channels, and in the quarter with total followers up more than 20%, compared to the prior year.

We continue to lead the outdoor grilling industry and social media and have over 1 million more followers than our largest competitor in the growing category. Our ability to drive awareness and penetration of the Traeger brand is heavily tied to retail execution and the presentation of trader product on retail floors. At the Home Depot, we made meaningful progress on our initiatives to elevate our merchandise in the third quarter. In the quarter, we added more than 300 Traeger Islands at Home Depot locations across the country and ended with more than 800 Traeger Islands. As a reminder, these islands are elevated fixtures that prominently feature Traeger grills, consumables and accessories and offer a more premium shopping experience. Home Depot locations with a Traeger Island are meaningfully more productive for our brand versus the chain average.

In the third quarter, the Home Depot also added [Flexwall] (ph), our Traeger branded Bay experience to an additional 300 locations and relocated Traeger Bays to be more optimally positioned adjacent to our grills in an additional 300 locations. Together, we expect that these merchandising initiatives will materially improve the visibility and positioning of Traeger at the Home Depot, and we have a lot of energy around continuing to roll out these and other enhancements across the Home Depot store base. 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 into our product development capabilities and building on the strength of our innovation engine.

This includes adding resources behind our testing and engineering capacity and our sustaining engineering team, who look for ways to innovate our product and manufacturing processes to drive efficiency and cost savings. We’re also standing up a new platform 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 into our capabilities in the areas of R&D, product development and engineering to ensure that we continue to lead as a disruptor in the outdoor cooking industry. On the meter side of the house, this week, we launched a transformational next generation of MEATER product, the MEATER 2 Plus. The MEATER 2 Plus marks a significant step forward in smart thermometer technology and its many innovations and upgraded features will allow users to achieve perfect results every time.

The MEATER 2 Plus is equipped with five internal temperature sensors and on ambient sensor to detect the core temperature of the meat, reducing human error in pro placement. It has an impressively high ambient temperature max of 932 degrees Fahrenheit, and internal temperature Max of 221-degree Fahrenheit, significantly higher than other smart thermometers on the market, allowing for cooking meat over the direct heat of an open train. Other innovations include enhanced wireless connectivity, faster charging, and a 100% waterproof design, allowing for deep frying and sous vide cooking. The MEATER team has been hard at work designing the 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. Next, I’ll provide an update on our consumables business. In the third quarter, we achieved slight growth in consumables as compared to the prior year, an improvement from the 21% sales decline we saw in the first-half of 2023. And 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 started shipping our limited edition Turkey blend pellets in September.

Alexander Raths/Shutterstock.com

This artisanal mix of all natural hardwood features maple Hinckley and Rosemary to elevate your Turkey’s flavor whether it’s roasted or slow smoked. This bag also contains our brain kit to ensure users will cook a juicy and flavorful bird for their family and friends. We will be featuring 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 discussed our strategic decision to optimize our pellet manufacturing footprint by consolidating our tele mill portfolio from 7 mills to 5. Our pellet business is starting to see the benefit of these actions. By divesting two higher cost mills and increasing capacity at the other mills, we have seen a material improvement in capacity utilization with utilization rates up materially across our mill 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 means to bring the highest quality pellets to our consumers. On the Traeger sauces and rub side, our food consumables business continues to grow and benefit from increased distribution into the grocery channel. As we mentioned last quarter, we relaunched our new barbecue sauce portfolio at Kroger in approximately 2,200 Kroger locations. Sell-through following this relaunch has been solid and turns for the soft line at Kroger are up materially. 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 growing 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 strong double-digits, aided by a focused effort on demos and events where Pitmaster, serve up food cooked on trigger grills, outside retail locations. We also continue to see healthy sell-throughs in our new timberline in Ironwood drills, which launched in Europe and Canada earlier this year. consumer demand in many of our international markets remains challenged as consumers are cautious given pressures on discretionary spend due to inflation and lower confidence, as well as ongoing geopolitical tensions.

However, we remain confident in our long-term strategy to grow 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 improving Traeger’s financial positioning and flexibility over the last year has positioned the company well to navigate a challenging environment. We are anticipating the likelihood of continued macroeconomic volatility going forward, and we’ll take a prudent approach to managing the business, while also leaning into 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.

Dom?

Dom Blosil: 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. Grill revenue increased compared to the prior year as volumes benefited from [Indiscernible] a recently launched product as we lapped a substantial negative impact on Grill volumes as retailers aggressively destock 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 remains resilient and sell-through excluding this customer was up to prior year. Our food consumables business was a contributor to growth in the third quarter, driven by strong orders of trigger revs and sauces. Consumables sales were ahead of our expectations in the third quarter. Accessories revenues increased 21% to $36 million, driven by growth as leader as well as growth in trigger branded accessories. Geographically, North American revenues were up 24% and Rest of World revenues were up 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 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 one lower supply chain costs, which drove 590 basis points of margin benefit; two, favorability in MEATER gross margin, which contributed 250 basis points three, 170 basis points of favorability related to the lapping of costs associated with last year’s restructuring for 70 basis points of favorability due to not having the trigger provisions business in the current period. And five, FX favorability of 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 in each period, Third quarter operating expenses were up approximately 1% as compared to the third quarter of 2022, despite the 26% sales increase.

Net loss for the third quarter was $19 million as compared to net loss of $211 million in the third quarter of 2022. Net loss per diluted share was $0.16 and 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 as compared to 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 as 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. 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 materially from the $95 million of liquidity that we had at the end of last year. We continue to 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 1/3 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, panel inventories are now positioned appropriately 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 or down 8.5% to 10% as 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% as compared to the prior range of 36% to 37%. Recall, we started this year with a guidance range 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 now 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. 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 next year, and we are 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 the conservative top line scenario to ensure we maintain financial flexibility. Despite a 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. which has resulted 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 highly confident that we are well positioned to create significant value for both shareholders and consumers in the long term as we continue to execute against our growth strategy. I will now turn the call over to the operator for questions.

Operator?

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Peter Benedict with Baird. Please go ahead, your line is open.

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

Dom Blosil: Yes, good questions. So 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 are underpinning to how we think about prudence in our forecast is really driven more by kind of the macro environment getting a better or improving read on the consumer weakness with high ticket items. I think these are the factors that are informing maybe a bit more prudence as we think ahead and it’s not necessarily driven by retailer ordering habits because those are tracking with replenishment cycles that we would expect. And so in terms of like sell-through visibility although we’re not seeing nice comps year-over-year, I think the themes that are largely consistent with what we’ve talked about on the last call, say, barring some catalysts that shifts that in one direction or another, our replenishment will match that accordingly, as well as kind of the ordering behaviors of our retail partners.

So this is really more a conversation about what we’re seeing in the macro the fact that we don’t necessarily view things as improving at this moment in time and therefore want to ensure we reflect that appropriately in our thinking in Q4. And then certainly, as we think about 2024, where we believe prudence is of utmost importance before when we react to trends that we simply can’t measure just yet. In terms of — sorry — I was going to answer your second question. In terms of gross margin, Yes, I think that one is sort of disconnected. But at the end of the day, it’s a little bit early to start speaking about gross margin in ’24, but we don’t necessarily view gross margin directly connected to the — our kind of thinking on demand and sort of how the category may perform in ’24, which right now, we’re — our current thinking is that it will be down relative to this year.

Peter Benedict: Got it. No, that’s helpful. And my next just to clarify on the — I think you mentioned a $2 million EBITDA benefit or it was the timing, I guess, 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.

Dom Blosil: Yes, that’s really driven — that’s driven off of the revenue component. So there — we saw some orders shift from Q4 into Q3 the flow-through that falls from that, that shift is really what’s driving the EBITDA pacing as well from Q4 to the benefit in Q3.

Peter Benedict: Got it. Alright, understood. Thanks so much.

Jeremy Andrus: Yes.

Dom Blosil: Next questions?

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

Simeon Siegel: 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, I guess, 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? Thanks, guys.

Jeremy Andrus: So Simeon, good question on the consumer replenishment. I mean this is something that I would say we spent a fair bit of time thinking about speaking with consumers about from a quantitative perspective and sort of thinking about the math behind replenishment. The reality is that replenishment cycle certainly declined during the pandemic as there was pull forward demand. And our expectation is that it will normalize. It’s hard to see exactly how soon that happens. What we’re seeing, and I’d step back and look at just broader big ticket, everything that we see in here across consumer big ticket categories is that replacement is happening more out of necessity than out of upgrade and discretion. And we think that trend continues. In this economy with higher interest rates, consumers’ finances, we think we won’t catch back up to normalized replacement cycle. Hard to know based on the data that we see when that will be.

Dom Blosil: And I guess in terms of the kind of normalization of ASPs with respect to taking price back on most of our products to what we’re really the right kind of pricing architecture across our portfolio pre-pandemic. I think you’ll start to see that normalize over the course of next year where the comparison is more of an apples-to-apples basis. But at the end of the day, I think from a pricing and an ASP standpoint, we’re sort of comfortable with where ASPs are trending and this is really just a function of comping pandemic moves to offset the pressure on gross margin based on those macro factors that were taking shape and not something that would signal anything different than this is the right pricing strategy for how we think about optimizing mix and volume. And correspondingly, we are seeing an uplift in unit volume, which I think is a positive and what you would hope to see as you take some prices back down to what we think are the right levels.

Simeon Siegel: Okay. That’s great. And then lastly, if I could just throw in, maybe can you guys just talk about frequency of use, how that’s changing or if it has at all? And then just as we work through the client that you’re — or the customer you’re referring to with the pellets, how should we think about the reported relationship between Grill and pellets growth going forward? Thank you.

Dom Blosil: Yes. No real changes to usage. And one measure of that is both the attach rate that we measure, as well as sell-through performance for consumables. Consumables sell-through actually comped slightly positive in Q3. And you can see that we delivered some outsized growth relative to our internal expectations in Q3 on consumables as well. So that continues to be a highly resilient component of our business, certainly aligned with our thesis, and it’s proving to be the case even in a more challenging consumer environment. And so I’d say that generally speaking, those KPIs that we measure around attached are positive and specifically around attachment that’s holding to what we view as sort of a pre-pandemic normal attach rate and nothing really to report there. So we’re happy with the performance of consumables and how that fits into the broader question around consumer behaviors and usage of our grills.

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

Jeremy Andrus: Thank you.

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

Peter Keith: Hi, thanks. Good afternoon, everyone. Thanks for taking the questions. Just following up on the ASP dynamics. I guess could you address the sell-through rates kind of by mix? Are you seeing any strength at the high end to the low end? And then 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 maybe take a little bit more and drive more demand.

Dom Blosil: Yes. I think on the second question, we’re always open to making adjustments. I think right now, we feel pretty good about how we’ve laid out our pricing strategy and some of the adjustments that we’ve made. But we’ll always evaluate trends and sensitivities around price versus volume and adjust accordingly as needed. But as of right now, we feel pretty good about where we sit. In terms of that dynamic between kind of, let’s say, above $1,000 below $1,000, we’ve definitely seen a shift below $1,000. So the mix has shifted quite a bit down into that $1,000 sub-$1,000 price band. And I think that, in our view, makes sense in part because we did take some pricing down in those products that sit sub $1,000, where we see a little bit more sensitivity to price, which in turn has driven an uplift in volumes.

And so that’s definitely something that’s playing out and has been a slight shift in what we’ve seen historically, at least over the last, call it, 12 to 18 months, where there was maybe a little bit more resiliency in the premium prices above $1,000 and kind of that mix split was maybe a little bit more even and now it’s favoring sub-$1,000.

Peter Keith: Okay. Great. Maybe, I guess, on a — well, not a related note, but pricing is a factor. So just trying to think about the puts and takes to the gross margin as we enter 2024, just particularly considering the strong gross margin expansion you just saw. So just Dom maybe you could lay out not quantifying them, but some of the key drivers, I would think supply chain costs continue to be a benefit, FX continues to be a benefit, meter probably helps. And then pricing, should we think about you guys lapping that at some point in early 2024?

Dom Blosil: Yes. Yes, the nail on the head. I think those are exactly how we think about it. So you survey our gross margin task for strategy and you think about controllables versus the uncontrollables in the short term and what we’re seeing now is the uncontrollables working in our favor, right? So meaningful tailwinds in inbound transportation, we’ve actually seen outbound transportation rates, not necessarily kind of a macro dynamic per se, but we pulled some levers to really optimize rates there. So there are some things in the short term that are materializing. And I think what’s exciting about that is the fact that we’re now building confidence that these things are structural. And then kind of the medium to longer-term initiatives are consistent with what you had mentioned and what we’ve talked about on past calls, right?

So if you think about strategic sourcing broadly, unlocking margin expansion via new product offerings continuing to optimize our value chain leaning into direct import as one example of that. These are things that we’ll continue to execute on that we think will provide incremental benefits or expansion to gross margin, but it’s great to see that the assist of macro has really taken shape this year, and we believe is structural and should continue to benefit gross margin over the medium to longer term as we then kind of layer on controllables that take a little bit of time to materialize, but are kind of building and clarity and then certainly confidence that we can action those. And then to your point, just like lapping some of the initial price dilution via taking prices down.

Peter Keith: Yes. All right. And one last question I just had for Jeremy. So you’ve done a good job of highlighting the success of Home Depot, but where are you with any of your other retail partners? Are you getting more space in stores? Are you getting downsized at all? And what’s the thought in terms of potentially bringing on more retail partners in 2024?

Jeremy Andrus: So first of all, we highlighted Home Depot in part because it’s the largest grill reseller in the world. and we’re still relatively underpenetrated there. So — aside from even highlighting how Depot, I think it speaks to our strategy around penetration of retail in terms of acquiring additional space, merchandising, creating the tools at retail, both visual and in terms of retail associate education that drives sell-through. And so big opportunity. But I would say Home Depot is certainly emblematic of our approach to every retail partner. We if you look at sort of the our top customers, there are a lot of regional and specialty retailers, and we get there a little bit differently through our sales force in the field at a national level, of course, ACE hardware has been a fantastic customer partner and we’re having the same conversations there and with real progress in terms of penetration East and retail, visual merchandising.

So we’re — we continue to drive retail productivity in using the same strategy that we’ve described. The — I would say in terms of distribution opportunities, we continue to believe that our current footprint has a lot of a lot of opportunity to drive growth and penetration. One of the areas that I might highlight is the grocery channel in terms of consumables. In an effort to be where our consumers want us to be. We’ve expanded pellet distribution. We’ve highlighted some of our successes in other consumables, rubs and sauces, that continues to be an opportunity that we chase. And then as you look at international markets, Canada, Europe, Australia, these are markets where we are significantly underpenetrated from a location perspective, and we’re seeing progress.

It’s — I would say it’s — we’ve been incubating and we’re starting to see some successes and we certainly saw that in the third quarter some nice growth there. But there’s — we’re not worried by distribution opportunities we’re still sold in — we’re in 3.5% of U.S. households and on grills. We do always think about how we stay disciplined and yet drive higher penetration. We think the discipline is a lasting strategy that really is sustainable over time. And so always looking to fill in the gaps geographically in distribution and sort of chasing opportunities as they’re appropriate.

Peter Keith: All right, thank you very much guys, and good luck with the holiday season.

Jeremy Andrus: Thanks, Peter.

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

Joe Feldman: Great, thank you very much. Hi guys. I had a question about innovation you guys are bringing a lot of innovation to the category, and it seems pretty rapid. And I’m wondering how do you balance that in this market where people — the appetite for big ticket discretionary is still not very high as you just described. So I’m wondering like how you guys are thinking about that? Like do you delay some of the innovation like until a time when it’s a more conducive environment or — just maybe you could share thoughts there.

Jeremy Andrus: Yes. So Joe, good question. A couple of thoughts. One is that we really believe in leading with great product we have a very engaged and captive community, and we find we get a great return by launching new products, new better experience, new innovation. We have made some meaningful investments in our team. We brought in, as we said, a new leader over product. Brendan joined us six or seven months ago. And we still believe there’s a lot of opportunities for us to get better at developing the right product and creating this incredible product market fit with our consumers. So I would just lead by saying that is core to our strategy, and we think that along with brand and community are great modes for our business.

In terms of the cadence of innovation, you really have to take a long view, and it really takes multiple years ago from concept to product launch and then from product launch to adoption. I mean there’s a long period in which we’re really driving our product marketing message to gain penetration with those products. So we tend not to think in terms of economic cycles. We believe that if we’re consistently launching good products if we’re consistently disrupting our own product by bringing better innovation, more value to our consumers, then that’s the right way to build a consumer brand. And so we’ll just — we will continue independent of macro cycles to bring product to market because if we delay a current generation, that will simply delay a future generation when the macro may be more favorable to high-ticket consumer discretionary.

I would also — just speaking to — we launched this week a new MEATER product, the MEATER 2 Plus. And I think it’s important for us to just acknowledge that is another market that’s very large. If you look at the U.S., for example, there were 20 million meat probes sold per year. We are a small percentage of those. We have a very, very passionate and engaged consumer of meter. The product, which includes a digital experience, and we will continue to innovate there. The innovation that we launched on Monday, by the team started working on that long before I had met the team. They started working on that product six or seven years ago. And so it took that mall to perfect something that is technically complicated but very simple and elegant to the consumer.

And so we bring product to market. Innovation is not always predictable in terms of cadence. We bring it when it’s ready.

Joe Feldman: Okay. That’s really helpful. And just a quick follow-up. 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 pretty challenging in ’24?

Dom Blosil: Yes, there’s always room to flex. I think that our approach to planning for 2024 is to start in a very conservative manner. And I think that’s where there’s benefit in thinking prudently about what the category is doing and the fact that it may be that we expect it to be down in 2024. So we want to ensure that there’s cushion to absorb that without having to make dramatic shifts or pivots within our investment strategy and our OpEx configuration. That said, to the extent that we see trends emerge that require further cuts to ensure that we protect profitability, especially in light of the fact that we do have high leverage on the balance sheet, we have fairly deep insights into where we would kind of manage that.

And I think that at the end of the day, we’re performance managing the P&L monthly. So we’ll never get caught on our heels and we’ll be able to react to trends. And I think building in that conservatism around how we plan OpEx will certainly support that.

Joe Feldman: That’s great, thanks guys. Good luck with this quarter.

Dom Blosil: Thanks, Joe.

Operator: Our next question comes from Brian McNamara with Cannacord Genuity. Please go ahead, Brian. Your line is open.

Brian McNamara: Good afternoon, guys. Thanks for taking the questions. Another publicly traded company with 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 giving retailers hesitancy on restocking in some of the recently destocked discretionary consumer durables?

Jeremy Andrus: Yes. I mean, hard to comment on the broader drilling industry. We have some visibility into inventory levels, but we’re very familiar with our inventory levels. I think we probably — we probably got in front of this sooner than our competition. It benefits no one for channel-level inventories to be high. And so we were strategic in terms of how we fulfilled how we drove promotions. And I guess I can just speak for Traeger and say that we’re very pleased with our channel level inventories. They felt they felt really good for quarter replenishment has been as we would expect, retailer sells a unit replenishes a unit. But I would also just note that from a balance sheet perspective, the notable decline in channel level inventories down more than one-third since the beginning of the year. And we feel like we’re in a good steady state relative to where we are seasonally.

Brian McNamara: Great. And then secondly, on the macro front, can you talk about what you’re seeing in terms of elasticity and 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 up market?

Dom Blosil: I think we’ve certainly offset some of that with the pricing we took back to really a normal pricing strategy pre pandemic and the corresponding uplift in volumes has validated that. That said — or maybe that’s providing some offset to the macro and/or pressures on consumer with respect to high ticket items we definitely think we’re still feeling some of that. But at the end of the day, I think it’s more pressure broadly on comps year-over-year and just kind of demand trends and less so around our price points, right? So again, we’re comfortable with how we’ve set our pricing strategy across the portfolio. We’ve seen a corresponding uplift in volumes, especially sub a $1,000 and right now, it’s more isolated to what we’re seeing in macro more than it is how we think about pricing internally.

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

Dom Blosil: Thanks, Brian.

Operator: 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.

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TRAEGER INC

Q3 2023

Earnings Transcript

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