Q2 2021 Traeger Inc Earnings Call
Good afternoon. Thank you for attending the tradeoffs second quarter fiscal 2021 earnings conference call.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers that again I would now like to pass the conference over to your host Tom Burton with triggered. Thank you you May proceed Mr. Burton good.
Good afternoon, everyone. Thank you for joining <unk> call to discuss its second quarter results, which we released this afternoon and can be found on our website at investors trigger dot com.
Hosting the call are Jeremy Anderson, Chief Executive Officer of trader, and Don Basel, Chief Financial Officer.
Before we get started I want to remind everyone that manages remarks on this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095 that are based on current management expectations.
These may include without limitations predictions expectations targets or estimates.
Including regarding our anticipated financial performance and actual results could differ materially from those mentioned.
These forward looking statements also involve substantial risks and uncertainties some of which may be outside of our control that could cause actual results to differ materially from those expressed in or implied by such statements.
These factors and uncertainties among others are discussed in our filings with the SEC.
Courage you to review these filings for a discussion of these factors, including our quarterly report on Form 10-Q filed today, which is also available on the investor portion of our website at IR, Dr trigger Dot com.
You should not place undue reliance on these forward looking statements speak only as of today and.
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 net income as adjusted diluted EPS as adjusted adjusted EBITDA and adjusted EBITDA margin, which we believe are useful supplemental measures that assists in evaluating our ability to generate earnings provide consistency and comparability with our cost performance and facilitate period to period comparison of our core operating results.
And our results of peer companies.
Reconciliation of these non-GAAP measures to the most comparable GAAP measures and definitions of these indicators are included in our quarterly report on Form 10-Q and in our earnings release, both of which are available on the investor portion of our website at IR, Dr trigger Dot com.
Now I would like to turn the call over to Jeremy Anderson, Chief Executive Officer of trigger.
Thank you Tom and thank you everyone for joining us for our first earnings call as a public company.
I'm incredibly excited to be here today to share our story and talk about her journey ahead.
First I'd like to say, how proud I am of what we have accomplished to date as a team.
In terms of driving our growth.
Strategies, completing exciting acquisition and launching our successful IPO.
Today, I will share why trager represents a unique and compelling growth opportunity later during the call Don will discuss the details of our second quarter financial performance and provide our outlook for 2021 and longer term.
We are pleased with the momentum in our business.
For the second quarter revenue grew 39%, reflecting ongoing strength in consumer demand across product segments, including grills consumables and accessories. We are excited to see growing brand awareness and extraordinary customer engagement with strong performance across regions.
Customers enter the funnel.
As a recognized trader is a pioneer in outdoor cooking and we drive lifetime customer value with our consumables and accessories categories.
At the heart of our brand as a passionate and engaged community called the trader Hood, which is comprised of everyone from casual drillers to competitive with Pip Masters and professional chefs with.
The strength of the triggers that is reflected in our strong topline performance and our growth growing loyal following.
We have over $7.0 million followers on social media that create hundreds of thousands of user generated post across various social media platforms, demonstrating our engaged and supportive fan base.
For those of you less familiar with us trader as the creator and category leader of the wood pellet grill and a disruptor in outdoor cooking.
Our outdoor cooking system ignites, all natural hardwoods to grill smoke bake roast, braise and barbecue versatile and easy to use our grilles empower cooks evolves skill sets to create delicious meals with Woodford flavor. So that it's always exciting to fire up the trigger so let me dive in in <unk>.
They're the key attributes of our business model that have been and will continue to be pivotal the growth and success of our company first.
We are the pioneering brand of wood fired cooking, our differentiated cooking platform enables trader users to create memorable cooking experiences. This has cultivated a brand that we believe is category defining aspirational and extensible ultimately, creating strong brand equity and community.
We believe that our outdoor cooking platform provides meaningful opportunities to drive household penetration for many years to come second we offer an accessible user experience. Our automated control system maintains a set temperature, enabling trager owners to control their drill from their smartphone smartwatch.
Using our app, they can automate entire recipes and programmed cooking cycles, allowing for fantastic and consistent results for everyone from first time cooks to seasoned chefs, we are creating an extensive digital library.
<unk> hundred original recipes that owners can access through our App website and other digital marketing channels.
Especially proud of our unique content available through trigger kitchen live which received more than 100000 views weekly driving increased grow usage and customer lifetime value illustrating this in 2020. The average trader owner user grew 56 times. Additionally, we.
For high quality consumables, we are a vertically integrated wood pellet manufacturer. So we can ensure that the highest quality ingredients and manufacturing processes are used.
Leading to leading to a superior cooking experience.
Our wood pellets combined with our rubs and sources deliver recurring purchases over 92% of trigger owners purchase trigger branded wood pellets in the last year.
Third we haven't we have engaged in vocal advocates are traders that is a powerful vehicle and engaged global community that is hungry to share experiences and encourage other members to try recipes and cooking styles. We have over 1400 valued community ambassadors that range from micro.
<unk> to well known ambassadors, including Joe Rogan and Dan Patrick.
Finally, we continuously invest in disruptive innovation.
We use data from Wi Fi enabled drills to better understand our users' cooking habits, including which recipes are used how long cook cycles last the grille temperature and what time of day, the grille is active or in standby.
Information gains recipe and product development.
With tremendous opportunity in front of US we continued to disrupt outdoor cooking industry.
We remain focused on executing our growth strategies to drive profitable and sustainable long term growth first we plan to drive brand awareness of the 75 million households that owned Grilles. We are only 3% penetrated in our unaided awareness nationwide is 10% clearly.
Our market opportunity is significant.
Our strategy is to ensure that consumers think of wood pellet.
When purchasing our purchasing of replacing a grill and we're focusing on marketing campaigns to scale, our unaided brand awareness and accelerate household penetration.
Our marketing strategies have enabled us to reach more than 10% penetration and heritage markets, which incidentally, our some of our fastest growing markets and we will deploy marketing campaigns to drive awareness outside of these markets.
These top of funnel.
Have.
We have proven successful in the past and we know we can build lifetime value once we get.
Consumers engage with the brand.
These additional marketing programs that extend across multiple channels, including TV connected TV digital and social media and through retail partners.
As we build our presence our powerful word of mouth helps to fuel additional growth.
One step in and particularly proud of is that 80% of trade or owners have recommended our drills to an average of six people are.
Our latest trader to end may 15th was our largest to date, we saw 16000 user generated pose as well as record number of cooks more than the big Grilling holidays fourth of July Memorial Day, Thanksgiving and Labor day.
Second we will optimize our omnichannel distribution strategy by focus by primarily focusing on enhancing retail distribution we.
We are building in top tier retail relationships and investing to deliver authentic into our brand in store brand experiences.
That are optimized for conversion.
Although we have a significant retail white space and we believe that we have a large enough opportunity a large opportunity to further develop deep and strong relationships that will increase our penetration with existing retailers.
In addition to further optimizing our distribution channel strategy, we are seeking to maximize retail productivity by growing our DTC channel to complement retail sales through our DTC channel, we've established technology and operations at scale.
We believe we have everything in place to acquire customers.
<unk> provide subscription opportunities curates third party brands and provide bundle offers.
As we look to advance our DTC growth, we recently hired a new VP of digital marketing E Commerce, Jacob Liberty, who formerly headed e-commerce and performance marketing at Yeti.
Third we plan on growing our recurring revenue the more we increase household penetration the more opportunities we have to build brand awareness and sell consumables. We believe trigger owners already prefer wood pellets and we plan to leverage that loyalty to build a preference for trager branded rubs and sources as well.
Just like our wood pellets or other consumables promise quality and dependability for our owners.
In order to continued consumable sales growth, we plan to expand the accessibility of our wood pellets and other consumables through new distribution and easy DTC purchase experiences inspire trader users to cook more at home through our unique and growing digital content.
And lastly grow our portfolio of consumables, including new flavors of wood pellets rubs and sauces.
As we execute on these strategies, we believe we can significantly grow our recurring revenue.
Beyond North America, which accounts for roughly roughly half of the worldwide outdoor cooking market, we plan to export our brand globally, we plan to deploy our omnichannel distribution strategy and brand awareness playbook to key markets that have a culture of outdoor cooking, but have only experienced gas in charcoal.
In North America, we are driving significant market share gains for multi national gas and charcoal brands and we believe we are positioned to do the same internationally.
Lastly, we plan to continue to offer innovative superior home cooking experiences.
While we are already disrupting outdoor cooking, we believe that we can replicate this experience with other cooking modalities, we plan to target categories, where consumer demand is strong the innovation has been lacking.
Through product innovation Athletic brand unit.
Passionate community and strong partnerships, we believe over the long term, we can introduce the trigger experience into other categories.
In the food at home market.
Included in our business strategy, we have considered a wide array of potential strategic transactions, including acquisitions.
Strategic investments of businesses New technologies services.
And other assets that complement our business on July one 2021, we acquired all of the equity interest of action labs creator of meter a wireless smart thermometer that provides users the ability to monitor the status of a cook cycle with their connected devices through the meter app user.
Wi Fi Bluetooth technology.
This acquisition will help facilitate our entry into the adjacent accessory market with a highly complementary product. We believe this will bolster our existing offering.
Efficiencies for our consumers and expose us to new growth channels. Furthermore.
<unk> action continues our digital evolution to create a premier connected user friendly and rewarding cooking experience.
Before I turn it over to Don I want to I want to address the supply chain headwinds that we continue to see across several industries.
While there is no question that consumer demand for Trager remained strong supply chain issues are persisting into the second half of the year, which is creating additional pressure on our margins. These challenges are transitory in nature, and we remain confident that our competitive strengths and loyal community.
Remained tailwind to our business long term as we expand our disruptive cooking solutions globally.
We have a significant runway ahead of us and we could not be more excited about our future.
I will now turn the call over to Don to discuss our second <unk> second quarter financial performance in greater detail Don Thanks, Jeremy.
And good afternoon, everyone as Jeremy mentioned, we are very excited to share our second quarter momentum and our outlook for the future of Schrader. Our business has experienced rapid growth and we are building on this momentum through strategic investments in product innovation brand awareness and global expansion.
Looking back at the second quarter, we exceeded our expectations in revenue and profitability for the second quarter total revenue increased 39% to $213 million compared to the second quarter last year, driven by strength across product segments Grill revenue increased 40% to $156 million.
Attributable to growth in both volume and ASP.
Growth in ASP was driven by product mix towards premium offerings, including our ironwood and timber line series.
We also experienced an increase in our installed base of grills, which in turn drives recurring consumables revenue.
Thats consumables revenue grew 28% to $41 million compared to the second quarter of last year.
Lastly, accessories revenue increased 65% to approximately $16 million, reflecting strong consumer demand and growth in asps.
We are pleased with the revenue growth in our core channels and saw strong gains in national and specialty retail.
And in our direct to consumer channel.
Looking at our performance by market, we continue to see great momentum in the U S as well as exceptional growth in Canada and rest of world.
We remain in the early stages of our international expansion and we are highly encouraged by the strong acceptance of the <unk> brand outside of the U S.
Gross profit for the quarter increased $80 million compared to $67 million.
In the second quarter of last year gross profit margin was 39, 1% in the second quarter decreasing 40.440 basis points from the same period last year. The decrease in gross margin was largely due to increased inbound transportation costs inflationary pressures on commodities and appreciation of the <unk>.
Annie's renminbi relative to the U S dollar.
We view many of these headwinds and gross margin as transitory and we are implementing measures to navigate these global supply chain challenges, which I will speak to shortly.
Despite these measures navigate these global supply chain challenges I'm sorry. Despite these unprecedented macroeconomic challenges the fundamentals of our business are strong consumer demand is growing customer engagement remains high and we are driving higher asps and customer and lifetime value.
Sales and marketing expense increased by 125% to 47 million compared to $21 million in the second quarter of last year.
The increase was primarily due to higher advertising spend as we amplify our top of funnel demand creation to build brand awareness.
We also reinstated our Costco Roadshows program, which was part of last year due to Covid, which resulted in higher commission and travel related expenses.
Last there was an increase in professional services, primarily related to consulting and third party customer service support.
G&A expenses increased by 167% to $25 million compared to $9 million in the second quarter of last year as a percentage of revenue G&A expense increased to 11, 6% for the quarter as compared to six 1% in Q2 of last year.
This was largely due to an increase of $10 million and professional services in connection with the refinancing of our long term debt.
Consulting services and legal services.
The increase also reflects investment in growth related infrastructure.
As a result of these factors net loss for the second quarter was $13.0 million as compared to net income of $27.0 million in the second quarter of last year net loss per diluted unit was <unk> <unk> compared to net.
Net income per diluted unit of 17, and the second quarter last year.
Adjusted EBITDA and adjusted net income are both used by our management team as additional measures of our performance for purposes of business, making decision.
Asian, including managing expenditures and evaluating potential acquisitions to help to identify additional trends in our financial results that may not be shown solely by period to period comparisons of net income or income from continuing operations.
Adjusted net income for the quarter was $21.0 million or <unk> 15 per diluted share as compared to $35.0 million or 26 cents per diluted unit in the same period last year.
Adjusted EBITDA was $27 million in the second quarter as compared to $39 million in the same period last year.
Now turning to the balance sheet.
At the end of the second quarter cash and cash equivalents totaled $75 million compared to $12 million at the end of the second quarter last year.
This reflects the $52 million paid for the acquisition of option labs.
We ended the quarter with total principal amount outstanding under our new first lien term loan facility of $510 million on.
On June 29, 2021, we refinanced our existing credit facilities and entered into a new first lien credit agreement.
Under which we replaced our existing first and second lien term loans.
It includes a delayed draw of $50 million and increased <unk> and increased the capacity on our revolving credit facility from $67 million to $125 million.
We also increased the capacity and of our receivables financing agreement through $100 million.
Inventory at the end of the second quarter was $86 million.
Compared to $69 million at the end of the second quarter last year, we continue to work to maintain an inventory balance that represents the right product mix to meet expected demand and we are investing in higher levels of safety safety stock in response to the supply chain challenges related to the pandemic, we are comfortable with the level and quality of our inventory to meet the to meet <unk>.
<unk> demand as we look ahead.
Turning to our guidance, we continue to see strong momentum in the trigger brand across regions and across product categories following better than expected growth in the second quarter.
As Jeremy discussed we completed the acquisition of meter in early July liter expands our connected platform with unique technology that enhances the cooking experience meter generated roughly $60 million in revenue on a TTM basis and as of June and its profit and entered a profitable business.
We see meaningful synergy that we plan to unlock as part of our integration strategy and we are excited to see revenue tracking ahead of our expectations and.
In addition to this acquisition, we plan to launch a new product offering, which we will announce in early Q4 and majority of the investments related to startup costs were incurred during our second quarter and in the remainder of these costs will be reflected in the back half of the year.
Turning to the supply chain as you have heard from many other consumer companies the macro supply chain challenges persisted, including higher inflation Mac manufacturing constraints and port congestion. Our number one focus is getting our product to our consumers, while mitigating cost pressures or wherever possible.
We are implementing various near term and long term measures to help mitigate the accelerating costs ranging from.
Previously mentioned price increases warehousing product in Asia to smooth production and manage the volatility in vessel capacity constraints and diversifying our manufacturing base on.
Our adjusted EBITDA outlook reflects continued gross margin pressures in the back half of the year due to supply chain challenges that I outlined as well as ongoing investment across sales and marketing and public company costs.
Our guidance reflects the impact of these costs based on the visibility we have today.
For fiscal year end 2021, we expect revenue to be between $760 million and $770 million and we expect fiscal 2021, adjusted EBITDA to be between $103 million and $108 million.
Over the long term, we believe we can drive annual revenue growth of approximately 20% as we execute on our growth strategy. We will continue to build brand awareness drive product innovation and expand our presence both in the U S internationally.
We believe we can reach 45% gross margins long term through sourcing initiatives, including diversification of our manufacturing base delivering on product cost savings enhancing our product assortment and increasing supply chain efficiency efficiencies.
We believe that our strong topline growth and gross margin expansion, coupled with continued reinvestment in our business will yield adjusted EBITA margin of roughly 20% over the long term.
In conclusion, we are extremely confident about our future and as we continue to disrupt the drilling industry by bringing product innovation to consumers through a powerful go to market strategy.
With that we will now open up the call for questions operator.
Certainly we will now begin the Q&A session. If you like to ask a question press star.
Followed by one on your Touchtone keypad, if for any reason you would like to review that question. Please press star followed by team again to ask a question Press Star one as a reminder, API speaker phone. Please remember to pick up your handset before asking your question, we will pause here briefly.
To allow questions to generating Q.
The first question is from Randy Panic with Jefferies. Please proceed.
Hey, guys good afternoon.
Can you hear me alright.
Yes.
Alright, great. So.
Just I guess, Jeremy maybe give us your perspective on.
The consumables distribution give us some perspective of where it is now.
And then.
How you're thinking about expanding that footprint with partners.
Across the country.
Over the next let's say 12 months to 24 months, how should we think about.
The expansion of that should be regionalized nationalized just just give us some perspective, how you are thinking about that that part of the business.
Yes, great question Randy so.
First of all I would say that.
It's only been the last.
Sort of 12 months.
We have been.
Meaningfully expanding distribution of pellets.
<unk> traditionally been sold.
The Grilles are sold in and one of the things that we learned and consumer research is that while.
The Grilles are considered purchase and they need their own dedicated point of sale and deep education to consumables need to be in convenient locations, where consumers shop regularly.
And so we've really focused initially on pellet distribution, we've begun to expand it to places where consumer would naturally expected items. So I would say grocery is probably the most meaningful channel distribution channel expansion that we've undertaken we've opened meaningfully meaningful.
New doors.
During this calendar year.
Some of these.
They're national change, although we're always focused on disc.
Distribution first and foremost in the markets that have the greatest penetration when we ultimately believe that grocery represents an important channel that we've learned in our consumer research they want to find pellets.
And then I would move to rugs and sauces.
The rubs and sauces component of our consumable business.
Traditionally have been more about the recipe creation, ensuring that there is an easy guy to helping consumers create a great home cooking experience and it's only been recently that as we've seen traction in our core channels and I would say, notably in <unk>.
Specialty retail, especially barbecue, especially hardware, we've seen nice sell through and so we've been testing outside of our core channels and we've seen actually very significant traction and we believe it's suggesting and while it's clear it's suggesting we have permission to play in more traditional consumer.
Consumables channel. So again grocery would be would be a natural my expectation is that.
Over the next 12 months or so you will see the consumables distribution increase within our core channels and as we'll rebuild as we are.
Building, an enhanced consumable line with a price pack architecture, that's appropriate for grocery.
Back half of 'twenty to first first half of 'twenty, three you'll start to see the rubs and sources and more traditional consumable channels.
Super Helpful. And then just one more question.
I wanted to get your perspective on how youre thinking about.
Technology, obviously, one of the great things about the brand as the connection it has through technology.
When I think about the trigger at for example, let's say to me right now Mike Farrell has 60% pellets right. So.
How are you guys thinking about the next level or the next leg of technology implementation kind of further enhance.
You put up before you want to increase the ability or reduce the friction point for.
For consumers to buy and do states with you interact with the brand. So just give us some perspective on maybe your wish list.
Technology, that's going to be happening over the coming quarters and years.
Yes, so I would say.
Fresh every everything and really fundamentally begins with our great cooking experience.
And.
And ultimately, it's a very seamless booking experience and an equally seamless purchasing experience.
Really optimizing and Omnichannel distribution strategy, but certainly using technology.
Our app and the website to remove friction from that purchase experience.
We are we're very early innings in.
Really understanding the value of.
There is one to one connection with our consumer understanding what their cooking when they're cooking and really using that data to deliver personalized experience.
And we're actually in the process, we spend a lot of time and habitat with our consumers and I think we're making some very significant progress currently is that over the next couple of quarters Youll see.
In a greatly enhanced digital experience.
And it really goes it really boils down to only.
Early in the moment from the moment it consumer decides they're going to Cook at home all the way through.
The inspiration of what we're going to Cook the recipe, how and where they are going to procure ingredients, how theyre going to cook it whether it would be.
Video short form recipe content long form recipe content.
And so the technology is there it's about us really intimately understanding our consumers how they want to use it and youre going to see very significant advancements I would.
I would even suggest that over the next six to 12 months, you will see more evolution and innovation in the digital experience.
Then <unk> seen in the last four or five years trager, we're that committed to making the cooking experience much better and certainly all of the components.
Of purchasing an ingredient procurement.
And an easy recipe content.
Our components of that so.
The technology is there and we're finding ways to make it very elegant cooking experience and we really like the progress.
That's on its way to market.
Very helpful. Thanks, guys.
Thanks Randy.
Thank you Mr. Chronic the next question is from John Glass with Morgan Stanley. Please proceed.
Thanks, very much first Jeremy I'm wondering if you could just talk a little bit about the go to market strategy. You employed this summer you have been seen.
Great demand and some new markets, maybe kind of recap what you did there and maybe some of the result, and then if you think about the next couple of quarters. How do you think about the Mexican market you're going to approach what are they for example.
Sequence of events as we think about the brand moving east.
Yes.
This is a really important part of the acceleration of our unaided brand awareness in Europe.
There is a lot of history and how we've arrived where we are I would say the first handful of years under this management team our real focus was building a an authentic brand platform.
Long before we were investing in customer acquisition, we were thinking about what are the tenets of a brand that creates real emotion with our consumer.
How do we.
<unk> <unk> cooking experience that gets people excited and the reality is most people are not exciting to cook trader owners are and that really starts with this foundation of brand. So all those things that we've done with commuting ambassadors grassroots marketing, which has always been an important part of our business model.
By social media.
Cooking classes all of these sorts of things that has been the foundation of the brand the.
The last couple of years, we've really been honing.
In our marketing execution model to ensure that we get a return on our brand platform.
And so we've tested we've tested many markets we've seen great success.
Lake City is the market that we have the most history and as a management team.
So.
We've been able to refine our marketing model.
<unk> increased our household penetration from very low single digits with a 15% household penetration six years since we've been here.
And all of the elements of that model has been testing and measuring and refining.
And then we call. This our market is salt program.
And so we rolled this out beginning in the back half of last year into 14 markets around the us strategically chosen one of them being in Salt Lake City.
Which we're continuing to scale.
We are we are monitoring those activities and the results of those activities weekly and monthly we look at sell through in these markets. Nearly every week, we are measuring sell through.
Every month, we are measuring unaided brand awareness in these markets and we're really focusing all of our discretionary.
Sales and marketing resources into a narrow set of markets and we believe this is what gives us the ability to amplify our marketing spend and create a groundswell of the way that we have in Salt Lake City.
I actually just yesterday.
I was with.
Our sales and marketing team reviewing the success of what we know these markets and looking at the analytics behind the markets that we will begin to launch in the fourth quarter of this year.
Really with a focus of driving meaningful.
Good awareness next year, particularly in key selling season.
As a long tail effect to these activities, we will continue to invest in the markets that we're in but we're learning a lot from the from this process and so on the sales side.
It's alignment of our in store merchandising, having the right assortment at the point of sale and deeper investment in visual merchandising retail training more boots on the ground. So that we can service retail really educated the point of sale and then it's all of the top of funnel activities on the Mark.
Cutting side.
Advanced television broadcast TV.
Great Radio advertising digital advertising all of these things then drive consumers into retail.
No debt.
Great a grill buyer.
Looks at or evaluate one about $1 six brands.
Those are the brands and the initial consideration set and at 70% of purchases happen within that initial consideration set at 10% unaided awareness, we're simply not well enough.
Need to be better now we need to be in that initial consideration set more often so I think we're getting good at creating top of funnel awareness.
Leading to mid funnel marketing activities and converting at the point of sale. So we feel really good about these investments we like the returns. There is no question, it's never perfect and so we're always refining and.
Of those 40 markets that we are this year.
Probably.
We'll probably call two or three of them will.
We will keep keep 10 or 11 of them and we will add another six or eight strategically chosen markets next year and again, we will continue to grow.
<unk> crossed all of the geographies that we invest in but the expectations that we grow exponentially and really create this meaningful groundswell in the markets that we're investing in.
Thanks for that Dom I, just wanted to follow up on your supply chain commentary.
I think it's gotten worse since we last shot at it.
It was a month ago I think there was some disruption in Vietnam.
Recurring now maybe some contextual inflation around it just what you expected or is it maybe worse than you expected and what specifically whether its manufacturing capabilities or it's a supply issue of components or is it shifting as that which are the pieces are more a greater or lesser pressure than maybe expected initial short time ago.
Yes, that's a great question I would say that the answer to your first question is yes.
We are seeing.
Challenging some of these challenge worsen as we head into the back half of the year.
And we certainly took a fairly a fairly conservative viewpoint on kind of where we were.
Kind of June July timeframe, as we look ahead and just based on kind of the known factors that we were experiencing at the time.
And ultimately some of the headwinds that we felt in gross margin in Q2 inbound transportation rates.
Facts.
These are actually trending in a slightly worst direction currently.
And so that's one sort of factor that we're seeing emerge.
Growing headwinds just really related to inbound transportation and Thats something that our products are really sensitive to just given the size of our products and sort of the load ability per container I'd say the second piece that I think is emerging is.
Slightly newer in terms of a headwind to steel.
We've seen just as you look at kind of the indexes on cold rolled steel and.
In China that sort of increased 30% to 40%.
And thats beginning to have an impact on our cost of goods as well. That's one that we also believe will be transitory over time.
And we're sort of evaluating.
What China is doing as they look at some of these inflationary pressures and maybe ways to sort of offset the impact.
Either in the near or longer term and so something that we're watching closely and I would say that at the end of the day. The biggest component right now that we're really focused on more than anything else is the impact that we're seeing and sort of the drilling pressures that we're feeling in inbound transportation and so I think our strategy is.
Is really consistent with.
And where we've been all along this year and I think first and foremost we're focused on protecting revenue.
And that means that we want to position ourselves such that we're able to stay nimble in terms of accessing vessel capacity container capacity in China is such that we can bring inventory into the U S to fill demand and we have a few levers in place to do that one of which is.
A recent decision to standup origin warehousing, so on onsite warehousing in China.
Not only to keep kind of production it smoothed levels with our factories, but also to ensure that we can stay nimble and effectively control the outcome that at the end of the day, it's having an impact on flow of goods to the second piece is we are investing more in inventory and so we're making a conscious decision.
To carry more inventory and so and higher lead times I'm, sorry, higher safety stocks in the U S just to build more cushion into into.
Into our supply chain, so that we're able to to manage some of the volatility and ultimately keep demand moving and I think the second piece to that is just how we manage rate volatility.
Certainly a focus and we have key levers in place that allow us to a degree to manage what we're seeing is a growing again headwind in costs. We do have fixed rates that we've locked in and one of the benefits of having onsite warehousing.
In Asia that we can draw from us that allows us to stay nimble in terms of the mix of fixed rate containers that we can procure and ship to the U S.
This this this change.
Changes quarter to quarter.
Pending on availability and where our inventory position lies in for example in Q3, we are seeing a shift away from fixed rate to premium and spot rates.
But could see that shift back in our favor in Q4, so again something that we're watching closely and managing rate volatility is important but it certainly comes second to just ensuring that we're able to protect that.
Protect revenue and I think the positive here is we've been focused on this now for a handful of months the supply chain team has done a fantastic job of managing our freight partners as well as just managing the complexities that come with navigating the constraints with with vessel capacity.
And I would say that.
Our inventory position today is where we think it should be in order to meet demand in the back half of the year and we're continuing to ensure that we're navigating these challenges and getting ahead of any future potential risks that emerge that we cant foresee so that we can.
Absorb those and ensure that we still have revenue to to fill demand here in the U S.
Great. Thank you very much.
Thank you Mr glass.
The next question is from <unk> Siegel with BMO capital markets. Please proceed.
Thanks, Hey, guys good afternoon.
Jeremy could you talk about what the supply chain from the other side. So maybe the impact on revenue if there is any.
How do you think about supply constraints versus demand you.
You highlighted marketing maybe speak to the way you approach transactional marketing versus brand building and then Don just to kind of circle back on that point you just brought up.
Any way to quantify the transitory costs that you think you would see.
Yeah. Thanks, guys.
Sure so.
Jamie first of all on the on the supply side I would say.
We already we already a reasonably good position for the first time in a long time.
Certainly.
Since early first quarter of.
2020, when the pandemic hit.
We've been very very diligent around.
Expanding capacity.
Within our existing.
Manufacturing facilities in both.
Both China and in Vietnam, we have.
Been working very carefully with them even remotely.
Got an office in Shanghai to manage manufacturing, but also team here that interact daily.
With these facilities.
To drive efficient <unk>.
Production and high utilization rates and so we made a strategic decision.
Over a year ago number one to increase capacity.
Number two to start to carry more inventory as we got cutoff being so we're finally.
<unk> taken time to both add capacity and to feel the impact of of more.
<unk> coming off the line, but I would say in the quarter, we're feeling like we're not leaving.
Much much demand on the table, we did a little bit in the second quarter, but we feel like we're caught up now.
And so my expectation is that in steady state steady state is.
So.
This environment that may be a bold prediction.
But even even in this environment that we have.
The mechanisms and the processes in place to keep supply running smoothly.
We describe some of the things that we're doing in terms of running at high utilization rates increased safety stock in the U S.
In our multiple Dcs, increasing safety stock in Asia, and bringing it over as cost effectively as we can.
So I feel pretty good about where we are.
In in the third quarter and going forward from the supply perspective.
Switching to.
The marketing side, that's an interesting it's an interesting question building brand.
It's sort of a more transactional customer acquisition component I would say, we always lead with brand.
And that's what we do best and our capability around.
Cost effectively driving top of funnel awareness and really really moving that consumer mid funnel into conversion, that's something that we're getting better at that and so it's certainly a capability that we've been focused on.
We view those marketing activities of course very differently.
And we also view the needs very differently in terms of where the consumer is in their purchasing decision journey.
And so for example in markets like.
Utah, and Oregon, where we have <unk>.
Higher unaided awareness, we're going to invest more of our marketing spend in mid funnel activities looking to convert a customer base that has had multiple touch points and they've done their research we find on average that.
A trade or consumer does a lot more research than a traditional grill consumer about twice as much research about six six hours of research and so we track them through the funnel and where there is higher our unaided awareness and we invest a lot more of that transactional piece, but really with always with the intent.
We're building a brand that has a long tail.
Is that a sustainable and repeatable revenue and I think this capability around converting the consumer that's been exposed to the brand is something that that we are getting much better at and it's a place where we plan to invest a lot more as we develop some of.
These markets with higher brand awareness.
Yeah, and I'll jump in I think first.
Appreciate the question.
At this point.
We aren't going to provide direct guidance on on gross margin in the back half of the year I think what I will say is that we do expect gross margin pressures in the back half and in particular, particularly in Q3 to be fairly outsized relative to where we were.
Lending in Q2, and I would say that ultimately this is a gross margin story, which is almost entirely driven by the macro inflationary pressures, which we believe are transitory.
And EBITDA is reflecting that even though we continue to see strong demand on top line and certainly the right controls in spend as well as conviction and where we need to continue to invest to drive growth in the brand.
I think that the other the other point here.
That I would make is.
Although there may be a lag too to some of the.
The strategy that we're implementing to offset these pressures.
<unk>.
That the price increases is an important one that that will ultimately influence. The later half of <unk>. Two in terms of offsetting these is growing macro pressures and we're also exploring a few other avenues, which we believe could be meaningful levers to to further offset dd's.
Pressures and so I think at this point, we just don't have it.
Visibility aside from what we know today to communicate anything on gross margin other than.
It is a growing pressure in that business.
Certainly that that's really the main theme as we think about performance for full year.
Thank you Mr. Siegal. The next question is from Peter Keith with Piper Sandler. Please proceed.
Hey, Thanks, Good afternoon, everyone. Congrats on your first quarter out of the gate here.
Don maybe just a follow up when you talked about exploring other avenues to offset pressures I know you have commented on pricing.
Hence you're coming down the pipe in in Q4 with an increase.
At point, now, where you think you've finalized that or.
Maybe just to provide perspective, you have a sense of maybe how much the grille bucket is increase in price with some of your main competitors.
Yeah sure.
So we have finalized that we feel really really good about where we landed on our strategy and it has been communicated and so that will take effect and be fully realized in Q4. So that's a great win and kudos to our sales team for <unk>.
For executing on that and obviously, great partners and ensuring that we're aligned on.
That strategy.
In terms of competition, yes, we don't know exactly what their internal making that better strategy is but we are seeing price increases from from our competitors, both our larger and smaller competitors and so they are clearly feeling some of the same pain points that we are in.
Terms of inflationary pressures inbound transportation costs et cetera, and are addressing addressing this through price increases as well.
Thank you Mr. Keith.
The next question is from Sharon Zackfia with William Blair. Please proceed.
Hi, good afternoon.
I guess to follow up on that comment on your pricing philosophy, given that a lot of what you are seeing appears to be transitory is thought to be transitory and how did you land on that number I mean are you seeking enough that.
A third of half three quarters I mean, how much of the pressure are you looking like an offset there and just to clarify as well are all of your suppliers up and running at this point or are you facing kind of any shutdowns at all in Asia.
Yes, so great question on.
On pricing philosophy, so we clearly.
Evaluated the pressures that we're feeling in the impact on gross margin and certainly that was the the guiding force in evaluating a price increase this year. However, we were fairly methodical in our approach to.
Our price increases and it wasn't.
Set prices at at levels to fully offset any headwind that we feel I think we want to still ensure that we are balanced in our strategy to how we think about pricing, which is why we were very methodical in the analysis that went into which which products we are raising price on.
And ultimately where we felt we had permission to make certain adjustments on price such that there wasn't a corresponding impact to gross profit as a result of slower volumes.
Across those those Skus and I think the good news is that there is precedent here and I think we've proven that there is a relative degree of built in any lasted and elasticity in our products and so theres permission to raise price.
But it's fairly complex and we want to ensure that that is a balanced approach versus just simply trying to solve for a gross margin percent and so I think thats. The first comment I would make.
Second comment I would make here is that.
It's not it's not set up to fully offset rising pressures that may come as a surprise, which we're certainly seeing an inbound transportation and so it will be a meaningful component of of of.
<unk>.
Or a meaningful offset to the pressures that we're feeling but it won't necessarily offset entirely those pressures. However, we are exploring other avenues.
That may be even more temporary in nature, but where we have permission to make certain adjustments to be slightly more reactive to some of the changing dynamics that were facing day to day week to week month to month, and Thats something that will likewise evaluate and potentially execute on in <unk>.
Q4.
And in addition to the price increase thats going into effect here shortly.
Remind me the second question facilities, <unk> facilities were up and running across.
All three of our main factories in Asia.
Thank you Ms. Zackfia. The next question is from Peter Benedict with R. W. Baird. Please proceed.
Hey, guys. Good afternoon, just first just a clarification it sounds like you.
<unk> got visibility into the product flow to kind of support the second half revenue outlook is that the way that Jeremy what you're trying to kind of.
Imply I guess with those comments you feel good about where you are with inventory. That's my first question.
Yes, we do protect production's been smooth wed like our inventory position.
As I said, we're being fairly methodical around.
How we move inventory from Asia to the U S. Just trying to trying to balance cost as much as possible in this environment, but we feel good about inventory position our expectation is that it will.
It will satisfy demand.
In the back half of the year.
Yes, Thank you and just good to hear that the meter business seems to be doing well here.
Still early with you guys, but maybe can you talk a little bit more about your plans to leverage that.
Is there anything you are going to able to do to influence kind of the back half of the year or is this something that's more of a 'twenty two.
Is that where we should see maybe meter more integrated with the core brands.
Yes.
Theres certainly some.
Some activities that could have some I would say some nominal incremental upside this year of course, it's new and.
We're really taking a long view on this acquisition.
We actually we had a partnership with meter <unk>.
18 months ago in integrating their product.
Their technology into some new innovation that we're launching next year.
And so.
So we know the product well, we understand its capability, we like how it fits into.
Not only our brand from an accessory perspective, but into our core product line and so they were already plans in place.
Some of those will be leveraging our retail distribution capabilities that will mostly happen next year.
We want to make sure that we're thoughtful around where we launch it meaning that.
This is a premium product it's expensive, it's new innovation. It requires merchandising at the point of sale requires education and so I would say we are the most of the rebuilding our strategy for next year.
And.
And leveraging the right trade your points of distribution.
In beginning to.
Connect the brands in the marketplace, but there'll be some there'll be some upside in the fourth quarter, mostly through.
Mostly through E Commerce partners, just given the time to bring it to channel, but we'll also be tested in some some of our sort of premier specialty distribution.
Retailers, just so that we can start to really test and understand what is the right way to scale the go to market.
Thank you Mr. Benedict.
Question is from Jim Duffy with Stifel.
Keith.
Thank you Hi, Jeremy had done nice work with your first call.
Thank you.
I wanted to ask I know there is no end to the outdoor cooking season, but as we move past labor day are there any metrics you can share about the state of channel inventories.
And then can you speak to the mechanics of the channel strategy to manage the pricing transition.
Have you seen any pull forward of orders to get ahead of price increases.
Yes, I can jump in.
It's a good question on the on the channel inventory levels, and I would say that compared to where we were in 2020 as we were navigating the pandemic and certainly they're very robust.
Demand and pull through at point of sale of inventory levels in.
And channel are much improved and not to say that it's perfect, but we're in a fairly good spot now and Thats really been a very focused effort from from the beginning of the year to where we are now to ensure that one.
We are improving and channel.
Inventory levels, so that we're not seeing out of stocks. The way, we did last year and two to ensure that we remain balanced in how we manage that collaborate collaborative planning process with our retail partners to ensure that they are also not over inventory we have seen a dynamic at least earlier.
In the year, where just given the disruption that Covid has had on on product flows inventory there hasnt been an appetite for more and Jeremy mentioned early that we are methodically.
Really obsessed with evaluating sell throughs.
As well as on hand levels on a weekly basis, and we have real infrastructure in place to manage that as a partnership with our retail partners and that also allows us to pull back when we believe that there may be an over appetite for inventory when it's not needed and so fundamentally our strategy hasn't changed other than just.
Trying to get to the point, where our channel and channel inventory levels are at the right spot and we feel like we're in a pretty a pretty good position there.
And I think the second on your second question.
I would say no.
We haven't seen any any anything that would indicate behavioral shifts and trying to bring in and bring in more inventory prior to the price increase.
Thank you Mr. Duffy.
The next question is from Joe Feldman with Telsey Advisory group.
Pete.
Yeah, Hey, guys congrats on the start to the.
Being public.
I had a question can you break to the home depot I know you guys have been working on.
More shop in shops in rolling that out can you give us an update on where you are with that and.
The level of upgrades and what youre seeing from those upgrades.
Yes, absolutely first of all I would say.
Home depot is the largest reseller in the world and we have we.
We have a tremendous partnership with them I think they were.
Really value.
Having a differentiated brand thats focused on experience and premium innovation.
And it's in there.
They've really been a great partner since earliest days, which I think is phenomenal given the size of their business.
It's one of the things that.
But we've been talking about for many years and I feel like we are making progress we have certainly.
Home depot on how our brand looks at retail we think it's incredibly important that inventory is just sitting there with a price tag on it that when a consumer approach as our brand.
Sure. He has an experience where they are able to understand that this is a brand that's meaningful.
It's not just the grille, if it's an experience in all of the components of the digital the recipes all of these things or integrate into that experience.
I would say early on.
As we pushed home depot and some of the.
Waves that we wanted to express our brand and retail.
There was there.
<unk>.
There wasn't alignment it's taken time for us to really align on what a great representation of the trigger brand looks like.
We've made a lot of progress this year.
Launched.
About 50 locations.
<unk> premium fixture and brand experience, we've been tracking sell through we're seeing a lift in sell through and theres alignment to begin to roll that out.
I expect that next year, we'll see a very significant increase in the number of doors that we will have this premium brand experience.
What we know is that when a consumer walks into.
A specialty retailer and they are greeted by a sales associate who oftentimes in those of them by name.
They know what they are looking for they understand the tray your brand and the attributes of the product are conversions really really high.
And we measure that conversion through various studies that we've done we know that home depot. The traffic is really high and that conversion is really low.
So to some extent, that's frustrating and to another we sit down and we view it as we've used and abused opportunity and so the way that we speak to our customer is very different the home depot that a specialty retailer because you've gotta catch of consumers there.
<unk> down the aisles in a less assisted environment, we need to create an environment that is friendly for the brand and I think we've got a great partnership with home depot and a willingness to to begin to really invest much more.
Next year than we have in any of the six years that we've been in home depot.
Thank you.
Thank you.
Thank you Mr Feldman.
There are no additional questions lighting at this time I will now pass you back to Jim for closing remarks.
Well, we appreciate thank you for listening in.
Lighting for us to announce our first quarter as a public company. We've got an engaged team were fired up we think this is a ton of fun. We appreciate the great questions that have come in we certainly appreciate.
Our fiduciary obligation to our shareholders and the confidence that you've placed in us.
As you have recently become owners of trader stock.
We are we are incredibly optimistic about the future we could not be more excited about it we could not be more confident it.
We're looking forward to furthering our relationship going forward. So thank you so much take care.
That concludes the <unk> second quarter fiscal 2021 earnings conference call enjoy the rest of Europe.
Thank you.