Q3 2021 Traeger Inc Earnings Call
Hello, and welcome to the Tragus third quarter fiscal 2021 earnings conference call. My name is that Lance and I will be coordinating your Cogs thing.
If you would like to register a question during the presentation you may do so by pressing star followed by one on your telephone keypad.
I will now hand over to your host Tom Button General Counsel.
Please go ahead when you're ready.
Good afternoon, everyone. Thank you for joining triggers call to discuss its third quarter results, which were released this afternoon and can be found on our website at investors got trigger dotcom.
Hosting the call are Jeremy Andrews, Chief Executive officer of trigger and Don Bustle Chief Financial Officer.
Before we get started I want to remind everyone that management's remarks on this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
They are based on current management expectations.
They 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 these may be outside of our control and 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.
We encourage 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 Relations portion of our website at investors got trigger dot com.
You should not place undue reliance on these forward looking statements, which 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 net income as adjusted diluted EPS as adjusted adjusted EBITDA and adjusted EBITDA margin, which we believe are useful supplemental measures that assist in evaluating our ability to generate earnings provide consistency and comparability with our past performance and facilitate peer.
Two period comparison of our core operating results and the results of peer companies.
Adjusted EBITDA and adjusted net income and loss are both used by our management team as an additional measure of our performance for purposes of business decision, making including managing expenditures and evaluating potential acquisitions that help to identify additional trends and their financial results. They may not be shown solely by period to period comparisons of net income or income.
From continuing operations each of adjusted EBITDA and adjusted net income has inherent limitations because of the excluded items and may not be directly comparable to similarly titled metrics used by other 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.
Our earnings release, both of which are.
Billable on the Investor Relations portion of our website at investors that trigger dot com.
Now I would like to turn the call over to Jeremy interest Chief Executive Officer trigger.
Thank you Tom Thank you for joining us for our third quarter earnings call before we begin I want to welcome our new VP of Investor Relations Nick back as it will be joining our team later this month it couldn't be more excited to have Nick that trigger and look forward to working with him.
I would also like to thank the entire trigger team for their contributions as we continue to transform the way people Cook and empower everyone to create delicious meals.
Today, I will discuss highlights from our quarterly results.
Our progress in executing our long term growth strategies as well as how we are navigating the supply chain headwinds.
I will then turn the call over to them to discuss details of our third quarter financial performance and provide an outlook for the remainder of 2021.
We are pleased with the momentum in our business for the third quarter with revenues, increasing 12% year over year on a two year stack basis, our growth was 110% in the third quarter.
Early highlighting ongoing strength in consumer demand for trager across our product categories. We remain obsessed with sell through our strong growth at retail continues to earn us additional floor space with our retailers.
We continue to see encouraging results from our market assault strategies in the form of increased demand and brand awareness we.
We deployed these strategies in 14 markets during the second quarter and saw brand awareness double and a significant lift in sales.
Following our Q2 seasonal marketing campaign.
Continue to see substantially faster growth in our focused markets relative to the company average.
More consumers are entering the purchase funnel and recognizing that triggers innovations make cooking with wood simple.
By leveraging technology premium quality and a thoughtful digital experience everyone can become an pitmaster.
Given these results we plan to expand our market assault strategy in 2022 to further extend and elevate our brand in new markets.
We are enthusiastic about Q4 activation strategies.
As we look forward to the holidays.
Unlike most brands in our category, we have a really strong holiday business and Thanksgiving is one of our largest drilling days.
We plan to be very active with innovation and unique marketing strategies that will continue to drive brand awareness and elevate our voice.
This will both attract new consumers as well as engage the existing Drager Hood.
In particular, we are pleased to collaborate with one of our largest retail partners home depot with exciting content on ESPN College game day.
We believe that the versatility of our grills allows for accessible user experiences where a trager can be used for virtually any cooking occasion.
That user experience drives frequency contributing to the ongoing momentum in our consumables and accessories categories.
Turning to product innovation, we are excited about our two new premium priced limited edition wood pellet offerings.
We successfully launched a pellet collaboration with me church barbecue and.
Highlight smoked flavoring preferred by Texas pit Masters and also launched a limited edition, Turkey blend wood pellet with Brian kit for the Thanksgiving holiday.
One of our long term growth pillars is to disrupt cooking experiences both indoor and outdoor.
We have continued to do so with meter which has experienced strong growth since the acquisition.
It is now being offered on our website and we plan to increase distribution.
Of meters wireless meet thermometers through our retail partners as meter is currently available primarily via e-commerce channels.
We have already begun to roll out meter to our best retail locations and we will see meaningful distribution expansion in 2022.
We take great pride in providing an incredible cooking experience for our customers and we believe there are significant opportunities to offer holistic solutions, where consumer demand is strong but innovation is lacking.
To that end on November 2nd we launched a business concept, we've been working on for the past year called trigger provisions.
We're offering premium meal kits, consisting of high quality proteins, and partially prepared sides with easy to follow instructions all delivered directly to your doorstep.
The idea was born from consumer feedback around the difficulty and time it takes to purchase high quality proteins and ingredients and the desire to have a simplified complete meal experience.
That feedback taught us that trigger has permission to play in more spaces throughout the consumer cooking journey.
Product offering is perfect for so many of our community members because it provides everything you'd need to create an amazing meal on your trigger.
We've done the work to elevate and simplify the consumer experience meals are developed and curated by our culinary team to deliver our favorite trager recipes as well as facilitate consumer discovery of new offerings.
We're sourcing high quality ingredients, including wide view and heritage breed proteins smokehouse style sides rubs sauces and extras.
As well as dedicating instructions to prepare cook and serve.
Unforgettable meal, which all seamlessly integrates.
And to the existing trade or experience.
These premium boxes, which are shipped frozen are designed to be served for any occasion, making cooking easy inefficient and at a value with prices ranging from 16 to $30 per person based on protein selection in box size.
We believe that this complete solution elevates to trigger cooking experience beyond the grill and disrupt what is currently being offered in the marketplace.
Put simply it's working.
Following a six month test in four markets. We are extremely pleased with the strong response from our consumers many of whom have purchased more than one provisions box.
We found that 92% of participants expressed intent to purchase again and 58% indicated interest in four or more boxes per year.
We estimate the total U S market opportunity to be $20 billion. In addition, we believe we are able to scale. This business over time with lower customer acquisition costs, given the entrenched brand loyalty and the trigger hood.
Turning next to a topic that has been top of mind across many industries, we highlighted last quarter the supply chain challenges that we would face during the second half of the year. Despite persistent challenges we continue to focus on what we can control and I am proud of how our team has responded.
To the unprecedented strain across the global supply chain.
Our ability to meet demand during the quarter was outstanding we hit all of our service level agreements and our inventory position is the best it has been in two years.
Our strategy to increase production and warehouse inventory in China and in the U S has paid off and our customers consistently tell us that our fulfillment performance is at a higher level than that of our competition.
Don will provide more details on the supply chain impacts, but I am pleased that we have inventory available to meet global demand.
We have instituted mitigation strategies to counter the significant increases in inbound freight costs.
Vietnam production facility that was closed for several weeks during the end of the second quarter and early in the third quarter is back in full swing.
In addition, we began working with a new manufacturing facility in China that I expect has the potential to be our best yet and are working on North American manufacturing that we expect to be operational in 2022.
Stepping back a bit our long term growth pillars remain intact.
Have tremendous opportunity ahead of us as our household penetration and unaided brand awareness remains low the wood pellet category continues to grow faster than the overall grill category due to superior overall cooking experience to traditional grills.
And we are industry leaders driving that growth, we will continue to drive brand awareness through top of funnel advertising.
As it is essential for us to be included in the consumers' initial consideration set.
We have significant runway to increase penetration with our existing retail customer base. We continue to work with our trade partners to elevate our hoar presence through enhanced merchandising opportunities, including fixtures shop in shops custom build outs in select retail locations and improve.
In store associate training.
In addition, we are improving and increasing our assortment and more doors with additional bids in higher end grill assortments.
As our brand awareness increases, we will be able to capture significantly more floor space, particularly strong grill markets such as the South east.
Our DTC channel is underpenetrated and represents another meaningful growth opportunity.
We are pleased with our performance in that channel and we will continue to invest in its growth.
As previously highlighted trager leads through innovation and we will continue to drive the category with new game changing products and experiences to that end. We are excited about new grill and platform innovation that we will be introducing into the marketplace in 2022.
This new offering will further strengthen our position as a leader in the category.
Our focus on innovation is not confined to grill is only.
But also manifests itself across other categories.
<unk> consumables accessories and digital experiences.
We remain excited about the growth opportunities ahead of us in consumables, we have great new product introductions, and rubs and sources and we will continue to provide strong limited edition collaborations we send our pellet offerings that resonate with our trigger hood.
We see an opportunity to increase the accessibility of sauces, and rubs by expanding into new distribution, including grocery.
Finally, we are enthusiastic about exporting our brand globally, we had strong results in Canada and the brand continues to strengthen in Germany and in other geographies like the U K our global journey is just beginning.
We have significant white space ahead of us and we continue to be extremely positive about our future.
I will now turn the call over to them to discuss our third quarter financial performance in greater detail them.
Thank you Jeremy and good afternoon, everyone. Thank you for joining us to start we are pleased to share our third quarter results and our outlook for the future of trader.
Lapping an extremely strong third quarter of 2020 comparison, our business performed well across channels and geographies and we are excited about the returns generated from our investments to drive brand awareness.
As Jeremy discussed our investments in innovation are a key differentiator for trigger.
We are excited to share our latest innovation trigger provisions with you.
Looking back at the third quarter, we're happy with our strong revenue and EBITDA performance for the third quarter revenue increased 12% to $162 million compared to the third quarter last year, driven by growth in grill and accessories.
Sales revenue increased 4% to $109 million attributable to a higher average selling price, partially offset by lower unit volumes. We are extremely pleased by the performance of our grill category given that we were comping against a grill revenue growth rate of 98% in the third quarter of 2020.
Other illustrating the extraordinary demand for our products.
Consumables revenues declined 12% to $28 million compared to the third quarter of last year.
Driven by a return to normal seasonal retail ordering patterns.
We were up against an unusually tough third quarter of 2020 comparison during what's consumables revenue grew 72% over the prior year, reflecting the pandemic impact on seasonal shifts in our business.
Lastly, accessories revenue increased 182% to $25 million driven by the incremental revenue from the acquisition of meter and the strong growth in traeger accessories.
Looking at our performance by market continuing to see great momentum in consumer demand in the U S as well as exceptional revenue growth in Canada and rest of world.
We remain in the early stages of our international expansion are highly encouraged by sugars brand momentum outside of the U S.
Gross profit for the quarter decreased to $54 million compared to $66 million in the third quarter last year.
Gross profit margin was 34% in the third quarter decreasing approximately 200 basis points over the same period last year.
As we highlighted during last quarter's call. The decrease in gross margin was due to a combination of increased freight rates and logistics costs appreciation of the Chinese renminbi relative to the U S dollar.
Increased commodity and other product costs and amortization of acquired intangible assets, while the rising inbound freight costs and an unprecedented and is expected to persist through 2022.
<unk> taken steps to mitigate the increased costs through price increases as well as through the implementation of freight surcharges.
As such we believe our pricing actions will continue to drive sequential improvements during the fourth quarter and we believe that the third quarter will represent the floor for gross margin this year.
Sales and marketing expenses increased by 82% to $49 million compared to $27 million in the third quarter last year.
The increase was primarily due to acceleration of equity based compensation expense of $10 million associated with our IPO.
Excluding the $10 million of equity based compensation sales and marketing expenses increased $12 million or 44%, reflecting increased advertising spend to drive brand awareness and conversion along with higher personnel related expenses across sales and marketing functions.
General and administrative expenses increased by 338% to $76 million compared to $17 million in the third quarter last year.
The increase was primarily due to acceleration of equity based compensation expense of $37 million associated with our IPO and increase in professional services in connection with non routine startup costs attributed to trigger provisions and higher personnel related expenses to build the infrastructure to support our current and future growth.
As a result of these factors net loss for the third quarter was $89 million as compared to net income of $8 million in the third quarter last year.
Net loss per diluted share was <unk> 78 cents compared to net income per diluted share of seven cents in the third quarter last year.
Adjusted net loss for the quarter was $7 million or <unk> <unk> per diluted share as compared to adjusted net income up $24 million or 22 cents per diluted share in the same period last year.
Adjusted EBITDA as a key performance measure that we use to assess our financial performance.
That EBITDA was $4 million in the third quarter as compared to $34 million in the same period last year.
The decline in adjusted EBITDA was due to the factors previously mentioned.
Now turning to the balance sheet.
At the end of the third quarter cash and cash equivalents totaled $18 million compared to $12 million at the end of the previous fiscal year.
We ended the quarter was $370 million of debt, resulting in a net leverage ratio of three point for.
In addition last quarter, we amended our receivables financing agreement that increased the net borrowing capacity up to $100 million.
At the end of the third quarter, we had drawn down $19 million under this facility for general corporate and working capital purposes.
Inventory at the end of the third quarter was $115 million compared to $69 million at the end of the previous fiscal year.
The increase in inventory was driven by two factors.
First we have made a deliberate decision to lean into higher inventory levels and second the cost of inventory has been increased due to certain macro pressures I referenced earlier.
We continue to work to maintain our inventory balance that represents the right product mix to meet expected demand and we continue to invest into higher levels of safety stock in response to supply chain challenges related to the pandemic.
We're comfortable with the level of the quality of our inventory to meet demand during the upcoming holiday period.
Turning to our guidance.
We are reaffirming our fiscal year 2021 expected revenue range of 762 $770 million in expected adjusted EBITDA to be in the range of $103 million to $108 million.
Know that earlier, our year to date 2021, and profitability has been negatively impacted by exogenous macroeconomic pressures on global supply chain that spans inbound freight rates higher landside logistics costs.
<unk> of the Chinese renminbi relative to U S dollar and inflationary pressures on commodity prices.
We're particularly sensitive to the higher inbound freight rates given the large size of our grills.
We believe that the elevated inbound freight rates are transitory, but will likely persist through 2022 for context, we estimate that the unfavorable impact to our gross profit and our adjusted EBITDA due to the year over year increase in inbound freight rates will be between 25 and $30 million for the fiscal year 2012.
Sure.
In an effort to mitigate these cost pressures we implemented a price increase in late Q3, followed by the addition of a freight surcharge in early Q4, our pricing actions should partially offset the expected inbound freight headwind for the remainder of 2021 and in 2022.
Our fiscal year end 2021, adjusted EBITDA outlook reflects continued gross margin pressures, partially offset by mitigation strategies and includes ongoing investment in product innovation sales and marketing and the higher cost to operate as a public company and we believe that the global macro supply chain challenges person.
Through 2022, we remain hyper focused on strategies to both navigate and mitigate these risks are.
Our first priority is to protect revenue to meet current and future demand by one leaning into higher on hand inventory levels, which also helps to navigate current land site bottlenecks and buy to managing continuity and Asia production by securing long lead time components and by leveraging low cost Asia warehousing of finished goods.
Our second priority is to manage container rate volatility by strategically control the mix between our lower contracted container rates and the higher spot in premium container rates.
Looking beyond 2021, and as Jeremy discussed we are very excited about the launch of trigger provisions, which we believe represented a $20 billion total addressable market in the U S.
Year to date the investments we have made the configure trigger provisions for launch and scale are in line with our expectations.
We are developing a disciplined and deliberate approach to the pacing of these costs and further scale trigger provisions in 2022 and beyond however.
However to unlock sustainable profitable long term growth.
22 will be an important investment year as we continue to expand our sourcing and fulfillment capabilities fine tune the customer experience and ramp our investment in customer acquisition.
In conclusion, our team has done a fantastic job of managing the global macro supply chain challenges.
We remain excited about our future as we continue to disrupt the grilling industry with new product innovation.
The tracker Hood increased brand awareness and expand trigger globally.
With that we will now open the call for questions operator.
Thank you for our Q&A, if you would like to ask a question. Please press star followed by one on your telephone keypad and if you change your mind. Please press star followed by two one.
When preparing to ask you a question on planes and showing the devices on muted and please also limit yourself to one question on a follow up question.
Our first question today comes from running clinic from Jefferies.
Your line is now open.
Yeah. Thanks, a lot so I guess first Jeremy you talked about.
Mexico, I guess, North American production coming online in 2022, I think it's in Mexico. It correct me if I'm wrong can you just give us some more color on <unk>.
Hey.
When exactly do you think in 2022 Ah that.
That goes live and then B.
How that how much capacity you can do out of that facility or facilities whenever you're building down there procuring and how you kind of think about building long term kind of nodes of manufacturing and supply going forward for the next few years. Thanks.
Hey, Randy Thanks for the question I would say a couple of things.
First of all.
It's been our objective to diversify our base of manufacturing from me.
Just from a portfolio of risk perspective.
He's looking to add high quality manufacturers as I said in my prepared remarks, we added a facility in China that was opportunistic it's not where we're looking to increase concentration, but we partnered with someone.
That was.
As turnkey from a partnership perspective as we've seen.
But.
In terms of when we would bring our manufacturing operations online in 'twenty, two I'd say sometime in the.
In the middle Middle part of the year second and third quarter is probably likely we've been working on that for.
For for Boy.
For a year now.
And I think safe to say, sometimes second quarter, maybe as late as early third quarter.
<unk>.
The typical it's a I wouldn't say, it's an easy is turning on a facility we start with.
With a a single SKU, we optimized process, we manage quality.
And there's sort of a long process of optimization with them with a manufacturing partner that happens over the course of many years.
But this is in line with.
Our strategy to bring.
Manufacturing to North America, frankly, we'll be looking at other options to get to bring manufacturing even closer to our customer base, which is all about the quality of the partnership but also the level of automation.
Clearly.
Inbound transportation from Asia is very very painful now we suffer from that disproportionately to other brands given the size and weight of our inventory.
And so we.
We clearly don't believe that those cost either but we think there's value in having a diversified source I could also see at some point in time.
When Europe is large enough to support manufacturing that there was some some opportunities there as well so.
Quality production ability of partners to innovate and as close as is economically feasible to our base of customers given size and weight of inventory is sort of the context around our strategy.
Super Helpful. And then I guess my last question is I just wanted to unpack I can get more color around <unk>.
Trager provisions it seems like a really interesting and good idea strategically. So can you maybe give us some perspective on what you learned out of those I think you said four markets you had a test run in and what yes, what was some of that kind of a key level takeaways from how consumers were ordering repeat purchase behavior or anything.
That and then just to give us some flavor on how <unk> made a lot of investment to get this strategy off the ground kind of give us some perspective of how you can kind of.
Roll that out across the country I guess set for that now and just give us some perspective of how that the business may look from a margin profile perspective or anything of that nature, you can share with us. Thanks.
Yeah. So let me let me.
I'm going to go into a little bit of a different order first of all.
Why why the concept.
The mission of our business is to create better culinary experiences in People's homes.
And that started with the grill.
It would we have innovated and will continue to innovate it led to great recipe content we connected.
The grill to the cloud to make the cooking experience better and this is part of the journey in creating a cooking experience that is better that removes the friction that actually makes the cook.
Mixed cooking more fun cooking that fund for a lot of people.
The you know the heavy lifting effort in not only.
Procuring good good good cuts of protein.
Unique cuts of protein from unique sources. It takes time, it's often they are often or usually not available in many markets and if you think about preparing 234 side the number of ingredients and the amount of time that it takes to purchase.
Into to create those sides.
Lot of work and so we learned as we spent time with our consumers that this was the this was a service they would really value.
When we when we launched I think it was interesting to read comments on social media I read thousands of comments.
Social media and they very consistently said I can't believe trigger thought of this this makes so much sense.
Didn't did not read any comments otherwise and so.
The concept makes sense there is value in the offering it's sort of restaurant.
Better than restaurant quality.
Any restaurant competitive price, but what would trigger owners owner told us in the process is they get to cook it themselves.
And there is a little bit of preparation theres, a little bit of cooking, but it's not.
Not all of the things that it takes so they like that part of what they they liked the storytelling component of it bringing someone into your home and being able to talk about what you made where it was inspired with protein came from.
And they really appreciated all of the thoughtful details behind the unboxing process, which they really really enjoyed it so the experience for us it's from ordering unboxing cooking and serving and the reaction was very positive net promoter score.
For the service.
Since since launch to date is in the seventies.
We think there are opportunities to improve that.
But we found that.
92% of participants who paid full price for this product expressed intent to purchase again.
58% indicated interest in four or more boxes per year.
So if you think about lifetime value of customer.
We are very proud of the fact that we sell a premium.
Drilling solution.
With an eight with an average selling price at retail of.
$850 or so and climbing consistently.
We sell.
You know on average five to six bags of pellets to a consumer per year, some rubs and sources, but suddenly if you think about.
A consumer purchasing four or more.
Meals per year.
And at <unk> and <unk>.
A couple of hundred dollars than we are.
We're still early to know exactly what that is but the Thanksgiving meal, which was priced at $300 has sold very well.
What that does to what that does to lifetime value of customer, giving them a value food that goes through a drag or is it really it very meaningfully multiplies. It. So you know.
I would say that the concept makes sense the feedback is universally positive.
And it's very very large space and so we're going to build it thoughtfully.
We don't see this as driving revenue or profit in the business any time soon that's a nice it's a nice part about thoughtful innovation.
You don't innovate when you need revenue you innovate with it was a very long runway to be able to really ensure that the customer experience is always impeccable and gets better there is work to do to scale supply chain, but we intend to do it.
In a scrappy way, that's how trigger was built.
And you know.
I think it's worth re emphasizing that.
The that this is frozen.
And so we are not building.
A complicated supply chain that that takes fresh ingredients through it not our model we think the.
The frozen model in terms of what what we're serving is it.
It is a convenient experience.
It is not meant to be seven nights, a week and frankly, we think it's where our consumers are telling us.
A higher quality experience.
No.
A protein that is flash frozen at the moment of harvest.
Is actually remarkably pressure.
When you saw and Cook on your trager than something Thats been quote unquote fresh in the supply chain.
That was very thorough and very helpful. Thank you.
Sure.
Our next question comes from John Glass from Morgan Stanley John. Please go ahead.
Thanks, very much I did first Jeremy just wanted to follow up on that first one you said, it's not something that's going to be revenue or profit accretive near term I just want to understand the context of that is it just going to be small and ramp.
And to be clear is there if it does scale or when it does scale is it a similar margin business ultimately to the base business that we won't see that it will just be accretive to revenue or do you think this is a different model somehow from a profitability standpoint over the long term.
Yeah I can jump in this is Tom thanks for the question.
And it's certainly a good one I mean, we're early in terms of how we're defining the shape of the P&L specific to provision.
In the short term I mean, that's that's an accurate statement as we as we develop the supply chain as we build out our sourcing network. One of the key focuses is building nimbleness in to that that's forcing network, which would allow us to grow in scale over time and thereby.
Drive drive expansion of margins to a steady state point and so there is infrastructure. There is cost upfront around sourcing that you know as we begin to amortize over more and more units will start to scale on but the shape of the P&L will be different from triggers core business core business and that's something that we'll plan to share.
Next year as part of our annual 2022 guidance, but I think it is worth noting that it will be a different makeup than what youre seeing in triggers core business today, I think where we see value as number one in the size of the total addressable market that could be as big or bigger than triggers core business today and two that does provide for <unk>.
Some flexibility in how we think about the margin structure to ensure that we're delivering the right customer experience.
That work that we're smart about customer acquisition cost as we think about the first sale versus the fourth or the fifth.
How do we think about <unk> or pricing of the model, which I believe is at a premium compared to other product offerings in the space.
But certainly we will also be profitable over time as we continue to scale the program in the business.
And it could be fairly fairly strong and flow through as top line scales in relation to the leverage we're getting through our supplier network. The leverage we're getting through the investments, we're making in logistics and in third party.
Warehousing and fulfillment to how we think about the unfair advantage that we believe we have from a customer acquisition acquisition costs, and how that will scale and effectively provide for more value upfront versus having to start from scratch without a large community in and sort of captive audience listening and wanting to purchase the product.
So that's really how we think about it today and certainly we will follow up with more details as we head into 'twenty, two and share more guidance on the full year as well as specific specific to our thinking about provisions at that point in time.
Thanks for that and maybe back to the here and now can you just talk a little bit more about the grill business in the third quarter volumes were down I think asp's or mix was up can you just unpack where you were on a volume basis versus expectations was it a better quarter worse and how do you what was it pricing or mix that helped to offset.
Cut that or or both and maybe could you just quantify what what the moving pieces around the grill business this quarter.
Yeah. So the units were down and that's something that we had expected I'd say that unit unit volumes were better than we were originally planning earlier in the year.
We're still we're still seeing I think sell through indicators that are in line with our expectations. As we think about how the business begins to normalize from a seasonality standpoint, but a return to normal in terms of like retail ordering pattern.
Clearly there were.
Components of the pandemic that made for an interesting comp in Q3, and so as we see these things normalize really no surprises emerged from a unit volume standpoint, and really the growth did come via ASP. As you had mentioned and that's largely driven by a shift in mix, we saw a fairly sizable shift in <unk>.
Mix.
For a price point, starting with the pro 780, and up that's where all of the volume effectively shifted and so from that standpoint.
Asps grew as a result of that and Thats effectively what what drove the growth from our grill standpoint in the quarter.
Okay in the benefit therefore pricing with Communist surcharges on freight will come more in the fourth quarter. Then those were taken late third quarter and Thats writer.
Okay exactly yep. Thank you.
Our next question comes from coal Mountain <unk> from Credit Suisse Cuomo. The line is now open.
Thanks, Good evening everybody I.
I guess a couple of a couple of questions on the comments on <unk> being the GM floor.
Can you maybe just talk about what youre seeing specifically that would suggest.
Gross margins start to get better from here, obviously, there is a price increase that you mentioned.
And I'm, sorry, if I missed.
The amount of the price increase but also just in terms of what youre seeing in terms of cost of supply bottlenecks. All the other things that of course, we're observing across series of different.
Different industries on why you feel confident on this GM number.
Yeah. So I would say that number I guess to answer your first question. Yeah. We view, we view Q3 as really the four for the year.
I think that based on the price increase and the surcharge, we should see sequential improvement over Q3 from a gross margin standpoint. However, if you look at kind of a world index of container rates, where were most sensitive to some of these macro trends that we're seeing that are impacting gross margin.
You see a fairly aggressive ramp in those rates over the course of Q3, which for our business has a longer tail given when we recognize those expenses relative to when we're purchasing containers. So that's kind of number one that that's something that we'll keep continue to flow through the P&L, but I think too.
We're just seeing those rates sustain I'd say that.
If you look at kind of the current environment.
We're more index container rates peaked around 11 to $12000.
Over the last couple of weeks, we've seen those taper down to call it $9000 and so they are really sitting still at at at peak.
Peak levels, but clearly there has been an improvement in the trend over the last couple of weeks that I think is favorable and there is some indication that that will continue through the end of Q4.
Ultimately will create a slight tailwind as we head into Q1 as well. However, I think that the general consensus is that where we may see some tapering of those rates they will likely rebound or accelerate in the first half of next year. So something that we'll watch closely we clearly don't have a crystal ball, but but it's something that we think will will.
Be transitory hopefully by the end of 'twenty, two which is why we implemented these price increases which is.
Ultimately critical for our business given the fact that the rates have increased over $2000 average container rates from.
From the prior year or two and so it's a fairly dramatic increase and the price increase in and of itself should should provide for some sequential improvement over Q3, which is probably what gives us the most confidence in.
In terms of the ability to see some sequential improvement over Q3 and gross margins.
Okay, Great and then.
I know you mentioned you.
We're quite pleased with your ability to supply and fulfill I just wanted to confirm that the inventory condition. It sounds like its better but over the course of the quarter was.
Where are you out of stock was there any money left on the table.
Or were you able to kind of get by.
Yeah, we were able to get by I think we're feeling pretty good both about our own inventory position, it's certainly seasonally higher than it's normally been which we've talked about as being by design, we've deliberately leaned into inventory just given the complexities within the supply chain.
Our ability to procure or secure.
Painters and Asia to the bought the current bottlenecks that we're seeing especially at the port of L. A where there's some record number of vessels sitting out in the water. It's like 80 vessels as of today and thats been climbing over the last quarter. We're also seeing vessels late roughly.
Roughly 18 days before they're able to be in the process containers through the yard and so these are clearly bottlenecks that can complicate supply chains and make it very challenging to fulfill demand, which is why we have been strategically investing more in inventory and so number one we do feel comfortable with the level of <unk>.
Our inventory today to fill demand through through the end of the year too.
We've done a fairly good job of keeping product in stock with core retail on the web site and don't believe we have really missed any turns there.
And then three.
It's ultimately something that we'll continue to watch but at the end of the day, we feel like in channel inventory levels are in a pretty good spot as well and so I think those three things combined give us confidence through year end, it will be able to meet demand and fairly decent spot coming into the new year.
Okay, great. Thank you.
Our next question comes from Sharon Zackfia from William Blair Sharon. Please go ahead.
Hi, Good afternoon, I guess a question on the price increases what has the customer response been to the grill price increases.
I mean, so if you're talking about our retail partners I think that they were expecting it.
And ultimately they've partnered with Lyft trigger to implement those price increases and so I think we have great partnerships.
We're not the only brand raising prices right now and ultimately I believe our retailers have come to expect that I would say if you think about it through the lens of the consumer.
The main data point that we have is really coming via sell through indicators and up to this point through through October we really haven't seen any meaningful deviations that would signal.
A change or an outlier impact too to kind of run rate.
Volume performance compared to prior year based on those price increases and so that's something that we'll continue to watch and we'll clearly see more data flow through as we.
Head through November and into December, but at least quarter to date in Q4 were feeling pretty confident that the price increase didn't have a dramatic impact on on volumes.
That's really helpful and I know you mentioned the freight component I remember on the last call. There was a conversation about rolled steel is that still elevated or have you seen that rollover and I guess on the container side too is there the possibility of them looking to lock in your inbound freight for next year.
Or at some point.
Yeah. So on the first question I don't know that we've seen any any real movement in steel the last price increase that rolled through four for trigger was in Q3, and that's something that we'll watch every quarter at this point I believe they've been fairly stable and it's something that.
We'll continue to watch, but no no material.
Changes to that trend there.
On the inbound.
On the inbound side as you think about kind of fixed versus floating container rates. We typically lock in our fixed allocation every April and so that's something that we will do there is some indication.
Base based on some some industry research that we have at the momentum that we're seeing in spot rates and some of the dynamics that may take shape in 2022 may indicate higher fixed contract rates. So that's something that we'll have.
We'll approach.
Carefully and clearly there's an advantage to locking in as high a fixed allocation as possible as an example, this year one of the challenges that we're facing as you can't lock in 100%, we were able to lock in call it 50% to 60% and our partners are honored that which has been a real advantage for trager and so to the extent that we can manage more.
More allocation to fixed versus the bookings that are tied to spot and premium rates the better position that we're in.
But again, it's something that is kind of an unknown until we head into two kind of that April time frame when we're renegotiating our contract rates as well as to what extent, we can lock in fixed.
Yeah.
Okay. Thank you.
Our next question comes from Peter Benedict from Baird. Peter Your line is now open.
Alright, guys. Thank you.
First question just I know, it's all good.
Maybe size or frame the impact the price increase you think it will have on kind of <unk> revenue.
And then maybe full year 'twenty, two just to kind of isolate that impact.
And I'm curious how you guys are thinking about the fourth quarter revenue outlook here, maybe relative to the 90 days ago. It looks like you've got a lot more inventory I'm not sure how much of that is sellable inventory versus kind of on its way here, but.
Just kind of curious about.
About your view just on the fourth quarter relative to maybe where you were about 90 days ago. That's my first question.
Yeah, so on the on the price increase.
And we kind of evaluated the impact of that we think that it's probably a 150 to 250 basis points of sequential improvement.
And so that's something that will will have a larger impact on the first half of next year, just given the higher volumes that obviously, we drive in that period of time.
That's generally what we've kind of estimated to be the.
The impact of the price increases and certainly something that we can share an update on.
As we proceed through the quarter.
Look I can you repeat your second question.
Well that's helpful. And then just just how you're thinking about the fourth quarter revenue in general relative to maybe where it 90 days ago. I know you guys held the full year guidance, but you've got it looks like you've got more inventory on hand than maybe you were expecting or again the balance sheet inventory numbers are higher but I'm not sure how much of that is sellable inventory if its just.
On its way here, but just as your view of kind of the revenue opportunity in the fourth quarter changed.
Here in the last few months.
Yeah, No I think if anything Q3 performance to Q3 performance just reaffirmed our.
Our confidence in Q4, and so we effectively held the range. The same our reaffirmed guidance for full year. So no real deviations there from an from an inventory standpoint again, we're in full control of what we have I would say that more of that is sitting in our warehouse and on the water.
Then last year.
Because we have been fairly deliberate in bringing inventory in securing containers and ensuring that we're protected or building cushion into our supply chain via higher inventory levels. As I had mentioned in my comments earlier part of that is the part part of the increase in inventory is due to the fact that inventory gets <unk>.
Costs, more and Thats because of the burden of inbound freight.
That's associated with the inventory that we're purchasing today and so that number actually look bigger than it normally would just on a unit adjusted basis.
But I'd say it kind of.
Under normal sort of seasonal levels of inventory, we're probably.
Holding holding the burden component constant for inbound freight we're probably 20 days ahead of where we normally like to be from an inventory standpoint, but again, we feel really good about that position given the fact that it's.
Sort of built ahead of any potential future risks that could emerge from within the supply chain and it's all good inventory right and so at the end of the day, we're going to sell through it we don't have challenges with obsolete inventory, obviously, we're not tied to fashion trends or anything like that and so we actually have the luxury of being able to lean in.
The higher inventory balances.
In order to obviously offset some of the risks that we're seeing the supply chain and at some point in time, if we believe that we're slightly heavier on inventory and things begin to subside on the supply chain or macro front, we don't have any challenges in moving that inventory and we'll just adjust our inventory plan accordingly.
Yeah.
Okay. That's helpful. And then my next question just on the gross margin.
Any way you can maybe take a stab at sizing the sequential improvement you're expecting in the fourth quarter versus the third quarter and I understand 2022 has a lot of moving parts, including provisions, but just.
Do you think at this point there is an opportunity to call back the pivot you've seen here in 'twenty, one from a gross margin perspective.
Or is that probably is that is that a tall order at this point in Q4.
Is that your question.
Q4, just with.
Yes, Q4 was the sequential change from <unk> to <unk>, and then broadly I won't want to add to it I think there is an arbitrage.
No. It's a good question I mean, the sequential improvement wont be dramatic.
We're not going to claw back to first half levels.
But like I said on a sort of a normal or volume adjusted basis. As you look at the impact of the price increase it could be 150, 200 plus basis points of improvement.
There are other components in gross margin that we referenced such as the amortization that we acquired from meter and so there are a couple of aspects to that that if you normalize.
So a slightly improved gross margin over what we're showing in Q3 for example, the amortization that we acquired a 100 basis points of margin and so theres a little bit of noise in there, but I'd say sequentially.
The price increase should add 100.
150 to 200 basis points of improvement.
Got it okay. Thanks, so much.
Got it.
Our next question comes from Peter Keith from Piper Sandler your.
Your line is now open.
Yeah. Thanks, so much guys.
You had talked earlier in the script around your market sell strategy hitting 14 markets.
I was curious if you could just unpack that a little bit with some of the specific marketing.
Attempts that you've made and then maybe even what are the some of the specific markets that you've gone after.
Yes so.
Happy to take that question.
Let me start by saying the.
The intent of the market is soft strategy is to align all of our discretionary and incremental sales and marketing resources.
Narrow geographies and.
And so.
There is a meaningful investment in top of funnel media.
<unk> TV advanced television digital.
Digital investments there.
There is incremental investment in the market in terms of boots on the ground. We are very we have a lot of energy around activation with account managers salespeople at a local level, we think that drives meaningful.
Merchandising improvements and <unk>.
Education, and retail we spend a lot of time training and helping retail associates understand the brand how it works how to sell it.
And so cross was 14 markets.
We really saw meaningful lift and there are a number of components.
In addition.
Radio.
Sports radio local talk radio.
And then the investments around merchandising fixtures in.
That we make at the point of sale. So the intent is to be very narrowly focused into.
As opposed to spreading the dollars across a broad geography to really have a number of touch points that we think are required.
Part of the consideration phase of buying a trader.
Those 14 markets range in size.
And they range in geographic location Theres some.
Inner Mountain region, Utah's, one Colorado has been one Oregon.
Portland, I should say, we organized around DMA.
And we've done some smaller markets markets like Spokane for example.
Our expectation heading into next year is that we will edit a couple of those markets.
And simply based on the return on spend that we believe we're getting and we will add some additional markets.
I would expect that we will keep and continue to invest in 12 of the 14 markets.
And that we will add.
An additional.
Six or seven markets will focus.
And the markets will focus in the southeast we've got three markets that will focus on their traditional outdoor cooking markets that are <unk>.
Markedly our penetration is still very low.
But where we have a customer base, we're winning and we will likely add a market.
In the Midwest.
And rust belt region.
And again the intent is to add these market slowly over time and to continue to invest in and maintain the markets that we think are.
Are performing well.
Okay, Great that's excellent.
Excellent summary.
And then maybe to follow up a little bit but at the very end of the closing or the opening remarks prepared remarks, you were talking about 2022 will be an important investment year I don't know.
That's directly with some of the early reads on trigger provisions.
Ben any.
Change in recent months, you want to ramp up the investments.
Drive future growth.
No I wouldn't say, there's any change from steady state I mean, 2021 was a meaningful investment year.
The investment that we made in provisions was very significant.
And it has started to generate some revenue not profit yet, but we'll manage that carefully we will certainly manage.
Any any of the losses associated with it as tightly as we're able to.
But I don't believe that.
There will be a change in investment strategy.
We believe in investing in innovation investing in brand.
And that.
There's a long tail on both of these investments and of course any of the infrastructure that goes along with it to make our business run.
More efficiently and so you won't see it.
Any meaningful change in terms of the types or level of investments that we make in the business next.
Next year.
Okay. Thanks, so much and good luck with the holiday season.
Thank you.
Our final question today comes from Joe Feldman from Telsey Advisory Group. Your line is now open.
Yeah, Hey, guys. Thanks for taking my questions just two quick ones.
With regard to the freight pressure that youre seeing and Tom I think you mentioned it was $25 million to $30 million of headwind you're expecting this year.
Can you remind us how many months that really this work because it seems like it's more of like a second half thing so I'm wondering.
I'm just trying to think about how we should think about annualizing that next year or does the pressure last longer next year, we're hearing that from some companies that it could last.
A bit longer so that's what I was trying to.
Think about it.
From that standpoint like on a monthly.
Accruals so to speak.
Right good question.
I mean, we've seen the really we started to see inbound freight rate change.
Change course back in Q4 of last year.
So theres been sort of a steady increase in inbound freight rates.
Through the first half of this year and then if you look at this kind of world index of container rate they really accelerated in the back half kind of starting in Q3, I mean fairly dramatically and thats kind of really what surprised us as you know we were seeing.
Our rates that we're kind of double what they were last year, maybe slightly higher going from call. It an average container rate of 2000 and $3000 upwards of you know.
<unk> $5000.
And then they really took off in Q3 and it really sustained at those levels and so you've seen these rates go from call. It four to $5000 to $11 $12 $1000 on average with certain containers going for $25000 plus and so it's really.
Definitely back weighted in the year and depending on where we see these rates.
Move or sort of normalize in 2022 will dictate to what extent, we feel that burden.
And so as you think about the $25 million to $30 million impact that is largely weighted towards the back half of the year, which on an annualized basis. If you sort of extrapolate that into 2022, if if these rates sustain at sort of Q3 Q4 levels and that number could look bigger than the $25 million to $30 million now.
Our price increase will offset it plus our freight surcharge will offset a component of that and to the extent that rate paper and maybe they don't go back to four to $5000, but theyre better than kind of what we're seeing today.
That will show some some improvement compared to the back half of this year, but hard to say and I think that we share that sentiment with other brands just.
Just based on what we what we're reading and kind of there are all kind of on the on the kind of boots on the ground Reed.
Don't see a catalyst that would shift to this dynamic meaningfully into a tailwind in 2022 and something that so something that we're watching and preparing for accordingly.
I would just add that.
The good news for US it is a challenging moment in terms of the transportation cost, but it gave us the ability to raise price not once but twice.
We like how our consumers are responding to that.
And we believe like most like like most brands that these.
These meaningfully increased levels of transportation costs are transitory.
And when they do mitigate when they come back down to more normalized levels, whatever that may be and whenever that may be we will be a net beneficiary.
A flow through perspective.
And I don't think that will be the case with all brands, but.
We have a strong brand and our consumer has responded well to a fairly meaningful.
Fairly meaningful increase.
Got it that's really helpful. Thanks for clarifying that for me and then the last one maybe a quick one.
No that grill units were down year over year, how do they compare to 2019, though the third quarter, presumably they were up pretty nicely much like the revenue number was.
Or am I mistaken.
No they were yep that's right.
Okay.
Got it.
At least not yet.
<unk>.
Standpoint, yet.
On the two year stack.
Okay.
That's great.
We have no further questions I'll now hand back to the management team for any closing remarks.
Look we appreciate the thoughtful questions.
It's.
It's been a unique moment in time for this brand and I would say that.
We feel really good about how the brand the businesses position.
We are investing in areas that we believe are consumers care about.
We are taking share.
And we are doing it in an environment that that's been unprecedented and.
To grow over the third quarter of 2020, we think is remarkable.
It was a year where sell through was robust.
And when inventory levels were depleted and so there was a lot of channel load in there was low seasonality.
So we like how we're positioned we spend our time obsessing over the experience that a consumer has and we believe long term that's a winning formula anything that we can do to service our consumer we're doing.
And anything that we can do to mitigate some of these challenging components of supply chain, we are doing as well and I'm very proud of the team for how they have responded to a difficult environment long term I think it makes us better and we will always look to the future with our consumer.
And very strong positioning in mind, and we feel good about where we are from that perspective. So I. Appreciate the question. Thanks for the interest and we look forward to staying connected.
In over the coming quarters.
This concludes today's call you may now disconnect your lines and we thank you for joining.
Uh huh.
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Yes.
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