Q4 2021 Traeger Inc Earnings Call
Yes.
Thank you for joining and welcome to the trade desk fourth quarter and full year 2021 earnings conference call.
At this time all participants are in a listen only mode. There.
There will be a question and answer session.
At the end please press star one on your telephone keypad to register a question.
I would now like to turn the Kuneva G Magee Vice President of Investor Relations. Sir. Please go ahead.
Good afternoon, everyone. Thank you for joining triggers call to discuss its fourth quarter and full year 2021 results, which were released this afternoon and can be found on our website at investors that trigger dotcom.
Nick back as Vice President of Investor Relations at trigger with me on the call today are Jeremy address Chief Executive Officer, and Don Basile, Our Chief Financial Officer before we get started I want to remind everyone that management's remarks on this call may contain forward looking statements that are based on current expectations, but are subject to substantial risks and uncertain.
That could cause actual results to differ materially from those expressed or implied herein.
We encourage you to review our SEC filings for a discussion of these factors and uncertainties.
But there are also available on the Investor relations portion of our website.
You should not take 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, which we believe are useful supplemental measures. The most comparable GAAP financial measures and reconciliations of the non-GAAP measures contained herein such GAAP measures are included in our earnings release, which is available on the Investor relations portion of our website at investors that figure dotcom.
This call will also include estimates regarding market and industry data, we prepared based on managements knowledge and experience in the markets in which we operate together with information obtained from various sources, including publicly available information released by independent industry analysts and third party sources as well as data from our internal research.
Now I would like to turn the call over to Jeremy Andrus, Chief Executive officer of trigger.
Thank you Nick Thank you for joining us for our fourth quarter earnings call.
Today, I will discuss highlights from our full year and quarterly results and share our progress in executing our long term growth strategies I will then turn the call over to Tom to discuss details on our fourth quarter financial performance and to provide an outlet for fiscal 2022.
2021 was a pivotal year for trigger and we are pleased to have kept it off with a strong fourth quarter performance. We reached several milestones during the year and I am exceptionally proud of our team for driving the company to the next level as we continue to transform the way people Cook at home.
An important milestone in the history of trigger was our successful IPO in July 2021.
We also delivered record sales in 2021 and grew the topline by 44% on top of 50% growth in 2020 with grill revenues up.
85% on a two year stack basis, we.
We finished the year with strong momentum and grew fourth quarter sales by 31% exceeding the high end of our sales guidance for the year.
This growth came despite the significant challenges we faced in the global supply chain.
We estimate that in 2021, we grew our sales faster than the category and our market share at the end of the year increased by more than 50%.
Relative to 2018.
We also believe we are effectively increasing the grill industries total addressable market is.
Trade risk premium innovation of the category continues to drive industry Asp's. Furthermore, in 2020 , one we expanded our offering by launching our DTC business concept, Craig your provisions and by acquiring meter a highly innovative player in the wireless smart thermometer category.
We believe these new business lines will enhance our relationship with our existing customer installed base and drive incremental lifetime value and increased engagement beyond our core grill and consumables business.
Looking beyond the incredible progress we made in 2021 I remain as excited as ever about the future of trager.
We are still in the early stages of growth and we've just scratched the surface in terms of our plans to penetrate the global outdoor cooking market.
Before Dan discusses our fourth quarter results and our outlook for 2022 I want to spend some time reviewing our progress on our key strategic initiatives.
We continue to drive towards our long term objectives, our growth strategy remains centered around four strategic pillars I will briefly touch on each of these pillars.
Our first strategic growth pillar is to accelerate brand awareness and penetration in the United States, We believe driving penetration the U S. With an estimated Tam of 75 million grill owning households is our largest growth opportunity. We ended 2021 with an installed base of $2.
5 million drills up from $2 million in 2020, or a three 5% household penetration in the U S implies that we have a long runway ahead of us as evidenced by the mid teens penetration rates, we have achieved in some of our heritage markets.
And what's more in 2020 , one growth continued to be strong and our most penetrated markets, indicating that we haven't yet come close to hitting the ceiling in these markets the momentum behind the Drager brand is evidenced by the growth in unaided awareness, which increased meaningfully to 13%.
In 2021 up from 11% in 2020 and 7% in 2019.
Our increasing share has been driven by our significant brand building efforts with a large emphasis on social.
Our top of funnel efforts are working in 2021, we added 138000, Instagram followers and 67000, Facebook followers, an increase of 14% and 16% respectively.
Yeah more than 1 million people, our Instagram follower base is the largest in the outdoor cooking sector.
Outpaces, our largest competitor by two and a half times <unk>.
Engagement on our social channels remains very healthy in the fourth quarter trigger had its most successful Thanksgiving campaign and brand history, which resulted in 7 million video views more than double Thanksgiving 2020, and a mid teens percentage increase in user generated content submissions.
Our market is salt strategy continued to drive strong results and legitimize our view of material upside opportunity awareness and market growth.
Despite pulling back on incremental marketing spend as we entered a seasonally slower period during the fourth quarter, we continued to see awareness and demand in our salt markets well in excess of the company average and we were pleased with the lift in sales we saw in the quarter relative to control markets.
In 2022, we intend to expand our market is solid program to additional geographies, including eastward expansion to markets in the Midwest and southeast, where we see tremendous upside opportunity and awareness of the trader brand.
Our efforts to increase awareness are bearing fruit as our most important retail partners continue to allocate more floor space to the Drager brand trigger continues to focus on driving productivity in the grilling category at retail and we are not only selling more skus to our largest retailers, but our partners are in the best.
Alongside us and premium merchandising of our brand for example at the home depot, we are materially increasing our SKU count across 350 doors in 2022.
These doors will have a more expansive merchandising assortment, which historically has driven twice of productivity versus home depot doors with a more limited assortment. Furthermore, we are quadrupling the number of home depot doors.
With high in fixed stream prominently displaying the trigger assortment any trigger island.
These premium doors are significantly more productive than average with materially higher conversion any better brand presence.
Our retail partnerships continue to strength and we have significant runway in front of us to expand our penetration. Moreover, we are also adding new channels of distribution.
We recently launched at best buy in the fourth quarter and are encouraged by early results.
Our next growth pillar is to disrupt outdoor cooking through game changing product innovation.
Innovation is in our DNA and we have a demonstrated track record of being too.
Newly bringing innovation to the market.
We expect that 2022 will be an inflection point in our innovation cycle as next week, we will be launching a new grill platform, which we believe will be one of the most important launches in the company's 35 year history.
We are extremely excited about this new grill lunch is it truly represents the innovation leadership a trigger.
This new Grill line incorporates attributes from years of investment into consumer research and customer feedback to put it simply we listened to what our customer wants from a trigger and we are delivering.
Our confidence in this strategy is reflected in the fact that our consumer replaces their traeger grill at a 20% faster rate than the overall grill industry average.
We believe this is largely driven by our history of innovating the grill category and continually improving the consumer experience, thus setting the company up well for a strong multi year replacement cycle.
It's important to note that this launch will be a driver of innovation and newness in our grill assortment for several years not just 2022.
As in the past Trager strategy is to launch powerful innovations with a select number of premium Skus initially into Cascade New features through the rest of the assortment over the next few years.
In the fourth quarter, we launched trager provisions and activated Influencers and social media as well as email campaigns to drive awareness, we continue to be optimistic around the long term growth potential for trigger provisions and we will continue to refine the offering as we move through 2022.
We aim to grow our provisions business in a thoughtful manner focusing on protecting the consumer experience and the unit economics before scaling and investing into the business more aggressively.
We are also driving innovation in the connected cooking space through our meter acquisition much like trager meter is a disruptive and premium player that is using technology to enhance both the outdoor and indoor cooking experience.
Or has seen strong growth since our acquisition and this growth will continue in 2022, as we expand distribution into someone's triggers best retailer doors.
Furthermore, in 2022 are new Grill line will incorporate elements of meters technology into the trigger app and ecosystem.
The third pillar of our growth strategy is to drive recurring revenue sewer consumables business.
Based on continued success, we are increasing distribution of our consumables offering in the grocery channel. Our research shows that the trade Rahood watch consumables available where they shop every week not just word grills are sold in.
In 2021, we've doubled the number of grocery doors, where triggers sauces and rubs or sold.
We are excited to share their distribution into the grocery channel is planned to increase this year driven by the launch it sources and rubs and Kroger in March of 2022.
We are extremely excited to partner with Kroger and see tremendous opportunity to grow our consumables penetration and drive brand awareness beyond our existing retail footprint.
As evidenced by this expansion in consumables distribution traders innovation extends across all our product categories not just grills, we launched a number of successful consumables in the fourth quarter.
These include two premium priced limited edition pellet offerings in the fall followed by our launch of two more this quarter a bold blend any brisket blend.
<unk> also entered into the hot sauce category with trader original Hot sauce, and launched two new sources show me, the honey and liquid gold plus two new rubs anything Rob and perfect pork rub.
Our fourth growth pillar is to expand the trigger brand globally.
21 was a banner year for our international business, which made up more than 10% of revenues for the year we.
We see a large opportunity to use the playbook that has been so successful in the U S to capture share abroad.
In the fourth quarter, our international business continued its strong growth and more than doubled year over year.
Our Canadian business, which is our largest market outside the U S is showing extremely strong momentum with sales more than tripling versus prior year in the fourth quarter.
Our European business also continued to see strong growth in the fourth quarter and 2022, we plan to continue driving awareness and penetration of the trigger brand.
Ross International markets through targeted marketing and localized social campaigns.
We remain highly enthusiastic about the opportunity to grow trager across the globe.
While I'm very confident in our long term prospects and our ability to execute on the strategic growth pillars.
We are more cautious and how we are guiding to full year due to emerging macro headwinds facing the consumer.
These include higher inflation, the conflict in Ukraine and asset price volatility.
Headwinds are coming at a time when our business is comparing to a two year period that saw accelerated demand, which benefited from government stimulus and COVID-19 restrictions. Despite the near term headwinds our three year revenue CAGR remains very healthy and significantly above industry trends.
I'd like to now discuss a topic that is impacting many companies global supply chain and inflationary pressures.
As we discussed during last quarter's call, we faced significant supply chain challenges and inflationary pressures related to our supply chain in the second half of 2021, I am proud of how well our team has navigated these unprecedented challenges.
We have continued to prioritize delivery of product to ensure that we can adequately fulfill strong demand by increasing production and by warehousing product in Asia.
It's just been a winning strategy as evidenced not only by our fourth quarter top line growth, but also by the record level of on time in full shipments we experienced during the quarter.
As Don will discuss we are not building in any improvement in the supply chain environment or related cost pressures in 2022 into our outlook at the same time, we're not standing still rather we're focusing on driving forward our key long term growth strategies, while simultaneously.
Managing the business for the new near term reality, we are actively implementing cost mitigation strategies to help bolster our short and medium term gross margin profile.
These strategies include price increases, which are most immediate mitigation tool as well as manufacturing logistics warehousing and product design efficiencies, which will benefit in margins over the medium to long term, we plan to open our new Mexico facility for mass production at the end of this year.
<unk> and are evaluating long term opportunities to bring more of our manufacturing closer to our core market in the U S.
Whether our product team is bringing innovation to our production model with a focus on creating game changing product more efficiently.
Organization is hyper focused on identifying and executing on gross margin enhancing initiatives.
Additionally, in the face of increased costs in an uncertain macro environment. We are aggressively managing our cost structure, we are strategically reducing and deferring certain nonessential expenses and are thoughtfully re prioritizing near term SG&A to manage the P&L we.
We believe this discipline is prudent given the environment. It is critical to note that we are focused on protecting the core drivers of our brands held and are not compromising in any way our customer experience or product innovation engine.
Stepping back we had several major milestones in 2021 and ended the year with strong growth in the fourth quarter, allowing us to exceed our full year revenue and EBITDA guidance.
We are making significant progress on our key strategic growth pillars that remain in the early stages of achieving our potential there.
Despite near term challenges I am extremely bullish on our business and our ability to capitalize on our tremendous long term growth opportunity with that I'll turn the call over to them.
Thanks, Jeremy and good afternoon, everyone. As Jeremy noted we are pleased with our performance in the fourth quarter and remain confident in our long term growth opportunity for trigger.
As an organization we are focused on driving towards our long term goals, while also navigating a highly fluid near term environment.
I will start by reviewing our fourth quarter results and then we'll discuss our 2022 outlook as well as provide an update on our first quarter trends.
Fourth quarter revenues increased 31%.
$175 million, driven primarily by growth in grills and accessories.
Sales revenue was up 9% to $101 million following a 70% increase in the fourth quarter last year.
It was attributable to a higher average selling price driven by price increases taken in the second half of 2021, partially offset by slightly lower unit volumes.
Fourth quarter unit volumes were impacted by the exit of an unprofitable distribution channel and would have been up low double digits. Excluding prior year sales to this channel.
Consumables revenues declined 19% to $26 million compared to the fourth quarter of last year, reflecting a normalization of seasonal ordering patterns against a very strong fourth quarter 2020, when our consumables revenue was up 121%.
Finally, accessories revenues increased 425% driven by incremental revenue from the acquisition of meter and strong growth in trigger accessories.
Looking at performance by market, we continued to see strong momentum in the U S as well as exceptional growth in Canada and rest of world.
We are in the early stages of growth abroad, and we remain highly optimistic about the opportunity to grill globally.
Gross profit for the fourth quarter increased to $65 million.
From $51 million last year.
Gross profit margin was 37, 4% down 80 basis points to last year.
As we have discussed previously inbound freight rates spiked to unprecedented levels in the second half of 2021, we continue to be our largest year over year margin headwind in the fourth quarter.
Higher inbound freight costs negatively impacted gross profit by over 550 basis points in the fourth quarter.
Amortization of intangible assets related to the meter acquisition and increased warehousing expense driven by investments in additional capacity. We're also dilutive to margin.
Offsetting these pressures was margin favorability of 380 basis points, driven by our pricing actions and grill mix.
Other positive drivers of gross margin include lower outbound freight driven by the exited at a higher cost sales channel a higher mix of customer orders fulfilled via our direct import program.
Favorability in Wi Fi connectivity cost per grill.
Due to a onetime accrual true up.
Sales and marketing expenses were $39 million compared to $29 million in the fourth quarter of last year.
The increase was primarily driven by advertising costs related to meter, which is not a component of the 2020 comparable period.
The increase was also driven by higher equity based compensation expense of $3 million due to the restricted stock units issued under the trigger 2021 incentive award plan.
As well as higher personnel related expenses associated with an increase in head count in our marketing customer experience and sales functions.
General and administrative expenses were $44 million compared to $15 million in the fourth quarter of last year.
The increase in general and administrative expenses was driven primarily by higher equity based compensation expense of $16 million due to the restricted stock units issued under the trigger of 2021 incentive award plan higher personnel related expenses increased professional service fees related to non routine costs, where our trigger provisions platform.
And non routine legal expenses.
As a result of these factors net loss for the fourth quarter was $34 million as compared to a net loss of $3 million in the fourth quarter of last year.
Net loss per diluted share was 29%.
Compared to three in the fourth quarter of last year.
Net income for the quarter was $4 million or <unk> <unk> per diluted share as compared to adjusted net income of $4 million or <unk> <unk> per diluted share in the same period last year.
Adjusted EBITDA was $14 million in the fourth quarter as compared to $14 million in the same period last year.
Adjusted EBITDA for fiscal year, 2021 was $109 million above the high end of our prior guidance range of $103 million to $108 million.
Now turning to the balance sheet at the end of the fourth quarter cash and cash equivalents totaled $17 million compared to $12 million at the end of the previous fiscal year.
We ended the year with $379 million of long term debt.
Additionally, at the end of the year the company had drawn down $9 million on its revolving credit facility.
$41 million under its receivables financing agreement.
Resulting in total net debt of $413 million net leverage ratio of three eight.
Inventory at the end of the fourth quarter was $145 million.
Compared to $69 million at the end of the previous fiscal year.
The increase in inventory was driven by three factors.
First we have made a deliberate decision to lean into higher inventory levels to ensure adequate supply for demand due to supply chain constraints.
Secondly, the cost of inventory has increased due to certain macro pressures I referenced earlier.
Largely driven by higher inbound transportation expense and higher input costs.
Lastly, approximately $12 million of the inventory increase is related to meter which was not in the inventory base in 2020.
We remain confident that we have the right inventory balance to meet expected demand and we continue to invest into higher levels of safety stock in response to persistent supply chain challenges.
Turning to our guidance for fiscal year 2022.
For the year, we expect revenues of $800 million to $850 million, implying a year over year increase of 2% to 8%.
We expect adjusted EBITDA of 70 million to $80 million.
Let me provide additional color around our operating assumptions.
In terms of sales we are guiding to topline growth that is below our historical growth rate.
That implies growth that is well in excess of our long term targets on a multiyear basis.
There are two central factors that are influencing our 2022 sales guidance.
Firstly, we.
We are comparing against a two year period of extremely strong growth and therefore expect some normalization in our multi year growth rate.
This is reflected both in sell through which benefited from government stimulus and accelerated materially in the first half of 2021 as well as sell in which outpaced sell through in the first half of 2021 as retailers restock low channel inventories. Secondly, we are taking a more cautious approach relative to consumer behavior and our 2020.
Two planning given emerging pressures on consumer confidence.
These include broad based inflationary pressures and growing geopolitical risks.
Looking at current trends, we have seen a deceleration in sell through at retail over the last several weeks coinciding with these growing pressures on the consumer and are assuming a continuation of these trends in our 2022 revenue guidance.
These dynamics will disproportionately impact first quarter revenue growth, which was our strongest growth quarter last year.
We expect that quarterly revenue seasonality after the first quarter in 2022 will look similar to 2019.
With lower seasonality in Q2 versus 2019 and higher seasonality in Q4, which is meters largest quarter.
Specifically for grills, the midpoint of our full year guidance assumes that grill revenues in the first half of 2022 are down double digits as we lap the strong selling experienced in the first half of 2021.
We expect sequential improvement in grill revenue growth in the back half of the year relative to the first half however.
However, we are assuming negative grill revenue growth for the full year.
We know that our grill business has delivered strong multiyear growth and even with this decline 2020 to grill revenues are expected to have grown at a three year CAGR in the low to mid 20% range.
In terms of gross margin, we are expecting continued pressure versus 2021 full year growth rate in our modeling a full year gross margin range of 34% to 35%.
In order of magnitude, we expect the annualized <unk> of higher inbound freight rates and increased input cost would be the largest drags on our gross margin.
We expect these pressures to be partially offset by pricing actions taken in the second half of 2021 and the first quarter of 2022.
From a pacing perspective, we expect gross margin in the first half of 2022 to be higher than our full year rate.
I'd like to spend a moment, putting inbound freight costs in that perspective.
This is the largest driver of gross margin decline relative to our 2020 gross margin rate of 43, 1%.
Compared to pre pandemic levels container cost have increased by a factor of three or four times.
And we are seeing increases in excess of $10000 per container.
Having shipped over 6000 containers in 2021, the cost of inbound transportation materially impacted both gross margin and EBITDA.
We expect that inbound container rates will track above $10000 through 2022, which will continue to pressure gross margin.
In terms of SG&A, we are tightly managing expenses to help offset the continued margin headwinds will continue to invest in the core growth engine, but will delay other investments as we navigate.
A highly fluid macro environment.
Note that SG&A in the first half of 2022, we'll be comparing to the period before meter was in our expense base.
While we typically do not give quarterly projections, we are providing first quarter guidance as we are 11 weeks into the quarter.
We're expecting first quarter revenues to be between $208 million and $212 million, implying a decline of between 10 and 12% with grill revenue is expected to decline in the low to mid 20% range offset by materially higher accessories revenue driven by a meter.
We expect first quarter gross margins decline sequentially compared to the fourth quarter's rate and expect EBITDA in the range of $22 million to $24 million.
Looking beyond 2022, I want to touch on some of the medium to long term gross margin drivers we have in place.
Firstly prices a key lever that we will continue to evaluate to manage margins.
We implemented two price increases in the back half of last year and raised price again on certain grill and accessories and on pellets in early 2022.
Secondly, we're thinking transformational around design and production.
We're working together to drive changes in design manufacturing and supply chain processes, which we believe will result in higher product margins and lower costs.
Further we will look to optimize the assortment over the medium to long term.
<unk> products that are accretive to our overall margin profile.
Overall, we continue to feel extremely optimistic about triggers long term growth path as we continue to disrupt the outdoor cooking industry with new product innovation.
Traeger Hood increased brand awareness and penetration and expand trade or abroad.
And with that we'll open the call to questions operator.
Thank you if.
If you would like to ask a question. Please press star one on your telephone keypad. When is your time speech you kind of ask one question and one follow up before having to go back into the question Keith.
We have a first question on the phone lines from.
Randy <unk> of Jefferies. Randy Your line is open.
Yes, Thanks a lot.
I guess this question is more for you.
Can you give us some added perspective any color on just how much.
Sell through has.
Slowed.
And then just how much that has caused sell into change.
Just curious there and then I think last quarter in the third quarter. There was this trend line, where you were seeing asps up through mix shift. So is the mix shift now changing to where the consumers becoming.
More price sensitive.
That's it for me to get a little bit more guarded on the macro or I'm, just trying to get a sense of how much of this revenue coffee is a function of.
A true change in how the consumer is buying it becoming maybe more price sensitive.
Rather than maybe there are some COVID-19 demand hangover in the.
In the outlook or what have you. So just curious there. Thanks.
Yeah definitely.
Yeah on the first question with regards to the sell through.
Well you know, how we model demand internally as we sort of fit the model between sell in and sell through trends and we forecast sell through and we've been watching this obsessive Lee.
Since the beginning of time.
Jeremy I started but but certainly as we implemented price increases starting in in late Q3, and then a second price increase in Q4, and then subsequently a price increase in early Q1 of this year.
And I would say two things one.
Really no outliers.
We implemented price I would suggest that it was potentially the wrong decision and we understood that there were some tradeoffs between volume and price.
You know that in effect is helping sort of offset the cost pressures and so right decision for sure.
And largely the sell through trends, we're tracking in line with our forecasted expectations until about three weeks ago and in which case, we were surprised to see a fairly substantial deviation from our our sell in or sell through forecast and so we're sort of.
Reacting to that without recognizing that it's based on two data points with a third positive data point based on the latest sell through trend and so it's something that we're trying to get a little bit smarter on but believe that it's important to react based on limited points of data to ensure that we can stay nimble throughout the course of the year.
In the event that the sell through trends continue to decline beyond our expectations and in conjunction with that we actually believe that over the last three weeks. These trends coincide with some of the macro factors that are probably placing additional pressure on consumers in terms of.
Channel mix I'd say two things I think the first is that when we raised price about $1000 I think we validated a fair amount of any elasticity at those price points I think what we've learned and I think this is something that's accelerating and our sell through trends is that theres, a little bit more price sensitivity below.
$1000 and that's something that we're sort of thinking through as as the year progresses in the event that you know we want to pivot or make a different decision. There. So that's something that we'll well that we'll continue to evaluate but there are multiple factors baked into these trends that we believe require patience, but certainly.
Prudence as we manage our P&L and potentially reshape it based on sort of new these new norms, and then 2022 and I think what gives us comfort is that although we recognize there was a pandemic pull forward.
If you look at kind of a two and a three year stack on on sell through trends. They are incredibly strong right and so we're dealing with a very challenging Q1 comp from a sell through standpoint, but there hasn't been sort of an ela and increase to the watermark at which this business can perform and we believe sort of reset the bar.
At a higher level and obviously that doesn't change. The fact that Q1 comps will be challenging regardless and we anticipated some of that they just they're just accelerating and so it's something that we'll continue to watch, but that's sort of the dynamic that that play today.
Got it and then just last question is on the the down year over year anticipated EBITDA dollar guide is that effectively.
That all free.
Kind of it increases factoring into that number being a lot lower just just just wanted to just unpack that a little bit more obviously, there's lower sales kind of expectation, but I'm trying to I'm sure. There's a margin compression angle. So I'm just curious I mean, what what that is.
Yeah. There definitely is so you know how do we think about gross margin for full year, we're sort of pegging a range at between 34 and 35%.
It's really a tale of two halves right I think when you look back to 2020 182 is when we really felt and were somewhat surprised by the dramatic increase in inbound transportation costs that clearly is annualizing for full year 2022, which is placing.
Extra sort of pressure on the first half of this year and that certainly is one of the larger factors I'd say the second factor that.
We're sort of anticipating which isn't fully reflected in what we're seeing in Q1 per se, but just based on where oil prices have gone and the fact that we have seen a steady increases in and outbound transportation costs.
We're anticipating in our model that that becomes a somewhat more substantial headwind in 2022. So there are those are two factors that we're watching closely clearly there are other components to the gross margin pressure as we annualize.
Some of the input costs or commodity costs tied to our grill, specifically, where we felt more of that in the back half of last year, which is now annualizing. This year and so Fortunately the price offset is a nice addition to them.
Two how we sort of manage through this period of volatility, but there are.
<unk> persisting on the transportation side that we don't anticipate to alleviate this year and in fact.
There are signals that they may increase relative to what we were seeing last year, especially on the fixed side of contracts.
Understood. Thank you so much.
Thank you Randy we now have the next question on the phone lines from.
Peter Benedict of Baird, Sir Peter Please go ahead.
Yeah.
Hey, guys. Thanks, Thanks for your question.
So I guess two questions one.
I'm curious if you have any stats to share around grill usage trends, maybe what you saw last year, how that's compared as that kind of topped out.
Is it continuing to improve is it slowing.
And our read on consumables from that and then can you give us more color what channel you exited I think Dom you had mentioned that as well as a factor in <unk>. That's my first question.
Yeah definitely yes, so on grill usage, yeah, we haven't we haven't measured any any any trends that are contrary to what we've seen.
Well, we measured over the last you know call. It 18 to 24 months I think the trends are still positive consumers continue to engage with the product and I think for <unk>.
Based on the Iot connected grill that we can sort of measure usage by.
It's positive and so we're certainly happy with that there really hasn't been you know do you think about these macro dynamics, they don't necessarily impact how consumers engage with our product post purchase on the consumer consumable side, we had been anticipating some normalization of attach.
As you look at 19 compared to 20, and then certainly the overhang in 'twenty one.
Was definitely a spike in in and attach and we're seeing that in normalized somewhat.
As we kind of track through the back half of 'twenty, one and anticipate that that may sort of find.
The right normal in 2022, and we never believed that the 2020 levels, we're going to persist. So no no red flags there, we're happy with how our consumables business is tracking the attachment rate.
As well as just really use it generally across our connected products I would just add one other data point that I think is relevant Super Bowl of this year was our largest.
Cookie.
Brand engagement day ever.
Connected cooks were up 55% year over year from the prior year Super Bowl so.
I shared some of the brand engagement statistics.
On social we are seeing it validated from the from a cookie behavior perspective as well.
And then can you repeat the second question.
Yeah.
Yes, I was just curious about it and I'll, let you know.
The unprofitable channel Oh, Yeah, sorry, yeah, Yeah, we won't give specifics on the channel it's been a great channel for the for the brand for a number of years.
Unfortunately, the way the program is configured it just doesn't work in this macro environment from a transportation cost.
Cost standpoint, and so it became unprofitable and we made a decision to shutter that that that business and so when you normalize for for that component both on a full year basis as well as in Q4, specifically.
There's actually a fairly meaningful return to growth on the trailer side of the business both from a unit and a revenue standpoint.
It was definitely the right decision, especially in this environment, we don't want to operate in channels that are dragging profitability and are operating at a loss and that was the genesis of the decision to pull a yeah I would just add it was it was not a core channel to our business and it was not a growing channel yep.
Okay, great. Thanks, guys.
Thank you.
We now have another question from Kim Ann.
<unk> of BMO capital market. Please go ahead your line.
Great. Thanks, a lot guys.
A quick few quick ones for me. So you guys have a view the latest datapoint sell through do you have a view of whether that was trigger or industry. So would love to hear that the second thing I think you mentioned pricing on the pellets.
What are you what are you seeing on that so post that tests or that price and then just a little higher level. Jeremy your comments about this coming year. So I'm really exciting qualitatively. So maybe as you think about within that guidance and the conservativism is appreciate it. So as you think about that Dom anybody think about units versus price, how youre thinking about that built into your grill revenue.
Thank you.
Yes.
Yeah. So let me let me let me let me hit the first one.
We do track market share and.
We will we'll know more when we see the first quarter market share I can say a couple of things quantitatively what.
What we hear from our retail partners is that the category is down.
And that triggers down less than the category. So our expectation is that we will continue to take share.
As we have done.
Historically.
The other piece I would add.
Again this is anecdotal I have been too.
Two tradeshows.
Over the last three weeks and we've spoken to hundreds of retail partners.
<unk>.
Shop owners shop managers and the brand energy is as strong as it's ever been so our belief is that the position is is exactly what it has been growing and then we will fare better than the category in 2022.
Yeah and on Grill Asps.
I mean, when we made the decision to raise price.
There was clearly.
That decision was clearly made in an effort to obviously manage the higher costs.
To sell our product and we understood that that would come at the cost of some unit volume and so that was definitely deliberate as you fast forward to 2022, we will look at kind of sub $1000 and determine you know as we better understand data if we need to make adjustments.
Two our entry price point.
Fair enough and certainly not something we're going to do in the immediate term, but something that we will look at kind of well I should say short term, but kind of we'll look at medium to long term.
And from an ASP standpoint, we are seeing meaningful growth in ASP for Grilles in 2020, you, which is certainly driven by.
The price increases that we made as well as the introduction of new innovations, which from a channel mix standpoint will also elevate asps.
Yeah, and I would just add our expectation is that units will be up double digits on a three year CAGR in 2020 to be.
Based on the guidance that we've shared.
Great. Thanks, Don did I Miss hear did you talked about taking pricing on Howard well.
Oh, Yes, we did take price on pellets yet.
Yep.
And I.
I think.
Yeah, Yeah, no yeah, no no no no signals that it's had really any impact whatsoever I think that.
That continues to be a great sort of embedded revenue stream for the brand I think we've we have permission to take price there in part because I think the offering as we think about price pack architecture and sort of premium as Asian of the experience.
With art with our pellets the quality the packaging.
We invest in that product and therefore, we believe that we have some permission to take price I think when you look at kind of an average or a blended average price increase.
For the 2022 period, it's probably like $1 50 to $2 and that really Hasnt impacted unit volumes based on what we can measure.
Great. Thanks, a lot guys best of luck for the year and looking forward to seeing the next week.
I mean.
Okay.
The next question comes from John Glass with Morgan Stanley . Please go ahead, when you're ready John .
Thank you good afternoon.
First Jeremy and then new Grill that Youre launching next week can you maybe provide what the ESP is like when does that relative to your baseline high end grills and how meaningful is that in your forecast the sales forecast for 'twenty. Two is that a meaningful contributor this year or do you think this is your divestment you sort of get ahead of it and talk about the grill the marketing perspective.
Thank the impact is more than 23 from a sales perspective.
So first of all I would love to tell you much more about it what I can tell you is that it is premium it is meaningfully premium too.
To the top end of our line right now.
And again as I said.
If you look at our history of Cascade and innovation, we launched Timberline and 2017, we brought all of that technology, plus additional technology and the direct drive all the way down to a pro seven 575, which was priced at $7 99 at the time. So this this is premium.
It will contribute to sales we believe those sales will come mostly from specialty given that's where it's where it's going to be largely distributed.
And it's.
It's not a meaningful driver of sales.
In the year, but we expect that the platform will create very meaningful sales in 'twenty three and beyond.
That's helpful. Thank you.
To remind us what proportion of your sales are in that sub $1000 category, where youre seeing pricing.
Price sensitivity and did you for conservatism baked in into the forecast. If there is going to be maybe pricing actions, but I'm, assuming you're thinking reductions to stimulate sales.
Did you did you did you forecast that in your gross margin.
Forecast to be conservative or would it be after we think gross margin. If you were to do some pricing actions in the sub thousand dollar grill.
Yeah. So I'd say on the first question no that is not in the model again. This is this isn't sort of a reaction to a couple of weeks of sell through data.
So it's something that we'll watch.
There are other ways to manage the margin to the extent that we do lower price on entry level grills, where are where we're learning that our consumers are more sensitive which I think is also compounded by the fact that.
In this period of record inflation at least over the last.
30 plus years.
As well as just maybe some of the other aspects to that the macro that are putting pressure on consumer and so again, it's it's something on the table and did they get the extent that we lower lower price and believe that's the right decision. It may come with some offsets that allow us to sort of manage the margin impact.
Accordingly.
And then you know obviously from a unit volume standpoint, as you sort of look at the spread across our various price points, we certainly do a lion share of the volume.
Below below $1000 and I would say that it's probably weighted slightly higher to products below $1000.
On a revenue basis, and and maybe slightly less above $1000, but theres more parity between the two price bands on a dollar basis than on a unit basis.
Okay got it thank you.
Thank you John we now have Peter Keith of Piper Sandler. Please go ahead, when you're ready P. J. Your line is now open.
Hi, guys. This is Matt on for Peter just two quick ones from me kind of both related to gross margin.
I think the.
The trajectory of your input costs were kind of just curious on what we should be monitoring and maybe what are the main components in your old steel and then also kind of in regards to freight can you remind us of your exposure in terms of your card your contract versus spot market exposures.
And I guess will there be a different in 2022 versus last year. Thanks.
Yeah. So on the commodity side I would say that still represents a line.
A large component of the the landed cost or the material cost of our grills and we're certainly sensitive there.
And you know as you think about the the rising cost of components, which were reliant on electronics chipsets.
Those are factors that that that that will anniversary this year and create some incremental margin pressure.
On the on the inbound transportation side.
We are heading into a period, where it will start to lock in more fixed rate those fixed rates will be.
No.
Well above where we locked fixed rates in.
2021.
And we're also feeling some pressure as a lot of these carriers are asking for two and three year contracts, which could be signaling that they believe there is maybe some some some pressure that they could feel on the pricing power that they've benefited from up to this point, especially if we enter it.
To a recession and there's maybe a shock to demand, which we believe would potentially put pressure on those prices and what benefit you know consumer goods manufacturers and so we're navigating what is a fairly complex environment right now because of the trade off really is do you lock in rate.
That are fairly unfavorable and lock those in for two to three years, knowing that there's a probability that rates come down for a variety of reasons, one of which would be demand.
And balancing that with the need to ensure that we can lock in capacity because that has been a risk.
And I think what wherever leaning as we'd prefer to float more of more of our our mix of trend.
Of containers versus lock in at elevated rates at two and three years.
Certainly trades, a little bit of risk, but to the extent that we believe we're in a good inventory position, which will continue to lean into for a period of time.
We'd prefer to avoid a situation where we're locked in at you know 10 to $13000 of container for the next three years if things.
If those container rates shifts shifts south so it's a little bit of a bet, but we believe it's the right one and we are locking in some fixed at higher rates just to win.
Sort of secure a baseline of predictable containers, but the other component that we believe is a benefit as our D. I program right. So we launched that program with home depot that takes multiple touches out of our supply chain, we believe that.
An important initiative, we're evaluating it with other key partners that can offset you know meaningful volume on an annual basis that we're bringing into the U S. And therefore that would provide a little bit more flexibility, where we can lean on their pricing power and bargaining power.
To drive there to take advantage of their lower container costs and shift that that risk away from from trager. So that's kind of the balance that we're navigating in I think patience is really important.
Because again, it's just hard to believe that these rates.
Persist for the next three years and there's a reason carriers are asking for two and three year contracts right and so that's kind of how we're positioning it today manage risks that we're comfortable with but provide enough and that's sort of cushion within our needed capacity on containers to take advantage of any downward trends in price.
Overtime.
That makes sense I appreciate it.
Sure thing.
Thank you, we now have Sharon Zackfia.
From William Blair. Please go ahead, when you're ready Sharon.
Hi, good afternoon.
I'm not sure yet, but the year is still young.
So on a on the door count you talked about entering Kroger.
In March and best buy in the fourth quarter can you talk about.
As we think about grills and accessories and consumables how much do you expect the door count to increase in 2022 for those categories.
Relative to 'twenty, one when all is said and done.
And then on the Mexico facility.
Just assuming.
Things are where they are as it relates to trade and so on how.
How much benefit would you see to gross margin from Mexico, and 23 and how much of your production can you actually flow through Mexico.
Yeah.
Great great questions on the consumable side I would say over the past couple of years, we've been focused on driving.
Pellets into grocery just given the convenience and what we've learned in our consumer consumer research.
On the rubs and sauces.
We really havent sold them meaningfully outside of our core channels.
And.
And so they they will it will increase dramatically in terms of disk.
Distribution the number of doors.
And so that is that will be meaningful.
In terms of Mexico.
I guess I would step back and say.
It takes time to both open a facility.
Refine process get efficient and meaningfully scaled with volume.
So I would expect.
As we see the macro conditions, particularly around transportation move in our favor that we will see more of that first as a contributor too.
To cost.
But I would also say that.
The if there is a positive to what we're experiencing right now we are absolutely thinking about configuring our business differently longer term.
So.
More methodical and thoughtful design for manufacturing from a from a product perspective.
We're thinking differently about how and where we manufacture where we assemble those loan impact 'twenty three but we certainly believe that they will impact 'twenty 'twenty, four and beyond and that they will be very meaningful. So so we are innovating in how we how we manufacture but I would.
Expect 'twenty three to be a.
Driven more by the macro environment.
And we'll see what it looks like when we get there and I think I would just maybe add to that.
Long term the goal is to diversify our sourcing base and to the extent that you know.
We built and configured Mexico in a way to scale appropriately.
Could envision sort of an equal weighting of of of volumes or sort of manufacturing volumes across each location and I would just add to jeremy's comments to this isn't simply about.
Optimizing the cost of that is sort of the material cost of the grill, excluding the burden, which is largely transportation I mean that that piece in and of itself coming.
Pre pandemic was certainly a manageable component of landed landed costs. It is substantial and to the extent that there are structural changes to inbound transportation prices, where they may not fit at 10 to $15000, but could find their way down to 5000, depending on which port which coaster.
Shipping to that as a massive opportunity that ties into what Jeremy is talking about where we design for manufacture ability, but also explore ways to increase load ability on a container.
I think there are some really exciting learnings there that could dramatically improve the cost structure and help manage through both medium and long term risk to the extent that these these container rates become structural longer term. So we have some really exciting levers that I think are the sort of.
Built off of the this environment and it's requiring a rethinking and I think we can find some some real nice margin improvement.
As we sort of track toward these initiatives.
Can I ask one quick follow up are there any provisions in the startup costs that we should expect bleeding into 'twenty two.
Yeah. Great question. So you know I think as we look at 'twenty, two we're clearly reconfiguring SG&A or should they sort of re sizing. It based on our long term financial model right I mean that really guides, how we how we manage investment capacity.
With with 800 basis points of margin compression.
From from kind of 2020 to 2022 at least that's forecasted it just requires that our SG&A reset so that it's in line with our long term financial model and so that's kind of goal number one and within that we are going to focus directly on the core right like that's a guiding principle.
All we want to ensure that within our phone that that focus.
Really driving in year high return investments and maybe saving other longer term investments are pacing those differently because certain things can wait right like I think priority number one is navigate through what is becoming a fairly challenging 2022.
And we'll stay nimble to the extent that trends improve in and sort of increased investment capacity to then maybe accelerate certain investments that we're going to talk to delay and that ties into provisions as well right like in this environment. It's just hard to you know.
Keep keep a new initiative or a new business unit.
Pacing from an investment standpoint as it was previously designed and just given the size of the Tam and the belief that this could be something that meaningfully accretive at the business long term, there's there's sufficient time and I think a permission to be patient. So we're going to scale that back fairly dramatically and really focus.
You know with the team in place on continuing to test product market fit optimize unit economics, and keep kind of overhead low and really manage burn rate well below what you saw in 2021 to.
To the point, where it just wont be impactful to SG&A. So that that is a component of sort of how we're reconfiguring our resizing SG&A this year.
Okay.
Thank you.
We now have a final question on the line from Joe Feldman.
Telsey Advisory Great State. Please go ahead Jay.
Great. Thanks for taking my question guys.
Wanted to ask on the inventory you did a great job of explaining why.
Why it's elevated but I guess I was curious.
Have you read in a little too much at this point considering the sell through that you're forecasting for this year and maybe how should we think about.
Inventory level through the year like will it end.
More more flattish level, just given the big increase we just saw this quarter or how should we.
Think about that.
Yeah, it's a.
Great question I would say no we haven't leaned into heavy I mean, when you look at how uncertain. The macro is and the fact that even.
The COVID-19.
<unk> continues to kind of rear its ugly head in Asia or in China, specifically and just how draconian they are when they're single case and.
And suddenly, they're shutting down offices and clothing ports.
Maintaining a heavier inventory balance is definitely the wise thing to do and I think it's a real.
Anthony we have today.
And so it's taken its definitely an investment that we've made and we are carrying higher inventory levels than ever before obviously there have been some shifts in our forecast. This year based on the sell through trends that will continue to watch, but I think I'd say two things to answer your question one.
We don't deal with obsolescence rates and so this is full price healthy inventory. It's just heavier I'd say too we do have we are resetting.
The inventory levels to the extent that what we're seeing in the sell through trends persist and anticipate that by year end, we will bring those inventory levels down. So you know where last year youre looking at Dsos.
On an annual basis.
Of roughly a 111 days, we think that it is.
Appropriate to maybe target something closer to four turns by year end.
And to ensure that there's there's a a a a positive sort of cash flow component to working capital by end of year. So we'll definitely rightsize inventory.
As we persist through the year and sort of learn new things and our demand planning team is.
Tied to the hip with with them with the sales team with with our factories in China. So something that we manage on a weekly basis and have real real sort of we have levers and or flexibility to sort of fine tune our inventory position as we track through the year as we sort of Mary.
<unk> kind of the macro risk with you now.
Trends, either north or south based on overseeing in and sell through so we don't we feel comfortable with our inventory position, but clearly with the pressure that gross margin is placing on on cash flows and on EBITDA that is something that we will be focused on to ensure that we're optimizing working capital and AR.
Accordance with with that dynamic.
Yeah.
Got it that's really helpful. Thanks for explaining that and then just the follow up I had was.
To pay significant door increases on the grill side I think you know.
Our points of distribution for grills are largely locked in.
And you know we continue to explore new opportunities, but in 2022, you won't see much retail expansion on the grill side.
Okay. That's helpful. Thanks, guys. Good luck with this quarter.
Thank you.
I'd like to hand, it back to the team for some closing remarks.
I just want thank you wanted to say first of all we appreciate the thoughtful questions and conversation and just add that.
For my original my initial comments I not only have deep confidence in the position of this business. This brand long term, but.
Even more confidence in the quality of our team. This team is committed they're fired up.
They are ready to not just grind out the current moment, but build something significantly more compelling for the future.
And we're excited about it so are we appreciate it and look forward to being in touch over the over the coming weeks.
Thank you for joining this does conclude today's call.
You may now disconnect your lines.
[music].
Okay.
Right.
[music].
Okay.
[music].