Q2 2022 Weber Inc Earnings Call
Which erupted shortly after our last earnings call, we have since suspended our commercial operations in Russia, resulting in a $25 million revenue reduction.
We have many employees globally with ties to Ukraine, and we are supporting them as best we can I'm, particularly moved by the efforts of our team in Poland, who not only continue to make great progress on operational initiatives that our new plant, but many of whom are hosting refugees in their homes and donating their time and resources to help Ukrainians it.
It is this type of spirit that makes Weber, a special place to work and I'm proud to be part of this team.
Weber has operated through many economic environments over the last 70 years, we faced every type of cycle every recession every inflation surge every war and we've navigated them all to achieve consistent and resilient sales growth marked by a 10% CAGR all the way back to 1980.
While we expect current macroeconomic headwinds to continue through 2022, we are confident we will manage this market cycle well just as we have in the past.
And the reason is that Weber is as durable as the products. We make we have the right brand the right strategy the right global team and the right operational footprint to drive the company's long term success and unlock substantial value creation for shareholders.
With that said I'll turn now to our operational and financial performance for our second quarter.
We're pleased with the progress made against strategic initiatives in the quarter to maintain our position as the clear global category leader to drive large sequential improvements to our gross margin to further optimize our unique global manufacturing and distribution capabilities and to continue to deliver the highest quality most innovative products and best service to.
Our consumers around the world.
For the second quarter, net sales were $607 million, which.
Which was down 7% versus the prior year period, and down 4%, excluding a negative 3% impact of foreign exchange rates.
This sales performance is still markedly above 2020 levels with Q2 sales from 2020 to 2022 up 46% on a two year stack basis or $180 million and.
And compared to pre pandemic 2019, our Q2 sales. This year are up 35% in fiscal year to date sales were up 37%.
We generated $86 million and adjusted EBITDA in the quarter down from $149 million in the second quarter of 2021.
The decline is a result of a year over year sales decrease attributable to the challenging supply environment. The significant devaluation of the euro and the inflationary cost of goods impact we've been discussing.
We're pleased that the pricing actions, we took last fall and in Q2, which were fully accepted are offsetting these challenges and favorably impacting gross margin. This dynamic will continue to improve over the next several quarters.
We continue to experience significant cost increases in commodities and inbound freight with container rates up three to four times versus prior year levels. These increases will continue to produce difficult comps for the rest of fiscal year 2022, but we do believe the inbound freight costs have stabilized and we don't see additional near term risk of further increases to fill.
Full year.
As I just mentioned, we addressed inflationary cost pressures through pricing and other tactical initiatives and were pleased to report the effectiveness of these actions.
Taking price when we did drove gross margin improvement of nearly 12 percentage points above first quarter results. This margin expansion effort will help us achieve improving year over year gross margin comps for the rest of fiscal year, 2022, and well into fiscal 2023.
Bill will provide more context around the strong gross margin improvement.
Turning now to our operating environment since the beginning of March the industry has seen a significant drop off in year over year point of sale data with sharply reduced shopper traffic both in retail stores and online. This can be partly attributed to unfavorable weather in the early spring months as well as a return to travel for many families enjoying a spring break.
In addition, there is meaningful inflationary pressure on consumer spending behaviors globally and in some regions significant consumer distraction related to the Ukraine conflict.
The sale of data and trends, we are monitoring inform our financial outlook for the fiscal year and based on these evolving macro factors combined with recent changes in the valuation of the Euro. We now expect our net sales to be between $1 65 billion and $1 8 billion.
Following that update through to the bottom line, we expect adjusted EBITDA to be between $140 million and $180 million.
Bill will present, a breakdown of the drivers behind these numbers in a moment.
Weber has decades of commercial and operational experience across global markets offer deep insights into environments like the one our industry is facing today.
And with these external pressures in full view, we have taken decisive actions, which include the following first taking pricing actions to offset cost headwinds. The most recent of which was announced in early Q2 and took full effect in early Q3.
Second reducing SG&A spend while still amplifying, our new product launches to grill is globally.
Third driving two key operational initiatives that will improve our efficiency and gross margin performance well into the future our global ERP upgrade across all regions and the startup and notwithstanding of our new Poland manufacturing plant.
Fourth and finally investing for future growth with continual product and technology innovation, including an exciting range of new products teed up for 2023 to build on this year's launches.
These initiatives are consistent with our existing strategic growth priorities. As a reminder, these priorities are to introduce disruptive new products.
Accelerate direct to consumer revenue in e-commerce grow with new retail customers and drive new consumer revenue streams expand.
Expand in emerging geographies.
And finally to execute value enhancing operational initiatives.
These growth priorities continue to be the foundation of our go forward strategy and business roadmap I'd like to highlight the progress we're making in 2022.
Earlier this year, we unveiled three new product lines that transformed the outdoor cooking experience designed to fuse the best and smart technology high quality materials superior performance engineering and craftsmanship.
First is the 2022 Genesis smart gas grill lineup.
Second is the all new Weber crafted outdoor kitchen collection of grilled wear accessories.
And third is the stealth edition of the smoke fire Smart Wood pellet real line, which is a red Dot product design Award winner this year.
These products are revolutionizing the way Weber owners grill and gather for outdoor meals.
Smart technology experiences nearly doubling usage of our Weber connect platform, which we believe will only further solidify first party data relationships with our already loyal user base.
Creating innovative products not only improves families cooking experiences, but also drives top and bottom line growth through accelerated purchase frequency and trade ups as well as increased frequency and value of accessory purchases in between major grill purchases.
The experiences these products deliver are resonating really well with our consumers are.
Our 2022 innovations are receiving an average four eight out of five stars from purchasers online, which bolsters our consumer satisfaction scores as a reminder, our global satisfaction score remains exceptionally high at 91% with 96% of Webber owners recommending Weber to their friends and family.
Additionally, wherever continues to be recognized as the global barbecue leader by grilling enthusiasts through recent awards that stretch across our uniquely diverse range of product segments.
These include best gas Grill, a 2022 by CNET best overall electric ruled by Martha Stewart Dot Com.
First charcoal grill, a 2020 to buy gear patrol and best portable grill by Wired magazine.
We also received best Grill accolades from a wide range of publications and tech fashion and culinary arenas globally.
As Engadget key three British and German GQ, The New York Times Food network Epic curious Yahoo, and many more.
Wherever it was even named the most trusted barbecue grill brand of 2022 by Life story Research group based on their evaluation of consumer Trust and brands bound inside and outside the home or.
Our brand is as strong as ever.
Among global Grill brands Weber engages the largest community of grill is online by more than double approaching 4 million followers across social channels around the world.
Further our engagement and outpacing the competition on Facebook Instagram and Twitter are.
Our community even extend outside our Weber owned channels with fans, who have started forums across Facebook and other third party community sites. These organic forums are great Weber communities with members sharing their passion for grilling with Weber products on a daily basis, our marketing and Influencer teams actively engaged with these forums, providing them with access to resources.
Products and experts.
We are the global category leader with an immense industry, leading installed base of more than 55 million Weber households worldwide.
Building on that base, we are entering new markets and growing brand awareness and household penetration.
As demonstrated by our results in emerging geographies.
For the quarter sales in emerging countries grew 26% over the prior year quarter and represented 12% of our global sales versus 9% of sales in the second quarter of last year.
We see more opportunity and white space in these emerging markets and we're not taking our foot off the accelerator.
Lastly, I wanted to touch on the progress against our value creation strategy last fall, we achieved a major milestone in our multi continent manufacturing strategy as we began producing grilles at our new Poland plant initially.
Initially this facility was designed to manufacture two key product lines for Europe , However, giving the outstanding results year to date, which have exceeded our throughput and cost savings expectations. We have begun the build out of an expansion that will nearly double the capacity expand the number of product lines manufactured there and enable us to serve other regions outside Europe , including North.
America in early 2023, we anticipate the expansion will be completed and fully operational by the fourth quarter of this year and will serve as a key competitive differentiator for us in driving long term value for Weber shareholders.
I'll say it again Weber is as durable as the products. We make the challenges. We are seeing are trying but they are temporary we are highly confident in our strategy and our ability to not only mitigate our exposure in this market, but to set ourselves up for continued long term growth and the clear category leadership, we've consistently demonstrated over the last 70 years.
We remain exceptionally well positioned and uniquely so with the best brand the largest geographic and consumer footprint, the only global manufacturing footprint, the best innovation engine and the best team in the industry.
I would like to thank our team members for their continued resilience passion and commitment to serving our customers and loyal Weber fans as we continue to focus on delivering value to our shareholders with that I'll pass it over to Bill Horton, our chief financial officer to discuss the second quarter financials and guidance in greater detail Bill.
Thanks, Chris and thank you everyone for attending our call today.
During our fiscal Q1 earnings call in early February I discussed the seasonality of our business and with the second and third quarters have historically represented approximately 70% of our annual sales.
Through January and early February sales were generally in line with our expectations with most of the sales being retailer load in of our products in advance of the late March through mid July heavy Pos driven sales period.
However in late February into early March we saw two dynamics that impacted our selling results first component part availability from suppliers continued to bring challenges to our supply chain impacting our ability to manufacture and distribute our products to customers.
This left us with more than $50 million of unfulfilled customer orders at the end of fiscal Q2.
These are firm orders that will be delivered with a timing shift from Q2 to Q3.
Second we noticed a significant drop off in retailer foot traffic.
Both in key brick and mortar retailers and online.
Primarily in the U S, which started to generate declines in early season point of sale data for the outdoor grilling category.
We are seeing in real time for today's macroeconomic headwinds are impacting drillers and retail foot traffic and this will likely have negative impacts on outdoor grilling category Pos in the near term.
This is reflected in our fiscal 2022 outlook that I will speak to shortly.
Now, let me summarize our second quarter actuals, our fiscal second quarter continued the trend from the last three quarters with sales and income down versus the comparable prior year period.
Very strong growth on a two year stacked basis.
As a reminder, the last three quarter growth rates, we've comped against where plus 82% plus 83% and plus 52%.
Our focus is on executing against long term objectives that drive sustainable growth.
Our top priority remains building off of our established momentum generating consistent growth compared to our sales activity prior to the pandemic period, which brought an unprecedented lockdowns.
To this end second quarter fiscal 2022, net sales decreased 7% or $47 million to.
$607 million from $654 million last year.
The year over year sales reduction foreign exchange accounted for $20 million driven by U S dollar strength against the Euro and Australian dollar.
So excluding the impact of foreign exchange net sales declined by just 4%.
On a two year stack basis sales increased 46% above 2020 or $180 million from $427 million to $607 million.
Even amid today's challenging operating environment, we are finding ways to drive meaningful growth compared to our pre pandemic performance.
For the Americas, net sales decreased 18% or $67 million to $306 million from $373 million last year.
As a point of reference in the second quarter of 2020 America's net sales were $235 million.
On a two year stack basis revenue increased 41% versus Q2 of 2020.
For EMEA net sales increased 9% or $22 million.
The $268 million from $246 million last year.
Excluding the impact of $18 million of negative foreign exchange headwinds.
Net sales grew 16%.
On a two year stack basis, net sales increased 47% compared to Q2 of 2020.
Successful retail sell in ahead of grilling season, and other consumer outreach engagements have allowed us to continue to achieve strong growth and expand the Weber brand throughout the region. Despite our decision to suspend operations in Russia.
As Chris mentioned earlier expanding into emerging geographies is a key focus area and in Europe and emerging country sales grew 31% over the prior year led by the UK, Italy, Denmark, and Norway, who all exhibited strong sales growth for the quarter.
In Asia Pacific net sales decreased 6% or $2 million to.
To $34 million from $36 million last year.
For the quarter foreign exchange negatively impacted sales by $2 million.
Primarily driven by the Australian dollar weakness against the dollar.
So on a constant currency basis sales were flat year over year.
Severe flooding in certain regions in Australia also adversely affected product demand while regions unaffected by the flooding grew well.
On a two year stack basis, APAC net sales increased 157% compared to Q2 of 2020.
Our Asia Pacific team continued to generate brand and channel growth through a multitude of activities, including sponsorships outdoor cooking events marketing campaigns and social media engagement.
And those activities are yielding solid results.
As one example, our named sponsorship of the women's Big Bash Cricket League in Australia was an overwhelming success.
For the quarter gross profit decreased $77 million.
Or 27% to $209 million from $286 million last year, and gross margin decreased 932 basis points to 34, 3% from 43, 7% last year.
If you recall during our first quarter earnings call I mentioned, we have initiated incremental pricing actions to address unprecedented cost challenges with inbound freight material cost inflation tariffs and supply chain disruption at historically high levels.
I discussed how our price increases were staggered that the favorable Poland plant results were skewed towards the back half.
And that we would continue to improve gross margin comparisons as we move through 2022.
To emphasize this point, 73% of our commodity and inbound freight cost variances are in the first half of this fiscal year.
And only 35% of the full year effective price increases are realized in the first half.
As we move through the balance of the year, you will see a rising effect of our pricing actions, resulting.
And continued sequential gross margin improvement through 2022 and well into 2023.
For the quarter, we made significant progress against our recovery plan as we improve gross margins by nearly 12 percentage points.
From 22, 6% recorded in the first quarter to 34, 3% in the second quarter.
With the exception of the net sales Miss and continued FX headwinds in the quarter. Our gross margin assumptions were in line with our expectations during our Q1 call.
Selling general.
General and administrative costs for the second quarter decreased by $18 million or 10% to 166 million from $184 million last year.
And decreased 77 basis points to 27, 3% from 28, 1% of sales last year.
The decrease was primarily driven by specific cost cutting actions taken across the company.
We believe our SG&A actions will continue to improve profitability throughout the remainder of 2022.
For the quarter net income decreased by $120 million to a net loss of $51 million from net income of $69 million in the prior year.
As previously discussed the decrease was primarily driven by higher inbound freight costs higher commodity cost and increased income taxes.
Adjusted EBITDA decreased 63 million to 86 million from $149 million last year.
For the second quarter adjusted EBITDA margin came in at 14, 2%.
22, 8% last year.
As previously discussed cost of goods sold and foreign exchange headwinds accounted for 930 basis points of the EBITDA margin reduction.
Offset slightly by our pricing actions and SG&A savings.
For the six months ended March 31.
Net cash used in operating activities increased to $243 million from $215 million in the prior year.
Increased cash usage was driven by global supply chain challenges.
Leading to increased inventory levels and inflationary cost increases in raw materials and inbound freight.
In the quarter, we added $250 million incremental term loan b, which brought total liquidity to $313 million and we remain in compliance with our credit agreement.
Now turning to fiscal year guidance.
We believe that 2022 will be a story of two distinct paths in.
In the first half of the year global supply chain disruptions and inflationary pressures led to a significant cost challenges that we addressed by taking decisive pricing and cost reduction actions.
As we look at the second half of the year, our pricing and cost cutting actions will sequentially improve margins.
But the effects of inflation will impact consumer sentiment and sales volume.
Earlier, we call out the drop in year over year point of sale data and low foot traffic both in store and online in key channels.
These recent consumer traffic patterns across both channels will impact our business as.
As grilling season kicks into high gear.
As Chris mentioned, we are resetting our 2022 fiscal year guidance, our fiscal year sales outlook range is $1 65 billion to $1 8 billion.
And our adjusted EBITDA range is $140 million to $180 million.
We want to provide some additional context for you is there are a few drivers within this range.
As we have discussed is early season pass and retail traffic trends continue throughout the season. It would have a negative impact on sell through projections industrial reduced Q3 replenishment orders and topline results.
This is the single largest driver of our guidance and any upside would have a positive impact on our results.
In addition, given 30% of our business is conducted in euros, we have seen a material negative effect from FX.
When we last spoke to you the euro to USD was one four and this has come down to 1.04.
Which has impacted the midpoint of our EBITDA range by over $40 million.
Finally should volumes come down we would have fixed cost absorption impacts.
Importantly, this revised guidance still outpaces, our pre pandemic sales levels above fiscal 2019 by $428 million.
In 2020 $200 million and.
And we are continuing to build on the momentum generated over the last few years.
We're also working hard to outperform these numbers.
As Chris referenced earlier since 1980 Weber has grown at a 10% CAGR and has not necessarily been linear in macroeconomic event years like this one.
I want to reiterate the points, Chris made earlier the fundamentals of our business remains strong and we have the right team and strategy to take on the current operating environment.
We are going to transition directly into questions now ahead of concluding remarks from Chris.
Operator, I'd like to open up the call for questions.
Thank you.
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Our first question today comes from Robby <unk> from Bank of America. Bobby. Please go ahead. Your line is now open.
Hey, good morning, guys.
Thanks for taking my question, it's actually two questions.
The first is Chris can you maybe talk more about the customer.
If theres a customer behavior shifts that you can discern from what Youre seeing are there.
Are your wholesale partners talking about different shifts in categories of year grills are they gravitating to lower price points.
Any kind of thoughts on what you may be seeing in consumer adjustment to the high inflation environment.
Sure Robbie Thanks, and thanks for the question.
It starts with traffic I think so I would tell you.
A lot's changed in the world since since our last conversation in mid February .
And the dynamics in Europe to start with because of the EPA as a global brand.
Monitored the answer to your question in a couple of different a few different continents, but in Europe , the impact of the Russian invasion in Ukraine.
Certainly.
Consumer anxiety, and just general societal anxiety I think.
Into a into disarray.
They're around consumer confidence and focus if you will or distraction relative to to the category. That's been true in the U S. Although I think more driven by the macroeconomic factors around inflation.
And.
The devaluation of 401K accounts.
Also I mentioned comments.
Even for the month of March which is largely what we're basing that judgment on although clearly clearly it's informed by April as well.
The consumer behaviors in March were impacted by even even the return for the first time in three years to taking a spring break.
Which was I think.
Really really impactful dynamic to consumer behaviors in March and so it starts with traffic and I think thats. What we saw between February and March was a substantial falloff almost like flipping a light switch on March one there was a substantial falloff in retail traffic and Thats true both in brick and mortar and online retailers and that consumer traffic.
<unk> is where is where we started the conversation in terms of modeling consumer behavior.
That's that's continued to lag.
Honestly, even since March and so that informs our decision on the guidance relative to the consumer dynamics on <unk>.
Trade down or maybe differences across segments, we haven't seen differences across segments, it's been fairly consistent between gas charcoal electric pellet and so.
And even accessories, so I think.
In general the traffic is driving it at a macro sense at a category level and it's less about consumers being in the category, but making different choices in the category.
Relative to pricing, we have taken a lot of pricing and we're not alone I think everyone. In the industry has taken a lot of pricing in the last year year, and a half and that does create price elasticity issues and so it's something we are keeping an eye on is how are the increased prices versus let's say pre pandemic levels, how is that affecting the unit volume takeaway.
Our consumer choices.
<unk> price points, but generally I would say, we haven't seen anything early season that that looks differentiated between.
More expensive grilles in our lineup versus more discount growth in our lineup. The last thing I would say Ravi as we've watched a lot of innovation this year and our primary innovation on gas grills as I mentioned earlier is on Genesis, which tends to be our premium line and so.
What we're trying to do with expensive or more expensive grills is bringing an entirely new value equation to the table, where the innovation. The addition of technology of the initiatives. Some of the features and benefits that are new to Genesis earn the pricing and so that's where we're trying to fight against price elasticity is to deliver increased value propositions to consumers that really.
Make it worth the money.
That's really helpful and just a quick follow up maybe for Bill is the sort of changing environment should we think of the lower long term adjusted EBITDA margin target for Webber.
No Ravi Thanks for the question for the long term no I think what.
It is important to note that.
If you look at our Q2 results.
With the exception of the sales shift, which was driven really by the supply chain complexity, we would've been right on our margin assumptions and we were on our general margin assumptions in the quarter. So all the actions we've taken on pricing.
Casting and cost cutting or right in line with our expectations. So we feel confident about the actions. We took in place you saw the sequential gross margin improvement from Q1 to Q2.
We're guiding to that Thats going to continue for the foreseeable future. So youll, obviously, our 2022 EBITDA margins are down versus prior year, but for the long term, we feel confident in the glide path that we projected going forward.
Got it thanks, so much.
Yeah.
Thanks Oliver.
Thank you.
Our next question today comes from Simeon Siegel from BMO capital markets. Simeon. Please go ahead. Your line is now open.
Hey, Good morning. This is Dan stroller on for Simeon Thanks for taking my question.
Given the strength of gross margin relative to the last few quarters. So was hoping you could speak a bit about the successes you've had in controlling that line operationally versus the macro pressures and how that could progress through the rest of the year. Thank you.
Yeah, Thanks, Dan I'll take this.
As I mentioned.
Last question, taking pricing action when we did through gross margin improvement sequentially as you call out almost a full 12 percentage points.
Versus last year pricing drove 770 basis points.
Of improvement and this was up from Q1's impact of 330 basis points and you've heard me talk about so there is a bit of a lag.
The one call it I'll make just to emphasize on margin as we took into our first half of the year almost 75% of our cost of goods sold variances just the way that our inbound freight accounting works. We took the bulk of that in the first half of the year and then our pricing impact we only realized about 35%.
In the first half of the year, so what youre seeing in our margin progression is and Youll continue to see this is the result of the pricing actions and some of the actions, we're taking on Cogs to kind of control the environment. So in the supply chain in particular, the one thing I would say we have a few.
We've done we adjusted our inbound supply of finished goods and components as we saw retail foot traffic begin to slow as Chris alluded to so we adjusted our inbound supply of finished goods.
Continue to adjust our factory output and mix to make sure we're balancing inventory levels to the evolving this evolving demand picture.
And then the other point is Poland as fully operational as we expected so youre going to continue to see the benefits of the Poland plant, which again helps us from inbound freight costs tariffs and just productivity within the.
Facility, So does that answer the question.
Yeah. That's helpful. Thanks, and then maybe just one inventory any color you can shed on what it looks like at retail maybe in terms of weeks of inventory or anything. Thank you.
Yes, I would say generally we feel good about where our retailer inventories are both in the U S.
And.
And in Europe , where we get reasonably good data so.
Generally overall, it's up about 15% year on year trade inventory and if you think about what's happened with pricing where we've taken three.
Three consecutive price increases to the trade again, followed by competitors.
Most of the trade inventory increase is driven by price so I would say.
Cross the board, we're feeling really good that if the retail traffic picks up.
Pos picks up towards the higher end of our guidance. The trade is positioned and we are positioned from an inventory standpoint to fulfill that demand.
Alright, Thanks best of luck.
Thanks, Dan.
Thank you.
The next question today comes from Nick and Alexander from J P. Morgan. Please go ahead. Your line is now open.
Hi, Thanks, very much for taking my question I guess on the first one have you seen any improvement in Pos trends.
But weather is broken in the northeast, it's gotten a little bit warmer.
Sure.
And if not like how does that inform your view.
Yes.
The selling season.
I think so <unk>. This is Chris thanks for the question I think.
We have seen we have seen some some green shoots I would say in just in the last couple of weeks I think your point on whether is well taken.
It was it was a unusually cold and wet.
March and April in the Midwest and the northeast and so that's just in the last in the last week or so shifted.
And so we're watching that in real time, we know we've been in this business for a long time for 70 years and so we know how.
Cold wet month into spring can slow things down to start start the year and so certainly there is hope and optimism that that as weather improves so will consumer shopping patterns and Pos.
POS tied to those that dropped that traffic assumption. However, I would say the best way I can frame. It is that the April the April point of sale actuals and even early may did inform our guidance. So.
While we saw the downtick of.
From February to March that was sharp and it started to started to show some of those green shoots in recent weeks, we're still we're still basing our guidance based on a I would say a more conservative scenario I think we're just trying to be prudent here and not and not.
Hope's not a strategy I'd like to say so we're trying to trying to use the data that we have in front of us to to guide the range and the reason the ranges.
Why does it is is because.
At the at the lower end of the range. You would you would want you would expect to see that March trend continue through the entire year and so.
That's a conservative outlook given your observations on on weather.
And as we know anything we do better than what we saw in March climbs up to the higher end of the range and goes from there. So I think be the point of sale outlook is is conservative.
Our fingers are crossed four.
Things to turn they have turned some but they haven't they haven't returned back to maybe where we would all want them to be.
That's generally the story on Pos.
One thing I would say Megan to add on that though I guess is.
A lot in front of US obviously, so at this time of the year, let me just frame it kind of front half back half I think Bill mentioned, we get 40% to 45% of our sales in the second half of the year, but we get 65 or more percent of our point of sale in the second half of the year. So we have the three biggest weekends of the category or in front of us in the in north.
Erika That's memorial day father's day, and fourth of July and those weeks can be big enough in the seasonal category. We operate in that that can definitely change the trajectory of what the season will look like and so there is still a lot in front of US we're just trying to be conservative.
Got it that's helpful and I guess as a fee.
Follow up can you just talk about the levers you can pull it.
Maybe pls days this week are worse than whether it's more promotional support at retail or if you had pulled back on price increases I guess I'm just trying to understand how to think about the tradeoff between.
Adding demand and protect our margin.
It's a good it's a good question and a good dialogue that we have on a day in day out basis here as we're running the business I would say.
We have been early in our actions so far and so we saw the costing.
Earlier than most in the category and we took the pricing earlier than most that helped us. It's why the gross margin story is the way that Bill described earlier and that's really important so I don't see us rolling back price increases, we do have our promotional calendar and we do have marketing investment and whether thats in.
Digital marketing and demand generation, among consumers, where things are going really well actually our consumer engagement in social media and some of our influencer activities is substantially higher than it was this time last year and so we are seeing underlying consumer interest and grilling to be quite strong just as strong as it had been.
Over the last couple of years.
I think as you as.
As you contemplate.
What that means for the back half of the year. We would we would continue to be proactive about that driving driving promotions for sure. We have a significant number of promotions planned intending to.
One convert that digital energy into purchases, whether through our DTC channels or through our traditional retail partners. We also have more traditional.
Marketing promotions in place that will look at certain product lines that we want to emphasize or work on some efforts to bundle accessories to grills and drive average order value and drive basket size higher so there's a number of initiatives that we have underway and I think our general our general approach is to be early.
And be on the front end so that in a in a tough market we can take share.
This is bill the one thing I would probably add.
Getting to your question about.
Pos or retail traffic doesn't doesn't pick up significantly the one thing just to mention is our unique global manufacturing footprint really allows us we know it's a valuable competitive advantage for us.
Allows us to flex to demand so our inventory positions are strong.
As I mentioned the trade inventory positions are strong, but we also have the ability to flex up reflects dale with both within Europe with the Poland facility and in the U S with our.
Facility here in the northwest suburbs of Chicago, So if we see that retailer demand pick up we believe that we know we have this advantage because we can flex to it and we're managing our temp labor in such a way that we can flex up flex down.
The manufacturing plants to fulfill demand does that help.
Yes, that's really helpful. Thank you so much.
Okay.
Okay.
Thank you Megan.
The next question today comes from Chris Carey from Wells Fargo. Chris. Please go ahead. Your line is now open.
Hi, good morning.
When we grow I was wonder.
I was wondering if I appreciate.
The environment has certainly become more difficult.
And whether it was <unk>.
Arguably historically.
That.
Do you have perhaps a little bit more perspective now.
We're getting into a new grilling season, just around any impact of the pull forward in demand from Covid.
More than perhaps what you were thinking.
Second.
Just curious.
How you feel about market shares in the quarter and whether you think that you held share or not going into this year.
And then a follow up.
Sure. Thanks, Chris This is Chris <unk>.
I appreciate the question. It is it's been the puzzle for a couple of years now to figure out what 2020 in 2021.
<unk> the one thing I would say on demand this year and I would point even to the Q2 performance.
This is and this is a consistent message that we've that we've noted in the data and continues to be true today.
Is that the pandemic, while it did drive a lot of incremental sales and and I do I am a believer in the pull forward dynamic for fiscal 2020, if we go back to the start of the pandemic.
I don't believe as much and pull forward in 2021, and what I would point to is the two year stack and so when you look at where sales are this year even in Q2.
I think we mentioned we were up 46% on a two year stack basis versus versus 2020, and if you look out on a pre pandemic level. If you go back to 2019, we were up 35% in the quarter and 37% on a year to date basis, and so the way that I frame. This in prior dialogues as we believe that the <unk>.
Pandemic heightened consumer engagement in the category and has established a new base of operations. If you will for the category and that continues to be true in our sales today. So while there were onetime purchases, particularly in 2020, and we would characterize those in many cases as people who had.
An old grill and that was the impetus to update their product line, we haven't seen.
An enormous pull forward dynamic, particularly in 2021, so I think the dynamics that are going on in 'twenty, two or more around all of the macro pressures on consumers the inflation pressure on the prices of gas and groceries.
The pressure the pressure of the volatile stock market on things like 401, K savings or just consumer confidence more broadly and those factors to me are more fundamental too to the drop in retail traffic and category wide performance I don't I don't think that Theres a.
A huge pull forward, probably 22 versus <unk> 21.
Second thing you asked about a share and I would say that even in the declining market we have seen.
And obviously, we have market shares in all different markets around the world and so to make it to the broadest possible statement I would say our shares are consistent and steady where they are we have not seen any any share with traction in some markets, we've seen share gains and in our emerging geographies, which is less of a market share gain in more of an absolute growth.
Story, we see really strong results in those emerging geographies and so overall.
I am very confident in our business and our operational fundamentals, we have the right strategy. The innovation is working the emerging geography.
Elements are working the marketing strategies are driving consumer engagement and growth and so I feel good about our ability to continue to maintain or grow share in the category and then the last thing I'd probably point to is we.
We have a we have a seven year were not new to this we have a 70 year history and in fact, Chris I went back and looked at the Bill and I went back and looked at our <unk>.
History, I really only have good quality data back to 1980, but thats enough freight like we went back and looked and chart that goes 42 years deep and we looked at all of the recession years, along the way and the <unk> nine in 2001 in 1990 983 and in all of those environments.
And we've delivered a 10% historical CAGR over the last the last 70 years or over this period back to 1980.
Generally although that curve is not always linear in the years either during or right. After these recessionary windows Weber its business historically take a substantial jump and we tend to come out of these periods, a stronger and so from a market share standpoint, and from a consumer interest in consumer demand generation standpoint, we're very.
Confident going forward in the runway we have in front of us.
Thanks, Chris that's helpful. And then I guess I'm trying to Dimensionalize this quarter and the full year is typically the March quarter is less reliant on foot traffic and as you noted June quarter is where the reorder activity happens if.
If I just take your commentary around pricing impacting gross margin. It seems like pricing was at least mid teens in the quarter.
So.
I guess I'm trying to dimensionalize the shortfall here, specifically in the Americas, where volume.
Down, 30% or something like that.
And so is your view that the supply chain headwinds.
You noticed $50 million left on the table was really why you came in below on on Q2 and that the back half is much more a function of.
Just less confidence around reorder activity and perhaps that's because retailer inventories high but youre thinking that the consumer.
Activity is going to be softer in the back half just because of the macro headwinds is that it.
Is that a fair way to Dimensionalize, how you view the quarter in the back half or is there more to it.
Yes, Chris This is bill I'll, maybe take a first shot at it and Chris can jump in you actually nailed it was.
That's exactly kind of what we saw you didn't call out the miss in the quarter, but again, it's primarily driven by the supply chain complexities and more so about to your point around the U S business with the Genesis production that was impacted by.
The complexity of getting component parts to make Genesis. So now that we've got those parts in house, we're producing genesis at record rates. So youll see that start to turn in Q3 as those grills gets shipped out because we have firm orders against those.
The other call it I would make just on the Americas business is.
That business is trumping, an extremely high tough comp last year.
If you go back to Q2 last year, the Americas was up 59% last year versus Europe . It was up 37%. So that's part of the dynamic in the Americas and Europe and look the other point is.
As we look to our guidance.
We are generally seeing foot traffic in Pos slightly stronger in Europe than what we're seeing in the U S. We're still diving into to understand the dynamics there, but generally in our guidance, we our outlook in the mid to low end the midpoint high end of our range as Chris mentioned earlier is really driven by Pos.
Assumptions, we have our gross margin outlook in line, we hit it in Q2, we're going to hit it going forward, we have our SG&A and cost in line. It really just depends on the Pos dynamics and where they play out.
That answer the question.
That's great. This is just a confirmation.
Roughly mid teens pricing in Q2, and you noted that it should be ramping into the back half. So is it fair to think about high teens pricing going into fiscal Q3.
Yes, I think Thats I can then let me let me hit a couple of points as we look at going forward.
We obviously had Q1, where we were down almost 20%.
Versus prior year on gross margin the second quarter improved significantly almost 12 percentage points to only down 9%.
And then outlook ing by the time, we get to Q4, where gross margin favorable.
Year on year because of the pricing actions that we took so.
Got this lapping effective pricing that in the first quarter was only three 3% improvement to gross margin second quarter was double that to seven 7% and then in the back half of the year, we expect that to continue to increase and then the flip side like I mentioned earlier, most of our <unk> III and <unk>.
The purchased goods inflation.
Got it.
Hitting Q the first half of the year, 75%. So we start to see that normalize. So those two dynamics drive the gross margin improvement that we're still committed to.
Thanks, Bill I appreciate that.
Thanks, Craig.
Thank you.
As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
The next question today comes from <unk> <unk> from UBS investment Bank. Please go ahead. Your line is now open.
Hi, Thank you for taking my question and good morning.
Guidance with looking anything at flat to down mid single digit unit declines of the year.
The new guidance range would imply obviously.
Down double digit for units.
Just I'm trying to understand given the cadence of pricing action.
Starting from Q2 and going to Q3 insurance back how much of that is offsetting.
Declined for the year in other words on full year basis.
Much of that pricing, helping sales guidance on a full year basis versus unit growth.
And I think as we look at.
For the midpoint of our guidance generally our PJ youre right.
Pricing is certainly offsetting it we're projecting.
Full year price increases driving.
Close to <unk>.
12% to 15% improvement in our.
Net sales results. So then the volume and then FX is the other component which is about.
A 3% drag on our top line. So then the balance would be.
The impact of.
The volume decline.
Unit growth that's right so.
As Chris mentioned, we can kind of model this conservatively.
Conservatively.
We wanted to as we were reading early season traffic in Pos. So the range is as we go to the low end of the range, we just factor that in.
Then.
If we if we take what happened in early May.
And you can project that out I think Chris mentioned, we did see some slight improvement in traffic patterns.
Most of our channels here in the U S.
That would then lead us towards the higher end of the scenario both on the pricing impact because obviously as volume drive.
Further pricing benefit, but it would also improve our volume impact year on year does that help the question. Yes. That's super helpful. Thank you and then just a quick follow up on gross margin.
For the year I think previously it was closer to something like 37% margin just based on what the implied on the gross margin line and I know you've talked about longer term margin outlook for the business sort of being in tech, but as we look for the year. Given what you are looking at in terms of freight cost stabilizing and raw material costs that you are.
Have locked in how should we think about gross margin on a full year basis now versus prior guidance.
Yes, I would say versus prior guidance from a rate standpoint, we're right in line with our gross margin outlook.
We don't necessarily provide full year gross margin guidance down to the.
To the right, but I will tell you from a year on year improvement standpoint, I'll just emphasize again.
I went back and looked at what we provided during our last call and our gross margin progression from a rate standpoint is right in line to slightly favorable to what we provided during the last call again, our pricing flow through has been strong.
Our costs are in line. So I would say by the time, we get to Q4, we're projecting to be up.
A full six percentage points year on year.
And obviously that.
Driven by if you go back to last year.
When we started it really significantly see the inbound.
In the variances hit in the P&L and then we led into Q1 of this year, which was our lowest gross margin percentage.
Honestly.
Because of this dynamic where we took you go back to last year were taking in all of those containers and insulated rates, we had adjusted our standards. So our cap variances that hit the first quarter drove our first quarter gross margin is down to 24, 2%. So we will come out of Q4, nor.
A <unk> 37.
Which historically has been actually our lowest gross margin quarter. So you can probably do the math and figure out that gross margin improvement is going to continue going forward.
No. That's helpful. Just a quick follow up.
Component parts availability situation has gotten a little bit better as you move as you progressed through the quarter or about the same as what you are looking at the beginning of the quarter.
It's much better from where we landed at the end of the second quarter.
<unk>.
Honestly the last two weeks of Genesis production, because if you go back to Q2, I will emphasize that of that $50 million shift.
35 to 40 of it within the U S driven entirely almost by component parts.
Supply availability to make the Genesis launch.
Yes.
The launch of our new Chesterfield, So thats been corrected we're hitting daily output targets and in many cases hitting weekly records.
Production on Genesis, So youll see that course, correct in Q3, and then in Europe . The transit time increase the other call it $50 million in the quarter and we feel good about where those sit and I mentioned, the Poland inventory positions earlier in the call as well and we're seeing good output and throughput through that facility. So I would say generally.
We're feeling much better today.
From where we came out of the quarter.
Thank you very much that's helpful.
Thank you.
There are no additional questions waiting at this time, so I'd like to pass the conference over to <unk> for closing remarks.
Thank you I want to thank everyone for joining us today <unk> has a rich history and decades of operational experience that continue to light the way in this tough macro environment, but we're more confident than ever in the fundamentals of our business. We've seen this before environments like this over the course of our history and we've always come out strong.
We're approaching the second half of the year with clear eyes, and with Prudence and we continue to focus on the things we can control driving topline performance prioritizing cost savings initiatives, taking pricing action, where needed and delivering the best possible grilling experience for our consumers around the world.
So that will close our call today, Thank you very much.
That concludes the rent that incorporated second quarter 2022 earnings conference call. Thank you for your participation you may now disconnect your lines.
Okay.