Q2 2022 Traeger Inc Earnings Call
With Saddam to discuss details on our quarterly financial performance and to provide an update on our fiscal 2022 guidance.
The second quarter, our business was negatively impacted by several macro related headwinds, which drove materially lower than anticipated topline results for the quarter. These pressures and other headwinds are negatively impacting our outlook for the balance of the year.
Despite a very challenging backdrop I remain confident in the positioning of the trade your brand as a disruptor and innovator in the grilling category and in our ability to navigate current challenges.
Our long term business thesis has not changed we continue to believe the trigger brand has an incredible one and though we have a large opportunity to meaningfully grow our household penetration. However, we are also fully aware that our near term trajectory has changed and then it will take us longer to achieve our previous.
Schools as such we are taking decisive action with a high level of urgency in order to position the company for future growth profitability and to drive long term shareholder value.
On our last two earnings conference calls I reviewed our progress on each of our four strategic growth pillars.
Given the rapidly evolving backdrop and the change in our outlook for the year I would like to instead focus on our assessment of the near term dynamics that are pressuring the business and the actions and strategies, we have implemented to navigate the environment.
Then I will discuss why I continue to be confident in trade was long term growth opportunity.
In the second quarter, our sales were $200 million down 6% the prior year with particular weakness in our grill business, which was down 25%.
While we expected moderated growth in grills in the quarter, given we were lapping a 40% increase from the prior year results were lower than anticipated.
As we noted earlier in the year, we began to see a deviation from our previously forecasted sell through starting in March.
In order to arrive at our prior full year sales guidance of $800 million to $850 million, we assume a continuation of the softer sell through trends for the balance of the year. However, as we move through the second quarter, which includes some of our most important retail sales weeks of the year sell through trends deviate.
<unk> even more.
That guidance assumed.
We believe there are a few factors that are contributing to softer sell through trends first we believe that after a two year period of accelerated spending and home related and durable goods that consumers shifting discretionary expenditures towards experiences. This.
This shift is driving strong growth in demand in sectors, such as hospitality and travel.
Expensive goods like grills appliances and furniture.
This shift in consumer behavior is occurring at a time when we were lapping abnormally strong sell through trends from the second quarter of 2021, when consumer spending greatly benefited from government stimulus.
Furthermore, consumer sentiment declined in the quarter to record lows as elevated inflation and talk of a looming recession weighed on consumer psychology.
While we understood. These factors will likely to continue to pressure our sell through earlier this year their impact deepened as we move through the second quarter the.
The combination of declining consumer sentiment and the spending shift away from durables in the face of heightened comparisons is driving an unprecedented decline in the grill category to put this into perspective during the 2008 2009, great financial resection. The grill category was down in the low.
Double digit range, we believe the grill category is down to below 20% range year to date through may on a revenue basis and down in the 30% range on a unit basis.
The largest decline in the grill category that we have seen in our data sets.
In particular grills under $1000 or seeing immense pressure industry wide and are down significantly more than the category average year to date.
We believe that this likely reflects greater sensitivity to macro pressures and inflation amongst consumers that are shopping at the sub $1000 price point.
Compounding the issue of lower than planned sell through our heightened levels of inventory at retail.
In an effort to ensure adequate stock given the volatility in the supply chain environment over the last two years, our retail partners have been replenishing product more aggressively and holding more inventory than is typical.
Sell through of our Grilles missed forecast in the peak selling season in channel inventories increased to levels greater than we target.
Higher inventories in combination with the slowing macroeconomic backdrop and the specter of recession have led to a sharp shift in retailers ordering behavior.
Often referred to as a bolus effect.
Our retail partners are now heavy on inventory and our product category, which is negatively impacting our replenishment order activity for the second half of the year.
These factors are driving a substantial reduction in our revenue outlook for the balance of the year and in particular, where pressure third quarter sales, which tends to be a replenishment based quarter.
We are keenly aware that the consumer and the macroeconomic backdrop are in the process of Recalibrating. After a two year period of outsized growth.
And while we hope for stabilization, we are focused on positioning the business for this environment.
This includes resizing, our cost structure for the current revenue run rate right sizing inventories and doubling down on our reference to drive gross margin.
Let me walk through our key tactical priorities as we navigate the near term environment.
Our first near term priority is to reduce our cost structure.
Earlier this year, we discussed strategically reducing and deferring certain non essential expenses and reprioritising SG&A to manage the P&L.
Given the lower revenue run rate, we experienced in the second quarter and in an effort to protect profitability and drive efficiencies in the business, we implemented a broader cost reduction and streamlining plan in late July . We believe these actions will drive operational efficiencies and it will allow the organization to focus on initiatives.
That are best positioned to drive the highest return on investment and the best experience for our consumers.
As Don will discuss we expect to realize meaningful cost savings from these actions.
First we have aggressively reduced certain discretionary expenses across the organization.
<unk> reductions in travel and entertainment Noncritical professional services and top of funnel marketing.
Second we initiated a reduction in workforce in late July which impacted approximately 14% of the global full time salaried workforce.
This was a very difficult decision. We believe this was the right thing to do for our business.
Our process focused on identifying rules that could be consolidated reductions in the areas of the business that are lower priority as well as the removal of head count and the provisions business.
Over the last several quarters, we have added a significant amount of talent across all departments of the company and we move forward with an incredibly strong team.
We value the dedication of our impacted colleagues and I would like to thank these team members for their contributions to the business.
Finally, we decided to suspend operations of trade or provisions.
Our customers have been delighted with the provisions offerings since its launch in November of last year.
The business would have required significant continued investment in internal resources in order to scale.
Despite its potential provisions was unprofitable and given the current constraints on the P&L. We believe this is not the appropriate moment for us to be incubated business, given the large runway of profitable growth in our core business.
Our next strategic priority is to right size inventories, including both our balance sheet inventory as well as in channel inventories.
As we have discussed over the last several quarters, we have leaned into inventory given supply chain constraints and volatility.
Given the lower sales forecast, we are working to aggressively reduce our balance sheet inventories. This includes materially lowering production volumes in our Asian manufacturing facilities as we work through existing inventory.
While our grille inventory carries very little obsolescence risk. It is critical that we align working capital with the current revenue picture.
As part of this effort to align supply and demand. We also decided to postpone our near shoring efforts and to help plans for production in Mexico.
While we believe manufacturing closer to our core U S market.
Remains a long term strategic objective.
Current supply and demand dynamics diminish the benefits of production of what would initially have been only a couple of grill skus in Mexico.
In terms of channel inventories were working in partnership with our retailers to actively manage days on hand, including selectively using promotional efforts to drive sell through.
It is important to note that we will use promotions thoughtfully and strategically.
Priority of not compromising the health of the brand.
We will continue to collaborate with our retail partners on the goal of right sizing their inventories in channel such that our retailers are positioned to return to a more normalized replenishment cadence versus the current destocking.
Finally, we remain focused on driving improvements to gross margin. Our gross margin task force continues to identify and execute on cost savings across the supply chain.
Opportunities for cost reductions have been identified in areas, including product input costs packaging logistics and warehousing. This cross functional collaboration is an ongoing effort and we expect the team will continue to identify new savings and efficiencies as we move forward.
Furthermore, we are seeing the favorability in spot container rates as well as in currency.
While we expect that these favorable cost dynamics as well as our gross margin initiatives will not materially impact 2022 margins as we first must work through higher cost inventory, we do see building tailwind for 2023 and beyond.
Overall, I believe we're taking the right steps to position trader the best navigate the unprecedented macroeconomic challenges that we face.
These challenges my confidence in the Trager story remains incredibly strong let.
Let me walk through some of the factors that are driving my confidence.
First the energy around the trigger brand remains extremely strong in May we held our fifth annual trader day holiday, which is dedicated to bringing a global trader community together to pick outdoors gets sherwood fired food with friends and family to kick off the grilling season.
<unk> 2022 was the highest single day for user generated content in the history of the brand.
Overall for the second quarter user generated content post inorganic video views were both up significantly versus last year, indicating that consumer engagement with the brand on social media is stronger than ever.
Moreover, our consumers continue to love using their Trager and act as evangelists for the brand.
Our NPS score leads the industry and remains at an all time high we continue to delight consumers with the innovation, we are bringing to market with our new timberline grill, having some of the highest NPS scores and our entire assortment.
Importantly awareness of the trader brand continues to grow in core markets. Despite the tough backdrop for Grilles. This year for example brand awareness in the west is up over 30% versus last year. Despite this geography, including some of our most penetrated markets.
Increasing awareness is the largest driver of growing our household penetration and remains a meaningful long term opportunity.
Furthermore, our key merchandising efforts at our most important retail partners continued to drive our brand presence and increased penetration productivity. For example, after resetting 350 stores at the home depot earlier. This year, we now have nearly 900 home depot locations with a.
Broader and higher end trader grill assortment, including double the number of grill, skus and an expanded assortment of accessories.
In the third quarter, we will be adding over 300 additional home depot doors with high end fixed stream.
These fixtures elevator brand at the home depot.
Sit above the floor on wood decking.
Prominent signage and brand messaging and include up to six grille, skus as well as an assortment of krager accessories and consumables.
Next I'm as excited as I have ever been about our product pipeline. The recent launch of our game changing timber line has been well received and has brought significant energy to the brand.
This model is a halo product, which brings innovation to the market in a much higher than average price point.
As we have mentioned, we will look to Cascade innovation.
From this recent launch across our grill assortment in the coming years.
While it is too early to discuss details I'm extremely bullish on our product roadmap for both 2023, and 2024 and look forward to providing an update on upcoming launches over the next few quarters.
Considering the challenging backdrop I'm encouraged by the trends in the consumable side of the product portfolio.
Our pellet sell through is trending close to 2021 levels and maintaining strong growth over 2020.
This performance speaks to the resiliency of the pellet business and its recurring revenue nature.
Sales of our sauces, and raws benefit in the second quarter.
Increased distribution and consumer acceptance in the grocery channel subsequent to a rollout at Kroger with.
Continue to believe our consumables business is a strong complement to our core grill business, which drives recurring revenues and consumer engagement with the trader brand <unk>.
Lastly, I remain confident in the secular growth of the outdoor cooking category. The grill category has proven to be resilient over time and data shows that Americans love to Cook outdoors and are cooking more at home even as the world has normalized after the height.
Of Covid in fact, our connected cooking data shows that krager owners are growing at a similar pace to last year, implying that our consumers remain highly engaged with their products.
In summary, we are not satisfied with our near term financial results and we are acting decisively and swiftly to position ourselves for the challenging backdrop and to emerge stronger when the environment normalizes.
We are taking proactive steps to put trager back on its historic path of growth and profitability and to drive shareholder value. Despite facing challenges Trager brand will continue to disrupt the outdoor cooking sector and with that I'll turn it over to Dom Dom.
Thanks, Jeremy and good afternoon, everyone as Jeremy discussed we faced macroeconomic headwinds in the second quarter that negatively impacted our top line performance and we will continue to pressure our results for the balance of the year.
While the challenging consumer backdrop was built into our thinking when we provided guidance earlier this year.
Economic conditions have worsened during the second quarter and the corresponding impact of sales in our peak season was greater than anticipated as consumers shifted spending away from our category.
Shifts in consumer behavior, and the deteriorating economic conditions have led to higher levels of channel inventories, resulting a dramatic shift in retail ordering patterns that we anticipate will pressure sales in the second half of 2022.
Get them pressures on the top line during the second quarter, we accelerated our expense reduction efforts where.
We are taking swift and aggressive actions to mitigate pressures on the P&L and to drive efficiencies in our business with a focus on positioning failure to successfully navigate todays economic crosscurrents.
Outlining the actions after reviewing our second quarter results and then we'll provide an update on our 2022 outlook.
Second quarter revenues declined 6% to $200 million due to the declining grill revenue.
Revenue declined 25% to $118 million.
Revenue was impacted by lower unit volumes, partially offset by higher average selling prices driven by price increases taken in the second half of 2021 and the first quarter of 2022.
As well as a mix shift to higher Asps grills.
Consumable revenue increased 2% to $42 million with growth driven by increased distribution and our rubs and sauces business.
Finally, accessories revenue increased 157% driven by incremental revenue from the acquisition of meter.
Geographically second quarter, North American revenue was pressured by the aforementioned challenges in our U S business, along with negative growth in Canada.
Which is experiencing similar headwinds as in the United States.
Our rest of World business was positive year over year in the second quarter, driven by incremental revenue from the acquisition of meter.
You're anticipating pressuring our second half sales internationally, given ongoing macroeconomic challenges impacting consumer across many of our international markets.
Gross profit for the second quarter decreased to $74 million from $83 million last year.
Gross profit margin was 36, 7% down 240 basis points to last year.
This decline was largely driven by one an unfavorable shift in grill mix, which impacted gross margin by 325 basis points and to higher inbound freight costs that resulted in 180 basis points of margin pressure.
These pressures were offset by 315 basis points of favorability driven by our pricing actions.
Second quarter gross margin was modestly better than our expectations.
Driven by favorability in outbound freight and a higher than forecasted mix of orders fulfilled via our direct import program.
Selling and marketing expenses were $44 million.
At $47 million in the second quarter last year.
The decrease was driven primarily by a reduction in top of funnel marketing and lower professional fees offset by higher employee expense.
During the quarter, we proactively reduced certain selling and marketing expenses, given the lower revenue run rate.
General and administrative expenses were $29 million compared.
Compared to $25 million in the second quarter of last year.
The increase in general and administrative expense was driven primarily by equity based compensation expense as well as personnel related expenses associated with meter, which is not reflected in the comparable period last year.
In the second quarter, we recorded a $111 million noncash impairment charge to our goodwill related to the adverse impacts from macroeconomic conditions as well as the market price of our stock.
Please note that this amount is an estimate and will be finalized prior to filing our second quarter 10-Q.
As a result of these factors net loss for the second quarter was $132 million as compared to net loss of $5 million in the second quarter of last year.
Net loss per diluted share was $1 12.
Compared to a loss of five cents in the second quarter of last year.
Adjusted net income for the quarter was $5 million or <unk> <unk> per diluted share as compared to an adjusted net income of $17 million or <unk> 15 per diluted share in the same period of last year.
Adjusted EBITDA was $18 million in the second quarter as compared to $27 million in the same period of last year.
Now turning to the balance sheet.
The end of the second quarter cash and cash equivalents totaled $14 million compared.
Compared to $17 million at the end of the previous fiscal year.
We ended the quarter with $392 million of long term debt.
Additionally, as of the second quarter will get drawn down $84 million under our receivables financing agreement and $3 million under our revolving credit facility, resulting in total net debt of $465 million and a net leverage ratio of seven.
Inventory at the end of the second quarter was $164 million compared to $86 million at the end of the second quarter of last year.
Two factors contributed to the year over year growth in inventory.
First our landed cost of grill inventory increased with higher inbound transportation and other material input costs.
Inventory includes approximately $14 million related to meter, which is not in the comparable inventory base last year.
Last lower than anticipated second quarter sales led to sustained higher inventory levels at the end of Q2.
It is important to note that our grille inventory carries very little obsolescence risk.
We're actively pursuing strategies to reduce our grille inventory levels, which I will describe later.
In response to deteriorating macroeconomic conditions and the corresponding pressure on demand.
We have implemented measures to manage near term profitability protect liquidity and simplify our strategic focus.
Firstly quickly respond to the softening demand in Q2 by reducing planned expenses and by prioritizing initiatives with a predictable return on investment.
Second we identified and subsequently actualized material cost saving measures, including a reduction in workforce the suspension of operations of trigger provisions and the closure of our Mexico factory.
These measures were implemented in July and are expected to result in annualized savings of approximately $20 million.
We will continue to evaluate expense levers as we reposition the business for 2023 and beyond.
We also remain focused on driving gross margin improvements.
Margin task force continues to identify cost improvements that spanned product sourcing to supply chain optimization.
This is a core capability that will catalyze continuous improvements to gross margin independent macro dynamics.
We are seeing improving macro conditions in inbound container rates from Asia as well as favorability in currency.
We don't anticipate these emerging tailwind to materially impact 2022 margins given expected inventory churns, but we are optimistic that they could benefit our 2023 margins.
Finally, we are actively working through excess inventory levels remain elevated both in channel and on our balance sheet.
To rebalance in channel inventory with current demand trends and a correspondingly work down on hand inventory to normal levels. We are focused on demand and supply levers first.
We are strategically pulsing promotions to drive incremental sell through.
Second we are addressing with softer demand trends sub $1000 with a change to opening price points.
Last we are managing our factories to minimum production levels as we work down excess on hand inventory.
We expect these actions to result in substantially normalized inventory levels by the end of 2022.
Turning to our guidance for fiscal year 2022.
We are lowering our full year revenue guidance to 642 $660 million.
And our adjusted EBITDA guidance to 35% to $45 million.
There are three factors that influenced our lower guidance range.
We are flowing through the lower than projected second quarter results.
We are forecasting sustained pressure on demand through the second half of 2022.
Last we are anticipating significant retailer destocking, which will result in lower replenishment orders.
These factors will pressure selling in the second half of 2022, and we will have an outsized impact on our third quarter sales performance, which we're forecasting to be down as much as 50% compared to the third quarter of 2021.
In terms of gross margin, we are increasing our outlook to the high end of our prior guidance range of 34% to 35%.
System with our previous forecast.
<unk> gross margin in the second half of the year to track below first half results.
We expect Q3 to represent the low point in the year and to be materially lower than full year guidance.
On SG&A, although we initiated certain cost measures in late Q2, the largest operating expense reductions were actualized in late July as a result, we expect these expense reductions to have the most impact on the fourth quarter.
Please note that our guidance for gross margin and EBITDA is exclusive of the $6 million to $7 million of pre tax charges, we expect to incur in conjunction with the cost reduction measures implemented in July .
Guidance also excludes the $111 million impairment charge, we recorded in the second quarter.
Overall, the macroeconomic backdrop is presenting significant near term challenges to our business. However, I believe we have put the right actions in place to position the company to navigate this dynamic environment.
While we are expecting a highly challenging second half of the year I remain confident in the long term opportunity for chegg or to gain share and penetration.
And with that we will open the call to questions operator.
If you would like to ask a question. Please press star followed by one on your telephone keypad if for any reason you'd like to remove that question. Please press star followed by two again to ask a question press Star one.
Our first question comes from Simon Siegel with BMO. Your line is now open.
Thanks, Hey, everyone. Good afternoon can we.
In light of everything else the raised full year gross margin expectations interesting all things considered I think you did beat this quarter's gross margin so can.
Can we drill into the comfort in raising that gross margin a bit more maybe specifically address the comment about selective promotions you might do maybe of what youre thinking about freight will be in the back half maybe.
Maybe give a little more color on the cadence of <unk> versus <unk> in the rate there and then and then if you can just.
What was that shift in grill product mix that you mentioned that impacted this quarter. Thanks a lot.
Yes, its I mean has it gone so on the on the gross margin side, Yes, we're just building confidence in the forecast.
And some of the predictability that we're seeing in gross margin.
We were definitely.
Fine tuned in terms of the effort that took place both into how we forecast growth margin.
How we've configured around.
These initiatives tied to our gross margin path for us and so as you think about this dynamic there continue to be macro pressures.
That we face in growth margin, but they're stabilizing.
And so Fortunately, we're not seeing building headwinds there I think second we're starting to actually realize some benefit in cost of <unk>.
Cost of goods specific to currency, so that's becoming a tailwind and we're starting to see that materialize in gross margin and we expect that to be <unk>.
The remainder of the year.
The task force continues to unlock savings that we captured in the run rate economics of the future P&L. So that creates a nice foundation as we kind of build our strategy around how to move inventory and posting these promotions accordingly, and I think just given some of the tail winds that are building improve predictability.
The benefit from direct import which is offsetting some of the.
The inbound transportation costs.
As well as just some other improvements whether it be in dilution or other areas of the business, we feel like and on top of it just the fact that the price increases that we've taken over the last three quarters are doing what they were intended to do we have some cushion within gross margin.
Two pulse these promotions.
Impacting gross margin and in fact, we have confidence that we can raise to the high end of what we guided to and so those are really the factors that give us confidence that not only can we raise but we can raise in light of the fact that we will propose one or two additional promotions this year.
Add to that that we're not only going to pulse promotions.
And intend to offset some of the expense tied to those promotions.
These levers in gross margin were also going to offset any potential flow through impact down to EBITDA with adjustments to opex and so one of those adjustments of bringing top of funnel marketing down.
In effect to fund some of these promotions and so on balance we still feel confident in the high end of the range even with these promotions in place and I believe that Thats at least one positive trend as we forecast gross margin through the remainder of the year on the on the mix side, it's really tied to the new <unk>.
Offering above $3000, so the new Timberline grill.
And that is kind of early stages low volume, we haven't reached economies to really extract margin out of that product.
It's so new in the market, but that is having a dilutive impact on grill mix overall, and thats really whats, reflecting in the mix comment.
Great. Thanks, and then maybe Jeremy just picking on that the marketing comment so.
Recognizing the challenges now, but also noting your comments about the long term opportunity. How do you want us to think about or how are you thinking about I guess approaching lower pulling back on marketing now too, which makes sense with reps versus the notion of brand awareness switch.
There's obviously as you think about the Drager brand going forward.
Yes.
Thoughts.
First is that.
It became clear to us as we came into the spring that consumers were focused elsewhere, notably on sort of travel leisure experienced driven spend and so that was the first.
Sort of strong indication that we should be pulling back.
I think also.
As we think about the next let's say six to six to 12 months.
Until we start investing again more meaningfully and top of funnel for customer acquisition.
Two things that were that were focused on the.
The first is execution at retail we have a field sales team of 50 individuals and ensure that the brand is set well at retail.
We're really trading retail associates to capture the captive traffic that is walking walking into their stores are important.
Second as an investment in I would say community engagement, which is more sort of mid funnel.
Ensuring that the brand stays strong metrics around engagement cookie.
Cooking social engagement.
The leverage we get on that is not only long term brand strength.
But it's it's evangelism in the near term, we feel like that's a that's a better and more predictable investment.
Until we feel like we both have investment capacity and the consumer who is who is more focused on this category.
Yes.
Great. Thanks, a lot guys best of luck for the rest of year.
Thanks.
Our next question comes from John Glass with Morgan Stanley . Your line is now open.
Thanks. Good afternoon first can you can you just talk do you have a sense what is the size of the inventory at the retail channel.
Either metric either days.
Outstanding or absolute dollar amount that's there.
Yes.
We don't.
We're not going to speak to that specifically.
On on or we don't we won't see that kind of publicly but.
I think what I would generally say two to answer the question is.
<unk>.
There they are much higher than we typically like them to be we've talked in the past about our collaborative planning process with supply chain with supply.
With the supply.
The supply planners at our largest retail accounts and we typically try to hold inventory levels consistent within a band that we're both comfortable with and that typically aligns with our retail partner strategy as they manage on hand inventory levels to support future growth.
Performance at retail and I think what ultimately happened is heading into the year.
And channel inventory levels were probably slightly above what they normally are and that's due to the fact that our retail partners had made a decision coming out of the pandemic in a position of sort of starved inventory and sort of out of stock.
Product that they ultimately right sized and probably Overcorrected Jeremy alluded to this both effects, which is obviously headline news and I think we're all familiar with now and that began to grow.
Over the course of Q1, which typically happens.
Ahead of our peak sell through season.
And I think what ultimately took place.
Late in May when we started to pick up some some real demand signals that suggest any deviation from expectations.
Is that there was going to be a heavier in channel inventory problems and then we were hoping for so our team started to react in kind and began partnering with with retail to try to figure out what's going on what their readers.
And they were actually even later than we were to react.
And ultimately in kind of late and in June they started to react accordingly, and that took the form of kind of a fairly aggressive destocking effort, which we believe will persist through the remainder of the year and they are also actually targeting lower on hand inventory levels than what they normally target pre pandemic, that's something that we're working.
Through and ultimately may not be a sustained trend because it isn't entirely makes sense, but it's going to be a partnership in terms of how we navigate this challenge both in channel as well as on our own balance sheet in order to try to drive these these excess or higher end channel inventory.
Level down throughout the course of the year and so at the end of the day, it's a manageable problem. It's not a problem that we believe needs to persist through say the end of 'twenty three and believe we can.
Largely over largely correct in channel inventory levels with our larger accounts by year end. The only other point that I would add is it's not necessarily a systemic problem across the board our specialty retail account for example don't tend to hold more than let's say 30 days of inventory because they just don't have.
Stock rooms to hold that inventory, nor do they have already seen to carry excess and so that tends to be more of a.
Replenishment model more predictable early seeing these bigger in channel inventory levels sitting with our larger accounts and that's something that we're aggressively working on to ensure that we find ourselves in a better spot by year end.
Thanks for that and can you just you talked about the leverage ratio I think is around seven turns can you just talk about covenant.
Covenant risk or access to incremental liquidity, if you needed I assume this is a period you thought you'd be getting cash from reduced inventories that didn't happen.
Can you just paint that picture, where you are in that liquidity front. Please.
Yeah for sure. So liquidity is our number one focus and.
At least through the end of June we feel comfortable with.
Liquidity position, we still have nice capacity on our cash flow revolver.
Little bit of cash on the balance sheet.
But most of that that that liquidity is really tied up in inventory and again thats something that is going to take longer to work through which is why we shifted our viewpoint on cash flow generation this year.
The covenant side, we're proactively managing balance sheet, we always do and one of the things that we initiate a initiated in kind of Q2, and then heading into Q3 as a as an amendment holiday on our credit agreement, which will allow for one.
An increase to our covenant ratio from six two turns to eight five turns and that provides ample relief on the covenant and an ample cushion as we manage.
<unk> EBITDA as defined by that credit agreement through year end, and so that really checks the box on providing additional flexibility to kind of navigate this higher leverage period of time and provide cushion against that covenant, but at the end of the day. Our main focus really now is on liquidity and ensuring that we're making the right.
Actions are taking the right actions to preserve and protect liquidity in a fairly challenging moment and as we sort of work down these excess inventory levels.
Find ourselves in a much better liquidity position at the start of 2023, So I'd say that we're feeling pretty good about some of these efforts and that we've sort of put into motion.
And we're fortunate in that we have good partners on the credit side that will allow us to bridge from now to when the covenant holiday expires.
The amendment holiday expires, which is.
At the end of Q2 2023.
Got it. Thank you that's helpful.
Yeah.
Our next question comes from.
<unk> <unk> with credit Suisse. Your line is now open.
Hi, guys could you talk a little bit about.
Kind of inventory in the supply chain versus number of units.
You've already talked quite a bit about inventory yet.
Retail partners and such but not that long ago, we had the capacity.
The constraint in the supply chain constraint. So you still have a lot of units I guess coming over and how do you.
Account for that given the new environment.
Yes. Good question so no we.
We've talked a little bit about on our prepared remarks around our strategy.
Two to work down the higher inventory levels.
And it really starts with kind of managing down in channels like I referenced earlier, and we're doing that through a combination of.
Of actions, one of which is pushing incremental promotions, which we've learned based on sell through data when we when we promote that there is a very.
Nice lift and sell through so that's really one that kind of work down those levels. We've actually also lowered lowered or reverted back to our original price points on our entry level products.
Stimulate more growth sub $1000, where we're seeing more sensitivity.
With with consumers that are purchasing below $1000 and we're seeing a nice lift there.
And then obviously just working with our retailers to ensure that we're moving product in and we're sort of in lockstep as they as they destock.
On the supply side, we're working with our factories.
Bring there are we have been working with our factories to bring those those production levels down to sort of minimum levels, which in turn will allow us to focus primarily on what we have on hand, and so from an in transit inventory standpoint, we're going to manage that down to a very low number.
And that in turn should accelerate our ability to work down our on hand levels in conjunction with.
Improving in channel, which in turn should ultimately position us at the start of 'twenty, three and a much better spot. So that we can rebalance sell in against the sell through and replenishment and fortifying steady state.
Just on that balance and so that's really what we're focused on.
And feel confident that that will get there.
Largely by yearend.
Got it and then from a demand perspective have you guys thought about or is there anything maybe you can add on perhaps what we're seeing right now is just a little bit of demand pull forward.
The replacement cycle. If it was a typical I think we were using kind of four years or something as a typical replacement cycle.
Maybe that shrunk coming.
Coming out of the pandemic.
If you think of maybe what a run rate would look like can you maybe just give some context on.
Some of this just demand pull forward as opposed to.
Some of these bigger macro things that.
We're worried about across a whole series of industries.
Yes.
Great question it is.
It's not easy to.
Really pull apart all of the factors driving demand there certainly has been a fair bit of noise that we felt since March.
I think it's clear that they're that there was some pull forward.
This is a fairly steady business.
Fairly city category, the outdoor cooking category that was growing low single digits.
Grew mid high teens in 'twenty, one so although there may have been some nominal incremental penetration in the U S household there was probably some pull forward of replacement cycles.
Hard to know how.
How much of that how much of what we're feeling now.
As a function of that pull forward, but certainly some of it.
Relative to.
General consumer weakness.
The consumer <unk>.
Reprioritising discretionary spend towards travel.
It is something that we're monitoring closely at a category level and I would just say one of the other trends that we're seeing in the category. That's notable is that.
There is.
We're softness opening price points and I think thats.
That probably speaks a little bit more too.
At least that that trend.
Towards consumer weakness.
The combination of three things.
I would add though that with with some of that pull forward I mean, the benefit of this business model is when you accelerate the installed base of Grilles that in turn I think drives improvements or growth across.
Our consumables business and even accessories and so when you look at both sell in as reported in Q2 as well as sell through trends across our consumables and accessories categories. Youre just not seeing the same impact right. So on a two and a three year stack even year over year. When you look at sell through trends across pellets.
<unk> and other consumables the decline is fairly muted.
And in somewhat comparable to what we reported in our GAAP financials and I think at the end of the day that really helps sort of stabilize some of the pain, we're feeling with maybe some of that pull forward and how that impacts future growth or at least growth in year around the grill category.
And I think Thats, a stabilizing factor that we really always want to lean into I think the behavior of our consumers and how they interact with the product as measured by our Iot data sort of attach rates on pellets, they're holding at levels that makes both both makes sense and haven't really deviated from normal trends and so those are.
All really positive signals pre a rebound and grill growth, which we're really taking advantage of and believe that the strength of the broader portfolio is something thats sustainable and durable long term, we just so happen that you're dealing with.
A more challenging environment right now with with with our higher priced products.
Meaning our grill category.
Okay, Great that's useful thank you guys.
Our next question comes from Peter.
<unk> with Baird. Your line is now open.
Oh, Hey, guys couple of questions. So Tom can you maybe give us some help here what what level of inventory our dollar inventory on the balance sheet.
Aligned with.
With this normalization of goal that you have.
And then how are you thinking about.
Free cash flow this year.
Capex spend just trying to understand given given the dynamics you've got here laid out for the backup there where does it put you on those metrics by the end of the year.
Yes happy to.
So as we think about kind of our general guidelines as we manage inventory and I guess to just unpack the Q2 inventory levels a little bit further I spoke on the call to the fact that about $14 million of that is meter which wasn't in the baseline. So you have to remove that and then if you nor.
<unk> Q2 for pre pandemic days in inventory.
And you account for the fact that our inventory is burdened with excess cost between inbound transportation.
The inflationary pressures on raw materials as well as.
Globus historically, some some some negative impact on currency, which is now improving and then you look at the excess inventory component of sort of the build in total inventory for Q2 as you bridge from Q to Q.
Q2 of 'twenty one.
I would say that.
Split between outside of meter the split between the higher burden and the excess inventory probably weighs more in favor with access but that delta is probably a mix of kind of <unk>.
30% to 50%.
On on excess and then the remainder being just a higher cost of inventory and so just by nature inventory is going to sort of sit at higher levels, because it's more expensive to carry right now and that should improve over time as these macro factors improve and we can capture that in future purchases out of Asia.
<unk>.
But as you sort of push that then forward what we're really focused on is the excess inventory component meter has the inventory that they need the burden on on inventory carrying cost is what it is until that sort of improves from a macro standpoint, and the remainder is what we're sort of in <unk>.
Lola for Mexican excess inventory standpoint, and so the general guardrails to answer your question or.
We typically try to manage to roughly 90 days of forward forecasted revenue.
And that will obviously be will sort of deviate from 90 days when you when you measure days and inventory on a trailing basis and so by year end. If you think about a business that's targeting sort of 90 days of forward.
Inventory.
And we may not fully get there, we're probably thinking 100 110 days that would in turn translate to a days in inventory level that's probably.
Much higher than we would and then we would.
Expect in sort of a more steady state environment, and it's probably sit.
Sitting above sort of.
At or slightly above the days in inventory that were reporting for Q2, but in a much better position as we head into peak season, and we believe a more normalized level because we're going to have inventory that quickly moves when we start to set product in Q1 of 2023 and in turn will dramatically.
<unk> accelerates that DIY target.
So that by kind of the end of Q1, we're in a much better spot and it's more in line with how we want to manage these targets going forward if that makes sense and so as you sort of measure it on a TTM basis, that's going to look much higher than what we believe will ultimately be a healthy inventory position ahead of going to be a much.
Larger seasonal period for the business relative to what's ultimately informing a higher higher DIY at the end of the year, which is accounting for lower lower inventory or lower sales levels in Q3, and Q4, So I would anticipate days in inventory to hold fairly consistently through year end.
But know that there's a.
We're much better positioned heading into peak season to bring that down on a TTM measure.
Yes.
Okay. That's helpful anything on Capex or free cash flow as you think about the full year.
Free cash flow.
Yes, we expect.
Free cash flow negative by year end.
Okay, and how about just given the fact that it will happen.
Inventory hit again.
Yes, yes understood.
Level of Capex spend youre expecting for the year.
If thats been adjusted at all.
Yes, we're adjusting that down we have a few commitments that were locked into but we're probably targeting between four and sort of $6 million a quarter through year end.
And then as we think about capitalized.
Yes.
That's great and then how are we thinking about.
Just real revenue I guess over the back half of the year <unk> versus <unk> and what are you guys seeing in terms of market share I mean, obviously, there's not a lot of them.
The segment right now, but is there any reads on market share that you guys can consider.
Sure.
Yes, the market share holding consistently at least for trigger our market share is held through on a year to date basis. We are seeing share decline amongst some of our competitors. So I think that's a positive signal in that the category is down and triggers maintaining share.
And in terms of kind of a read through the remainder of the year, we don't really have.
A specific.
A specific number to share, but I think at least through Q2, we're holding our market share and I think thats a good brand signal.
Okay, and then last question I would just have us around gross margin.
Youre, adding about 35% for this year you talked about some benefits from direct your direct import program, obviously, the container rate dynamics, which which could end up playing out next year. How do you think about that longer term. There are a lot of factors that hit you.
This year.
If you just think about things not necessarily getting any better than where they are today.
But the container rates start to come in I mean, how much of a benefit could that be next year is that a 100 basis points or 250.
How would you help us frame that potential benefit in 2023 of your gross margin.
Yes, it's a little too early to speak to that right now, but what I would say is that as you look at spot container rates to the east and the West coast.
Compared to like peak peak levels in the back half of last year, they're off about 50% and I would say there are probably 20% to 25%.
Relative to the <unk> 2021 average and Thats, a meaningful improvement right, it's not getting anywhere near what we were paying pre pandemic levels, but if you think about a dynamic where inbound transportation sort of hovering.
Kind of 20% to 25% below those averages last year and that trend seems to be improving from here through the end of the year and the fact that at least year to date inbound transportation is probably driving two years to three 400 basis points of margin compression it was much larger than the <unk>.
Back half of last year, it could be a substantial tail.
Tailwind to gross margin and so something that we're watching and believe that will be a tailwind for 'twenty, three but a little bit a little bit too early to speak specifically to what that could mean.
Our next question comes from Sharon Zackfia with William Blair.
Please limit yourself to asking one question and one follow up please thank you.
Your line is now open.
Hey, guys. This is Alex on for Sharon and yes. So we would just wondering if you could maybe talk through the $20 million of annualized savings.
How much of that is in SG&A versus cost of sales and then do you guys have any plans to reinvest part of those savings into sales driving initiatives going forward.
Yeah. Good question. So to answer your first question, it's mostly SG&A and just to reiterate it is a run rate number right. So that's not what we anticipate.
Capturing in our run rate economics through the remainder of the year, that's sort of the annualized component.
Extended annualized.
Savings based on those initiatives and they are largely if not a really a majority of those savings will be in SG&A.
Sure.
In terms of.
To answer your second question I think right now the focus is more on profitability.
Then in growth, we are pulling levers to drive and stimulate growth to the extent that we can where we have controls.
One of those is pulsing promotions as I had mentioned earlier and obviously adjusting price at entry.
At opening price points for the brand.
Well as a host of other initiatives that our sales team is constantly focused on.
But as of right now I think we need to really prioritize profitability, which in turn prioritizes liquidity and we aren't planning to take those those savings and reinvest them anywhere else, we want those to flow through.
And the profitability.
Okay, great. Thanks for that and then just one other quick one if you could if I could squeeze this in.
So you guys talked about the impact the impact to the.
The sub 1000 growth.
Some consumers are slowing purchases there could you maybe talk to that.
The higher price grills, and just qualitatively, what you're seeing on sales momentum on that side.
You touched on the.
The timberline XL, having a bit just not having economics, there, but just what youre seeing on the qualitative side of the higher price growth.
Yes, so I think below $1000 were seeing.
We are seeing declines in growth.
And thats, partially offset by what by collectively Samsung growth above $1000 and that is being buoyed up by.
The new timberline grills, but we arent seeing the same pressures above $1000 and on a collective basis, some growth above $1000 relative to our.
A fairly substantial decline below 1000, which is sort of adding up to the decline in our grill category for the quarter.
And those trends are both consistent.
From a sell in standpoint, as well as a sell through standpoint.
Okay, great thanks for that and pass it on.
Okay.
Our next question comes from Peter Keith with Piper Sandler Your line is now open.
Hey, Thanks, Good afternoon, everyone I wanted to circle back on some of the balance sheet questions and the debt leverage I'm, just still a real simple math, but if youre carrying a $465 million of debt right now and youre going to do $40 million of EBITDA for the year at the midpoint of the Guy that gets you to 11 five times leverage so that would be well.
Above that I think the eight five times leverage holiday that youre getting.
And dominant same time, you're saying free cash flow is probably gonna be negative for the year. So how do you not land above that that covenant limit as we look to the back half of the year.
Yes, no. It's a good question and definitely worth clarifying so our credit agreement defined EBITDA differently. So what we report.
Our our financial information in the 10-Q or.
<unk> 10-K has a different definition of EBITDA doesn't take advantage of certain add backs that are permitted in the credit agreement.
It's also a it's also measured based on a different quantum of debt. So we're able to exclude the <unk> facility as part of the first lien net leverage ratio test and so that eight five covenant is based on first lien net leverage Im sorry, first lien net debt exclusive of the.
Our facility and consolidated EBITDA, which is the definition in our credit agreement that allows for incremental add backs that up.
They are fairly material and sort of.
Define.
Consolidated EBITDA number on a pro forma basis, that's substantially larger than what we report on our financials and so based on that measure.
As we look at kind of where we landed in Q2, we probably had.
A little bit of cushion against what was originally the covenant of $6 two as we.
Kind of factor in the amendment holiday in the eight five covenant.
Covenant.
We actually have substantially more cushion as measured by that pro forma or consolidated EBITDA definition.
And it provides for far more flexibility in terms of how we manage leverage with our creditors.
And I think that ample cushion translates into.
A nice bridge for trigger to really focus more on execution navigating these business challenges without having to worry about.
Leverages headed because we can manage through that based on this amendment.
As well as just how do we sort of manage EBITDA differently from.
A credit standpoint, and so that in turn adds more and more and more cushion.
The covenant and and allows us to again, just focus on executing and running the business versus having to aggressively manage against that covenant and focus more on liquidity and so thats really kind of the nuance. There is it's not a function of the EBITDA that we can report it's actually a different.
The EBITDA that that translates into far more cushion against that eight five.
Leverage ratio or covenants that we have to track against from quarter to quarter.
Okay. That's helpful. And then maybe pivot a question to Jeremy So theres, obviously, some some pullback on expenses a little bit on advertising, but some of your key growth initiatives around the retail and merchandising efforts and product innovation product launches are those remaining on plan and on track.
You'll have more of these things rolling out in 2023 or are those areas pullback as well.
It's great question I would I would start probably by saying that.
In a moment where investment capacity is constrained.
Is a great, forcing mechanism of prioritization and discipline.
And we've spent a lot of time thinking about where do we get the highest return from our investments. There is no question that the two that you've that you have named or at the top of that list four.
Sales and marketing investment that is available. So merchandising we have believed from the very first day before you had a marketing department that showcase the brand effectively at retail.
A good investment.
<unk> been there to speak to and communicate with captive consumers we will continue.
Those investments, we will obviously see carefully about which retailers which retail locations.
And what quantum of investment and point of sale merchandising.
But those that are the comparable this will absolutely get funded.
Across channels and we've spoken specifically about our investment in upgrading brand presence in home depot. Those will continue we had a plan in the back half of the year and we're going to continue to execute on that plan on the product side I would say.
I would make a similar comment which is product is the lifeblood of our future. We know that with a strong brand and community and great Channel partners that we would put good product into those.
Into that engine, we get a great return and so we.
We are we're continuing our product investments.
Again on the product side.
There is a lot going on behind the scenes and at certain forces us to determine where do we get the highest return to prioritize that but I will say.
The level of discipline and thinking and resourcefulness that I have seen this year is unlike any other year that I've seen in the business.
So.
As much as.
These are challenging moments to go through I am very convinced that this will make us better as a team I like the investments that we're making in product.
Feel really good about the future there.
We are we're investing left but we're also doing less and.
I think we are sufficiently resourcing the future product.
Okay. Thanks for the feedback and good luck with the back half.
Thanks.
Our next question comes from Joe Feldman with Telsey Advisory Group. Your line is now open.
Yes, thanks, guys for taking the question with regard to the gross margin.
I know you mentioned once or twice that you feel you have a good cushion to do some <unk>.
Promotions and even with pulsing promotions you have this cushion, but I guess.
What is the cushion coming from is it because youre seeing supply chain costs come down or is it because of the mix.
Sure.
To higher margin consumable and accessory goods that is that what.
The cushion is that you are talking about.
Yeah. Good question, so like I said I think.
Year to date, our gross margin is tracking ahead of our internal plan not not considerably but it is tracking above and so we're starting to see some tailwind excellent.
I actually actually materialize in our financials on the promotion side, we're still going to be disciplined and so if you think historically.
How we manage promotions, we don't like this brand to be on sale.
But and so we've typically aligned to roughly three promotional periods a year.
Plan. This year was around four and we'll probably add one two maybe three additional promotions when it makes sense. So that's kind of number one we're not talking about being on promotion for most of the year. These are strategic promotions, where we believe that when we believe we are fishing when the Fisher eating and.
And believe that.
The benefit to that is there maybe come with some margin impact, but the gross profit dollars that flow through more than offset it I would say too we don't fully fund. These promotions that are in partnership with our retail partners and they help fund the promotions and so it's not a full sort of.
It doesn't fully flow through triggers P&L.
And I think the third pieces, we raised price three times, which does give some flexibility and permission to add a few promotions because we're obviously promoting off a much higher price points, which are offset much of the.
The gross margin impacts that we're facing from a macro standpoint. So those three factors really allow us to use these promotions in a way such that they wont be highly dilutive to gross margin as it relates to our guidance for full year and.
And like I said earlier in addition to those factors that are baked into gross margin. We're also funding these promotions via lower marketing spend and top of funnel because we believe in this environment.
Noting has more influence over demand than top of funnel demand creation, which tends to be more of a prospecting effort and has a longer tail to generating a return and so that's really kind of in combination.
We'll manage through this year with with posting a few incremental promotions, while avoiding a situation where they become dilutive beyond what we're guiding to at the high end of our range.
Okay understood Okay, thanks for explaining that.
And then it's.
My follow up actually was above the top of funnel marketing.
I guess.
Can you clarify then for me top of funnel versus promotion I mean aren't you either way Youre are you trying to bring in new people to buy the grille.
And so yes, we think you are but I think that well.
Yes, sorry go ahead.
No no. It's a great question like our top of funnel marketing strategy is still core it's a core component of how we think about the long term. We're just really focused in year and kind of on the short term.
And in this environment, we have to prioritize resources.
In areas where.
The return or the way we measure of return is far more predictable right and so in the case of in channel.
In channel inventory levels promotions are far more influential on our ability to move through those than top of funnel and so as we think about the mix of marketing. This year in particular in this may extend into 'twenty three we're going to de prioritize top of funnel, which for trigger is more about building the <unk>.
Marketing funnel and a more robust way because as we've spoken to earlier that initial consideration set which is highly correlated to brand awareness.
Is largely influenced by our strategy to attack top of funnel, which is more scalable and more.
And sort of more and more influencing of brand awareness, which in turn over time can drive more conversion off of a larger a larger funnel, but in this environment.
Because thats more of a prospecting effort and has a longer tail to every turn.
Instead focused on kind of middle lower funnel from a marketing and demand creation standpoint.
Do you have a more kind of one to one relationship between spend and return on that spend so it's a more immediate conversion.
The consumer and.
And likewise promotions or similar right and so in an environment, where consumers may be more focused on spending discretionary dollars.
On experiences or travel or things outside of the home promotions arent opportunity to stimulate more immediate growth and at retail, which and this year is more important than investments in prospecting, which will take effect over a longer time horizon.
That was the final question, so I'll pass the call back over to the management team for additional remarks.
Thanks.
Great thoughtful questions.
There's no there's no doubt this is a.
This is a challenging moment.
From a macro perspective.
Sure.
As we play in the category of outdoor cooking.
And Wade through.
Precedented period in terms of decline in the category.
I would say that this is also a moment or the type of moment.
Defined teams.
No.
Willingness to make hard decisions.
Desire to be better to be smarter.
And a careful balance between.
The near term realities that we're playing in that we live in.
A medium to long term of offensive and this is a this is a brand that is.
It's built to grow.
It is built to disrupt that hasnt changed.
But I think what youll see in the near term is a level of.
Greg actually what I would submit to you in the near term as the level of grit levels of resourcefulness a level of discipline.
So that as we move through this moment we are positioned.
To be.
Even better.
As we reinvest back into the business in a way that you have for many years. So that's a commitment I feel nothing but confidence in the future and the team and we'll slog through the environment that we're in thanks.
That concludes the conference call. Thank you for your participation you may now disconnect your lines.