Q3 2022 Traeger Inc Earnings Call
[music].
Hello, and welcome to todays <unk> third quarter fiscal 2022 earnings Conference call. My name is Bailey and I'll be your moderator for today's call.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
I would now like to pass the conference over to our host Knickerbockers, Vice President of Investor Relations.
Please go ahead.
Good afternoon, everyone. Thank you for joining triggers call to discuss its third quarter 2022 results, which were released this afternoon and can be found on our website at investors not trigger dot com.
Back as Vice President of Investor Relations that trigger with me on the call today are Jeremy Andrews, Our Chief Executive Officer, Dom <unk>, our Chief Financial Officer.
Before I get started I want to remind everyone that management's remarks on this call may contain forward looking statements that are based on current expectations, but are subject to substantial risks and uncertainties that could cause actual results to differ materially from those expressed or implied herein.
We encourage you to review our annual report on Form 10-K for the year ended December 31 2021.
Our quarterly report on Form 10-Q for the quarter ended September 32022 once filed.
And our other SEC filings for a discussion of these factors and uncertainties, which are also available on the Investor relations portion of our website.
You should not take undue reliance on these forward looking statements, which speak only as of today and we undertake no obligation to update or revise them for any new information.
This call will also contain certain non-GAAP financial measures, which we believe are useful as supplemental measures. The most comparable GAAP financial measures and reconciliations of the non-GAAP measures contained herein as us GAAP measures are included in our earnings release, which is available on the Investor relations portion of our website at investors that trigger dot com now.
Now I'd like to turn the call over to Jeremy Anderson, Chief Executive Officer of trigger Jeremy. Thank.
Thank you Nick Thank you for joining our third quarter earnings call today, we'll discuss our third quarter results, our near term strategic priorities and our progress on our key growth pillars.
I will then turn the call over to Don to discuss details on our quarterly financial performance and to provide an update on our fiscal 2022 guidance.
As we anticipated third quarter was a highly challenging period.
After two years of record growth in 2020 in 2021, the grille industry is contracting in 2020 to.
Consumers are shifting expenditures towards services and leisure.
Way from discretionary big ticket goods and decades high inflation and ongoing geopolitical uncertainty are negatively impacting sentiment.
Moreover, retailers are increasingly cautious in their ordering behavior, given heightened levels of channel inventories.
As well as the risk of a recessionary slowdown.
These factors drove a 42% decline.
Third quarter sales with particular softness in our grille sales, which were down 64% versus last year.
Despite these challenges we are making progress on our near term priorities as we navigate the current environment.
We believe that our ongoing efforts to rationalize inventory reduce costs and to bolster our balance sheet and liquidity profile allowed traders to navigate the current operating environment and position the company for strong improvement, there's a macroeconomic pressures subside, having said that we acknowledged at the pace it.
Which we can drive certain of these improvements will be influenced by the broader economic environment, which remains highly volatile.
Third quarter, largely played out as we anticipated.
Sell through of our grills and retail was lower than last year, but consumer demand was roughly in line with our forecast coming into the quarter.
While demand was lower than 2021, the year over year decline in sell through during the quarter moderated from the declines we experienced in the first half of the year and grew at a strong three year CAGR.
We continue to view of near term sell through trends as challenging. However, we are seeing a modestly higher level of predictability in terms of consumer demand relative to earlier in the year.
Sell through in the quarter benefited from our strategy to drive incremental consumer demand with strategic promotions to consumer.
We are responding favorably to promotional discounts with both our smoke in summer and labor day promotions driving healthy consumer demand, allowing our retail partners to further work through on hand inventory.
Despite sell through trends that were in line with our projections in Q3 excess inventories across both the grill category in other product categories as well as cautious sentiment around the consumer and the macroeconomic environment are causing our retail partners to be highly conservative in their ordering behavior.
This has impacted our fourth quarter and we now expect our full year results to come in at or slightly below the low end of our prior guidance of 635% to $640 million in sales and 33% to $35 million in EBITDA. It is important to understand the magnitude of retailer destock.
Which is the largest driver of the decline in our grill sales in the second half of 2022, we believe that more than two thirds of the anticipated decline in grill sales in the second half of the year can be attributed to retailer destocking as opposed to lower levels of consumer demand.
Despite this near term rebalancing of supply and demand we do not believe retailers are retrenching from the grill category or from Trager.
The outdoor cooking category is resilient and historically has experienced fairly predictable growth.
We believe our retail partners remain committed to outdoor cooking and in particular to our brand.
Our long term caretakers and drive premium innovation the grill category.
Organizations committed to ensuring that the company is positioned for long term profitable growth at the same time, we are keenly aware of the near term challenges that face our industry as well as the overall economy and therefore, our focus on executing on our key tactical priorities.
These near term priorities will preserve profitability and cash flow.
Also creating healthier marketplace, specifically as we discussed last quarter, our key near term priorities.
Do you see in our cost structure, right sizing inventories and driving improvement in gross margin.
In July we implemented a restructuring plan in an effort to both drive operational efficiencies and to streamline organization will focus on our highest return initiatives.
These actions included the closure of trade or provisions as well as a reduction in force.
We realized meaningful savings from these actions in the third quarter and are reiterating our target run rate annualized savings of $20 million.
We are aggressively managing our expenses and will continue to stay highly disciplined as we move into 2023. Additionally.
Additionally, we have also taken steps to reduce our near term outlay for capital expenditures as we look to enhance cash flow and liquidity.
Our next near term priority is right sizing inventories, which remain elevated both in channel and on our balance sheet.
In terms of in channel inventory in the third quarter, we strategically increased our promotional cadence by adding two promotional periods.
Focus on discounts for Skus with excess channel inventory.
In terms of inventory on our balance sheet, we have materially lower production in Asia to give us the opportunity to work through our on hand inventory. These.
These actions combined with our retailers Destocking efforts resulted in some progress on our inventories.
However, this remains an ongoing effort, which we expect to continue into the first half of 2023.
Our next strategic priority is to drive gross margins Rick.
Recapturing gross margin is a key focus across the organization.
Our gross margin task force continued to work to identify and execute on cost savings across the supply chain.
Notably the team's efforts have led to expected improvements in product packaging and transportation costs in 2023 across our grill assortment as well as additional cost savings.
Associated with lower pallet and packing costs in our pellet business.
We are also seeing substantial reductions in certain input cost, including inbound freight rates and commodities like steel.
We are optimistic that our cost savings efforts and lower input costs should be margin tailwind in 2023.
However, it is important to note that we do not expect to see a material impact flowing through our income statement until we've worked through our higher cost inventory in mid 2023.
Moreover, we expect we will look to strategically and selectively reinvest some of these input cost improvement back into product and into pricing as we move into 2023 tactical priorities are of critical importance. However, we remain committed to our long term strategic growth pillars, let me discuss the progress we have.
Made in each of these areas.
Driving awareness of the trigger brand remains our largest long term growth opportunity at three 5% household penetration across the U S and mid teens penetration in our most mature markets. We believe there is substantial upside to be realized and driving brand awareness.
It is a testament to the momentum of our brand that we continue to make strong inroads in driving awareness. Despite a highly challenging market backdrop, and lower top of funnel marketing and investment capacity.
In fact, our unaided brand awareness hit an all time high in the third quarter, improving by 15% versus the beginning of this year and up 50% versus two years ago.
The continued growth and awareness of the <unk> brand and one of the most difficult periods in drilling history.
So the energy behind the brand and the strong connection we have with our user base.
Our grille owners are passionate about trager and act as evangelists organically driving brand recognition.
As evident when you look at our social media Kpis in the third quarter with our user generated content post up nearly 50% and video views more than tripling year over year across social platforms.
We also continued to drive awareness of the trigger brand through enhanced merchandising and product presentation at retail.
In September we rolled out a new merchandising treatment called flex well across 871 home depot doors.
<unk> is a trigger branded in bay backing.
That allows for branding shelving and hanging space for our products and is featured in home depot doors with premium Craig or merchandising.
Additionally, we added 314 Trager islands at home depot doors in the third quarter. These new merchandising enhancements.
Further add to triggers visibility on home depot floors.
Now onto product innovation, our next growth pillar.
In the third quarter, we had significant innovation in the consumable side.
In late September trigger partnered with whistle to collaborate on new products at the intersection of smoking whiskey.
Whistle take whiskey is one of the most awarded craft distilleries in the U S and so we were thrilled to launch our whiskey barrel pellet blended whisky hard barbecue sauce and whiskey desktop in collaboration with whistle pig <unk>.
<unk> orders have had good momentum in the launches picked up positive PR men's journal Byrne blog and food side in terms of Grill innovation. We are extremely excited about the new product pipeline as we move into 2023.
We expect to launch two new rules next year, both of which are planned to be on retail floors in the first quarter.
We have shown these new grills to some of our key retail partners and the early response has been fantastic.
It is too early to discuss these new products. However.
We will be able to provide more details when we report fourth quarter and March next year.
Suffice it to say, we expect <unk> to continue to deliver game changing innovation in 2023 and beyond our next growth pillar isn't driving recurring revenues.
While our consumables business was down versus prior year in the third quarter sell through of our pellets was only slightly below prior year.
In line with 2020 levels as.
As we look at connected Cook data the number of clicks continues to increase strongly as we grow our installed base of Grilles. In fact, there were over $1 million more cooks in the third quarter versus prior year, and almost $3 million more cooks versus third quarter in 2020.
This gives us confidence in our long term recurring revenue nature of the consumables business.
In the third quarter, we continued to expand our pellet offering with the introduction of 30 pound value size bags.
Furthermore, we continue to expand distribution of our pellets into the grocery channel and remain on track to gain 600 additional grocery doors for the year as we sell into grocers like Meyer giant Eagle Harris Teeter and Albertsons.
First growth pillar is to expand the tray your brand globally similar to the U S or international markets faced challenges in the third quarter as geopolitical turmoil and inflation negatively impacted consumer sentiment despite.
Despite these near term challenges, we continue to see evidence that the trigger brand has meaningful upside outside of our core U S market.
For example, we are seeing trade your success with the home depot in the U S translate to the Canadian market as well the home depot, Canada has leaned into the wood pellet grilling category, allowing traders to increase sell through by strong double digits in the third quarter contributing to increase sell through was an increase.
And the assortment and floor space of Treasury products and marketing investments behind the brand.
In summary, we are highly focused on executing upon our near term strategic priorities as we navigate the current environment, while remaining committed to our key long term growth pillars.
As a disruptor in outdoor cooking, we are positioned extremely well for long term success and I remain highly confident in the growth thesis for trigger in.
In the near term, we will focus on the variables that are within our control and we will remain agile given the volatile environment.
With that I'd like to turn the call over to Dom Dom.
Thanks, Jeremy and good afternoon, everyone.
Today I'll review, our third quarter performance before providing an update on our outlook for fiscal year 2022, I will also discuss some initial thoughts on 2023.
Second quarter revenues declined 42% to $94 million.
<unk> revenue declined 64% to $39 million impacted by materially lower unit volumes as our retail partners aggressively reduced replenishment orders in an effort to lower end channel inventories, partially offset by higher average selling prices related to price increases taken in the second half of 2021 in the first quarter of 2022.
Consumables revenue decreased 10% to $25 million.
Due to lower sales of pellets as retailers reduced on hand inventories offset by higher sales of rubs and sauces, which benefited from increased distribution.
Accessories revenue increased 18% to $30 million driven by strong growth at meter offset by lower sales of trigger branded accessories.
Geographically North America revenue was pressured by the aforementioned challenges in our U S business, along with negative growth in Canada.
Our rest of World business grew 10% driven by growth in media revenues in international markets.
Gross profit for the second quarter decreased to $26 million from $54 million last year.
<unk> profit margin was 27, 7%.
580 basis points to last year.
Excluding $1 $6 million of one time costs related to restructuring actions.
Gross margin was 29, 4%.
The decline in gross margin was driven by one higher logistics costs due to decreased leverage and increased outbound freight costs, which resulted in a 400 basis points of margin pressure to a crude discounts related to promotional activity, which resulted in 240 basis points of margin pressure.
Three one time costs related to restructuring activities in the third quarter, which resulted in 170 basis points of margin compression.
For higher drill cost and mix impact of 140 basis points and five the negative impact of provisions inventory liquidation, which impacted margins by 90 basis points.
These pressures were offset by 440 basis points of favorability driven by our pricing actions.
Sales and marketing expenses were $25 million compared to $49 million in the third quarter last year.
The decrease was driven primarily by lower stock based compensation and a reduction in top of funnel marketing and lower professional fees.
Third quarter sales and marketing expense benefited from restructuring and cost savings actions taken in the third quarter in response to the lower revenue run rate.
General and administrative expenses were $71 million compared to $76 million in the third quarter of last year.
The decrease in the general and administrative expense was driven primarily by lower professional fees and performance compensation expense offset by higher stock based compensation expense largely due to the expense related to the accelerated investing of the CEO of <unk> and psus.
Excluding stock based compensation.
General and administrative expense was down $11 million versus prior year.
In the third quarter.
<unk> had a $110 million noncash impairment charge to our goodwill related to the adverse impacts of macroeconomic conditions. Please note. This amount is an estimate and will be finalized prior to filing our third quarter 10-Q.
As a result of these factors net loss for the third quarter was $210 million.
As compared to a net loss of $89 million in the third quarter last year net loss per diluted share was $1 75.
Compared to a loss of 78% in the third quarter of last year.
Adjusted net loss for the quarter was $26 million or 21 per diluted share as compared to adjusted net income of $7 million or <unk> <unk> per diluted share in the same period last year.
Adjusted EBITDA was a loss of $12 5 million in the third quarter as compared to adjusted EBITDA of $4 $1 million in the same period last year.
Now turning to the balance sheet at.
At the end of the third quarter cash and cash equivalents totaled $8 million 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 end of the quarter. The company had drawn down $13 million under its receivables financing agreement and $47 million on its revolving credit facility, resulting in total net debt of $444 million and a net leverage ratio of eight 9% from a liquidity perspective.
We ended the third quarter with total liquidity of $86 million.
Inventory at the end of the third quarter was $162 million compared to $115 million at the end of the third quarter last year.
Three factors contributed to the increase in inventory versus prior year.
First the landed cost of the Grilles increased versus prior year, driven by higher inbound freight and other input costs.
Grille units in inventory remained elevated given lower than anticipated sales in 2022.
Finally, neater accounted for approximately $5 million of the increase with this level of growth aligned with its strong topline momentum versus last year.
As Jeremy discussed we are actively working to optimize our on hand inventory and we have materially reduced production to better align supply with their reduced demand forecast.
With respect to channel inventories, we continue to be highly focused on right sizing excess supply and channel in collaboration with our retail partners.
During the quarter.
Sell through of drills remain negative to last year. However, the decline moderated relative to the first half of the year. This improvement was partially driven by the addition of two promotions, which resulted in stronger sell through and allowed our retail partners to accelerate the reduction of their existing inventories.
While the improvement in sell through combined with the retailers Destocking efforts drove a sequential reduction in inventory at weeks of supply channel inventories remain elevated and we expect retailer destocking to continue into the first half of next year.
Turning to our outlook for full year 2022, we now anticipate full year sales of $635 million to $640 million and EBITDA of $33 million to $35 million or updated you takes into account anticipated pressure on fourth quarter sales driven by retailers Destocking action.
<unk>, which will negatively impact the grille in consumable sales in the quarter offset by expected strength of our meter business. Furthermore.
Also expecting pressure on our pellets business with a large customer introduce at a private label pellet offering excluding this customer our pellet business is healthy and we are expecting pellet sell through to be flat to up to last year in the fourth quarter shifting.
Shifting to gross margin, we continue to forecast full year gross margin of approximately 35% when adjusting for the $1 6 million in one time restructuring costs, we incurred in the third quarter.
We expect that fourth quarter sales and marketing and general and administrative expenses will benefit from the cost reduction efforts and we reiterate our target of $20 million and run rate annualized savings.
Last while it is too early to discuss specific guidance for 2023 I'd like to provide some initial high level thoughts as we look forward to and plan for next year.
I'll leave that retailer Destocking will continue to pressure our sell in during the first half of 2023 as channel inventories remain elevated and retailer sentiment as cautious as we exit our peak selling season in Q2 and move into the second half of 2023, we believe inventory replenishment dynamics should be more normalized and fair.
We will be lapping the large destocking that occurred in the second half of 2022.
The pace at which inventory dynamics normalize will be governed by consumer demand.
Given the wide range of outcomes in terms of inflation GDP growth and employment next year.
We'll remain nimble and we will plan our business prudently for gross margin, we are expecting a more favorable cost backdrop in 2023, as we are seeing tailwind and input cost, including inbound freight rates and commodities. Furthermore, we will begin to realize some savings related to our efforts to reduce supply chain and input costs. However.
As Jeremy noted earlier, we do not expect to see the benefit of these margin tailwind has flowed through the P&L until we work through our existing high cost inventory.
We will also look to selectively reinvest some of the savings from input cost reductions back into pricing and enter product.
Given the volatility of the environment.
We'll continue to manage our expenses tightly with a focus on investing into our highest return initiatives in conjunction with cost reduction efforts to drive efficiency and to enhance profitability and cash flow.
Furthermore, next year's expenses will benefit from the annualized nation of the restructuring and cost savings actions. We took earlier in the third quarter of 2022 in summary, we are taking the necessary actions to right size inventories and to optimize our cost structure to enhance profitability and liquidity.
These actions will allow a trigger to successfully navigate the current environment as well as positioning the business for strong growth and profitability for the long term.
With that we will open the call to questions operator.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad. If you would like to at least that question. Please press star followed by two again to ask a question. Please press star followed by one.
As a reminder, if you are using a speakerphone. Please remember to pick up your handset before asking your question behind their request that you keep to one question and one follow up thank you.
Our first question today comes from the line of Simeon Siegel from BMO. Please go ahead. Your line is now open.
Thanks, Hey, guys good evening.
So I.
I guess I'm just wondering how you guys.
Jeremy So I'm just wondering how you assess what is too much supply, forcing pricing pressure versus maybe just a lighter level of demand as people work through post pandemic replenishment cycles and on the back of that how you guys are going to approach thinking about the need for go forward promotional discount needs.
And then maybe lastly, just on the back of that do you guys want to give us a like for like version of it of ASP to counter some of the mixed dynamics. Thank you.
Thanks.
Yes, I think I can help answer some of those so on the demand question.
I think it's pretty straightforward in terms of the dynamics between sell through and this concept of Destocking and you can see it in our seasonality right like we've never seen or experienced seasonality shift for this low in terms of the trough in Q3 and the slight uptick in Q4.
And as you kind of marry that dynamic with sell through trends that were seeing a sequential improvement in terms of the year over year comp coming out of peak season and in the first half of the year and on top of that as we post a few incremental promotions in Q3, we've actually seen nice.
Comps even over prior year in the data.
And so we're seeing some stability from a sell through standpoint, and the growth rate as you measure that against prior year is very different than what youre seeing from a sell in standpoint, and so effectively consumer demand is holding relative to our expectations in the back half of the year.
It found some some some steadiness over the first half of the year and a three year comp is still holding really well as you compare this year versus kind of pre pandemic norms. So those I think are positive signals that from a demand standpoint, although there is softness it still.
Positive from our perspective, but the challenge is the fact that we have too much inventory in channel and I think that's contributing to this the sell in dynamic.
As a retailer a destock and we kind of take some of that that that impact from a revenue standpoint, this year, which we're obviously deliberately willing to do.
And I think thats, what youre seeing in our P&L relative to what we're seeing from a demand standpoint.
From a promotional standpoint, I mean, yes, we'll continue to think through the promotional lever and like I said, we do see a real uptick in kind of uplift and sell throughs and that helps advance the cause in terms of just cleaning up in channel inventory levels like I said.
Ed on the prior call or one of US said there are limits to how aggressive will be from a promotional standpoint.
But to the extent that.
There within reason, we will push promotions to help kind of move excess inventory through channel. So long is a text box on profitability as well as just the health of the brand.
And then.
Can you just maybe ask your question one more time on the ASP front.
So I think you called out yes, and thank you for that so I think you called out Asps had the ongoing impact from product mix introducing higher price. So any way to think about if we were to take out product mix, how asps E books on any form of a like for like basis.
Yes, I mean, I would say that from a mix standpoint, the only real difference is.
Is the introduction of our of our timber line Excell and <unk>.
And then Tim but like the new Timberline launch obviously those were at very high price points, and then that did contribute to some ASP lift but most of this is being driven by price increases that remain in effect.
The one that three pricing increases that we took to last year and then one earlier this year offset by some of the incremental promotions as well as holding price slightly lower coming out of Q2 on our entry price points being the pro 22, and <unk> 34.
Great. Thanks, a lot guys best of luck for holiday.
Appreciate it.
Thank you.
The next question today comes from the line of John Glass from Morgan Stanley . Please go ahead. Your line is now open.
Thanks very much.
First can you just talk about what to do you know what the channel inventory actually it looks like now maybe how it's changed quarter to quarter given the promotional activity do you have reasonably good.
Knowledge, just given what you have sold to them and their sell through or do you not really know exactly what that channel inventory it looks like.
Okay.
No we do I mean at least for our larger accounts, we have good visibility into in channel inventory levels.
Some of our smaller accounts like specialty we've talked about in the past where they don't have the capacity to carry a lot of inventory and so we're less concerned with that long tail of specialty, but as we measure in channel inventory levels across our largest accounts, which obviously make up a majority of.
The business from where we have the best information within kind of the sell through data that we collect we are seeing sequential improvement.
Over Q2 on that front and it really varies from SKU to SKU or certain skus are heavier and other skus are actually finding finding a path toward a more kind of right sized level and so it's a continued kind of progression as we help our retailers work through these these inventory levels in channel.
Pushing promotions helps accelerate that but part of this is really going to be about time, right and kind of letting. These these inventory levels are worked through accordingly at the cost of some revenue and that will be the biggest lever, especially when we head into Q1 and Q2 of next year, where we start to.
Ramp up volumes and that will in turn accelerate the bleed down of in channel inventory levels as well as help improve our own balance sheet.
Alright, thanks for that.
Mentioned that there was a large retailer that's starting a private level label pellet business. How important is that retailer to your overall pellet sales and how do you think about that maybe becoming a bigger ratio overtime. If theres. Other possibilities you see private label and other retailers. For example, how do you sort of explain what happened and why it happened and how.
<unk>.
A retailer that is it's doing that.
Yeah John .
First of all it is an important retailer to us.
With that said.
I would add a couple of thoughts one is that we do see.
Stable attach and heightened loyalty on trader pellets to our installed base the.
The second half.
We believe just understanding our retailers.
The strategies are scales.
The.
This is likely a one off.
<unk>, we actually did see.
Another one of our large retailers.
Attempt to private label it was on shelf for six to eight months didn't perform well.
And so they pulled in so.
We do see some private label from time to time, but candidly, we don't see it impacting our business much I think this is.
As a function of.
Of the strategy of this of this retailer.
If you were to exclude this customer are.
Sell through is actually sort of flat to up.
Outside of that.
That one specific customer so we feel good about our pellet business.
Near and long term.
Thank you.
Sure.
Thank you.
The next question today comes from the line of Randy Clinic from Jefferies. Please go ahead. Your line is now open.
Yes, thanks, guys.
I guess can you give us some perspective on how you I don't know if you got it I didn't hear you say it but some capex guidance for this year and what kind of how youre thinking about capex for next year.
And then along that but just trying to get a sense of how we should be thinking about free cash flow generation.
When you talked about the cost cuts of $20 million I believe annualized.
Are you thinking through like this could just be a floor.
That's in the number of deaths or do you think that you've done enough on the $20 million.
Kind of generate enough.
Cash.
In the business to start kind of delevering or.
Relatedly, how do you think about deep.
De levering going forward whats that kind of.
What's the strategy there.
Yep great.
Great questions.
On the Capex front, I would expect capex to trend similar to similar levels.
That we saw in Q3, which we brought down fairly dramatically.
So I think we've done a fairly good job of halting certain investments.
One of the biggest ones was a planned investment in a rollout of new fixtures for for 2023.
Going to leverage the assets that we have update that kind of a PLP in and kind of look and feel of those fixtures that avoid incremental cost there.
Other measures that we're that we're taking to kind of manage capex to it to a lower level, whether that be halting certain initiatives slow rolling or just simply pulling them out of the system completely for now.
So.
That level of Capex will has come down dramatically and then we expect it to kind of hover at similar lower levels to Q3.
And so that's something that we're highly focused on and is certainly a benefit to how we manage liquidity in the short term.
On your question regarding like where do we go from here, we are definitely going to bank the $20 million of run rate savings.
The difference is that and I think as an extension of that that's not where we're stopping the differentiation between that $20 million and what we would do going forward is the $20 million is obviously tied to a restructuring event.
We're now at a point in time, when we can sort of manage it deliberately a budget for 2023 that allows us to more deliberately planned for cost reductions and adjustments to our short term plan that may be a slight deviation from how we think about this business long term to ensure that.
We are fully optimizing and kind of.
Focus focusing in on those those controllable levers right. So.
A real slowdown in hiring for example.
Is one thing that we'll be looking at from a planning standpoint holding off on.
The larger top of funnel spend that within the business. The last couple of years and really focusing more on middle and lower funnel and higher returning performance marketing. So there are a handful of things were sort of mid budget cycle, but that really is the overarching theme right. We have a long term plan that we continually refresh year after year and that really guy.
That's how we think about the next handful of years, but the stepping stone between this year and let's say 24, and a real focus on austerity in 'twenty, three and using that as a fundamental principle in our planning process to adjust our expenses.
And kind of rightsize, our cost structure in accordance with what we're seeing from <unk>.
<unk> has a liquidity as well as potential.
Potential risks to demand in 'twenty three so that's kind of a nice moment in time to do this in a more deliberate way versus reacting in the moment with restructuring and other adjustments that we took in Q in Q3.
Helpful. And then I guess, Jeremy maybe there should be a good kind of question for you around you.
<unk> an industry.
In a cycle right. So we obviously, we had we were kind of a steady eddy growth industry that had kind of super Spike COVID-19, but coming off of that maybe get your perspective on.
When the industry started or when the industry starts to stabilize.
What levels, you think are appropriate for industry kind of <unk>.
Volume levels, if you will and then how do you think.
After that timeline that you can lay out what do you think it stabilizes the industry. What you think the appropriate kind of normalized growth algo for the industry would be recognizing you guys would be a share gainer within that industry growth going forward. So just that'd be super helpful to get your thoughts there. Thanks.
Sure sure. This is obviously something we spend a lot of time thinking about.
Psi size growth returned to a more normalized replacement cycle cadence.
I'd say first of all that.
As you alluded to this tends to be a fairly steady and resilient category Americans cook outside they have for decades.
And that is going to continue.
We did see a double digit decline in 2019.
Industry fell by about 10% declined an incremental sort of 1% and next year and then and then it group the next.
The next 11 years 10 years and so we are we are trying to really understand as we do the math around replacement cycles.
And.
Overlain of course macroeconomic conditions, when when we return to more normalized.
Buying.
At a consumer level.
The industry is down year to date about 11% in units and about 20% in dollars and of course.
Im sorry, I said that backwards down down about 11%.
In dollars and about 20% in units and of course the.
The dollar component is simply a function of inflation and price increases.
It is.
Sure.
As Dan said it is starting to stabilize in terms of growth rate year over year.
And we expect to see that trend continue partly due to comps, but also partly due to starting to get to get ahead of some of the replacement cycles in some of the demand that was pulled in.
During the pandemic when does that happen at part of that is going to be a function of the economy.
But we do believe that.
In any environment that a steady that.
But over the next sort of 12 months.
Sort of flat.
Flat from a replacement cycle perspective, we benefit a little bit by having a slightly shorter replacement cycle than the rest of the industry, both due to usage as well as to innovation driving compressed ownership.
Cycles, and then somewhere between 2425, we think the industry returns to pre.
Pre pandemic levels.
Historically grown.
Low low low single digits.
Then we go back to doing what we have always done to build this to build this brand, which is to bring disruptive product to market and to gain share through.
Through product experience and.
And through building our brand.
Super helpful. Thanks, guys.
Thanks Ian.
The next question today comes from the line of.
Peter Benedict from Baird. Please go ahead. Your line is now open.
Good afternoon, guys. Thanks for all the color.
Just curious your thoughts on distribution.
And then any plans or considerations to expanding its distribution you talked about home depot still well up in Canada, something not just.
Well first domestically.
Any opportunities that might help you with.
With moving some of the products you have on hand.
Is there anything internationally that you can do.
The next 12 months to accelerate the process. That's my first question.
Yes.
Yes, Peter.
First of all.
I would start by saying that the largest opportunity that we have is to really penetrate our current existing distribution.
Was east coast.
Last week in meetings and haven't seen a sustained couple.
A couple of days in market and one of the things that was abundantly clear is that within our existing distribution channels. There is there are meaningful opportunities to to upgrade assortment.
Upgrade the quality of merchandising to upgrade training.
Those within those retailers, that's really how we build the brand and as you look at sort of a.
Heat map of trager penetration.
In sales across retail.
It's very clear that it follows our heritage markets, and where we've made investment and.
So.
We have an opportunity to make much deeper investments we spoke to some I spoke to some of those.
In my prepared remarks.
We've seen some nice progress, but there's a lot there's a lot to go and we we often speak about the progress in home depot, because it's the largest reseller.
In the world.
And it but it represents how we think about going to market and driving productivity and retail.
But even outside of home depot, we've got some great accounts, where we just have an opportunity to take them.
Through higher tiers of assortment of merchandise.
That is that its purpose.
Fulfilling in at the margin.
There is certainly doors that we're adding but I would say more sort of.
Local regional.
Furniture and appliance.
Barbecue specialty.
<unk>.
We believe that within our current channel within our current distribution strategy and our footprint. If you look at a market like Utah. For example that has high teens penetration. It's not that we have a lot more doors of distribution. It actually is probably fairly similar to other markets or differences.
We have deeply penetrated those doors with with the right assortment merchandising so that's our focus.
We're always we're always thinking about our channel strategy, we're always thinking about what's out there.
But with a real commitment to depth.
Depth.
Productivity at every point of sale and we think we are.
We are still many innings in front of US there in terms of international No question. There is opportunity we've got a fairly focused international strategy.
Europe Europe has been an area of focus and I would say, even more specifically between Germany and the UK. These are markets, where we think there's opportunities.
Our focus for now is a ground game.
Yes. It is.
Been in retail.
Its merchandising its all of the nuts and bolts.
Of how we built the brand here and then its basic level sort of brand assets Influencers social media local to those markets.
International markets will be.
Incubating them and they are steady growers.
But.
Overtime, we will lean into them from a from a marketing investment perspective, as we have done in the U S over the last few years.
As we think about the size of our platform here.
Both given how large it is relative to other markets, but how underpenetrated. It still is and how much growth. We see we will continue to disproportionately invest in.
In the U S and Canadian markets.
Got it thanks for that Jeremy and then I guess, maybe Tom just follow up on Randy's.
Question, just can you maybe talk to us about the deleverage process I'm not sure I heard much there where you stand with the debt covenants currently just an update on that front.
And with respect to the Capex it looks like maybe the second if we just annualize the second half rate.
We're talking 10% to $10 million to $12 million or so for next year is that a level that you think you can pull the capex down to.
Just curious on that.
That outlook for 'twenty three thank you.
Yeah. So the focus on deleveraging really is a function of of EBITDA in the short term right. So I think at this point, we really want to build and and kind of improve our liquidity position thats priority number one priority number two is too.
Begin to make advancements and increased profitability in the business, which in turn will translate into higher EBITDA and therefore help us deleverage from where we are.
And so I would say at this point at least in the short term deleveraging will come via improvements in.
Profitability, however to the extent that we're able to drive.
Liquidity and improve our free cash flow situation next year that will in turn help drive some from deleveraging.
That where we will be able to pay down the.
The revolving capacity, but we don't plan on Delevering, the kind of the term loan anytime soon so those are probably the two main areas that we're focused on from a from a leverage standpoint in terms of improving that situation.
On the Capex side, we're not going to share we're not ready to share what the target is next year, but I will say that this has been a very intense and kind of.
It's been a it's been a real focus from the team and I would say that.
The goal is to keep capex investments to a minimum and really prioritize where we're making those investments to ensure that we're not starving the business from a long term standpoint. So one example of that would be.
Tooling and or investments, we're making in future product roadmap that will be a priority and we will prioritize other areas. One example, I gave earlier was pulling out capital expenditures for new fixtures in 2023, and so we're not ready to give a number on capex.
For next year, but I would.
I would say that it will be lower than where we landed this year.
Okay, great. Thanks very much.
Thank you.
Hey, guys good morning.
Yes.
I apologize go ahead.
Okay.
Yeah.
Yes, Im just going to I was going to follow up on I think I missed this last question.
With regards to the credit facility I apologize. So we've talked earlier about the difference between leverage that we report through our financial statements and leverage that's defined by our credit agreement, which are very different and so are our leverage as measured by the credit.
By the credit the credit agreement.
Is hovering around.
About six turns of leverage which is due to Q2 components, one being a different definition of net debt, which excludes the AAR facility.
And it's measured on a first lien basis and then the second piece to that is the fact that we have a different definition of EBITDA as per the credit agreement, which allows for.
Additional or incremental add backs as an example pro forma run rate adjustments, where we execute on an initiative to either restructure or pull out or rightsize costs in certain areas and we're able to keep and.
And pick up some of those run rate benefits that will be embedded into the future economics of our of our P&L, but on a TTM basis, and so that allows us to kind of navigate the credit agreement and the leverage ratio that is tied to a covenant accordingly, and we're sitting well from that from a leverage standpoint as part of that definition in Q3.
We don't anticipate that we would have any problems against that covenant through year end.
Thank you.
The next question today comes from the line of Joe Feldman from Telsey Advisory Group. Please go ahead. Your line is now open.
Yeah, Hey, guys. Thanks for taking my question. So wanted to ask you guys made a comment during the prepared remarks about real.
Focusing on the highest return initiatives to invest in and I was just hoping maybe you could share. An example, or two of what that exactly means to you guys.
Yes, I mean, I think what the underpinning of that is the highest returning investment that's the most immediate and most predictable right and the Best example of that is how we allocate.
Demand creation dollars right. So when we spend on demand creation whether.
So an example would be search engine marketing or sort of digital advertising, where it's highly measurable.
In terms of the correlation between what we spend and the corresponding return on investment via revenue.
And so it's really kind of a wandering relationship there and that just gives us confidence that we're allocating scarce resources, we're doing so in areas that have the most predictable return.
And kind of the end year end quarter.
Kind of Timeframes, something that would be longer term that we still believe in but just unfortunately are making those investments right now would be prospecting marketing for a longer tail investments in top of funnel that are really intended to drive and build brand awareness, which we've talked about.
On previous calls as being an important component to our long term strategy, whereby driving more consumers into the funnel raising brand awareness, which in turn.
Increases that initial consideration set for trager. These things have real benefit, but the tail is longer because you're prospecting and it will require incremental touches with the consumer to convert and so we just don't have the luxury to invest in those things right now, which is why we're real allocating dollars more to kind of middle low.
<unk> funnel marketing investments that do generate that return, another example, which I, which I spoke to on Capex.
The fixture piece right and I think right now we're just trying to be scrappy with the assets that we have we can make improvements within point of sale, it's important but we're going to delay other investments on that front until we have the capacity to do so so those are a couple of examples of what we look at whether it's kind of near.
Term benefits to shifting resources in areas that have a higher and immediate return in year and delaying certain investments that are important for the long term, but don't necessarily contribute directly to the growth in year <unk>, they're not quite as measurable as together things that I mentioned.
Joe the only thing that I would add to that is product product is one of the long lead time investments.
But we believe we need to continue to make its also.
<unk> comment about predictability, we see a very predictable return on our product investment.
With with healthy channels.
<unk> brand.
A community that is.
Is very anxiously looking at whatever we launch.
We continue to invest in products I think it's so this is actually Ben.
In a forcing mechanism to make sure that we are simplifying our product investments and making investments in the most important.
Opportunities that really drive outsized returns and a ship with long lead time. So it continues.
Through good times and bad.
Got it that's really helpful. Thank you and then if I could just follow up with one other.
The.
Fully appreciate that.
Slowing down the production of.
New Grilles until you kind of work through the balance sheet inventory you have.
I was just wondering if from your factory partners in China, and Vietnam like are there any minimums that you have to produce a certain level to kind of maintain or is that nothing to really worry about here.
Yeah. So.
Sure.
Yes, and no I mean, if we had you completely parse production, we can do that but we don't necessarily want to right. I mean, our motivation is to ensure that we're also good partners to our factories and we're protecting continuity.
For those factories, because theres disruption, if you turn off production they scale down labor and that comes at a cost to our factories is both in the short term as well as when we need to ramp production, which is both.
A little bit more cumbersome for trigger as well as for our factories, where they have to go back and find the labor to to keep up with the demand that we're producing against from a supply standpoint. So we're motivated independent of any contractual obligations to keep them at minimum production levels that allow them to keep the lights on.
And protect continuity and sort of.
NAV agate and minimize the disruption to them, which in turn will extend kind of the length of time at which we're able to ramp down our own inventory levels, but obviously it helps dramatically because we are operating at those men levels that allow us to.
Naturally and progressively improve our inventory position.
Through the end of this year and obviously through through through part of next year.
That's very helpful. Thanks, guys I appreciate it.
Good luck with the quarter.
Yes.
Thank you our.
Our final question today comes from the line of Peter Keith from Piper Sandler. Please go ahead. Your line is now open.
Yeah.
Hi, This is Matt on for Peter Thanks for taking our questions. Just wanted to ask about gross margin I realize you you won't see the tailwind until you work through the higher cost inventory, but how confident are you that that happens by <unk> 23, and then is there any way you can quantify what the gross margin.
Kind of take out in 2003 as well.
Okay.
Yeah. So on the first question, yes, we are pretty confident that.
Middle of the year, we will start to benefit from some of the tailwind there that are building from a macro standpoint.
Obviously, it takes time to work through the high cost inventory, that's sitting on our balance sheet, but I think headline news as well as our own point of view as we navigate and kind of work with our freight forwarders on rolling forward new contracts at different rates like spot spot rates have come down.
<unk> right. So one at a moment in time.
Once our inventory levels and improve and we're buying inventory at lower cost will start to see that benefit roll through the P&L, which we're hoping to see at kind of the midpoint of next year, but take full advantage of.
In the outer years, and so that will be a nice tailwind that will benefit from FX is also one that.
We'll start to benefit as well the P&L and gross margin once we've worked through these higher inventory levels.
So we are pretty confident that we'll get there and we won't be able to realize the full impact even in the back half of the year, but we will start to see sequential improvements that will dramatically not dramatically, but we will sequentially and incrementally begin to improve gross margin through the course of 2023.
Hmm.
And the gross margin.
Is there any way to quantify what they've been working on.
Yes, so I don't I don't know that we're necessarily going to share that.
The total dollars but.
These things take shape weekly monthly and it's it's.
It's something that will be core and fundamental to our strategy for the long term. So it's not necessarily something where you pull a lever and suddenly you've found millions and millions of dollars. This is kind of continuous improvement in our progression as we work through cost downs on on products.
Two kind of negotiations with factories to how we improve landside movement in inventory and kind of optimize our footprint, whether it be warehousing or or outbound transportation to ensure that we're moving product in the most efficient way we've talked earlier about.
Launching direct import with a couple of customers.
Which is contributing contributing nice gross margin enhancement.
Really all throughout the course of this year. So it's one where we will continue to work at it and we have longer term levers as you think about how we develop a product roadmap that optimizes margin structure. It will be interesting to see what happens in kind of this macro dynamic.
And how we sort of navigate price strategy to optimize both gross margin and volumes as we see these commodities prices and inbound transportation rates decrease.
I think what I would say to you is theres a long list of items that were that were focused on and kind of the partnership between the ops team and the finance team is very tight and we're really excited about the opportunities that are in front of us some of which takes some time some time to mature, but it is something that we're bullish on and we will start.
To.
Realized this year as well as over the course of next year and without quantifying I will say that it is something that will contribute Q2 gross margin over time, and we will continue to build on that strategy not only this year, but obviously over 'twenty three and beyond.
Sure.
Okay.
Okay.
Thank you.
There are no further questions at this time, so I'd like to pass the call back over to Jeremy Andress for any closing remarks. Please go ahead.
Oh, great. Thank you for joining our call and we look forward to speaking with you again in March when we update on our fourth quarter earnings take care. Thanks.
Thank you all for your participation.
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