Q4 2022 Traeger Inc Earnings Call
Good afternoon. Thank you for attending today's triggered fourth quarter and fiscal 2022 earnings conference call. My name is Megan and I'll be your moderator for today's call.
All lines, what do you mean, that's in the presentation portion of the call with an opportunity for questions and answers at the end.
I would like to ask a question. Please press star one on your telephone keypad I would now like to pass the conference over to Nick Backups, what trigger.
Nick Please go ahead.
Good afternoon, everyone. Thank you for joining triggers call to discuss its fourth quarter 2022 results, which were released this afternoon and can be found on our website at investors that trigger dotcom.
Nick back as Vice President of Investor Relations at trigger with me on the call today are Jeremy address our Chief Executive Officer, and Tom Basile, Our Chief Financial Officer.
Before we get started I want to remind everyone that management's remarks on this call may contain forward looking statements that are based on current expectations and are subject to substantial risks and uncertainties that could cause actual results to differ materially from those expressed or implied here at <unk>.
We encourage you to review our annual report on Form 10-K for the year ended December 31, 2022, once filed and our other SEC filings for a discussion of these factors and uncertainties, which are available on the investor relations portion of our website.
Should not take undue reliance on these forward looking statements speak only as of today and we undertake no obligation to update or revise them for any new information.
This call will also contain certain non-GAAP financial measures, which we believe are useful supplemental measures, including adjusted EBITDA and adjusted EBITDA margin.
Most comparable GAAP financial measures and reconciliations of the non-GAAP measures contained herein such GAAP measures are included in our earnings release, which is available on the Investor Relations portion of our website at investors Dot Traeger Dot com now I would like to turn the call over to Jeremy Anderson, Chief Executive officer of trigger.
Thanks, Nick Thank you for joining our fourth quarter earnings call.
Now I will discuss our fourth quarter results and provide an update on our strategic priorities as well as our outlook for 2023.
He will then turn the call over to Tom to discuss our quarterly financial performance and to provide further detail on our fiscal 2023 guidance.
<unk> was a challenging year for trigger after two years of outsized growth the dramatic shift in consumer spending patterns away from big ticket durable goods.
Leisure along with lower consumer confidence caused by inflation and geopolitical turmoil led to unprecedented pressure on demand in the grill category.
In the face of a deteriorating backdrop, we took swift and decisive action during the year to position trigger for enhanced financial flexibility and to lower costs.
Pleased with our team's execution of our near term tactical priorities and I believe we have made demonstrable progress positioning us to successfully navigate what likely will be a continued volatile environment 2023 and to emerge a more efficient company.
It's important to note that we feel strongly that the current environment does not impact our long term opportunity to significantly grow the trigger brand globally, our brand is healthier than ever and despite a tough backdrop in 2022, we successfully launched our new Timberline Grill grew up a brand awareness to them.
All time high saw meaningful growth in social media engagement drove an industry, leading net promoter score and realized strong growth in our meter business.
We ended 2022 with fourth quarter results that were better than anticipated, which allowed us to exceed our annual guidance.
Fourth quarter sales were $138 million, putting full year revenue was $16 million higher than the upper end of our guidance range, while fourth quarter. Adjusted EBITDA was $7 million put into your $7 million ahead of the high end of our annual range.
During the quarter, we strategically increased our promotional cadence.
Indeed, our holiday promotional period.
As we discussed previously we leaned into promotions to activate consumer demand in an effort to accelerate the reduction of our retail partners inventories are.
Our approach was strategic and targeted with a particular focus on promoting grill, skus, where inventory imbalances were greater than.
Our strategy was successful and contributed to better than expected sell through growth in the quarter, which drove upside in replenishment activity.
Your grill significantly outpaced sell in the fourth quarter as retailers continue to aggressively destock, resulting in materially improved inventory levels in the channel at you at.
Additionally, we saw upside in our direct to consumer business through the holiday period.
Finally, our accessories business outperformed driven by very strong performance at meter meters of holiday driven business and the meter team delivered outstanding results in the fourth quarter closing out a great first full year under trade or ownership with strong double digit growth and solid margin performance.
Over the last two quarters, we have discussed our key near term priorities to decision trigger for the current environment.
These initiatives are right sizing inventories, reducing our cost structure and driving improvement in gross margins the.
The organization's universal focus on these tactical priorities in the fourth quarter allowed us to make significant progress in these areas.
In terms of right sizing, our inventories better than expected south stream grilles in the quarter as well as continued destocking by our retail partners drove meaningful improvement in weeks of supply in the channel.
Furthermore, lower production levels in Asia, combined with improved replenishment activity drove a reduction in our balance sheet inventories with grill inventories in particular declined meaningfully versus the third quarter.
In terms of our cost structure, our actions in 2022 as well as ongoing expense discipline contributed to our ability to drive EBITDA upside in the fourth quarter.
As we looked at 2023, we will continue to be highly focused on managing expenses and.
In addition to the $20 million in annualized cost savings measures.
We have already implemented we have identified additional savings opportunities for 2023.
The team is hyper focused on driving efficiencies in the business and we will stay highly disciplined as we move through the year.
Our final near term strategic priorities to drive gross margin over the last year. Our gross margin task force are evaluated and implemented over 75 initiatives across product packaging transportation logistics and design.
As Don will discuss we are anticipating gross margin expansion in 2023.
We expect this expansion to be driven by both internal initiatives as well as the benefit of lower input costs, including materially lower inbound freight rates.
Previously, we expect that we won't see the full benefit of lower input costs until after we work through the higher cost inventory on our balance sheet, which we believe should be in the second half of 2023.
While we are encouraged by the progress we made in the fourth quarter, we are taking a cautious approach to our 2023 plan or.
Our sales guidance of $560 million to $590 million.
<unk> is a 10% to 15% decline versus 2022.
There are several factors driving our cautious top line outlook first it is unclear when consumer spending patterns will normalize and when the outdoor cooking category will return to sustained growth.
Second the outlook for the macroeconomic environment remains highly uncertain with the full impact of the federal reserves monetary tightening policies yet to be felt.
Patients still elevated on the housing market showing deteriorating fundamentals.
Finally, as we discussed last quarter retail Destocking will continue to pressure our selling in the first half of the year as our retail partners continue to reduce inventories.
We expect that 2023 will be a tale of two house III Trager and we're planning to return to topline growth in the second half of the year.
It's important to note that the expected growth in the second half is not predicated on an improvement in the macro environment, but it is a reflection of our expectation for more normalized channel inventories as well as lapping the large pipeline declines we experienced in the second half of 2022 due to retailer destocking.
Despite forecasting a decline in sales for the year, we are guiding to an increase in EBITDA in the current environment. We are focused on efficiency profitability and cash flow and our ability to drive. This improvement is a direct result of our cost and gross margin initiatives as well as a more favorable input cost.
Cost environment.
Thus far I have discussed our progress on our tactical initiatives, which will allow us to navigate the current environment. However, we also remain committed to executing against our long term opportunity and this ties back to our strategic growth pillars.
Our first growth pillar is to accelerate brand awareness and penetration in the United States. We ended 2022 was three 5% penetration of the 76 million grill owning households in the U S, which are most penetrated markets in the mid teens.
Despite a softer marketplace and reduce capacity for top of funnel marketing.
Brand awareness continues to grow and we believe that the energy around trade was stronger than ever.
Engaging our communities one of our most effective tools to drive awareness as we know the trade or owners are vocal advocates for our brand.
In the fourth quarter community engagement and the trigger of his passion for the brand was particularly evident during Thanksgiving well not traditionally thought of as an important drilling day Thanksgiving is one of our largest took game of the year with members of the trailers and across the country delighting their friends and family with trade or smoked Turkey inside.
This year, we created unique content with their traeger Thanksgiving cooking series, featuring marketing and chefs Timothy Hollingsworth with recipes and techniques focused on perfecting Thanksgiving on your trader.
The trader who was out in full force on Thanksgiving and engagement on social networks with strong with video views up 80% year over year across social platforms and influence or impressions up 25% to last year.
Fourth quarter capped a phenomenal year in terms of engagement and we saw impressive growth in our social kpis with 18% growth in followers across platforms user generated content post up nearly 50% impressions up 33% and video views more than doubling for the year.
We continue to drive awareness and penetration through enhancing our in store merchandising with key retail partners.
The home depot, we made serious inroads in elevating the retail experience for trader customers. In 2022, we ended the year with 500, Traeger Island doors, which prominently displayed trade or product on an elevated fixture and we now have 902 Bay pellet cluster doors with flex wall or trader branded data.
Experience.
Our merchandising strategies are not only elevate in the trade or brand to the consumer.
But they are driving sales productivity at home depot doors with these merchandising enhancements and materially outperformed standard doors in the fourth quarter.
Moreover, in the fourth quarter, we launched a national merchandising program for meter at the home depot with meters best selling SKU meter plus now available in home depot stores across the country.
Our next growth pillars to disrupt outdoor cooking through product innovation Astra.
After a big year for innovation, a trigger in 2022 with the introduction of our new Timberline, we've kicked off another year of meaningful innovation with two new grill launches in 2023.
First on February 15th we launched our new Ironwood Grill.
Our new Ironwood feature several key innovations that have been cascaded down from the new Timberline Adam.
Affordable price.
This includes our smart combustion technology, the integration of the pop and rock accessory rail and the easy clean recent ashcake.
The new Ironwood bring significant innovation and technological advancements at an attractive price.
Next on February 22nd we launched a new traeger flat rock, our premium flat top grill the.
The griddle segment has been growing very strongly in the last several years how.
However, our flat rock is like nothing else in the marketplace.
Several consumer pain points.
Our griddle features our in house designed truism cooking areas, which allow for greater precision across separate temperature zones a fifth.
Some of stainless steel, you burners, which eliminates hot and cold spots in our flame black construction, which resets as a cooktop.
Inside the cooking cavity locking in heat blocking out wind.
We believe our flat rock into the best and most innovative grid around the market.
Early reception of the product has been fantastic and the buzz generated on social media has been greater than any other launch in our history.
We have taken a disciplined approach to launching flat rock with a limited launch at the start we.
We see significant runway in terms of expanded distribution going forward.
Our next strategic pillars, driving recurring revenues in the fourth quarter, our consumables business modestly outperformed our expectations.
Sell through with pellets remains stable and sales at retail were in line with prior year in the fourth quarter, which demonstrates the resiliency of this product segment.
Further our line of sauces, and Rob's continues to see strong growth, thanks to new flavor additions and growing distribution and Kroger and other grocery accounts in the fourth quarter, we launched two new hot sausage.
Carolina, Reaper and garlic jalapeno lime.
In 2023, we expect that distribution will continue to build for Rob said sources in the grocery channel Strega seeks to grow brand awareness and ensure consumables products are always can be into purchase.
Our last strategic pillar is to expand the trigger brand globally in the fourth quarter. We were encouraged to see sell through of our Grilles that are retail partners in Canada, and Europe that was ahead of expectations.
Which allowed for an improvement in channel inventories in these markets.
While we believe the macroeconomic environment, our international markets will remain challenging in the near term.
We are excited about our 2023 initiatives to drive awareness and growth of the trade or brand abroad.
We continue to add points of distribution in key international markets, but remain highly focused on driving same store sales growth in 2023 and beyond.
We are driving productivity through several key initiatives.
First we are bringing innovation to our overseas markets in January we launched our new Timberline and European markets and in February we launched our new Ironwood in Europe and Canada.
Next we are empowering our international sales team to focus on in store growth drivers, including merchandising demos and retail associate training.
Last we are segmenting, our international retailer base to incentivize increased investment into the Traeger brand from our most productive retail partners.
Overall, we remain incredibly excited about the long term opportunity for trigger as we move into 2023, we are focused on executing against our near term strategy, which will drive efficiencies in our business and position the company for growth in the second half of the year and beyond.
We made as confident as ever in the trade or brand and I believe we have the right plans in place to position the company for both near and long term success and with that I'll turn it over to Dom Dom.
Thanks, Jeremy and good afternoon, everyone today, I'll review, our fourth quarter performance before providing an update on our outlook for fiscal year 2023.
Fourth quarter revenue declined 21% to $138 million.
Grill revenue declined 52% to $48 million.
Grill revenue was negatively impacted by lower unit volumes of our retail partners destock their effort to lower in channel inventories. This decline was partially offset by higher average selling prices.
Consumables revenues of $24 million down 7% the prior year due to lower pellet volumes offset by increased volume of food consumables.
Accessories revenue increased 36% to $65 million driven by strong growth at meter.
Fourth quarter revenues were ahead of our expectations, which allowed us to exceed the high end of our full year guidance range by $16 million.
Upside was driven by better than expected revenue growth that meter stronger replenishment sales in our grill business as our holiday promotions of improved sell through as well as better than expected sales in our digital channel.
Geographically North American revenues were down 22%, while the rest of world revenues were down 14%.
Gross profit for the fourth quarter decreased to $48 million and $65 million in 2021.
Gross profit margin was 34, 5% down 250 basis points to 2021.
Excluding $600000 of costs related to restructuring actions gross margins would have been 34, 9%.
The decline in gross margin was primarily driven by one higher logistics costs due to deleverage and increased freight costs, which resulted in 530 basis points of margin pressure to a true up related to a warranty reserve, which negatively impacted gross margin by 130 basis points and three restructuring cost.
A 40 basis points.
These pressures were offset by one pricing and mix benefit of 230 basis points.
Q1 hundred 10 basis points of favorability related to meter, which generated a higher than company average gross margin in the fourth quarter and three currency favorability and 110 basis points due to the strengthening of the U S dollar versus they remind me.
Sales and marketing expenses were $28 million compared to $39 million in the fourth quarter of 2021.
The decrease was driven primarily by lower stock based compensation and lower professional fees and reduced employee costs.
General and administrative expenses were $24 million compared to $44 million in the fourth quarter of 2021.
Decrease in general and administrative expense was driven primarily by lower equity based compensation lower professional service fees and reduced employee costs.
Fourth quarter operating expenses benefited from our restructuring and cost savings actions taken in early third quarter of 2022, and we are on track to achieve more than $20 million in annualized run rate cost savings.
As a result of these factors net loss for the fourth quarter was $29 million as compared to a net loss of $34 million in the fourth quarter of 2021.
Net loss per diluted share was 24 cents compared to a loss of 29.
Quarter of 2021.
Adjusted net loss for the quarter was $8 million or seven cents per diluted share as compared to adjusted net income of $3 million or <unk> <unk> per diluted share in the same period in 2021.
Adjusted EBITDA was $7 million in the fourth quarter as compared to $13 million in the same period of 2021.
Fourth quarter, adjusted EBITDA was better than our expectations, which allowed us to exceed the high end of our annual guidance by $7 million.
Adjusted EBITDA upside was driven by outperformance in the fourth quarter yourselves relative to what was implied in guidance as well as gross margin upside relative to expectations.
Now turning to the balance sheet.
At the end of the fourth quarter cash cash equivalents and restricted cash totaling $52 million compared to $17 million at the end of the previous fiscal year.
We ended the quarter with $404 million of long term debt.
In December the company drew down $12 $5 million from a delayed draw credit facility, which is expected to be used in the second quarter of 2023 to fund the payment of the meter earn out relating to tell me 22 performance.
Additionally, as of the end of the quarter. The company had drawn down $12 million under our receivables financing agreement and $72 million under its revolving credit facility, resulting in total net debt of $436 million.
From a liquidity perspective, we ended the fourth quarter with total liquidity of $95 million.
Inventory at the end of the fourth quarter was $153 million compared to $142 million at the end of the fourth quarter of 2021 and $156 million at the end of the third quarter of 2022.
While we expect that the process of inventory optimization will continue in the first half of 2023.
We are pleased with the progress we've made in the fourth quarter as grill inventory declined substantially versus the third quarter and the year over year increase in total inventory moderated to 8% from 40% in the third quarter.
We were also encouraged by the progress we made in terms of channel inventory in the fourth quarter as our strategies to drive consumer demand combined with our retail partners Destocking efforts resulted in a meaningful improvement in weeks of supply.
During the quarter sell through of Grill has outpaced our plan, which allows retailers to work down their existing inventory on hand.
While improved inventories in the channel remain above target levels. We therefore are planning for continued retailer destocking in the first half of 2023.
Well this will negatively impact our sell in during this period, we believe that it will allow for a healthier retail channel and set the company up for growth in the second half of the year and beyond.
Next let me discuss our guidance for full year 2023.
For the year, we expect revenues to be between $560 million and $590 million, implying a year over year decline of 10% to 15%.
This outlook is being driven by several factors first we expect that retailers will continue to normalize grill inventories in the first half of 2023.
Which will pressure our sell in.
Second our assumptions around sell to reflect ongoing macroeconomic risks to the consumer and uncertainty around spending patterns for goods versus services and experiences.
Last we are expecting that consumables business to decline in 2023, primarily driven by unexpected sales decline at a large customer who introduce new private label pellet offering in the second half of 2022 as.
As well as the lapping of loaded into the grocery channel due to new distribution in 2022.
We expect that we will see a sales decline in the first half of the year followed by sales growth in the second half our.
Our assumption for growth in the second half of the year is being driven by our expectation that channel inventories in retail over replenishment activity will return to normalized levels.
We will also be lapping the substantial negative impact to our topline due to retailer destocking in the second half of 2022.
We're not assuming a materially different macro or consumer environment in the second half of the year as compared to the first half.
Gross margin for the year is expected to be 36% to 37%.
Which represents 80 to 180 basis points of improvement relative to our fiscal year 2022, adjusted gross margin of 35, 2%.
We expect to see the largest year over year growth in gross margin in the third quarter, given the expected improvement in fixed cost leverage as we lap the large sales decline we experienced in the third quarter of 2022.
The largest driver of forecast expansion in gross margin for the year, the declining inbound transportation rates, which are applied significant pressure on our gross margin over the last few years.
We expect adjusted EBITDA for the year of $45 million and $55 million.
This represents adjusted EBITDA growth of 8% to 32% compared to our 2022, adjusted EBITDA of $41 $5 million.
From a margin perspective, our guidance implies an adjusted EBITDA margin of 8% to nine 3% as compared to our 2022 adjusted EBITDA margin of six 3%.
The improvement in EBITDA is being driven by the anticipated expansion in gross margin as well as our focus on expense control.
Given the lower revenue outlook for 2023, we are aggressively managing expenses and we have identified opportunities for further efficiencies beyond the $20 million in annualized savings we've already discussed.
We expect the first quarter will be our most challenging quarter of the year.
For Q1, we are anticipating sales of $145 million $265 million, which represents a decline of 31% to 35% versus Q1 of 2022.
First quarter topline will be particularly pressured by continued retailer destocking against a very strong multi year comparisons.
We're anticipating first quarter, adjusted EBITDA of $16 million to $20 million.
Looking at the balance of the year, we anticipate that the second quarter will also be challenging from a top line perspective, and believe sales could decline in excess of 20% versus prior year.
We expect double digit sales growth in the second half of the year.
From a balance sheet perspective, we expect to meaningfully worked down inventory levels in the first half of the year with the largest decline expected to occur in the second quarter, which started largest selling period at retail.
Overall in the face of significant headwinds in 2022, we took swift action to position the company to navigate challenging environment.
I'm pleased with the progress we've made to improve the financial flexibility and efficiency of the business and I believe we will continue to see improvements in these areas it'll be moved through 2023.
With forecasted improvements in gross margin and the benefit of our cost discipline.
That could drive growth in EBITDA this year and we look forward to the second half of the year when we expect to return to positive topline growth.
We remain highly confident in the opportunities in the Traeger brand and believe we have the right strategies in place to position the business for long term success and with that I'll turn it over to the operator for Q&A operator.
Thank you.
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Our first question comes from the line of Simeon Siegel with BMO. Your line is now open.
Thanks, Hey, guys good afternoon.
Jeremy with flat rocks, you've now introduced the propane product pretty big deal any general thoughts on product expansion from here and then Dom can you just speak to the increased logistics and warehousing costs, how should we be thinking about those going forward and then maybe can you just remind us the margin differential between grill is consumables and accessories. Thanks guys.
Eight eight for me so I.
I would start by saying.
The wood pellet grill continues to be the center of our universe.
That is we have a meaningful advantage there from from both a brand a product perspective, and a product development capability perspective.
As we look at the space and we think about what a trigger cookie and experience really might be that we believe that not only received a trend in <unk>.
In flat topic real cooking.
Gives me.
But we think it's a great complement.
Gives me do it wouldn't really grill.
Wood pellet grill is.
Low and slow.
It is fired by wood pallets, it's conviction cooking and a flat top or a griddle is it's hot and fast and we believe cooking either the same deal across both both products.
Or cooking different types of foods, just just offers more brand flexibility cooking flexibility.
And we did a lot of research before we got into category on not only what that product might mean to a triggers could trigger consumers cooking experience.
But really what are the opportunities to innovate and bring a better experience to market.
You know interestingly there there really hasn't been any notable pushback on unexplained in not only to new category, but a new fuel source.
My expectation is that we will be we will be very focused going forward again, most of our innovation around wood pellet grills and associated cooking experience with the flat rock really is a great accessory.
Two a trigger.
I would just add.
Returned from a trade show this week one of our largest customers.
Had hundreds.
Actually north of a thousand retail managers in attendance.
The flat rock has been it's been very well received we're early innings, we launched it a month ago, but you know we clearly we came at it from a from a constrained.
H Chan with constrained environment, just wanted to ensure that as we launch something new outside of our core category that it turns and it's well received and I think anecdotally. It's certainly that is certainly the case, although it's too early to speak to sell through.
The energy on social was was high at launch and in talking to dozens of store managers, who brought it and they really like what they're seeing thus far.
Yeah, I think jumping into your second question I mean, it's really kind of a simple mix between what is largely what has largely been the biggest driver of gross margin erosion, which is inbound transportation theres still a long tail to that that we're working through as rates.
To improve so that was one key component. The other is just deleverage on the fixed cost structure within cost of sales, namely warehousing.
That's largely fixed and so when volumes come down that puts pressure on gross margin percentage I would just note or add that although you know in 2022 and to a certain extent in the first half of 'twenty three.
Transportation will continue to be a driver of gross margin erosion, it's an improving picture over the course of 'twenty, three and the capitalized higher costs.
Baked into inventory for historical <unk>.
Transportation rates that we've paid for as you know procured by historical containers that bleeds through inventory will start to capture those improvements based on the improvements we're seeing in the spot prices in the back half of 2023.
Awesome. Thank you and then anything on just the mix generally margin differential between grill is consumables and accessories.
In terms of margin nothing nothing noteworthy I mean again I think the biggest driver is stems from you know grill.
The grill side of our category mix, otherwise I think you know me.
Margin structure is fairly.
Allen stand and sort of consistent or stable within consumables and accessories and in particular meter has actually been a driver of expansion in gross margin and when you look at the fee in Q4 and part of that is a function of outperformance on the meter side specific to gross margin.
Great sounds great guys best of luck for the year.
Thanks, Jamie.
Thank you.
Our next question comes from the line of Peter Benedict with Baird. Your line is now open.
Hey, good afternoon, guys. Thanks for taking my question first one just I appreciate.
Right.
The thought on the year not expecting the macro to get better.
What how do you think about the P&L, if if demand or sell through.
Is actually tougher in the back half of the year that is the first half either because the consumer gets a lot weaker youll start to cycle. Some of the promo activity that that maybe helped in the back part of this year, just trying to think about how well or your view on your ability to deliver the EBITDA.
In the event that maybe sell through is less than you think in the back half of the year. That's my first question.
Yeah, It's a great one and it's something that we're definitely considering as we stress test our internal view of it.
Or forecasts over the four quarters of 2023.
It's really a formula that we've applied to the last couple of years, which is a real focus on leading indicators that could suggest a weakness of consumer or a shift in demand.
So I think at the end of the day, what we'll do is we'll watch fairly closely between now and the end of Q2. The way we built our operating plan for 2023 takes that into consideration as well and so effectively what we've done is we've said let's be more.
<unk> and how we pace certain critical initiatives and other initiatives that will impact outer years, and we want to make in this year, but let's maybe hold on that until we have better line of sight into that specific picture around you know consumer health in any macro hiccups that.
May emerge as we track through the first half of this year.
So what that allows us to do is stay reactive and nimble to those trends before we get ahead of ourselves from a spend standpoint, and so that allows for some cushion and we'll roll that forward to the extent that there's a downward trend or a negative picture emerging as we track through do Andrew.
See a disruption from a demand standpoint in Q2 in particular, which is a great leading indicator then for replenishment in the back half of the year and so that's probably the biggest piece that I think we're managing and is top of mind for this team, but certainly to the extent that we need to react in other areas.
Have levers to do that than me.
Constantly manage a dynamic sort of risks and opportunities component to how we forecast this business weekly and monthly and we know exactly which levers we can pull if we need to manage that risk in the back half of the year.
I would just just to add one quick thing to that Peter which is.
We were more promotional last year.
Then we typically are and we use promotions.
Thoughtfully both in terms of.
The level of promotional activity.
As well as where we promoted and which skus in an effort to really use them to drive to drive inventory levels down.
Our desire is to be less promotional that's always our disposition.
From a brand perspective, and we've built a plan that contemplates a more normal promotional cadence, but it's something where we have flexibility to the extent that that demand doesn't.
Doesn't trend to plan.
We certainly yeah, we have experienced been.
Being opportunistic and working collaboratively with our retailers where necessary.
No. That's that's helpful color. Thank you I guess related to that maybe.
Any thoughts on I mean, you mentioned the liquidity at the end of the quarter, just how you're planning.
Average liquidity.
You're not just any latest updates on covenants things like that how does how does your plan and vision envision those trending and then my follow up would be around real usage. You know you guys have the connected grill or a lot of data, but what have you seen in terms of just the usage of grilles that are out there in the marketplace. Thank you.
Yeah. So.
I think we spoke to our list of priorities.
I know in Q3 Q4 last year right. It all starts with liquidity and you know we've been hyper focused on liquidity over the last you know.
Two and a half quarters and that will continue through the remainder of the year and we're actually feeling much better about our liquidity position and so you know I think from a liquidity standpoint, Q1 will be the trough. We saw a nice improvement in liquidity from Q3 to Q4 based on no active.
Management of working capital using promotion as a lever to clear inventory and draw down on inventory to just driving more efficiency topline as well as the promotion that drove out performance from a top line standpoint.
That carries forward into this year right. So we'll continue to actively manage working capital.
And we will see a nice draw down on inventory you know between now and let's say Q3, which will be a nice tailwind from a cash flow standpoint, you know, we'll stay disciplined opex all of those different components of liquidity that you know are important and will continue to stay focused on those but we're feeling better about the trend in bill.
Leave that although Q1 is sort of.
The low watermark will stay above a healthy level through the remainder of the year.
We can in essence checked that box, but obviously, we're staying focused on it in the event that something changes on leverage I would say that as of today, we do not we really don't anticipate having an issue with our ability to maintain compliance with our covenants, we're clearly trending and leverage levels that are uncomfortable.
Manageable I would just highlight a few nuances there that I think are particularly important as you think about this dynamic and what it means in terms of how we manage our credit agreement given the amount of debt. We have on the balance sheet. The first thing I would say and I think we've spoken to this in the past, but I think its important to reaffirm the definition of EBITDA.
As per our credit agreement is calculated very differently than the adjusted EBITDA figure that we report to and in our public filings.
This definition effectively allows for one time adjustments other pro forma add backs that we wouldn't include in reported adjusted EBITDA. So I think one example, I would give you is.
The actions that we took in Q3 around restructuring and some other cost improvements on a TTM basis, we can actually take those as if they were in place over a 12 month period and add those back into the current period EBITDA as for the definition of our credit agreement right. So.
That's a nice comp.
Cone into how we manage leverage because it gives us credit for actions that we're taking to improve the run rate, but we get full benefit of that over an annualized our TTM period.
And so I think that's kind of the first piece is the definition is different.
And those aren't put components that we would ever added back into our adjusted EBITDA that we report I think the second layer to that as you know the definition of first lien net leverage per the credit agreement is a little bit different than maybe what you would calculate them you know from off of our balance sheet for for your leverage purposes.
And specifically, we exclude in our permitted to exclude the AAR facilities. So anything that's drawn on the facility. We can exclude from that the numerator of that calculation and as an example, there in Q4 or we would effectively exclude 12 million of it was drawn down on the facility and so again, how we manage leverage as per.
The credit agreement is a function of those components and it gives us some latitude to navigate these challenges and also get credit for actions, we're taking to improve the run rate view of leverage and kind of be immediate period right. So again to summarize we don't anticipate an issue here in terms of.
Gaining compliance with the covenant.
And and and and believed that at this point in time, where we're comfortable with where we are and then I guess the last question that you had assuming that answers. Your question on leverage is around.
The performance of connected grills, and I would say that at this point you know based on what we see through the end of 2022, there's really no outlier that would suggest a meaningful shift in the behavior of our consumers and the engagement they have with the connected grills.
And I'd say first and foremost.
We've seen an uptick in that year around the connected grilles that are active as sort of a defined as active and I think second to that as you sort of measure activity or average cost per week or total cooks per year. It stayed fairly consistent from 2020 right.
Probably some marginal shifts as the installed base of connected grills grows, but otherwise I would say that the activity per grill as measured on a on a yearly basis is staying pretty steady.
Between 2020 and in 2022 at which I think is a real positive as we measure them.
The activity.
Our thrills and how the consumers are effectively using the grilles.
Yeah.
That's very helpful. Thanks, Thanks, so much for the perspective.
Thanks.
Yeah.
Thank you.
Our next question comes from the line of Brian Harvey with Morgan Stanley .
Your line is now open.
Yeah. Thank you good afternoon guys.
Maybe just to follow up on those comments you were just making and specific to the consumables segment.
I assume that there's kind of been growth on the food side and so therefore, probably the pellet side has been down a little bit more and so could you address you know is that mainly driven by just the new private label of pellets that are in the market or has there been a change in kind of attach of you know your customers buying those pellets what's.
Driven outside of it and you know how do you think that will trend in 'twenty three.
Yeah, Great question and as a caveat you know the way we measure attach outside of the connected real data that we gather is a selling metrics. So it's not perfect, but I think it gives us good directionality in terms of consumption.
Consumption of these consumables and so your first statement is accurate.
<unk> seen growth in the food consumables side of consumables.
That's partly a function of what Jeremy spoke to in his opening remarks around some loading in grocery and some nice demand for SaaS is robbed et cetera on the pellet side, but we didn't know and I think what we saw over the course of the pandemic was a fairly dramatic spike in AR.
Cash and AR and we've talked in the past, that's partially a function likely of.
Consumer stocking up in 2020 due to scarcity as well as being you know nest it at home and probably cooking more than they normally would and so we knew that at some point consumables attach in particular pellets, but normalize likely back to pre pandemic levels, which we're seeing and so.
I would say that in terms of.
That consistency and or steadiness of demand and consumption of pellets is trending roughly in.
In line with what we've seen pre pandemic save there has been a little bit of incremental pressure on that given the fact that what you mentioned earlier. This this large customer offering private label, which is eating into some sell through just based on the canvas cannibalization of our current offering there we don't believe that necessarily.
<unk>.
Permanent you know and so we have some strategies in place to try to offset some of that cannibalization and kind of bring that attach rate back up to what we believe is a normal level, but otherwise, it's holding pretty steady we're happy with what the attach rate looks like and it's actually providing nice.
Stability from a from a revenue standpoint, given that it is just as predictable recurring revenue stream.
Independent of the fact that you know grill sales have been down I think the last point I would make there as there always is a component of of course.
Correlation between pellet sales and real sales and so on real sales are down you do expect to see some impact to pellet sales only because theres an initial.
<unk> purchase of pellets, when they buy a grill right and so that that component moves correspondingly, but the embedded component tied to our installed base is holding pretty steady relative to pre pandemic levels. So no surprises there.
Okay got it. Thanks, and then maybe can you talk about the accessory side as well it sounds like you know, adding meter to home depot doors listen it was a significant driver of that was there anything else in terms of new products or any sort of promotions and you know I guess the same question would you expect that segment to grow in.
2023 or or perhaps not.
Yeah. So I guess I'll answer that second question and I'll, let Jeremy hit the first but.
I think ultimately we're not guiding to category level growth in 2023, but from an accessories standpoint, it's segmented obviously between traeger accessories and meter and meters, but a nice grower in this business.
And if you look at extreme growth in Q4 for example of 2022 relative to say 2019 pre the acquisition of meter there's been a substantial increase or the CAGR is fairly robust right.
But independent of that we've actually seen growth on the traeger accessories side as well.
So I think we're really happy with the portfolio of accessories and how those are performing and are particularly excited about the addition of meter and what that could mean as part of kind of our long term growth algorithm in the future Yeah I would add.
We bought a great business, it's a great product, it's a phenomenal team.
And our U K office about a month ago and continue to believe more in that opportunity and really the thesis behind why we acquired it.
Meter is is mostly a.
Most of their revenue is digital in nature of E Commerce.
That hasn't changed much since we bought it we are.
Undoubtedly given given our capabilities in traditional retail managing accounts from specialty up through large accounts such as east in home depot, we have the capability there that we're beginning to bring to bear, but it's early and so most of the meters growth.
It was really driven by.
The channels that it has been in for a number of years and it's not really it's not yet driven by the synergies that we have in our retail footprint, but those are coming and we've got a lot of confidence in our ability to bring that product to retail the same way that we did.
Our wood pellet grill innovation, which as you know it is.
Premium its innovative it requires training at retail it requires.
<unk> from from retail associate all the way to consumer So we think theres a lot to unlock still in front of us, but that that's it's really not whats been driving the growth.
Thank you.
Thank you.
Our next question comes from the line of Randy Connick with Jefferies. Your line is now open.
Hey, guys. Thanks for taking my questions.
First on back just quickly back to the balance sheet. Just can you just remind us any kind of payments or anything we need to kind of you'll get done in 2023.
And any kind of availability under the existing credit facility just curious there.
And then I.
I guess on the remember when you guys announced you're postponing.
Near shoring with Mexico.
How do you think about when to reconsider or potentially reconsider our Mexico. Once again is that something a couple of years away. Just curious there and then just finally on inventory.
We anticipate inventory growth matching up with sales growth.
By the second half of the year or more like the end of 2023.
For the help guys.
Yeah. So first question was around any obligations or payments I'm. The only one the only kind of a meaningful one.
Is the payment of meter earn out right. So that's structured in a way such that there's a component of of of 'twenty, one that theyre able to catch up in 'twenty. Two so they were able to achieve that so that that's one.
Components of the payment and so we draw on them.
Partially down on on.
Our delayed draw facility, which has subsequently expired in order to fund that payments, which would probably happen in around the April timeframe. So that's one.
And then.
And then to your last question on inventory growth.
What we expect in ultimately the.
Over the course of 2023 is that it's growing.
Or is declining relative to the base rate. So I'd say that it's sort of a moderate percent decrease in Q1, and then it's a fairly sizable double digit decrease between Q2 and Q4, so it wasn't necessarily track with inventory that makes.
Because again, we're still sort of cleaning up the balances and driving too.
Well, we look at internally, which is sort of a days and inventory on a forward kind of three months basis to ensure that we're covered oversee a 90 day period, which we feel comfortable with but nothing more rate and we're not there yet, but we think by the AR, but by Q3 will be in kind of that that position where.
You know our inventory levels are at a point, where we're comfortable with both the composition and the.
Quantum of inventory, but youll see ultimately a fairly decent size decrease year over year on a quarterly basis.
Between Q2 and Q4.
Great and just on the near shoring with Mexico, Yes.
The Mexico.
Production.
Yeah.
Sorry, yes so.
With the answers.
We see near shoring is absolutely a strategy long term not just in Mexico, but as we see our base of business grow.
Both here and in Europe , we will evaluate opportunities for more efficient sourcing.
Closer closer to closer to the consumer, but certainly with a cost and margin in mind.
Mexico is something that we continue to evaluate.
Have a very good base of sourcing currently between China and Vietnam.
And as.
As you know container rates have declined meaningfully so it takes some pressure off time, but we do believe sort of medium to long term that that Mexico is a viable opportunity for us and something we continue to evaluate.
Great. Thanks, guys.
Thanks Randy.
Thank you.
Our next question comes from the line of Peter Keith with Piper Sandler. Your line is now open.
Hey, Thanks. Good afternoon, guys. Appreciate you taking the question I wanted to explore the topic of the ocean freight costs.
I actually can't think of anyone that research has been more negatively impacted promotion freight. So I was wondering if you could frame up two things number one when you look back over the last two years, what you think the.
The impact has been maybe on a dollar basis or a gross margin basis, and then looking forward how much recovery do you have from lower ocean freight costs baked into the 2023 outlook.
No.
Yeah good questions.
I'd say on the first one I don't have kind of orders of magnitude in front of me.
The.
Kind of the dollar amount that ultimately put pressure on our business I think we referenced numbers in the past up we can certainly share offline if need be but it's been fairly substantial right and I guess, if I heard a recall back to Q4. When this really kicked in I mean, I think we alluded to like.
Eight or 900 basis points of impact right. So it's been fairly it's been fairly a fairly meaningful if not the biggest driver of gross margin erosion over the last 18 months.
As you mentioned I'd say that going forward what were seeing is.
Again kind of this tale of two halves around gross margin, where we're still locked in and or have higher inbound transportation costs capitalized in our inventory and so we're still carrying a higher basis from that standpoint in our inventory, but as we've worked through those heavier levels in that bleeds off will begin to.
Capture.
These fairly I.
I would say favorable spot rates that that element.
Merged in certain cases, we're seeing spot trend back to kind of pre pandemic levels, a slightly more complicated picture because we did lock in some fixed.
Components of our allocation of containers and that was in an effort to hedge risk against the.
Unknown of can we even access or procure containers.
Small, there's a small percentage, but we do factor that into the into the kind of run rate over the course of 2023.
Based on that mix, we don't expect to be necessarily paying at spot markets at least based on what we're seeing today, but there'll be dramatically better than.
What we like what we've experienced over the last 18 for 18 months or so on the gross margin front I mean, we're not you know, we're not going to share specific numbers, especially around the quarters, but if you look at it.
You look at our guidance range of 36% to 37% you.
You can bet that a large majority of a majority of the gross margin expansion year over year is tied to inbound transportation improving.
Okay.
Yeah Fair enough, maybe we can talk more offline because it seems like I'm guessing you're probably going to see continued benefits into 2024 that we want to think about.
And maybe a separate question for you would be on it.
Do you feel you feel good about sell in sell through at retail.
Yes, simplistically as sell through.
One year and how are we thinking about sell through year on year and in the context of your full year guidance for 2023.
Yeah.
Yeah. Good question, So I would tell you that in 2020.
In 2022, you know, we Werent, we were definitely comping slightly down relative to the prior year.
Think peaked in Q3, but sequentially improved in Q4 in part due to our promotion.
Our extended promotion that holiday promotion.
And I guess, the only other layer I would add to that is you know, even though there was a negative comp year over year.
It was really not that dramatic, especially as you compare it to the decline in grill sales on a sell in basis right. You can also see it in the market share data where traeger.
It was certainly down in conjunction with a decline in the market, but it's a it's fairly disconnected from what youre seeing in sell through which just reinforces the point that this is more of a destocking issue than it is a demand issue and I think that because our market share effectively held steady.
We're sort of moving in accordance with the market and there is still healthy demand for our brand all things considered.
In terms of moving shifting forward to our outlook for 2023, I think the first thing I would say as you know, we're not necessarily forecasting industry growth.
We want to remain cautious there, but we do hope and sort of have a a belief that there will be rebound into growth in 'twenty four and beyond.
And I think from a sell through standpoint, we're being conservative here.
But it will still be disconnected from you know first half of the year performance on drills, which will continue to be impacted by destocking, even though.
We believe that sell through trends will hold fairly steady and we will continue to signal nice demand from the consumer or at least at retail.
Sell through holding steady or is that just kind of thinking about it and sort of flattish year on year.
For the better part of 2023.
Yeah, we're not guiding we're not guiding to sell through I think what I would just say there is that yeah. I think steady as is probably the word we want to use.
Okay fair enough. Thanks, so much for the insights.
Yep.
Thank you.
Our next question comes from the line of Joe Feldman with Telsey Advisory Group. Your line is now open.
Great. Thanks for taking the question guys. So I apologize if I missed it with all the information you've given tonight, but with regard to the cost savings you said you've identified for 2023.
Wondering if you could share a little more color.
And maybe where that would be and would it be to the same magnitude that we saw in 2022 that 20 million or maybe a little lower than that.
Yeah, I won't specifically speak to the specific magnitude.
But there are a variety of areas that.
That we've evaluated as part of our budgeting process for 'twenty, three and I think I'll.
I'll, just say that if you recall back to some of our comments and in kind of Q3 Q4. There was a moment in time in the back half of last year, where we made swift actions.
Structuring and.
Kind of right sizing capacity unwinding of Mexico relationship et cetera that are baked into that kind of run rate $20 million as well as some incremental action.
Actions, we took that are probably more temporary in nature with the second layer being okay. This helps kind of bridge between now and when do we start to plan for 2023, which will give us the opportunity to further explore areas in a more deliberate way versus a reactive way to drive efficiency.
Across the P&L and really across the entire operation.
So if I were to give you a few examples of things that we've evaluated and then we define define as sort of core principles for Howard.
Budgeting and defining our operating plan for the year.
Seeing from kind of tightening.
<unk> to net dilution to how we rebalance capacity across the supply chain to ensure that.
Pasadena, whether it'd be on the manufacturing side.
Or in.
In other areas of the business is balanced with kind of the demand that we're seeing and forecasting to just continued efforts on the gross margin side was a task force that is hyper focused on driving expansion opportunities both near term long term you know.
Reshaping opex to ensure that it's moving more closely in line with our long term financial model and core principles out there theres. Some delayed initiatives I had mentioned earlier where to the extent that we unlock incremental SG&A capacity based on revenue performance will look to fund right now their Pos.
As I said the biggest one there as an example would be top of funnel.
But again, we'll continue to.
We focus more on middle and lower funnel.
And ultimately just general efficiency across kind of our fixed cost structure.
I would just add though that it's not all about driving efficiency and sort of cost reductions. There are also key principles that we're focused on to protect the long term and I'd say two to three examples of that are one ensuring that meter is properly funded and that our product growth.
Engine is properly funded right, we don't want to starve or hinder growth in 'twenty four and beyond a lot of the actions that we're taking this year are intended to set the right base that we can build on in 'twenty four.
And ultimately we believe are necessary just given some of the dynamics and sort of right sizing of demand trends and sort of sell in based on this destocking effort. So again those are.
Handful of examples, but we have four principles that are ultimately guiding this and are baked into our current operating plan, which does contribute to incremental savings on top of the $20 million that we spoke to early on.
Okay. That's really helpful. Thank you so much Tom and maybe just one more follow up I could ask.
With regard to the consumer demand.
Which I know we all.
I understand the environment, especially in big ticket and I was just curious like.
As you talk to kind of some of your retail partners, maybe some of them more specialty oriented ones were.
You know are they seeing any kind of green shoots or maybe it's like a good response to some of the new grill lines that you've you've just put out or any anything that that you.
Get you a little excited about that maybe things could come back towards the second half of this year.
Yeah, absolutely I would say first of all.
The.
12 months ago, when we started to feel.
And start to soften it took a while to unpack what was driving that and there are a number of sort of negative forces. They were negative in a number of negative forces on the consumer then.
As well as.
As there are now I think as the consumer weakens there there is a.
A bit of a tailwind in terms of our consumers.
In pent up travel needs, which we certainly felt last year, we feel that trend start to decline a little bit, but again in a tough environment.
<unk>.
I think what what we see there we like first of all is that the.
The sell through is more predictable.
First eight nine months of last year, it bounced around a lot and it's really really hard to forecast the business, we feel better about the predictability of sell through.
We launched two new products last last month, and we were really excited about the timber line that we launched 12 months ago last spring.
But clearly were watching something with a lot of energy, but at a very high price point.
And so the ability to with the Ironwood Cascade down some of those features technology sort of IV language to a more affordable price point down to $2000, albeit.
Accessible but still at premium.
The response has been very positive to that to that growth again, we're four weeks into it.
Flat rock.
As I said in my prepared remarks.
More social engagement more energy to them that that watch than any launch that we've done.
And again premium to the to the griddle category at $900, but certainly you know certainly accessible from our consumer perspective.
So I would say that we liked energy we see there.
Retailers are notably our specialty retailers are really excited about it.
And are there upside opportunities.
There certainly could be.
As we as we see the macro environment now, we just think it's prudent to be too.
To be cautious in how we think about it.
We have levers.
To drive growth.
Around some of these products some incremental investment to drive near term near term demand to the extent that the euro pieces as we would like it to so plenty to be excited about.
And those new products, but I would say I would step back and say.
What we really get excited about is what this business and so forth.
We like our position in the market, we like I'm sure.
We like our brand position there there is no more passionate <unk>.
Sooner than a traeger consume it that I've ever seen as a consumer of many brands.
We like the outdoor cooking category. It is going to grow we're in a trough, but it is going to grow this as a long term trend that's not going away.
And we feel like we have team and capability to really build the right product and innovation.
To fuel growth so.
We're in it or an interesting environment, where we've got a balanced meeting near term needs of the macro environment, but feeling a lot of optimism over a medium to long term.
Okay.
Thank you.
That concludes the Q&A session I will now pass the conference back over to the management team for closing remarks.
I think so much we appreciate your time and look forward to being in touch.
Right.
That concludes the trigger fourth quarter and fiscal 2022 earnings conference call. Thank you for your participation I Hope you have a wonderful day.