Q3 2024 Traeger Inc Earnings Call
Hello and welcome to the Traeger 3rd quarter 2024 earnings conference call. My name is Alex and I'll be coordinating since the cold today. If you'd like to ask a question once the presentation has finished, please press star, followed by one on the telephone keypad.
Speaker Change: I'm now hand it over to your host, make a practice, I'm a person of the best relations. Please go ahead.
Speaker Change: Good afternoon everyone. Thank you for joining Triguit calls for discussing third quarter 2024 results.
Speaker Change: with her release this afternoon and can be found on our website at investors.trigger.com. Nick Bacchus, Vice President of Investor Relations at Trigger. With me on the call today, our Jeremy Andrus, our Chief Executive Officer, and downblossom, our Chief Financial Officer.
Speaker Change: Before we get started, I want to remind everyone that the assistance from Mark S. on this call may contain forward looking statements within the meaning of the safe harbor provisions of the private security's location reform act of 1995.
Speaker Change: East Dayman, sir based on current expectations and views, future events including but not limited to. I look as to revenue results for the civil and accessories categories for the fourth quarter of 2024. And our anticipated full year fiscal 2024 results.
Speaker Change: That statements are subject to risk and uncertainty that could cause actual results to get from materially from those expressed to imply here in.
Speaker Change: and Curgeter View are annual port of 410K for the year ended December 31, 2023, according to the report of 410Q for the quarter ended September 30, 2024 once filed. And are other SEC filings for discussion of these factors and uncertainties, which are available on the
Speaker Change: You should not take underline for these forward-looking statements which we speak to only as of today. We undertake no obligation to update or revise up for any new information.
Speaker Change: This call will also contain certain non-gap potential matters.
Speaker Change: including adjusted EBITDA, adjusted net income or loss, adjusted net income or loss per share, and adjusted EBITDA margin, which we believe are useful supplemental measures.
Speaker Change: The most comparable GAAP financial measures and reconciliations of the non-GAAP measures contained herein to such GAAP measures are included in our earnings release, which is available on the investor relations portion of our website at investors.trader.com. Please note that our definition of these measures may differ from similarly titled metrics presented by other companies.
Speaker Change: Now, I'd like to turn the call over to Jeremy Andrus, Chief Executive Officer of Traeger. Jeremy?
Jeremy Andrus: Thanks, Nick. Thank you for joining our third quarter 2024 earnings call. I will start by reviewing our third quarter performance, and then turn the call over to Dom to discuss our financial results and to provide more detail on our 2024 financial guidance.
Jeremy Andrus: Our third quarter performance included several important highlights.
Jeremy Andrus: First, we return to top line growth in the quarter, with revenue growth of 4%.
Jeremy Andrus: Critically, this growth was driven by very strong performance in our grills category, which grew 32% as compared to the prior year.
Jeremy Andrus: Second, our profitability improved significantly.
Jeremy Andrus: Third quarter gross margin expanded by 440 basis points. This improvement in gross margin was driven by both external factors as well as our margin enhancement initiatives, which continued to bear fruit.
Jeremy Andrus: Expense discipline, along with the strong gross margin improvement, translated to adjusted EBITDA of $12 million,
Jeremy Andrus: a significant improvement from last year's $5 million and drove a just-as-even-done margin expansion of 610 basis points versus the third quarter of last year.
Jeremy Andrus: Given our better-than-anticipated third quarter performance, we are increasing our fiscal 2024 financial guidance.
Jeremy Andrus: We now expect sales of $595 to $605 million and adjusted EBITDA of $78 to $81 million.
Jeremy Andrus: At the midpoint of the range, we are increasing our adjusted EBITDA guidance by 4% on top of last quarter's 15% increase in guidance.
Jeremy Andrus: This increase in our adjusted EBITDA guidance is being driven by our third quarter performance and our expectation for full year gross margin to be 41.8% to 42.3%, up from our previous 40.5% to 41.5% range.
Jeremy Andrus: The growth in our grills business in the third quarter reflects strong sell-through at retail during the period.
Jeremy Andrus: Our strategy to lean into promotions this year, given the soft industry demand backdrop, was successful and the consumer responded favorably to our Labor Day promotion.
Jeremy Andrus: Given that our retail partners experienced better than anticipated sell-through in our peak season, channeled inventories coming out of the second quarter were in a very clean position, and the strong consumer demand in the third quarter drove upside in replenishment sales.
Jeremy Andrus: I am pleased with the stronger than anticipated grills demand in the corridor. Despite this performance, we continue to view the consumer demand backdrop as mixed for our category and we think the consumer remains discerning in their purchasing behavior.
Jeremy Andrus: While we saw healthy sell-through across our overall grill assortment, we continue to see outperformance in grills that are priced below $1,000, which we believe demonstrates that the consumer remains selective in their spending patterns.
Jeremy Andrus: And while we did see a reduction in our grills ASP, partially due to this mix shift, as well as our promotional strategy, we are bringing new customers into the Traeger hood and we are gaining market share.
Jeremy Andrus: We view this favorably as our strong brand loyalty and attachment of adjacent revenue streams like pellets and accessories contribute to a high customer lifetime value.
Jeremy Andrus: The strength in our third quarter of grills performance is giving us the confidence to increase our full year outlet for the grill segment.
Jeremy Andrus: We are now assuming positive low single digit growth in grills for the year. I am very pleased with our ability to grow our grills revenues in an environment that remains challenging for big ticket and home related goods purchases.
Jeremy Andrus: Our sell-through performance in the third quarter demonstrates that there is a strong and growing appetite for the Traeger brand.
Jeremy Andrus: As I've discussed on prior calls, our largest opportunity and our first long-term growth pillar is to accelerate brand awareness and penetration in the United States.
Jeremy Andrus: I believe that the elements for growth remain in place and that our brand health is stronger than ever. For example, our research shows that Traeger's unaided brand awareness as of the third quarter increased by approximately 20% as compared to 2022.
Jeremy Andrus: The fact that awareness of the Traeger brand is meaningfully growing in a challenging industry environment and during a time when we have not been investing aggressively into top of funnel marketing is evidence of the strength of our brand.
Jeremy Andrus: The affinity for the brand within the Traeger hood is also evidenced by our industry leading that promoter score, which remains materially higher than any other outdoor cooking brand.
Jeremy Andrus: The energy around Traeger is being fueled by our continued investment in community engagement and brand activation.
Jeremy Andrus: Our social media presence continues to be a strong source of connection with the Traegerhood and our digital content is an important part of the consumer flat wheel.
Jeremy Andrus: We continue this activation strategy in the third quarter.
Jeremy Andrus: We also launched Traeger Kitchen in the third quarter. Traeger Kitchen is a weekly YouTube series featuring pro chefs and pitmasters giving step-by-step tutorials of their favorite recipes cooked on the Traeger.
Jeremy Andrus: Viewers can get tips, tricks, and recipes for cooking on their Traeger from some of the biggest names in outdoor cooking by tuning in. The feedback and reception from the Traegerhood has been fantastic and we are seeing strong growth in YouTube subscribers since its launch.
Jeremy Andrus: Moving on to our accessories business. In the third quarter, the strong growth in our grills business was partially offset by softness in our accessories category, driven by a reduction in revenues at meter.
Jeremy Andrus: As we discussed last quarter, Meter is seeing pressure on its e-commerce sales which we believe is largely attributable to a change in its demand creation strategy earlier this year, which proved ineffective.
Jeremy Andrus: We were anticipating continued pressure on meter in Q3, and sales results ended modestly lower than our expectations.
Jeremy Andrus: The good news is that the third quarter is METER's lowest volume period of the year, and we have implemented strategies to drive improvement going forward.
Jeremy Andrus: Metre is a fourth quarter weighted business and ahead of the holiday selling period, the team is focused on re-accelerating prospect marketing to fill the funnel of potential customers.
Jeremy Andrus: We are increasing our demand creation with a focus on driving conversion at a healthy ROAS in meter's peak season.
Jeremy Andrus: METR has also brought innovation to the market with its launch of METR Pro XL, METR's four probe solution in September, and its recent launch of METR Pro Duo, its new two probe solution.
Jeremy Andrus: We believe that METER's revamped demand creation strategy and recent product innovation will drive improvement in the fourth quarter and into next year. However, while we expect sequential improvement in the trend, we are planning for a decline in our accessories business in the fourth quarter.
Jeremy Andrus: Moving on to consumables. Our consumables revenues declined in the third quarter. However, this was largely due to a shift in revenue piece in your appellate business.
Jeremy Andrus: Underlying demand trends for consumables remained healthy and third-quarter sell-through was positive for both pellets and food consumables.
Jeremy Andrus: We are expecting our consumables category to return to positive growth in the fourth quarter.
Jeremy Andrus: Driving recurring revenue of your consumables offering remains a long-term growth pillar. In the third quarter, we relaunched our Me Church Blend wood pellets, a limited edition pellet, in partnership with pitmaster and Traeger ambassador Matt Pittman.
Jeremy Andrus: On the food consumable side, we continue to gain distribution and added rubs into Safeway for the first time in September.
Jeremy Andrus: Overall, I am pleased with our third quarter performance and our team's ability to execute.
Jeremy Andrus: Thus far in 2024, we have demonstrated our ability to successfully navigate a period of challenging consumer demand in our category and have grown adjusted EBITDA while continuing to invest in our long-term growth pillars.
Jeremy Andrus: I am grateful for our retail partners, with whom we have worked closely to drive a successful year thus far, and with whom we are eager to continue to grow.
Jeremy Andrus: I also want to thank the entire Traeger team for their hard work and dedication to serving our consumer and driving continued improvements in our business.
Jeremy Andrus: As I look forward to the rest of this year and into next year and beyond, I continue to be extremely confident in Traeger's positioning and our ability to drive growth.
Jeremy Andrus: The improvement in sell-through trends over the last two quarters is encouraging.
Jeremy Andrus: and has ensured that channel inventories remain healthy and appropriate. This is great news as our product innovation pipeline is strong and is expected to accelerate into 2025 and beyond.
Jeremy Andrus: I'll now turn the call over to Dom to discuss third quarter financial results in more detail. Dom?
Dom: Thanks, Jeremy. And good afternoon, everyone. Today, I will review our third quarter performance and discuss our updated outlook for fiscal year 2024.
Jeremy Andrus: Third quarter revenues grew 4% to $122 million.
Jeremy Andrus: Grill revenues increased 32% to $75 million.
Jeremy Andrus: Grill revenue strength was driven by better than anticipated sell-through as consumers responded favorably to our promotional offering, and our retail partners replenished inventories following healthy demand in the second quarter.
Jeremy Andrus: During the third quarter, we saw strong volume growth in grills, which was partially offset by a lower ASP, driven by a mixed shift to lower priced grills, a higher mix of direct import sales, and strategic pricing actions.
Jeremy Andrus: Consumables revenues were $23 million, down 11% to third quarter last year.
Jeremy Andrus: Third quarter was negatively impacted by revenue pacing shifts in the quarter.
Jeremy Andrus: Underlying consumer demand trends in our consumables business remain healthy and sell-through was positive in the third quarter. We expect to see positive revenue growth in consumables in the fourth quarter compared to the prior year.
Jeremy Andrus: Geographically, North America revenues were up 10%, while rest of world revenues were down 40%.
Jeremy Andrus: Rest of World Revenues were pressured by a reduction in sales load-in related to a European product partnership with Meter.
Jeremy Andrus: Moving on to gross margin, which continues to be a highlight in our profitability improvement story. Third quarter gross profit increased to $52 million from $45 million in the third quarter of 2023.
Jeremy Andrus: Ghost profit margin was 42.3%, up 440 basis points versus the third quarter of 2023.
Jeremy Andrus: Our gross margin continues to benefit from both external factors, including lower transportation rates, as well as the ongoing internally driven margin optimization efforts.
Jeremy Andrus: Third quarter gross margin expansion was driven by one, lower supply chain cost, which drove 320 basis points of favorability. Two, 110 basis points of favorability related to a one-time credit from a transportation partner.
Jeremy Andrus: 3. Warranty favorability of 70 basis points
Jeremy Andrus: 4. Pellet mill efficiency worth 50 basis points 5. Other benefits worth 100 basis points
Jeremy Andrus: These favorable items were partially offset by dilution of 210 basis points.
Jeremy Andrus: Sales and marketing expenses were $26.2 million, compared to $25.9 million in the third quarter of 2023.
Jeremy Andrus: As a percentage of sales, sales and marketing expenses were down 60 basis points versus the third quarter of last year.
Jeremy Andrus: General and administrative expenses were $24 million compared to $25 million in the third quarter of 2023.
Jeremy Andrus: I am pleased with our ability to effectively leverage our operating expenses and to maintain financial discipline as our sales return to positive growth in the quarter.
Jeremy Andrus: Net loss per diluted share was $0.15 compared to a loss of $0.16 in the third quarter of 2023.
Jeremy Andrus: Adjusted EBITDA was $12 million in the third quarter, as compared to $5 million in the same period of 2023.
Jeremy Andrus: Moving on to balance sheet highlights.
Jeremy Andrus: At the end of the third quarter, cash and cash equivalents totaled $17 million, compared to $30 million at the end of the previous fiscal year.
Jeremy Andrus: We ended the third quarter with $416 million of short and long-term debt, resulting in total net debt of $399 million.
Jeremy Andrus: Our liquidity profile remains healthy, and we ended the third quarter with total liquidity of $177 million.
Jeremy Andrus: Inventory at the end of the third quarter was $105 million, compared to $96 million at the end of the fourth quarter of 2023, and $102 million at the end of the third quarter of 2023.
Jeremy Andrus: We believe that balance sheet inventory levels are appropriate for our current demand outlook.
Jeremy Andrus: Furthermore, in-channel inventory levels were healthy coming out of the third quarter, giving better than expected sell-through of grills in both the second and third quarters of this year.
Jeremy Andrus: We are pleased with the health of channel inventory levels and believe our retail partners are well positioned from an inventory perspective as we begin to ship new grill product in the fourth quarter and into 2025.
Jeremy Andrus: Thank you. Thank you.
Speaker Change: Now I'd like to discuss our updated financial outlook for fiscal year 2024.
Speaker Change: We are increasing the low end of our revenue guidance range and are updating our revenue outlook to $595 million to $605 million.
Speaker Change: The improved outlook for the grills category is being partially offset by the expectation for continued pressure in our accessories category, driven by an expected revenue decline at meter.
Speaker Change: We're expecting our accessories category revenues to decline in the fourth quarter versus the prior year.
Jeremy Andrus: For adjusted EBITDA, we are raising our full year guidance to a range of $78 million to $81 million, an increase from our prior range of $74 million to $79 million.
Jeremy Andrus: The improvement is being driven by an increase in our gross margin outlook.
Jeremy Andrus: We are now assuming full year 2024 gross margin of 41.8% to 42.3%, up 490 to 540 basis points versus last year, and up from our prior range of 40.5% to 41.5%.
Jeremy Andrus: The increase in our gross margin outlook reflects upside in the second half of the year as compared to our prior expectation.
Jeremy Andrus: We are seeing a larger-than-expected benefit from certain margin components, including a higher mix of grill sales from our direct import program, which carry a higher margin than grills fulfilled through our domestic logistics infrastructure.
Jeremy Andrus: Overall, I am highly encouraged by the progress our organization continues to make.
Jeremy Andrus: In the third quarter, we returned to positive sales growth, led by 32% growth in grills.
Jeremy Andrus: We are seeing the benefit of the focus the organization has placed on margin improvement over the last two years, and our gross margin is expected to see 515 basis points of expansion this year at the midpoint of our guidance range, and an incredible 685 basis points over the last two years.
Jeremy Andrus: Our strong execution is allowing us to raise our adjusted EBITDA guidance once again. I continue to believe that we are very well positioned as we look to drive long-term shareholder value.
Jeremy Andrus: And with that, I'll turn the call over to the operator for any questions. Operator?
Speaker Change: Thank you. As a reminder, if you'd like to ask a question, please press star followed by 1 on your telephone keypad. If you'd like to remove your question, you may press star followed by 2.
Speaker Change: Our first question for today comes from Anna Glaston of Be Righty. Your line is now open, please go ahead.
Anna Glaston: Hi, good afternoon, guys. Thanks for taking my questions.
Speaker Change: First, I'd like to touch on the implied guidance for grills in the fourth quarter. I believe on the last quarter, you spoke to a sell-in benefit, you know, flowing in to 4Q, which was a little bit earlier than the prior expectation for the beginning of 2025. Is that still the case? And really, the angle of my question is trying to understand, you know, the shift in growth from 3Q to 4Q, obviously, you know, we're not pulling forward.
Speaker Change: 40% growth in growth quarter-over-quarter, but there's any help there.
Speaker Change: Yeah, good question. I think, you know, directionally speaking, you're right in that we don't expect the strong Q3 grill growth and Q3
Speaker Change: to sequentially hold in Q4. We will see that moderate down.
Speaker Change: I think Q4 is largely in line with our prior view, but we do expect...
Speaker Change: Thank you. Bye.
Speaker Change: Although moderated, you know, in Q4, we expect some marginal growth.
Speaker Change: and Drills.
Speaker Change: And I think generally speaking, this is all predicated on the fact that we're really pleased with obviously sell-through in Q2, as well as sell-through in Q3, in part driven by our Labor Day promotion, and then just the outside benefit in Q3 related to the replenishment coming out of Q2.
Speaker Change: both Traeger and otherwise. I don't know that we've seen the landscape shift meaningfully. You know, we talked
Speaker Change: We talked a couple of years ago about the introduction of a private label pellet into one of our larger retailers, and we felt the impact of that. So we see brands come and go, and I don't know that we're seeing the landscape shift.
Speaker Change: Meaningfully, on pellets, we tend to believe that in our
Speaker Change: A research would suggest that a Traeger owner is loyal to the Traeger brand. You know, one of the things that we attempt to do as we invest in product marketing around pellets is tell a story around the quality of the pellet.
Speaker Change: How it influences the cooking process and the outcome. I think it's notably important that Traeger is vertically integrated around pellets and we do that in parts so that we can control the process. And we tune our grills to our pellets. And every pellet's a little bit different.
Speaker Change: We certainly believe that we're well-positioned from a product and a brand perspective.
Speaker Change: , , , , , , , , , , , , , ,
Speaker Change: You know, there are low barriers to entry in this category to build a low-quality pellet, you know, there's plenty of sort of mill space that a competitor could lease or manufacture, but that's been the case for many years and we're not meaningfully seeing the landscape shift.
Speaker Change: Great, that's it for me. Thanks.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from Megan of Morgan Stanley. Your line is now open, please go ahead.
Speaker Change: Thank you. Bye. Bye.
Megan: Hi, thanks. Good afternoon. Thanks for taking our questions.
Speaker Change: I wanted to start a little bit, you know, back to maybe Anna's first question just on the grill sell-through and the category.
Speaker Change: And, you know, you are seeing, I think you talked about positive POS in the second quarter or so.
Speaker Change: I think you're implying that you still saw positive POS in the third quarter, but...
Megan: You are, I guess, your comments around the category maybe were a bit subdued, balanced, don't want to put words in your mouth, but
Speaker Change: And related to that, how is what you're hearing from the retailers on, you know, early ordering for the spring selling season kind of playing into how you're thinking about the category into 2025?
Speaker Change: Yeah, so first of all, you know, we believe the category is down, low single digits, you know, one and a half, two percent year-to-date, and correct, we did see positive sell-through in grills in the third quarter.
Speaker Change: for the year. So the answer is category...
Speaker Change: We are outperforming the category. We are taking some share.
Speaker Change: As we step back and think about where we are in sort of the life cycle of recovery.
Speaker Change: I would say, you know, first of all, this is a, I would characterize this category as very resilient. As we look at decades of industry data, you know, we certainly hadn't exaggerated and pulled forward in the pandemic. And I think what we're seeing right now
Speaker Change: is that we're getting beyond that pull forward and it's colliding a little bit with a consumer, a weakened consumer who's less focused on high ticket durables, less focused on home goods.
Speaker Change: And it's our belief that the category is it's found bottom, you know, it's we think we found the trough.
Speaker Change: And then I think the question is, you know, what is the timing and the trajectory of the recovery?
Speaker Change: in prior decades and certainly just immediately prior to the pandemic, between the trough and a normalized category, there's a lot of growth.
Speaker Change: What that trajectory will look like, I think, is unclear, but given that it feels like we found bottom,
Speaker Change: We're seeing interest rates come down. We believe that will start to motivate more housing transaction, more investment in current homes.
Speaker Change: become more attractive and
Speaker Change: In housing category like this, and we get further from the pandemic, we just see growth in the category.
Speaker Change: You know, the category dynamics, the macro, and really intersecting with
Speaker Change: in intersecting with the investments and the initiatives in our business. And we think this certainly tees up a very successful next two to three years.
Speaker Change: That's really helpful. Thank you. And maybe just a follow up to that for Dom on the, you know, EBITDA side of things when we do kind of see a normalized.
Speaker Change: Recovery and top line, how should we think about, you know, maybe incremental margins, I think
Speaker Change: You guys have been really good at controlling the OPEX, still leveraging sales and marketing in this quarter, but the gross margins also come in, maybe a bit better than your expectations. So, how should we think about...
Speaker Change: When you might look to maybe reinvest some of that upside back into top of funnel marketing. I know you've been
Speaker Change: pretty candid that you want to wait to do that until there's a meaningful inflection in the category. But, you know, could you do that next year, maybe sooner rather than later, just trying to get a sense of how to kind of think about the flow through in a more normalized backdrop.
Speaker Change: That's a great question. I mean, you know, a lot of it is predicated on
Speaker Change: signals that we want to lean into from a top-line growth standpoint, right? So Jeremy talked about category, finding bottom. So timing is certainly important. That said, I mean, I don't know that we think about investing the upside per se, but I think it's important to think about the upside.
Speaker Change: So much as we think about our long-term financial model and guardrails that we've defined in order to ensure that when there is a return to top-line growth, which in part will want to
Speaker Change: feel the fire of via, you know, increased investment capacity and sort of, you know, based on where we want to invest in that increased capacity.
Speaker Change: But I don't know that we would lean in beyond what kind of the guardrails dictate around profitability and throat flow through. So clearly we would unlock incremental capacity.
Speaker Change: both in advance of and, you know, post kind of this return to growth, which we would invest. But if we wouldn't do it beyond those guardrails to ensure that we're continuing to drive EBITDA expansion, and certainly gross margin has
Speaker Change: you know performed in line with expectations in relation to the initiatives that we've been focused on as well as the macro that's been beneficial in terms of just the predictability around how that's
Speaker Change: improve the gross margin picture. However, I do think that, you know, those those initiatives probably got us ahead of where we thought we would be today, which is great news.
Speaker Change: to how we think about profitability, which ultimately needs to be profitable, sustainable growth, right? That's an important, you know, pillar to how we think about the future and one that we'll continue to manage both with discipline as well as
Speaker Change: You know, a focus on ensuring that we're smart about where we're doubling down and or increasing investments to accelerate growth on top line.
Speaker Change: Great. Super helpful. Thank you.
Speaker Change: and Nick Bacchus. Thanks, everyone.
Speaker Change: Our next question comes from Simeon Siegel of BMO Capital Markets. Simeon, your line is now open, please go ahead.
Speaker Change: Hey, good afternoon, guys. It's Dan Stroller on Presumium. Thanks for the time here.
Speaker Change: I wanted to ask a bit on Meter. The first is if you think you've fully addressed the marketing transition, or if you're still working through that and there's just sort of a bit of a timing lag for sales to inflect.
Speaker Change: And the second is, Justine, if you've ever given color before on what percent of the Traeger Grille owner install base?
Speaker Change: currently owns a probe. Thank you.
Speaker Change: Yes.
Speaker Change: So, first of all, you know, we certainly have been deep into this marketing investment and sort of transition strategy.
Speaker Change: You know, it's hard to, it's hard to...
Speaker Change: call, sort of return to sell through until we get through the fourth quarter. In the fourth quarter, we do a meaningful share of business, but we like some of the early signals that we're seeing.
Speaker Change: And some of the investment really was around prospect marketing in an effort to drive fourth quarter performance. I don't know that it's a flip that gets switched immediately, but I think we're making some progress.
Speaker Change: In terms of the percentage of the Traeger installed base
Speaker Change: that owns the MeterProbe. I would say it's small at this point. You know, currently, we have a
Speaker Change: There is limited integration between the meter and the Traeger grill. That's something that will increase over time.
Speaker Change: And given that we've built Meter as an independent brand while we have found opportunities to collaborate from a grant perspective and co-market, we think there's still a lot of opportunity.
Speaker Change: in front of us. You know, what I can tell you is, you know, as we look at the meter install base, a very small percentage
Speaker Change: Nick Bacchus, Jeremy Andrus, Nicholas Bacchus
Speaker Change: to cross-pollinate both brands and that's something that we're focused on but I would say certainly more opportunity in front of us than progress to date.
Speaker Change: Thank you. Good night. Good night. Good night. Good night.
Speaker Change: I appreciate the detail. Thank you.
Speaker Change: Okay, thanks.
Speaker Change: Thank you. Our next question comes from Peter Keith of Piper Sadler. Your line is now open, please go ahead.
Speaker Change: Hi, this is Alexia Morgan on for Peter Keith.
Speaker Change: My first question is on tariffs and China exposure. It seems like most recently you've said that three quarters of grills and then most of accessories are manufactured in China, but do you have any update to that? And what are you able to do to mitigate tariff risk?
Speaker Change: Yes, definitely a hot topic and one that we've started talking about.
Speaker Change: what we've been talking about for a number of years now. So first of all, let me let me provide just some some
Speaker Change: General information on state of play in terms of where we manufacture and where we may have risk. About 80% of grills
Speaker Change: are manufactured in China. About 20% are manufactured in Vietnam.
Speaker Change: You know, currently, wood pellet grill is not included.
Speaker Change: on the import code in terms of tariffs. So although we have exposure to China, tariffs were assessed only on our accessories and not on our grills. With that said, we've been thinking about diversification for some period of time.
Speaker Change: The ability to scale meaningfully
Speaker Change: And so the 20% is certainly a backward-looking number.
Speaker Change: and not a forward-looking number.
Speaker Change: Based on the capacity
Speaker Change: that we'll have.
Speaker Change: If you go beyond grills, as I said, accessories, non-meter accessories are largely manufactured in China. We're currently assessed a tariff on those. Meter is produced entirely in Taiwan, and our consumables are produced here in the U.S.
Speaker Change: You know, there's a lot of chatter on tariffs right now, and I think it's going to take a little bit of time to sort out.
Speaker Change: exactly the new administration's strategy on tariffs, timing, magnitude of those tariffs. But I would say that
Speaker Change: We have been building.
Speaker Change: optionality around in our sourcing model.
Speaker Change: We've been diversifying, not just in Vietnam, we're looking closely at other...
Speaker Change: manufacturing options.
Speaker Change: in Asia.
Speaker Change: We've been working on Mexico as a long-term geography in which to manufacture, and although the U.S. is not a viable manufacturing partner.
Speaker Change: source, given a number of the dynamics of the category, we feel like we have
Speaker Change: to how tariffs evolve. And so I think we're well positioned to do the best thing for the business. We won't be reactive. We've been very proactive in this process.
Speaker Change: And as we understand the shifting landscape, we will make decisions accordingly.
Speaker Change: When tariffs are assessed, and to the extent that they are assessed, across
Speaker Change: Geographic sourcing locations
Speaker Change: We will work closely with our manufacturers to become more efficient, to figure out how we can share in those tariffs.
Speaker Change: And pricing is always a lever.
Speaker Change: Okay, thank you so much for the color. And then I just have one more on gross margin. It looks like gross margin expansion continue to look really good. Can you break down the drivers there over the next 12 or so months? And then it looks like full year gross margin guidance implies Q4 gross margin below the first three quarters. Do we have that math right? And if so, what's the cause of that?
Speaker Change: Yeah, your math is right on on Q4 being kind of lowest quarter of the year.
Speaker Change: You know, there's a couple of factors to that. One is really a product mix dynamic.
Speaker Change: Second, we are, you know, promotional in Q4, the normal promotional period for Traeger.
Speaker Change: I mean, those are probably the two main factors at play. I would also call out that sequentially from Q3 to Q4, you could explain away some of the sequential decline as you implicitly, you know,
Speaker Change: model Q4 based on a freight credit we received, you know, as part of our gross margin task force. We
Speaker Change: focus both on future operational efficiencies, but have also been able to uncover some benefits, you know, based on the past. And there was a one-time credit that we realized.
Speaker Change: to the tune of 110 basis points in Q3, which obviously won't repeat in Q4, so that does
Speaker Change: Nick Bacchus, Jeremy Andrus, Nicholas Bacchus
Speaker Change: In terms of, you know, longer term view, I mean, obviously we won't be getting into specifics on how we think about gross margin for next year.
Speaker Change: You know, we have talked about how
Speaker Change: We've sort of jumped ahead of initial plans on
Speaker Change: Gross margin progress. It's really been a phenomenal outcome and we're really happy with how things have tracked Clearly, there's been a macro assist that you know, we benefit from but more so the team has really dug in
Speaker Change: and focused on driving initiatives to
Speaker Change: impact both, you know, the short term as well as the long term, you know, view, whether it be incremental expansion and or just stability in kind of a new level of gross margin for the future. And so where I would, you know, provide optimism about the future, obviously, it's dynamic. And I would say that we're sort of within
Speaker Change: a realm where we feel comfortable but aren't ready to speak beyond that in terms of our viewpoint on gross margin next year.
Speaker Change: David Bacchus.
David Bacchus: Okay, thank you. That's it for me.
David Bacchus: Thank you.
Speaker Change: Thank you. Our next question comes from Peter Benedict of Baird. Your line is now open, please go ahead.
Peter Benedict: Hey guys, thanks for taking the question. Bob, just the 210 basis points of gross margin headwind that was kind of within that number in the quarter, was that just the promotions? Was that the Labor Day promotions? Having not, you didn't do them a year ago, you did them this year. I'm kind of curious if that was the driver there. That's right.
Speaker Change: Yeah, yeah, it's tied. It's tied to promotional activity, yep.
Speaker Change: Thank you. Bye-bye.
Speaker Change: And so as we think about going forward, I mean, the consumers clearly respond to promotions, not just from you, from a lot of companies we track. I mean, what's your view on the promotional stance for 4Q? And as you start to bring new innovation in in 2025, how do you, how are you thinking about pricing and promotion on those items?
Speaker Change: I think, you know, for Q3, we did run an incremental promotion, our Labor Day promotion, so that was new in the quarter. Q4 promotional activity.
Speaker Change: is consistent with past years. It's just kind of our normal holiday promotion, plus there's a meter element as they're in kind of their peak season. You know, what we're seeing is certainly success with our promotions. You know, it's sort of uncovered.
Speaker Change: The fact that there's pent-up demand especially at lower price points and you know, I think where you see these significant, you know unit volume increases
Speaker Change: both at a sell-through level as well as on a recorded basis.
Speaker Change: You know, one could attribute that, in large part, to sub-thousand dollar products, both in terms of where we leaned into promotion more so than past years.
Speaker Change: and due to the fact that that's probably where there's pent-up demand, and certainly where there's meaningful volume. So I think that's been an interesting learning, both in terms of how we think about
Speaker Change: continuing to unlock
Speaker Change: you know, market share gains and sort of growth in kind of peak seasons.
Speaker Change: when we want to spike the spike.
Speaker Change: And it certainly may inform how we think about the future, and clearly promotion has been an important lever for the brand, although in a restrained way.
Speaker Change: We won't stray outside of kind of the guardrails that we believe are valuable.
Speaker Change: From a brand standpoint, but clearly there's an opportunity so long as we can check the box on, you know, margin and brand health, et cetera, to continue to use that as a lever to stimulate demand in the right period of time.
Speaker Change: Thank you.
Speaker Change: That's helpful on that. Thank you. And then maybe for
Speaker Change: , , , , , , , , , , , , , ,
Speaker Change: with Grills, is there anything within maybe your heritage markets that might be of note? I'm thinking Oregon, I'm thinking Utah, are those?
Speaker Change: Would it make sense for those markets to come out first? Those are the early adopters. I don't know, just trying to think about what you're looking for in terms of signs that the, that we're starting to come out the bottom, not just bottoming. Thank you.
Speaker Change: Yeah, you know, we were certainly pleased with that new data point on awareness. And I would say it's really a testament to two things. The first is,
Speaker Change: Our consumers are evangelical, I mean, like, they're passionate about the brand and they share. There's no way to stretch a marketing dollar further. There's no more credible way to tell a brand story than to have a consumer share it with a friend.
Speaker Change: I think the second is that, although we have not...
Speaker Change: We have not been leaning into top-of-funnel marketing investments.
Speaker Change: Where we invest every day in the brand puts a brand in front of new consumers in terms of our presence on social media, our work with influencers, our increased investment in points of sale, you know, in high traffic accounts that get seen by
Speaker Change: consumers. And so, you know, low top of funnel investment, but still a lot of opportunities.
Speaker Change: to be in front of consumers.
Speaker Change: in their everyday lives at retail and on social media. In terms of where we're seeing...
Speaker Change: You know, where we're seeing growth and how we might speculate what that means as we sort of invest more top of funnel and see the categories start to grow.
Speaker Change: I would say the
Speaker Change: You know, the awareness inquiries are fairly broad-based. They're more noted in markets where our household penetration is lower. And I think that's just a function of...
Speaker Change: of
Speaker Change: in the Atlanta DMA where we made some investments in top of funnel as we tested some new marketing strategies. And, you know, I would say
Speaker Change: We're building all of the foundation from a product, marketing, brand, and sales perspective to really drive growth in the future.
Speaker Change: We always have the optionality, as we see the category demand begin to recover, to really lead into that with top of funnel investments. And so, there are certain things that we do.
Speaker Change: as a baseline to building our brand every day.
Speaker Change: Nick Bacchus, Jeremy Andrus, Nicholas Bacchus
Speaker Change: as we start to see a consumer more receptive.
Speaker Change: to this category. I would end by saying, you know, we have, we've talked about investments that we've made.
Speaker Change: in new product development and innovation.
Speaker Change: You know, I'm actually really proud of the team that's helped create the capacity to make these investments, and our product team for driving hard to bring new products to market, not only because...
Speaker Change: Part of the boat around our business is building a better product experience.
Speaker Change: But on the sales and the marketing side, we've gotten so good at launching products that
Speaker Change: Where we're going to spend a dollar
Speaker Change: in addition to product development.
Speaker Change: is in launching new products, and we tend to...
Speaker Change: Nick Bacchus, Jeremy Andrus, Nicholas Bacchus
Speaker Change: in a very lean resource environment over the last couple of years.
Speaker Change: are going to be very high returning as we bring these new products to market. So, you know, that's going to happen whether the category recovers or not. We think it's on its way, but we'll be probably a little bit more reactive to accelerating growth as we see the category more, the consumer in this category more focused on replacement.
Speaker Change: Gotcha. Thanks for that. Good luck.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you. Our next question comes from Jo Feldman of Telsey Advisory Group. The line is now open. Please go ahead.
Jo Feldman: Thanks for taking some questions guys. I was hoping you could kind of reconcile something for me and maybe it's just I misunderstood or with regard to the consumables sales which were down 11%
Jo Feldman: I guess you guys, if I heard you correctly, you said sell-through was positive.
Jo Feldman: So can you square that up is that mean ASP is way down? Yeah
Jo Feldman: What's going on there?
Speaker Change: It's a good question. Yeah, I'm happy to clarify.
Jo Feldman: Nick Bacchus, Jeremy Andrus, Nicholas Bacchus
Jo Feldman: some pacing of orders.
Jo Feldman: from a sell-in standpoint and or another way to put it, you know, from a reported standpoint between Q3, Q4, which will, you know, in turn benefit that the number in Q4
Jo Feldman: which was up in sell-through.
Jo Feldman: relative to what we reported, which is largely a sell-in number.
Jo Feldman: that sometimes is subject to pacing.
Jo Feldman: you know, not issues, but, you know, pacing changes based on the timing of orders, which in this case.
Jo Feldman: are landing in Q4. And that's really, again, magnified by the fact that we're dealing with kind of a lower base and therefore it's kind of magnifying that percentage. But we do expect to see a return to growth from a reported sell-in standpoint.
Jo Feldman: in Q4. And I would, you know, add that kind of the underpinnings of health of consumables all remain intact, right? Attach rates.
Jo Feldman: remain, you know, kind of consistent with previous levels.
Jo Feldman: all shows, you know, consistency and usage across a handful of KPIs that we evaluate. So, the health is there, and this is really just a timing function that's kind of happening between Q3 and Q4.
Speaker Change: Got it. Thank you for clarifying that, Tom. And then maybe just a quick follow-up. Given the strength, and it's sort of been asked in a different way, but how are you guys thinking about inventory for the fourth quarter? And also just thinking further out again to the tariff question that was asked earlier. You know, would you guys consider accelerating inventory to avoid, you know, when the actual tariffs potentially come?
Jo Feldman: Because it seems like it's going to be broad-based beyond just China at this point.
Speaker Change: I guess he's not in office yet, but at some point he will be.
Jo Feldman: Thanks. Bye. Bye.
Speaker Change: Yeah, certainly, you know, it's something we'll watch closely and, you know, well, I think everything's on the table, but, you know, obviously implementation matters. And what Jeremy said, I think is important in terms of timing, you know, products on list level of tariff, et cetera. And we'll be hyper focused on this. I think we have.
Jo Feldman: a good plan in place to the extent that we need to react, both in the short term as well as how we think about long-term mitigation efforts. You know, in terms of using
Jo Feldman: inventory as a lever. I just don't know that it would ever be sufficient to overcome tariffs and eventually you're going to have to face the news. So maybe in the short term it buys you a little bit of time, but I just don't believe that that will be a lever that
Jo Feldman: Nick Bacchus, Jeremy Andrus, Nicholas Bacchus
Jo Feldman: you know, in channel inventory levels.
Jo Feldman: Remain healthy. Balance sheet inventory levels are healthy in relation to how we forecast demand.
Jo Feldman: down to the SKU level, as well as how we think about ramp for new product that we're planning to launch and potentially set in in Q4, as I think we referenced on a prior call, is.
Jo Feldman: a tailwind of revenue in that quarter. But outside of that, I mean, you know, inventory is managed well. We have clean working capital and wouldn't see a deviation from that in NQ4, if that answers your question.
Speaker Change: Yeah, I was just trying to get a sense of how you're planning it for the quarter. It sounds like it's clean and you'll manage it to the demand, so that makes sense. Thank you, Tom. Yeah. Yeah, of course.
Speaker Change: Thank you. Our next question comes from Brian McNamara of Canaccord. The line is now open, please go ahead.
Brian McNamara: Hey, good evening, guys. Thanks for taking our questions. First off, what is your expectation for the grill market for 2025? Do you expect it to grow? I remember last year on the Q3 call, you said you expected another down year for grills.
Brian McNamara: And whether a category grows or not, do you guys expect to grow next year? It seems like you have some tailwinds like new innovation, a potential replacement cycle from early pandemic purchases five years ago. Thanks.
Speaker Change: Yeah, Brian, so first off, from a category perspective, you know, as I said, we're certainly getting to the end of the pull forward demand and we think there's some macro catalysts that
Jo Feldman: drive growth in this category in addition to just normalized replacement cycles as consumers invest more in their houses, transact more with houses with lower interest rates.
Jo Feldman: And so, you know, we think the category is, we think it's found or finding bottom, you know, categories down.
Jo Feldman: about one and a half, two percent year to date. And that's been the slowest rate of decline over the last three years. So we think that speaks positively to where the category is. In terms of
Jo Feldman: You know forecasting category growth next year hard to do other than we feel like we're getting on the backside
Jo Feldman: of the pull forward demand and we think we're heading towards recovery. We do think that there will be some category growth next year, hard to call time here, trajectory of growth.
Jo Feldman: And, look, we've been investing.
Jo Feldman: in
Jo Feldman: in things that we believe will drive growth in the future, notably investments in new product development, as we've been good brand stewards and making investments to continue to
Jo Feldman: keep our community engaged. And so, you know, we're certainly not getting to next year at this point in time, but we feel good about the investments that we're making in the business and feel like we're certainly getting closer to just seeing the resilience of this category getting back to growth.
Speaker Change: That's helpful. Secondly, I guess one for Dom, gross margins have been really impressive this year, but freight is moving in the wrong direction. Can you remind us what percent is spot versus contract for you guys and how do you plan to mitigate that potential risk?
Dom: So I guess I'm not fully understanding the risk. I mean, I think what we've seen in the spot market is maybe a little bit more volatility this year. We saw spot prices spike kind of middle of the year around July, and they've kind of come back down. And I think from our standpoint, you know, this continues to be.
Jo Feldman: a tailwind, maybe, you know, a tailwind that's starting to, you know, lessen over time as we lap.
Jo Feldman: The more dramatic improvements in the spot market. I'd say that the more obvious tailwind is the fact that we do have a fixed contract.
Jo Feldman: rolling off
Jo Feldman: Next year, it was a longer term contract with rates well above spot, so that will be a tailwind, albeit smaller than what we've, you know, seen historically. And, you know, I would say that kind of the mix of.
Jo Feldman: the mix between fixed and spot.
Jo Feldman: by design, just given the volatility and the fact that there was a growing tailwind.
Jo Feldman: that we didn't want to miss out on by locking into high-fixed contracts at a greater degree of capacity.
Jo Feldman: So, I think we're kind of settling into hopefully a new norm.
Jo Feldman: Like I said, there's a little bit of volatility this year, but clearly it's been a tailwind and one that I think we're finding a nice predictability in as we begin to plan a gross margin for the next year or two.
Speaker Change: And I would just add to that, you know, direct import continues to be a nice component of how we think about
Speaker Change: that picture more broadly between, you know, what we procure relative to how we think about leveraging partnerships to get the best pricing and remove touches throughout the supply chain that I think is also a growing, has been a growing component of mix within the business.
Speaker Change: Great, thank you guys.
Speaker Change: Yeah, that's awesome.
Speaker Change: Thank you. Our next question comes from Philip Lee of William Blair. Your line is now open, please go ahead.
Philip Lee: Hey guys, good afternoon. Gains and gross margin are really impressive and I think your EBITDA guidance assumes about half of that uptick for the full year and gross margin outlook flows through the bottom line. So can you maybe just talk about what's driving the differential there and then whether those investments could potentially lead to upside on the top line? Thank you.
Speaker Change: I don't know that I totally understood your question. Could you restate that? I'm sorry.
Speaker Change: Yeah, it looks like on your full year, it looks like the gross margin guide was an improvement by 100 basis points and the EBITDA margin guide was about half that.
Speaker Change: Just kind of wondering where, what the differential is there, if it's, you know, further investments in growth or, you know, what kind of expenses are driving that differential and margin?
Speaker Change: Got it. I got it. Yep. Well, so Q4, you know, is heavily weighted in favor of meter revenues. They do about half of their sales in the quarter, and it's
Speaker Change: you know, very much a direct-to-consumer slash, you know, a digital business. And so we do lean more heavily into investments to drive that growth.
Speaker Change: an increase in operating expenses in the quarter, largely tied to those variable investments around digital marketing and demand creation that's more variable and tied to dot-com and D2C business.
Speaker Change: and mainly for meter given the weighting of their seasonality.
Speaker Change: Good, great. That makes a lot of sense. And then you've spoken now over the past couple quarters about a pipeline for newness next year and some upside there. Can you maybe just give us a little bit more color around the expected timing, what categories you're really focusing on, and then maybe how much of the assortment we should expect to be refreshed. Thanks a lot.
Speaker Change: Yeah, so.
Speaker Change: And first of all, as we've said on prior rings calls, we've really moved to invest more in new product development, and we don't do it to tie markets or recovery. We simply believe that this is an important mode around our business.
Speaker Change: And interestingly, we really began to invest more in 22 and 23 in the lean years, so that as we came out of this market recession, the growth category, that we would be positioned to grow.
Speaker Change: And so I think what that's going to mean is there will be more newness and we will see newness more consistently.
Speaker Change: We launched
Speaker Change: A model called the Ironwood, where we cascaded technology from our timber line down to Ironwood, which sells at $1,800-$2,000.
Speaker Change: And our expectation is that that process will continue into 25 and into 26.
Speaker Change: I think one of the greatest capabilities that we have been in the process of not only investing in, but mastering, is really thoughtful product strategy, product management, and product execution.
Speaker Change: And, you know, that sort of understanding the consumer all the way through engineering, manufacturing, and the process of going to market.
Speaker Change: And so, you know, there's more coming next year. There's more coming the year after. I've got visibility into multiple years of our product pipeline. And one of the things that gives me the most confidence and that also offers me a lot of satisfaction
Speaker Change: is seeing our product and operations teams.
Speaker Change: really step up and have the capability to deliver product on time, on quality, and on cost.
Speaker Change: And so these are capabilities that don't get developed overnight, they take time. And I would say from the moment that we began to invest more in these capabilities,
Speaker Change: to when we start to see us harvest some of those investments, we're getting close.
Speaker Change: And I think what's positive is that we will see that capability
Speaker Change: continue to drive growth in years to come. So, there's a lot of new coming in, you know, certainly the next three or four years of which I have visibility and, you know, the focus will be on grills, accessories, and consumables.
Speaker Change: Thank you.
Speaker Change: We'll take no further questions for today. So that concludes today's conference call. Thank you all for joining. You may now disconnect your lines.