Hello, and welcome to today's Traeger Third Quarter Fiscal 2022 Earnings Conference Call. My name is Bailey, and I'll be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Nick Bacchus, Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone. Thank you for joining Traeger's call to discuss its third quarter 2022 results, which were released this afternoon and can be found on our website at investors.traeger.com. I'm Nick Bacchus, Vice President of Investor Relations at Traeger. With me on the call today are Jeremy Andrus, our Chief Executive Officer; and Dom Blosil, our Chief Financial Officer. Before I get started, I want to remind everyone that management's remarks on this call may contain forward-looking statements that are based on current expectations and are subject to substantial risks and uncertainties that could cause actual results to differ materially from those expressed or implied herein. We encourage you to review our annual report on Form 10-K for the year ended December 31, 2021 and our quarterly report on Form 10-Q for the quarter ended September 30, 2022 once filed and our other SEC filings for a discussion of these factors and uncertainties, which are also available on the Investor Relations portion of our website. You should not take undue reliance on these forward-looking statements. We 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. The most comparable GAAP financial measures and reconciliations of the 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.traeger.com. Now I'd like to turn the call over to Jeremy Andrus, Chief Executive Officer of Traeger. Jeremy?

Thank you, Nick. Thank you for joining our third quarter earnings call. Today, I will discuss our third quarter results, our near-term strategic priorities and our progress on our key growth pillars. I will then turn the call over to Dom to discuss details on our quarterly financial performance and to provide an update on our fiscal 2022 guidance. As we anticipated, third quarter was a highly challenging period. After 2 years of record growth in 2020 and 2021, the grill industry is contracting in 2022. Consumers are shifting expenditures towards services and leisure, away from discretionary big-ticket goods and decades high inflation and ongoing geopolitical uncertainty are negatively impacting sentiment. Moreover, retailers are increasingly cautious in their ordering behavior given heightened levels of channel inventories as well as the risk of a recessionary slowdown. These factors drove a 42% decline in our third quarter sales, with particular softness in our grill sales, which were down 64% versus last year. Despite these challenges, we are making progress on our near-term priorities as we navigate the current environment. We believe that our ongoing efforts to rationalize inventory, reduce costs and to bolster our balance sheet and liquidity profile will allow Traeger to navigate the current operating environment and position the company for strong improvement as the macroeconomic pressures subside. Having said that, we acknowledge at the pace at which we can drive certain of these improvements will be influenced by the broader economic environment, which remains highly volatile. The third quarter largely played out as we anticipated. Sell-through of our grills in retail was lower than last year, but consumer demand was roughly in line with our forecast coming into the quarter. While demand was lower than 2021, the year-over-year decline in sell-through during the quarter moderated from the declines we…

Thanks, Jeremy, and good afternoon, everyone. Today, I will review our third quarter performance before providing an update on our outlook for fiscal year 2022. I will also discuss some initial thoughts on 2023. Second quarter revenues declined 42% to $94 million. Grill revenue declined 64% to $39 million, impacted by materially lower unit volumes as our retail partners aggressively reduced replenishment orders in an effort to lower end channel inventories, partially offset by higher average selling prices related to price increases taken in the second half of 2021, in the first quarter of 2022. Consumables revenue decreased 10% to $25 million due to lower sales of pellets as retailers reduced on-hand inventories, offset by higher sales of rubs and sauces, which benefited from increased distribution. Accessories revenue increased 18% to $30 million, driven by strong growth at MEATER, offset by lower sales of Traeger branded accessories. Geographically, North American revenue was pressured by the aforementioned challenges in our U.S. business along with the negative growth in Canada. Our rest of world business grew 10%, driven by growth in MEATER revenues in international markets. Gross profit for the second quarter decreased to $26 million from $54 million last year. Gross profit margin was 27.7%, down 580 basis points to last year. Excluding $1.6 million of one-time costs related to restructuring actions, gross margin was 29.4%. The decline in gross margin was driven by: one, higher logistics costs due to decreased leverage and increased outbound freight costs, which resulted in 400 basis points of margin pressure; two, accrued discounts related to promotional activity, which resulted in 240 basis points of margin pressure; three, one-time costs related to restructuring activities in the third quarter, which resulted in 170 basis points of margin compression; four, higher drill costs and mix impact of 140…

[Operator Instructions] Our first question today comes from the line of Simeon Siegel from BMO.

So I guess I'm just wondering how you guys -- Jeremy, so I'm just wondering how you assess what is too much supply forcing pricing pressure versus maybe just a lighter level of demand as you worked through post-pandemic replenishment cycles? And on the back of that, how you guys are going to approach thinking about the need for go-forward promotional discount needs? And then maybe lastly, just on the back of that. Do you guys want to give us a like-for-like version of ASP to counter some of the mix dynamics?

Thanks, Simeon. Yes, I think I can answer some of those. So on the demand question, I think it's pretty straightforward in terms of the dynamics between sell-through and this concept of destocking. And you can see it in our seasonality, right? Like we've never seen or experienced seasonality shift this low in terms of the trough and in Q3 and the slight uptick in Q4. And as you kind of marry that dynamic with sell-through trends, what we're seeing is sequential improvements in terms of the year-over-year comp coming out of peak season in the first half of the year. And on top of that, as we post a few incremental promotions in Q3, we've actually seen nice comps even over prior year in the data. And so we're seeing some stability from a sell-through standpoint. And the growth rate, as you measure that against prior year, is very different than what you're seeing from a sell-in standpoint. And so effectively, consumer demand is holding relative to our expectations in the back half of the year. It has found some steadiness over the first half of the year. And the 3-year comp is still holding really well as you compare this year versus kind of pre-pandemic norms. So those, I think, are positive signals that from a demand standpoint, although there's softness, it's still positive from our perspective. But the challenge is the fact that we have too much inventory in channel. And I think that's contributing to the sell-in dynamic as retailers destock and we kind of take some of that impact from a revenue standpoint this year, which we're obviously deliberately willing to do. And I think that's what you're kind of seeing in our P&L relative to what we're seeing from a demand standpoint. From a promotional standpoint, I mean, yes, we'll continue to think through the promotional lever. Like I said, we do see a real uptick and kind of uplift in sell-throughs. And that helps advance the cause in terms of just cleaning up in-channel inventory levels. Like I said on the prior call or one of us said that there are limits to how aggressive we'll be from a promotional standpoint. But to the extent that they're within reason, we will pull promotions to help kind of move excess inventory through channel so long as it checks the box on profitability as well as just the health of the brand. And then can you just maybe ask your question one more time on the ASP front?

So I think you called out -- so I think you called out ASP had the ongoing effect from product mix introducing the higher price. So anything to think about if we were to take out product mix, how ASP looks on any form of a like-for-like basis?

Yes. I mean I would say that from a mix standpoint, the only real difference is the introduction of our Timberline XL and -- look, the new Timberline launch, obviously, those are at very high price points. And then that did contribute to some ASP lift. But most of this is being driven by price increases that remain in effect, the 3 pricing increases that we took, 2 last year and then 1 earlier this year, offset by some of the incremental promotions as well as holding price slightly lower coming out of Q2 on our entry price points being the Pro 22 and the Pro 34.

The next question today comes from the line of John Glass from Morgan Stanley.

First, can you just talk about what -- to the extent you know what the channel inventory actually looks like now, maybe how it's changed quarter-to-quarter given the promotional activity? Do you have reasonably good knowledge just given what you've sold to them and their sell-through or do you not really know exactly what [indiscernible] looks like?

No, we do. I mean at least for our larger accounts, we have good visibility into in-channel inventory levels. Some of our smaller accounts like specialty, we talked about in the past, where they don't have the capacity to carry a lot of inventory. And so we're less concerned with that long tail of specialty. But as we measure in channel inventory levels across our largest accounts, which obviously make up a majority of the business and where we have the best information within kind of the sell-through data that we collect, we are seeing sequential improvements over Q2 on that front. And it really varies from SKU to SKU or certain SKUs are heavier and other SKUs are actually finding a path toward a more kind of rightsized level. And so it's a continued kind of progression as we help our retailers work through these inventory levels and channel, posting promotions helps accelerate that. But part of this is really going to be about time, right? And kind of letting these inventory levels work through accordingly at the cost of some revenue. And that will be the biggest lever, especially when we head into Q1 and Q2 of next year where we start to really ramp up volumes. And that will, in turn, accelerate the bleed down of in-channel inventory levels as well as help improve our own balance sheet.

Right. You mentioned that there was a large retailer that started a private label pellet business. How important is that retailer to your overall pellet sales? And how do you think about that maybe becoming a bigger issue over time if there's other possibilities you see private label and other retailers, for example? How do you sort of frame what happened and why it happened and how big a retailer that is that's doing that?

Yes, John. So first of all, it is an important retailer to us. With that said, I would add a couple of thoughts. One is that we do see stable attach in high loyalty on Traeger pellets to our installed base. The second is, we believe just understanding our retailers, their strategies, their scales that this is a -- this is likely a one-off situation. We actually did see another one of our large retailers attempt to private label. It was on shelf for 6 to 8 months, didn't perform well and so they pulled in. So we do see some private label from time to time, but candidly, we don't see the impact in our business much. I think this -- it is a function of the strategy of this retailer. If you were to exclude this customer, our pellet sales was actually sort of flat to up outside of that one specific customer. So we feel good about our pellet business near and long term.

The next question today comes from the line of Randy Konik from Jefferies.

Yes. I guess for Dom, can you give us some perspective on how you -- I don't know if you guided -- I didn't hear you say it, CapEx guidance for this year and kind of how you're thinking about CapEx for next year? And then along that, I'm just trying to get a sense of how we should be thinking about free cash flow generation? When you talked about the cost cut of $20 million, I believe, annualized. Are you thinking through like this could just be a first step in a number of steps? Or do you think that you've done enough on the $20 million to kind of generate enough cash in the business to start kind of delevering? Or I guess, relatedly, how do you think about delevering going forward? What's that kind of -- what's the strategy there?

Yes. Great questions. On the CapEx front, I would expect CapEx to trend similar -- at similar levels that we saw in Q3, which we brought down fairly dramatically. And so I think we've done a fairly good job of halting certain investments. One of the biggest ones was a planned investment in a rollout of new fixtures for 2023. We're going to leverage the assets that we have, update the kind of the POP and kind of look and feel of those fixtures but await incremental cost there. There are other measures that we're taking to kind of manage CapEx to a lower level, whether that be halting certain initiatives, slow rolling or just simply pulling them out of the system completely for now. And so that level of CapEx will -- has come down dramatically, and then we expect it to kind of hover at similar or lower levels to Q3. And so that's something that we're highly focused on and is certainly a benefit to how we manage liquidity in the short term. On your question regarding like where we go from here? We're definitely going to bank the $20 million of run rate savings. The difference is that -- and I think as an extension of that, that's not where we're stopping. The differentiation between that $20 million and what we would do going forward is that $20 million was obviously tied to a restructuring event whereas we're now at a point in time when we can sort of manage deliberately a budget for 2023 that allows us to more deliberately plan for cost reductions and adjustments to our short-term plan that may be a slight deviation from how we think about this business long term to ensure that we're fully optimizing and kind of focusing in on those controllable levers, right? So a real slowdown in hiring, for example, is one thing that we'll be looking at from a planning standpoint. Holding off on the larger top of funnel spend that was in the business the last couple of years and really focusing more on middle and lower funnel and higher returning performance marketing. So there are a handful of things. We're sort of mid-budget cycle but that really is the overarching theme, right? We have a long-term plan that we continually refresh year after year. And that really guides how we think about the next handful of years. But the stepping stone between this year and, let's say, '24 is a real focus on austerity in '23 and using that as a fundamental principle in our planning process to adjust our expenses and kind of rightsize our cost structure in accordance with what we're seeing from a leverage, a liquidity as well as potential risk to demand in '23. So that's kind of a nice moment in time to do this in a more deliberate way versus reacting in the moment with restructuring and other adjustments that we took in Q3.

Helpful. And then, I guess, Jeremy, maybe this would be a good kind of question for you around your thoughts on industry in the cycle, right? So we obviously -- we had -- we were kind of [indiscernible] growth industry than a kind of super spike COVID with coming off of that. Maybe get your perspective on when -- where the industry starts to -- or when the industry starts to stabilize, at what levels do you think are appropriate for industry kind of volume levels, if you will? And then how do you think after that time line that if you could lay out when you think it stabilizes the industry, what you think the appropriate kind of normalized growth algo for the industry would be, recognizing you guys would be a share gainer within that industry growth going forward? So just that would be super helpful to get your thoughts there.

Sure. This is obviously something we spend a lot of time thinking about, size, growth, return to a more normalized replacement cycle cadence. I'd say, first of all, that as you alluded to, this tends to be a fairly steady and resilient category. Americans cook outside, they have for decades, and that is going to continue. The -- we did see a double-digit decline in 2009. The industry fell by about 10%, declined an incremental sort of 1% the next year. And then it grew the next 11 years, 10 years. And so we are trying to really understand as we do the math around replacement cycles and overlaying, of course, macroeconomic conditions when we return to more normalized buying at a consumer level. The industry is down year-to-date about 11% in units and about 20% in dollars. And of course -- I'm sorry, I said it backwards, down about 11% in dollars and about 20% in units. And of course, the dollar component is simply a function of inflation and price increases. It is -- as Dom said, it has started to stabilize in terms of growth rate year-over-year, and we expect to see that trend continue partly due to comps, but also partly due to starting to get ahead of some of the replacement cycles and some of the demand that was pulled in during the pandemic. When does that happen? A part of that is going to be a function of the economy, but we do believe that in an environment that is steady that over the next sort of 12 months that it's sort of flat from a replacement cycle perspective. We benefit a little bit by having a slightly shorter replacement cycle than the rest of the industry, both due to usage as well as to innovation-driving compressed ownership cycles. And then somewhere between '24 and '25, we think the industry returns to pre-pandemic levels, and it has historically grown low single digits. And then we go back to doing what we have always done to build this -- to build this brand, which is to bring disruptive product to market and to gain share through product experience and through building a brand.

The next question today comes from the line of Peter Benedict from Baird.

Just curious of your thoughts on distribution and any plans or considerations expanding distribution. You talked about Home Depot, obviously doing well up in Canada. So I'm thinking that just -- well, first, domestically, are there any opportunities that might help you with the -- with moving some of the products you have on hand? And then is there anything internationally that you could do maybe over the next 12 months to accelerate the process? That's my first question.

Yes, Peter, first of all, I would start by saying that the largest opportunity that we have is to really penetrate our current existing distribution. I was on the East Coast last week in meetings and had a chance to spend a couple of days in market. And one of the things that was abundantly clear is that within our existing distribution channels, there are meaningful opportunities to upgrade assortment, to upgrade the quality of merchandising, to upgrade training within those retailers. That's really how we've built the brand. And as you look at sort of a heat map of Traeger penetration in sales across retail, it's very clear that it follows our heritage markets and where we've made investment. And so we have an opportunity to make much deeper investments. And we spoke to some -- I spoke to some of those in my prepared remarks, we've seen some nice products, but there's a lot to go. And we often speak about the progress in Home Depot because it's the largest [indiscernible] in the world. And -- but it represents how we think about going to market and driving productivity at retail. And I would say even outside of Home Depot, we've got some great accounts where we just have an opportunity to take them through higher tiers of assortment merchandise. And so that is focus. We're also filling in at the margin. There's certainly doors that we're adding, but I would say more sort of local, regional furniture and appliance, barbecue specialty. And we believe that within our current channel, within our current distribution strategy in our footprint, if you look at a market like Utah, for example, that has high teens penetration, it's not that we have a lot more doors of distribution. It actually is probably…

Got it. And then I guess, maybe, Dom, just a follow-up on Randy's question, just can you maybe talk to us about the deleverage process? I'm not sure very much there where you stand with the debt covenants currently, just an update on that front? And with respect to the CapEx, it looks like maybe the second -- if we just annualize the second half rate, are we talking $10 million to $12 million or so for next year? Is that a level that you think you can pull the CapEx down to? Just curious on that outlook for '23.

Yes. So the focus on deleveraging really is a function of EBITDA in the short term, right? So I think at this point, we really want to build and kind of improve our liquidity position. That's priority #1. Priority #2 is to begin to make advancements and increase profitability in the business, which in turn will translate into higher EBITDA and therefore, help us deleverage from where we are. And so I would say at this point, at least in the short term, deleveraging will come via improvements in profitability. However, to the extent that we're able to drive liquidity and improve our free cash flow situation next year, that will, in turn, help drive some deleveraging, be it debt where we'll be able to pay down the revolving capacity. But we don't plan on delevering the kind of the term loan anytime soon. So those are probably the 2 main areas that we're focused on from a leverage standpoint in terms of improving that situation. On the CapEx side, we're not going to share -- we're not ready to share what the target is next year, but I will say that this has been a very intense and kind of -- it's been a real focus from the team. And I would say that the goal is to keep CapEx investments to a minimum and really prioritize where we're making those investments to ensure that we're not starving the business from a long-term standpoint. So one example of that would be tooling and/or investments we make in future product road map, that will be a priority and we'll deprioritize other areas. One example I gave earlier was pulling out capital expenditures for new fixtures in 2023. And so we're not ready to give a number on CapEx for next year, but I would say that it will be lower than where we landed this year.

The next question today -- apologies. Go ahead.

Yes, I was going to follow up. And I think I missed his last question with regards to the credit facility, I apologize. So we talked earlier about the difference between leverage that we report through our financial statements and leverage that's defined by our credit agreements, which are very different. And so our leverage as measured by the credit agreement is hovering around about 6 turns of leverage, which is due to 2 components: one being a different definition of net debt, which excludes the AR facility and it's measured on a first lien basis. And then the second piece to that is the fact that we have a different definition of EBITDA as per the credit agreement which allows for additional or incremental add backs as an example, pro forma run rate adjustments where we execute on an initiative to either restructure or pull out or rightsize cost in certain areas. And we're able to keep and take up some of those run rate benefits that will be embedded into the future economics of our P&L but on a TTM basis. And so that allows us to kind of navigate the credit agreement and the leverage ratio that's tied to a covenant accordingly. And we're sitting well from a leverage standpoint as per that definition in Q3 and don't anticipate that we would have any problems against that covenant through year-end.

The next question today comes from the line of Joe Feldman from Telsey Advisory Group.

So wanted to ask, you guys made a comment during the prepared remarks about really focusing on the highest return initiatives to invest in. And I was just hoping maybe you could share an example or 2 of what that exactly means to you guys?

Yes. I mean I think what the underpinning of that is the highest returning investment that's most immediate and most predictable, right? And the best example of that is how we allocate demand creation dollars, right? So when we spend on demand creation, whether -- so an example would be search engine marketing or sort of digital advertising, where it's highly measurable in terms of the correlation between what we spend and the corresponding return on investment via revenue. And so it's really kind of a one-to-one relationship there. And that just gives us confidence that when we're allocating scarce resources, we're doing so in areas that have the most predictable return in kind of the in-year and in-quarter kind of time frames. Something that would be longer term that we still believe in, but just unfortunately, are making those investments right now would be prospecting marketing, so longer-tail investments in top of funnel that are really intended to drive and build brand awareness, which we've talked about on previous calls as being an important component to our long-term strategy whereby driving more consumers into the funnel, raising brand awareness, which in turn increases that initial consideration set for Traeger, these things have real benefit, but the tail is longer because you're prospecting and it will require incremental touches with the consumer to convert. And so we just don't have the luxury to invest in those things right now, which is why we're reallocating dollars more to kind of middle, lower funnel marketing investments that do generate that return. Another example, which I spoke to on CapEx is the fixture piece, right? And I think right now, we're just trying to be scrappy with the assets that we have. We can make improvements within point of sale, it's important. But we're going to delay other investments on that front until we have the capacity to do so. So those are a couple of examples of what we look at. Whether it's kind of near-term benefits to shifting resources in areas that have a higher and immediate return in year and delaying certain investments that are important for the long term, but don't necessarily contribute directly to growth in year and/or they're not quite as measurable as the other things that I mentioned.

Joe, the only thing that I would add to that is that product is one of the long lead time investments that we believe we need to continue to make. It also to Dom's comment about predictability, we see a very predictable return on our product investment with healthy channels, strong brand, a good community that is very anxiously looking at whatever we launch. We continue to invest in products. I think this has actually been a nice forcing mechanism to make sure that we are simplifying our product investments and making investments in the most important opportunities that really drive outsized returns, and it's a long lead time. So it continues through good times and bad.

Got it. That's really helpful. And then if I could just follow up with one other. The -- I fully appreciate the slowing down the production of new grills until you kind of work through the balance sheet inventory you have. I was just wondering if from your factory partners in China and Vietnam, like are there any minimums that you have to produce a certain level to kind of maintain? Or is that nothing to really worry about here?

Yes. So yes and no. I mean, if we had to completely pause production, we could do that. But we don't necessarily want to, right? I mean our motivation is to ensure that we're also good partners to our factories, and we're protecting continuity for those factories. Because there's disruption if you turn off production, they scale down labor and that comes at a cost to our factories, both in the short term as well as when we need to ramp production, which is both a little bit more cumbersome for Traeger as well as for our factories where they have to go back and find the labor to keep up with the demand that we're producing against from a supply standpoint. And so we're motivated independent of any contractual obligations to keep them at minimum production levels that allow them to keep the lights on and protect continuity and sort of navigate and minimize the disruption to them, which in turn will extend kind of the length of time at which we're able to ramp down our own inventory levels. But obviously, it helps dramatically because we are operating at those min levels that allow us to naturally and progressively improve our inventory position through the end of this year and obviously through part of next year.

Our final question today comes from the line of Peter Keith from Piper Sandler.

This is [indiscernible] on for Peter. Just wanted to ask about gross margin. I realize you won't see the tailwinds until you work through the higher cost inventory. But how confident are you that, that happens by 2Q '23? And then is there any way you can quantify what the gross margin [indiscernible] in '23 as well?

Yes. So on the first question, yes, we're pretty confident that come middle of the year, we'll start to benefit from some of the tailwinds that are building from a macro standpoint. It obviously takes time to work through the high-cost inventory that's sitting on our balance sheet. But I think headline news as well as our own point of view as we navigate and kind of work with our freight forwarders on rolling forward new contracts at different rates, like spot rates have come down dramatically, right? So at one -- at a moment in time, once our inventory levels have improved and we're buying inventory at lower cost, we'll start to see that benefit roll through the P&L, which we're hoping to see at kind of the midpoint of next year, but take real full advantage of in outer years. And so that will be a nice tailwind that we'll benefit from. FX is also one that will start to benefit as well, the P&L and gross margin once we've worked through these higher inventory levels. So we're pretty confident that we'll get there. We won't be able to realize the full impact even in the back half of the year, but we'll start to see sequential improvements that will dramatically -- or not dramatically, but we'll sequentially and incrementally begin to improve gross margin through the course of 2023.

And the gross margin path for us. Is there any way to quantify [indiscernible]?

Yes. So I don't know that we're necessarily going to share the total dollars, but these things take shape weekly, monthly. And it's something that will be core and fundamental to our strategy for the long term. So it's not necessarily something where you pull a lever and suddenly, you found millions and millions of dollars. This is kind of continuous improvement in the progression as we work through cost [indiscernible] products to kind of negotiations with factories, to how we improve land side, movements in inventory and kind of optimize our footprint, whether it be warehousing or outbound transportation to ensure that we're moving product in the most efficient way. We've talked earlier about launching direct import with a couple of customers, which is contributing nice gross margin enhancements really all throughout the course of this year. So it's one where we'll continue to work at it. And we have longer-term levers as you think about how we develop a product road map that optimizes margin structure. It will be interesting to see what happens in kind of this macro dynamic and how we sort of navigate price strategy to optimize both gross margin and volumes as we see these commodity prices and inbound transportation rates decrease. So I think what I would say to you is there's a long list of items that we're focused on and kind of the partnership between the ops team and the finance team is very tight. And we're really excited about the opportunities that are in front of us, some of which will take some time to mature, but it is something that we're bullish on, and we'll start to realize this year as well as over the course of next year. And without quantifying, I will say that it is something that will contribute to gross margin over time, and we'll continue to build on that strategy, not only through this year, but obviously over '23 and beyond.

There are no further questions waiting at this time. So I would like to pass the conference back over to Jeremy Andrus for any closing remarks. Please go ahead.

Great. Thank you for joining our call. We look forward to speaking with you again in March when we update on our fourth quarter earnings. Take care. Thanks.

Thank you all for your participation.