Hello, and welcome to Traeger's First Quarter Fiscal 2023 Earnings Conference Call. My name is Terry, and I'm the conference operator for today. [Operator Instructions] I would now like to hand the call over to Nick Bacchus to begin. Please go ahead.

Good afternoon, everyone. Thank you for joining Traeger's call to discuss its first quarter 2023 results, which we released this afternoon and can be found on our website at investors.traegers.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 we get started, I want to remind everyone that management's remarks on this call may contain forward-looking statements, including regarding our anticipated full year 2023 results which are based on current expectations but are subject to substantial risks and uncertainties that could cause actual results to differ materially from those expressed or implied herein. We encourage you to review our annual report on Form 10-K for the year ended December 31, 2022, 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, including adjusted EBITDA, adjusted net income and adjusted gross margin, which we believe are useful supplemental measures. The most directly 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.traeger.com. Now I'd like to turn the call over to Jeremy Andrus, Chief Executive Officer of Traeger.

Thank you, Nick. Thank you for joining our first quarter earnings call. Today we'll be discussing the first quarter results as well as our progress on executing our long-term strategies. I will then turn the call over to Dom to discuss further details on our quarterly financial performance. In the first quarter, we continued to execute against our plan as we navigate a challenging environment and position the business for a return to top and bottom line growth in the second half of 2023. First quarter revenues of $153 million came in towards the higher end of our guidance range, while adjusted EBITDA of $22 million exceeded the high end of our range by $2 million. I am pleased with our ability to overdeliver on our adjusted EBITDA guidance for the quarter and believe our results demonstrate our strong organizational focus on positioning Traeger for improved profitability. While our top line continues to be pressured by retailer destocking as well as lower consumer demand in our grill business, our first quarter results increase our confidence in our ability to achieve our full year guidance. And as a result, we are reiterating our prior guidance. During the quarter, sell-through of grills remained negative versus the first quarter last year as we continue to lap our very strong multiyear comparisons. The impact of lower consumer demand in the first quarter was compounded by continued retailer destocking compared to the first quarter last year when retailers were still building inventories. However, sell-through in the quarter was in line with our forecast coming into the year. Importantly, following a holiday period in which we lean into promotions at retail in an effort to accelerate demand in clear channel inventories, we reverted to a more typical promotional cadence in the first quarter that was similar…

Thank you, Jeremy, and good afternoon, everyone. Today, I'll review our first quarter performance and discuss our outlook for fiscal year 2023. First quarter revenue declined 32% to $153 million. Grill revenues declined 40% to $90 million. Grill revenue was negatively impacted by lower unit volumes as our retail partners continue to destock in an effort to drive lower end channel inventories partially offset by higher average selling prices. Consumables revenues were $30 million, down 24% to first quarter of last year, driven by lower volume of pellets. Our consumables business was negatively impacted by the loss of volume with a customer who introduced a private label pellet last year as well as lapping the large load-in of food consumables into the grocery channel in the first quarter of last year. Accessories revenue decreased 1% to $33 million due to lower unit volumes of Traeger branded accessories, partially offset by increased sales of meter. Geographically, North American revenues were down 33%, while Rest of World revenues were down 13%. Gross profit for the first quarter decreased to $55 million from $83 million in the first quarter of 2022. Gross profit margin was 36.2%, down 80 basis points versus first quarter of 2022. The decline in gross margin is primarily driven by, one, lower drill margin due to pricing mix and the timing of some expenses tied to our spring promotion, which negatively impacted gross margin by 240 basis points. Two, increased amortization of 70 basis points; and three, other unfavorable items worth 110 basis points. Offsetting these margin pressures were: one, FX favorability, which positively impacted margin by 170 basis points; and two, lower freight and logistics costs, which drove 170 basis points of margin favorability. Sales and marketing expenses were $22 million compared to $35 million in the first…

[Operator Instructions] The first question on the line comes from Simeon Siegel from BMO Capital Markets. Please go ahead.

Thanks so much, guys. Good afternoon. So I was hoping that we could talk a little bit more about pellets. Maybe both sides. So can we talk a little bit more about what you think the consolidation will do of the mills? So any color there from the supply side, thinking through the benefits, maybe quantifying some of the costs? And then secondarily, on the demand side, so can you guys talk through obviously, the element with a large retailer. So when do we lap that? Maybe any color you've seen from their offering, how people are responding? And then lastly, we use pellet as an engagement proxy. So to distill out maybe the change in retailer and timing? Just help us think through how you're seeing engagement of just usage in general?

Good questions. I'd start with the closure of the two pellet mills, right? So I'd first start by saying this ties into the broader strategy that we've been executing over the last, call it, 12 months in terms of just really optimizing the entire cost structure of our business, right? And as we think about the dynamics during the pandemic as well as what we're seeing now post pandemic and the fact that we're getting a better understanding for the demand pull forward that we experienced. I think what we effectively landed on here as part of, again, our overall strategy to kind of reoptimize and rebalance our cost structure is, one, we really determined that at this point forward, we just had too much capacity in the system; and two, that was putting pressure on the unit economics of our pellets. And so the opportunity that we identified was to rebalance our capacity in light of what we believe is the demand that we can forecast today for the next, call it, two, three years. And adjust that capacity to a level that allows us to optimize the utilization rate of that capacity. And in turn, we can improve the unit economics on a run rate basis for our pellets and something that we're very excited about. And I think that the second layer to that is we were -- we had the luxury of identifying 2 pellet mills in the portfolio that, frankly, were less efficient than the remaining portfolio. And so we can actually shift some of the demand or utilization of capacity in other areas and further pick up gains from a unit economic standpoint on those pellets. So that's really the driving factor. It's just a component of the broader strategy and something that we wanted to address in line with how we think about just improvements in our operation and continuing to pick up margin improvements in gross margin, in particular. The second question on -- sorry, can you repeat the second question?

Just -- may be through demand..

Is it the last...

I just think that's the supply side. Just how are you thinking about engagement? How are you thinking about demand maybe selling or sell-through? And again, just helping us basically to textualize from the what you're actually seeing versus the retailer dynamic?

So we really look at the usage and sort of the demand of consumables, in particular, in two ways. The first is through consumables attachment against our installed base, and what we're seeing right now is a reversion back to pre pandemic attach rates. We've talked about this on previous calls where we saw a spike in attach and during the pandemic and always believe that, that would sort of renormalize post pandemic, right, just given all of the factors associated with why that would be. And so I think the good news here, as we kind of look ahead and what we're seeing now is that attach against the install is tracking or sort of falling more in line with pre-pandemic where we would expect it to be, save a little bit of incremental pressure via the private label pellet launched by one of our large customers. As we think about the second layer to that, which is more a tail on consumer demand, it's a read into the IoT data that we collect, which is a better measure of usage rates, right? And I think what we're seeing there continues to be positive. So we kind of look at it in multiple ways. One way is via cohorts, which is kind of like-for-like over time as you evaluate vintage and usage of those cohorts as well as sort of aggregate cooks month-to-month. On the aggregate cook side, it's pretty consistent with what we've shared in the past in terms of number of cooks per month. And on the cohort data, what we're seeing is what we would expect. Like as a cohort ages, a 19 cohorts there is a marginal decline in usage over time. And part of that may be explained by the fact that as they age in to say, year four, they're looking to replace a grill given that they're approaching that life cycle and may enter into a new cohort. So it's exactly -- it's playing out exactly as we would expect. And I think the second layer to that, which we feel is very positive is as you look at each cohort and you look at, say, a pandemic cohort, they're behaving exactly the same as pre-pandemic cohorts as are post-pandemic cohorts. And so I think what we see here is just kind of building installed base of consumers, of users of our product who behave the same in a very similar pattern over time. And that first year of cook behavior really mirrors what we've seen historically. And so that just gives us a lot of confidence that the pull forward did what we hoped it would do at the end of the day, even though there's this overhang of pull forward in demand, we're also picking up consumers that will continue to be active and highly engaged with our product into the future.

That's great. Perfect. Best of luck for the rest of the year.

The next question on the line comes from Peter Benedict of Robert W. Baird & Co.

The question first, just on gross margin, Dominic, see a little over 36% during the first quarter. I recognize you guys are still expecting 36%, 37% for the year. Do you still expect gross margin rate to kind of build sequentially as we move through the quarters. And so that's my first question, kind of related to that and how you see kind of maybe the walk to north of 37% over time longer term?

Sure. So I'd say that we remain -- I would give me more cautious tone on H2. I think that's consistent. So we're happy with where we landed in Q1. Really, no surprises as we look at actual gross margin versus what our internal models show. I would say that the pressures that we're seeing in Q1 will be consistent in Q2, right? So I wouldn't necessarily look at the first half of the year as sort of the building sequential improvement in gross margin in part due to the fact that, as we've talked about in the past, we still carry a high -- the carrying cost of our inventory still remains higher than we'd like it to be. Where as you shift forward to the back half of the year where we expect to start realizing sequential improvements in gross margin, that's largely driven by the fact that as we clear this higher cost inventory, we'll begin to take advantage of what our really improved rate in the inbound transportation market, where I wouldn't suggest that they're all the way back to pre-pandemic levels given some of the nuances and dynamics internally around how contracts work, et cetera, but there are substantial improvements from what we were paying for containers a year ago, six months ago. So that's really the consistent theme, a cautious viewpoint on how gross margin comps in the first half of the year with sequential improvements in the back half. And then in terms of just how we think about the future -- in terms of the future. Yes. It's consistent with what we spoke to in the past, right? Our strategy really is focused on: one, portfolio management, driving gross margin expansion via an optimized mix within the portfolio as we launch new product at higher margin. It's strategic sourcing as we continue to lean on and build out a highly functioning and really highly expert-oriented operations and product team to go out and continue to cost down existing product within the portfolio as well as how we think about just the manufacturing landscape over time. And then lastly, just general operational improvements. Again, we've used one example of direct import where we cut out 1 layer of our value chain, which has proven to be a great element to the building tailwinds in gross margin.

No, that's helpful. I mean the second question is the inventory getting better in shape of [indiscernible]. You talked about a normalization and demand patterns. Jeremy, I think you were probably referring -- I assume you're referring to maybe week-to-week build as you kind of start to move into the spring season. Is that -- and is that what gives you confidence in forecasting that there will be replenishment by retailers in the back half of the year? Maybe just tease that out a little bit more. It's an important dynamic, and I want to make sure we understand what you guys are seeing here in the early part of spring?

Yes. So I think there are a couple of components to the predictability. One is that, I would say, this year, for the first time in multiple years, we're seeing predictability itself. And we track that very carefully week by week and certainly compare against prior years where we've got more normalized seasonality and against our forecast. And I would say we are seeing point-of-sale data that's just -- it's reasonably predictable, whereas last sort of three years have been fairly volatile in the pandemic on the upside and then last year on the downside. The second component really that gives us confidence in our guidance -- in our forecast is retailer inventory levels coming back down to healthy levels, which effectively allows us to replenish the units as they're sold through. So we certainly -- we've seen the health improve meaningfully in the first quarter, in the second quarter. We expect that we'll end the quarter feeling like retail inventory levels are in a really good place, and that just gives us a view into revenue.

The next question on the line comes from Peter Keith of Piper Sandler.

Thanks. Good morning, everyone. Sorry, long day. Good afternoon, everyone. The credit environment is obviously something that has kind of a steady drumbeat in the background. And we're hearing that smaller retailers are having to pull back on inventory purchases just because of the tighter credit backdrop. You guys do have some big wholesale partners, but you also have some small ones. And I'm wondering, is there any issue on order trends with some of your smaller retail partners out there because of this backdrop?

No, not from our side. I mean we have a really strong partnership with our retail partners, and we work on terms and it sort of ebbs and flows over the course of the season, where we're setting larger quantities in, say, late Q1 for promotional periods or just the uptick in demand in Q2, we tend to work on extended dating programs, et cetera, to sort of optimize their own sort of cash flow positions given the fact that they are smaller retailers. In addition to that, we tend to think of specialty within our realm as kind of this one to show one to go model where they're not necessarily going to preload inventory at the levels you would see it a larger big box, right, because they don't have the storage and therefore, that gives them the ability to turn inventory more efficiently and manage their own cash conversion cycle accordingly. And so we want to be great partners here, and I think that goes a long way in terms of the trend we're seeing relative to what you're seeing, but we haven't necessarily seen anything pop up that would signal a problem from a credit standpoint and/or impact order behaviors.

Okay. Helpful. And then maybe for Jeremy, on the marketing side, you've talked about kind of pulling back on some of the top of funnel marketing. What about that bottom funnel marketing? I'm thinking more specifically around your boots on the ground efforts with retailers. I know you do in-store demos, you would train sales associates, you gave sales associates discounts, so they would own the product. Are those efforts still ongoing? Or is that something that also you're having to pull back on, just given the demand environment?

No, I would say those efforts are still ongoing. As we think about near-term versus long-term needs. Obviously, in the long term, we do need to -- medium to long term, we need to invest more in brand awareness through top-of-funnel customer acquisition. In the near term, we focus on two components. One is community engagement. And I shared some of the metrics in my prepared remarks on success that we're seeing in engaging the community around social, user-generated content, cooking, just general cooking behavior, and that's sort of like -- that's the specialness, that's a secret sauce of the platform that we can always lean into. We built the brand long before we spend dollars on top of funnel, we built a brand by executing effectively at retail. And we really feel like that is a competitive advantage that we have that no other outdoor cooking brand has, which is national coverage. In the most important markets, boots on the ground, in retail, merchandising, training, stimulating demand, managing partnerships and we haven't pulled back there. And we think that's -- we believe it's a high returning investment. And as we go from specialty retail to national retail like Home Depot, for example, the needs change. And so we service those accounts on the ground differently. But we continue to make investments in the point of sale, I would say notably with Home Depot were sort of multiple years into making investments at retail in terms of breadth of assortment but also investment in fixturing these trigger islands as we've called them. So the investment on the ground is alive and well. And as we progress and sort of stabilize and begin to grow and have incremental investment capacity. There's no question we will begin to lean more into this market or sell strategy, which is really connecting the boots on the ground, the retail execution with top of funnel investment in media.

Okay. That's great. Maybe you just mentioned Home Depot or at the end. Has there been any update from the -- not the door expansion, but I guess, as you call it, the building out of the island and the two bay walls?

The Home Depot partnership is a strong one. We've made a lot of progress in terms of continuing to add space. We launched a few hundred incremental fixture doors in the fall. And in the second half of this year, we will again, we will meaningfully grow the both floor space and the number of fixtures at retail. And that's sort of -- that's just -- that's a very -- it's a long-term but very predictable form of growth by really driving presence at retail, which we find is directly correlated with brand growth.

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

Yes. I wanted to ask you a little bit more on some of the innovation with the Ironwood and the Flatrock griddle it sounds like you've seen a great response, at least via social media. I'm curious if you're seeing a good unit response as well. Is the industry at retail, taking it in? And you're seeing pretty decent demand from the end user. I would guess the Ironwood probably more so, you mentioned Flatrock is a little more limited distribution at the moment. But any thoughts on that?

Well, we're early. We're early in May. But I would say the energy that we felt on social, in early innings, we're seeing correlated with sell-through. Our expectation out of the gate was that Ironwood would perform very well. It is -- that's a price point that is accessible to our consumer base. There's meaningful similarities in terms of design and innovation from the Timberline, which is nearly twice the retail sales price. So we're pleased with the consumer response on Ironwood. Flatrock, candidly, the social response caught us off guard, there was a lot more energy around that launch than we had expected, which I think really speaks to permission that we have as a brand with a very engaged community and strong retail partnerships to distribute product. It gives us confidence in our ability to do something outside of wood pellet grill, but again something that was always intended to be a complement to the wood pellet grill. In terms of Flatrock contributing to upside to the year, we believe that the disciplined approach was to launch it narrowly at retail and sell-throughs exceed our expectation will be relatively constrained for the next six -- sort of six to eight months on inventory. There are long lead time components there but we really do believe head into '24 that this has the potential to be a meaningful grower for us.

That's terrific. Great to hear that. And then the one other thing I was going to ask about was I think in the prepared remarks, Jeremy, you made a comment about being nimble and able to jump into new opportunities. Potentially when they arise. And I guess I was curious if you could share any more color on that, what you may have meant?

Yes. I mean I think it's important to sort of think about that within the context of where we've been notably the last 18 months. We have -- we've worked hard to be lean -- to get lean as a business to ensure that we are very thoughtful in terms of how we prioritize initiatives and allocate investment dollars behind those initiatives. And as we -- it really -- it motivates us to get really focused and really invest back in the core business. In a moment like this, where we are constrained from an investment capacity perspective, the nimble suggests that we understand our priorities, that we are being thoughtful not just to the current moment that we're in, but we'll be thoughtful to the future. Traeger has always been a disruptor. It's always been a share gainer and it will be going forward. And so thinking about long lead time investments product, for example, it takes multiple years to get product to market. It's important for us to continue to lean into some of the -- to those investments. And so as we create upside from plan, we have a decision to make, and that's what do we flow through versus what do we invest back in the business to ensure that we're driving future growth. And so when I spoke about being nimble is really being thought around our priorities and being willing to reinvest some of the upside to ensure that we continue to be a share gain or long term.

The next question on the line comes from Brian McNamara from Canaccord Genuity.

I'm curious if you could expand a bit. On channel inventories relative to where you thought they'd be two months ago when you reported Q4. Are they better, worse or in line? I know April wasn't helpful from a weather standpoint, but are you seeing sequential improvement into May. Historically, I would imagine there's a catch-up in May and June when there's a late start to spring for this category. Is that how you're thinking about it as you reaffirm guidance?

Yes. So that's right. We -- over the course of Q1 relative to our plan, we actually saw a nice improvements ahead of our plan from an in-channel inventory standpoint. Part of that is kind of isolated to certain SKUs where we had more of a problem from a weeks on hand standpoint. And I think that just really builds our confidence in the fact that as we now enter peak selling season, we're sort of positioned at the front of that in a better spot from an inventory level standpoint and channel than we thought we'd be. And I think that's really positive news. So we're happy with the progress there. And that's also translating into, I think, an accelerated improvement in on-hand balance sheet inventories.

Got it. And I guess just from a unit share perspective, I mean, you guys have 3% to 4% unit share. So by definition, you can't be the problem in the channel. I'm just curious as the market resets after we clear all these channel inventories, do you guys expect to gain shelf space or floor space with your retail partners in a more normalized environment?

Absolutely. Look, we feel good about our channel level inventories, and we are always motivated to add floor space, our positioning is very strong both from a consumer perspective but also in correlated fashion at a retail level. So not surprising if you were to go into some of our highest penetrated markets you're going to see the broadest assortment in the most real estate and part of the way that we grow is by adding real estate. So that part of the strategy hasn't changed. We will -- as I said, as we add incremental Traeger islands and fixtures in the Home Depot in the third quarter, we'll continue to gain share of space, and we believe that will also drive share of business in the category.

[Operator Instructions] Thank you, everyone. We have no further questions. Therefore, this does conclude today's conference call. Thank you all for joining. You may now disconnect your lines.