Hello, and welcome to the Traeger Second Quarter Fiscal 2023 Earnings Conference Call. My name is Lauren, and I'll be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Nick Bacchus, to begin. Nick, please go ahead.

Good afternoon, everyone. Thank you for joining Traeger's call to discuss its second quarter 2023 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 we get started, I want to remind everyone that management's remarks on this call may contain forward-looking statements that are based on current expectations and are subject to substantial risks and uncertainties, which 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. Our quarterly report on Form 10-Q for the quarter ended June 30, 2023, 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 to revise them for any new information. This call will also contain certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income, adjusted net income per share, adjusted EBITDA margin and adjusted net income margin, which we believe are useful supplemental measures. 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.traeger.com. Please note that our definition of these measures may differ from similarly titled metrics presented by other companies. 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 second quarter earnings call. Today, we'll be discussing our second quarter results and our progress on our key long-term strategies. I will then turn the call over to Dom to discuss further details on our quarterly financial performance and to provide an update on our fiscal year 2023 guidance. Today, I'm pleased to be able to announce better-than-expected results for the second quarter. As expected, our top line results were down to prior year as our retail partners continue to destock and work through grill inventories. However, results outpaced our expectations with upside in revenues driven by better-than-expected grill and consumable sales. Outperformance in our quarterly sales and the continued benefit of our cost efficiency actions, drove better-than-anticipated adjusted EBITDA, allowing us to deliver $21 million of adjusted EBITDA, up from $17 million in the prior year. I believe our results demonstrate our strong organizational focus on positioning Traeger for improved profitability and financial health. In the outdoor cooking industry, the second quarter is the most critical selling period at retail as consumers purchase grills for the summer grilling season. As always, our organization remain highly focused on sell-through in Q2 given this is the most important indicator of consumer demand for our products. As we move through some of the most important weeks at retail in the second quarter, we were pleased to see sell-through results that were modestly ahead of our expectations. As we have discussed over the last several quarters, following a period of outsized growth in big-ticket, home-related durables during the pandemic, consumers shifted their disposable expenditures towards travel and services leading to one of the largest declines in the history of the grill industry on record last year. While we believe this shift largely remains in place…

Thanks, Jeremy, and good afternoon, everyone. I'm pleased with our second quarter performance and with the progress we made over the last several quarters on our initiatives to improve the financial positioning of the Company. Today, I will begin by reviewing our second quarter results and then comments on our updated fiscal 2023 guidance. Second quarter revenues declined 14% to $172 million. Grill revenues declined 21% to $93 million. Grill revenue was negatively impacted by lower unit volumes as our retail partners continue to destock in an effort to lower in channel inventories as well as a lower average selling price as we lowered pricing on end-of-life and legacy models. Despite lower year-over-year revenue, grill revenue performance was ahead of our expectations in the quarter. Consumables revenues were $35 million down 17% to second quarter of last year, driven by lower sales of pellets. Our consumables business continued to be negatively impacted by the loss of volume with a customer who introduced private label pellets last year. Excluding this customer, sell-through of pellets was healthy and up over prior year. Additionally, in Q2, we lapped last year's large load-in of food consumables into our grocery channel. Consumables sales were modestly ahead of our expectations in the second quarter. Accessories revenues increased 7% to $43 million, driven by growth of Traeger accessories as well as MEATER. Geographically, North American revenues were down 16%, while Rest of World revenues were up 3%. Gross profit for the second quarter decreased to $63 million from $73 million in the second quarter of 2022. Gross profit margin was 36.9%, up 25 basis points versus second quarter of 2022. The increase in gross margin was primarily driven by: one, lower transportation costs, which drove 170 basis points of margin benefit; and two, FX favorability of 120…

[Operator Instructions] Our first question comes from Simeon Siegel from BMO Capital Markets.

Thanks, guys. Good afternoon. Nice job on the progress. You guys call out performance of DTC versus wholesale domestically. Could you elaborate a little more on the lower Grill ASP you mentioned in the press release, maybe the same question for lower consumables ASP and then how you're thinking about ASP for both maybe for the next several quarters, sorry about my choking.

Yes, on the Grill side, with respect to ASP, we took fairly aggressive pricing over the course of the pandemic to offset inbound transportation costs as we emerge from that environment, that macro environment and begin to see macro tailwinds in inbound transportation that are now reflecting in our P&L, obviously, fully, but in dribs and drabs, it's driving some margin expansion. We subsequently decided to begin taking price back down on most of our grills to effectively pre-pandemic levels, save one or two outliers. One example of that being the fact that we're moving through end-of-life product on our previous generation Ironwood and Timberline with the new products that replace those, those will sit in market for a period of time at a fairly lower price point than is normal. So that's kind of onetime, but the remainder of it really is bringing pricing back to what we believe are more appropriate levels to stimulate the right level of volume but nothing abnormal relative to where we were pre-pandemic. And I think on the pellet front, it's probably more just a nuance of dynamics around channel mix and nothing signaling any changes in pricing strategy.

Awesome. And then lastly, nice job on the gross margin. Could you just elaborate on the gross margin dilution comment you referenced? And then maybe how to think about the drivers going forward?

The dilution specific to, yes. So yes, right. That's really tied to two components. The first being some channel mix where we tend to see co-op dollars at a higher rate relative to other channels. So that's one component of it. The second one is the fact that the promotion that we ran -- or the promotions that we ran in Q2, which are normal this time of year performed well in excess of our expectations, which stimulated more sell-through than we were forecasting, which in turn, just drives higher gross to net dilution on the P&L. So nothing that would signal anything other than our promotions did we effectively needed them to do and, in fact, outperformed.

Perfect. Again, nice job on the progress, guys. Best of luck for the rest of the year.

Our next question comes from Peter Benedict from Baird.

First of all, just on the guidance for the year, you took it up clearly the first half was better than you thought. How was the second half relative to maybe what you were thinking at the beginning of the year just in terms of revenue and process? Is it kind of consistent? Or is what you're seeing here having you embrace a bit more of a positive view on the second half?

No, it's consistent. I would probably point out a couple of things. One, we -- in relation to top line as we exceeded our internal forecast in the first half of the year. We're taking that full beat in rolling it forward. I would note that, one, that we do expect the same rebound to growth in the second half of the year. Previously, we've alluded to this kind of tale of two halves. So that remains consistent. I'd say that as a component of that, we do remain cautious as we proceed through the course of the year. So one underpinning of this of our forecast in the back half of the year, which, again, is consistent with what we spoke to on the previous call, is the fact that this isn't driven by sell-through growth, it's driven by the comp where we began to aggressively destock in the back half of last year. So we're benefiting from that comp. So I think that's kind of the main point that I would make as we track into the second half of the year. But again, we're sort of marrying some confidence with cautious optimism as we consider some of the macro dynamics that are still at play and the fact that this is more a function of the comp than anything else. On the EBITDA front, I would just mention that it's important to consider the $4 million of timing expense that I had mentioned on the call. So from an EBITDA standpoint, we did exceed our internal forecast through first half of the year and specifically in Q2. However, we're not rolling forward the entire beat there because of this $4 million expense timing shift. So something to consider as you think about modeling the back half of the year.

That's helpful. And then just on inventory, obviously, a very nice level here, several hundred million. How should we think about that as we move through the balance of the year? I think 3Q typically -- or I think you were thinking it would be similar to Q2, it was 90 days ago. Is that still the case? Did we start building inventory from [indiscernible] is there an opportunity to continue to bring it down? How should we think about the shape of inventory or the balance of the year?

Yes. I mean this is a real big win, right? I mean we've been really focused on inventory over the last 12 months with inventory levels peaking Q2 last year. And we're really excited to announce that our inventory position in channel is largely where it needs to be our target weeks on hand are aligned with our expectations, if not maybe a little bit lower than they need to be, which provides for some opportunity. And we saw this in Q2 of a more normalized replenishment rate. In terms of how you think about inventory in Q3, Q4, I think you would expect to see some inventory build in Q3, in advance of the holiday period in Q4 as well as the fact that MEATER benefits from much more seasonality in Q4. So there will be some revolve and I would expect to see moderating -- a moderate drawdown on inventory in Q4 as we sell-through that and ending the year strong as we think about the unlocked on working capital between 22% and 23% from an inventory standpoint.

And our next question comes from Joseph Feldman from Telsey Advisory Group.

I wanted to ask you with regard to the replenishment cycle returning to more normal demand levels. I guess I just wanted to square that with your comment that you said that you're not expecting consumer demand to necessarily pick up. So I guess I'm curious, is it because you think the inventory is just too lean in the channel at this point at retail and so they need to bring back goods? But maybe you could square those two comments.

Yes. Let me step back a bit and talk about where the industry is. If you look at sell-through in 2022, it was down meaningfully, somewhere mid-high teens. Year-to-date, it's still down, but at a much lower rate, let's say, low -- sort of low mid-single digits. And so the industry is high ticket durable discretionary items are still challenging. And we're hearing that in the industry and across product categories. So it feels like we are nearing a trough. And in terms of recovery, look, that's good question. We're doing everything we can to understand the environment to model replacement rates. But I think we are getting to the end of this period of pull forward that we've been feeling the last sort of 18 months. And -- but the strength of recovery, we'll see. I think there are a variety of factors that goes into that. What we're really benefiting from right now is a combination of a few things. Number one, sell-through has fell, it's felt stable, and it was not stable for a long period of time. Second is this destocking effect. I mean it was -- it was a real drag on our top line. The back half of last year was very painful for that reason. That is largely behind us. In channel inventories are healthy. We are feeling we're feeling good about inventories on our balance sheet. So the confluence of these events in markets, although there's not a tailwind in terms of the category or in terms of the broader economy relative to high ticket durables, because the inventory is under control, and because we are internally just managing expenses in a very lean way. Inventory in a very lean way and really starting to trade out some of the high-cost inventory all of these things are leading to better performance. But there's not an industry tailwind that's driving this.

Got it. That's really helpful, Jeremy. And then if I could follow up a little one more. Just the -- on the consumables side, the rollout to Kroger was terrific. And I guess, as always, we would love to see you guys roll it out everything faster to everywhere. So I guess can you share more thoughts about kind of the strategy over the next maybe 6 to 12 months, how you're going to roll things out in consumables?

Absolutely. So let me first address pellets. We talked about pellet sell-through has been healthy. We've been aggressively pursuing the grocery channel for pellets, and we're seeing nice growth there. We believe that although the grills are a considered purchase, consumers will go to a destination after doing their research, the pellets and other consumables need to be convenient purchases. So we're seeing nice sell-through in grocery. In terms of the other consumables, we highlighted sauces, rolling them out in an improved packaging configuration as well as at a lower price point that was just more appropriate for grocery. The market received that very well. We had -- a lot of our -- until that rollout, a lot of our consumables sort of rub and sauce business that really started in specialty retail where larger higher price points sold through in grocery is just more competitive. So we're feeling good about the uptake of this new packaging and no question. We'll be rolling it out methodically over time in grocery, but early indication is very positive.

Great. And good luck with the third quarter.

[Operator Instructions] Our next question comes from Randy Konik from Jefferies.

Joined the call a little late. So I guess, maybe, Jeremy, let me get some perspective from you. I know the Flatrock product has done very well. Maybe -- I don't know if you discussed this, but maybe give us a little more perspective on the reaction from, I guess, your customer base from the accounts, not necessarily actual customers, but your wholesale accounts. And given that success, are they asking you to produce other types of gas products? Just want to get some perspective there on how you're thinking about the future going forward from a product category perspective?

Yes, Randy, it's a great question. Timely a few of us were out in market last week. We spent a couple of days in Seattle had a chance to walk into a number of retailers who carry Flatrock. There's good and bad news. The good news is, is that it's selling through well. The bad news is inventory and channel is really light. And that's not a surprise to us. We -- the intended launch was -- it was to be constrained, it was to be limited. And part of that is selling a product outside of a core wood pellet grill category. The other is, if you think back to when we started building these, inventory was a dirty word. And so we've built a very disciplined constrained launch, and it has by far exceeded our expectation. I was in a specialty retailer last week that had received three units. They sold through in 24 hours and is still waiting to get more. Now they do buy through a distribution center. I was in another retailer that actually prebooked a meaningful number, and they have sold more than 30 units and they routed inventory as well. So the good news is there's a lot of demand, and I would much rather fix a supply problem than a demand problem. We are ramping up production on that, and we should be caught up to our existing channel by the fourth quarter. But the goal is to really it's to increase distribution next year. In terms of the broader category question that you asked, are they asking for other products? Right now, they're just asking for more Flatrocks. And so we certainly see within the griddle category, an opportunity first to win at the Flatrock. But there's some other -- there are some other products in that category that we think makes sense, and we're contemplating those. But beyond that, we just feel like between griddle, the size of the griddle category, wood pellet grills, our 3.5% household penetration. There's a balance between introducing new products and staying focused in going really deep at what we're good at. And I would say for now, what we're hearing is we like the brand, we like the position in retail, give us more griddles, and I think that certainly is plenty of runway for the next couple of years for us.

Super helpful. And again, I joined late, so I don't know if you went over this, but can you give us some perspective if you haven't given it yet on how the pellet or Traeger looks relative to the broader category of grill, I guess, gas at the moment. Like what are you seeing in each versus in the U.S. versus international? I'm trying to get -- what I'm trying to get at is where are we in the bottoming process of these pellets and gas at the moment?

So if we step back and look at the broader outdoor cooking category, I would say that charcoal is flat, pellet is gaining modestly, griddle has gained aggressively and gas is declining. And so I think the griddle category gained aggressively partly because it was new, it caught a lot of excitement. But I think the growth currently and the growth in the future it is going to be griddle and it's going to be wood pellet and it will be at the expense of gas. Charcoal is interesting. It's -- you can sort of delineate charcoal into two consumer segments, those buy really inexpensive, almost disposable consumable low-priced charcoal grills for briquettes. And then those more the enthusiast buying higher-end comodo solutions. The Charcoal category seems to be pretty flat over the last couple of decades, and it probably stays there. But gas still occupies still owns greater than 50% of the dollar share. Wood pellets up to about 20% and growing. If you look at unit share, wood pellet is significantly lower and notably Traeger because we sell a much higher ASP than gas. Let me add. Yes, and I'll just add on -- yes, just one follow-up thought on that, which is if you look at this category over time, this category is resilient, it does recover, always has, always will. There are 76 million households that own Grills. And my guess is that number will be higher two to three years from now. And so it's really a question of what does the trough look like? How long is it, when does it begin to recover? And so it's a little bit more of a when than an if. And I think all of the historical data suggests that we think we're getting closer to a trough in the broader category. So we see -- we sort of see our objective is, number one, stabilize the business, be lean as we generate return on our spend, drive gross margin and then start to lean back into investment in top of funnel to take share of a category that should begin to grow again soon.

Well put. Thank you so much, Jeremy.

Our final question comes from Brian McNamara from Canaccord Genuity.

Congrats on the improved results. I wanted to dig a little deeper into channel dynamics, particularly your competitor channel inventories. Is there anything to call out there? Any significant improvement, whether it be by fuel type or the like? With a small unit share, presumably, Traeger is not -- wasn't the problem to begin with. So did you guys feel boxed out having to wait for your retail partners to clear all of this other stock for your growth to resume?

I would say there's no question in the back half of last year, it wasn't just a Traeger battle. It also wasn't just a category battle. It was an inventory bottle. And every retailer was pushing on this. There were certainly moments where we had at a SKU level, at a retail, at a distribution center level, low inventory that we'd have to sort of aggressively push our retailers to bring back up to reasonable weeks on hand. But I would say it's really more of a -- it's been a broader category challenge. And I don't -- I wouldn't characterize the back half of last year as being a problem getting inventory into retail. And it's really -- it's just -- for us, it's just focused on normalizing inventory levels. Fortunately, every retailer did it and retailers are getting healthier. So we feel good about where we are. We like the declines that we're seeing in terms of how they're moderating. And we're currently -- if you look at a trailing 12 months on units, it's meaningfully below pre-pandemic levels. And all that suggests is as we catch up to replacement cycles, the category is going to grow. But to your original question, was there some impact at the margin of trying to get inventory into retail, maybe some, but not really the driver of revenue as much as just general destocking.

Thank you. We have no further questions. So this concludes today's call. Thank you for joining, everybody. You may now disconnect your lines.