Traeger Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 11 speakers on the call.

Operator

Hello, everyone, and welcome to the TRYDER Second Quarter Fiscal 20 24 Conference Call. My name is Carla, and I will be coordinating your call today. During the presentation, you will have the opportunity to ask questions.

Operator

I will now hand you over to Nick Bachus, Vice President of Investor Relations to begin. Nick, please go ahead.

Speaker 1

Good afternoon, everyone. Thank you for joining Traeger's call to discuss the Q2 2024 results, which were released this afternoon and can be found on our website at investors. Traeger.com. I'm Nick Backus, Vice President of Investor Relations at Traeger. With me on the call today are Jeremy Andress, our Chief Executive Officer and Don Blossil, our Chief Financial Officer.

Speaker 1

Before we get started, I want to remind everyone that management's remarks on this call may contain certain forward looking statements that 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 ks for the year ended December 31, 2023, our quarterly report on Form 10 Q for the quarter ended June 30, 2024 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. We undertake no obligation to update or revise them for any new information.

Speaker 1

This call will also contain certain non GAAP financial measures, including adjusted EBITDA, adjusted net income, adjusted net income per share and adjusted EBITDA margin, which we believe are useful supplemental measures. 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. Trigger.com. Please note that our definition of these measures may differ from similarly titled metrics presented by other companies. I'll now turn the call over to our Chief Executive Officer, Jeremy Andress.

Speaker 2

Thanks, Nick. Thank you

Speaker 3

for participating in today's call to review our Q2 performance and discuss our business outlook. I am very pleased with our Q2 results. Our performance underscores the hard work our entire organization has put into driving increased efficiencies in our business over the last 2 years and further demonstrates our team's ability to execute in what remains a challenging consumer environment. While our 2nd quarter sales of $168,000,000 represents a 2% decline versus last year, our Grills business was up 2% year over year, a significant improvement from the 14% decline we saw in the Q1. Moreover, we delivered a very strong second quarter gross margin of 42.9%, up 600 basis points compared to the prior year.

Speaker 3

This resulted in adjusted EBITDA of $27,000,000 a 25% improvement from Q2 last year. Our better than expected results give us confidence in our outlook for the balance of fiscal 2024. Today, we are updating our fiscal year 2024 revenue guidance to a range of 5.90 dollars to $605,000,000 and I'm pleased to say that we are increasing our adjusted EBITDA guidance to $74,000,000 to $79,000,000 an increase of 15% at the midpoint of the range as compared to prior guidance. Our improved adjusted EBITDA guidance has been driven by an increase in our gross margin outlook to 40.5% to 41.5%, up from the prior range of 39% to 40%. As an outdoor cooking company, the 2nd quarter is our most important selling period at retail as consumers buy ahead of the summer grilling season.

Speaker 3

Coming into the quarter, we are anticipating that ongoing weakness in industry demand would continue to pressure our Grills revenue. As we noted on our Q1 earnings call, sell through trends for Grills remain negative in the early part of the year. The second quarter is typically a promotional period for our industry. Given the soft demand backdrop, this year we strategically leaned into promotions and offered incremental savings to the consumer. Consumers reacted favorably and we saw a marked inflection point in sell through trends as we kicked off the season with our Memorial Day promotion.

Speaker 3

Demand for our grills meaningfully improved as we move through the Q2 and exceeded our expectations. I'm very encouraged by the strong consumer demand for our grills in the Q2. In an economic environment that remains challenging for many consumers who are feeling pressures from inflation and with continued headwinds for big ticket home related purchases, our consumer came out in full force in our peak season. I believe there are a couple of key learnings here. 1st, notwithstanding the pressure we have faced in the last 2 years as consumers shifted to a post pandemic and inflationary environment, there continues to be a large and growing appetite for Traeger products.

Speaker 3

The strong demand in Q2 not only speaks to the strength of the Traeger brand, but ultimately points to the long term opportunity for Traeger as brand awareness expands over time. Next, it is clear that the consumer is currently very price conscious and we saw particular strength in our lower price point grills, a continuation of the trend we have seen for several quarters now. Long term, we view this as a positive development as consumers that come into the Traeger hood exhibit high levels of retention, purchase our consumables over their lifetime as users and oftentimes trade up to higher price point grills. Furthermore, it's important to note that Traeger remains positioned as a premium brand. For example, our opening price point grill is still at a materially higher price point versus the industry average selling price.

Speaker 3

Sell through strength in Grills during the quarter was further supported by our ground game initiatives. One of our long term strategic pillars is driving increased brand awareness, which remains our largest opportunity to expand household penetration over time. Brand awareness and perception are clearly tied to the consumers' experience of our brand at retail. And during the Q2, we focused on driving excitement and engagement with consumers in collaboration with our retail partners. This included completing over 4,000 weekend selling events at retail partner locations, where retail sales specialists train store associates for product demonstrations featuring Traeger Grills and food cooked on the Traeger.

Speaker 3

The ability for consumers to see our product in action and to taste the flavor of wood fired food makes all the difference in driving conversion at retail. We also partner with key retailers in certain must win markets to drive boots on the ground activation, more targeted marketing efforts and sales initiatives in store. These efforts not only provide important learnings for scalable ground game and marketing activation strategies going forward, but drove meaningful sell through upside in these markets relative to control markets in the Q2. From a sell in perspective, better than anticipated consumer demand drove growth in Grille revenues in the 2nd quarter and is fueling an improved outlook for our Grills business for the year. We now expect Grille revenues to be approximately flat versus our prior outlook for a negative high single to low double digit percentage decline.

Speaker 3

As channel inventories were very clean coming out of Q2 and with the inventory wind down with end of life SKUs tracking ahead of schedule, our outlook for replenishment sales in the second half has improved. We also expect to benefit from initial load in of new product in the Q4. Importantly, despite improved trends in the second quarter, we continue to plan the balance of the year prudently with respect to sell through of grills, as we expect that consumer demand in seasonally slower periods could decelerate and acknowledge that the economic backdrop remains highly dynamic. The improved outlook in our Grills business is being partially offset by reduced expectations for accessories revenues driven by METRE. In the Q2, METRE experienced lower than anticipated sales in its e commerce channels, which make up a majority of its revenue base.

Speaker 3

We believe that METER is being impacted by changes in our demand creation strategy implemented earlier this year, which proved ineffective in driving top line. The good news is that we believe we have diagnosed the issues impacting the business and have implemented strategies to drive improvement going forward. This includes adjusting our demand creation strategy as well as driving new product innovation in the second half of the year. Also, we are doubling down on expanding Meters wholesale distribution and will be relaunching our retail offering with improved packaging and in store fixtures ahead of holiday. We remain confident in the long term opportunity for METER and believe the changes we are making position the business for improvement.

Speaker 3

It is important to note that the majority of METER's year is in front of us with more than 2 thirds of full year revenues occurring in the second half and so there's ample time to pivot effectively. Moving on to consumables. 2nd quarter consumables revenues were largely in line with our plan and were impacted by a timing shift into the Q1. Looking at first half consumable sales, to normalize for this timing shift, revenues were up 2% versus prior year, which speaks to the recurring and stable nature of our consumables revenues. We continue to expand distribution of the consumables into the grocery channel and we believe this is a natural extension of our current distribution footprint, which drives convenience for consumers to purchase our pellets, rubs and sauces.

Speaker 3

In the Q2, we added distribution of pellets, rubs and sauces to 200 associated food stores. We also added additional pellet SKUs at Lums and Byer Leaves, Market of Choice and Hy Vee. We continue to see meaningful opportunities to grow share via increased distribution and share of shelf. Turning to international. Our international business remains a meaningful long term opportunity for us.

Speaker 3

In the second quarter, international results at Traeger were heavily dependent on region and channel of distribution. For example, in Canada, we saw significant acceleration in sell through trends in our big box channels as consumers responded favorably to our summer promotions. The specialty channel in Canada by contrast saw challenging results in the quarter with pressure on Grills north of $1500 In Europe, sell through was softer versus last year and our distributors continued to work through excess inventories. The consumer environment in many of our international markets continues to be challenging. However, we remain focused on the long term opportunity to drive awareness and penetration of the Traeger brand by replicating many of the strategies that have been successful in the U.

Speaker 3

S. This includes implementing ground game strategies like in store product demos and increasing brand presence with elevated merchandising and by activating the brand on social media. In closing, I'm incredibly proud of our organization's ability to execute and to deliver strong results against a challenging backdrop. Our 2nd quarter results demonstrate our commitment to delivering continued improvements to our business. My confidence in the long term opportunity for Traeger remains very high and our business is well positioned for long term success.

Speaker 3

And with that, I'll turn it over to Dom to provide more detail on our Q2 performance and our updated outlook for fiscal 2024. Dom?

Speaker 2

Thanks, Jeremy, and good afternoon, everyone. Today, I will review our 2nd quarter performance and discuss our updated outlook for fiscal year 20 24. 2nd quarter revenues declined 2% to $168,000,000 Grille revenues increased 2% to $95,000,000 Grille revenue benefited from better than expected sell through during the quarter as consumers responded favorably to our promotional strategy. Consumables revenues were $34,000,000 down 3% to 2nd quarter last year. Pellet revenues were negatively impacted in the quarter due to a timing shift, which benefited the 1st quarter, partially offset by growth in food consumables in the quarter.

Speaker 2

When looking at the first half overall to adjust for the pacing shift in pellets, consumables sales were up 2% versus the first half of twenty twenty three. Accessories revenues decreased 9% to $40,000,000 largely driven by lower sales at METR. Geographically, North America revenues were down 5%, while rest of world revenues were up 32%. Gross profit for the Q1 increased $72,000,000 from $63,000,000 in the Q2 of 2023. Gross profit margin was 42.9%, up 600 basis points versus the Q2 of 2023.

Speaker 2

I am pleased with our strong gross margin performance in the 2nd quarter, which is being driven by both lower supply chain costs in addition to our margin enhancement initiatives. The increase in gross margin was driven by 1, lower freight and logistics costs, which drove 3 20 basis points of favorability 2, optimization of operations, which drove 170 basis points of margin 3, FX favorability, which positively impacted margin by 70 basis points and 4, other favorable items worth 90 basis points. This was partially offset by increased dilution of 50 basis points related to promotional activity. Sales and marketing expenses were $28,200,000 compared to $27,900,000 in the Q2 of 2023. During the quarter, increased investments in brand awareness and employee related costs were partially offset by reduced professional fees.

Speaker 2

General and administrative expenses were $30,000,000 compared to $52,000,000 in the Q2 of 2023. The decrease in G and A expense was driven by lower stock based compensation expense, partially offset by higher costs related to legal matters. Net loss for the Q2 was $3,000,000 as compared to net loss of $30,000,000 in the Q2 of 2023. Net loss per diluted share was $0.02 compared to a loss of $0.25 in the Q2 of 2023. Adjusted net income for the quarter was $7,000,000 or $0.06 per diluted share as compared to adjusted net loss of $4,000,000 or $0.04 per diluted share in the same period in 2023.

Speaker 2

Adjusted EBITDA was $27,000,000 in the 2nd quarter as compared to $21,000,000 in the same period of 2023. Let me now discuss the balance sheet. At the end of the Q2, cash and cash equivalents totaled $18,000,000 compared to $30,000,000 at the end of the previous fiscal year. We ended the quarter with $427,000,000 of short and long term debt, resulting in total net debt of $409,000,000 From a liquidity perspective, we ended the 2nd quarter with total liquidity of $175,000,000 Inventory at the end of the second quarter was $91,000,000 compared to $96,000,000 at the end of the Q4 of 2023 $98,000,000 at the end of the Q2 of 2023. We believe inventories on our balance sheet are appropriately positioned for our current demand outlook.

Speaker 2

Additionally, channel inventories were healthy exiting the 2nd quarter, even better than anticipated sell through of grills. Taking a step back, I'm very pleased with the progress the organization has made in improving balance sheet health over the last 2 years. Since Q2 2022, balance sheet inventories are down more than 40% and liquidity is up nearly 30%. Furthermore, the growth in adjusted EBITDA we have realized over the last four quarters has resulted in a reduction in our leverage ratio as defined by net debt to TTM adjusted EBITDA of more than 5 turns compared to a year ago. Our organizational focus on driving continued improvements to our business positions us well to continue to drive deleverage over time.

Speaker 2

Now turning to our updated outlook for fiscal year 2024. For revenues, we are updating our range to $590,000,000 to $605,000,000 The narrowing of our revenue outlook reflects our first half performance as well as our updated view on the second half. For Grille revenues, we are now forecasting approximately flat revenues compared to 2023, which is up substantially from our prior guidance for a high single digit to low double digit decline. Our improved outlook for Grille revenues is being driven by our better than expected performance in Q2 as well as an improved outlook for the second half, as strong Q2 sell through was driving improved replenishment. The improvement in our outlook for our Grills business is being partially offset by a reduction in our accessories revenues driven by METRE.

Speaker 2

As Jeremy discussed, METRE's performance missed our expectation in the 2nd quarter and our more conservative outlook is driving our view for negative accessories revenues growth in the second half of the year. In terms of gross margin, we are increasing our full year 2024 guidance to 40.5 percent to 41.5%, which implies growth of 360 basis points to 4.60 basis points. I've been very pleased with our gross margin performance over the last two quarters, and our year to date gross margins have been ahead of our expectations. Our outlook continues to assume that our margin will benefit from lower realized supply chain costs as well as internal margin improvement initiatives. We are seeing a greater than anticipated benefit from certain factors, including expected transportation costs and a higher mix of sales from our direct import program, which have contributed to upside in the first half of the year.

Speaker 2

Furthermore, the improved outlook for our Grills business is driving lower than expected deleverage. We expect to see greater gross margin growth in the 4th quarter as compared the Q3. For adjusted EBITDA, we are increasing our guidance to a range of $74,000,000 to $79,000,000 up from our prior outlook of $62,000,000 to $71,000,000 This represents a 15% increase versus our prior year outlook at the midpoint of the range and implies 21% to 29% growth in adjusted EBITDA compared to full year 2023. Overall, I am very pleased with our team's strong execution in the Q2 and with our ability to substantially increase our adjusted EBITDA outlook 4. We have continued to make significant progress on driving efficiencies in our business, which I strongly believe position Traeger for long term success.

Speaker 2

I will now turn the call over to the operator for questions. Operator?

Operator

We will now begin the question Our first question comes from Anna Glasgon from B. Riley.

Speaker 4

Hey, good afternoon guys. Thanks for taking my questions.

Operator

I guess, first, thanks

Speaker 4

for the detail around you saw a meaningful inflection around the promotions. Just want to clarify, did you actually see positive sell through? Or did you just see a sequential improvement versus what you had expected?

Speaker 3

Yes, we did see positive sell through. And again, it's a trend of consumer price sensitivity that we've seen in our business that we've noted in the past in terms of mix. We're certainly seeing that as headline commentary from other consumer brands. So we chose to lean into promotions and it was well received. And I would say the positive signal that we take away from this is certainly that there is meaningful demand for the Traeger brand.

Speaker 3

When great brands go on sale, consumers react and that's what we saw.

Speaker 1

Anna, did you have another question?

Speaker 4

Sorry, I was muted, talking to myself. I wanted to touch on meter, expanding a little bit more on the demand creation issues. Was it that you're marketing in the wrong place, just not getting the ROI? Or maybe expanding on what was going on earlier in the year and now what you're changing as we approach the back half?

Speaker 3

Yes. So first of all, meter is largely an online business. We are certainly in the process of leveraging our channel synergies, Traeger being heavily a traditional retail business. But we came into the year with a hypothesis that we could more efficiently drive sell through, focusing on more on sort of lower funnel conversion and less on upper funnel prospect marketing. I think that strategy just didn't play out as expected.

Speaker 3

We certainly have plenty of history with the brand in investing more prospecting in advance of key selling seasons and we'll probably be back into that strategy. It's been effective for us in the past.

Operator

Great. That's it for me. Thanks, guys. Thanks. Our next question comes from Simeon Siegel from BMO Capital Markets.

Speaker 5

Hey, good afternoon, guys. It's Dan here on for Simeon. So just 2 from us. First, we just wanted to see if there's anything you could share in terms of new Grille customers purchasing versus replenishment Grille purchases? So anything there, maybe how it was in the quarter or just how it's trended recently?

Speaker 5

And then curious on usage patterns, pre COVID cohort versus more of the newly acquired customers? Thanks.

Speaker 6

Yes, sure. Yes, it's fairly consistent. You'd expect given our low household penetration in the U. S. The lion's share of consumers conversion the brand are new consumers.

Speaker 6

We understand that there is a growing component of our installed base that sort of represents the loyalty loop back to the brand and it's something that we're focused on especially long term. But given the life cycle that we're in, a lot of the new Grille sales are new consumers that we're acquiring, which we'd certainly view as positive as we reinforce the loyalty loop on the other end of the funnel. With respect to your second question around consumer engagement, I'd say that it's consistent in a couple of different measures, one being in the connected data that we evaluate month to month, quarter to quarter, The trends that we're seeing in connected cooks are actually growing. They grew in Q2, which we see as positive. And then I think the second element to that is, as we evaluate attach rates for consumables, they're trending consistently with pre pandemic levels.

Speaker 6

We've talked on previous calls that during the pandemic, there was a fairly dramatic spike in attach rates. Obviously, we've come back down to earth post COVID. And when you sort of normalize for the private label customer that introduced a private label pellet, that the attach rates are consistent with pre pandemic. So we again view that as positive and it's been a consistent theme from quarter to quarter.

Speaker 2

Thanks a lot. Best for the rest of the year, guys. Thanks.

Operator

Our next question comes from Megan Alexander from Morgan Stanley.

Speaker 7

Hey, thanks. Good afternoon. Thanks for taking our question. Wanted to just start with, I was wondering, sorry if I missed it, if you could just tell us what units and ASPs were in the quarter on a year over year basis? And then just a follow-up to that, Grille is now flat.

Speaker 7

That really seems to be driven, I guess, by volumes. Is that fair? And so would that suggest that you're actually expecting volumes to now be up in 2024?

Speaker 6

So to answer your first question, yes, so grills sales grew slightly 2%. The volume grill volumes did increase kind of high double digits. The offset was ASP, which declined kind of mid double digits. And we understood that dynamic going into the quarter. It's how we sort of designed our promotional strategy.

Speaker 6

We want to ensure that we're focusing and strategically planning our promotion around where consumer appetite is. There's pressure on high ticket durables. We've seen a trend toward lower and opening price point grills for our brands of $1,000 and we leaned into that and that proved to be an effective strategy, which drove a fairly nice lift to volumes, albeit offset by the decline in ASPs given that mix shift.

Speaker 7

Okay. That's helpful. And then I guess, you kind of touched on it there and you did in the prepared remarks as well. But just bigger picture, I guess, how are you thinking about maintaining that premium position? And while leaning into clearly what's selling is lower price points and driving promotions to increase that awareness.

Speaker 7

I imagine it's a pretty fine balance. So I would just be curious if you could expand a bit on how you're thinking about that.

Speaker 3

Yes, it definitely is a fine balance. We have a fairly traditional promotional calendar, and we were largely in line with that. We had a longer promotion as opposed to 2 shorter promotions in sort of in the second quarter. We talk a lot about how we continue to maintain a premium position and also be sort of thoughtful to the environment that we're selling in. And we feel like we have the ability to thread that needle in the near term, in part given the consumer environment and the competitive environment for Grills.

Speaker 3

But I'd also say, it's important to note that where we were more aggressive in promotion, we are also approaching end of life of product, which tends to be an even more appropriate time

Speaker 8

to be

Speaker 3

promotional. We get an opportunity to reset in as both as the environment improves, but also as we launch new product, new innovation and sort of ensure that we're always coming back to those important price points that we view as premium but accessible to a broader consumer. Our promotional strategy really hasn't deviated from our historical strategy, a little bit more aggressive on opening price point, but not meaningfully different. Let me add just one other comment. Sorry, Megan, just one other comment, which I think is relevant just for context setting.

Speaker 3

Our opening price point product, even on promotion, is meaningfully higher than the average selling price of the grill in the industry. So I think the context of where our brand still sits even on promotion is important to consider.

Speaker 7

Got it. That's helpful. Thank you.

Speaker 5

Thanks.

Operator

Our next question comes from Philip Lee from William Blair.

Speaker 8

Can you maybe speak a bit more about the trends you've seen in the Q3 to date? And then how we should think about then subsequent growth during the Q4 and holiday driven by some of the newness you spoke about earlier versus maybe some expected volatility around the election and some multi year choppy comparisons?

Speaker 6

Yes, I mean, we can't speak to the Q3 trend certainly, and I don't know that we are going to be spending airtime on Q4 either. It's sort of baked into our guidance. And so you can sort of back into what that may look like based on how we performed year to date. But there are 3 components that I think are worth noting in terms of what informed an update to our guidance, a raise to our guidance this year. And the first being the fact that sell through did outperform expectations in Q2, which lends itself to an improvement in sell in.

Speaker 6

The second element to that is the fact that it should stimulate greater replenishment in Q3 as we rebuild inventory levels off of what was more robust sell through in Q2. And then the 3rd piece that we referenced is just a catalyst that we have now baked into our plan in Q4, which is a load in of some product ahead of our 2025 launch of new product. This is sort of normal course where sometimes we load in some revenue for a new product launch in the following year in late Q4 and that's sort of a new development that we've included in the plan as you think about some of the catalysts in the back half of the year building on what was a solid first half of the year.

Speaker 8

Okay, great. Yes, that's really helpful. And then just a little bit switching gears here, but you've done a lot to minimize some of the overhead and improve the efficiency of operations over the past couple of years. But as we think about maybe a more meaningful recovery in grills now on the horizon, are there areas in the business that maybe under invested in that will need to ramp up? Or is there a pretty clean fixed cost structure going forward that we can bank on some sales fall through against?

Speaker 8

Thank you.

Speaker 6

Yes, I'd say that the cost structure is pretty clean. We spent the last 12, 18 months really focused on sort of rightsizing our cost structure, focusing on driving gross margin improvements, benefiting from macro trends. And I would say that how we've shaped the P and L, over the course of this period of time puts us in a really good spot to now focus on a better cadence in terms of driving top line growth and consistent leverage through the P and L into profitability. And I think we've talked on past calls about how we've focused on rightsizing our cost structure without forsaking certain investments in the long term, demand creation, some prospecting, although there's been some shifts across the funnel as well as our product development engine, right? So we feel pretty good in how we've positioned that, how our OpEx is oriented.

Speaker 6

And I think that from this point forward, there should be better consistency across the P and L as we drive leverage through that cost structure and ensure that we continue to maintain the right resource allocation against our long term plan.

Speaker 8

Excellent. Great. Best of luck. Thanks.

Operator

Our next question comes from Brian McNamara from Canaccord Genuity.

Speaker 8

Hey, thanks guys for taking the question. I wanted to clarify your new outlook for grills, particularly as it relates to getting through the sunsetting of products a bit maybe a bit faster than you initially thought and the initial loading of the new product in Q4. Is this just a function of promotions kind of driving the delta here? And are you pulling some of those planned 2025 innovations forward?

Speaker 6

So definitely sell through in Q2 greatly influenced a shift in our forecast for grills in the year. I would as I mentioned on a previous in my previous comment, Q3 is also benefiting from some of that replenishment with an offset to the fact that we are seeing some pressure in accessories mainly driven by meter. And then in terms of your question regarding the load in of new product in Q4, It's not necessarily pulling from 2025. It's more just a function of how timing works out in relation to when we're able to ship product from China when we're ready to do so and also to ensure that to the extent that it's possible, we're loading certain channels as early as possible such that when we're ready to launch new product in the following year, there are SKUs on the floor that align with that marketing strategy and that launch strategy.

Speaker 8

Got it. Understood there. And then on your revised gross margin guidance, I think it implies roughly a 400 basis point step down in H2 versus H1. What's driving that apart from some seasonal elements? I think you guys did 43% gross margin in We've had a bunch of noise in the markets.

Speaker 8

And so like how should investors be thinking about a sustainable gross margin rate in the business moving forward?

Speaker 2

Hey, good question. So in

Speaker 6

the back half of the year, I think it's consistent with what we spoke to on the last call, which is Q3 gross margin is the trough for the year. Just given the lower sales volume in the quarter, we see some deleverage within COGS and that pressures gross margin. Q4 is also sequentially lower than the first half of the year, mainly connected to the fact that we are more promotional in Q4. I would say to your latter question, we are seeing sustainability in gross margin. Structurally, there have been shifts that we're benefiting from and we view those structural shifts as sort of permanent, barring a surprise, which I think is a real positive for the brand.

Speaker 6

That's the macro side that has really moved in our favor, especially when you compare some of the pandemic pressure that we felt. We're also benefiting from structural changes that we've driven and controlled through operational efficiencies. And that's still a focus for the brand to continue to drive improvements across our supply chain within our product development process that should hopefully drive incrementality in gross margin. The only comment I would make is year to year, we are still subject to and sensitive to macro shifts, right? So where FX may move, where inbound rates may move, we are sensitive to that from year to year.

Speaker 6

But the underlying theme is the structural changes that we've seen from pandemic to now we believe will persist and we view that as both structural and sustainable on top of the fact that we continue to focus on gross margin improvements as a key pillar of our long term strategy.

Speaker 8

Great. Thanks

Operator

a lot. And our next question comes from Justin Keppler from Baird.

Speaker 9

Yes, good afternoon guys. Thanks for taking the questions. Just a follow-up down to the gross margin question. You talked about the macro moving in your favor, but obviously being subject to shifts. I guess based on what you know today, would you expect freight and logistics costs to remain a gross margin tailwind as we move into 2025?

Speaker 6

It's a little early to speak to 25. I mean, I think the one point I would make is and we baked this into our plan, I think we talked about this on our last call is we did see some we have seen some increase in the spot market for inbound transportation, but we've captured that. So hard to say where that moves in 2025. We actually think that more capacity will come online. So TBD, but otherwise, I don't know that we're in a position to start speculating on 'twenty five, but feel good with the momentum that we've driven this year and then certainly have a different viewpoint on what long term gross margin looks like relative to where we've been the last couple of years.

Speaker 9

Makes sense. Thank you for that. Two questions kind of related to innovation. I guess first one would be on your 25 innovation pipeline. Just given the consumers feel cautious and they're gravitating toward lower price points, I'm curious if those macro trends have influenced your innovation in any way as we think about next year?

Speaker 3

Yes. So a couple of thoughts. One is, as we have articulated on past calls, we have been couple of years, notably as the consumer environment became difficult, we believe product. And we don't and launched in very different cycles. And we don't build in the world of durables just given what it takes to engineer and the time it takes to go to market, it would be difficult to react to market cycles.

Speaker 3

And so, no, we don't change our product roadmap relative to the cycle. We believe that, number 1, given the price points we're launching that we have the ability to sell those price points that are very appropriate for the brand, what's coming to market. The second is that it's been a contracting industry for multiple years. And at some point, strength that strengthens and that will happen over the course of many years of this product platform that we're launching. So we feel good about the price points, the position for the consumer, the value.

Speaker 3

We're getting better every year at product development, but we take a fairly consistent steady point of view on the development timeline. To the extent that the environment is soft, that may influence how we forecast inventory at different price points. It may influence it would influence mix and it could influence promotion strategy, but it doesn't change how we think about the process and timing for bringing new product to market.

Speaker 9

Okay. Thanks for all that color, Jeremy. I'll just leave it there. Thank you, guys.

Speaker 1

Okay. Thanks.

Operator

Our next question comes from Peter Keith from Piper Sandler.

Speaker 10

Hi. Thanks. Good afternoon. Nice results guys. It's pleasing to see the raise to the EBITDA guide.

Speaker 10

Maybe just pick on the updated guidance. I mean the Grille outlook for flat for the year is impressive. I guess it implies 10% Grille revenue growth in the back half. And I'm wondering what kind of visibility you have to that. Are you thinking sell through continues to remain positive?

Speaker 10

Or is it really just visibility around the replenishment in this early Q4 load in?

Speaker 6

It's the latter. Yes, visibility around replenishment and then the load in Q4.

Speaker 10

Right. So if sell through were to remain positive in the back half, then there potentially could be some upside to that Grille revenue outlook?

Speaker 6

Yes, but we're sort of maintaining caution there. We are not extrapolating the sell through performance in Q2 out through the remainder of the year. I think right now the going assumption is sell through will sort of revert back to how we were thinking about it as we build the plan early in the year and we wouldn't necessarily expect positive comps in the back half of the year. So really it's more driven by those 2 catalysts, the replenishment and the product load in.

Speaker 10

Okay. And the ability to drive the positive sell through with promotions, I guess you're striking when the iron's hot and that would be in Q2 around key holidays. Is it fair to think about if Q2 has got some key holidays and there's a little bit of a low with Q3 and then maybe you could strike again with the iron's hot in Q4 around the Christmas holidays?

Speaker 3

Yes, Peter. We generally have a promotion around the holidays built around Cyber 5. And so that is planned, that has been planned. And I would say that consistent with sort of the type of promotion that we ran in the Q2, we believe that continues to be appropriate for the environment that we're in and that is also baked into the guidance that we provided.

Speaker 10

Okay, great. And then just a big picture question. As we think about the impact of lower interest rates on your business, I guess, how do you guys think about it? Is it are there direct benefits in regarding financing? Or do you think about it just more indirect as consumer gets healthier and maybe housing improves?

Speaker 10

Just framing up a lower interest rate environment and its impact on trigger would be helpful.

Speaker 3

Yes. So I'll share a couple of thoughts on that. The first is, yes, there are absolutely direct sort of correlations between interest rates and grill demand. 1 is certainly consumer financing. Americans finance just about everything in some way, from low price points all the way up to houses and a $1,000 purchase often is financed either on our website through a financing partner at retail through financing programs that they offer.

Speaker 3

And there's no question that headline news would suggest American consumers have spent their cash. They've spent they are meaningfully in debt and financing costs do matter. There's also correlation between housing transactions and new grill purchases. And while that doesn't drive most of our business, it certainly influences 15% to 20% of the business. And given where interest rates have been, housing transactions are very low.

Speaker 3

But I think the and so certainly some direct impact from a broader consumer health perspective, I think that's where we see lower interest rates. We begin a new cycle where interest rates come down, the consumer gets healthy, their debt is more manageable and consumers begin to buy again. And I would say notably in durables, which tend to have some cyclicality around interest rates and health of the consumer. Oftentimes, when rates are when interest rates are high and consumer is relatively weak, Purchases are pushed out unless they're absolutely necessary. And so we expect to benefit from that.

Speaker 3

And I think the combination of a healthier consumer, but also as investments that we've been making in product and increased investments in brand and top of funnel that we plan, we believe that we'll take share. And I think the combination of the 2 will be meaningful for our business. The last thing I would say is just in sort of zooming out and thinking about where the industry is from a unit volume perspective relative to where it's been historically, unit volumes are still meaningfully below pre pandemic levels, somewhere in the 20 plus percent range. And that's simply a function of pull forward demand, which is probably now intersecting with a weakened consumer. But if you look at the decade of industry data prior to the pandemic, this is a really resilient industry that just chugs along and grows at low single digits and we expect that the industry will rebound and it will ultimately be larger than it was in 20 19 simply because of the adoption of outdoor cooking that happened during the pandemic.

Speaker 3

So I think there are multiple industry and macro drivers that will work in our favor. They have been headwinds, but those headwinds will ultimately turn to tailwinds. And it will be good for the business when they intersect with the investments that we've been making to bring new product to market.

Speaker 10

Okay. Great. Appreciate the thoughtful answer.

Speaker 3

Thank you, Peter.

Operator

Our next question comes from Brian McNamara from Hennepore Genuity.

Speaker 8

Thanks for taking the follow-up guys. Just a quick one on the replacement cycle of Traeger Grills versus I guess the industry. Is it still 5 years for the Traeger and maybe 7 to 8 for the industry? And presumably with we'll be 5 years from the early days of the pandemic in Q1 of next year. Should we expect any kind of replacement tailwinds there if this plays out next year?

Speaker 9

Yes, you're right in

Speaker 6

that. We've continued to validate that about there's about a 5 year replacement cycle for Traeger and Par Consumer and it's 7 to 8 years for the broader industry. And yes, we are looking at as part of our strategy heading into the next couple of years is how do we capitalize on what could be a wave of consumers who purchased 4 or 5 years ago that are looking to upgrade and that lines up nicely with our innovation cycles. So that presents a nice opportunity to convert people on a new product that may have a legacy product and certainly speaks to the benefit of having a more condensed innovation cycle within what is largely a slow moving category and something that we do value. That loyalty loop is certainly something that we care about and we want to ensure that we're designing strategies around how we unlock that growing base of consumers that are ready to upgrade and something that we're most definitely focused on and have looked at it the same way as you in that those pandemic purchases are coming up on a period of time where they may be looking to upgrade.

Speaker 6

And as our installed base grows, as consumers age out, as that installed base grows, that represents a larger and larger opportunity over time.

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Key Takeaways

  • In Q2 Traeger delivered 42.9% gross margin (up 600bps YoY) and $27M adjusted EBITDA (up 25% YoY), reflecting improved supply chain costs and operational efficiencies.
  • Full‐year 2024 revenue guidance was raised to $590–605M and adjusted EBITDA to $74–79M, driven by a stronger margin outlook of 40.5–41.5%.
  • Grills sales improved 2% YoY in Q2, reversing prior weakness, and are now expected to be flat for the year thanks to successful Memorial Day promotions, replenishment, and a planned Q4 product load‐in.
  • Accessories revenues, led by the METER e-commerce business, fell short of expectations, prompting a more conservative outlook and new demand‐creation and distribution strategies to drive a turnaround.
  • The balance sheet continues to strengthen with inventory down over 40% since Q2 2022, liquidity up nearly 30%, and net debt reduced, positioning Traeger for continued deleveraging.
AI Generated. May Contain Errors.
Earnings Conference Call
Traeger Q2 2024
00:00 / 00:00