Thank you for joining and welcome to the Traeger Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a question-and-answer session at the end. [Operator Instructions] I would now like to turn the call over to Nick Bacchus, Vice President of Investor Relations.

Sir, please go ahead..

Good afternoon, everyone. Thank you for joining Traeger's call to discuss it’s fourth quarter and full year 2021 results which releases 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 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 SEC filings for a discussion of these factors and uncertainties which are also available on the Investor Relations portion of our website. You should not take undue reliance on these forward-looking statements. We speak only as of today and we undertake no obligation to update or revise them for any new information.

This call will also contain certain non-GAAP financial measures which we believe are useful supplemental measures.

The most comparable GAAP financial measures and reconciliations of the 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.traegerr.com.

This call will also include estimates regarding market and industry data that we prepared based on management's knowledge and experience in the markets in which we operate, together with information obtained from various sources, including publicly available information released by independent industry analysts and third-party sources as well as data from our internal research.

Now, I'd like to turn the call over to Jeremy Andrus, Chief Executive Officer of Traeger..

global supply chain and inflationary pressures. As we discussed during last quarter's call, we faced significant supply chain challenges and inflationary pressures related to our supply chain in the second half of 2021. I am proud of how well our team has navigated these unprecedented challenges.

We have continued to prioritize delivery of product to ensure that we can adequately fulfill strong demand by increasing production and by warehousing product in Asia.

This has been a winning strategy as evidenced not only by our fourth quarter top line growth but also by the record level of on-time, in-full shipments we experienced during the quarter. As Dom will discuss, we are not building in any improvement in the supply chain environment or related cost pressures in 2022 into our outlook.

At the same time, we are not standing still. Rather, we are focusing on driving forward our key long-term growth strategies while simultaneously managing the business for the new near-term reality. We are actively implementing cost-mitigation strategies to help bolster our short- and medium-term gross margin profile.

These strategies include price increases which are our most immediate mitigation tool; as well as manufacturing, logistics, warehousing and product design efficiencies which will benefit margins over the medium to long term.

We plan to open our new Mexico facility for mass production at the end of this year and are evaluating long-term opportunities to bring more of our manufacturing closer to our core market in the U.S. Further, our product team is bringing innovation to our production model with a focus on creating game-changing product more efficiently.

The organization is hyper-focused on identifying and executing on gross margin-enhancing initiatives. Additionally, in the face of increased costs and an uncertain macro environment, we are aggressively managing our cost structure.

We are strategically reducing and deferring certain nonessential expenses and are thoughtfully reprioritizing near-term SG&A demands and P&L. We believe this discipline is prudent given the environment.

It is critical to note that we are focused on protecting the core drivers of our brand health and are not compromising in any way our customer experience or product innovation engine.

Stepping back, we hit several major milestones in 2021 and ended the year with strong growth in the fourth quarter, allowing us to exceed our full year revenue and EBITDA guidance. We are making significant progress on our key strategic growth pillars yet remain in the early stages of achieving our potential.

Despite near-term challenges, I am extremely bullish on our business and on our ability to capitalize on our tremendous long-term growth opportunity. With that, I'll turn the call over to Dom..

Thanks, Jeremy and good afternoon, everyone. As Jeremy noted, we are pleased with our performance in the fourth quarter and remain confident in the long-term growth opportunity for Traeger. As an organization, we are focused on driving towards our long-term goals while also navigating a highly fluid near-term environment.

I will start by reviewing our fourth quarter results and then we'll discuss our 2022 outlook as well as provide an update on our first quarter trends. Fourth quarter revenues increased 31% to $175 million driven primarily by growth in grills and accessories.

Grill's revenue was up 9% to $101 million, following a 70% increase in the fourth quarter last year. Growth was attributable to a higher average selling price driven by price increases taken in the second half of 2021, partially offset by slightly lower unit volumes.

Fourth quarter unit volumes were impacted by the exit of an unprofitable distribution channel and would have been up low double digits excluding prior year sales to this channel.

Consumables revenues declined 19% to $26 million compared to the fourth quarter of last year, reflecting a normalization of seasonal ordering patterns against a very strong fourth quarter 2020 when our consumables revenue was up 121%.

Finally, accessories revenues increased 425% driven by incremental revenue from the acquisition of MEATER and strong growth in Traeger accessories. Looking at performance by market. We continue to see strong momentum in the U.S. as well as exceptional growth in Canada and rest of world.

We are in the early stages of growth abroad and we remain highly optimistic about the opportunity to grow globally. Gross profit for the fourth quarter increased to $65 million from $51 million last year. Gross profit margin was 37.4%, down 80 basis points to last year.

As we have discussed previously, inbound freight rates spiked to unprecedented levels in the second half of 2021 and continue to be our largest year-over-year margin headwind in the fourth quarter. Higher inbound freight costs negatively impacted gross profit by over 550 basis points in the fourth quarter.

Amortization of intangible assets related to the MEATER acquisition and increased warehousing expense driven by investments in additional capacity were also dilutive to margin. Offsetting these pressures was margin favorability of 380 basis points driven by our pricing actions and grill mix.

Other positive drivers of gross margin include lower outbound freight driven by the exit of a higher-cost sales channel, a higher mix of customer orders fulfilled via our direct import program; and favorability in WiFIRE connectivity cost per grill, largely due to a onetime accrual true-up.

Sales and marketing expenses were $39 million compared to $29 million in the fourth quarter of last year. The increase was primarily driven by advertising costs related to MEATER which is not a component of the 2020 comparable period.

The increase was also driven by higher equity-based compensation expense of $3 million due to the restricted stock units issued under the Traeger 2021 incentive award plan as well as higher personnel-related expenses associated with an increase in headcount in our marketing, customer experience and sales functions.

General and administrative expenses were $44 million compared to $15 million in the fourth quarter of last year.

The increase in general and administrative expenses was driven primarily by higher equity-based compensation expense of $16 million due to the restrictive stock units issued under the Traeger 2021 incentive award plan, higher personnel-related expenses, increased professional service fees related to nonroutine costs for our Traeger Provisions platform and nonroutine legal expenses.

As a result of these factors, net loss for the fourth quarter was $34 million as compared to a net loss of $3 million in the fourth quarter of last year. Net loss per diluted share was $0.29 compared to $0.03 in the fourth quarter of last year.

Adjusted net income for the quarter was $4 million or $0.03 per diluted share as compared to adjusted net income of $4 million or $0.03 per diluted share in the same period last year. Adjusted EBITDA was $14 million in the fourth quarter as compared to $14 million in the same period last year.

Adjusted EBITDA for fiscal year 2021 was $109 million, above the high end of our prior guidance range of $103 million to $108 million. Now, turning to the balance sheet. At the end of the fourth quarter, cash and cash equivalents totaled $17 million compared to $12 million at the end of the previous fiscal year.

We ended the year with $379 million of long-term debt. Additionally, at the end of the year, the company had drawn down $9 million on its revolving credit facility and $41 million under it’s receivables financing agreement, resulting in total net debt of $413 million and a net leverage ratio of 3.8%.

Inventory at the end of the fourth quarter was $145 million compared to $69 million at the end of the previous fiscal year. The increase in inventory was driven by three factors. First, we have made a deliberate decision to lean into higher inventory levels to ensure adequate supply for demand due to supply chain constraints.

Second, the cost of inventories increased due to certain macro pressures I referenced earlier, largely driven by higher inbound transportation expense and higher input costs. Lastly, approximately $12 million of the inventory increase is related to MEATER which was not in the inventory base in 2020.

We remain confident that we have the right inventory balance to meet expected demand and we continue to invest into higher levels of safety stock in response to persistent supply chain challenges. Turning to our guidance for fiscal year 2022.

For the year, we expect revenues of $800 million to $850 million, implying a year-over-year increase of 2% to 8%. We expect adjusted EBITDA of $70 million to $80 million. Let me provide additional color around our operating assumptions.

In terms of sales, we are guiding to top line growth that is below our historical growth rate but that implies growth that is well in excess of our long-term targets on a multiyear basis. There are two central factors that are influencing our 2022 sales guidance.

Firstly, we are comparing against a two year period of extremely strong growth and therefore, expect some normalization in our multiyear growth rate.

This is reflected both in sell-through which benefited from government stimulus and accelerated materially in the first half of 2021 as well as sell-in which outpaced sell-through in the first half of as retailers restock low-channel inventories.

Secondly, we are taking a more cautious approach relative to consumer behavior in our 2022 planning given emerging pressures on consumer confidence. These include broad-based inflationary pressures and growing geopolitical risks.

Looking at current trends, we have seen a deceleration in sell-through at retail over the last several weeks coinciding with these growing pressures on the consumer and are assuming a continuation of these trends in our 2022 revenue guidance.

These dynamics will disproportionately impact first quarter revenue growth which is our strongest growth quarter last year. We expect that quarterly revenue seasonality after the first quarter in 2022 will look similar to 2019, with lower seasonality in Q2 versus 2019 and higher seasonality in Q4 which is MEATER's largest quarter.

Specifically for grills, the midpoint of our full year guidance assumes that grill revenues in the first half of 2022 are down double digits as we lap the strong sell-in experience in the first half of 2021. We expect sequential improvement in grill revenue growth in the back half of the year relative to the first half.

However, we are assuming negative grill revenue growth for the full year. We know our grill business has delivered strong multiyear growth. And even with this decline, 2022 grill revenues are expected to have grown at a three year CAGR in the low to mid-20% range.

In terms of gross margin, we are expecting continued pressure versus 2021's full year growth rate and are modeling a full year gross margin range of 34% to 35%. In order of magnitude, we expect the annualization of higher inbound freight rates and increased input costs to be the largest drags on our gross margin.

We expect these pressures to be partially offset by pricing actions taken in the second half of 2021 and the first quarter of 2022. From a pacing perspective, we expect gross margin in the first half of 2022 to be higher than our full year rate.

I'd like to spend a moment putting inbound freight costs into perspective as this is the largest driver of gross margin decline relative to our 2020 gross margin rate of 43.1%. Compared to pre-pandemic levels, container costs have increased by a factor of three to four times and we are seeing increases in excess of $10,000 per container.

Having shipped over 6,000 containers in 2021, the cost of inbound transportation materially impacted both gross margin and EBITDA. We expect that inbound container rates will track above $10,000 through 2022 which will continue to pressure gross margin. In terms of SG&A, we are tightly managing expenses to help offset the continued margin headwinds.

And we'll continue to invest in the core growth engine but we'll delay other investments as we navigate a highly fluid macro environment. Note that SG&A in the first half of 2022 will be comparing to the period before MEATER was in our expense base.

While we typically do not give quarterly projections, we are providing first quarter guidance as we are 11 weeks into the quarter.

We're expecting first quarter revenues to be between $208 million and $212 million, implying a decline of between 10% and 12%, with grill revenues expected to decline in the low to mid-20% range, offset by materially higher accessories revenue driven by MEATER.

We expect first quarter gross margins to decline sequentially compared to fourth quarter's rate and expect EBITDA in the range of $22 million to $24 million. Looking beyond 2022, I want to touch on some of the medium- to long-term gross margin drivers we have in place. Firstly, price is a key lever that we will continue to evaluate to manage margins.

We implemented two price increases in the back half last year and raised price again on certain grills and accessories and on pellets in early 2022. Secondly, we are thinking transformationally around design and production.

We are working together to drive changes in design, manufacturing and supply chain processes which we believe will result in higher product margins and lower costs. Further, we will look to optimize the assortment over the medium to long term, launching products that are accretive to our overall margin profile.

Overall, we continue to feel extremely optimistic about Traeger's long-term growth path as we continue to disrupt the outdoor cooking industry with new product innovation, grow the Traegerhood, increase brand awareness and penetration and expand Traeger abroad. And with that, we'll open the call to questions.

Operator?.

[Operator Instructions] We have our first question on the phone line from Randy Konik of Jefferies. Sir Randy, your line is open..

Yes, thanks a lot. I guess, Dom, this question is more for you. Can you give us some added perspective and color on just how much sell-through has slowed and then just how much that has caused sell-in to change? Just curious there.

And then, I think last quarter, in the third quarter, there was this trend line where you were seeing ASPs up through mix shift.

So is the mix shift now changing to where the consumer is becoming more price-sensitive that's informing you to get a little bit more guarded on the macro? Or -- I'm just trying to get a sense of how much of this revenue caution is a function of a true change in how the consumer is buying and becoming maybe more price-sensitive, rather than maybe there are some COVID demand hangover in the outlook or what have you.

So just curious there..

Yes. Yes, definitely. See, on the first question with regard to sell-through, we -- how we model demand internally is we sort of fit the model between sell-in and sell-through trends and we forecast sell-through. And we've been watching this obsessively really since the beginning of time, when Jeremy and I started.

But certainly, as we implemented price increases starting in late Q3 and then with a second price increase in Q4 and then subsequently a new -- a price increase in early Q1 of this year. And I would say two things. One, there were really no outliers when we implemented price that would suggest that it was potentially the wrong decision.

We understood that there were some trade-offs between volume and price. That, in effect, is helping sort of offset the cost pressures. And so right decision for sure.

And largely, the sell-through trends were tracking in line with our forecasted expectations until about three weeks ago, in which case we were surprised to see a fairly substantial deviation from our sell-through forecast.

And so we're sort of reacting to that without recognizing that it's based on two data points with a third positive data point based on the latest sell-through trend.

And so it's something that we're trying to get a little bit smarter on but believe that it's important to react based on limited points of data to ensure that we can stay nimble throughout the course of the year in the event that the sell-through trends continue to decline beyond our expectations.

And in conjunction with that, we actually believe that over the last three weeks, these trends coincide with some of the macro factors that are probably placing additional pressure on consumers. In terms of channel mix, I'd say two things.

I think the first is that when we raised price above $1,000, I think we validated a fair amount of inelasticity at those price points. I think what we've learned and I think this is something that's accelerating the sell-through trends, is that there's a little bit more price sensitivity below $1,000.

And that's something that we're sort of thinking through as the year progresses in the event that we want to pivot or make a different decision there. So that's something that we'll continue to evaluate.

But there are multiple factors baked into these trends that we believe require patience but certainly prudence as we manage our P&L and potentially restate it based on these sort of new -- these new norms in 2022.

And I think what gives us comfort is that although we recognize there was a pandemic pull-forward, if you look at kind of a two and three year stack on sell-through trends, they're incredibly strong, right? And so we're dealing with a very challenging Q1 comp from a sell-through standpoint.

But there has been sort of an increase to the watermark at which this business can perform that we believe sort of reset the bar at a higher level. And obviously, that hasn't changed the fact that Q1 comps will be challenging regardless and we anticipate some of that. They're just accelerating.

And so it's something that we'll continue to watch but that's sort of the dynamic that's at play today..

Got it. And then just last question is on the down year-over-year anticipated EBITDA dollar guide. Is that effectively -- is that all freight kind of increases factoring into that number being a lot lower? Just want to just unpack that a little bit more. Obviously, there's lower sales kind of expectation but I'm sure there's a margin compression angle.

So I'm just curious on what that is..

Yes. There definitely is. So as we think about gross margin for full year, we're sort of pegging a range of between 34% and 35%. It's really a tale of two halves, right? I think when you look back to 2021, H2 was when we really felt and were somewhat surprised by the dramatic increase in inbound transportation costs.

That clearly is annualizing for full year 2022 which is placing extra sort of pressure on the first half of this year. And that certainly is one of the larger factors.

I'd say the second factor that we're sort of anticipating which isn't fully reflected in what we're seeing in Q1 per se but just based on where oil prices have gone and the fact that we have seen steady increases in outbound transportation costs, we're anticipating in our model that, that becomes a somewhat more substantial headwind in 2022.

So those are two factors that we're watching closely. Clearly, there are other components to the gross margin pressure as we annualize some of the input costs or commodity costs tied to our grills specifically, where we felt more of that in the back half of last year which is now annualizing this year.

And so fortunately, the price offset is a nice addition to how we sort of manage through this period of volatility. But there are pressures persisting on the transportation side that we don't anticipate to alleviate this year.

And in fact, there are signals that they may increase relative to what we were seeing last year, especially on the fixed side of contracts..

Understood. Thank you so much..

Thank you, Randy. We now have the next question on the phone lines from Peter Benedict of Baird. Sir Peter, please go ahead..

Hey guys, thanks for the question. So, I guess two questions. One, I'm curious if you have any stats to share around grill usage trends, maybe what you saw last year, how that's compared, has that kind of topped out? Is it continuing to improve? Is it slowing? And a read on consumables from that.

And then can you give us more color what channel you exited? I think, Dom, you had mentioned that as a factor in 4Q. That's my first question..

Yes. Definitely. Yes, so on grill usage, yes, we haven't measured any trends that are contrary to what we've seen in -- what we've measured over the last, call it, 18 to 24 months. I think the trends are still positive. Consumers continue to be engaged with the product.

And I think for -- based on the IoT-connected grills that we can sort of measure usage by, it's positive. And so we're certainly happy with that. There really hasn't been -- as you think about these macro dynamics, they don't necessarily impact how consumers engage with our product post purchase.

On the consumables side, we have been anticipating some normalization of attach. As you look at '19 compare it to '20 and then certainly the overhang in '21, there was definitely a spike in attach.

And we're seeing that normalize somewhat as we kind of track through the back half of '21 and anticipate that, that may sort of find the right normal in 2022. And we never believed that the 2020 levels were going to persist. So no red flags there.

We're happy with how our consumables business is tracking, the attachment rates as well as just grill usage generally across our connected products..

I would just add one other data point that I think is relevant. Super Bowl of this year was our largest cooking day, a brand engagement day ever. Connected cooks were up 55% year-over-year from the prior year's Super Bowl. So I shared some of the brand engagement statistics on social.

We're seeing it validated from a cooking behavior perspective as well..

And then, can you repeat the second question?.

Yes. I was just curious on the unprofitable channel that you exited..

Oh, yes, yes, sorry. Yes. Yes, we won't give specifics on the channel. It's been a great channel for the brand for a number of years. Unfortunately, the way the program is configured, it just doesn't work in this macro environment from a transportation cost standpoint. And so it became unprofitable. And we made a decision to shutter that business.

And so when you normalize for that component, both on a full year basis as well as in Q4 specifically, there's actually a fairly meaningful return to growth on the Traeger side of the business both from a unit and a revenue standpoint. It was definitely the right decision, especially in this environment.

We don't want to operate in channels that are dragging profitability and/or operating at a loss. And that was the genesis of the decision to pull away..

Yes. I would just add, it was not a core channel to our business and it was not a growing channel..

Yes..

Great. Thanks, guys..

Thank you. We now have another question from Simeon Siegel of BMO Capital Markets. Simeon, please go ahead. I’ll open your line..

Great, thanks. A quick -- few quick ones for me. So do you guys have a view -- the latest data point, the sell-through, do you have a view of whether that was Traeger or industry? So would love to hear that. The second thing, I think you mentioned pricing on the pellets.

What are you seeing on that, so post that test or that price? And then, just a little higher level; Jeremy, your comments about this coming year sound really exciting qualitatively. So maybe as you think about within that guidance -- and the conservatism is appreciated.

So as you think about that, Dom, any way to think about units versus price, how you're thinking about that built into your grill revenue?.

Yes. So Simeon, let me hit the first one. We do track market share and we will know more when we see the first quarter market share. I can say a couple of things qualitatively. What we hear from our retail partners is that the category is down and that Traeger is down less than the category.

So our expectation is that we will continue to take share as we have done historically. The other piece I would add and again, this is anecdotal, I have been to two trade shows over the last three weeks. And we've spoken to hundreds of retail partners and shop owner, shop managers and the brand energy is as strong as it's ever been.

So our belief is that the position is exactly what it has been, that it's growing and that we will fare better than the category in 2022..

Yes. And on grill ASPs, I mean when we made the decision to raise price, there was clearly -- that decision was clearly made in an effort to obviously manage the higher costs to sell our product. And we understood that, that would come at the cost of some unit volume. And so that was definitely deliberate.

As you fast forward to 2022, we will look at kind of sub-$1,000 and determine as we better understand data if we need to make adjustments to our entry price points. Certainly not something we're going to do in the immediate term but something that we will look at kind of -- well, I should say, short term but kind of we'll look at medium to long term.

And from an ASP standpoint, we are seeing meaningful growth in ASP for grills in 2022 which is certainly driven by the price increases that we made as well as the introduction of new innovations which from a channel mix standpoint will also elevate ASPs..

Yes. And I would just add, our expectation is that units will be up double digits on a three year CAGR in 2022 based on the guidance that we've shared..

Great.

And Dom, did I mishear? Did you talk about taking pricing on pellets as well?.

Oh, yes. We did take price on pellets, yes. Yes..

And any early signals on that?.

And I think -- yes, yes. No signals that it's had really any impact whatsoever. I think that, that continues to be a great sort of embedded revenue stream for the brand.

I think we have permission to take price there in part because I think the offering, as we think about price pack architecture and sort of premiumization of the experience with our pellets, the quality, the packaging. We invest in that product and therefore, we believe that we have some permission to take price.

I think when you look at kind of an average or a blended average price increase for the 2022 period, it's probably like $1.50 to $2 and that really hasn't impacted unit volumes based on what we can measure..

Great. Thanks, guys. Best of luck for the year. And thanks for the color [ph]..

The next question comes from John Glass of Morgan Stanley. Sir, please go ahead when you’re ready, John..

Thank you. Good afternoon.

First, Jeremy, on the new grill that you're launching next week, can you maybe provide what the ASP is? Like what is that relative to your baseline high-end growth? And how meaningful is that in your forecast, the sales forecast for '22? Is that a meaningful contributor this year? Or do you think this is your investment, you sort of get ahead of it and talk about the grill from a marketing perspective, that you think the impact is more in '23 from a sales perspective?.

So first of all, I would love to tell you much more about it. What I can tell you is that it is premium. It is meaningfully premium to the top end of our line right now. And again, as I said, if you look at our history of cash grade innovation, we launched Timberline in 2017.

We brought all of that technology plus additional technology in the direct drive all the way down to our Pro 575 which was priced at $799 at the time. So this is premium. It will contribute to sales. We believe those sales will come mostly from specialty given that's where it's going to be largely distributed.

And it's not a meaningful driver of sales in the year but we expect that the platform will create very meaningful sales in '23 and beyond..

That's helpful. Could you also remind us, what proportion of your sales are in that sub-$1,000 category where you're seeing price sensitivity? And Dom, did you, for conservatism's sake, bake in into the forecast if there is going to be maybe pricing actions? I'm assuming you're thinking reductions to stimulate sales.

Did you forecast that in your gross margin forecast to be conservative? Or would we have to rethink gross margin if you were to do some pricing actions in the sub-$1,000 grills?.

Yes. So I'd say on the first question, no, that is not in the model. Again, this is sort of a reaction to a couple of weeks of sell-through data. So it's something that we'll watch.

There are other ways to manage margin to the extent that we do lower price on entry-level grills, where we're learning that our consumers are more sensitive which I think is also compounded by the fact that we're in this period of record inflation, at least over the last 30-plus years as well as just maybe some of the other aspects to the macros that are putting pressure on consumer.

And so again, it's something on the table. And to the extent that we lower price and believe that's the right decision, it may come with some offsets that allow us to sort of manage the margin impact accordingly.

And then obviously, from a unit volume standpoint, as you sort of look at the spread across our various price points, we certainly do a lion's share of the volume below $1,000.

And I would say that it's probably weighted slightly higher to products below $1,000 on a revenue basis and maybe slightly less, above $1,000 but there's more parity between the two price bands on a dollar basis than on a unit basis..

Okay, got it. Thank you..

Thank you, John. We now have Peter Keith of Piper Sandler. Sir, please go ahead when you’re ready, Peter. Your line is now open..

Hi guys, this is Matt [ph] on for Peter. Just two quick ones for me, kind of both related to gross margin. I think the trajectory of your input costs, we're kind of just curious on what we should be monitoring and maybe what are the main components in your old steel.

And then also kind of in regards to freight, can you remind us of your exposure in terms of your contract versus spot market exposures? And I guess, will there be a difference in 2022 versus last year?.

manage risk that we're comfortable with but provide enough sort of cushion within our needed capacity on containers to take advantage of any downward trends in prices overtime..

That makes sense. I appreciate it..

Thank you. We now have Sharon Zackfia from William Blair. Sir, please go ahead when you’re ready, Sharon..

Hi, good afternoon. Not a sir yet, but you’re still young. So on the door count, you talked about entering Kroger in March and Best Buy in the fourth quarter.

Can you talk about, as we think about grills and accessories and consumables, how much you expect the door count to increase in 2022 for those categories relative to '21 when all is said and done? And then on the Mexico facility, just assuming things are where they are as it relates to freight and so on, how much benefit would you see to gross margin from Mexico in '23? And how much of your production can you actually flow through Mexico?.

Sharon, great questions. On the consumables side, I would say, over the past couple of years, we've been focused on driving pellets into grocery, just given the convenience and what we've learned in our consumer research. On the rubs and sauces, we really haven't sold them meaningfully outside of our core channels.

And so they will -- it will increase dramatically in terms of distribution, number of doors. And so that is -- that will be meaningful. In terms of Mexico, I guess I would step back and say, it takes time to both open a facility, refine process, get efficient and meaningfully scale volume.

And so I would expect to -- as we see the macro conditions, particularly around transportation, move in our favor that we will see more of that first as a contributor to cost.

But I would also say that the -- if there is a positive to what we're experiencing right now, we are absolutely thinking about configuring our business differently longer term and so more methodical and thoughtful design for manufacturing from a product perspective. We're thinking differently about how and where we manufacture, where we assemble.

Those won't impact '23 but we certainly believe that they will impact '24 and beyond and that they will be very meaningful. So we are innovating in how we manufacture but I would expect '23 to be driven more by the macro environment. And we'll see what it looks like when we get there..

And I think I would just maybe add to that, I think long term, the goal is to diversify our sourcing base. And to the extent that we've built and sort of configured Mexico in a way to scale appropriately, we could envision sort of an equal weighting of volumes or sort of manufacturing volumes across each location.

And I would just add to Jeremy's comment, too. This isn't simply about optimizing the cost of the sort of the material cost of the grill excluding the burden which is largely transportation. I mean that piece in and of itself coming pre-pandemic was certainly a manageable component of landed costs. It is substantial.

And to the extent that there are structural changes to inbound transportation prices, where they may not sit at $10,000 to $15,000 but could find their way down to $5,000 depending on which port -- which coast they're shipping to, that is a massive opportunity that ties into what Jeremy is talking about where we design for manufacturability but also explore ways to increase loadability on the container which I think there are some really exciting learnings there that could dramatically improve the cost structure and help manage through both medium- and long-term risk to the extent that these container rates become structural longer term.

So, we have some really exciting levers that I think are sort of built off of this environment and it's requiring a rethinking. And I think we can find some real nice margin improvements as we sort of track towards these initiatives..

Can I ask one quick follow-up? Are there any provision start-up costs that we should expect bleeding into '22?.

Yes, great question. So I think as we look at '22, we're clearly reconfiguring SG&A -- or I should say sort of resizing it based on our long-term financial model, right? I mean that really guides how we manage investment capacity.

And with 800 basis points of sort of margin compression from kind of 2020 to 2022, at least as forecasted, it just requires that our SG&A reset so that it's in line with our long-term financial model. And so that's kind of goal number one. And within that, we are going to focus directly on the core, right, like that's a guiding principle.

We want to ensure that within that focus, we're really driving in-year high-return investments and maybe saving other longer-term investments or pacing those differently because certain things can wait, right? Like I think priority number one is navigate through what is becoming a fairly challenging 2022.

And we'll stay nimble to the extent that trends improve and sort of increase investment capacity to then maybe accelerate certain investments that we're going to delay.

And that ties into provisions as well, right? Like in this environment, it's just hard to keep a new initiative or a new business unit sort of pacing from an investment standpoint as it was previously designed.

And just given the size of the TAM and the belief that this could be something that's meaningfully accretive to the business long term, there's sufficient time and I think a permission, to be patient.

So we're going to scale that back fairly dramatically and really focus with the team in place on continuing to test product markets that optimize unit economics and keep kind of overhead low and really manage burn rate well below what you saw in 2021 to the point where it just won't be impactful to SG&A.

So that is a component of sort of how we'll be configuring or resizing SG&A this year..

Great [ph]..

Thank you. We now have our final question on the line from Joe Feldman of Telsey Advisory Group. Sir, please go ahead, Joe..

Great. Thanks for taking the question, guys. Wanted to ask on the inventory; you did a great job explaining why it's elevated.

But I guess I was curious, have you leaned in a little too much at this point, considering the sell-through that you're forecasting for this year? And maybe how should we think about the inventory level through the year? Like what would end more at a flattish level just given the big increase we just saw this quarter? Or how should we think about that?.

Yes. It's a great question. I would say no, we haven't leaned in too heavy.

I mean when you look at how uncertain the macro is and the fact that even the COVID-19 piece continues to kind of rear its ugly head in Asia or in China specifically and just how Draconian they are when there's a single case and suddenly, they're shutting down offices and closing ports, maintaining a heavier inventory balance is definitely the wise thing to do.

And I think it's a real advantage we have today. And so it's taken -- it's definitely investment that we've made and we are carrying higher inventory levels than ever before. Obviously, there have been some shifts in our forecast this year based on the sell-through trends which we'll continue to watch.

But I think I'd say two things to answer your question. One, we don't deal with obsolescence, right? And so this is full price, healthy inventory, just heavier.

I'd say, two, we do have -- we are resetting the inventory level to the extent that what we're seeing in the sell-through trends persist and anticipate that by year-end, we will bring those inventory levels down.

So where last year, you're looking at DSOs on an annual basis of roughly 111 days, we think that it's appropriate to maybe target something closer to four turns by year-end and to ensure that there's a positive sort of cash flow component to working capital by end of year.

So we'll definitely right-size inventory as we persist through the year and sort of learn new things.

And our demand planning team is tied to the hip with the sales team, with our factories in China is just something that we manage on a weekly basis and have real sort of -- we have levers and/or flexibility to sort of fine-tune our inventory position as we track through the year as we sort of marry kind of the macro risk with trends, either north or south, based on what we're seeing in sell-through.

So, we don't -- we feel comfortable with our inventory position. But clearly, with the pressure that gross margin is placing on cash flows and on EBITDA, that is something that we will be focused on to ensure that we're optimizing working capital in accordance with that dynamic..

Got it. That's really helpful. And then just the follow-up I had was I know you guys talked a lot about new doors both for grills, for consumables. Can you quantify like just the number of new doors you're thinking this year or roughly? It just might be helpful for us..

Yes. I mean, I think where you'll see the largest increase in doors would be on the consumables side, so the relationship with Kroger. I wouldn't anticipate significant door increases on the grill side. I think our point of distribution for grills are largely locked in.

And we continue to explore new opportunities, but in 2022, you won't see much retail expansion on the grill side..

Okay, that’s helpful. Thanks, guys. Good luck with this quarter. Thank you..

Thank you..

I'd like to hand it back to the team for some closing remarks..

I just want -- thank you. I wanted to say, first of all, we appreciate the thoughtful questions and conversation and just add that from my original -- my initial comments, now we have deep confidence in the position of this business, this brand, long term but even more confidence in the quality of our team. This team is committed. They're fired up.

They're ready to not just grind out the current moment but build something significantly more compelling for the future. And we're excited about it. So we appreciate it and look forward to being in touch over the coming weeks..

Thank you for joining. This does conclude today's call. You may now disconnect your lines..