Good afternoon. Thank you for attending today's Traeger Fourth Quarter and Fiscal 2022 Earnings Conference Call. My name is Megan and I'll be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to Nick Bacchus with Traeger. Nick, please go ahead..

Good afternoon, everyone. Thank you for joining Traeger's call to discuss its fourth quarter 2022 results, which were released this afternoon and can be found on our website at investors.traeger.com. I'm Nick Bacchus, Vice President of Investor Relations at Traeger.

With me on the call today are Jeremy Andrus, our Chief Executive Officer; and Dom Blosil, our Chief Financial Officer.

Before I get started, I want to remind everyone that management's remarks in this call may contain forward-looking statements that are based on current expectations and are subject to substantial risks and uncertainties that could cause actual results to differ materially from those expressed or implied herein.

We encourage you to review our annual report on Form 10-K for the year ended December 31, 2022 once filed and our other SEC filings for a discussion of these factors and uncertainties, which are 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 including adjusted EBITDA and adjusted EBITDA margin.

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

Thanks, Nick. Thank you for joining our fourth quarter earnings call. Today, I will discuss our fourth quarter results and provide an update on our strategic priorities as well as our outlook for 2023. I will then turn the call over to Dom to discuss our quarterly financial performance and to provide further details on our fiscal 2023 guidance.

2022 was a challenging year for Traeger. After two years of outsized growth, the dramatic shift in consumer spending patterns away from big ticket grillable goods to travel and leisure, along with lower consumer confidence caused by inflation and geopolitical turmoil, led to unprecedented pressure on demand in the grill category.

In the face of a deteriorating backdrop, we took swift and decisive action during the year to position Traeger for enhanced financial flexibility and to lower costs.

I am pleased with our team's execution of our near-term tactical priorities and I believe we have made demonstrable progress, positioning us to successfully navigate what likely will be a continued volatile environment in 2023 and to emerge a more efficient company.

It is important to note that we feel strongly that the current environment does not impact our long-term opportunity to significantly grow the Traeger brand globally.

Our brand is healthier than ever and despite a tough backdrop in 2022, we successfully launched our new Timberline grill, drew up a brand awareness to an all-time high, saw meaningful growth in social media engagement, drove an industry-leading Net Promoter Score and realized strong growth in our MEATER business.

We ended 2022 with fourth quarter results that were better than anticipated, which allowed us to exceed our annual guidance.

Fourth quarter sales were $138 million, putting full year revenue $16 million higher than the upper end of our guidance range while fourth quarter adjusted EBITDA was $7 million putting the year $7 million ahead of the high end of our annual range.

During the quarter, we strategically increased our promotional cadence extending our holiday promotional period. As we discussed previously, we leaned into promotions to activate consumer demand in an effort to accelerate the reduction in our retail partners' inventories.

Our approach was strategic and targeted with a particular focus on promoting real SKUs where inventory balances were greatest. Our strategy was successful and contributed to better-than-expected sell-through of grills in the quarter, which drove upside in replenishment activity.

Sell-through grills significantly outpaced sell-in the fourth quarter as retailers continue to aggressively destock resulting in materially improved inventory levels in the channel at year end. Additionally, we saw upside in our direct-to-consumer business through the holiday period.

Finally, our accessories business outperformed driven by a very strong performance at MEATER. MEATER is a holiday-driven business and the MEATER team delivered outstanding results in the fourth quarter closing off a great first full year under Traeger ownership with strong double-digit growth and solid margin performance.

Over the last two quarters, we have discussed our key near-term priorities to position Traeger for the current environment. These initiatives are rightsizing inventories, reducing our cost structure and driving improvement in gross margins.

The organization's universal focus on these tactical priorities in the fourth quarter allow us to make significant progress in these areas.

In terms of rightsizing inventories better-than-expected sell-through of grills in the quarter as well as continued destocking by our retail partners drove meaningful improvement in weeks of supply in the channel.

Furthermore, lower production levels in Asia combined with improved replenishment activity drove a reduction in our balance sheet inventories with grill inventories and particular declining meaningfully versus the third quarter.

In terms of our cost structure, our actions in 2022 as well as ongoing expense discipline contributed to our ability to drive EBITDA upside in the fourth quarter. As we look to 2023, we will continue to be highly focused on managing expenses.

In addition to the $20 million in annualized cost savings measures, we have already implemented we have identified additional savings opportunities for 2023. The team is hyper-focused on driving efficiencies in the business and we will stay highly disciplined as we move through the year. Our final near-term strategic priority is to drive gross margin.

Over the last year, our gross margin task force has evaluated and implemented over 75 initiatives across product, packaging, transportation, logistics and design. As Dom will discuss, we are anticipating gross margin expansion in 2023.

We expect this expansion to be driven by both internal initiatives as well as a benefit of lower input costs including materially lower inbound freight rates.

As we've noted previously, we expect that we won't see the full benefit of lower input costs until after we work through the higher cost inventory on our balance sheet, which we believe should be in the second half of 2023. While we are encouraged by the progress we made in the fourth quarter, we are taking a cautious approach to our 2023 planning.

Our sales guidance of $560 million to $590 million implies a 10% to 15% decline versus 2022. There are several factors driving our cautious top-line outlook. First, it is unclear when consumer spending patterns will normalize and when the outdoor cooking category will return to sustained growth.

Second, the outlook for the macroeconomic environment remains highly uncertain with the full impact of the Federal Reserve's monetary tightening policies yet to be felt, inflation still elevated and the housing market showing deteriorating fundamentals.

Finally, as we discussed last quarter, retail destocking will continue to pressure our selling in the first half of the year as our retail partners continue to reduce inventories. We expect that 2023 will be a tale of two halves for Traeger and we are planning to return to topline growth in the second half of the year.

It is important to note that the expected growth in the second half is not predicated on an improvement in the macro environment, but as a reflection of our expectation for more normalized channel inventories, as well as lapping the large topline declines we experienced in the second half of 2022 due to retailer destocking.

Despite forecasting a decline in sales for the year, we are guiding to an increase in EBITDA. In the current environment, we are focused on efficiency, profitability, and cash flow and our ability to drive this improvement is a direct result of our cost and gross margin initiatives as well as a more favorable input cost environment.

Thus far I have discussed our progress on our tactical initiatives, which will allow us to navigate the current environment. However, we also remain committed to executing against our long-term opportunity and this ties back to our strategic growth pillars. Our first growth pillar is to accelerate brand awareness and penetration in the United States.

We ended 2022 with 3.5% penetration of the 76 million grill-owning households in the U.S. with our most penetrated markets in the mid-teens. Despite a softer marketplace and reduced capacity for top of funnel marketing, our brand awareness continues to grow and we believe that the energy around trade is stronger than ever.

Engaging our community is one of our most effective tools to drive awareness as we know that Traeger owners are vocal advocates for our brand. In the fourth quarter, community engagement and the Traeger of his passion for the brand was particularly evident during Thanksgiving.

We're not traditionally thought of as an important grilling day, Thanksgiving is one of our largest peak days of the year with members of the Traeger and across the country delighting their friends and family with Traeger smoked Turkey in sites.

This year, we created unique content with our Traeger Thanksgiving cooking series, featuring Matt Goodman and Chef Timothy Hollingsworth with recipes and techniques focused on perfecting Thanksgiving on your Traeger.

The Traeger that was at full force on Thanksgiving and engagement on social networks was strong with video views up 80% year-over-year across social platforms and influencer impressions up 25% to last year.

Fourth quarter capped a phenomenal year in terms of engagement and we saw impressive growth in our social KPIs with 18% growth in followers across platforms, user-generated content post up nearly 50%, impressions up 33%, and video views more than doubling for the year.

We continue to drive awareness and penetration through enhancing our in-store merchandising with key retail partners. At Home Depot, we made serious inroads in elevating the retail experience for Traeger customers in 2022.

We ended the year with 500 Traeger Island doors, which prominently display Traeger product on an elevated fixture and we now have 900 two-bay pellet cluster doors with Flex Wall, our Traeger branded bay experience.

Our merchandising strategies are not only elevating the Traeger brand to the consumer, but they are driving sales productivity as Home Doors with these merchandising enhancements materially outperformed standard doors in the fourth quarter.

Moreover, in the fourth quarter, we launched a national merchandising program for MEATER at the Home Depot, with MEATER's best-selling SKU, MEATER Plus, now available in Home Depot stores across the country. Our next growth pillar is to disrupt outdoor cooking through product innovation.

After a big year for innovation at Traeger in 2022, with the introduction of our new Timberline, we have kicked off another year of meaningful innovation, with two new grill launches in 2023. First, on February 15, we launched our new Ironwood grill.

Our new Ironwood feature several key innovations, that have been cascaded down from the new Timberline at an affordable price. This includes our smart combustion technology, the integration of the pop-and-lock accessory rail and the easy clean grease and ash keg.

The new Ironwood brings significant innovation, and technological advancements at an attractive price. Next on February 22, we launched the new Traeger Flatrock, our premium flat top grill. The griddle segment has been growing very strongly in the last several years.

However, our Flatrock is like nothing else in the marketplace and solve several consumer pain points.

Our griddle features are in-house design true zone cooking areas, which allow for greater precision across separate temperature zones, a system of stainless steel burners, which eliminates having cold spots at our FlameLock construction, which recesses a cooktop inside the cooking cavity, locking in heat and blocking out wind.

We believe our Flatrock is the best and most innovative griddle on the market. Early -- the product has been fantastic, and the buzz-generating on social media, has been greater than any other launch in our history.

We have taken a disciplined approach to launching Flatrock, with a limited launch at the start, we see significant runway in terms of expanded distribution going forward. Our next strategic pillar is, driving recurring revenues. In the fourth quarter, our consumables business modestly outperformed our expectations.

Sell-through pellets remained stable and sales at retail, were in line with prior year in the fourth quarter, which demonstrates the resiliency of this product segment. Further, our line of Sauces & Rubs continues to see strong growth, thanks to new flavor additions and growing distribution in Kroger [ph] and other grocery accounts.

In the fourth quarter, we launched two new hot sauces, Carolina Reaper & Garlic and Jalapeno & Lime. In 2023, we expect that distribution will continue to build for rubs & sauces in the grocery channel as Traeger seeks to grow brand awareness, and ensure consumables products are always convenient to purchase.

Our last strategic pillar is to expand the Traeger brand globally. In the fourth quarter, we were encouraged to see sell-through of our grills and our retail partners in Canada and Europe, that was ahead of expectations, which allowed for an improvement in in-channel inventories in these markets.

While we believe the macroeconomic environment in our international markets will remain challenging in the near-term, we are excited about our 2023 initiatives to drive awareness and growth of the Traeger brand abroad.

We continue to add points of distribution, in key international markets, but remain highly focused on driving same-store sales growth in 2023 and beyond. We are driving productivity through several key initiatives. First, we are bringing innovation to our overseas markets. In January, we launched our new Timberline in European markets.

And in February, we launched our new Ironwood in Europe and Canada. Next, we are empowering our international sales team, to focus on in-store growth drivers including merchandising, demos and retail associate training.

Last, we are segmenting our international retailer base to incentivize increased investment into the Traeger brand, from our most productive retail partners. Overall, we remain incredibly excited about the long-term opportunity for Traeger.

As we move into 2023, we are focused on executing against our near-term strategy, which will drive efficiencies in our business and position the company for growth in the second half of the year and beyond.

I remain as confident as ever in the Traeger brand, and I believe we have the right plans in place to position the company for both near and long-term success. And with that, I'll turn it over to Dom.

Dom?.

one, pricing and mix benefit of 230 basis points; two, 110 basis points of favorability related to MEATER, which generated a higher than company average gross margin in the fourth quarter; and three, currency favorability and 110 basis points due to the strengthening of the US dollar versus renminbi.

Sales and marketing expenses were $28 million compared to $39 million in the fourth quarter of 2021. The decrease was driven primarily by lower stock-based compensation, lower professional fees, and reduced employee costs. General and administrative expenses were $24 million, compared to $44 million in the fourth quarter of 2021.

A decrease in general and administrative expense was driven primarily by lower equity-based compensation, lower professional service fees, and reduced employee costs.

Fourth quarter operating expenses benefited from a restructuring and cost savings actions taken in early third quarter of 2022, and we are on track to achieve more than $20 million in annualized run rate cost savings.

As a result of these factors, net loss for the fourth quarter was $29 million, as compared to a net loss of $34 million in the fourth quarter of 2021. Net loss per diluted share was $0.24 compared to a loss of $0.29 in the fourth quarter of 2021.

Adjusted net loss for the quarter was $8 million or $0.07 per diluted share as compared to adjusted net income of $3 million or $0.02 per diluted share in the same period in 2021. Adjusted EBITDA was $7 million in the fourth quarter as compared to $13 million in the same period of 2021.

Fourth quarter adjusted EBITDA was better than our expectations, which allowed us to exceed the high end of our annual guidance by $7 million. Adjusted EBITDA upside was driven by outperformance in fourth quarter sales relative to what we've implied in guidance as well as gross margin upside relative to our expectations.

Now turning to the balance sheet. At the end of the fourth quarter cash, cash equivalents, and restricted cash totaled $52 million compared to $17 million at the end of the previous fiscal year. We ended the quarter with $404 million of long-term debt.

In December, the company drew down $12.5 million from a delayed draw credit facility, which is expected to be used in the second quarter of 2023 to fund the payment of the MEATER earn-out relating to 2022 performance.

Additionally, as of the end of the quarter, the company had drawn down $12 million under its receivables financing agreement and $72 million under its revolving credit facility, resulting in total net debt of $436 million. From a liquidity perspective, we ended the fourth quarter with total liquidity of $95 million.

Inventory at the end of the fourth quarter was $153 million compared to $142 million at the end of the fourth quarter of 2021 and $156 million at the end of the third quarter of 2022.

While we expect that the process of inventory optimization will continue in the first half of 2023, we are pleased with the progress we made in the fourth quarter as grill inventory declined substantially versus the third quarter and the year-over-year increase in total inventory moderated to 8% from 40% in the third quarter.

We are also encouraged by the progress we made in terms of channel inventory in the fourth quarter as our strategies to drive consumer demand combined with our retail partner destocking efforts is opening a meaningful improvement in weeks of supply.

During the quarter, sell-through and grill has outpaced our plan, which allows retailers to work down existing inventory on hand. While improved inventories in the channel remain above target levels. We, therefore, are planning for continued retailer destocking in the first half of 2023.

While this will negatively impact our sell-in during this period, we believe that it will allow for a healthier retail channel and set the company up for growth in the second half of the year and beyond. Next, let me discuss our guidance for full year 2023.

For the year, we expect revenues to be between $560 million and $590 million implying a year-over-year decline of 10% to 15%. This outlook is being driven by several factors. First, we expect that retailer will continue to normalize grill inventories in the first half of 2023, which will pressure our sell-in.

Second, our assumptions around sell-through reflect ongoing macroeconomic risks to the consumer and uncertainty around spending patterns for goods versus services and experiences.

Last, we are expecting our consumables business to decline in 2023, primarily driven by an expected sales decline at a large customer, who introduced a private label pellet offering in the second half of 2022, as well as the lapping of load-in into the go-through channel due to new distribution in 2022.

We expect that we will see a sales decline in the first half of the year, followed by sales growth in the second half. Our assumption for growth in the second half of the year is being driven by our expectation that channel inventories and retail replenishment activity will return to normalized levels.

We will also be lapping the substantial negative impact to our top line due to retailer destocking in the second half of 2022. We are not assuming a materially different macro or consumer environment in the second half of the year as compared to the first half.

Gross margin for the year is expected to be 36% to 37%, which represents 80 to 180 basis points of improvement relative to our fiscal year 2022 adjusted gross margin of 35.2%.

We expect to see the largest year-over-year growth in gross margin in the third quarter, given the expected improvement in fixed cost leverage, as we lap the large sales decline we experienced in the third quarter of 2022.

The largest driver of forecast expansion in gross margin for the year is the decline in inbound transportation rates, which have applied significant pressure on our gross margin over the last two years. We expect adjusted EBITDA for the year of $45 million to $55 million.

This represents adjusted EBITDA growth of 8% to 32% compared to our 2022 adjusted EBITDA of $41.5 million. From a margin perspective, our guidance implies an adjusted EBITDA margin of 8% to 9.3%, as compared to our 2022 adjusted EBITDA margin of 6.3%.

The improvement in EBITDA is being driven by the anticipated expansion in gross margin, as well as our focus on expense control. Given the lower revenue outlook for 2023, we are aggressively managing expenses and we have identified opportunities for further efficiencies beyond the $20 million in annualized savings we've already discussed.

We expect the first quarter will be our most challenging quarter of the year. For Q1, we are anticipating sales of $145 million to $155 million, which represents a decline of 31% to 35% versus Q1 of 2022. First quarter top line will be particularly pressured by continued retailer destocking against a very strong multiyear comparison.

We are anticipating first quarter adjusted EBITDA of $16 million to $20 million. Looking at the balance of the year, we anticipate that the second quarter will also be challenging from a top line perspective and believe sales could decline in excess of 20% versus prior year. We expect double-digit sales growth in the second half of the year.

From a balance sheet perspective, we expect to meaningfully work down inventory levels in the first half of the year, with the largest decline expected to occur in the second quarter, which is our largest selling period at retail.

Overall in the face of significant headwinds in 2022, we took swift action to positioning the company to navigate a challenging environment. I am pleased with the progress we made to improve the financial flexibility and efficiency of the business, and I believe we will continue to see improvements in these areas as we move through 2023.

With forecasted improvements in gross margin and the benefit of our cost discipline, we expect to drive growth in EBITDA this year and we look forward to the second half of the year when we expect to return to positive top line growth.

I remain highly confident in the opportunities in the Traeger brand and believe we have the right strategies in place to position this business for long-term success. And with that, I'll turn it over to the operator for Q&A.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Simeon Siegel with BMO. Your line is now open..

Thanks. Hey guys. Good afternoon. Jeremy, with Flatrock, you've now introduced a propane product, a pretty big deal.

Any general thoughts on product expansion from here? And then Dom, can you just speak to the increased logistics and warehousing costs? How should we think about those going forward? And then maybe can you just remind us the margin differential between grills, consumables and accessories. Thanks guys..

Hey, Simeon. So I would start by saying, the wood pellet grill continues to be the center of our universe. That is -- we have a meaningful advantage there from both a brand and a product perspective and a product development capability perspective.

As we look at the space and we think about what the Traeger cooking experience really might be we believe that not only we've seen a trend in Flatrock grill cooking, -- excuse me, but we think it's a great complement to a wood pellet grill.

Wood pellet grill is low and slow, it is fired by wood pellets, it's convection cooking and a flat top or a griddle is -- it's hot and fast. And we believe cooking either the same meal across both products or cooking different types of foods just offers more brand flexibility -- cooking flexibility.

And we did a lot of research before we got in the category on not only what that product might mean to a Traeger consumers cooking experience, but really what are the opportunities to innovate and bring a better experience to market.

Interestingly, there really hasn't been any notable pushback on expanding not only to new category, but a new fuel source. My expectation is that we will be very focused going forward. Again, most of our innovation around wood pellet grills and the associated cooking experience, but the Flatrock really is a great accessory to a Traeger.

I would just add, return from a trade show this week of one of our largest customers had hundreds, actually north of 1,000 retail managers in attendance. And the Flatrock has been very well received. We're early innings. We launched it a month ago.

But we clearly -- we came at it from a constrained -- a channel constrained environment just wanted to ensure that as we launch something new outside of our core category that it turns and it's well received. And I think anecdotally that is certainly the case, although, it's too early to speak to sell through.

The energy on social was high at launch and in talking to dozens of store managers who brought it in, they really like what they're seeing thus far..

And I think jumping into your second question, I mean, it's really kind of a simple mix between what is largely -- what has largely been the biggest driver of gross margin erosion which is inbound transportation. There's still a long tail to that that we're working through as rates improve. So that was one key component.

The other is just deleverage on the fixed cost structure within cost of sales, mainly warehousing that's largely fixed. And so when volumes come down that puts pressure on gross margin percentage.

I would just note or add that, although, in 2022, and to a certain extent in the first half of 2023 inbound transportation will continue to be a driver of gross margin erosion.

It's an improving picture over the course of 2023, as the capitalized higher costs baked into inventory for historical inbound transportation rates that we've paid for as procured by historical containers that bleeds through inventory will start to capture those improvements based on the improvements we're seeing in the spot prices in the back half of 2023..

Awesome. Thank you.

And then, Dom, anything on just the mix generally margin differential between Grills Consumables and Accessories?.

In terms of margin nothing noteworthy. I mean, again, I think the biggest driver is -- stems from grill like the grill side of our category mix.

Otherwise, I think, margin structure is fairly balanced and sort of consistent or stable within Consumables and Accessories and in particular MEATER has actually been a driver of expansion in gross margin and when you look at the fee, in Q4 part of that is a function of outperformance on the MEATER side specific to gross margin..

Great, sounds great. Guys, best of luck for the year..

Thanks, Simeon.

Thank you. Our next question comes from the line of Peter Benedict with Baird. Your line is now open..

Hey. Good afternoon, guys. Thanks for taking my questions. First one, just I appreciate the thought on the year not expecting the macro to get you better.

What is -- how do you think about the P&L if demand or sales through is actually tougher in the back half of the year than it is in the first half either because, the consumer gets a lot weaker you'll start to cycle some of the promo activity that maybe helped in the back part of this year.

Just trying to think about how -- or your view on your ability to deliver the EBITDA in the event that maybe sales through is less than you think in the back half of the year? That's my first question..

Yeah. It's a great one. And it's something that we're definitely considering as we stress test our internal view of -- or forecast over the four quarters of 2023. And I think it's really a formula that we've applied to the last couple of years which is a real focus on leading indicators that could suggest a weakness of consumer or a shift in demand.

And so, I think at the end of the day what we'll do is, we'll watch fairly closely, between now and the end of Q2. The way we built our operating plan for 2023 takes that into consideration as well.

And so, effectively what we've done is we've said, let's be more conservative in how we pace certain critical initiatives and/or initiatives that will impact outer years and we want to make in this year but let's maybe hold on that until we have better line of sight into that specific picture around consumer health and any macro hiccups that may emerge as we track through the first half of this year.

And so what that allows us to do is stay reactive and nimble to those trends before we get ahead of ourselves from a spend standpoint.

And so that allows for some cushion and we'll roll that forward to the extent that there's a downward trend or a negative picture emerging, as we track through Q2 and when we see a disruption from a demand standpoint in Q2, in particular, which is a great leading indicator then for replenishment in the back half of the year.

And so that's probably the biggest piece that I think we're managing and is top of mind for this team. But certainly to the extent that we need to react in other areas, we have levers to do that and constantly manage a dynamic sort of risk and opportunities component to how we forecast this business weekly and monthly.

And we know exactly which levers we can pull if we need to manage that risk in the back half of the year..

I would just add one quick thing to that Peter, which is we were more promotional last year than we typically are. And we use promotions thoughtfully both in terms of the level of promotional activity as well as where we promoted and which SKUs in an effort to really use them to drive inventory levels down. And our desire is to be less promotional.

That's always our disposition from a brand perspective and we've built a plan that contemplates a more normal promotional cadence but it's something where we have flexibility to the extent that demand doesn't trend to plan. We certainly – we have experienced being opportunistic and working collaboratively with our retailers where necessary..

No, that's helpful color. Thank. I guess related to that maybe thoughts on – I mean you mentioned the liquidity at the end of the quarter. Just how you're planning leverage liquidity your – not just any latest updates on covenants things like that. How does your plan envision those trending? And then my follow-up would be around real usage.

You guys have the connected grills, a lot of data. What have you seen in terms of just the usage of grills that are out there in the marketplace? Thank you..

Yes. So I think we spoke to our list of priorities I don't know in Q3 Q4 last year, right? It all starts with liquidity. And we've been hyper focused on liquidity over the last 2.5 quarters and that will continue through the remainder of the year. And we're actually feeling much better about our liquidity position.

And so I think from a liquidity standpoint Q1 will be the trough.

We saw a nice improvement in liquidity from Q3 to Q4 based on active management of working capital, using promotion as a lever to clear inventory and draw down on inventory, just driving more efficiency top line as well as the promotion that drove out performance from a top line standpoint and that carries forward into this year, right? So we'll continue to actively manage working capital and we'll see a nice drawdown on inventory between now and let's say, Q3 which will be a nice a tailwind from a cash flow standpoint.

We'll stay disciplined to OpEx. All of those different components of liquidity that are important and we'll continue to stay focused on those, but we're feeling better about the trend and believe that although Q1 is, sort of, the low watermark we'll stay above a healthy level through the remainder of the year. So we can in essence check that box.

But obviously we're staying focused on it in the event that something changes. On leverage, I would say that as of today we do not -- we really don't anticipate having an issue with our ability to maintain compliance with our covenants. We're clearly trending in leverage levels that are uncomfortable, but manageable.

I'll just highlight a few nuances there that I think are particularly important as you think about this dynamic and what it means in terms of how we manage our credit agreement given the amount of debt we have on the balance sheet.

The first thing I would say and I think we've spoken to this in the past, but I think it's important to reaffirm the definition of the EBITDA as per our credit agreement is calculated very differently than the adjusted EBITDA figure that we report to in our public filings.

And this definition effectively allows for onetime adjustments other pro forma add-backs that we wouldn't include in reported adjusted EBITDA. So I think one example I would give you is the actions that we took in Q3 around restructuring and some other cost improvements.

On a TTM basis, we can actually take those as if they were in place over a 12-month period and add those back into the current period EBITDA as per the definition of our credit agreement, right? So that's a nice component to how we manage leverage because it gives us credit for actions that we're taking to improve the run rate, but we get the full benefit of that over an annualized or TTM period.

And so I think that's kind of the first piece is the definition is different. And those are components that we would ever add back into our adjusted EBITDA that we report.

I think the second layer to that is the definition of first lien net leverage per the credit agreement is a little bit different than maybe what you would calculate -- off of our balance sheet for your leverage purposes and specifically we exclude and are permitted to exclude the AR facility.

So anything that's drawn on the AR facility, we can exclude from the numerator of that calculation. As an example there in Q4, we would effectively exclude $12 million of what was drawn down on the AR facility.

And so again how we manage leverage as per the credit agreement is a function of those components and it gives us some latitude to navigate these challenges and also get credit for actions we're taking to improve the run rate view of leverage in kind of the immediate period, right? So again to summarize, we don't anticipate an issue here in terms of maintaining compliance with the covenant and believe that at this point in time, we're comfortable with where we are.

And then I guess the last question that you had assuming that answers your question on leverage is around the performance of connected grills.

And I would say that at this point based on what we see through the end of 2022 there's really no outlier that would suggest a meaningful shift in the behavior of our consumers and/or the engagement they have with the connected grills.

I'd say first and foremost, we've seen an uptick in that year around the connected grills that are active as sort of being defined as active.

And I think second to that as you sort of measure activity or average cooks per week or total cooks per year it stayed fairly consistent from 2020, right? There's probably some marginal shifts as the installed base of connected grills grows, but otherwise I'd say that the activity per grill as measured on a yearly basis is staying pretty steady between 2020 and 2022, which I think is a real positive as we measure the activity of our grills and how the consumers are effectively using the grills..

That’s very helpful. Thanks so much for the perspective..

Thank you. Our next question comes from the line of Brian Harbour with Morgan Stanley. Your line is now open..

Yes, thank you. Good afternoon guys. Maybe just to follow-up on those comments you were just making and specific to the consumables segment I assume that there's kind of been growth on the food side. And so therefore probably the pellet side has been down a little bit more.

And so could you address -- is that mainly driven by just the new private label pellets that are in the market or has there been a change in kind of attach of your customers buying those pellets.

What's kind of driven that side of it? And how do you think that will trend in 2023?.

Yes. Great question. And as a caveat the way we measure attach outside of the connected grill data that we gather is a sell-in metric. So, it's not perfect. But I think it gives us good directionality in terms of consumption of these consumables. And so your first statement is accurate. We have seen growth in the food consumables side of consumables.

And that's partly a function of what Jeremy spoke to in his opening remarks around some load-in in grocery and then some nice demand for sauces, rubs, et cetera. On the pellet side, what we did know and I think what we saw over the course of the pandemic was a fairly dramatic spike in attach.

And we've talked in the past that that's partially a function likely of consumers stocking up in 2020 due to scarcity as well as being nested at home and probably cooking more than they normally would. And so we knew that at some point consumables attach in particular pellets would normalize likely back to pre-pandemic levels which we're seeing.

And so I would say that in terms of the consistency and/or steadiness of demand and consumption of pellets, it's trending roughly in line with what we've seen pre-pandemic.

Say there has been a little bit of incremental pressure on that given the fact that what you mentioned earlier this large customer offering private label, which is eating into some sell-through just based on the cannibalization of our current offering there. We don't believe that's necessarily permanent.

And so we have some strategies in place to try to offset some of that cannibalization and kind of bring that attach rate back up to what we believe is a normal level. But otherwise it's holding pretty steady.

We're happy with what the attach rate looks like and it's actually providing nice stability from a revenue standpoint given that it's just this predictable recurring revenue stream independent of the fact that grill sales have been down.

I think the last point I would make there is there always is a component of correlation between pellet sales and grill sales.

And so when grill sales are down, you do expect to see some impact to pellet sales, only because there's an initial purchase of pellets when they buy a grill, right? And so that component moves correspondingly, but the embedded component tied to our installed base is holding pretty steady relative to pre-pandemic levels. So no surprises there..

Okay. Got it. Thanks. And then maybe could you talk about the Accessories side as well. It sounds like adding MEATER to Home Depot doors was a significant driver of that.

Was there anything else in terms of products or any sort of promotions? And I guess the same question would you expect that segment to grow in 2023 or perhaps not?.

Yeah. So I guess I'll answer that second question. I'll let Jeremy hit the first. But I think ultimately, we're not guiding to category level growth in 2023. But from an Accessories standpoint, it's segmented obviously between Traeger Accessories and MEATER. And MEATER has been a nice grower in this business.

And you'll -- if you look at Accessories growth in Q4 for example of 2022 relative to say 2019 pre the acquisition of MEATER there's been a substantial increase or the CAGR is fairly robust, right? But independent of that we've actually seen growth on the Traeger Accessory side as well.

And so I think we're really happy with kind of the portfolio of Accessories and how those are performing. And I'm particularly excited about the addition of MEATER and what that could mean as part of kind of our long-term growth algorithm in the future..

Yeah. I would add, we've got a great business. It's a great product. It's a phenomenal team. I was in our UK office about a month ago and continue to believe more in that opportunity and really the thesis behind why we acquired it. MEATER is mostly -- most of their revenue is digital in nature of e-commerce.

And that hasn't changed much since we bought it. We are undoubtedly -- given our capabilities in traditional retail managing accounts from specialty up through large accounts such as Ace and Home Depot, we have a capability there that we're beginning to bring to bear. But it's early.

And so most of MEATER's growth is really driven by the channels that it has been in for a number of years. And it's not really -- it's not yet driven by the synergies that we have in our retail footprint, but those are coming.

And we've got a lot of confidence in our ability to bring that product to retail, the same way that we did a wood pellet grill innovation which is, it's premium, it's innovative. It requires training at retail. It requires education from retail associate all the way to consumer.

So we think there's a lot to unlock still in front of us, but that's -- it's really not what's been driving the growth. .

Thank you..

Thank you. Our next question comes from the line of Randy Konik with Jefferies. Your line is now open..

Hey, guys. Thanks for taking my questions. I guess first on back -- just quickly back to the balance sheet. Just can you just remind us any kind of payments or anything you need to kind of get done in 2023? And any kind of availability under the existing credit facility just curious there.

And then, I guess on the – I remember, when you guys announced your postponing near-shoring with Mexico, how do you think about when to reconsider or potentially reconsider Mexico once again? Is that something a couple of years away? Just curious there.

And then just finally, on inventory, do you anticipate inventory growth matching up with sales growth by the second half of the year or more like the end of 2023? Thanks for the help guys..

Yeah. So, first question was around any obligations or payments. The only kind of meaningful one is the payment of MEATER earn-out, right? So that's structured in a way such that, there's a component of 2021 that they're able to catch up in 2022. So they were able to achieve that. So that's one component of the payment.

And so we've drawn partially down on our delayed draw facility, and which has subsequently expired in order to fund that payment, which would probably happen in around April time frame. So that's one.

And then to your last question on inventory growth, I mean, I think what we expect in ultimately over the course of 2023 is that, it's growing or declining relative to the base, right? So I'd say that, it's sort of a moderate percent decrease in Q1, and then it's a fairly sizable double-digit decrease between Q2 and Q4.

So it wouldn't necessarily track with inventory that makes sense, because again we're still sort of cleaning up the balances and driving to what we look at internally, which is sort of a days in inventory on a forward kind of three-month basis to ensure that we're covered over say a 90-day period, which we feel comfortable with, but nothing more, right? And we're not there yet.

But we think by the – by Q3, we'll be in kind of that position where our inventory levels are at a point where we're comfortable with both the composition and the quantum of inventory. But you'll see ultimately, a fairly decent sized decrease year-over-year on a quarterly basis between Q2 and Q4..

Great. And just on the near-shoring at the Mexico – yeah, the Mexico production, say you perform? Sorry..

Yeah. So, yeah, the answer is we think near-shoring is absolutely a strategy long term not just in Mexico, but as we see our base of business grow both here in Europe, we will evaluate opportunities for more efficient sourcing closer to consumer, but certainly with cost and margin in mind.

So next is something that, we continue to evaluate we have a very good base of sourcing currently between China and Vietnam, and as you know, container rates have declined meaningfully.

So it takes some pressure on time, but we do believe sort of medium to long term that Mexico is a viable opportunity for us and it's something we continue to evaluate..

Great. Thanks, guys..

Thanks, Randy..

Thank you..

Our next question comes from the line of Peter Keith with Piper Sandler. Your line is now open..

Thanks. Good afternoon, guys. I appreciate taking the question. I wanted to explore the topic of the ocean freight costs. I actually can't think of anyone that I research has been more negatively impacted from ocean freight. So, I was wondering if you could frame up two things.

Number one, when you look back over the last two years, what you think the impact has been, maybe on a dollar basis or a gross margin basis.

And then looking forward, how much recovery do you have from lower ocean freight costs baked into the 2023 outlook?.

Yes, good questions. I'd say, on the first one, I don't have kind of orders of magnitude in front of me, the kind of the dollar amount that ultimately put pressure on our business. I think, we've referenced numbers in the past that we can certainly share offline, if need be.

But it's been fairly substantial, right? And I guess, if I were to recall back to Q4, when this really kicked in, I mean I think we alluded to like 800 or 900 basis points of impact, right? So, it's been fairly -- it's been a fairly meaningful, if not the biggest driver of gross margin erosion, over the last 18 months as you mentioned.

I'd say that, going forward, what we're seeing is, again kind of this tale of two halves around gross margin where we're still locked in and/or have higher inbound transportation costs capitalized in our inventory. And so, we're still carrying a higher basis from that standpoint in our inventory.

But as we work through those heavier levels and that bleeds off, we'll begin to capture these fairly I would say, favorable spot rates that have emerged. And in certain cases we're seeing spot trend back to kind of pre-pandemic levels. A slightly more complicated picture, because we did lock in some fixed component of our allocation of containers.

And that was in an effort to hedge risk against the unknown of, can we even access or procure containers. There's a small percentage, but we do factor that into the kind of run rate over the course of 2023.

But based on that mix, we don't expect to be necessarily paying at spot markets at least based on what we're seeing today, but they'll be dramatically better than what we've experienced over the last 18 months or so. And on the gross margin front, I mean we're not going to share specific numbers especially around the quarters.

But if you look at our guidance range of 36% to 37%, you can bet that a large majority -- a majority of the gross margin expansion year-over-year, is tied to inbound transportation improving. .

Okay. Yes, fair enough. Maybe we could talk more offline, because it seems like -- I'm guessing you're probably going to see continued benefits in 2024, that we want to think about. Maybe a separate question for you, would be on -- you feel good about sell-through at retail.

I guess, simplistically is sell-through up year-on-year? And how are we thinking about sell-through year-on-year, in the context of your full year guidance for 2023. .

Yes. Good question. So I'd say, that in 2022, we weren't -- we were definitely comping slightly down, relative to the prior year. That I think peaked in Q3, but sequentially improved in Q4 in part due to our promotion or extended promotion at quality promotion.

And I guess the only other layer I would add to that is even though there was a negative comp year-over-year, it was really not that dramatic, especially as you compare it to the decline in grill sales on a sell-in basis, right? And you can also see it in the market share data where Traeger was certainly down in kind of conjunction with a decline in the market, but it's fairly disconnected from what you're seeing in sell-through which just reinforces the point that this is more of a destocking issue than it is a demand issue.

And I think that because our market share effectively held steady, we're sort of moving in accordance with the market and there's still a healthy demand for our brand all things considered.

In terms of moving -- shifting forward to our outlook for 2023, I think the first thing I would say is, we're not necessarily forecasting industry growth, we want to remain cautious there, but we do hope and sort of have a belief that there will be a rebound of growth in '24 and beyond.

And I think from a sell-through standpoint, we're being conservative here, but it will still be disconnected from first half of year performance on grills, which will continue to be impacted by destocking even though we believe that sell-through trends will hold fairly steady and we'll continue to signal nice demand from the consumer at least at retail..

Okay. That's helpful. I guess just to just clarify the sell-through holding steady.

Is that just kind of you thinking about it sort of flattish year-on-year for the better part of 2023?.

We're not guiding to sell through. I think what I would just say there is that, yes, I think steady is probably the word we want to use..

Okay. Fair enough. Thanks so much for the insights..

Thank you. Our next question comes from the line of Joe Feldman with Telsey Advisory Group. Your line is now open..

Great. Thanks for taking the question guys. So I apologize, if I missed it with all the information you've given tonight.

But with regard to the cost savings you said you've identified for 2023, I'm wondering, if you could share a little more color on maybe where that would be? And would it be to the same magnitude that we saw in 2022, that $20 million or maybe a little lower than that?.

I won't speak to the specific magnitude. But there are a variety of areas that we've evaluated as part of our budgeting process for '23.

And I think I'll just say that if you recall back to some of our comments in kind of Q3, Q4, there was a moment in time in the back half of last year, where we made swift actions via restructuring and kind of rightsizing capacity, unwinding the Mexico relationship et cetera that are baked into that kind of run rate $20 million, as well as some incremental actions we took that are probably more temporary in nature with the second layer being okay this helps kind of bridge between now and when we start to plan for 2023, which will give us the opportunity to further explore areas in a more deliberate way versus a reactive way to drive efficiency across the P&L and really across the entire operation.

And so, if I want to give you some examples of things that we've evaluated and that we define as sort of core principles for how we're budgeting and defining our operating plan for the year, it's everything from kind of tightening gross to net dilution to how we rebalance capacity across the supply chain to ensure that capacity, whether it be on the manufacturing side or in other areas of the business is balanced with kind of the demand that we're seeing and forecasting.

Two, just continued efforts on the gross margin side with a task force that's hyper focused on driving expansion opportunities, both near-term, long-term reshaping OpEx to ensure that it's moving more closely in line with our long-term financial model and for principles there.

There's some delayed initiatives, I mentioned earlier where -- to the extent that we unlock incremental SG&A capacity based on revenue performance we'll look to fund. But right now, they're paused. I said the biggest one there as an example would be top of funnel.

Again, we'll continue to be focused more on middle and lower funnel and ultimately just general efficiency across kind of our fixed cost structure. I would just add though that, it's not all about driving efficiency and sort of cost reductions, there are also key principles that we're focused on to protect the long-term.

And I'd say two to three examples of that are, one, ensuring that MEATER is properly funded and that our product growth engine is properly funded, right? We don't want to starve or hinder growth in 2024 and beyond. A lot of the actions that we're taking this year are intended to set the right base that we can build on in 2024.

And ultimately, we believe are necessary just given some of the dynamics and sort of right-sizing of demand trends and sort of sell-in based on these destocking efforts.

So again, those are a handful of examples, but we have four principles that are ultimately guiding this and are baked into our current operating plan which does contribute to incremental savings on top of the $20 million that we spoke to early on..

That's really helpful. Thank you so much, Dom. And maybe just one more follow-up, I could ask. With regard to the consumer demand, which I know we all understand the environment, especially in big ticket.

But I was just curious like as you talk to kind of some of your retail partners, maybe some of the more specialty oriented ones where -- are they seeing any kind of green shoots or maybe it's like a good response to some of the new grill lines that you've just put out, or anything that gets you a little excited about that maybe things could come back towards the second half of this year?.

Yes, absolutely. I would say, first of all, the -- 12 months ago when we started to feel demand start to soften, it took a while to unpack what was driving that. There are a number of sort of negative forces. There were a number of negative forces on the consumer then as well as there are now.

I think as the consumer weakens there is a bit of a tailwind in terms of consumers in pent-up travel needs, which we certainly felt last year. We feel that trend start to decline a little bit, but again in a tough environment. I think what we see that we like first of all is that, the sell-through is more predictable.

First eight, nine months of last year, it bounced around a lot -- really, really hard to forecast the business. We feel better about the predictability of sell-through. We launched two new products last month and we were really excited about the Timberline that we launched 12 months ago last spring.

But clearly we were launching something with a lot of energy, but at a very high price point. And so the ability to with the Ironwood cascade down some of those features technology sort of ID language to a more affordable price point down to $2,000, albeit accessible but still premium, the response has been very positive to that growth.

Again we're four weeks into it. Flatrock, as I said in my prepared remarks, more social engagement, more energy around that launch than any launch that we've done. And again premium to the griddle category at $900, but certainly accessible from our consumer perspective. And so I would say that we like the energy we see there.

Our retailers -- notably our specialty retailers are really excited about it. And are there upside opportunities? There certainly could be. But as we see the macro environment now, we just think it's prudent to be cautious in how we think about it.

But we have levers to drive growth around some of these products, some incremental investment to drive near-term demand to the extent that the year paces as we would like it to. So, plenty to be excited about in those new products. But I would say a step back and say what we really get excited about is what this business is built for.

We like our position in the market. We like the long-term. We like our brand position. There is no more passionate consumer than a Traeger consumer that I've ever seen as a consumer of many brands. We like the outdoor cooking category. It is going to grow. We're in a trough, but it is going to grow. This is a long-term trend that's not going away.

And we feel like we have team and capability to really build the right product and innovation to fuel growth. So, we're in an interesting environment where we've got to balance meeting near-term needs of the macro environment, but feeling a lot of optimism over medium to long-term..

Thank you. That concludes the Q&A session. I will now pass the conference back over to the management team for closing remarks. .

Thanks so much. We appreciate your time and look forward to being in touch. Bye..

That concludes the Traeger fourth quarter and fiscal 2022 earnings conference call. Thank you for your participation. I hope you have a wonderful day..