Traeger, Inc. (COOK) Earnings Call Transcript & Summary

Good morning. Welcome to day 1 of the Morgan Stanley 2023 Global Consumer and Retail Conference. I'm Megan Alexander, I'm the Leisure Products and Services Analyst here at Morgan Stanley. I'm glad to be here today with Traeger and the company's CEO, Jeremy Andrus; CFO, Don Blosil; and VP of IR, Nick Bacchus. Many of you are likely familiar with Traeger, it's a creator and category leader of the wood pellet grill, which it complements with a variety of consumables and accessories products. A quick disclaimer before we start. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

So maybe we could start at the table, Jeremy. We're clearly operating in a challenging environment, and we can get into that. But could we start by taking kind of a step back, set the table from a high level, and maybe you can talk about what you believe is the most underappreciated aspect of Traeger's story today?

Absolutely. Good to be here. I would start by saying I met the Traeger brand 10 years ago. It's actually a 37-year-old brand now. And it was born out in Mount Angel, Oregon. 10 years ago, a high percentage of its sales were in the Pacific Northwest. And the thing that was so clear to me, the moment that I sat down with consumers, and I would say, continues to be the case today, is just the level of passion that Traeger owners have for their Traeger. Oftentimes, these are consumers who didn't cook before, who cooked but didn't like -- didn't enjoy cooking. And they find a Traeger which is a new solution. If you think about the world of grilling, it was charcoal for decades. And then the '80s, it started shifting to gas. A wood pellet grill is an innovation that helps a consumer enjoy cooking more, produce a better result in terms of flavor, texture, consistency, and we really democratized cooking. And I will say, from when I heard that in the very first moment, I didn't understand the passion. When you sit with consumers and they say about a brand that's been around for 25 years that you've never heard of, "Does brand change my life?" you step back and try and understand what are the elements of the experience that are so meaningful that a consumer has that much passion? I have become a cook. I have had my own journey with Traeger. I did not cook before, and Traeger has allowed me to not only become good at cooking but confident at cooking and cooking, inviting people in the home. And so Traeger has always started with this disruptive product solution that enables better cooking. And it creates this tremendous passion as it unlocks this experience of sitting around the table with family and friends and enjoy an incredible meal that you cooked yourself. And so starting with the product solution, we really believe in innovating on that solution. We invest a lot in the product experience, both in terms of making the grill better, enabling it with technology that makes a consumer able to cook better and more consistently, bring better flavor to the food as well as a digital experience, which is really the content that leads a consumer down the path of learning to cook from -- whether they're starting from scratch or they're a chef, it's content that enables the cooking journey. So this is a brand that's meaningful to its consumers. We have a community of highly engaged consumers, they cook often, they cook more often than a traditional griller, they post often to social media. We see that user-generated content. There's just a ton of passion behind this brand. I would say, small but mighty.

Awesome. Super helpful. Maybe coming back into the now and talking about the environment that we're operating in. You've seen kind of 2 -- 18 months, 2 years of negative growth for the category, and you've been candid that next year could be another down year. And there's really 2 forces at play here, right? The pull forward of the COVID demand era, and then you have a more challenging macro and pressure on the consumers. Maybe if you could spend some time thinking about how you assess those 2 dynamics and maybe where we are today, and how that influences how you're thinking about '24?

Absolutely. I would say, first of all, outdoor cooking is a very resilient category. There are 76 million American households that own a backyard barbecue. It has -- if you were to look at it sort of over decades, it's been a very consistent category with some moments of decline. 2009 was a moment of decline. It then grew from 2011 through 2021. And so it is predictable in terms of size of market and engagement by consumers at the category, broadly. Traeger, leading into the pandemic, for many years, was a grower, a share taker. We grew between 2015 and 2019 north of 30% top line CAGR, and we took share. Same thing that happened to us happened to many sort of home good brands, durables, home furnishings. It's -- we saw meaningful growth during the pandemic. And so our growth accelerated from low 30 -- from 30% CAGR to north of 50% during the pandemic. And so there was clearly some pull-forward demand. And we're still in that moment of consumers digesting that, that pull-forward demand. We're not yet back on normalized replacement cycles. And then I think in addition to that, we're experiencing just consumer sentiment beginning to soften a little bit. And so it's hard to say when the category recovers. While we're in this moment of decline in the category, I would say, although we don't know when it begins to grow, it will reach pre-pandemic levels again. What we know is that we have a very engaged consumer. And so during this window, we continue to focus on a couple of key things: product development, which has long lead time, and we're always investing in innovating the next product experience; and our brand. Although the category is not growing and we're not investing to acquire consumers, we do believe in continuing to invest in the experience that our consumer has with the brand, not knowing exactly when category returns to growth. And so as we think about next year, what I would say is, although we don't profess to have more data on the macro or the category that is publicly available, we do as much consumer insight work as we can. We haven't seen the category begin to recover yet, and so we take a cautious view in terms of how we think about forecasting our business, building inventory and then budgeting spend against revenue.

Awesome. Super helpful. Maybe as a follow-up, just to try and contextualize where we are and where we could go, is there any way to give us any sense of where industry units are today relative to 2019? I think you said they can get back to '19. And then how are you and maybe even the retailers looking at like where the units could bottom? Or any signs of inflection in the category?

So we're definitely still below pre-pandemic levels. And if you look at -- the TAM grew during the pandemic by about 1 million homes, so it grew from 75 million to 76 million homes. And so we should recover not only to pre-pandemic levels, but we should exceed them, given the growth in the TAM. We saw units decline in '22 by sort of mid-high teens. And then we've seen a much lower rate of decline in this calendar year in '23. And so it would appear that we are approaching a bottom in this category. And then it's a question of when do consumers begin to get back on that normalized replacement cycle. This is a category that a consumer doesn't have to upgrade if it's not broken. And so they may extend -- in a tough macro, they may extend their typical ownership life cycle of a product before they upgrade. And so we sort of think about where is bottom and then what is the rate of growth. My guess is that as the macro improves, generally and notably for a category like this, we will see some pent-up demand for those who are extending replacement windows. But hard to say when it recovers. I mean like we're not yet looking at '24 as a recovery year. We're sort of thinking about getting to a trough, which we appear to be closer to, and then really building our investment strategy around that expectation.

And I think it's important to clarify like the difference between the category and Traeger though, right? So when we talk about the category tracking pre-'19 levels, that's very different from where Traeger sits today, right? We're sort of comping over '19 at kind of two, threefolds, where we were tracking from a revenue standpoint in 2019 when you measure that based on sell-through information or data. So in terms of the sustained benefit because of the pandemic, that's impact for Traeger. That 4-year stack is robust, and it seems to be holding at a higher watermark. It's more a question of the year-over-year comp, which is sort of flat to slightly down as measured by sell-through. But it really kind of bucks the category trend, which reinforces our thesis that at 3.5% household penetration, this is less a question of growth in the category, albeit that's an important catalyst, and more a return to our core strategy, which is to unlock brand awareness nationally and connect that back to how we grow household penetration and grow our installed base through those mechanisms that we believe will continue to drive share gains off of now a much higher base, which we did benefit from through the pandemic, independent of the pull forward.

You touched on it a bit, but maybe just a follow-up, right? You only have 3.5% household penetration. When you talk about replacement rates, are you talking industry or Traeger? And do the replacement rates matter a bit more right now, just given you've been a bit constrained in terms of investing into that top-of-funnel brand awareness?

I would say, most of Traeger's growth has come by a consumer adding a second grill. And that's something that we see in the industry research as well that consumers are increasingly adding a second grill. Oftentimes, we're selling to a consumer who owns a gas grill and we're able to convince them that there's a better cooking experience. We see, in most cases, that second grill, that Traeger becomes their primary grill from a usage perspective. And so no question, there are 2 significant triggers for selling a Traeger or for buying a Traeger: One is you need to replace your grill, and so you begin to do research. And I would say, even in that case, we know that nearly 2 brands are considered, about 1.7 brands are considered in the initial consideration set when a consumer is replacing. We still have work to do on unaided brand awareness to make sure that we're in that initial consideration set. In terms of our ability to sell a second grill when they're not looking to upgrade or replace, that's a function of investment in customer acquisition. And I would say, in this period, we continue to make investments at the point of sale because we believe that that's a predictable -- we get a good return. That's how we built the brand over time. We haven't been making - we have not been making investments since early '22 in top-of-funnel marketing, partly just to protect scarce working capital, but also in part because we don't know that we have a consumer who's actively listening to the message. And so it's probably not a moment when the category's in decline that we get a great return on our investment in top of funnel. So we choose not to invest there right now. But as the category returns to growth, we will return to investing top of funnel and really driving share gains. If you look at our share, if you look at -- more than 3.5% of sort of the 76 million households that own grills. But if you look at our heritage markets, we have double-digit penetration. In a market like Utah, sort of mid-high teens penetration. And so if you were to go to markets South Central, Southeast, which are traditional outdoor cooking markets, our penetration is very low. And that's just because we haven't invested. We do believe and we have confidence that we have a sales and marketing model that can profitably drive penetration in markets, if we're focused in the markets that we go into and in this case, if we're thoughtful around the time of making those investments.

And the power of top-of-funnel investments and marketing connects back to the comment Jeremy made on the consumer decision journey, where the initial consideration set, we believe, is the most important battleground because of the 1.6, 1.7 brands that are considered, the conversion through the funnel based on brands that are considered is 60-plus percent, right? So winning that battleground is of utmost importance. And if you marry the 3.5% household penetration nationally for Traeger with mid-teens unaided brand awareness relative to, say, a Weber who has 60, 70-plus percent unaided brand awareness, that starts to form both our thesis on how to grow as well as the opportunity as you think about where we can go from here relative to our low household penetration and the importance and/or power of investing top of funnel to drive unaided brand awareness nationally in a very scalable way.

Awesome. So maybe thinking about the investments you're making in point of sale and maybe with promotions more broadly, you've talked about a consumer that's a bit episodic in its shopping behavior, potentially more price sensitive. What is that catalyst that you're seeing consumers react to? And how do you think about pulling that lever on price or promotion in an environment where the category might be down again next year?

We were -- we have -- I would say, as a general philosophy around promotion, we don't promote a lot. We just don't believe that great brands are on sale often. And it's easy -- if you overpromote, you suddenly set a -- you reposition your brand and you set a new price point at each of the products that you're promoting. So we're thoughtful around when we promote. We have typically promoted 3 times during the year, one in the spring, once around Father's Day and then once around [ CyberFive ]. And we've actually, historically over the last 10 years, we've been very diligent around that promotional cadence. We were more promotional in 2022, but that was really a function of inventory and needing to really reduce channel-level inventories. We came into this year and decided that we were going to return to our normal promotional cadence, just really wanting to ensure that we're building a durable brand, a brand that's known for being premium at every price point that we sell. And there are brands in our category that have been more promotional than us. But we tend to believe that we will be rewarded long term for being diligent and disciplined to a reasonable promotional cadence. And no question, we could have moved more units this year, and we could move more next year if we were more promotional. But we really want to do the right things in building this brand for the long term.

And we're probably looking more for like consumer signals that would suggest that Traeger has the permission to invest into top of funnel or catalysts that tie back to a core principle for this brand, which is sustainable, profitable growth long term. And an aggressive promotional strategy can be very short-lived. And we want to protect that, certainly. And if those catalysts or those indicators emerge, we will quickly strike and begin to invest into those from a top-of-funnel standpoint and believe that's a more profitable and sustainable way to approach growth long term via a healthy consumer that's listening and is prioritizing share of wallet to just higher-ticket durables and consumer goods.

Are there any specific signals that you can speak to that you're looking for? Is it consumer -- is it more macro like consumer sentiment? Is it just bright spots and POS or a shift back maybe towards over $1,000 price point or anything?

I think one obvious one is bright spots and POS. We do have seasonality in this business, but we also benefit from a more smooth, seasonal curve. We've learned that our consumer tends to use the grill far more frequently over the course of a year. It really is an extension of their kitchen versus a gas grill that's used a few times in the summer to cook hotdogs and burgers, right? And we can certainly lean into that. And I think one indicator and/or at least data point today that is informing how we think about '24, aside from the macro headlines, is the fact that sell-through is still slightly down relative to last year. If we saw an emerging trend, where in Q4, say, sell-through picked up, that may inform a different viewpoint on '24 relative to what we're seeing in macro headlines. And so there are indicators there that I think could inform a change in perspective. But that's certainly one of many that we watch and certainly an important one.

Maybe shifting a bit to the margins. It's been -- gross margin has been a bright spot this year. And you've talked a little bit about the uncontrollables and then the controllables within gross margin. Can you maybe just spend some time, Dom, unpacking kind of what inning we're in, in terms of the uncontrollables and controllables? And how we should think about the puts and takes in '24?

Sure. Definitely, early innings. We may be slightly -- the sort of the positive moves we've seen in the macro are taking hold more quickly than maybe some of the controllables that take time to mature and execute against. But certainly, the macro assist is first and foremost, critical to our evolving picture on gross margin, right? So last year, we hit a gross margin trough of around 35%. We're guiding to 150 to 200 basis points of margin expansion this year. A good majority of that is tied to the improving picture in inbound transportation, which has been the largest pressure point on our gross margin. We're highly sensitive to inbound transportation. And the cost and sort of price increases in that market were extreme. Those have reverted back to pre-pandemic levels as you look at the spot market for container prices. And that's an incredibly important assist as we think about foundationally where our gross margin sits today relative to what it can be. Pre-pandemic in '19, we were sitting at around 43 points of gross margin. So that's an important foundation to our long-term thinking on gross margin as well as just maybe some shorter-term benefits that we're seeing in FX. We pay local currency in China, we hedge that, and that's a nice tailwind built into '24. It's a little bit early to speak to our point of view on what '24 looks like and certainly, maybe the evolving picture over the next 3 years. But what we can say is we're aspirational in terms of where we want to drive gross margin, it's critical to think about -- in terms of how we think about value creation, and it's certainly helps unlock capacity to invest in those critical areas of our strategy that will stimulate growth. One example, again, being top-of-funnel marketing. But the controllables is really where we're focused. We stood up a gross margin task force with the goal to really attack key profit pools across the value chain, whether you think about strategic sourcing, how we optimize our portfolio of products to unlock margin expansion through high-volume, high-margin SKUs, to how we think about moving product from point A to point B. And even on the manufacturing side, we're vertically integrated. And one good example of an unlock that we drove last year or executed against was the consolidation of 2 pellet mills, which allowed us to optimize the unit economics of a pellet as well as rightsize or kind of rebalance capacity relative to utilization. So it's a consistent and constant effort of continuous improvement that has kind of a long tail that we will continue to attack and certainly be patient around. But our aspirations are definitely to expand gross margins from where they sit this year and continue to build on this momentum with the macro assist. And certainly, our evolving point of view is that the macro is now structural, where there may have been a question mark about that 6 months ago. And that allows us to now kind of build on that foundation in the future with these controllables that we have clear line of sight to and are pretty excited to execute against.

Awesome. So maybe shifting gears a little bit to the OpEx side of things. It seems like you're going to wait to kind of invest more into marketing until you see the category improving a bit. But how should we think about where you do plan to invest? And you've done a lot of restructuring in the SG&A line, so how do you balance continuing to invest for growth with potentially a challenging environment and maintaining flexibility on the working capital side as well?

Yes. It's really -- it's sort of the context of the moment, right? And on the marketing side, I mean, we still invest in marketing. It's just a focus more on middle-, lower-funnel marketing efforts that have a predictable in-year return, whereas top-of-funnel marketing tends to have a longer tail effect, it's more prospecting in nature. And from an attribution standpoint, it's a little bit harder to measure. So we want to be cautious there. And right now, the short- and kind of medium-term focus is definitely profitability. But as we think about OpEx management and sort of the evolving capacity within the P&L, we'll continue to prioritize profitability in the short term. And certainly, we don't want to starve areas of investment that connect to long-term success. So our product engine is critical. We're not going to cut investment in an area that is critical to the future, and that is the engine that drives growth at the end of the day. Jeremy mentioned consumer experience and community protecting the brand, in an environment like this, we believe, is also paramount to long-term success and then just prioritizing those kind of short-term, high-return areas that are more predictable. And when we see signals emerge that the consumer is either willing to listen and/or now willing to shift share of wallet, we'll begin to invest more in those longer prospecting investments.

So to that point, you recently launched a new platform, R&D team, focused on using consumer insights. So maybe I was hoping you could spend a little bit of time expanding on what that entails? And maybe how the entrance into a new category like the Flatrock griddle, kind of the learnings from that and how it -- how you think about the product development opportunity, going forward?

Absolutely. I mean I would say, first and foremost, we really believe in leading with great product and having a differentiated point of view on what a consumer values. We spent a lot of time in consumer insights, whether quantitative or qualitative. We spend a lot of time in habitat cooking with consumers, understanding how they cook, where their pain points are. And that's really what leads us to sort of innovation around the product experience. We spent a number of years trying to improve the experience of the core wood pellet grill. We went from a very simple analog device to a digital device that controlled temperature better, that connected to the cloud so that you can monitor your cooks remotely, a device that would tell you when your steak is a perfect medium, rare, however you cook it. The ability to really set it and forget it is really how we want the product to function. And so we've made a lot of improvements to our core product. It simply makes the cooking experience easier, produces more consistent, better results. Flatrock was an interesting conversation. It's the first time that we've launched a cooking device that's not a wood pellet grill. Certainly the first time that we've launched a device that didn't use hardwood pellets as the fuel and flavor source. But what we realized as we were talking to consumers and as we started to see growth in the griddle category, it was very clear that our consumers valued having a second option, which cooks very differently. So a wood pellet grill is a convection cooking, it's utilizing convection to drive smoke and cook and flavor the food, it's often a low-and-slow experience, whereas a Flatrock is a griddle. It is hot cast iron griddle, where you can cook -- it's hot and fast. You cook very differently, you cook different things. You cook breakfast, smash burgers, Philly cheesesteaks, stir fries. It's all a different list of menu items that's a perfect complement. So we spent a lot of time not only thinking about how we would complement our core category, but to the extent that it's appropriate that the brand makes sense on a product like this and also whether or not we could create a point of difference that matter to the consumer. We believe all of these things we were able to execute on all of these things just in terms of the position of the product in the market. And my expectation is that we'll continue to evolve in these categories. We'll continue to think a lot about how the accessories that interplay with each of the products and across the categories make the cooking experience better. And then it's our job to drive penetration of brand awareness in the market.

Awesome. Making me hungry. Maybe I'll ask one more question. I'm cognizant of time and want to leave time for anyone in the room that wants to ask questions. But maybe we could finish on the balance sheet and how we should think about -- you've made tremendous progress, but how we should think about your ability to kind of manage leverage and liquidity into another potentially challenging year for the category?

Sure. So I would say that we're sort of in a much better position in terms of being in the driver's seat, right? Like the last, call it, 12, 18 months has been highly reactionary, just given the fact that there's no global pandemic playbook for a brand, right? And there's been this bullwhip effect of inventory that was probably the main issue that we were facing, that ultimately put pressure on our balance sheet. We certainly have a high degree of leverage that we're very aware of and that we manage effectively. I mean it's been on our balance sheet since 2017, so it's nothing new to Traeger. And I think that if you look at the last 12 months, we've really made an effort and/or it's been a core focus to really rightsize and sort of improve that leverage profile and sort of risk profile of our balance sheet. We've effectively rightsized in channel inventory levels, and we're back to kind of a normal replenishment cycle, which in turn has also allowed us to rightsize the inventory levels on our balance sheet, based on coming off of that bullwhip effect of sort of demand and sort of excess supply. From peak, we've brought inventory levels down by about $60 million this year. Our liquidity has improved by 50. So as you think about kind of the different components of balance sheet as we think about it, one, it's working capital. And we believe that, from a working capital standpoint, we're now in kind of an efficient position. From a liquidity standpoint, more than healthy. We feel really good about that for the future, which, back to your point, allows us to navigate any potential surprises. From a leverage standpoint, we continue to delever. We've improved leverage from kind of peak Q1 levels by 5.5, 6 turns. And fortunately, it's cov-lite debt as well. So it's pretty easy for us to kind of navigate in the event that there are future challenges. But all in, we feel really good about where we're positioned. And we believe sequentially from here, we'll continue to improve our leverage profile and to the extent possible, use excess free cash flow as a priority in how we think about capital allocation and potentially paying down some incremental debt as well. So we feel really good about where we stand today, and we believe that picture will continue to improve.

So in the last minute or 2, any questions in the room? No. Okay. We'll end with there's three questions we're asking everyone at the conference. We've gotten into many of them, but we can kind of do this in rapid fire format. So the first one is thinking about the demand backdrop for the year ahead relative to recent trends, do you expect demand to accelerate, hold or decelerate?

Our belief is flat to slightly down.

Okay. And then the margin side, thinking about margins, are you planning for them to kind of be up, down, neutral? What are the puts and takes around that?

For '24 you're asking?

Going forward.

Going forward, yes. I mean again, without sharing guidance, our goal is to see continued expansion in gross margin.

And then lastly, again, we just kind of touched on it, but just on capital allocation between CapEx, buybacks, dividend, debt paydown, any of these buckets moving up or down in terms of importance?

I would say, debt paydown is probably of utmost importance to the extent that we have excess free cash flow. We would certainly prioritize capital investments that we believe will generate the right return. Fortunately, this is a somewhat capital-light business, and most of the CapEx is driven by growth initiatives. And so we'll evaluate those in the context of an evolving picture of the future, and we'll probably have a decision to make as we generate more free cash flow as to whether we're investing in capital expenditures that will tie into future growth versus deleveraging through debt paydown.

Can I just jump in? I just want to qualify my comment on the future. It was really in reference to the category, which as we track category data. Of course, as Dom talks about areas where we may invest, we're always looking to invest to grow faster in the category. And to the extent that we find those opportunities, I think that's what we're looking for.

Perfect place to end. So thank you very much.

Awesome. Thank you.