Monroe Capital Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 9 speakers on the call.

Operator

Welcome to the Trader Second Quarter Fiscal 2023 Earnings Conference Call. My name is Lauren, and I'll be coordinating your call today. There will be opportunity for questions at the end of the presentation. I'll now hand you over to your host, Nick Backus to begin. Nick, please go ahead.

Speaker 1

Good afternoon, everyone. Thank you for joining Traeger's call to discuss Q2 2023 results, which were released this afternoon and can be found on our website at investors. Traeger.com. I'm Nick Backus, Vice President of Investor Relations at Traeger. With me on the call today are Jeremy Andress, our Chief Executive Officer and Don Blossil, our Chief Financial Officer.

Speaker 1

Before we get started, I want to remind everyone that management's remarks on this call may contain forward looking statements that are based Current expectations, but are subject to substantial risks and uncertainties, which could cause actual results to differ materially from those expressed or implied herein. We encourage you to review our annual report on Form 10 ks for the year ended December 31, 2022. Our quarterly report on Form 10 Q for the quarter ended June 30, 2023, once filed, and there are other SEC filings for a discussion of these factors and uncertainties, which are also available on the Investor Relations portion of our website. You should not take undue reliance on these forward looking statements. We speak only as of today, and we undertake no obligation to update or to revise them for any new information.

Speaker 1

This call will also contain certain non GAAP financial measures, including adjusted EBITDA, adjusted net income, adjusted net income per share, Adjusted EBITDA margin and adjusted net income margin,

Speaker 2

which we

Speaker 1

believe are useful supplemental measures. The most comparable GAAP financial measures and reconciliations of the non GAAP measures The inherent that such GAAP measures are included in our earnings release, which is available on the Investor Relations portion of our website at investors. Traeger.com. Please note that our definition of these measures may differ from similarly titled metrics presented by other companies. Now, I'd like to turn the call over to Jeremy Andress,

Speaker 3

Thank you, Nick. Thank you for joining our 2nd quarter earnings call. Today, we'll be discussing our Q2 results and our progress on our key long term strategies. I will then turn the call over to Dom to discuss further details on our quarterly financial performance and to provide an update on our fiscal year 2023 guidance. Today, I'm pleased to be able to announce better than expected results for the Q2.

Speaker 3

As expected, our top line results were down to prior year As our retail partners continue to destock and work through Grille inventories, however, results outpaced our expectations With upside in revenues driven by better than expected grill and consumable sales, outperformance in our quarterly sales And the continued benefit of our cost efficiency actions drove better than anticipated adjusted EBITDA, allowing us to deliver $21,000,000 of adjusted EBITDA, up from $17,000,000 in the prior year. I believe our results demonstrate our Strong organizational focus on positioning Traeger for improved profitability and financial health. In the outdoor cooking industry, the 2nd quarter is the most critical selling period retail as consumers purchase grills For the summer drilling season. As always, our organization remained highly focused on sell through in Q2, Given this is the most important indicator of consumer demand for our products, as we move through some of the most important weeks At retail in the Q2, we were pleased to see sell through results that were modestly ahead of our expectations. As we have discussed over the last several quarters, following a period of outsized growth in big ticket home related durables during the pandemic, Consumers shifted their disposable expenditures towards travel and services, leading to one of the largest declines In the history of the Grille industry on record last year.

Speaker 3

While we believe this shift largely remains in place today And Grille sell through continues to be negative. In the Q2, we began to lap the declines in consumer demand That we experienced last year and we saw continued stabilization in sell through trends with year over year growth in certain key weeks. Improving sell through along with our retail partners' destocking efforts over the last several quarters Resulted in a materially healthier inventory position in channel at quarter end. We believe that in channel inventory levels Are now sufficiently balanced with demand and we expect that replenishment rates in the second half will be closer to normalized levels Following a period of aggressive destocking, rightsizing inventories in channel has been a critical focus of the organization And the team's efforts allow us to enter into the second half of twenty twenty three in a substantially improved position. Given our better than expected results in the first half of the year, we are increasing our full year guidance to 585 To $600,000,000 in sales from a range of $560,000,000 to $590,000,000 And to $55,000,000 to $59,000,000 in adjusted EBITDA from $45,000,000 to $55,000,000 Dom will add further color on our updated financial guidance for the year.

Speaker 3

However, I'd like to highlight a few points. 1st, while we are increasing our guidance, we remain keenly aware that the macroeconomic environment and consumer backdrop Continue to be fluid. We will continue to manage the business with a disciplined approach. Next, our guidance continues to We are not building in any material improvement in consumer demand in the second half, But rather we expect that our sales will benefit from more normalized replenishment rates as channel inventories are now balanced. Now I'd like to walk through each of our strategic growth pillars.

Speaker 3

Our first pillar is accelerating brand awareness and penetration in the United States. As a reminder, we ended 2022 with 3.5 percent penetration of the 76,000,000 Grille only households in the United States. We continue to believe that we have a long runway of growth in household penetration as evidenced by the mid teens penetration we have in our more mature markets. In the Q2, the energy around the Traeger brand continued to build. We kicked off the drilling season with our annual Mother's Day promotion With savings across our grill assortment and giftable items for mom and content on social channels and our website Featuring top Mother's Day brunch and breakfast recipes.

Speaker 3

Then on May 20th, we held our 6th Annual Traeger Day, Which we describe as our most epic day of the year. Traeger Day is a celebration of all things Traeger and is dedicated to bringing our community together cook outdoors and to share food made on the Traeger with friends and family. Members of the Traeger hood were out in full force and were engaging with our brand By sharing pictures and videos of their food on social media, we had nearly 18,000 user generated content posts NVIDIA views more than doubled versus last year's Traeger Day. Next, in June, we celebrated Father's Day With our annual promotion, including discounts on select grills and a Traeger gift guide for every dad, Our influencer network was very active on social media, highlighting the great deals available on Traeger products, driving over 6,000,000 impressions. Father's Day is one of the most important selling periods at retail, and our sell through trends exceeded expectations.

Speaker 3

We also leveraged our team of brand ambassadors in the Q2. Our BAs conduct live demonstrations of our grills across the country, Which not only creates energy and educates consumers about the brand, but also generates sales in locations where we may not be able to reach the consumer otherwise. In Q2, our BAs focused on special events like county fairs and rodeos across the country. We had significant growth in sales generated at special events in the 2nd quarter as compared to last year, in particular Our brand continues to receive significant and favorable press coverage, Which is another avenue driving awareness of Traeger. In the Q2, our total media impressions more than tripled compared to the Q2 of last year With articles, product reviews and mentions in Forbes, The Wall Street Journal and The New York Times amongst others.

Speaker 3

Our next growth pillar is disrupting outdoor cooking with product innovation. A key milestone for our organization in the 2nd quarter Was winning a Red Dot Product Design Award for our Timberline Excel Grill. The Red Dot Award is a preeminent award recognizing product In conceptual design, with a jury of roughly 50 international experts who test, discuss and assess Winning the Red Dot Award is truly an honor And speaks to the high level of innovation that Traeger is bringing to the outdoor cooking industry. Earlier this year, we launched 2 new grills, Our Ironwood and new premium griddle, the Flat Rock. We have been pleased with the strong consumer reception of both products.

Speaker 3

Our new Ironwood has performed well at retail and has garnered positive media attention, including a positive review by Rolling Stone. The Ironwood is a great example of our strategy to cascade innovation from halo products, in this case the Timberline XL, Which launched last year to other grills throughout the product line. We have been pleased with sell through trends for our new Ironwood thus far. Our Flat Rock Rental has performed strongly as well. As we decided that initial distribution in the Flat Rock would be somewhat limited, We expect to ramp production in the second half to fulfill solid demand at retail and expect Flat Rock volumes to grow As production accelerates into next year.

Speaker 3

In the Q2, we made a key addition to the team in the area of innovation and design. In May, we hired Brendan Welch as EVP of Engineering. Brendan will play a critical role in the product development and technical execution His extensive experience bringing amazing and innovative product to market with companies like Sonos and Bose Make him a great addition to the Traeger leadership team. Welcome to the Traeger hood, Brendan. Our next strategic pillar is driving recurring revenues through our Consumables business.

Speaker 3

In the Q2, our consumables category continued to be pressured as compared to prior year, Driven by lower sales at a customer who introduced a private label pellet offering. However, sell through excluding this customer remains healthy and trended positively to the Q2 of last year, demonstrating the recurring nature of our pellet business Even in what remains a tough environment, product innovation in our consumables business continues to be a key strategic imperative. In June, we launched our new steak blend pellet kit, which includes Traeger's steak blend pellets, steak rub, And chimichurri sauce mix, giving the consumer everything they need to cook the ultimate steak this summer grilling season. Consumers responded favorably as the kid is a great solution to make one of the most popular meals put on a Traeger. In the Q2, we continued to make inroads in terms of increasing distribution of consumables in the grocery channel.

Speaker 3

Our new barbecue sauce portfolio launched in Kroger with new and improved formulas and a more competitive MSRP. The sauces are packaged in a new, easy to use squeeze bottle with a flip top cap. The portfolio consists of Traeger Q, Apricot, Sweet and Heat and Texas Spicy sauces, and they rolled out in roughly 2,200 Kroger locations. We also added distribution of 3 flavors of pellets at 129 Raley's doors and 100 Piggly Wiggly locations. Our last strategic growth pillar is expanding the Traeger brand internationally.

Speaker 3

In the Q2, our international markets continue to be pressured As consumers in our key markets abroad contend with inflation and dealers work through excess inventories. However, similar to the U. S, Dealer inventories ended the quarter in a substantially more balanced position and we are optimistic this will allow for more normalized replenishment activity In the second half of the year, despite a tough consumer environment in our international markets, the energy around the Traeger brand continues to grow. In the international retail doors, we continue to be focused on driving productivity and awareness through our in store marketing and sales efforts, including merchandising enhancements and product demonstrations. This year, we refreshed over 1,000 points of distribution across Europe With updated branding and imaging, including POS signage that explains Traeger's wood pellet system and Wi Fi connectivity to the consumer, We have also grown our regional demo teams.

Speaker 3

These pit masters demo Traeger Grills and food every weekend from March to July Outside of retail locations in key international locations in the UK, Germany and other markets in Europe, We believe these on the ground initiatives in our core international markets should drive awareness of our brand And we continue to see a meaningful long term opportunity to grow Traeger outside of the U. S. Overall, I'm extremely pleased with the progress we have made over the past several quarters. Our strong efforts have allowed the company to be in a significantly Improved position with balance sheet and channel inventories now better lined with demand and improvement in gross margin and cost reduction efforts Driving an expected improvement in EBITDA in fiscal 2023. Despite the progress we have made, We acknowledge that the macroeconomic environment remains uncertain.

Speaker 3

We will continue to manage the business with a focus on navigating the near term, while also investing for long term growth. And with that, I'll turn the call over to Dom.

Speaker 4

Thanks, Jeremy, and good afternoon, everyone. I'm pleased with our Q2 performance and with the progress we made over the last several quarters on our initiatives to improve the financial positioning of the company. Today, I will begin by reviewing our Q2 results and then comment on our updated fiscal 2023 guidance. 2nd quarter revenues declined 14 percent to $172,000,000 Grille revenues declined 21 percent to $93,000,000 Grill revenue was negatively impacted by lower unit volumes as our retail partners continue to destock in an effort to lower in channel inventories As well as a lower average selling price as we lowered pricing on end of life and legacy models. Despite lower year over year revenue, Grille revenue performance was ahead of our expectations in the quarter.

Speaker 4

Consumables revenues were $35,000,000 Down 17% to Q2 of last year, driven by lower sales of pellets. Our consumables business continued to be negatively impacted by the loss volume with a customer who introduced private label pellets last year. Excluding this customer, del flu of pellets was healthy and up over prior year. Additionally, in Q2, we lapped last year's large loading of food consumables into our grocery channel. Consumables sales were modestly ahead of our expectations in the Q2.

Speaker 4

Accessories revenues increased 7% to $43,000,000 Driven by growth of Traeger Accessories as well as meter. Geographically, North American revenues were down 16%, While rest of world revenues were up 3%. Gross profit for the 2nd quarter decreased to $63,000,000 From $73,000,000 in the Q2 of 2022, gross profit margin was 36.9%, Up 25 basis points versus Q2 of 2022. The increase in gross margin is primarily driven by 1, Lower transportation costs, which drove 170 basis points of margin benefit and 2, FX favorability of 120 basis points. Offsetting these margin drivers were increased dilution of 220 basis points and other negative drivers worth approximately 40 basis points.

Speaker 4

Sales and marketing expenses were $28,000,000 compared to $42,000,000 in the Q2 of 2022. The decrease was driven primarily by lower marketing expense and employee costs. General and administrative expenses were $52,000,000 Compared to $31,000,000 in the Q2 of 2022. The increase in G and A was driven by higher equity based compensation expense, Partially offset by reduced employee expense. 2nd quarter operating expenses continued to benefit from the restructuring and cost Savings actions taken last year in addition to a highly disciplined approach to operating expense planning as we entered 2023.

Speaker 4

2nd quarter operating expenses also benefited from a shift in the timing of certain expenses for the second half of the year. Net loss for the Q2 was $33,000,000 as compared to net loss of $133,000,000 in the Q2 of 2022. Net loss per diluted share was $0.27 compared to a loss of $1.13 in the Q2 of 2022. Adjusted net income for the quarter was $4,000,000 or $0.04 per diluted share as compared to adjusted net income of $4,000,000 Or $0.03 per diluted share in the same period of 2022. Adjusted EBITDA was $21,000,000 The Q2 as compared to $17,000,000 in the same period of 2022.

Speaker 4

2nd quarter adjusted EBITDA was ahead of our expectations, Driven by better than expected grills and consumable sales, as well as a shift in the timing of expenses out of Q2 into the second half of the year. Next, I'll review our balance sheet highlights. At the end of the second quarter, cash and cash equivalents totaled $14,000,000 Compared to $39,000,000 at the end of the previous fiscal year, we ended the 2nd quarter with $404,000,000 of long term debt. At the end of the quarter, the company had drawn down $40,000,000 under its receivables financing agreement, resulting in total net debt of $429,000,000 In terms of liquidity, we ended the 2nd quarter with total liquidity of $155,000,000 up from $98,000,000 at the end of the first quarter. The sequential increase in liquidity was driven by the benefit of cash flow generated in the Q2 as we sold through inventories and collected receivables in our peak selling season.

Speaker 4

Inventory at the end of the second quarter was $98,000,000 compared to $153,000,000 at the end of the Q4 of 2022. I I am pleased with the continued progress we have made in rightsizing balance sheet inventories and believe we are appropriately positioned for the current demand outlook. Importantly, in channel inventories ended the 2nd quarter in a materially improved position and weeks of supply at retail are now in line with our target range. As we enter the second half of the year, we believe that channel inventories are more balanced and that retailer destocking is largely behind us. Next, I'll discuss our updated outlook for fiscal year 2023.

Speaker 4

Given our better than anticipated results in the first half of twenty twenty three, We are increasing our guidance for the year. For revenues, we are now guiding to a range of $585,000,000 to $600,000,000 We're down 9% to 11% to 2022 as compared to our prior revenue guidance of $560,000,000 to $590,000,000 On adjusted EBITDA, we are guiding to $55,000,000 to $59,000,000 up from our prior guidance of $45,000,000 to $55,000,000 And up from $42,000,000 in fiscal year 2022. Our guidance continues to assume a return to growth in the second half of the year, Driven by normalized replenishment rates as channel inventories are now in a substantially more balanced position and as we lap the large impact to our business Caused by destocking in the back half of last year, we are reiterating our outlook for full year gross margins of 36% to 37%, Which represents 80 basis points to 180 basis points of improvement relative to our fiscal year end 2022 adjusted gross margin of 35.2%. We expect to see the largest year over year gain in gross margin in the Q3 given the expected improvement in fixed cost leverage as we lap the large sales decline we Furthermore, we are expecting that approximately $4,000,000 of expenses that Shifted out of the first half of the year will fall into the second half of the year.

Speaker 4

Overall, I am pleased with the progress we have made on our initiatives to increase our financial flexibility And to position the company for a return to growth in the second half of the year and beyond. As our increased outlook indicates, We have growing confidence in our near term strategy. We will continue to manage the business with a high level of discipline and agility as we navigate the current environment We look forward to continuing to execute against our long term strategy. I'll now turn the call over to the operator for questions. Operator?

Operator

Thank If you change your mind, please press star followed by 2. When preparing to ask your question, please ensure that your phone is un muted locally. Our first question comes from Simon Segal from BMO Capital Markets. Simon, please go ahead.

Speaker 3

Thanks. Hey, guys. Good afternoon. Nice job on the progress. Did You guys call out performance of D2C versus wholesale domestically.

Speaker 3

Could you elaborate a little more on the lower grill ASP you mentioned in the Maybe the same question for lower consumables ASP and then how you're thinking about ASP for on both maybe for the next several quarters. Sorry about my choking.

Speaker 5

Yes, no worries. Yes, on the Grille side with respect to ASP, we took Fairly aggressive pricing over the course of the pandemic to offset inbound transportation costs. As we emerge from that environment, that macro environment and begin to see macro tailwinds in inbound Transportation that are now reflecting in our P and L, not obviously fully, but in drips and drabs, it's driving some margin expansion. We subsequently decided to begin taking price back down on most of our grills to effectively pre pandemic Levels save 1 or 2 outliers. One example of that being the fact that we're moving through end of life product On our previous generation ironwood and timberline with the new products that replace those, those will sit in market for a period of time At a fairly lower price point than is normal.

Speaker 5

So that's kind of one time, but the remainder of it really is bringing pricing back What we believe are more appropriate levels to stimulate the right level of volume, but nothing abnormal relative to where we were pre pandemic. And I think on the pellet front, it's probably more just a nuance of dynamics around channel mix And nothing signaling any changes in pricing strategy.

Speaker 3

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

Speaker 5

The dilution specific to yes, so yes, right. That's really tied to 2 components. The first being some channel mix where we tend to see co op dollars at a higher rate relative to other channels. So that's one component of it. The second one is the fact that the promotion that we ran or the promotions that we ran in Q2, which are normal this time of year performed, well in excess of our expectations, which stimulated More sell through than we were forecasting, which in turn just drives higher gross to net dilution on the P and L.

Speaker 5

So nothing That would signal anything other than our promotions did what we effectively needed them to do and in fact outperformed.

Speaker 1

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

Speaker 5

Thank you.

Operator

Thank you. Our next question comes from Peter Benedict from Baird. Peter, please go ahead.

Speaker 6

Hey guys, thanks. Thank you

Speaker 7

for taking the question. First of all, just on

Speaker 6

The guidance for the year, you took it up. Clearly, the first half is better than you thought. How is the second half relative to maybe what you were thinking at the beginning of the year Just in terms of revenue and profits, is it kind of consistent? Or is what you're seeing here Having you embrace a bit more of a positive view on second half?

Speaker 8

No, it's consistent.

Speaker 5

I would probably point out a couple of things. 1, we in relation to top line as we We exceeded our internal forecast in the first half of the year. We're taking that full beat and rolling it forward. I would note that, one, we do expect the same rebound to growth in the second half of the year. Previously, we've alluded So this kind of tale of 2 halves, so that remains consistent.

Speaker 5

I'd say that as a component of that, we do remain cautious As we proceed through the course of the year, so one underpinning of this, of our forecast In the back half of the year, which again is consistent with what we spoke to on the previous call is the fact that this isn't driven by sell through growth. It's driven by the comp Where we began to aggressively destock in the back half of last year, so we're benefiting from that comp. So I think that's kind of the main point that I would make as we track into the second half of the year. But Again, we're sort of marrying some confidence with cautious optimism as we Consider some of the macro dynamics that are still at play and the fact that this is more a function of the comp than anything else. On the EBITDA front, I would just Mentioned that it's important to consider the $4,000,000 of timing expense that I had mentioned on the call.

Speaker 5

So from an EBITDA standpoint, we did exceed Our internal forecast through the first half of the year and specifically in Q2, however, we're not rolling forward the entire beat there because of this $4,000,000 And timing shifts are something to consider as you think about modeling the back half of the year.

Speaker 6

That's helpful. Thanks, Dom. And then just on inventory, obviously very nice level here, several 100,000,000 How should we think about that as we move through the balance of the year? I think 3Q typically or I think you were thinking it would be similar 2Q, that was 90 days ago. Is that still the case?

Speaker 6

Can we start building inventory if Americans are an opportunity to continue to bring it down?

Speaker 1

How should we think about the shape of inventory over the balance of the year?

Speaker 4

Thank you. Yes. I mean, this

Speaker 5

is a real big win, right? I mean, we've been really focused on inventory over the last 12 months with inventory levels peaking Q2 last year, and we're really excited to announce Our inventory position in channel is largely where it needs to be, our target weeks on hand are aligned with our expectations, if not maybe a little bit lower than they need to be, which provides For some opportunity, and we saw this in Q2 of a more normalized replenishment rate. In terms of how you think about inventory in Q3, Q4, I think you would expect to see some inventory build in Q3 In advance of the holiday period in Q4 as well as the fact that METER benefits from much more seasonality in Q4. So there will be I would expect to see a moderate drawdown on inventory in Q4 as we sell through that And then ending the year strong as we think about the unlock on working capital between 202223 from an inventory standpoint.

Speaker 4

All right, great. Thank you very much. Thank you.

Operator

Thank you. Our next question comes from Joe Feldman from Telsey Advisory Group. Joe, please go ahead.

Speaker 2

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

Speaker 3

Yes, Joe. So let me step back a bit and talk about where the industry is. If you look at Sell through in 2022, it was down meaningfully,

Speaker 4

somewhere mid high teens.

Speaker 3

Year to date, it's still down, but at a much lower rate, let's say, Low sort of low mid single digits. And so the industry is high ticket durable discretionary items Are still challenged and we're hearing that in the industry and across product categories. So It feels like we are nearing a trough. And in terms of recovery, look, that's a Good question. We're doing everything we can to understand the environment to model replacement rates.

Speaker 3

But I think we are getting to the end of this period of pull forward that we've been feeling the last sort of 18 months. And, but the strength of recovery we'll see. I think there are a variety of Factors that goes into that, what we're really benefiting from right now is combination of a few things. Number 1, Sell through has felt stable and it was not stable for a long period of time. 2nd is this destocking effect.

Speaker 3

I mean It was a real drag on our top line. The back half of last year was very painful for that reason. That is largely behind us. In channel inventories are healthy. We are feeling good about inventories on our balance sheet.

Speaker 3

So The confluence of these events in markets, although there's not a tailwind in terms of the category or in terms of the broader economy Relative to high ticket durables, because the inventory is under control and because we are internally just managing Expenses in a very lean way, inventory in a very lean way, and really starting to trade out some of the high cost inventory, All of these things are leading to better performance, but there's not an industry tailwind that's driving this.

Speaker 2

Got it. That's really helpful. Thanks, Jeremy. And then if I could follow-up with one more, just the On the consumable side, the rollout to Kroger was terrific. And I guess, as always, we would love to see you guys roll it out everything faster to everywhere.

Speaker 2

So I guess can you share more thoughts about kind of the strategy over the next maybe 6 to 12 months how you're going to roll things out And consumables?

Speaker 3

Absolutely. So, yes, so let me first address pellets. We talked about pellet sell through as being healthy. We've been aggressively pursuing the grocery channel For pellets and we're seeing nice growth there, we believe that although the grills are a considered purchase, consumers will go to a destination after doing their research. The pellets and other consumables need to be convenient purchases.

Speaker 3

So we're seeing nice sell through in grocery. In terms of the other consumables, we highlighted sauces, rolling them out In an improved packaging configuration, as well as at a lower price point that was just more appropriate for grocery, The market received that very well. We had a lot of our until that rollout, A lot of our consumables sort of rub and sauce business, it really started in specialty retail, where larger Higher price points sold through and grocery is just more competitive. So we're feeling good about The uptake of this new packaging and no question, we'll be rolling it out methodically Overtime in grocery, but early indication is very positive.

Speaker 2

Great. Thanks guys and good luck with the 3rd quarter.

Operator

Our next question comes from Ramsey Connick from Jefferies. Ramsey, please go ahead.

Speaker 8

Hey, guys. How are you? I joined the call a little late. So I guess maybe, Jeremy, let me get some perspective from you. I know this Flat Rock product Has done very well.

Speaker 8

Maybe I don't know if you discussed this, but maybe give us a little more perspective on the reaction from, I guess your customer base from the accounts, not necessarily actual customers, but your wholesale accounts. And Given that success, are they asking you to produce other types of gas products? Just want to get some perspective there on how you're thinking about the future Going forward from a product category perspective? Thanks.

Speaker 3

Yes, Randy, it's a great question. Kindly, a few of us were out in market last week. We spent a couple of days in Seattle, had a chance to walk into A number of retailers who carry Flat Rock, there's good and bad news. The good news is, is that it's selling through well. The bad news is inventory channel is really light.

Speaker 3

And that's not a surprise to us. We The intended launch was it was to be constrained, it was to be limited and part of that is selling A product outside of our core wood pellet grill category. The other is, if you think back to when we started building these, inventory was a dirty word. And so we built a very disciplined constrained launch and it has by far exceeded Our expectation, I was in a specialty retailer last week that had received Three units, they sold through in 24 hours and is still waiting to get more. Now they do buy through A distribution center.

Speaker 3

I was in another retailer that actually pre booked a meaningful number, And they have sold more than 30 units and they were out of inventory as well. So The good news is there's a lot of demand and I would much rather fix a supply problem than a demand problem. We are ramping up production On that, and we should be caught up to our existing channel by the Q4. But the goal is to really is to increase distribution next year. In terms of the broader category question that you ask, Are they asking for other products?

Speaker 3

Right now, they're just asking for more Flat Rocks. And so we certainly see within the griddle category an opportunity first to win at the Flat Rock. But there are some other products in that category that we think makes sense and we're contemplating those. But beyond that, we just feel like between griddle, the size of the griddle category, Wood pellet grills and our 3.5 percent household penetration, there's a balance between introducing new products And staying focused and going really deep at what we're good at. And I would say for now what we're hearing is we like the brand, we like the position in retail, Give us more griddles and I think that certainly is plenty of runway for the next couple of years for us.

Speaker 8

Super helpful. And again, I joined late, so I don't know if you went over this. But can you give some perspective, if you haven't given it yet, on how the pallet or Traeger looks relative to the broader category of Grill, I guess, gas at the moment, like what are you seeing in each versus in the U. S. Versus international?

Speaker 8

Like, I'm trying to get what I'm trying to get at is, where are we In the bottoming process of these pellets and gas at the moment? Thanks.

Speaker 3

So if we're to step back and look at the broader outdoor cooking category, I would say that charcoal is flat, Pellet is gaining modestly. Griddle has gained aggressively And gas is declining. And so I think Griddle category gained aggressively partly because it was new. It caught a lot of excitement. But I think the growth currently and the growth in the future, it is going to be brittle and it's going to be wood pellet And it will be at the expense of gas.

Speaker 3

Charcoal is interesting. It's you could sort of delineate charcoal into 2 Consumer segments, those buying really inexpensive, almost disposable consumable low price charcoal grills for briquettes. And then those more the enthusiasts buying higher end Kamado solutions, The charcoal category seems to be pretty flat over the last couple of decades and it probably stays there. But gas still occupies, Still owns greater than 50% of the dollar share. Wood pellet is up to about 20% and growing.

Speaker 3

If you look at unit share, wood pellet is significantly lower And notably Traeger because we sell a much higher ASP than gas.

Speaker 8

Let me just let me add yes, of

Speaker 3

course. And I'll just add one Yes. Just one follow-up thought on that, which is, if you look at this category over time, this category is resilient. It does recover, always has, always will. There are 76,000,000 households that own grills and my guess is that number We'll be higher 2 to 3 years from now.

Speaker 3

And so it's really a question of what does the troughs look like how long is it, when does it begin to recover. And so it's a little bit more of a when than an if. And I think all of the historical data suggests that We think we're getting closer to a trough in the broader category. So we see we sort of see our objective is Number 1, stabilize the business, be lean and as we generate return on our spend, drive gross margin and then start to lean back into investment

Speaker 4

Well put. Thank you so much, Jeremy.

Speaker 1

Thanks, Graham.

Operator

Thank you. Our final question comes from Brian McNamara from Canaccord Genuity. Brian, please go ahead.

Speaker 6

Good afternoon, guys. Thanks for taking the question and congrats on the improved results. I wanted to dig a little deeper into channel dynamics, Particularly your competitor channel inventories. Is there anything to call out there, any significant Improvement, whether it be by fuel type or the like, with a small unit share, presumably, Traeger is not the wasn't the problem to begin with. So Did you guys feel boxed out having to wait for your retail partners to clear all of this other stock for your growth to resume?

Speaker 4

Thanks.

Speaker 3

Yes. I would say there's no question in the back half of last year, It wasn't just a Traeger battle, it also wasn't just a category battle, it was an inventory battle. And every retailer was pushing on this. There were certainly moments where We had at a SKU level, at a retail, at a distribution center level, low inventory that we'd have to Sort of aggressively push our retailers to bring back up to reasonable weeks on hand. But I would say It's really more of a it's a broad it's been a broader category challenge.

Speaker 3

And I wouldn't characterize the back half of last year as being a problem getting inventory into retail. It's really It's just for us it's just focused on normalizing inventory levels. Fortunately every retailer did it And retailers are getting healthier. So we feel good about where we are. We like the declines that we're seeing In terms of how they're moderating and we're currently if you look at it, trailing 12 months on units, It is meaningfully below pre pandemic levels and all that suggests is as we catch up to replacement cycles, The category is going to grow, but to your original question, I was there some impact at the margin of Trying to get inventory into retail, maybe some, but not really the driver of revenue as much as just general destocking.

Operator

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

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Earnings Conference Call
Monroe Capital Q2 2023
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