Traeger - Q3 2024

Executive Summary

• Q3 2024 revenue grew 3.7% to $122.1M, led by 32.5% growth in Grills; gross margin expanded 440 bps to 42.3% and Adjusted EBITDA rose to $12.3M, though GAAP net loss was $(19.8)M.
• Management raised FY24 guidance: revenue to $595–$605M, gross margin to 41.8%–42.3%, and Adjusted EBITDA to $78–$81M, citing stronger 2H margin drivers and better grill sell-through/replenishment.
• Strength came from sub-$1,000 grills and effective holiday promotions; margins benefited from lower supply chain costs (320 bps), a one-time freight credit (110 bps), and other efficiencies, partially offset by ~210 bps promotional dilution.
• Key risk: Accessories (MEATER) remains pressured near term despite marketing changes and new product launches; company expects sequential improvement but continues to plan for 4Q Accessories decline.
• Potential stock catalysts: margin re-acceleration and repeated guidance raises vs. headwinds in Accessories and lingering macro sensitivity; company argues the grill category has likely found a trough and expects better 2025.

What Went Well and What Went Wrong

• What Went Well
  • Returned to top-line growth: total revenue +3.7% YoY; Grills +32.5% on strong promotions and replenishment; NA revenue +10.4% YoY.
  • Significant margin expansion: gross margin 42.3% (+440 bps YoY), with 320 bps from lower supply chain costs, 110 bps one-time freight credit, 70 bps warranty, 50 bps pellet mill efficiency, and other +100 bps.
  • Raised FY24 outlook again: revenue $595–$605M, GM 41.8%–42.3%, and Adjusted EBITDA $78–$81M; CEO: “results…ahead of our expectations,” positioning for growth as innovation pipeline accelerates.
• What Went Wrong
  • Accessories down 31.3% YoY to $24.6M on MEATER weakness and lower Traeger-branded accessories; Rest of World revenue down 40.1% (notably Europe/MEATER partnership-related).
  • Mix and promotional dynamics pressured ASPs; management acknowledged 210 bps GM dilution tied to promotions (e.g., Labor Day), and expects Q4 GM to be the lowest of the year given mix and holiday promos.
  • Consumables revenue fell 11.2% to $22.5M due to seasonal ordering shifts; management flagged timing effects and expects 4Q consumables to return to growth.

Transcript

Operator (participant)

Hello and welcome to the Traeger Q3 2024 earnings conference call. My name is Alex, and I'll be coordinating the call today. If you'd like to ask a question once the presentation has finished, please press star followed by one on your telephone keypad. I'll now hand it over to your host, Nick Bacchus, Vice President of Investor Relations. Please go ahead.

Nick Bacchus (VP of Investor Relations)

Good afternoon, everyone. Thank you for joining Traeger's call to discuss its Q3 2024 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 we get started, I want to remind everyone that management's remarks on this call may contain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and views of future events, including but not limited to, outlook as to revenue results for consumables and accessories categories for Q4 2024 and our anticipated full-year fiscal 2024 results.

Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied herein. I encourage you to review our annual report on Form 10-K for the year ended December 31, 2023, our quarterly report on Form 10-Q for the quarter ended September 30, 2024, 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 place undue reliance on these forward-looking statements, which we speak to only as of today. We undertake no obligation to update or revise them for any new information. This call will also contain certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income or loss, adjusted net income or loss per share, and adjusted EBITDA margin, which we believe are useful supplemental measures.

The most comparable GAAP financial measures and reconciliations of the non-GAAP measures contained herein to such GAAP measures are included in our earnings release, which is available on the Investor Relations portion of our website at investors.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 Andrus, Chief Executive Officer of Traeger. Jeremy.

Jeremy Andrus (CEO)

Thanks, Nick. Thank you for joining our Q3 2024 earnings call. I will start by reviewing our Q3 performance and then turn the call over to Dom to discuss our financial results and to provide more detail on our 2024 financial guidance. This afternoon, we reported solid Q3 results that exceeded our internal expectations and demonstrate our team's dedication to driving consistent improvements to the business. Our Q3 performance included several important highlights. First, we returned to top-line growth in the quarter, with revenue growth of 4%. Critically, this growth was driven by very strong performance in our grills category, which grew 32% as compared to the prior year. Second, our profitability improved significantly. Q3 gross margin expanded by 440 basis points. This improvement in gross margin was driven by both external factors as well as our margin enhancement initiatives, which continued to bear fruit.

Expense discipline, along with the strong gross margin improvement, translated to adjusted EBITDA of $12 million, a significant improvement from last year's $5 million, and drove adjusted EBITDA margin expansion of 610 basis points versus Q3 of last year. Given our better-than-anticipated Q3 performance, we are increasing our fiscal 2024 financial guidance. We now expect sales of $595 million-$605 million and adjusted EBITDA of $78 million-$81 million. At the midpoint of the range, we are increasing our adjusted EBITDA guidance by 4% on top of last quarter's 15% increase in guidance. This increase in our adjusted EBITDA guidance is being driven by our Q3 performance and our expectation for full-year gross margin to be 41.8%-42.3%, up from our previous 40.5%-41.5% range. The growth in our grills business in the Q3 reflects strong sell-through at retail during the period.

Our strategy to lean into promotions this year, given the soft industry demand backdrop, was successful, and the consumer responded favorably to our Labor Day promotion. Given that our retail partners experienced better-than-anticipated sell-through in our peak season, channel inventories coming out of the Q2 were in a very clean position, and the strong consumer demand in the Q3 drove upside in replenishment sales. I am pleased with the stronger-than-anticipated grills demand in the quarter. Despite this performance, we continue to view the consumer demand backdrop as mixed for our category, and we think the consumer remains discerning in their purchasing behavior. While we saw healthy sell-through across our overall grill assortment, we continue to see outperformance in grills that are priced below $1,000, which we believe demonstrates that the consumer remains selective in their spending patterns.

While we did see a reduction in our grills ASP, partially due to this mix shift, as well as our promotional strategy, we are bringing new customers into the Traegerhood, and we are gaining market share. We view this favorably as our strong brand loyalty and attachment of adjacent revenue streams like pellets and accessories contribute to a high customer lifetime value. The strength in our Q3 grills performance is giving us the confidence to increase our full-year outlook for the grills segment. We are now assuming positive low single-digit growth in grills for the year. I am very pleased with our ability to grow our grills revenues in an environment that remains challenging for big-ticket and home-related goods purchases. Our sell-through performance in the Q3 demonstrates that there is a strong and growing appetite for the Traeger brand.

As I have discussed on prior calls, our largest opportunity and our first long-term growth pillar is to accelerate brand awareness and penetration in the United States. I believe that the elements for growth remain in place and that our brand health is stronger than ever. For example, our research shows that Traeger's unaided brand awareness as of the Q3 increased by approximately 20% as compared to 2022. The fact that awareness of the Traeger brand is meaningfully growing in a challenging industry environment and during a time when we have not been investing aggressively into top-of-funnel marketing is evidence of the strength of our brand. The affinity for the brand within the Traegerhood is also evidenced by our industry-leading Net Promoter Score, which remains materially higher than any other outdoor cooking brand.

The energy around Traeger is being fueled by our continued investment in community engagement and brand activation. Our social media presence continues to be a strong source of connection with the Traegerhood, and our digital content is an important part of the consumer flywheel. We continue this activation strategy in the Q3. In August, we kicked off Traeger Game Day. This social campaign features giveaways, contests, recipes, and content, all focused on engaging the Traegerhood during football season. We also launched Traeger Kitchen in the Q3. Traeger Kitchen is a weekly YouTube series featuring pro chefs and pit masters giving step-by-step tutorials of their favorite recipes cooked on the Traeger. Viewers can get tips, tricks, and recipes for cooking on their Traeger from some of the biggest names in outdoor cooking by tuning in.

The feedback and reception from the Traeger Kitchen has been fantastic, and we are seeing strong growth in YouTube subscribers since its launch. Moving on to our accessories business. In the Q3, the strong growth in our grills business was partially offset by softness in our accessories category, driven by a reduction in revenues at MEATER. As we discussed last quarter, MEATER is seeing pressure on its e-commerce sales, which we believe is largely attributable to a change in its demand creation strategy earlier this year, which proved ineffective. We were anticipating continued pressure on MEATER in Q3, and sales results ended modestly lower than our expectations. The good news is that the Q3 is MEATER's lowest volume period of the year, and we have implemented strategies to drive improvement going forward.

MEATER is a Q4-weighted business, and ahead of the holiday selling period, the team is focused on re-accelerating prospect marketing to fill the funnel with potential customers. We are increasing our demand creation with a focus on driving conversion at a healthy ROAS in MEATER's peak season. MEATER has also brought innovation to the market with its launch of MEATER Pro XL, MEATER's four-probe solution in September, and its recent launch of MEATER Pro Duo, its new two-probe solution. We believe that MEATER's revamped demand creation strategy and recent product innovation will drive improvement in the Q4 and into next year. However, while we expect sequential improvement in the trend, we are planning for a decline in our accessories business in the Q4. Moving on to consumables. Our consumables revenues declined in the Q3. However, this was largely due to a shift in revenue pace in our pellet business.

Underlying demand trends for consumables remained healthy, and Q3's sell-through was positive for both pellets and food consumables. We are expecting our consumables category to return to positive growth in the Q4. Driving recurring revenue via our consumables offering remains a long-term growth pillar. In the Q3, we relaunched our Meat Church Blend Wood Pellets, a limited-edition pellet, in partnership with pit master and Traeger ambassador, Matt Pittman. On the food consumables side, we continue to gain distribution and added rubs into Safeway for the first time in September. Overall, I am pleased with our Q3 performance and our team's ability to execute. Thus far in 2024, we have demonstrated our ability to successfully navigate a period of challenging consumer demand in our category and have grown Adjusted EBITDA while continuing to invest in our long-term growth pillars.

I am grateful for our retail partners with whom we have worked closely to drive a successful year thus far and with whom we are eager to continue to grow. I also want to thank the entire Traeger team for their hard work and dedication to serving our consumer and driving continued improvements in our business. As I look forward to the rest of this year and into next year and beyond, I continue to be extremely confident in Traeger's positioning and our ability to drive growth. The improvement in sell-through trends over the last two quarters is encouraging and has ensured that channel inventories remain healthy and appropriate. This is great news as our product innovation pipeline is strong and is expected to accelerate into 2025 and beyond. I'll now turn the call over to Dom to discuss Q3 financial results in more detail. Dom?

Dom Blosil (CFO)

Thanks, Jeremy, and good afternoon, everyone. Today, I will review our Q3 performance and discuss our updated outlook for fiscal year 2024. Q3 revenues grew 4% to $122 million. Grill revenues increased 32% to $75 million. Grill revenue strength was driven by better-than-anticipated sell-through as consumers responded favorably to our promotional offering and our retail partners' replenished inventories following healthy demand in the Q2. During the Q3, we saw strong volume growth in grills, which was partially offset by a lower ASP driven by a mix shift to lower-priced grills, a higher mix of direct import sales, and strategic pricing actions. Consumables revenues were $23 million, down 11% to Q3 last year. Q3 was negatively impacted by revenue pacing shifts in the quarter. Underlying consumer demand trends in our consumables business remain healthy, and sell-through was positive in the Q3.

We expect to see positive revenue growth in consumables in the Q4 compared to the prior year. Accessories revenues decreased 31% to $25 million, driven by lower sales at MEATER as well as a decline in Traeger branded accessories. Geographically, North America revenues were up 10%, while Rest of World revenues were down 40%. Rest of World revenues were pressured by a reduction in sales load-in related to a European product partnership with MEATER. Moving on to gross margin, which continues to be a highlight in our profitability improvement story, Q3 gross profit increased to $52 million from $45 million in the Q3 of 2023. Gross profit margin was 42.3%, up 440 basis points versus the Q3 of 2023. Our gross margin continues to benefit from both external factors, including lower transportation rates, as well as the ongoing internally-driven margin optimization efforts.

Q3 gross margin expansion was driven by one, lower supply chain costs, which drove 320 basis points of favorability. Two, 110 basis points of favorability related to a one-time credit from a transportation partner. Three, warranty favorability of 70 basis points. Four, pellet mill efficiency worth 50 basis points. And five, other benefits worth 100 basis points. These favorable items were partially offset by dilution of 210 basis points. Sales and marketing expenses were $26.2 million compared to $25.9 million in the Q3 of 2023. As a percentage of sales, sales and marketing expenses were down 60 basis points versus the Q3 of last year. General and administrative expenses were $24 million compared to $25 million in the Q3 of 2023. G&A expenses decreased 130 basis points as a percentage of sales.

I am pleased with our ability to effectively leverage our operating expenses and to maintain financial discipline as our sales returned to positive growth in the quarter. Net loss for the Q3 was $20 million as compared to net loss of $19 million in the Q3 of 2023. Net loss per diluted share was $0.15 compared to a loss of $0.16 in the Q3 of 2023. Adjusted net loss for the quarter was $7 million, or $0.06 per diluted share, as compared to an adjusted net loss of $14 million, or $0.12 per diluted share in the same period in 2023. Adjusted EBITDA was $12 million in the Q3 as compared to $5 million in the same period of 2023. Moving on to balance sheet highlights.

At the end of the Q3, cash and cash equivalents totaled $17 million compared to $30 million at the end of the previous fiscal year. We ended the Q3 with $416 million of short and long-term debt, resulting in total net debt of $399 million. Our liquidity profile remains healthy, and we ended the Q3 with total liquidity of $177 million. Inventory at the end of the Q3 was $105 million compared to $96 million at the end of the Q4 of 2023 and $102 million at the end of the Q3 of 2023. We believe that balance sheet inventory levels are appropriate for our current demand outlook. Furthermore, in-channel inventory levels were healthy coming out of the Q3, given better-than-expected sell-through of grills in both the second and third quarters of this year.

We are pleased with the health of channel inventory levels and believe our retail partners are well-positioned from an inventory perspective as we begin to ship new grill product in the Q4 and into 2025. Now, I'd like to discuss our updated financial outlook for fiscal year 2024. We are increasing the low end of our revenue guidance range and are updating our revenue outlook to $595 million-$605 million. Our revenue guidance reflects our current expectation for positive low single-digit growth in full-year grills revenues and improvement from our prior guidance for approximately flat grill revenues. The improved outlook for the grills category is being partially offset by the expectation for continued pressure in our accessories category, driven by an expected revenue decline at MEATER. We're expecting our accessories category revenues to decline in the Q4 versus the prior year.

For Adjusted EBITDA, we are raising our full-year guidance to a range of $78 million-$81 million, an increase from our prior range of $74 million-$79 million. The improvement is being driven by an increase in our Gross Margin outlook. We are now assuming full-year 2024 Gross Margin of 41.8%-42.3%, up 490 basis point-540 basis points versus last year, and up from our prior range of 40.5%-41.5%. The increase in our Gross Margin outlook reflects upside in the second half of the year as compared to our prior expectation. We are seeing a larger-than-expected benefit from certain margin components, including a higher mix of grill sales from our direct import program, which carry a higher margin than grills fulfilled through our domestic logistics infrastructure. Overall, I am highly encouraged by the progress our organization continues to make.

In the Q3, we returned to positive sales growth, led by 32% growth in grills. We are seeing the benefit of the focus the organization has placed on margin improvement over the last two years, and our gross margin is expected to see 515 basis points of expansion this year at the midpoint of our guidance range and an incredible 685 basis points over the last two years. Our strong execution is allowing us to raise our Adjusted EBITDA guidance once again. I continue to believe that we are very well-positioned as we look to drive long-term shareholder value. And with that, I'll turn the call over to the operator for any questions. Operator?

Operator (participant)

Thank you. As a reminder, if you'd like to ask a question, please press STAR followed by one on your telephone keypad. If you'd like to remove your question, you may press STAR followed by two. Our first question for today comes from Anna Glaessgen of B. Riley. Your line is now open. Please go ahead.

Anna Glaessgen (Senior Research Analyst)

Hi, good afternoon, guys. Thanks for taking my questions. First, I'd like to touch on the implied guidance for grills in the Q4. I believe on the last quarter, you spoke to a sell-in benefit flowing into 4Q, which was a little bit earlier than the prior expectation for the beginning of 2025. Is that still the case, and really, the angle of my question is trying to understand the shift in growth from 3Q to 4Q. Obviously, we're not pulling forward 40% growth in grills quarter over quarter, but just any help there?

Dom Blosil (CFO)

Yeah, good question. I think, directionally speaking, you're right in that we don't expect the strong Q3 grill growth in Q3 to sequentially hold in Q4. We will see that moderate down. I think Q4 is largely in line with our prior view, but we do expect that, although moderated in Q4, we expect some marginal growth in grills. And I think, generally speaking, this is all predicated on the fact that we're really pleased with, obviously, sell-through in Q2 as well as sell-through in Q3 in part driven by our Labor Day promotion and then just the outsize benefit in Q3 related to the replenishment coming out of Q2.

Anna Glaessgen (Senior Research Analyst)

Got it. Thanks, and then shifting to consumables, nice to see the positive POS in the quarter. Can you speak to the current competitive landscape in pellets? Are you still seeing the same degree of competitive encroachment from private label or discounting from peers?

Jeremy Andrus (CEO)

Yeah. We started seeing competition in pellets six or seven years ago as Traeger built out the category, and there was a greater installed base of wood pellet grills, both Traeger and otherwise. I don't know that we've seen the landscape shift meaningfully. We talked a couple of years ago about the introduction of a private label pellet into one of our larger retailers, and we felt the impact of that. So we see brands come and go, and I don't know that we're seeing the landscape shift meaningfully on pellets. We tend to believe that, and our research would suggest, that a Traeger owner is loyal to the Traeger brand. One of the things that we attempt to do as we invest in product marketing around pellets is tell a story around the quality of the pellet, how it influences the cooking process and the outcome.

I think it's notably important that Traeger is vertically integrated around pellets, and we do that in part so that we can control the process, and we tune our grills to our pellets, and every pellet's a little bit different, and so we certainly believe that we're well-positioned from a product and a brand perspective. There are low barriers to entry in this category. To build a low-quality pellet, there's plenty of sort of mill space that a competitor could lease from a manufacturer, but that's been the case for many years, and we're not meaningfully seeing the landscape shift.

Anna Glaessgen (Senior Research Analyst)

Great. That's it for me. Thanks.

Jeremy Andrus (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from Megan Alexander of Morgan Stanley. Your line is now open. Please go ahead.

Megan Alexander (Executive Director)

Hi, thanks. Good afternoon. Thanks for taking our questions. I wanted to start a little bit back to maybe Anna's first question just on the grill sell-through and the category. You did talk about seeing sequential improvement, and you are seeing, I think you talked about positive POS in the second quarter, so I think you're implying that you still saw positive POS in the third quarter. But you are, I guess, your comments around the category maybe were a bit subdued, balanced. Don't want to put words in your mouth, but can you just talk a little bit about how you're thinking about the category? Are you seeing enough to say we've maybe turned the corner? And related to that, how is what you're hearing from the retailers on early ordering for the spring selling season kind of playing into how you're thinking about the category into 2025?

Jeremy Andrus (CEO)

Yeah. So first of all, we believe the category is down low single digits, 1.5%-2% year to date. And correct, we did see positive sell-through in grills in the third quarter. And we're forecasting grills to be up sort of low mid-single digits for the year. So the answer is category. We are outperforming the category. We are taking some share. As we step back and think about where we are in sort of the life cycle of recovery, I would say, first of all, this is a, I would characterize this category as very resilient as we look at decades of industry data. We certainly had an exaggerated pull forward in the pandemic.

I think what we're seeing right now is that we're getting beyond that pull forward, and it's colliding a little bit with a weakened consumer who's less focused on high-ticket durables, less focused on home goods. It's our belief that the category is. It's found bottom. We think we found the trough. Then I think the question is, what is the timing and the trajectory of the recovery? What we know is that just looking at unit sell-through in prior decades and certainly just immediately prior to the pandemic, between the trough and a normalized category, there's a lot of growth. What that trajectory will look like, I think, is unclear. Given that it feels like we found bottom, we're seeing interest rates come down. We believe that will start to motivate more housing transaction, more investment in current homes.

These are some of the catalysts to driving the category. We believe that 2025 will be a better year for the category than 2024. And certainly, as lower interest rates become more attractive in housing and category like this and we get further from the pandemic, we just see growth in the category. So look, we look at this, and the category dynamics, the macro, and really intersecting with the investments and the initiatives in our business. And we think this certainly tees up a very successful next two to three years.

Megan Alexander (Executive Director)

That's really helpful. Thank you. And maybe just a follow-up to that for Dom, on the EBITDA side of things, when we do kind of see a normalized recovery in top line, how should we think about maybe incremental margins? I think you guys have been really good at controlling the OpEx, still leveraging sales and marketing in this quarter, but the gross margins also come in maybe a bit better than your expectation. So how should we think about when you might look to maybe reinvest some of that upside back into top-of-funnel marketing? I know you've been pretty candid that you want to wait to do that until there's a meaningful inflection in the category, but could you do that next year, maybe sooner rather than later? Just trying to get a sense of how to kind of think about the flow-through in a more normalized backdrop.

Dom Blosil (CFO)

It's a great question. I mean, a lot of it is predicated on signals that we want to lean into from a top-line growth standpoint, right? So Jeremy talked about category finding bottom. So timing is certainly important. That said, I mean, I don't know that we think about investing the upside per se so much as we think about our long-term financial model and guardrails that we've defined in order to ensure that when there is a return to top-line growth, which in part we'll want to fuel the fire of via increased investment capacity and sort of based on where we want to invest in that increased capacity. But I don't know that we would lean in beyond what kind of the guardrails dictate around profitability and flow-through.

So clearly, we would unlock incremental capacity both in advance of and post kind of this return to growth, which we would invest. But we wouldn't do it beyond those guardrails to ensure that we're continuing to drive EBITDA expansion. And certainly, gross margin has performed in line with expectations in relation to the initiatives that we've been focused on as well as the macro that's been beneficial in terms of just the predictability around how that's improved the gross margin picture. However, I do think that those initiatives probably got us ahead of where we thought we would be today, which is great news. And we've probably found a level that is maybe more manageable as we think about how we plan for the future, continuing to focus on gross margin.

but clearly, that OpEx discipline is a second layer and important component to how we think about profitability, which ultimately needs to be profitable, sustainable growth, right? That's an important pillar to how we think about the future and one that will continue to manage both with discipline as well as a focus on ensuring that we're smart about where we're doubling down and/or increasing investments to accelerate growth on top line.

Megan Alexander (Executive Director)

Great. Super helpful. Thank you.

Operator (participant)

Thank you. Our next question comes from Simeon Siegel of BMO Capital Markets. Simeon, your line is now open. Please go ahead.

Simeon Siegel (Managing Director and Senior Retail Analyst)

Hey, good afternoon, guys. It's Dan Stoller on for Simeon. Thanks for the time here. I wanted to ask a bit on MEATER. The first is if you think you've fully addressed the marketing transition or if you're still working through that and there's just sort of a bit of a timing lag for sales to inflect, and the second is just seeing if you've ever given color before on what % of the Traeger grill owner install base currently owns a probe. Thank you.

Jeremy Andrus (CEO)

Yes. So first of all, we certainly have been deep into this marketing investment and sort of transition strategy. We are seeing some nominal improvements. It's hard to. It's hard to call sort of return to sell-through until we get through the fourth quarter. Fourth quarter, we do a meaningful share of business, but we like some of the early signals that we're seeing. And some of the investment really was around prospect marketing in an effort to drive fourth-quarter performance. I don't know that it's a flip that gets switched immediately, but I think we're making some progress. In terms of the percentage of the Traeger install base that owns a MEATER probe, I would say it's small at this point. Currently, there is limited integration between the MEATER and the Traeger grill. That's something that will increase over time.

Given that we've built MEATER as an independent brand while we have found opportunities to collaborate from a brand perspective and co-market, we think there's still a lot of opportunity in front of us. What I can tell you is as we look at the MEATER installed base, a very small percentage of MEATER owners cook on a Traeger. It's sort of low, mid-single digits. So we think there's a real opportunity to cross-pollinate both brands. That's something that we're focused on. I would say certainly more opportunity in front of us than progress today.

Simeon Siegel (Managing Director and Senior Retail Analyst)

Got it. Appreciate the detail. Thank you.

Jeremy Andrus (CEO)

Okay. Thanks.

Operator (participant)

Thank you. Our next question comes from Peter Keith of Piper Sandler. Your line is now open. Please go ahead.

Peter Keith (Managing Director and Senior Research Analyst)

Hi. This is Alexia Morgan for Peter Keith. My first question is on tariffs and China exposure. It seems like most recently you said that three-quarters of grills and then most of accessories are manufactured in China. But do you have any update to that? And what are you able to do to mitigate tariff risk?

Jeremy Andrus (CEO)

Yes. Definitely a hot topic and one that we've started talking about, well, we've been talking about for a number of years now. So first of all, let me provide just some general information on state of play in terms of where we manufacture and where we may have risk. About 80% of grills are manufactured in China. About 20% are manufactured in Vietnam. Currently, wood pellet grill is not included on the import code in terms of tariffs. So although we have exposure to China, tariffs were assessed only on our accessories and not on our grills. With that said, we've been thinking about diversification for some period of time. Again, 20% produced in Vietnam, although we're in the process of adding a very large new manufacturing partner in Vietnam that has the ability to scale meaningfully.

And so the 20% is certainly a backward-looking number and not a forward-looking number based on the capacity that we'll have. If you go beyond grills, as I said, non-MEATER accessories are largely manufactured in China. We're currently assessed to tariff on those. MEATER is produced entirely in Taiwan, and our consumables are produced here in the U.S. There's a lot of chatter on tariffs right now. And I think it's going to take a little bit of time to sort out exactly the new administration's strategy on tariffs, timing, magnitude of those tariffs. But I would say that we have been building optionality around in our sourcing model. We've been diversifying not just to Vietnam. We're looking closely at other manufacturing options in Asia. We've been working on Mexico as a long-term geography in which to manufacture.

And although the U.S. is not a viable manufacturing source given a number of the dynamics of the category, we feel like we have built a fair bit of optionality with a partnership, say, we either have in place or that we're in the process of building. And with that optionality, we think we have the ability to react reasonably quickly and reasonably efficiently to how tariffs evolve. And so I think we're well-positioned to do the best thing for the business. We won't be reactive. We've been very proactive in this process. And as we understand the shifting landscape, we will make decisions accordingly. Of course, when tariffs are assessed, and to the extent that they are assessed across geographic sourcing locations, we will work closely with our manufacturers to become more efficient, to figure out how we can share in those tariffs. And pricing is always a lever.

I suspect that in an environment where tariffs are broad-based and pervasive, that most brands will also be leaning to price to mitigate the downside of those tariffs, and we would look to do the same.

Peter Keith (Managing Director and Senior Research Analyst)

Okay. Thank you so much for the color. And then I just have one more on Gross Margin. It looks like Gross Margin expansion continued to look really good. Can you break down the drivers there over the next 12 or so months? And then it looks like fully your Gross Margin guidance implies Q4 Gross Margin below the first three quarters. Do we have that math right? And if so, what's the cause of that?

Dom Blosil (CFO)

Yeah. Your math is right on Q4 being kind of the lowest quarter of the year. There's a couple of factors to that. One is really a product mix dynamic. Second, we are promotional in Q4. It's a normal promotional period for Traeger. I mean, those are probably the two main factors at play. I would also call out that sequentially from Q3 to Q4, you could explain away some of the sequential decline as you implicitly model Q4 based on a freight credit we received as part of our gross margin task force. We focus both on future operational efficiencies but have also been able to uncover some benefits based on the past, and there was a one-time credit that we realized to the tune of 110 basis points in Q3, which obviously won't repeat in Q4.

So that does maybe mitigate or offset some of the sequential decline based on how you model Q4. But I think the main drivers really are just around promotion, around holiday, as well as some product mix dynamics at play in that quarter specifically. In terms of longer-term view, I mean, obviously, we won't be getting into specifics on how we think about gross margin for next year. We have talked about how we've sort of jumped ahead of initial plans on gross margin progress. It's really been a phenomenal outcome, and we're really happy with how things have tracked. Clearly, there's been a macro assist that we benefit from.

But more so, the team has really dug in and focused on driving initiatives to impact both the short-term as well as the long-term view, whether it be incremental expansion and/or just stability in kind of a new level of gross margin for the future. And so where I would provide optimism about the future, obviously, it's dynamic. And I would say that we're sort of within a realm where we feel comfortable but aren't ready to speak beyond that in terms of our viewpoint on gross margin next year.

Peter Keith (Managing Director and Senior Research Analyst)

Okay. Thank you. That's it for me.

Jeremy Andrus (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from Peter Benedict of Baird. Your line is now open. Please go ahead.

Peter Benedict (Managing Director of Equity Research)

All right. Hey, guys. Thanks for taking the question. Just the 210 basis points of gross margin headwind that was kind of within that number in the quarter. Was that just the promotions? Was that the Labor Day promotions? Having not, you didn't do them a year ago. You did them this year. I'm kind of curious if that was the driver there.

Dom Blosil (CFO)

That's right. Yeah. Yeah. It's tied to promotional activity. Yep.

Peter Benedict (Managing Director of Equity Research)

That's correct, and so as we think about going forward, I mean, consumers clearly respond to promotions, not just from you, from a lot of companies. We track, I mean, what's your view on the promotional stance for Q4? And as you start to bring new innovation in 2025, how are you thinking about pricing and promotion on those items?

Dom Blosil (CFO)

Yeah. I think for Q3, we did run an incremental promotion, our Labor Day promotion. So that was new in the quarter. Q4 promotional activity is consistent with past years. It's just kind of our normal holiday promotion, plus there's a MEATER element as they're in kind of their peak season. What we're seeing is certainly success with our promotions. It's sort of uncovered the fact that there's pent-up demand, especially at lower price points. And I think where you see these significant unit volume increases, both at a sell-through level as well as on a reported basis, one could attribute that in large part to sub-$1,000 products, both in terms of where we leaned into promotion more so than past years and due to the fact that that's probably where there's pent-up demand and certainly where there's meaningful volume.

So I think that's been an interesting learning, both in terms of how we think about continuing to unlock market share gains and sort of growth in kind of peak seasons when we want to spike the spike. And it certainly may inform how we think about the future. And clearly, promotion has been an important lever for the brand, although in a restrained way. We won't stray outside of kind of the guardrails that we believe are valuable from a brand standpoint. But clearly, there's an opportunity so long as we can check the box on margin and brand health, etc., to continue to use that as a lever to stimulate demand in the right period of time.

Peter Benedict (Managing Director of Equity Research)

That's helpful. And thank you. And then maybe for Jeremy, the brand awareness improvement in the last couple of years is certainly encouraging in an environment where grill is not front of mind for folks. Maybe were there any regional callouts there? Anything kind of just of interest to dig behind that number? And then as you think about watching for signs of coming off the bottom here with grills, is there anything within maybe your heritage markets that might be of note? I'm thinking Oregon. I'm thinking Utah. Would it make sense for those markets to come out first? Those are the early adopters. I don't know. Just trying to think about what you're looking for in terms of signs that we're starting to come off the bottom, not just bottoming. Thank you.

Jeremy Andrus (CEO)

Yeah. We were certainly pleased with that new data point on awareness, and I would say it's really a testament to two things. The first is our consumers are evangelical. I mean, they're passionate about the brand, and they share. There's no way to stretch a marketing dollar further. There's no more credible way to tell a brand story than to have a consumer share it with a friend. I think the second is that although we have not been leaning into top-of-funnel marketing investments, where we invest every day in the brand puts the brand in front of new consumers in terms of our presence on social media or work with influencers. Our increased investment in points of sale in high-traffic accounts that gets seen by consumers.

And so low top-of-funnel investment, but still a lot of opportunities to be in front of consumers in their everyday lives at retail and on social media. In terms of where we're seeing growth and how we might speculate what that means as we sort of invest more top-of-funnel and see the category start to grow, I would say the awareness increase are fairly broad-based. They're more noted in markets where our household penetration is lower. And I think that's just the function of a small base and an opportunity to get in front of a greater percentage of consumers who have not seen the brand. We saw a nice uptick in the Atlanta DMA where we made some investments in top-of-funnel as we tested some new marketing strategies.

I would say we're building all of the foundation from a product marketing brand and sales perspective to really drive growth in the future. We always have the optionality, as we see the category demand begin to recover, to really lean into that with top-of-funnel investments. There are certain things that we do as a baseline to building our brand every day to engage in our consumer base. Then there are other things that we can simply put fuel on the fire as we start to see a consumer more receptive to this category. I would end by saying we've talked about investments that we've made in new product development and in innovation.

I'm actually really proud of the team that's helped create the capacity to make these investments in our product team for driving hard to bring new products to markets, not only because part of the moat around our business is building a better product experience, but on the sales and the marketing side, we've gotten so good at launching products that where we're going to spend a dollar in addition to product development is in launching new products. And we tend to make a dollar in a product launch stretch really far in our sales and marketing organization. So I think the investments that we've been making in a very lean resource environment over the last couple of years are going to be very high-returning as we bring these new products to market. So that's going to happen whether the category recovers or not.

We think it's on its way, but we'll be probably a little bit more reactive to accelerating growth as we see the category more the consumer in this category more focused on replacement.

Peter Benedict (Managing Director of Equity Research)

Gotcha. Thanks for that. Good luck.

Jeremy Andrus (CEO)

Thank you.

Peter Benedict (Managing Director of Equity Research)

Thank you.

Operator (participant)

Thank you. Our next question comes from Joe Feldman of Telsey Advisory Group. The line is now open. Please go ahead.

Joe Feldman (Senior Managing Director and Assistant Director of Research)

Thanks for taking some questions, guys. I was hoping you could kind of reconcile something for me, and maybe it's just I misunderstood. With regard to the consumables sales, which were down 11%, I guess you guys, if I heard you correctly, you said sell-through was positive. So can you square that up? I mean, ASP is way down, or what's going on there?

Dom Blosil (CFO)

No. That's a good question. Yeah. I'm happy to clarify. So I think first and foremost, it's kind of a low point from a volume standpoint for the year. So any kind of timing differences or otherwise, there's just magnification of that sensitivity, and really what took place in Q3 was some pacing of orders from a sell-in standpoint and/or another way to put it, from a reported standpoint between Q3, Q4, which will in turn benefit the number in Q4. So there's kind of a disconnect, obviously, between how the brand performed at point of sale from a consumable standpoint, which was up in sell-through, relative to what we reported, which is largely a sell-in number that sometimes is subject to pacing issues, but pacing changes based on the timing of orders, which in this case are landing in Q4.

And that's really, again, magnified by the fact that we're dealing with kind of a lower base, and therefore, it's kind of magnifying that percentage. But we do expect to see a return to growth from a reported sell-in standpoint in Q4. And I would add that kind of the underpinnings of health of consumables all remain intact, right? Attach rates remain kind of consistent with previous levels. The data that we collect via the installed base of connected product all shows consistency in usage across a handful of KPIs that we evaluate. So the health is there, and this is really just a timing function that's kind of happening between Q3 and Q4.

Joe Feldman (Senior Managing Director and Assistant Director of Research)

Got it. Thank you for clarifying that. And then maybe just a quick follow-up. Given the strength, and it's sort of been asked in a different way, but how are you guys thinking about inventory for the fourth quarter? And also just thinking further out, again, to the tariff question that was asked earlier, would you guys consider accelerating inventory to avoid when the actual tariffs potentially come? Because it seems like it's going to be broad-based beyond just China at this point. So I guess he's not in office yet, but at some point, we'll be.

Dom Blosil (CFO)

Yeah. Right.

Joe Feldman (Senior Managing Director and Assistant Director of Research)

Thanks.

Dom Blosil (CFO)

Yeah. Certainly, it's something we'll watch closely. And I think everything's on the table, but obviously, the implementation matters. And what Jeremy said, I think, is important in terms of timing, products on list, level of tariff, etc. And we'll be hyper-focused on this. I think we have a good plan in place to the extent that we need to react both in the short term as well as how we think about long-term mitigation efforts. In terms of using inventory as a lever, I just don't know that it would ever be sufficient to overcome tariffs. And eventually, you're going to have to face the news. So maybe in the short term, it buys you a little bit of time. But I just don't believe that that will be a lever that we pull. But everything's on the table, so never say never, I guess.

In terms of Q4 inventory, I mean, I don't know if you want to clarify the question. I think that the broad takeaway is in-channel inventory levels remain healthy. Balance sheet inventory levels are healthy in relation to how we forecast demand down to the SKU level as well as how we think about ramp for new product that we're planning to launch and potentially sell-in in Q4, as I think we referenced on a prior call, is a tailwind of revenue in that quarter. But outside of that, I mean, inventory is managed well. We have clean working capital and wouldn't see a deviation from that in Q4 if that answers your question.

Joe Feldman (Senior Managing Director and Assistant Director of Research)

Yeah. No, I was just trying to get a sense of how you're planning it for the quarter. It sounds like it's clean, and you'll manage it to the demand. So that makes sense. Thank you, Dom.

Dom Blosil (CFO)

Yeah. Yeah. Yeah. Of course.

Operator (participant)

Thank you. Our next question comes from Brian McNamara of Canaccord. The line is now open. Please go ahead.

Brian McNamara (Managing Director and Senior Analyst)

Hey, good evening, guys. Thanks for taking our questions. First off, what is your expectation for the grill market for 2025? Do you expect it to grow? I remember last year on the Q3 call, you said you expected another down year for grills. And whether the category grows or not, do you guys expect to grow next year? It seems like you have some tailwinds like new innovation, a potential replacement cycle from early pandemic purchases five years ago. Thanks.

Jeremy Andrus (CEO)

Yeah, Brian. So first off, from a category perspective, as I said, we're certainly getting to the end of the pull forward demand. And we think there are some macro catalysts that drive growth in this category in addition to just normalized replacement cycles as consumers invest more in their houses, transact more with houses with lower interest rates. And so we think the category is we think it's found or finding bottom categories down about 1.5%-2% year to date. And that's been the slowest rate of decline over the last three years. So we think that speaks positively to where the category is. In terms of forecasting category growth next year, hard to do other than we feel like we're getting on the backside of the pull forward demand, and we think we're heading towards recovery. We do think that there will be some category growth next year.

Hard to call a timing or trajectory of growth. And look, we've been investing in things that we believe will drive growth in the future, notably investments in new product development as we've been good brand stewards and making investments to continue to keep our community engaged. And so we're certainly not guiding to next year at this point in time, but we feel good about the investments that we're making in the business and feel like we're certainly getting closer to just seeing the resilience of this category getting back to growth.

Brian McNamara (Managing Director and Senior Analyst)

That's helpful. Secondly, I guess one for Dom, gross margins have been really impressive this year, but freight is moving in the wrong direction. Can you remind us what % is spot versus contract for you guys, and how do you plan to mitigate that potential risk?

Dom Blosil (CFO)

So I guess I'm not fully understanding the risk. I mean, I think what we've seen in the spot market is maybe a little bit more volatility this year. We saw spot prices spike kind of middle of the year around July, and they've kind of come back down. And I think from our standpoint, this continues to be a tailwind, maybe a tailwind that's starting to lessen over time as we lap the more dramatic improvements in the spot market. I'd say that the more obvious tailwind is the fact that we do have a fixed contract rolling off next year. It was a longer-term contract with rates well above spot. So that will be a tailwind, albeit smaller than what we've seen historically.

I would say that kind of the mix of fixed versus spot isn't something that I think we would communicate on this call other than we do enter into fixed contracts on an annual basis. I think over the last 12-18 months, we've probably been more naked in terms of the mix between fixed and spot by design, just given the volatility and the fact that there was a growing tailwind that we didn't want to miss out on by locking into high-fixed contracts at a greater degree of capacity. So I think we're kind of settling into, hopefully, a new norm. Like I said, there's a little bit of volatility this year, but clearly, it's been a tailwind and one that I think we're finding nice predictability in as we begin to plan a gross margin for the next year or two.

I would just add, too, that direct import continues to be a nice component of how we think about that picture more broadly between what we procure relative to how we think about leveraging partnerships to get the best pricing and remove touches throughout the supply chain that I think has been a growing component of mix within the business.

Brian McNamara (Managing Director and Senior Analyst)

Great. Thank you, guys.

Dom Blosil (CFO)

Yeah. Thanks for asking.

Operator (participant)

Thank you. Our next question comes from Phillip Blee of William Blair. Your line is now open. Please go ahead.

Phillip Blee (Equity Research Analyst)

Hey, guys. Good afternoon. Gains and gross margin are really impressive. And I think your EBITDA guidance assumes about half of that uptick for the full year, and gross margin outlook flows through to the bottom line. So can you maybe just talk about what's driving the differential there and then whether those investments could potentially lead to upside on the top line? Thank you.

Dom Blosil (CFO)

I don't know that I totally understood your question. Could you restate that? I'm sorry.

Phillip Blee (Equity Research Analyst)

Yeah. It looks like on your full year, it looks like the gross margin guide was an improvement about 100 basis points, and the EBITDA margin guide was about half that. Just kind of wondering what the differential is there, if it's further investments in growth or what kind of expenses are kind of driving that differential in margin?

Dom Blosil (CFO)

Got it. I got it. Yep. Well, so Q4 is heavily weighted in favor of MEATER revenues. They do about half of their sales in the quarter, and it's very much a direct-to-consumer/digital business. And so we do lean more heavily into investments to drive that growth. And so really, it's probably more a function of banking the upside in gross margin offset by an increase in operating expenses in the quarter, largely tied to those variable investments around digital marketing and demand creation that's more variable and tied to dot-com and D2C business, and mainly for MEATER given the weighting of their seasonality.

Phillip Blee (Equity Research Analyst)

Great. Great. That makes a lot of sense. And then you've spoken now over the past couple of quarters about a pipeline for newness next year and some upside there. Can you maybe just give us a little bit more color around the expected timing, what categories you're really focusing on, and then maybe how much of the assortment we should expect to be refreshed? Thanks a lot.

Jeremy Andrus (CEO)

Yeah. So first of all, as we've said on prior earnings calls, we've really moved to invest more in new product development. And we don't do it to time markets or recovery. We simply believe that this is an important moat around our business. And interestingly, we really began to invest more in 2022 and 2023 in the lean years so that as we came out of this market recession in the grill category that we would be positioned to grow. And so I think what that's going to mean is there will be more newness, and we will see newness more consistently. We launched an innovation platform in our Timberline grill in 2022 in the spring. Spring of 2023, we launched a model called the Ironwood where we cascaded technology from our Timberline down to Ironwood, which sells at $1,800-$2,000.

Our expectation is that that process will continue into 2025 and into 2026. I think one of the greatest capabilities that we have been in the process of not only investing in, but mastering is really thoughtful product strategy, product management, and product execution. That's sort of understanding the consumer all the way through engineering, manufacturing, and the process of going to market. There's more coming next year. There's more coming the year after. I've got visibility into multiple years of our product pipeline. One of the things that gives me the most confidence and that also offers me a lot of satisfaction is seeing our product and operations teams really step up and have the capability to deliver product on time, on quality, and on cost. These are capabilities that don't get developed overnight. They take time.

And I would say from the moment that we began to invest more in these capabilities to when we start to see us harvest some of those investments, we're getting close. And I think what's positive is that we will see that capability continue to drive growth in years to come. So there's a lot of new coming in, certainly the next three to four years of which I have visibility. And the focus will be on grills, accessories, and consumables.