Weber Inc.
Q1 2022 Earnings Call Transcript

Published:

  • Operator:
    Good morning and welcome to today’s Weber Inc. First Quarter 2022 Earnings Conference Call. My name is Jenna and I’ll be the Operator for today. If you’d like to ask a question for the Q&A session, please press star followed by one on your telephone keypad, and if you change your mind, it’s star followed by two. I’ll now hand over to the team. Please begin.
  • Brian Eichenlaub:
    Good morning and thank you for joining us today for our first quarter fiscal 2022 earnings call. I am joined this morning by Chris Scherzinger, our Chief Executive Officer, and Bill Horton, our Chief Financial Officer. I’ll start with our forward-looking statements disclaimer. As you are aware, certain statements made today, such as projections for Weber’s future performance, are forward-looking statements. Actual results could be materially different from those projected. For further information concerning factors that could cause results to differ, please refer to our public 10-Q SEC filing, our earnings release and our SEC filings, all of which are available on the Company’s website. During the call today, the Company may also discuss certain non-GAAP financial information. For a reconciliation of these measures to GAAP reporting, please refer to the Company’s earnings announcement, which has been posted on the Company’s website at investors.weber.com, and can be found in the Company’s SEC filings. A recording of today’s webcast will be archived for at least 90 days on Weber’s Investor Relations website. Now I’d like to turn the call over to Chris.
  • Chris Scherzinger:
    Thank you Brian, and good morning everyone. This morning, I’ll touch on three major themes from our first quarter. First is our solid sales performance, generally on track to our broader objectives leading into the 2022 season, particularly in the face of acute logistics and supply chain challenges in the quarter; second is our progress in proactively navigating these inflationary and disruptive market dynamics with a leadership mentality; and third is strong momentum and progress on our five key growth strategies, particularly the exciting new product innovations recently announced for the 2022 season. First let me talk about Q1 performance. The Weber team worked tirelessly to meet the needs of our customers amid continued strong demand for our products. We generated net sales of $283 million, a decrease of 8% from the prior year period but on a two-year stacked basis up 74.6%. Recall that the first fiscal quarter last year, which was the fourth calendar quarter of 2020, we saw unprecedented retailer restocking of depleted inventories coming out of the first COVID summer, when shelves were bare. This year’s Q1 results show strong sustaining demand in the face of healthier retailer inventories and represent a two-year compounded annual growth rate of about 30%. As you know, Weber is a seasonal business and our first quarter historically has been a low volume off-season quarter. We do believe we’re now seeing a return to normal outdoor cooking seasonality patterns and retailer order timing with fiscal Q2 and Q3 being our peak sales quarters. Like many organizations, our results were negatively impacted by the generational inflation headwind, including raw material commodity costs, extreme inbound freight cost increases, and unfavorable foreign exchange movements. These pressures impacted first quarter margins and led to an Adjusted EBITDA loss of $36 million. Since we last spoke to you, the operating environment has become more challenging and costly for our entire industry, and we believe these challenges will persist through the remainder of the year. Bill will cover this in greater detail shortly, as well as the positive financial impacts of the significant proactive actions we’re taking to mitigate the drag on near term financial results while also maintaining investment for future growth. Second, I’d like to talk about how we are navigating this very challenging operating environment. As I shared with you last quarter, we are intently focused on managing today’s costs and logistics challenges with agility and a leadership mindset, and I’m confident that when conditions eventually normalize, which they will, that Weber will come out stronger than ever. We have the strongest brand in the industry, we have a uniquely diversified global manufacturing footprint, and we have a world-class team bringing leadership, innovation and value to our consumers worldwide. Current container cost inflation, even at 10 times historic rates, cannot and will not derail our long term growth vision and success. That said, in this moment we are taking significant actions to combat the inflationary pressures. First, we’re driving numerous activities in our manufacturing, sourcing and transportation operations to manage costs down, including shifting manufacturing for certain product lines to different sites in our network, driving mid-season supplier negotiations and cost improvement initiatives, shifting transportation tactics at both the volume and mix level, and implementing commodity and currency financial management instruments. We also just recently introduced a second 2022 price increase in most key markets in order to address the even higher inflationary cost pressures than we saw six months ago when we took the first 2022 increase. We expect to see the impact of these combined pricing actions across the second and third quarters. Weber is a premium brand that does have pricing power in the marketplace on a global basis, yet this still requires great partnerships with our retail customers to execute given the difficult timing relative to the season. We are committed to delivering maximum value to our consumers and to building our business and our retail partners’ business collaboratively. In addition to cost reductions and pricing, we’re also aggressively pulling back SG&A expenses in areas that do not impact our demand generation for future growth levers. Combined, these three action plans will produce substantial offsets to the unprecedented inflation that 2022 is throwing at us. That brings me to my third and final topic today before I toss it to Bill, which is the exciting progress we’re making on the five key growth strategies for Weber, many of which are set to take great leaps forward in the 2022 season. At the risk of being redundant, long term thinking has always been one of Weber’s most defining characteristics and is one of the key reasons we’ve succeeded consistently over the past 70 years in good economic cycles and bad. In the face of today’s challenges, it’s in our DNA to keep an eye on the future and deliver the strategies and initiatives that will create shareholder value for many years to come. You’ve heard about these five key strategies from me in all of our communications to date, so today let me focus on how they’re coming to life in this moment to drive 2022 growth for Weber. First is introducing market disruptive new products. In January, we announced our new products for the 2022 season, really breakthrough products that re-imagine outdoor cooking and the experience for consumers. Our all-new 2022 Genesis line, including smart Genesis gas grills with Weber Connect built in, the new stealth addition of our SmokeFire smart wood pellet grill, Weber Crafted, the new outdoor kitchen collection of attachments and grill ware accessories that unlock new food discoveries and cooking methods on your patio to transform your Weber grill into a full blown, multi-faceted outdoor kitchen, and lastly a special 70th anniversary new product to be unveiled later this month, a pretty cool retro throwback to celebrate our heritage and our invention of modern grilling back in 1952. We are fired up about these products and the Genesis innovation on our flagship line, the most significant gas grilling innovation in 15 years. Here’s a quick rundown on the new Genesis. To start, it’s just larger, dramatically larger cook surface area, food prep area, and built-in storage with the largest high heat sear zone in the history of the Genesis. It has a proprietary lighting system called Night Vision that changes grilling after sunset forever, and a proprietary burner design called PUREBLU that delivers best-in-class high heat, even flame, and maximum fuel efficiency, plus integrated Weber Connect technology for real time food monitoring and step by step cooking instructions on your grill and on your phone and the built-in framework to turn that one single Genesis into a flat top grill, a pizza oven, a rotisserie pit, a stir fry and more with the Weber crafted line of grill ware, just a few examples of how we’re setting a new bar in outdoor cooking and taking our consumers’ experiences to new heights. Early consumer response has been extremely strong, piquing the interest of current Weber owners ready to trade up as well as owners of other lesser grills ready to move to a Weber experience. The second key strategy is to accelerate our direct-to-consumer and ecommerce revenue. Our Weber stores and grill academies internationally and our weber.com business across all regions showed strong performance in Q1, representing 12% of sales, and we have strong expansion initiatives in place for the 2022 season. We opened seven new Weber stores in the first quarter alone, bringing our total store count to 200 globally, and we’re on track to launch substantial weber.com site upgrades as well as new social influencer programming in all global markets in Q2. Third is expanding our retail customer base and new consumer revenue streams. We continue to deliver increased Weber presence across retail footprints in all regions globally, building on successes like REI and Best Buy in the U.S., Canadian Tire in Canada, Costco and Amazon in multiple regions around the world, and many more. We value building strong partnerships with retailers who can bring the Weber brand to life in their footprint. In addition, we have a number of exciting consumer programs going live or being piloted in 2022 to deepen user engagement and drive new recurring revenue streams, such as instructional video classes, grill trade-in events across Australia, as well as warranty and maintenance service programs. Fourth is expanding and deepening our presence in emerging markets. We are seeing great performance from our emerging geographies were Q1 sales were up 13% versus the prior year quarter. This growth was coming from developing countries in all regions with our most significant growth in the quarter coming from Mexico, Chile, Italy, eastern Europe, and China; and speaking of China, although it represents only a small part of our business today, we continue to see exciting investment opportunities building on the upcoming opening of our first Weber store in Shanghai for the 2022 season. Fifth and finally is executing on value-enhancing operational initiatives. While it may seem a paradox to talk about great progress operationally in the face of the current headwinds I discussed earlier, we continue to see great evidence that our multi-continent infrastructure is a productivity engine for Weber. This is a key competitive differentiator for us and a driver of long term value. Our new plant in Poland is yielding outstanding results and exceeding throughput and cost expectations; in fact, given our early success there, we are already leaning into add further capacity at the site. Looking ahead, both in the face of temporary but trying near term challenges and with a view to long term growth and category leadership, Weber remains exceptionally well positioned with the best brand, the largest geographic and consumer footprint, the best innovation engine, the best global operations, and the best team in the industry. I would like to take a moment to thank our team members around the world for their continued resilience, their passion and their commitment to our consumers in order to deliver maximum value to our shareholders. With that, I’ll pass it over to Bill Horton, our Chief Financial Officer to discuss the first quarter financials and guidance in greater detail. Over to you, Bill.
  • Bill Horton:
    Thanks Chris, and thank you everyone for attending our call today. As Chris mentioned, Weber is a seasonal business, and our first and fourth quarters historically represent our lowest sales quarters of the year with only the Australia and New Zealand business being in season for the quarter. Overall, in the first quarter we saw strong demand, but due to product availability issues caused by shipping delays, port congestion and China power supply limitations, we shifted some our early season trade sell-in to the second quarter. As discussed, Q1 fiscal 2022 net sales decreased 8% or $26 million to $283 million from $309 million last year, though they were up 75% on a two-year stacked basis. For the Americas, net sales decreased 13% or $23 million to $156 million from $179 million last year. On a two-year stacked basis, net sales increased 67% versus Q1 of 2020. Americas net sales this quarter were negatively impacted by supply chain related shortages of certain components, grill and accessories. We expect to make up this sales shortfall in Q2 and Q3. As we prepared for our selling season, we progressed on several initiatives, including increasing aisle space for our new product launches at key retailers, adding digital content in-store, and enrolling new influencers and ambassadors to our team. For EMEA, net sales decreased 4% or $3 million to $63 million from $66 million last year. On a two-year stacked basis, net sales increased 126% compared to Q1 of 2020. Our ability to expand the Weber brand into developing European markets has allowed us to continue to achieve strong growth in the region. We are structurally improving our business and expanding Weber stores in all major growth markets, targeting 20% to 50% more stores in all markets by the end of next year. We are also driving broad scale distribution up in several developing countries by more than 50% versus the beginning of 2021. Additionally, we are expanding our regional coverage in currently underserved emerging countries, such as the Basque and Andalusia areas in Spain and the Campania area in Italy, to get more payback on our national advertising spend. Both examples have focused metropolitan areas of more than one million people. In Asia-Pacific, net sales were $64 million, which were in line with last year’s sales. On a two-year stacked basis, net sales increased 57%. As I mentioned, Australia and New Zealand, our two largest markets in the region, are now in their core selling season and have seen very strong overall demand. Our Asia-Pacific team remains focused on brand and channel growth with investment in advertising and partnerships to engage, acquire and retain new generations of Weber consumers. Now turning to our gross margin results, for the quarter we faced unprecedented cost challenges with supply chain and material cost inflation and tariffs at historically high levels. Gross profit decreased $71 million or 53% to $64 million from $135 million last year, and gross margins decreased 2,100 basis points to 22.6% from 43.6% last year. It is worth noting that although not a year-on-year call-out, we continue to be burdened with more than $50 million of negative impact from tariffs despite being the only major grill manufacturer with a significant domestic manufacturing presence. We’ve talked about macro environmental factors impacting our business, and I’d like to share some examples of what we are seeing today, specifically for inbound freight. Although we realized continue commodity and purchased goods cost inflation in the quarter, the most significant driver of our gross margin rate declines was the result of record spot market pricing for export containers from China. For perspective, in Q1 2021 our global blended inbound cost of container was in the $3,500 to $4,500 range. Today, we are paying $14,000 and $16,000 on average per container, a year-over-year cost escalation of three to four times. In Q1, we shipped nearly 3,500 containers as we prepared for the coming grilling season. The negative impact to gross margin in the quarter was $31 million, an 11% impact on our gross margin rate or 52% of our year-over-year margin rate decline. The current situation is driven by multiple factors, including congestion of outbound shipping capacity in China following the power restrictions imposed by the government during our first quarter, continued high demand for shipping due to the Christmas season, and the shipping push leading up to the lunar new year. We are not expecting conditions to normalize during this fiscal year and our projections currently have inbound freight representing 16% of our full year cost of goods sold increasing more than three times from two years ago on a percent of sales basis, from 3% to 10% of sales. This surge in freight creates a $150 million-plus headwind on the business that is difficult to overcome in the short term. In terms of our approach to responding to inflationary pressures, we recently took our third price increase of the past 12 months in most regions, one in fiscal 2021 and two in fiscal 2022, and the impact will improve gross margin sequentially over the next several quarters. For example, in Q1 we realized 530 basis points of pricing impact which we expect to grow to 1,240 basis points in Q2. Selling, general and administrative costs for Q1 of 2022 increased by $34 million or 30% to $148 million year-over-year, and increased 1,540 basis points to 52.3% from 36.9% of sales last year. This increase was primarily driven by non-cash stock-based compensation expense of $21 million, higher one-time business and transformational costs of $6 million related primarily to our global SAP project, and $5 million in additional costs related to the 2021 June Life acquisition. Excluding the impact of non-cash stock-based compensation and other non-recurring costs, SG&A as a percent of sales was 39.9% versus 34.4% last year. For the quarter, net income decreased by $79 million or 1,626 basis points to a net loss of $75 million from net income of $5 million in the prior year. As previously discussed, the decrease was primarily driven by $21 million of higher non-cash stock-based compensation expense and $71 million of lower gross profit as a result of higher costs and inflation and lower sales over the prior year. Adjusted EBITDA decreased 196% to a loss of $36 million or 12.7% of net sales compared to $38 million or 12.2% of net sales last year. Again, the variance was primarily driven by higher cost of goods sold for the quarter and the return to normalized seasonality patterns. For Q1 of 2022, net cash used in operating activities increased to $188 million from $161 million for the three months ended December 31, 2020, an increase of $27 million or 17%. The increased usage was driven by global supply chain challenges leading to increased inventory levels, inflationary cost increases in raw materials and inbound freight, and an unfavorable impact of higher prepaid expenses and other current assets, primarily for income taxes. This was partially offset by favorable timing of payments impacting accounts payable. As you are aware, our credit facility includes a revolving credit facility and a term loan. As of December 31, 2021, we had $132 million of available borrowing capacity under the revolver and our last 12-month average net debt leverage ratio was 4.2 times and is compliant with our credit agreement. Keep in mind that we look at our leverage on an average basis given our usage of the revolver to fund working capital during Q1 and Q4, which also happened to be our lowest cash flow and EBITDA quarters due to the seasonality of our largest markets. Based on our growth plans, we believe our cash and cash equivalents position, net cash provided by operating activities, and availability under our secured credit facility are currently adequate to finance our working capital requirements, planned capital expenditures, and debt service. In the future, we may allocate additional capital towards strategic acquisitions and we may opportunistically assess options to strengthen our balance sheet and ensure the most efficient capital structure. These may include additional debt financing, stacking facilities, and other potential financing options. I’d like to wrap up my prepared remarks by providing updated guidance for fiscal year 2022. We previously guided net sales in the 6% to 8% range above 2021 and continue to anticipate sales within that range on a constant currency basis. However, when taking into account the negative headwinds on foreign exchange rates, particularly with the strength in the U.S. dollar against the euro, we now expect net sales to increase 4% to 8% on an actual currency basis for fiscal year 2022. In addition, while we are aggressively pursuing cost savings opportunities and substantial price increases to offset inflationary challenges and will continue to do so, we no longer have certainty that those initiatives can fully offset the inflation headwinds, particularly in the first half of the year before all the pricing actions take hold in full. In view of the continued external headwinds and our updated cost assumptions, we are now lowering our full year Adjusted EBITDA expectations to be between $275 million and $325 million. Nevertheless, we remain highly confident in the long term outlook for Weber and remain laser focused on executing on our five key strategic initiatives which will yield both short term and long term benefits for our stakeholders. With that, I’d like to open up the call for questions.
  • Operator:
    We have our first question is from Simeon Siegel of BMO Capital Markets. Please go ahead.
  • Dan Stroller:
    Hey, good morning. This is Dan Stroller on for Simeon. Thanks for your time here, and Bill, thanks for the specifics on the freight impacts, that was very helpful. Chris, on the call today, you mentioned the capabilities in Poland starting to really come to fruition. I think previously we were expecting it to start impacting the P&L in either late 2Q or sort of the back half. Just wondering if those impacts may start to be realized earlier, now or anything, and then I have one on inventory, thanks.
  • Chris Scherzinger:
    Sure, thanks Dan. Poland is going really well, as I mentioned in the remarks. I would say we started up in October and so we have a full quarter under our belt, and we continue to expand different product lines over time, and so I don’t think it will be fully maximized in terms of its impact on the P&L until the Q4 timeframe, to be honest, in full, but sort of growing linearly from here until there, and so generally things are going really well. Because of the dynamics that I talked about relative to the freight markets in particular, but commodities as well, we do see advantages to accelerating our investment there and to increase and shift more volume into that facility as it’s able to handle it and as we’re able to qualify new lines and new products SKUs to be produced there. I don’t know, Bill, if you want to add anything in terms of when you would see that hit the income statement and the margin line, but from an operational standpoint, it’s going extremely well.
  • Bill Horton:
    Yes Chris, I think you’ve hit it. I think, Dan, we’re certainly seeing the benefits on the P&L today because that plant is producing product that is, from a margin standpoint, accretive versus overall, if you will. But certainly, as Chris mentioned, it will sequentially improve and be more significant as we get into the meat of the season, so like Chris said, by Q4 you’ll get full run rate on Poland and, as he mentioned, we’ll be adding the additional lines in Poland that also brings more scale and productivity to that facility.
  • Dan Stroller:
    Got it, thanks. On inventory, anything you could give in terms of the composition of either in-transit or what the growth looks like on a unit basis versus cost? Thanks.
  • Bill Horton:
    Yes, let me--there’s a number of factors in play, and certainly our increased inventory was, as you saw in the financials, a driver of our operating cash flow in the quarter. Q1 inventory in 2020, one thing you have to remember, it was abnormally low, if you will, given the strong POS season last year and low retail inventory, so you definitely see that dynamic as we’re now replenishing--you know, last year we were replenishing well into Q1, Q2, and I think you’re seeing now a return to more normalized inventory levels. A second significant factor in our inventory is capitalized variances and higher cost of goods from Q4, so obviously if your inventory is more expensive, if you will, given what we’re seeing in inflation right now, you’ve got that variance that was sitting in Q4 that’s now being rolled off, but that’s sitting on the balance sheet right now and, as you mentioned, the longer transit times that we’re seeing, generally two times from call it two years ago what we’re seeing in transit times is having an impact. Then another part of the excess inventory is a conscious build-up of product coming into the season, so we’re seeing, as Chris mentioned, still really strong demand for product globally, so we’re protecting against the upside in sales and we’re bringing that product in, so that’s on our balance sheet as well. Then finally, as Chris mentioned in the Poland plant, we have a full raw material investment in finished goods built in Poland in parallel with our existing facilities, so as this dual supply of U.S.-built EMEA grills and the Poland plant start-up, you have a bit of a double count in there on inventory because we’re starting up the Poland plant, and just from safety stock levels, we wanted to make sure the Poland plant was executing on plan. I’ll kind of pause and see if that helps with your question.
  • Dan Stroller:
    No, that’s great. Thank you both, appreciate it.
  • Chris Scherzinger:
    Thanks Dan.
  • Operator:
    Our next question on the line comes from Megan Alexander of JP Morgan. Please go ahead with your question, Megan.
  • Megan Alexander:
    Hi, thanks very much. I was hoping you could talk about how your forecast is built out for the rest of the year in the Americas. Absent the shift you talked about to 2Q, are you assuming normal seasonality going forward, and if so, does that kind of mean we should cut our sales estimates given the base of 1Q did come in a bit below?
  • Bill Horton:
    Yes, I think great question. I wouldn’t recommend cutting your forecast, certainly. We’ve provided our guidance both on net sales, and there’s no dynamic within region, you know, that we purposely widened the range on guidance for a few reasons. First of all, as we’ve discussed, Q1 is by far our lowest quarter of the fiscal year, and given the uncertainty in the supply chain and some of the things that you’ve heard about, whether it be transit time increases, etc., we’ve got now 65% to 70% of our full year sales volumes still in front of us, so it just dimensionalizes even through Q1 into January that we still have our big part--the biggest part of our season, POS season still in front of us, so we’ve decided that until we get into our POS season, we’re going to hold a wider range on the sales outlook. The other piece in the Americas your question might relate to - you know, this Q1, Q2 dynamic that we talked about on the last call, that with the complexity in the supply chain and with the load of our new Genesis product line launch, there could be some shifting between Q1 and Q2 because of trade load for our new Genesis line, so you might be seeing some of that in our actuals. Does that help?
  • Megan Alexander:
    Yes, that’s really helpful. Just as a follow-up, in the prior guidance you were, I think, assuming 80% of that 68% growth was coming from price and the rest from units. Can you just talk about how that maybe has changed, given you are taking an additional price increase this year?
  • Bill Horton:
    Yes, so let me give you my perspective on the full year pricing. We expect pricing to be in the low double digits from a year-on-year growth standpoint. We expect foreign exchange, as we mentioned in our press release and on our prepared remarks, low single digit impact to foreign exchange, so therefore if you kind of back into the 4% to 8% guidance range on the top line, volume would be flat to down low to mid single digits. That’s our current range guidance as we see it right now, but again as we head into our POS season, we’re going to get much more insight into consumer demand once we get into the peak season.
  • Megan Alexander:
    Got it, thank you.
  • Bill Horton:
    Thanks for the questions.
  • Operator:
    Robbie Ohmes from Bank of America Global Research, your line is now open. Please go ahead with your question.
  • Robbie Ohmes:
    Hello, good morning. A couple of follow-ups on that. With the wholesale growth that you talked about - Best Buy and REI, can you give us any kind of update on how things look from your accounts regionally, and do you see any cannibalization or pushback from your wholesale partners when you’re opening up these new accounts?
  • Chris Scherzinger:
    Hey Robbie, it’s Chris. Thanks for the question. We haven’t seen that. I think it’s--it can be a test moment when you expand distribution, but we’ve been partnering very closely with our core distribution partners as well and I think our business is really healthy there. In fact, if you take a customer like Ace Hardware in the co-op and hardware channel, they’ve been one of our top performing customers, and so I think there is room for us to grow with new points of distribution that reach different consumers and different geographies, that don’t cannibalize the core. If you think about the entry into REI as an example, that’s primarily focused on our portable grills and specifically the Weber Traveler, and so that’s a little bit of a different type of shopping experience, a different use occasion for the consumer, and so it can be complementary to what goes on in our core channels. We certainly want to drive strategies with our core retailers as well as new retail partners to grow the business for them and for us, partnership in a collaborative way, and that’s been successful for us in recent years and it’s still successful this year.
  • Bill Horton:
    Yes Robbie, the other point--
  • Robbie Ohmes:
    That’s helpful.
  • Bill Horton:
    Sorry Robbie, this is Bill. The only thing I’d add is if you go back to 2018, when Chris and I started, this business was a $1.3 billion business, we’ve grown it north of $2 billion, and candidly when you look across $250 million of that growth has come from new customers, whether it be Costco if you go back a few years, and then you go into when we launched weber.com, Canadian Tire in Canada, now what you just mentioned with Best Buy and others, so we feel like we can manage through the complexities well and have done so, and will continue to do that.
  • Robbie Ohmes:
    That’s really helpful. Maybe this is for Chris as well, can you--Chris, can you remind us the acquisition strategy and what you’re working on or looking at these days?
  • Chris Scherzinger:
    Yes, thanks Robbie. We did create a new entity, subsidiary entity within Weber called 1952 Ventures, that’s named for our founding year when George Stephen founded Weber in 1952 and with the spirit of sort of reinventing the barbecue category, or frankly inventing the barbecue category, and that’s the strategic mindset that we go into with 1952 Ventures. We named Troy Shay, who is our Chief Growth Officer, also the CEO of 1952 Ventures, and Troy is currently focused on and in the process of evaluating a lot of different opportunities. As it speaks to either capital allocation strategy or the strategic intent behind different places where we would look to invest for disruptive and inorganic innovation, we would bring to bear the same strategies that we have for the core business, where we want to drive growth by extending into new segments, we want to drive growth by dialing up technology as a lever for the business, much like we did with the June Life acquisition a year ago, which has been really exciting for us, and then there are other high margin initiatives, like let’s say accessories as an example, where we can drive favorable gross margin mix and incremental consumer engagement in terms of purchase frequency and purchases and engagement with the brand in between grill purchases sequentially, and those are kind of the strategic pillars. I would say we look very diligently at potential candidates and are looking at potential candidates. They have to be accretive out of the gate and they need to be attractive from a mix standpoint, and then I would add we also like the idea of candidates that would benefit from the great infrastructure that we’ve built at Weber, particularly around a global footprint, and so with presence in 78 markets around the world, doing more than half of our business outside the U.S., and in particular now with the network of 200 Weber stores and grill academies around the world, we’ve paved a pretty exciting road to drive additional CARS down. We’re not going to do anything rash or foolish. We tend to be disciplined and very financially minded in terms of return on invested capital, but we do think there are opportunities for us to grow, and that will be one of our first phone calls when we nail down something.
  • Robbie Ohmes:
    That sounds great, thanks so much.
  • Chris Scherzinger:
    Thanks Robbie.
  • Operator:
    Our next question on the line comes from Arpine Kocharyan of UBS. Please go ahead with your question, Arpine, thank you.
  • Arpine Kocharyan:
    Hi, thanks. This is Arpine. I was wondering if you could talk about demand. I think in the release, you highlight sustained high consumer demand. I was wondering if you have any POS commentary - I understand you aren’t in high season POS yet, but anything you could share. Then my quick follow-up, could you give us some detail on what the retailer inventory situation is in terms of weeks of inventory? That would be helpful, thank you.
  • Chris Scherzinger:
    Sure, thanks Arpine, it’s Chris. I’ll comment first, and then Bill, if I miss anything, chime in to follow me up. Generally speaking, one of the concepts we’ve talked about even back during the IPO but over the last couple of quarters is this idea that the pandemic in the outdoor cooking category and the behaviors that fell out of the pandemic, particularly around call them lockdown behaviors or work-from-home behaviors, those home-oriented behaviors, we felt like had--based on all the tea leaves, we felt like that had good chance to last and sustain over time, and as consumers are more oriented around their homes and spending more time at home, even if work-from-home is not working all five days from home during the week but working two or three days from home during the week, which I think is a social dynamic that’s even still playing out today, it does it does create more engagement with cooking at home and more engagement with grilling, and that’s been generally a positive tailwind. The way that I characterized it over the last couple of cycles is it creates a new floor for the category, and so as you think about--you know, I mentioned in the remarks we were down in Q1 8% for the quarter from a demand standpoint, but the two-year stack was plus-75%, and so what we feel great about is the higher level of consumer engagement with grilling does appear to be sustaining, and it’s been--you know, we’re coming up on now two years since the outbreak of the pandemic, and that sustained new floor, if you followed me down that pathway, does continue to be holding. That bears out in our Q1 results, it bears out in the point of sale that we’re seeing. I would say Q1 point of sale was single digit soft but up mid-double digits - I don’t know the right way to put it, but up on the order of 50% over a two-year basis. Even though the first quarter, that October through December period, is a really low point of sale quarter and the peak season for us has always been, and will continue to be in the northern hemisphere at least when warm weather hits, and as I mentioned, we see a return to more traditional seasonality, and I think that the dynamics around--the favorable dynamics around staying at home, both related to the inflationary impact on eating out and some of those dynamics historically for Weber over our 70 years have driven a more home-oriented cooking behavior among consumers. There’s a lot of positive factors there that give us reason to believe that the trends that we’re seeing now can continue. The other thing I would add is one market that’s in season during that first quarter is our Australia-New Zealand business, which is a really healthy and attractive business for us, and because it’s in the southern hemisphere, their peak season tends to be in Q1. That business was up significantly for the quarter and even from a point of sale standpoint was growing year-on-year low to mid single digits without any pricing benefit, so from a volume standpoint a positive volume quarter in that market, and that would suggest--that probably portends well for northern hemisphere markets going into the northern hemisphere season in Q2 and Q3.
  • Arpine Kocharyan:
    That’s very helpful. Thank you for all that detail. Really quick on weeks of inventory at retailers, do you have that color?
  • Bill Horton:
    Yes Arpine, I don’t have the weeks per se in front of me, but what I can tell you is generally--and I’ll speak to both the Americas or the U.S. in particular and then I’ll give you some color around Europe. But generally in Q1, we were up about 22% at our five major retailers, where we actually can get inventory-on-hand data, and that was up 22% versus last year at the end of Q1. Our target was to be up about 40%, so we came out of Q1 a little bit lighter on trade inventory just driven by the supply chain challenges that I referenced, so as we work through Q2, we feel really confident and maybe a little bit more delayed versus where we expected to be, but once we get all the containers in and out the door, we should be close to about 30% up year-on-year, and that’s both just lapping last year, where you were still at low inventory levels and additionally we’ve got higher facings with our new product launches this year, that gives us just the ability to kind of have more inventory at shelf, if you will. From a European standpoint, I would say generally what we’re hearing from our retailers - again, we don’t necessarily get hard and fast data, but generally trade inventory is where we want it to be, or quote, normal, if you will, with the exception of, again, similar to the comments on supply chain, one example would be just at the end of Q1, we had $30 million of in-transit inventory for Europe that was waiting literally on the water to be shipped out to the trade, so you’ll see that course correct as well in our inventory in Q2. That’s just what I would add there.
  • Arpine Kocharyan:
    Thank you very much, that’s helpful.
  • Bill Horton:
    Thank you.
  • Operator:
    Our final question on the line comes from Chris Carey of Wells Fargo. Please go ahead.
  • Chris Carey:
    Hi, good morning. It’s a wide EBITDA range. I know you’ve kind of talked to various puts and takes, but can you just maybe help us understand what might get you to the high end versus the low end?
  • Bill Horton:
    Yes, thanks Chris. On that, as we discussed, Q1 is our lowest quarter of the fiscal year. I mentioned that it also happens to be bearing a much higher percentage of the inbound freight cost headwinds that came out of Q4 and certainly into Q1. But given the uncertainty in the supply chain at this moment in time and the reality that, as I mentioned earlier, 65% to 70% of our annual sales are yet to be booked from February through September and the inflationary impacts that are really impacting every consumer category out there, not just in our space, we’ve decided that until we get well into our POS season that we’re going to hold a wider range on both our top line and our bottom line impact. Obviously the top line results in third quarter will drive us towards the higher end of that range, assuming all of our sell-through and new products, etc, so that’s why we chose to go with the wider range at this time.
  • Chris Scherzinger:
    If I could just add, Chris, I would--and partially related to Bill’s comment around just having our lowest quarter behind us and having so much in front of us for the year, I think we felt like when we saw container rates at this, I think maybe highest cost ever in October, at least from my recollection over my 30 years, container costs we didn’t think could go up from there, and they went up from there, and they went up from there almost 50% in December-January. The container costs--you know, a crystal ball on container costs where I might have felt like, as a business leader, how could it possibly get any worse than this, and then it gets worse than that, it’s just difficult to pin that down. I don’t know exactly what’s going to happen with container costs post-lunar new year. My hope is that they’ll course correct and modulate--or moderate, rather, but rather than hanging our hat on that, so to speak, we’ve taking the approach of covering a range of options here. I think what you can expect is--I mentioned in my remarks, we’re taking very proactive actions on literally every front of the business to course correct this, and so within that window of range, the more that we can impact our freight tactics, the more that we can impact our supplier negotiations and cost improvement initiatives with our suppliers, the more that we can, as I mentioned earlier, shifting more manufacturing into Poland, the more that we can get the price increases accepted and out in the marketplace and producing the way that we would forecast those to produce, those things increase our certainty and reduce the variability, and that would be the kind of action that would narrow in that range as we get more--just more month under our belt, I think. I would expect us to have a much higher level of certainty a quarter down the road from where we are today, based on just living through the post lunar new year container dynamics and also implementing a lot of the actions that we called out in today’s call to go after improving the situation, and that’s the kind of think that will steer us in a good direction.
  • Chris Carey:
    Very helpful. Quick follow-up just on the outlook for cost. I think containers, you may have said is half of the COGS inflation that you’re expecting for the full year - please correct me if that’s not the case. Can you just provide some perspective on what else you’re factoring into the inflation outlook as far as the COGS go, and what you’re going to be pricing against? Thanks so much.
  • Bill Horton:
    Yes, generally in the first quarter, Chris, you’re correct that freight was more than 50% of the headwinds on COGS. It represented, call it 54% of our inflationary challenges on cost of goods, and then the bulk of the rest of the inflationary headwinds were in commodity and purchase grill costs, so collectively those combine to be almost 20 full percentage points drag on margin. Where we see that progressing throughout the year, again I mentioned that inbound freight represented more than it’s, quote, fair share if you will of cost impact in Q1, because you’re bringing in all this freight, it sits on the balance sheet in Q4 and into Q1, and it gets rolled off to the P&L and the bulk of that hits in Q1 when it’s obviously, as Chris mentioned, your lowest selling season. We expect that to normalize not because we’re being overly aggressive on rates - we’re actually assuming that the high freight rates that we’re seeing in the market that are four times historical averages essentially stay where they are today, so we’re not being optimistic in our outlook on where container rates are going to go. But across the year, we would expect that about roughly 40%of your gross margin impact is coming from inbound freight and closer to 60%, 65% coming from commodities and purchase grill costs being inflated.
  • Chris Carey:
    Okay, thanks so much.
  • Operator:
    As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. As we have no further questions registered, I’ll hand back over to the team.
  • Chris Scherzinger:
    Thank you all for joining us today. We are very--we continue to be very optimistic about the business and the long term prospects. We’re very excited about the innovation that I mentioned earlier and the advancement of our direct business, our Weber stores and grill academies, and certainly our progress in emerging markets, which we didn’t talk about a lot in the Q&A here, but that’s all going very well also, so there’s a lot of positive infrastructure being built and a lot of great opportunities for us going forward. The strategies that we have in place are working. We’re going to battle our way through this, I would use the word generational headwind from a transportation cost and commodity cost standpoint, and I’m confident that we’ll come out strong on the back end of that. But thank you for your time today, and look forward to speaking with you again soon.
  • Operator:
    Thank you very much for joining us today, ladies and gentlemen. You may now disconnect your lines. Have a good afternoon.

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