Good morning and thanks for joining us to discuss YETI Holdings' Second Quarter 2023 results. Leading the call today will be Matt Reintjes, President and CEO; and Mike McMullen, CFO. Following our prepared remarks, we'll open the call for your questions. Before we begin, we'd like to remind you that some of the statements that we make today on this call may be considered forward-looking, and such forward-looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. For more information, please refer to the risk factors detailed in our most recently filed Form 10-Q and the Form 8-K filed with the SEC today. We undertake no obligation to revise or update any forward-looking statements made today as a result of new information, future events or otherwise, except as required by law. Unless otherwise stated, our financial measures disclosed on this call will be on a non-GAAP basis. We use non-GAAP measures as we believe they more accurately represent the true operational performance and underlying results of our business. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in this morning's press release or in the presentation posted this morning through Investor Relations section of our website at yeti.com. And now, I would like to turn the call over to Matt.

Thanks, Tom, and good morning, everyone. YETI remains on pace in 2023 with sales moving to the higher end of our prior range, strong gross margin expansion and a raise to our adjusted operating margin and full year EPS. Before diving into the results and our strategic priorities, I would like to start with what we are seeing across our diverse channels in this increasingly dynamic environment. Starting with Soft Coolers and Gear Bags, that have been out of the market for the majority of 2023. We remain on track to reintroduce the M20 backpack, the M30 tote and our sidekick dried gear bag in the fourth quarter. We will also launch smaller sizes for each style of soft cooler in the fourth quarter and extend the sizes of the dry bag line in early 2024. Again, I would like to thank our YETI employees, partners and customers for their tremendous focus and execution throughout this effort to get these products back to market. Regarding overall consumer demand, we continue to see a range of performance across our wholesale and DTC channels. There remains a focus on Drinkware with strong trends around hydration, color and new styles. We're seeing this play out within our own portfolio and across specific consumer demographics. Customers are increasingly gravitating towards many newer formats of our bottles, straw lid tumblers and our new color match bottles. As we continue to grow and diversify our Drinkware category, we have expanded our products to include new size and customization offerings across a range of younger water bottles and we're pleased with the highly successful introduction of our Rambler beverage bucket. In hard coolers, we saw strength this past quarter particularly with our expanded line of wheeled coolers, offering mobile options will continue to unlock opportunities across customers…

Thanks, Matt. To start, I would like to provide a summary of the adjustments and charges associated with the voluntary product recall that are included in our GAAP results. I'll then focus on our adjusted non-GAAP performance which we believe provides a better picture of our underlying performance period. Finally, I'll discuss our updated outlook including the increase to our full year adjusted EPS target. Regarding the recall, our initial expense reserve taken in the fourth quarter was based on certain redemption assumptions including the rate of redemptions and type of remedy chosen. We began processing returns and claims from customers during the second quarter which has informed several adjustments to our reserves. While the overall redemption rate has been on plan, there have been differences in redemption rates across the impacted products. In addition, of the remedy options we are offering our customers impacted by the recall, we have seen higher-than-expected gift card elections versus the product replacement remedy option. We have therefore made the following three adjustments to our recall reserve. First, we increased the estimate for future gift card elections resulting in a reduction to second quarter GAAP sales of $24.5 million. Second, the update to our assumption of future gift card elections also resulted in a corresponding $5.1 million reduction in GAAP cost of goods sold given the lower estimated cost of future product replacement. And third, our recall-related logistics costs are now expected to be lower than our original assumptions thus resulting in a $10.7 million benefit to GAAP SG&A expense. Overall, these three adjustments drove a net increase in the estimated recall expense reserve of $8.5 million this quarter. For more information on these reserve adjustments which are excluded from our non-GAAP results, please refer to our Q2 earnings press release and 10-Q filings.…

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] We'll take our first question from the line of Randy Konik from Jefferies. Please go ahead.

I guess Mike to start with you given that we -- look you're coming out of a quarter where the market is clearly feeling like the numbers are bottom and you gave good kind of granular guidance for the rest of the year. Can you kind of maybe reorient us to reeducate us on how we should be just thinking about the long-term kind of operating margin ability of this business gross margins that would be just like -- just not specific numbers but just high level, how we should be kind of thinking about this business long term? Thanks.

Yeah. Hi, Randy. Thanks for the question. So here's what I'd say. If you go back to the last few years, we indicated that we gave up roughly around 600 basis points of gross margin rate due to inbound freight. This year, we've obviously raised our guidance and we said inbound freight is the majority of that impact. So that would imply there's more to go next year as we get into 2024. I think without I mean to your point without giving specific guidance, I think what we're going to have to do is sort of weigh that against a need to invest both in product, in terms of materials packaging things like that. As well as back into our SG&A to help drive future growth. So I think the only thing we've really said is that it's our intention to try to continue to drive operating margins higher over time. And we think we've got the levers to do that specifically within gross margin.

Super helpful. And then my last question maybe more for Matt. Maybe give us your perspective on where are we in the journey of taking an existing YETI customer like ourselves mostly on this call in building that breadth of product story with those existing customers versus the continued acquisition of new customers both domestically and abroad. Can you maybe give us some perspective on where we are in those different journeys and any kind of data that you guys look at to inform you and us on that where we are in those journeys? That would be super helpful as well. Thanks guys.

Good morning, Randy, and thanks for that question. As we've talked about throughout this story, one of the things that's been consistent with how we built the brand and how we built out the product portfolios with this idea of depth of breadth. And that applies directly to the product consideration from consumers and we've had great success in continuing to build breadth within our Drinkware business and breadth -- or adapt within our drinker business and adapt within our cooler business, but also introducing new product and new consideration things like chairs and bags and blankets and doubles. And recently saw fun deal we did with a limited run around this cast iron skillet. Just to continue to create opportunities for consumers to come back to the YETI brand and bring the same durability performance and design to it. We feel like we're still in the early days of that domestically. And obviously internationally, we're still building the brand and building out those initial moments of consideration. So we feel great about the umbrella that the brand gives us to expand product, we feel great about the portfolio we have today and the discovery that we're having within that. So we look at geographic penetration. We look at households. We look at geographic penetration domestically across the regions. And we look at the retention rate we're getting with consumers particularly from those high acquisition periods in 2020 and 2021. And as we said on the call, we feel great about the balance of acquisition of new customers we're getting and the retention we're getting.

Great. Helpful. Thanks guys.

Thank you. We have a next question from Peter Benedict with Baird. Please go ahead.

Hi, guys. Thank you for taking the question. I guess just on the SG&A maybe back to you Mike the growth mid to high teens. Can you maybe keys out a little more what the growth investment impacts are this year? I don't know if you've sized them for us. And how we think about the growth in SG&A beyond this year? Is there an opportunity to maybe harvest some of that leverage as you get sales associated with these investments, or is it best to think about SG&A maybe holding the line and growing with sales longer-term? That's my first question.

Here's what I'd say. In Q2, we said the primary drivers were; number; one incentive compensation; and number two, investing and then compounded by the fact that the stop sale obviously increased the impact on our leverage. From a dollar growth perspective, obviously, the incentive compensation had a pretty big impact in Q2. As we think about the year, we've said it's really four things. Number one, increase in variable expenses and a big piece of that is going to be related to the growth of our Amazon business; two, incentive comp; and then three, the investments we're making. In terms of where and how much we haven't given too much granular detail on that, but what I'd say is that it's really around headcount, demand creation, technology, et cetera to kind of to drive future growth and that's both in outside the U.S. in terms of building out our teams, growing brand awareness and inside the U.S. in terms of building out our teams here to help drive the product road map. In terms of where it goes from here, we certainly do not expect to have the disconnect between the growth in sales and the growth in SG&A going forward. It's our intention to try to have SG&A grow more in line with sales. We just look at this year as somewhat of an atypical year given some of the factors that I mentioned. And so I do think you'll continue to see increases in variable as we obviously won't expect D2C to grow faster than sales. We'll continue to invest in the business. But this year with the stop sale is just the investments that we're making are having a bit of an outsized impact. And it was just our intention to continue to invest despite the impact of the recall.

Okay. That's super helpful. I guess, just a follow-up would be to Matt or Mike. Plenty of cash on the balance sheet here. You're increasing your free cash flow view to $150 million to $200 million this year. Maybe latest comments or thoughts you would have on how to kind of leverage your considerable financial strength as we look out to the back half of this year and then longer term? Thank you.

Good morning, Peter. I'll take that one. We've been consistent in -- we believe this business can continue to drive strong margins and can continue to be a strong free cash flow generator. As we look forward with our cash position and the cash generation potential, we first and foremost prioritize investment in the business that we believe has sustained the growth potential and the expansion that we're driving, both domestically and globally. Secondarily, we'll continue to look at uses of cash that we believe feed and kind of fund the innovation engine. As I mentioned earlier, the brand reach that we have and the brand reach that we continue to build, create opportunity for innovation underneath that halo. And we think there are strategic uses of cash where we can bring innovation into the YETI portfolio and then leverage the incredible marketing and commercial teams that we have to go drive outsized returns. And so, that would be our kind of our primary and our top two focuses would be continue to invest in the business and find strategic innovation opportunities or targeted M&A opportunities to leverage the YETI brand and leverage the YETI platform.

Great. Thanks so much, guys. Good luck.

Thank you. Next in line is Sharon Zackfia with William Blair. Please go ahead.

Hi. Good morning. I was hoping to delve a little bit more to the Drinkware segment. I mean obviously growth of 8% is good. I'm wondering though is that kind of a good barometer of underlying demand right now or if you're continuing to see kind of any kind of I guess impact from retailers still not wanting to have as much inventory on the shelf. Just any thought process on underlying demand in that segment would be helpful. And then as it relates to international growth in the back half, what are your expectations there?

Thanks, Sharon. I'll take the Drinkware and Mike can step down on the international. Our Drinkware is and has been, as I mentioned in the prepared remarks, for going on a decade been a really important part of our business. We continue to see that resonate, both our product portfolio, our sizes, in our colorways resonate with consumers. We mentioned the recent colorway launch. So when we look across the horizon, we feel really good about where our Drinkware business not only is positioned today, but where it's growing. We have incredible partners in our wholesale partners that have been long-standing and they've seen the success not only of YETI every day but when we bring innovation and when we bring newness to the market and that hasn't changed and we're having great conversations with our wholesale partners. We're seeing great acquisition and retention across our DTC channels in our corporate and B2B business continued residence within Drinkware. So I think we've built a sizable business in Drinkware. What I'm most pleased with is the continued receptivity we're seeing to innovation in the domestic market, but also the reception we're seeing globally. And I think that tying into your second question remains a significant and out there for us opportunity.

And Sharon, on the international question, so it grew 19% in Q2. That was a bit of a step down from Q1, both from a growth as well as a mix perspective. But I think what I'd highlight is A&D and Europe continue to grow really nicely. Canada has been impacted by some of the dynamics that we've talked about in the US regarding the recall but we expect that to return to growth as we go into the second half. Here's what I'd say. We think that we can continue to increase our international mix over time. So and as we go into the second half, so I do think that we will see the international business grow faster than the US. How much? We don't typically give specific guidance on that other than to say we feel really good about our business outside the US and it has a pretty significant opportunity in front of us.

Sharon, does that answer your question?

Yes. Thank you.

Thank you. Next in queue is Joe Altobello with Raymond James. Please go ahead.

Hey guys, good morning. A big picture question, if I could. But if we put all the noise from this year aside, the recall, the retail order patterns, et cetera, it does sound like you think YETI is still a double-digit sales grower. And so given that maybe, could you give us a little bit more color on how those sales drivers may have changed over the past couple of years?

Thanks Joe. I'll take that one. I would say the growth drivers haven't fundamentally changed in our belief on what's possible but the importance of them change. The domestic market, obviously, is our largest market. What we continue to see is receptivity across the product portfolio and we called out on the call the strength of Coolers & Equipment and we specifically call that the strength of hard coolers. That's our longest-standing product, really our origin story continue to resonate when we see the success we're having across the domestic regions and the strength from all those. I think that story remains intact. Those are also the markets that are hungry for innovation and they're hungry for expansion and that's the focus of our incredibly talented product development and supply chain and operations teams is continuing to drive innovation to our longest-standing customers. And then globally, we talked a lot about the international opportunity for YETI. And a few years ago, it was a concept and today is a really meaningful part of the business. But still very early in that evolution in some of the largest and we think most attractive markets internationally particularly in the UK and Germany within the Greater UK, Europe. And those all remain we believe intact and in front of us. So the execution remains the same continue to drive the brand heat and growth of the brand continue to drive innovation underneath that and then execute and build the structure that can support YETI well into future growth.

Got it. That’s very helpful. And maybe just to transition over to margins. You talked on this earlier, but what do you see as the key margin drivers for 2024? Obviously inbound freight continued benefits there. But could you guys build on the 50% DTC penetration for example? And what other drivers are there?

Yeah. I think, Joe, I think you hit on the -- what I think will be the biggest one in 2024 is continued benefit from those inbound container rates. We did say also this quarter we expect now to see a benefit on product cost side. Where that goes and where are some of the other factors we called out in terms of FX, and I think we'll have to see where that plays out. But what we've said consistently is that we believe there's an opportunity to grow DTC faster than wholesale, which could provide some benefits. On the category side, traditionally drinkers had a higher gross margin than coolers and equipment. I think that could be something depending on where those categories grow in relation to each other we expect to be able to grow both of them. So, we'll have to see, but where -- what the impact from sales mix is. But I think the biggest thing to call out is the benefit will be continued benefit from inbound container rates.

Got it. Great. Thank you, guys.

Next in line is Robby Ohmes with Bank of America ML. Please go ahead.

Thanks. My first question is for you Matt. Can you give a little more color? I think you mentioned consumer conservatism some smaller basket sizes some change in UPTs. Is that -- are you seeing customers trading down, or what is conservatism and you think it will last through the back half?

Good morning, Robby, thanks. I would say that, there is a few things going on, and we talk about -- we use terms like it's a dynamic environment and we're seeing we're not seeing consistencies among channels and that remains true. The sum total is we feel really good about where the brand is. We feel good about where the business is. We feel good about the opportunity in front of us. The way it's coming in I would say has been more inconsistent than we've seen in the past and that causes our team in particular our advanced analytics team to dig in deeper and look for themes. Where we're seeing a bit of the conservatism I would call on those in between buying moments we're seeing customer counts continue to rise. And that's not just in our retail and in our e-commerce business, but also in our corporate sales business, where we're seeing some smaller kind of units per transaction, which we don't have a direct attribution to why. We're assuming that's a little bit of buying conservatism. So they're still coming back. They're still buying I wouldn't call it a trade down scenario because there's not a trade down play within our portfolio. And I don't know, if there's a trade down play against YETI. We said all along that YETI has been a once demand or one brand since its beginning. It's not -- we've never lived in a need category. I think what's most promising is that, in those natural buying what's the moms dads and grads we're continuing to see the consumer show up. And so our team's focus is in what I'll call those in between buying moments. Which leads to some of our strategy on how we release product, how we kind of launch our marketing campaigns, you just saw the Cosmic Lilac and Campgreen, the reason we put that in July is there's not a natural buying moment. It's in between some buying moments. And so we thought what a great time to bring out a winning color and put it into the market. So those are the things that are adjusting our philosophy a little bit. But we think overall we're seeing the success and the receptivity to innovation. We're seeing success and receptivity of the brand. And we're seeing a little bit of different consumer dynamics across our channels.

Got you. That's helpful. And then just a quick one for Michael. For the guidance, I think you said, it doesn't include -- in the back half doesn't include any further gift card redemptions. Obviously, there's going to be some -- how are you going to report going forward? Is there -- are there going to be similar adjustments to revenues in 3Q and 4Q? Could there be any more recall reserve increases from here? Maybe a little help on that.

Yes. Hey, Rob. Thanks for the question. Here's what I'd say. And I think we need to separate the adjustments that we made to our GAAP results from the gift card redemptions. So the adjustments that we made in this quarter are essentially us updating our assumptions for the entry that we made in Q4 of last year. So we've seen some different consumer behavior than we expected slightly. So we've seen people choosing more gift cards as opposed to value in kind product remedies. And so we're updating our sales and cost of sales assumptions related to that. We've also seen logistics costs related to the recall come in lower than we expected. So we're making that adjustment as well. I don't know. We'll see how things play out. But assuming behavior stays the way that it has played out thus far in the recall. We're trying to reflect in this reserve adjustment like what we expect to see for going forward into the future in terms of consumer behavior. Now when we talk about the gift card redemptions what we're talking about is consumers coming back and using that gift card with us for a sale. And so we wanted to call that out because we think it's important for you all to know, it's not an adjustable item given for a number of factors. But we will continue – assuming that it is material we'll continue to call that out in the second half. To your point, we're going to continue to have gift card redemptions whether it's high or lower when it happens we don't really know yet, which is one of the reasons why we didn't call it out or didn't include it in our second half outlook.

But just so I understand – if I understand the math there's $12.5 million of gift cards outstanding at the end of the quarter right? So going into 3Q. So if those are all redeemed that would be upside to the revenue guidance?

Just the $12.5 million were redemptions that we saw in Q2. As we disclosed in our Q, there are roughly $10 million of redemptions that are have yet to be – there are gift cards that are out there that have yet to be redeemed and could be redeemed at some point in the future. There are those two different numbers.

Got it. So $10 million of potential upside to the back half revenues on the redemptions versus guidance?

Well I mean, it really kind of comes down as to when those are redeemed.

Got you. All right. Perfect. Thank you, Michael.

Welcome.

Next in line is Peter Grom with UBS. Please go ahead.

Thanks, operator and good morning, everyone. So maybe just following up on that just quickly. Can you maybe give us a sense of what you've seen on the gift card front quarter-to-date you're kind of halfway through 3Q. So have you seen that kind of redemption continue through the first six to seven weeks here into 3Q?

We've certainly seen some additional redemptions, we'll have to see where the number lands for the quarter. There's a lot of factors there. But we have certainly seen some additional redemptions come through.

Got it. That's really helpful. And then I guess just following up on the gross margin components, I know the expectation was for freight to actually less of a benefit this quarter versus Q1 as you were largely cycling a true-up last quarter. That obviously didn't happen. So just as we think about the bridge, would you expect freight and product cost improvements that continue to build sequentially from here? And I guess I'm just trying to understand how we should be thinking about the broader phasing of gross margin in 3Q versus 4Q? Thanks.

Yes. So, what I would say is this quarter the two biggest drivers and we specifically called them out were inbound freight and product costs. The second thing is we've consistently said that margins are going to increase. The year-over-year increase in gross margin is going to go up sequentially as we go through the year. And that's certainly still our intention as well or what we see for the second half as well. In terms of specific drivers and how those will play out. We haven't really gotten down to that level of detail other than to say the biggest driver this year will be inbound freight. And now we're comfortable saying that product costs are going to be a benefit for the year. There's going to be some quarters where that goes up down. But for the year we're very comfortable saying that it will be slightly favorable which is part of the reason why we're comfortable taking our margins up for the year.

Got it. Thanks so much. I'll pass it on.

Thank you. Next in queue is John Kernan with TD Cowen. Please go ahead.

Excellent. Thanks for taking my question. So, just curious on DTC and how we go into next year and think about the long-term contribution margin from DTC, it's not 60% of revenue. Obviously, some of the product resale affected mix this year. But just curious on how we should think about DTC the overall contribution margin and benefit to both the gross margin and the operating margin line going forward? Thank you.

Yes. So, John thanks for the question. Here's what I'd say. So, just to be clear it was 55% of our mix in Q2, roughly the same as in Q1 and we expect the year to end at approximately 60%. I'd come back to without getting into too much detail of what we expect in 2024 we'll obviously have a lot more to say about that on future calls. But it is our intention to try to grow D2C faster than wholesale. We've been clear in the past that D2C has a higher gross margin than wholesale. But once you get down to the operating line like they're much closer. And it really kind of -- the other thing to keep in mind is that D2C is a relatively broad umbrella. There's a number of different sub channels under that have different overall profitability e-commerce versus stores versus corporate sales versus Amazon. So, we do think obviously that as D2C grows faster than wholesale, there's going to be a benefit on the gross margin line but we need to kind of make sure we balance that with some additional cost that that channel drags as well.

Got it. Maybe just one follow-up question. I don't mean to be the gift card redemptions here too much. But is there anything from a flow-through perspective on the margin line that we should be aware of just on as you potentially recognize more of the gift card redemption going to the back half of the year?

Well, I mean I think -- I'm sorry John, go ahead.

I was going to say does that flow through at a normal margin level. Is there anything we should be thinking about in terms of the actual incremental margin from those predictions?

Yes, I mean I think the only thing that I would call out is somewhat connected to your first question is they're obviously all a D2C sale and specifically an e-commerce sale. So they're, I would say that they flow through at a gross margin rate that is slightly higher than our overall average just by the fact that there are any commerce sale.

Got it. All right guys. Thank you.

Thank you. Next, we have a last question from Xian with BNP Paribas. Please go ahead.

Hi, guys. Thanks for the question. I think last quarter you mentioned wholesale is expected to be down low double digits in 2Q and 3Q. And it sounds like there was just the shift and the wholesale outlook for those two quarters is still the same. I guess is 3Q expected to be down high teens. I know you mentioned down double digits, but maybe a finer point on that.

Yes, hey, Xian, thanks for the question. I think, you're right. I mean, we did initially say both would be down low double digits. Wholesale obviously performed better. There's a number of different factors driving that one of which is the earlier launch of fall seasonal in Q3 our camp green and Cosmic Lilac colors that necessitated us starting to ship those into the wholesale channel in Q2, which was not in our prior outlook. So I view those as purely just a shift from Q3 into Q2. As you look across the first three quarters of the year there's really nothing changed. So I do think what you're asking essentially is wholesale going to be worse or lower growth in Q3 than our prior outlook. I think the answer is, yes. And as we said in the script, it will be in the kind of mid to high double-digit range of a decline in Q3. But again, as you think about the first three quarters of the year, or even the full year nothing has really changed. With one more call out part of that growth in Q3 is going back to a very strong comp for wholesale in Q3 of last year as that's really when the wholesale channel caught up on inventory.

Got it. Very helpful. And maybe just a quick one. Maybe can you just remind us Canada, how big it is now as a percent of international relative to like Europe?

Yes. We haven't given that level of detail other than to say, it's our biggest international region, but we haven't given the specifics of that country specifically. And just going back to some of the earlier comments Canada did grow in Q2 is just part of our overall international region. But we expect it did see some of the same impacts in the U.S. in terms of the recall impact and we expect that growth to accelerate as we go into the second half.

Yes. Good. Thanks. Thanks guys.

This concludes our question-and-answer session. I would like to turn the conference back over to Matt for any closing remarks.

Thank you operator, and thanks all for joining us. We look forward to speaking later this fall and updating you on the continued growth and progress of YETI.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.