Q4 2021 Leslie's Inc Earnings Call
Okay.
Good afternoon, and welcome to the fourth quarter and fiscal year, 2021 and conference call for Leslie Inc.
This time, all participants are in a listen only mode.
Following the prepared remarks management will conduct a question and answer session.
If you should require any operator assistance during the conference call. Please press star zero on the telephone keypad.
As a reminder, this conference call is being recorded and will be available for replay later today on the company's website.
I will now turn the call over to Caitlin Churchill Investor relation.
Thank you and good afternoon.
To remind everyone that comments made today may include forward looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations.
These statements speak as of today, and we will not be updated in the future if circumstances change.
Please review the cautionary statements and risk factors contained in the company's earnings press release, and recent filings with the SEC.
During the call today management will refer to certain non-GAAP financial measures a reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was furnished to the SEC today and posted on the Investor Relations section of Leslie its web site at IR adopt Leslie pool Dot com.
On the call today from <unk>, Inc is Mike <unk>, Chief Executive Officer, and Steve Wardell, Chief Financial Officer.
With that I will turn the call over to Mike Mike.
Thanks, Caitlin and good afternoon, everyone. Thank you all for joining us.
The format and cadence for this call will be a little different than our previous calls.
The first thing to note is we have posted a brief deck on the loves leaves the IR site.
Supplement our scripted comments and we will be referring you to specific pages as we present.
I'm going to start by highlighting our key results and performance drivers for Q4 and the full year.
Steve will then walk through our fourth quarter and full year financial results in detail.
<unk>, our share repurchase program and introduce our initial guidance for fiscal 2022.
Then I'm going to walk through how we bridge, our 2012 results to our 2022 guidance.
Explain why we believe we are uniquely set up to compete and win given the industry dynamics, we see for the year.
With that we'll get started.
I'm pleased to report that our Q4 performance resulted in another record quarter and continued the strong results we have delivered throughout the year.
Sales for the quarter were a record $409 million.
Comp sales increased 16% for the quarter on a shifted calendar basis and the two year stack comp for the quarter was 40%.
Gross profit for the quarter was a record $188 million and margin rate expanded 190 basis points.
Adjusted EBITDA for the quarter was a record $82 million.
Moving to results for the full year fiscal 2021 represented our 58th consecutive year of growth and produced all time record sales margin and EBITDA.
Sales for the year grew 21% to a record $1.343 billion.
Gross profit for the year grew 29% to a record 595 million and gross margin rate improved 290 basis points.
Adjusted EBITDA for the year grew 51% to a record $271 million and EBITDA rate increased 380 basis points to 20%.
In fiscal 2020, one we generated $170 million in operating cash flow up 64% from fiscal 2020 and ended the year with less than two turns of leverage.
All of this after increasing our investment in Capex by 40% to support growth.
Our commitment commitment to disciplined capital allocation that drives total shareholder return.
And with our strong financial position and free cash flow generation.
And our confidence in our long term growth prospects are the drivers of about $300 million share buyback authorization. We are pleased to announce today.
Our Q4 and full year results reflect the outstanding performance of our associates and vendor partners and managing constrained supply chain to meet strong consumer demand.
This is also a testament to the organization's ability to manage margin in the face of significant cost pressure and to continue to execute our growth initiatives at a high level, while operating a direct to consumer business in the grip of the global pandemic.
Our frontline associates have now been operating under COVID-19 protocols for more than 18 months.
Their discipline diligence and dedication are a driving force in our performance.
Now a few words on the industry in 2021, the less lease business and the pool industry benefited from strong consumer demand.
This demand was driven by the macro trends that accelerated with the onset of the pandemic with further elevated by work from home and what you are showing no signs of slowing.
The numbers for pool, construction and remodeling already particularly a good sign for us because we're gonna pools completed our business of our central maintenance starts and that annuity like demand continues for the life of the pool.
Against this background, our robust demand the competitive advantages derived from our integrated system of physical and digital assets working together with our strategic growth initiatives continue to win share.
Our consumer file is showing strong sustained growth totaled.
Total target file growth was 15% in the quarter and 18% for the full year.
Q4 was our eighth straight quarter of double digit file growth driven by our digital marketing capabilities.
We continue to achieve high ROI of marketing spend and had been.
Priest, our budget for 2022 by 30% to continue to drive this initiative.
Consumers are also responding well to our less lease connect omnichannel capabilities.
Opus ship from store ship to store and Boris.
These capabilities allow us to utilize the inventory at our location network to effectively fulfill consumer orders in whatever manner, they choose and.
And to increase consumer retention.
Leslie connect has enabled more than 30% Leslie digital orders since launching in February 2021.
Our loyalty program.
Lease pool, Perps drove loyalty feigel file growth of 14% in the quarter and 18% for the full year.
As consumers continue to be drawn to the program's key benefits.
5% rewards earn rate and free shipping.
Our pro initiatives are delivering solid results.
10 converted in three new pro locations, we launched in 2021 continue to outperform and we plan to convert 25 built five new locations in 2022.
Our pro affiliate program is scaling rapidly.
In November we passed 1000, plus pro affiliate agreements and we continue to sign up new affiliates daily.
For the year, our pro affiliate partner sales increased 86%.
The new one converted pro locations are expanding pool of affiliate program and our dedicated pro side helped grow our total pro business, which we now define as all of our nonresidential b to B business, 42% in the quarter and 44% for the full year.
Our pro business now accounts for about 15% of our total sales, but remains a small percentage of the approximately $2 4 billion pro market.
Moving to M&A for.
For the year, we completed three acquisitions that added eight locations and expanded our operations into a 38 state.
In October the first month of our fiscal 2022 and closed on the acquisition of be unhelpful, which operates seven locations in the greater Phoenix area.
As we execute our integration playbook.
N L locations are being rebranded as less lease our assortments are transitioning to the less lease model and we are installing our proprietary accu blue water testing system.
Okay.
We continue to see a welcome back with your acquisition opportunities in the pool and spa industry, and we have staffed up to accelerate our ability to acquire and integrate businesses in 2022.
With regard to residential white space, we added 16, new locations in 2021, including residential pro and acquired.
We ended the year with 952 total locations.
With regard to Eke Blue home.
We are encouraged that the initial production of version one point all sold out quickly in Q4.
That version two point, how has completed the prototyping stage.
However, we are experiencing deliberate delays in key components, specifically microchips, which are impacting manufacturing.
The number of devices, we will be able to produce for this pool season is uncertain.
Therefore at this time, we are not planning any significant sales for this initiative in 2022.
With regard to corporate governance, we published our inaugural ESG report in the quarter and have started work on our 2021 port.
I'm pleased to say that it's part of our ESG efforts and in recognition of the contributions of our frontline associates. We have raised our minimum starting wage for Leslie its full time associates to $15 an hour effective December 'twenty, six 2021 and.
And we have instituted a stock grant program for our store managers.
Also of note our assortment of equal products now numbers more than 1800 and sales for these products grew more than 40% in 2021.
Now I would like you to refer to the deck that we posted that Leslie IR site.
On page six.
We bridge, our 2021 sales growth in two different ways and also isolate the impact of some specific sales drivers.
And the first bridge, we estimate the impact of total industry growth from new pool builds to be 2%.
The math, we used as 110000, new in ground pools across a base of $5 5 million.
We estimate that retail price inflation for the year.
<unk>, 8%.
The balance of the bridge, 11% is.
Is the sales growth impact driven by our strategic growth initiatives.
The second bridge illustrates the sales growth impact from a residential pool pro pool and residential hot to consumer groups.
As you can see we.
Had good growth across all three groups, including our core residential pool consumer.
We have fielded a number of questions in previous calls and meetings with regard to the impact of Tricolore above ground pools and hot tubs on our total sales growth.
On page six we have broken out the impact for each by both price and volume.
I will also add that all three categories experienced acute supply chain disruptions that resulted an unmet demand for 2021.
We put up sold more.
Moving to page seven we isolate the sales growth impact from each of our six strategic growth initiatives.
You'll recall from our earlier presentations, we got it that over time each of these initiatives should contribute 100 to 300 basis points of growth per year.
Clearly our marketing capabilities resulted in an outsized impact from growing our consumer file.
Pro initiative also outperformed while deepening relationships M&A and residential white space performed within the range we had projected.
Thank you Blue home had us.
Okay.
Yeah.
Pardon the interruption. This is the operator, please hang honestly reconnect Michael Jacks line.
Michael you check your line is now back in life.
Thank you.
Sorry about that everyone not sure why the line dropped.
Exactly clear, where I stopped but I'm going to pick up.
With page seven.
And my comments on each of the strategic growth initiatives.
Clearly our marketing capabilities resulted in an outsized impact from growing our consumer file.
Our pro initiative also outperformed while.
While deepening relationships M&A and residential white space performed within the range we had projected.
Thank you Blue home had a successful launch but has not yet contributed meaningfully to sales.
We are very pleased with how the initiatives and the team's leading them performed in 2021.
Now I'll turn it over to Steve to share more detail on our financial results are $300 million share repurchase program and our 2022 guidance.
Steve.
Thank you Mike and good afternoon, everyone. As you can see from our earnings release, we reported record results for both the fourth quarter and full year fiscal 2021.
<unk> for the contributions of our entire team as they continue to execute at a high level in the current environment.
Before I get started I'd like to share a few highlights.
Mentum continued throughout the fourth quarter as we generated a counter comp on a two year stack basis of 40% compared to our prior guidance of the low thirties.
Again, the guidance across the board and finished the year with sales growth of 21% gross margin improvement of 290 basis points and adjusted EBITDA growth of 50% and we ended cash with 304 ended the year with cash of $345 million.
We also initiated guidance for fiscal 2022, which reflects double digit sales and adjusted EBITDA growth gross margin expansion and earnings growth in the mid to high teens. This is consistent with or better than our long term growth algorithm and.
And finally, we announced today that we are introducing our first share repurchase program, which includes an authorization for up to $300 million.
Our business generates robust cash flows and even after considering an increase in investment in talent capital expenditures and M&A for fiscal 2022, we have excess cash to deploy towards share repurchases.
I will discuss our capital allocation priorities in more detail, but the takeaway from this action is that it reflects our confidence in our long term growth prospects.
Today, I'll review, our fourth quarter of fiscal 2020 one performance.
Our performance for the full year of fiscal 2021.
Our guidance for fiscal 2022 and.
And our capital allocation priorities.
And before I turn to financial results for the fourth quarter.
Following is a quick reminder, on the calendar shifts which is consistent with prior quarter disclosures.
In fiscal 2020, the 50 <unk> week added approximately $18 million in sales and 3 million in adjusted EBITDA.
Also as a result of the fifth of fiscal 'twenty 'twenty, having 53 weeks, there where calendar shifts that impact our quarterly comparisons on a year over year basis in fiscal 'twenty one.
In the fourth quarter of fiscal 2021, we replaced a higher volume week of the end of June with a lower volume week at the end of September.
The combination of the 50, <unk> week, and the calendar shift negatively impacted fourth quarter comparisons to the prior year by approximately 38 million for sales by approximately $11 million for adjusted EBITDA.
Discuss the impact of these items on our fourth quarter and full year results as I review comparisons to prior year performance.
Fourth quarter results, our fourth quarter. This year included 13 weeks and ended October <unk> 2021, total reported sales for the 13 week period increased six 8% from the fourth quarter of fiscal 2020, which included 14 weeks, our comparable sales growth on a reported or unshifted basis increased 10%.
And our realigned period for 2020 for comparability, our comparable sales growth on a shifted basis.
For the fourth quarter of 2021 increased 16, 3%.
This increase is on top of comparable sales growth of 23, 3% in the fourth quarter of fiscal 2020 and represents comparable sales growth on a two year stack basis of 39, 6%.
We generated strong results across consumer types and continue to see strong performance in the core sanitizer and equipment product categories during the quarter.
Retail price inflation remained elevated.
And primarily related to chemical products channel management by major equipment manufacturers higher input costs and promotion management.
Gross profit increased 11, 3% and gross margin rate increased by 190 basis points from 46.0%.
Add from 44.1% in the prior year, primarily due to product margin improvements across our businesses and occupancy leverage and partially offset by business mix.
SG&A increased 21, 6% driven primarily by our sales increase in investments to support our growth.
Drivers of the increase over the prior year included higher equity based compensation and executive transition cost compensation accruals and other one time or non comparable cost which include public company costs. These increases were partially offset by lower sponsor management fees.
Adjusted EBITDA increased by two 4% or $1 9 million to 82.0 million compared to $80 1 million in the fourth quarter of fiscal 2020.
After factoring in the 50, <unk> week and the calendar shift adjusted EBITDA increased by 18, 3% or $12 $7 million when compared to fiscal 2020.
Adjusted EBITDA on a reported basis as a percentage of sales was 20.0% compared to 29% in the prior year period.
And adjusted net income increased by 14.0% or $6 $2 million to $50 5 million compared to $44 3 million in the prior year period.
Now I'll turn to full year results.
Total sales for the 52 week period increased 27% to $1 3 billion compared to $1 1 billion in the prior year our.
Our comparable sales growth on a reported or unshifted basis increased 21, 5%.
Using our realigned period in 2020 for comparability, our comparable sales growth on a shifted basis for fiscal 2021 increased 21, 2%.
This increase is on top of comparable sales growth of 18.0% in the prior year and represents comparable sales growth on a two year stack basis of 39, 1%.
Gross profit increased to 29, 2% to $595 2 million compared to $460 7 million in the prior year and gross margin rate increased by 290 basis points to 44.3%, primarily due to product margin improvements and occupancy leverage and partially offset.
By business mix.
SG&A increased 22, 8% to $386 1 million.
<unk> $314 3 million in fiscal 2020.
As we disclosed in our earnings release, the net impact of changes in equity based compensation costs related to equity offerings executive transition and other costs and the change in management fees increased SG&A by approximately $29 million in fiscal 2021 when compared to the prior year excluding.
Excluding these items that are not indicative of our core operating performance SG&A increased by $43 million or 14% and as a percentage of sales SG&A decreased to 26.0% in fiscal 2021 compared to 27, 5% in the prior year, a decrease of 150 basis points.
Adjusted EBITDA increased by 48.0% to $276 million.
And adjusted EBITDA as a percentage of sales increased 380 basis points to 22%.
After factoring in the 50 <unk> week, adjusted EBITDA increased by 56% or $90 9 million when compared to fiscal 2020.
Adjusted diluted net income per share doubled to 85 cents per share compared to 42 cents per share in the prior year.
Before I move on I'll comment on the impact of Tricolore, our primary chlorine based sanitizer.
As shown on slide six of the presentation materials Tricor sales grew by $70 million in fiscal 2021, with approximately 60% driven by price and 40% driven by volume.
Wait a more consistent supply of product and others in the industry I mean, we leveraged our inventory position to better serve new and existing customers.
Also it's important to note that as a result of our efforts to procure and convert more pounds of tricolor. During the year. We did experience an increase in costs related to Tri Corp. These cost increases were a key driver of the price component of our Tri core sales growth in fiscal 2020 one.
Moving to the balance sheet, we finished fiscal 2021 with cash and cash equivalents of $345 1 million compared to $157 1 million at the end of fiscal 2020, an increase of 188 zero million.
We ended the year with inventory of $198 8 million up 33% compared to 149.0 million at the end of the prior year.
We expect inventory conditions in the industry to remain tight throughout fiscal 2022, particularly for chemicals and equipment.
We have an always on procurement strategy at Leslie is and our team continues to practically work with our vendor partners to manage the flow of inventory as we continue to identify opportunities to strategically invest in inventory to meet heightened consumer demand.
As a result, we anticipate our inventory balances to be higher throughout the coming year.
With regard to debt at the end of fiscal 'twenty 'twenty. One total funded debt was 806.0 million compared to $1 2 billion at the end of fiscal 2020.
The $395 million reduction was due to the repayment of our senior unsecured notes in connection with our IPO and quarterly amortization payments on our outstanding term loan.
As of fiscal 2021 funded debt divided by adjusted EBITDA totaled three point several times and net debt divided by adjusted EBITDA totaled 1.7 times.
During the fourth quarter, our debt rating was upgraded by S&P to double B minus from B, plus and by Moodys to be a three from B one.
Now, let me turn to guidance for fiscal 2022.
Before I get to the guidance figures I want to remind everyone of the natural seasonality within our business.
Our primary selling season occurs during our fiscal third and fourth quarters, which span April through September in.
In 2021, the first half of the fiscal year accounted for approximately 25% of our annual sales while the third quarter represented approximately 45% in the fourth quarter represented approximately 30% we will continue to invest in our business throughout the year, including in operating expenses working capital and capital expenditures related to our growth initiatives.
<unk> while.
While these investments drive performance during our primary selling season that reduce our earnings and cash flow during the first half of our fiscal year.
Fiscal 2022 ends on October 1st 2022, and includes 52 weeks.
For fiscal 2022 we're providing the following annual guidance.
We expect sales of 1470 $5 million to 1000 $500 million, representing an increase of 10% to 12% compared to fiscal 2021. This.
This growth rate compares to our long term growth algorithm of mid to high single digits.
Strong industry fundamentals expected inflation and momentum behind our growth initiatives support our sales guidance.
Today, we also provided guidance for gross profit.
We expect gross profit of $655 million to $665 million, which implies a small improvement to gross margins when compared to fiscal 2021.
This compares to our long term growth algorithm, a flat to positive 25 basis points per year and follows a 290 basis point improvement in gross margins in fiscal 2020 one.
We continue to see opportunities to improve margins in each of our businesses.
As a result of our structural advantages are relationships are leading industry suppliers.
Proprietary brand strategies, and our vertical integration in both manufacturing and distribution.
We continue to expect some headwind on margins from business mix related to higher growth in our protocols business.
And we also expect inflation in the mid single digits.
We will continue to pass those cost increases through to consumers.
We expect adjusted EBITDA of 295 million to 305 million, representing an increase of 9% to 13% compared to fiscal 2021.
This growth rate compares to our long term growth algorithm of low double digits and it's important to note that we will continue to execute against the opportunities to leverage our operating costs and reinvest to drive growth in each of our businesses.
We expect net income of 170 million to $180 million and adjusted net income of $180 million to $190 million.
We expect diluted adjusted earnings per share of <unk> 94 cents to one dollar.
Representing an increase of 11% to 18% compared to fiscal 2021.
This compares to our long term growth algorithm of mid to high teens earnings growth.
We estimate our diluted share count of 190 million to 192 million shares and this range incorporates a reduction of approximately $3 million related to share repurchases.
And finally, I'd like to provide an update on capital allocation.
Our capital allocation priorities are as follows.
Our first priority is capital structure, and we finished the year in a solid position we had net debt divided by adjusted EBITDA of one seven times, we had $345 million cash on hand, and a $200 million revolving credit facility also our first debt maturity is our revolver in 2025.
Our second priority is to invest in growth and this has two parts. The first is capital expenditures in fiscal 2022 we expect to increase our level of investment by approximately 50% over fiscal 2021 levels.
Our investments will focus on new residential and pro locations distribution infrastructure and merchandising and information technology projects.
The second part is related to M&A.
We plan to continue to focus on acquiring high quality market, leading businesses to better serve new and existing consumer types. We have a robust pipeline of opportunities and our sales guidance has approximately 30 million in sales attributed to M&A.
And our final priority is return of excess cash to shareholders. Good morning unique position a high growth company with strong cash flow generation and modest maintenance capital requirements. Today, We announced our first share repurchase program as our board of directors approved a $300 million share repurchase authorization.
This action is consistent with our balanced and disciplined approach to capital allocation, our commitment to driving shareholder value and demonstrates our confidence in our long term growth prospects.
We expect to Opportunistically repurchase shares when we believe they were trading at a discount to intrinsic value.
In summary.
The full year and fourth quarter of fiscal 2021 were record periods and we drove strong financial results throughout our P&L.
Our entire organization continues to execute against our key growth initiatives with a great partnership of our long term vendors were successfully navigating the tight supply chain in this environment of heightened consumer demand.
We will continue our relentless focus on enhancing our consumers experience and executing our initiatives to continue to drive growth and market share gains.
With that I'll hand, it back over to Mike. Thank you.
Thanks, Steve.
Go to page 12 of the deck.
As we think about our 2022 performance. The first point I want to make is that every piece of data that we have tells us that the macro trends driving consumer demand in the pool industry should continue into 2022 and for the next several years.
We will build and hot tub backlogs driven by ongoing investment in the home and backyard.
Migration to the sunbelt that.
Desire for a healthy outdoor lifestyle.
A heightened sense of safety and standardization.
In hybrid and full time work from home schedules.
All of these macro trends support our forecast for healthy ongoing consumer demand.
Against this favorable industry backdrop, we are confident that we can grow the <unk> business faster than the industry across our consumer types and across our growth initiatives.
On page 13 is the bridge to our 2022 guidance.
We are expecting new pool builds to contribute 2% to our 2022 growth.
We arent forecasting inflation at 5%.
And we are expecting our strategic growth initiatives to drive an additional 5% sales growth.
We also expect strong growth to continue across all three of our consumer types residential pool pro pool and residential hot tub.
Moving to page 14, we are forecasting that each of our strategic growth initiatives with the exception of vacuum go home we.
We will drive 100 to 300 basis points of total sales growth.
Which is inline with our long term view.
Page 15 of the deck lays out the primary challenges facing the industry for the 2022 pool season, and importantly, our Leslie is positioned to mitigate and will benefit from each of them.
Your takeaway should be that we feel confident that we are well positioned to compete and win in this environment.
And then on page 16.
We would be remiss in not taking this opportunity to reinforce the Leslie is value proposition.
There are three key pillars that make Leslie is unique and that highlight our compelling competitive position and growth prospects.
Number one we operate in one of the most advantaged consumer products industries, it's large over $11 billion. It has annuity like demand because once the pools built it has to be maintained.
It is predictable growth the installed pool base has now grown every year for 51 years.
Number two we have built a consumer centric integrated ecosystem of physical and digital assets that is unmatched in scale and reach and that allows us to provide total pool and spa care solutions to all consumers whatever their needs and wherever whenever and however, they want to engage with us.
None of our competitors have that capability.
Number three despite being the largest direct to consumer brand in the industry, we have significant white space opportunities across all the consumer types, we serve and all the channels in which we operate.
We have new capabilities and talent to address these opportunities.
And multiple early stage.
Strategic growth initiatives.
And finally, we have a pipeline of disruptive information that only <unk> can bring to the pool and spa consumer.
To wrap up.
We are pleased with our record results for the quarter and year and we are encouraged by the durable demand we're seeing from our consumers.
The strength of the macro industry trends supporting that demand.
And the momentum we have across our strategic growth initiatives.
In a unique and advantaged industries Leslie.
Leslie is uniquely positioned into advantage to win.
We hope that the presentation and expanded data sets for this call help make that point.
Finally.
Our confidence in 2022 is expressed in our guidance at the high end of our long term growth algorithm and then our share repurchase program.
We look forward to sharing our results throughout the year.
With that I will hand, it back to the operator for Q&A.
Thank you we will now begin the question and answer session.
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A friendly reminder, questionnaires to please limit yourself to one question and if you have a follow up please rejoin the queue.
The first question comes from Ryan Merkel with William Blair.
Please go ahead.
Yeah.
Hey, guys. Thanks for taking the questions and all the details in the deck very helpful.
So I guess my first off last quarter, you mentioned select stock outs of coring tabs in equipment I guess, a two part question did that impact the current quarter and then how are you feeling about inventory of key items as you head into next season, and I think we're all pretty interested in coring tabs.
The price and volume commitment, how you're feeling about that.
Yes, if youll remember Ryan we quoted a com.
Org cabs in Q3 of 100%.
And then said that we wouldn't be able to maintain that in Q4, given the scarcity of supply.
We did see a deceleration in that comp.
Compound flooring tabs for Q4 was 38%.
So or deceleration based completely on supply.
It's bite that we were very pleased with the 16% comp given the lower rate of sales and chlorine tabs.
With regard to next year.
As Steve mentioned, we have a always on procurement strategy for key items.
And we have definitively procured more tricor for next year.
Is rolling from our manufacturers and our tolling operations.
And you should be at or above last year's levels in the next week or so.
And with regard to equipment I'm going to say that our equipment partners Theyre doing a great job of getting their supply chains back to speed and we feel.
Very good.
With regard to our position in key equipment.
Skus and also in tricolor cabs now all that being said.
<unk> also remains very strong so there's not a lot of slack in supply change yet, but we are in better shape.
And we'll be in better shape to the pool season than we were in Q4.
Got it that's great to hear and then my second question on the 20th your outlook. Your sales guide is a little bit above your long term average, but EBITDA growth is more in line is there anything to call out there why you wouldn't see a little bit more follow through on the higher sales.
Yes, it has to do with our growth investments and Steve might expand on this a little bit more but you know we're in a position where we're generating a lot of cash we have the ability to invest in the business and those investments are paying off.
And as we look into 2022, we want to make sure that we're taking.
The opportunities available to us to set us up not only for growth and profitability in 2022, but also on a go forward basis.
Yeah, that's exactly right I mean, we manage our expenses very carefully Ryan and we have to balance the leverage opportunities against our investment opportunities to drive growth and so that's what you're seeing in 2020 to a recognition of momentum against the growth initiatives, we have an opportunity to lean in so we're going to do just that in 'twenty two.
Alright makes sense, thanks, I'll pass it on.
Thanks, Ryan Thanks, Brian.
The next question comes from Simeon Gutman with Morgan Stanley.
Please go ahead.
Hey, guys. Thanks for the time and this is actually Hannah <unk> on for Seth.
First a general question on the competitive landscape. It feels like the industry is consolidating and it's somewhat accelerated pace and is that what youre seeing and can you comment on the M&A pipeline.
Yes, there is.
Theres, a fair amount of activity in M&A, I would say I'm not sure if it's <unk>.
Accelerating we're certainly looking to accelerate our action in this space because it remains still really highly fragmented as we've quoted before 8000 independent specialty retailers out there are actually the market leaders.
When combined in the space with just over I would say, 50%, 55% share so lots of opportunity.
Some acceleration and for US, we'll be looking to accelerate more.
Yeah.
Makes sense and then maybe a quick follow up on <unk>.
Could you walk through the drivers that got you to the 2% sales growth from pro tools next year, given how much growth you saw this year and where it's kind of currently sitting with sales penetration could that be conservative potentially.
Yeah.
We will look at me.
Every time, we quote an initial guide it's going to be a range.
And one thing we're committed to is making sure that we deliver on our guidance.
So that's a long way of saying that we believe there is some conservatism in there, but we also believe it is prudent given we're still operating in a global pandemic.
And there are still isolated challenges with the supply chain.
Makes sense. Thank you.
Before we proceed with the next question a friendly reminder, to all questioners to please limit yourself to one question and if you follow up please rejoin the queue.
The next question comes from Steven Forbes with Guggenheim Securities.
Please go ahead.
Good evening.
I wanted to focus on the outlook for unit growth, if I add up the.
The number of locations M&A pro residential targets I think it's per slide 14 here I think you're guiding to 50 net new locations.
Next year or mid single digit unit growth. So I guess is that is that correct and then.
Any color on the cadence of openings and then also how the pipeline for for each one of those sort of opportunities is.
As expected to sort of evolve as we look out here, maybe over a multiyear time period.
Yes Stephen.
I'll start with that and Steve May add on we have said before we believe there is an opportunity for them.
For stores in 200 underserved pro markets.
And in the residential space 700.
So the numbers, you're adding up four total new locations.
Is right in the range that we are thinking.
There is a lot of opportunity out there.
And in terms of pacing.
What's important for us is to get new locations.
We plan in the year opened for the pool season, So we really target to get those <unk>.
New locations up and running in the March April timeframe that being said.
You know the best time to get the retail space is when it's available.
Also when all always on strategy in terms of looking for good locations, but in general we really look to get set up for the season in the March April timeframe.
Yeah. The only thing I would add as you think about for pro store conversions, obviously best time to do that is off season. So right now it's a great time to be completing those.
And from an M&A perspective, it's opportunistic right. So as we get opportunities to close on we will do so and not necessarily have a are a point in time at which we will try to close them by now, but as Mike talked about for new stores typically do open those in March or April of each year to hit the season.
And obviously, we're looking at a long term long term locations across the company to serve consumers.
Thank you.
The next question comes from Garik <unk> with loop capital.
Please go ahead. Thanks.
Thanks for taking my question and thanks for all the detail on the 5% retail inflation outlook. Just curious if that assumes new pricing in fiscal 'twenty, two or is it really a function of carrying over a pricing that you secured last year.
Yes, Gary I'm going to say, it's a combination of both and clearly it's a a forecast.
And I'll note that it's it's not a cost forecast.
A retail price forecast.
Yes.
You know like anything we're going to forecast.
No.
We're trying to be as accurate as we can but also certainly a certain amount of conservatism in how we think about pricing going forward.
I mean, there's a lot of bottom inflation currently in the market.
We did see a slight slowdown in retail price inflation from.
Q3 into Q4.
5% is is how we're thinking about next year.
Great. Thank you.
Okay.
The next question comes from Liz Suzuki with Bank of America. Please.
Please go ahead.
Great. Thank you I was hoping you could actually expand on the competitive environment, a little bit in residential pool. There's been some recent M&A of one of your larger commercial competitors acquiring a residential pool chain I mean do their markets overlap with yours and does this present any potential margin pressure and then are some of those 35 locations.
We expect to add from bolt on acquisitions likely to be more on the residential side or the pro side.
Yeah.
Yes, good question.
Where are the acquisition that you are talking about.
I'm quite familiar with both companies the acquired company.
Good guys.
Strong operators, it's a regional business in Florida, and it has a heavy distribution component, which I think makes sense for the acquirer.
Yeah.
Competition is is all good.
Our business in that region is quite strong.
I'm going to assume there is.
As well we have not seen any.
Additional.
Our.
Franchising.
Activity or any unusual pricing activity since the announcement of the deal.
And in terms of.
New locations, we're going to focus.
On about five pro locations and at least 10 residential locations for 2022.
Yeah, and that's for new store openings from an M&A perspective, I think the focus is across the board right. So we will look at the residential pool stores will look at hot tubs, we'll look at pro opportunities as well.
But as Mike talked about the biggest opportunity out there is the 8000.
And you know single store operators, if you will where mom and pop so certainly a lot of opportunities in the pipeline in that area.
Great. Thank you.
The next question comes from Jonathan <unk> with Jefferies.
Please go ahead.
Great Hey, Mike H D, a great quarter and and helpful. Supplemental presentation. My question is a two parter is is there a specific assumption embedded in your 2022 sales guidance regarding tool utilization, whether it's flat or up or down relative to 2021, and you know them.
Another factor that's going to drive chemical sales is this growing awareness.
Now regarding cleanliness and recognition that backup pools have been you know historically understand anti so is there a way any data you are seeing that can frame what percentage of pools are still understand attached even after the last two years.
Yeah, Thanks, Jonathan I'll take I'll take a crack at the first part of that question and then we can talk about data on an under sanitized pools.
The assumption our sales guidance is that utilization of pools in 2022.
Bye bye pro customers, meaning the commercial side and also residential is that it should be similar to 2021.
Now, we do that because there's a lot of unknowns around the pandemic, but we do feel that people use their pools more in both 2020. One we are really glad to see that in 'twenty. One I think it speaks to the stickiness of the new behavior as people invest in their homes in their backyards and hot tubs and pools.
So.
We're we're modeling flat.
Do you think that might be a little conservative, but we definitely don't see it reducing.
Steve We had some data on understand innovation I cannot recall it off the top of my head I'm not sure if you do that.
It was more along the commercial lines and a significant level of understand utilization. So one of the opportunities. We talked to is now getting water tests more frequently alright. So in a consistent 10 point tests. So the <unk> in our stores the opportunity with actually Blue home is getting that water test them more frequently because we do believe that many bodies of water under sanitized.
And it's an education process that our store associates go through with consumers on a regular basis. So it's a it's the opportunity to kind of sell that in that total solution, but.
No specific metrics on kind of a quarterly or annual basis that I'm aware of.
Got you thanks very much helpful.
The next question comes from Andrew Carter with Stifel.
Please go ahead. Thanks.
Hey, Thanks, Good evening I wanted to just come back to the gross margin guidance because it seems relatively muted in terms of where you stand I mean, youre going to have pricing essentially matching what's your inflation is which should be a benefit and I would assume the private label program would gain additional penetration next year and if you don't mind also could you.
Update us where the private label penetration is overall as well as for chemicals. Thanks.
Yeah.
I'll start with the second part of that in terms of private label penetration.
We went into.
We ended the 20th at about 55%.
We were looking for growth of 150 200 basis points a year, maybe as much as 300 based on our assortment planning I would tell you that in 'twenty one.
We did not get there in terms of that kind of lift for the year and that was really driven by a very strong equipment business.
Our actual private label penetration is lower.
So still definitely on track for our long term goal, there, which is to get up over 70% by.
By say 2025.
We feel good about that but this year was a little skewed by equipment sales and particularly by.
The situation in Texas.
Steve you want to talk about margins.
Yeah. So it's a great question on margins and again there the equation that we talked about from a long term algorithm has a few components right. So structurally we have unique advantages in our industry. The size of the peers that we write the relationships that we have with our vendor partners number one our ability to grow is as Mike just talked about from a proprietary.
Our brand strategy, and then vertical integration for manufacturing and distribution.
You think about what we saw in 2021, we see some continuation of that into 'twenty two.
Which is we will find opportunities to increase rate kind of across our product categories and across our businesses.
There may be some margin headwind from a tri core perspective, as we procure more pounds. Some of those towns that come at higher prices. There. Those are higher priced pounds are still profitable from a dollar perspective that may have a rate impact so that that will be a headwind.
Overall, we believe right across the business will be up again.
I'll have occupancy leverage which should be to our benefit and then the final component is growth in our.
Businesses like our pro pool business that will be a business mix headwind. So overall, you know pleased to be in a position to have guided for gross margin positive and inside our long term growth algorithm. Despite the fact that we were up 290 basis points last year.
Thanks ill pass it on.
The next question comes from David Bellinger with Wolfe Research.
Please go ahead.
Hey, guys. Thanks for taking the question is in regards to the 300 million buyback program announced Tonight. So youre clearly seeing continued momentum in the business much improved cash flows.
We're also dealing with all these supply chain issues and concerns around inventories and also you've talked about it.
Greater potential for acquisition for next year. So just why now in terms of pulling the trigger on repurchases versus building inventories are growing our customer base further and do you expect to be active in the market immediately in Q1, just given where shares are trading today.
Yeah, I think the way to think about.
You described as tradeoffs as to reiterate Steve's point, Leslie said that very unique business and that we're both a growth business.
And we generate really significant and strong cash flow.
We're in the very fortunate position of not having to make tradeoffs between investing in growth or potentially returning returning money to shareholders. So that's the reason for the share authorization from the board.
And when we think about how it will be deployed as Steve said, we're going to be opportunistic.
If the question is.
Do you think this stock is currently undervalued I would say, yes, we do.
And we will be opportunistic in how we deployed at those share repurchase.
Moments.
By looking at the opportunities.
Over time, and we're not looking to do anything with in any specific timeframe.
Other than to do it when it has the best return for us.
Great. Thanks for that appreciate it.
The next question comes from Rudy Yang with Bahrenburg capital markets.
Please go ahead.
Hey, guys. Thanks for taking my question just regarding cost inflation for next year and is it possible that grows higher than you anticipated.
Just comment on how much you believe you can continue to pass on costs before witnessing a reduction in demand volumes, just especially given that your competitors typically offer competitive prices for similar products.
Yes, really it's a good question and you know as we've said before that the.
<unk> industry has a long history of passing costs through.
That continued in 2021 and you can see it in our margin performance.
<unk>.
We believe that is still going to be the case into 2022.
We haven't seen anything that would tell us differently, but yeah theres some theres some pretty strong price increases in the market currently.
As you can imagine we watch it everyday but currently we're not seeing any resistance.
Good luck.
<unk> come from Peter Keith with Piper Sandler.
Please go ahead.
Hey, good afternoon, it's obviously near on for Peter Thanks for taking my questions.
First I wanted to circle back up on gross margin.
Steve You said you expect it to be up for the full year I was wondering if you can give any color as to.
The shape of <unk>.
Gross margin expansion.
Progress through the year.
Yes, it should.
Year on year gains be uniform through the year or is there any first half second half kind of nuance.
Yes, good question.
When you think about that we do have seasonality impacts from a margin perspective.
As you think about just the leverage on fixed costs in the first half of the year versus the back half.
And that I think the guidance is on an annual basis and don't have anything further.
Fine that increases on a quarter to quarter basis.
Okay.
That makes sense.
I guess one other separately.
Looking at.
Digital marketing strategies.
The company has placed increased focus on this in the past once a year just wondering if you could give any updates on this front in alright any related kpis to call out that are trending in the right direction.
Okay.
I don't think I'm not sure Peter willing to say a lot more than we have.
Obviously, a very competitive situation.
But as I did mentioned in my remarks, we continue to see really favorable rois on our on our digital spend.
Favorable to the point that we'll want to continue to invest as long as we can maintain those and we've set ourselves up to do that in 2022 by taking our marketing budget.
But simply it's the digital marketing budget.
Dominant.
Nominal immediately use up 30% for the year.
Okay sounds good thanks, Mike.
Yes.
The next question comes from Dana Telsey with Telsey Advisory group.
Please go ahead.
Thank you good afternoon, everyone. As you think about accu blue in the home version I think which launched in June of this of 2021.
Nearly a third of the active members are new customers can you broadly talk about the initial response to that version one does it increase your enthusiasm when you launch number two which we understand is delayed by equipment shortages whats your expectation there. Thank you.
Yes, Dana Thanks for this question, we're very encouraged by the response to <unk> Blue home version one.
As you said as we put in the deck you know about a third of the new of the customer's floor at our new.
Two thirds are obviously already less lease customers.
We're just seeing a really a really nice response and it's a subscription model as you know and it has been.
Very very sticky to date, so very encouraged by that.
At the same time, we are leaning in to those first few thousand customers.
Focus groups in flight, we have a real nice feedback mechanism from the users and we're continuing to learn and refine both how consumers use the device and how we might remove any pain points out there have in using it wanted to.
Updates we've done recently is to get the PUL score on the App.
That wasn't available in the first and the first release and now we've updated that App for all the current users. So.
All good there.
I'm really encouraged by version 2.0.
And equally disappointed and the challenges, we're having around securing components.
So theres nothing in version one nothing in version two that would quell our enthusiasm for the potential but and we said in an earlier call. We didnt thing.
Supply chain component delays would impact us and we were wrong and yes. That's.
That's disappointing but.
Enthusiasm for the.
Long term potential of back you go home very very high.
Got it.
One more if I could add just.
Any comments on the start of this first quarter anything to keep in mind in framing fiscal 'twenty two.
Thank you.
Yes, thanks, Dana not not going to comment on on performance in the current quarter. We've got a few weeks left in the quarter and will report tie in the coming months.
Thank you.
The next question comes from Peter Benedict with Baird.
Please go ahead.
Hey, guys. Thanks.
Good job on that deck, but a lot of good information.
As we think about.
<unk> 22, and the outlook, obviously positive on the top line and with Providence, but.
As we think about maybe the cadence.
Last year in the second quarter, you did have the Texas storm, So Steve I know.
And I can actually get into specific quarters, but how should we be thinking about that it's a low volume quarter that was a big event, just just to level set things assuming there'd be some some some softer.
Growth rates in that quarter just.
I wanted to give you an opportunity to address that if you want.
Sure we talked about at Q2 that we thought Texas was approximate $10 million impact overall, when you think about the overall year at that $230 million increase in sales fairly small right and again I'm comparing Q2 to the total year.
But again, our first half from a EBITDA perspective, we've talked about historically.
Being roughly kind of flat breakeven if you will and then profit side really come in and kind of the second half of the fiscal year. So don't don't are not going to provide any further detail than that typical seasonality that we see I don't see any reason why there'd be material deviation on a quarter over quarter basis.
Gotcha, Okay. Thank you very much.
This concludes the question answer session.
I would like to turn the conference.
Michael <unk> for any closing remarks.
Thank you operator, and thank you all for joining us today on our Q4 earnings call.
Be safe and find time to join your family and friends. This holiday season.
And if you can preferably with a pool involved thanks.
Thanks very much.
Hi.
This concludes today's conference call.
May disconnect your lines. Thank you for participating and have a pleasant day.
Okay.
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Yeah.
Yeah.
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