Q2 2022 Leslie's Inc Earnings Call
[music].
Good afternoon, and welcome to the second quarter of fiscal 'twenty Conference call for Macy's, Inc.
At this time all participants are in a listen only mode.
Following the prepared remarks management will conduct a question and question and answer session.
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As a reminder, this conference call is being recorded and will be available for replay later on the Companys website.
I will now turn the call over to Caitlin Churchill Investor Relations. Please go ahead.
Thank you and good afternoon, I would like 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 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.
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 Barclays website at IR dot by at least pool Dot com.
On the call today from Leslie Inc. Is Mike <unk>, Chief Executive Officer, and Steve without Chief Financial Officer, with that I'll turn the call over to Mike Mike.
Thanks, Caitlin and good afternoon, everyone. Thank you all for joining us.
Please note that we have posted a brief deck on the lessees IR site to supplement our discussion and we will be referring to specific pages as we present.
I'm going to start by highlighting our key results and performance drivers for Q2, and then Steve will walk you through our financial results and increased full year guidance.
Before we get into our results I want to remind everyone about the Texas freeze in the second quarter last year and.
In February 2021, and unprecedented cold weather event damaged thousands pools and pool pads in Texas.
As events Spike sales of several product categories, most specifically equipment parts and Sanitizers.
As you will remember we estimated at the time, but the freeze and accompanying spike in demand increased sales in the quarter by approximately $10 million.
It is very gratifying for us to be able to report a positive comp in this year's quarter. Despite the extra ordinary circumstances in Q2 last year.
I would like to thank our team for driving these results with superior execution.
Across the organization.
For purposes of demonstrating what we believe to be our core underlying performance, we will be noting in our remarks, some key metrics, excluding the impact of the freeze.
I am pleased to report that our Q2 performance continued our streak of record results and illustrates our competitive advantages and serving the non discretionary and maybe like demand of the aftermarket pool industry.
Sales for the quarter increased 19% to a record $228 million with broad based strength across our three consumer groups.
<unk> grew 12% for the quarter residential heart grew 70% and pro pool grew 17%.
Comp sales increased 13% for the quarter and the two year stack comp for the quarter was 49%.
The comp in two year stack comp for the quarter, excluding Texas was 20% and 48% respectively.
Gross profit for the quarter was a record $85 6 million and margin rate expanded 30 basis points.
Adjusted EBITDA was $9 million for the quarter as we continued to make investments to grow our business.
Moving to the industry backdrop.
We continue to see the pool of hotbed, an industry benefit from strong consumer demand in the quarter.
This demand is being fueled by consumers continuing to invest in their homes backyards the desire for a healthy outdoor lifestyle.
Gration to the sunbelt.
A heightened sense of safety incentive <unk> and hybrid and work from home schedules.
We have seen no evidence of these macro trends abating.
With regard to inflation in the quarter product cost inflation was more than 10%.
Those costs through and as is our practice implemented additional pricing actions to maintain product margin rates.
Consumers have accepted the increased retail prices and we did not see any associated slowdown in demand as evidenced by our 20% comp for the quarter, excluding Texas.
For the full year, we now expect product cost inflation of 10% and remain confident in our ability to both past costs through and utilized pricing actions to maintain product margins if inflation trends higher.
We were pleased with our performance across product categories in the second quarter. However, several categories stood out.
Got it cool cleaner sales increased 64% in the quarter and 172% on a two year stack.
Variable speed pump sales increased 23% in the quarter and 109% on a two year stack.
Peter in heat pump sales grew 20% in the quarter and 104% on a two year stack.
<unk> sales grew 82% quarter and 284% on a two year stack.
And <unk> sales, including flooring tabs increased 96% in the quarter and 159% on a two year stack.
On page eight of the deck, we showed the first half results for these same categories.
With regard to chlorine tabs.
Apply remains constrained and retail prices elevated.
Over the last two years, our retail price for 35 pound bucket of Ted's has increased from $99 to $199.
We get a lot of questions about what happens if coring tab pricing versus and we have price deflation.
We do not believe that is likely in the near or medium term, let me explain why.
Consumers, commonly referred to as coring tabs.
Actually try quota tabs strike waters manufactured by combining chlorine caustic soda and urea.
That combination creates try corp.
Annually, which are then compacted into tab.
While domestic dry quarter capacity was impacted in 2020 in 2021 by the much discussed plant fire. The industry is also facing very tight chlorine supply conditions, which have created corresponding cost increases.
Shortage in chlorine has two drivers.
First is structural in the last 16 months core earning capacity in North America has been reduced by about 7%.
The second factor is that chlorine is a key component of PVC.
Korean use in PBC has a higher value of inquiry and use intra quarter manufacturing.
The reduction in total chlorine capacity and the growth in PVC manufacturing has caused the amount of north American sourced chlorine available to use Tri car manufacturers to decrease by about 20%.
The result is that domestic try quarter capacity is tight and following short of elevated consumer demand.
Imported chlorine and Tricor granules can bridge supply to the market.
However, both are very expensive to the combination of tariff costs antidumping duties and specialty handling and transportation cost.
In addition, urea another primary component of Treichler manufacturing is also experiencing significant cost increases driven by restricted supply and increasing demand.
Over the last 12 months the cost has increased more than fourfold from less than $200 per standard ton generically $900 per standard time.
We have summarized the supply and demand situation on page 11 of the deck.
Curious to takeaway.
The absolute increase in track water supply will need to come from high cost imports, where new domestic capacity utilizing high cost imported chlorate and all try core manufacturing will be utilizing high cost urea.
Given these challenging supply dynamics and continued robust demand. We believe it is highly unlikely to cost of Tricor and the retail price of chlorine tabs will go down in 2023.
We also get a number of questions with regard to how our business model will perform in different macroeconomic conditions.
As you can see summarized on page 14 in the deck over the last two decades Leslie has been successful and profitably growing sales in periods of rising interest rates.
Inflation housing industry slowdowns.
<unk> contraction declines in consumer spending and.
And reduced pool build rates.
In fact, our business model has proven to be durable and all of the macroeconomic conditions that have existed during our 58 consecutive years of growth.
And with the addition of Leslie disconnect.
<unk> on our six strategic growth initiatives.
And our investments in talent and capabilities. We believe we are better equipped today to grow profitably and challenging macroeconomic conditions.
Any other time in our history.
Getting back to our Q2 results, let's walk through the performance of our six strategic growth initiatives.
First our consumer file continues to grow.
Total target file growth was 3% in the quarter.
We are pleased with this result, given the impact of the Texas freeze in Q2 last year.
Second quarter 2022 was our 10th straight quarter of strong funnel growth.
We are driving this file growth with digital marketing and we continue to achieve high ROI on their spend.
We have now increased our marketing budget for 2022 by more than 30%.
The majority of the spend will be will be deployed in our Q3 and Q4.
Next we continue to deepen our relationships with our consumers.
Our loyalty program Leslie pool, perks drove loyalty file growth of 2% in the quarter. Despite the comparison against the Texas for Us last year.
Programs key benefits.
5% rewards earned rate and free shipping.
China resonate with consumers.
Average revenue per consumer grew 16% in the quarter, driven by pool, perks, and our segmented personalized marketing tactics.
The growth in average revenue per consumer exceeded the impact of inflation and reflects our growing wallet share.
Third our pro initiatives are driving strong results.
During the quarter, we began converting 29 residential stores to our pro format and building out five new <unk> stores.
We expect all 34, new pro locations will be operating prior to pool season, and will bring our total pro store count to 79.
Pro affiliate program continues to scale, we now have over 2100 agreements in place and our pro affiliate partner sales grew 43% in the quarter.
The new unconverted pro locations are expanding pro affiliate program and our dedicated Leslie <unk> E. Commerce site helped grow our total pro business, 17% in the quarter.
Excluding the impact of the Texas freeze a pro business grew 27% in the quarter.
Moving to M&A.
In the quarter, we closed on the acquisition of city, which operates seven locations in the greater Pittsburgh area.
In addition, we have entered into <unk> with two new targeted acquisitions that we expect to close in our third quarter.
We continue to see a wealth of acquisition opportunities amongst the approximately 8000 independent specialty retailers in the industry and we will continue to ramp up our acquisition activity.
Based on our acquisitions completed year to date.
We are increasing our 2022 forecasted sales for our M&A strategic growth initiative from 30 million to $45 million.
With regard to our residential white space initiative.
We have added three new locations year to date and remain on track to open at least 10, new residential locations in 2022.
Finally, thank you blew home.
As we discussed shortages of the micro chips required for manufacturing version two point has limited production for this pool season.
We expect to receive not more than a couple of thousand units, which will be used primarily for additional consumer testing.
We are not planning any significant sales for this initiative in 2022.
Now I'll turn it over to Steve to share more detail on our Q2 financial results and increased fiscal 2022 guidance.
Thank you, Mike and good afternoon, everyone.
We're pleased to report strong results for our fiscal second quarter, our performance illustrates our competitive advantages and serving the non discretionary annuity like demand of the aftermarket pull industry and our business continues to demonstrate a differentiated ability to grow in all economic environments.
Our dedicated team of associates continued to deliver exceptional service to our consumers each and every day and we thank them for their contributions.
I'll review, our second quarter and year to date fiscal 2022 performance and our upward revision to our outlook for the full year fiscal 2022.
Second quarter results. Our second quarter included 13 weeks ended on April <unk> 2022, we reported record sales of $228 1 million, an increase of 18, 5% or $35 $7 million when compared to the second quarter of fiscal 2021.
Our comparable sales growth increased 13, 3% or $25 $5 million.
This increase is on top of calendar adjusted comparable sales growth.
35, 5% in the second quarter of fiscal 2021 and represents comparable sales growth on a two year stack basis of 48, 8%.
You will recall in Q2 last year, we explained the shifts created by the 50 <unk> week in fiscal 2020 and spoke to comparable sales growth on both a reported and shifted basis given that dynamic.
As Mike mentioned in the second quarter of last year, the Texas <unk> positively impacted performance by approximately $10 million.
After excluding the impact of the Texas freeze in fiscal 2021 sales grew 25% and comparable sales grew 20% in the second quarter of fiscal 2022.
We generated strong results across all consumer types, and we continue to see solid performance in the core sanitizer and equipment product categories during the quarter.
Inflation remained elevated and primarily related to chemical products and equipment.
We expect higher retail prices and costs to continue.
We remain confident in our ability to pass.
Costs through annualized pricing actions to maintain product margins.
Gross profit increased 19, 5% and gross margin rate increased by 30 basis points to 37, 5% from 37, 2% in the prior year, primarily due to occupancy deleverage and product margin improvements.
Gross margin improvement was partially offset by business mix, including strong growth with both our pro pool and residential hot tub consumers.
SG&A increased 27, 3% over the prior year on a reported basis.
The year over year SG&A increase was primarily driven by our sales increase in investments in information technology merchandising systems and supply chain to support our growth.
We also incurred higher SG&A associated with acquisitions completed after the end of the first quarter of fiscal 2021.
As a reminder, we continue to invest in the business throughout the year and it does impact flow through in the first half of the fiscal year when SG&A as a percentage of sales is elevated given the seasonality of our business.
Total SG&A spend and SG&A as a percentage of sales in the first half of fiscal 2022 was favorable to our internal expectations.
We generated adjusted EBITDA of $8 7 million compared to $9 5 million in the second quarter of fiscal 2021 during.
During the current year quarter, we converted the increase in sales at a higher gross margin and invested against our key strategic priorities.
With positive adjusted EBITDA performance in each of the first and second quarter of this year. We're on track to generate positive adjusted EBITDA in each quarter of fiscal year for the first time unless these recent history. This is a testament to our business strategy and execution by our entire team.
Adjusted net loss remained relatively flat at $2 7 million in the second quarter of fiscal 2022 compared to a net loss of $2 8 million in the prior year.
Adjusted diluted loss per share was one cent.
In both the second quarter of fiscal 2022 and in the prior year.
Now I'll turn to year to date results.
Following are a few highlights.
<unk> sales for the 26 week period increased 22, 4% to $412 9 million from $337 4 million in the prior year, an increase of $75 $5 million.
Our comparable sales increased 16, 4%.
$55 $2 million.
This increase is on top of the shifted comparable sales growth of 31, 1% in the first half of fiscal 2021 and represents comparable sales growth on a two year stacked basis, a 47, 5%.
Gross profit increased 23, 9% or $29 5 million to $152 9 million from $123 4 million in the first half of fiscal 2021.
Gross margin rate increased by 40 basis points to 37.0% from 36, 6% in the prior year.
Adjusted EBITDA improved by 0.5 million to $9 8 million.
From $9 3 million in the first half of fiscal 2021.
Adjusted net loss remained relatively flat at $13 7 million in the first half of fiscal 2022 compared to a net loss of $13 4 million in the prior year.
And adjusted diluted loss per share was <unk> <unk> in both the first half of fiscal 2022 and in the prior year.
Moving to the balance sheet.
We finished the second quarter of fiscal 2022, with cash and cash equivalents of $52 million compared to $89 million at the end of the second quarter of fiscal 2021.
We also had $45 million drawn on our revolver at the end of the second quarter of fiscal 2022, and our current outstanding balances zero.
On inventory, we continue to expect inventory conditions in the industry to remain tight throughout fiscal 2022, particularly for chemicals and equipment.
We ended the second quarter of fiscal 2022 with inventory of $345 million up 24% compared to $278 million at the end of the prior year quarter.
Our team continues to proactively work with our vendor partners to manage the flow of inventory and we continue to identify opportunities to strategically invest in inventory to meet heightened consumer demand and prepare for pool season.
With regard to debt at the end of the second quarter of fiscal 2022 funded debt less cash was $795 million compared to $721 million at the end of the prior year quarter.
The increase was primarily related to a reduction in cash and cash equivalents as we executed share repurchases in the first half of fiscal 2022.
In the first half of fiscal 2022, we repurchased seven 5 million shares for a total of $152 million and we deployed $30 million towards acquisitions.
In a unique position high growth company with strong and consistent cash flow generation.
This allows us to pursue a balanced and disciplined approach to capital allocation and demonstrates our commitment to driving shareholder value and our confidence in our long term growth prospects.
Before I get to our outlook.
I want to remind everyone of the natural seasonality of our business.
Our primary selling season occurs during the fiscal third and fourth quarters, which span April through September .
In fiscal 2021, the first half of the year accounted for approximately 25% of our annual sales while the third quarter represented approximately 45% in the fourth quarter represented approximately 30%.
We generate substantially all of our full year profits in the second half of our fiscal year.
We are uniquely positioned to invest in our business throughout the year, including in talent operating expenses working capital and capital expenditures.
While these investments drive performance during our primary selling season, they reduce our earnings and cash flow during the first half of our fiscal year.
We are pleased with our strong start to the fiscal year and we are firmly focused on driving our initiatives and executing in pool season in 2022.
With regard to our outlook today, we are raising our full year fiscal 2022 outlook to reflect three discrete items first our updated views on inflation for the full year.
Contribution related to M&A transactions closed in the first half of the year.
And finally, our second quarter beat our internal expectations.
We expect sales of 1575 to 1600 $10 million, representing an increase of 17% to 20% compared to the prior year at.
At the midpoint. This is an $85 million increase compared to our outlook in February and the growth rates compare favorably to our long term growth algorithm of mid to high single digits.
Our outlook reflects an expectation for 10% inflation for the full year compared to 5% previously and our outlook now includes $45 million in sales related to M&A compared to $30 million previously.
We expect gross profit of $700 million to $715 million, which implies a small improvement to gross margin compared to the prior year.
At the midpoint. This is a $38 million increase compared to our outlook in February and the improvement in gross margin over the prior year is in line with our long term growth algorithm, a flat to positive 25 basis points per year.
We expect adjusted EBITDA of $315 million to $330 million, representing an increase of 16% to 22% compared to the prior year.
At the midpoint. This is an $18 million increase compared to our outlook in February and the growth rates compare favorably to our long term growth algorithm of low double digits.
We expect net income of $178 million to $190 million in.
And adjusted net income of $193 million to $205 million.
We expect diluted adjusted earnings per share of $1 <unk> to $1 10.
Representing an increase of 20% to 29% compared to the prior year.
At the midpoint. This represents a 6% increase compared to our outlook in February and the growth rates compare favorably to our long term growth algorithm of mid to high teens earnings growth.
There is no change to diluted share count, which we estimate to be between 187 to 189 million shares.
This range does not include the impact of any additional share repurchases that may be completed during the second half of fiscal 2022.
With regard to capital allocation, we have a balanced and disciplined approach and our priorities remain as follows.
Our first priority is capital structure.
Our second priority is to invest in growth through both capital expenditures and M&A.
We continue to execute our fiscal 2022 capital expenditure program and as demonstrated by our updated outlook. We continue to make progress on our pipeline of potential M&A opportunities.
Our final priority is to return excess cash to shareholders.
We have $148 million remaining under our share repurchase authorization and we will continue to evaluate opportunities to repurchase shares based on our financial position investment opportunities to drive growth and market conditions.
In summary.
During the second quarter of fiscal 2022, we generated record sales reported positive EBITDA and continuing to see strong results from our growth initiatives.
And we're grateful for the contributions of our entire team as they continue to execute at a high level in the current environment.
And with that I'll hand, it back over to Mike. Thank you.
Thanks, Steve.
Im going to wrap up by reiterating the strength of <unk> offense and defense.
I'll start with our defense and remind you of four key attributes of our business.
One we are benefiting from strong secular macro trends that are driving durable consumer demand and are showing no signs of slowing.
Two we operate in an industry that is able to pass costs through to consumers and we have the ability to take pricing action to protect product margins.
More than 80% of our assortment is non discretionary and benefits from recurring annuity like demand and four we have a long history of strong and consistent free cash flow generation that enables both continued investment in our business as well as opportunistic return of capital to shareholders in the form.
Of share buybacks.
To ensure we continue our track record of growth.
<unk> is a high powered offense with four important attributes.
One we have tangible strategic growth initiatives and unique to our industry omni capabilities that are driving meaningful results and are still early stage in their development.
Two our multi pronged pro initiative continues to scale.
We have set ourselves up to capitalize on robust M&A opportunities, we continue to see in the pool and spa industry.
For great execution by our merchandising team has put us in a favorable and advantaged inventory position.
With both a strong defense and a strong offense operating in a unique and advantage industry.
And with a track record of 58 consecutive years of growth and all types of macroeconomic conditions. We believe <unk> is uniquely qualified position and advantaged to continue to win in the market.
With that I'll hand, it back to the operator for Q&A.
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One moment, please while we poll for questions.
Our first question is from Ryan Merkel of William Blair. Please go ahead.
Hey, guys congrats on the quarter.
Thanks, Alright, thanks, Brian .
So first off thanks for all the details in the deck is really helpful. I was hoping you could address the pull forward question again.
Because from from a high level it looks like Youre, a COVID-19 winner your top line has been very strong stronger than tip.
Typical history. So have you tried to calculate.
What potential pull forward estimate.
Or is this just not your view because of the macro drivers and share gain in price.
Yes, Ryan I would say, it's not our view.
Both for the reasons you stated.
And also due to the fact that we track that very carefully we're able to see by consumer what they purchased.
Prior years versus what they've purchased year to date, it's one of the things that we try to pay a lot of attention to and we just haven't seen any.
Patients of any meaningful pull forward.
Okay.
You see robotic cleaners up 74%, that's sort of jumps off the page.
People are sort of pull forwarding some of that.
No I think look robotic cleaners, or just a much better product.
And all the manufacturers have done a great job with them.
My neighbor, just calls me and says I need new cleaner, what do I need.
And I gave them.
Pointed up to our website of course with no discount I might add and.
Instead, you want one of these robotics and Christine you said, while they seem expensive I said, you've got to see it work and he got it and then literally sentiment Texted me.
Short video of him watching his robotic cleaner work so that robotic cleaners. That's just there is a natural replacement cycle for cleaners.
And I think that's been accelerated by it's just it's just a much better product.
Okay.
Thanks for that it's still a question I guess I wanted to ask and then weather hasn't been great here in the north.
Was there any impact to April there.
If so is that something that can make up for the season.
Yes.
April well, let me speak to the quarter right.
In quarter, two I think the weather was.
Was.
Slightly positive.
And I think I would call April slightly negative.
But not a big impact either way.
Yes, not a typical Ryan shoulder season right. So late March into April and then when we get into kind of late September early October you're going to have some some weekly weather trends that have impacted week to week. The one thing we always talk about us.
When it gets warm and pool is always open up.
And it always gets cold and pulls are always closed down and some of those seasonal markets but.
Again from a base maintenance perspective, it's about the core season.
Certainly the single day that it opens they pull opens or it starts getting used or closes.
Great. Thanks best of luck.
Thanks, Brian .
Okay.
Our next question is from Simeon Gutman of Morgan Stanley . Please go ahead.
Hi, guys. This is Michael Kessler on for Simeon. Thank you for taking my questions.
First I wanted to ask about the updated and raised guidance on top line I think if you add the the updated inflation view plus the M&A view that I think basically gets you to the updated sales and raise sales guidance I guess number one is that right and I guess that would imply relatively unchanged I.
I guess go forward underlying volume consumption I guess assumptions.
Is that just I guess general kind of prudent conservatism as we move through the year or anything to call out as far as thinking about.
Ex those two discrete factors, yes, great. Thanks. Thanks for the question, yes, so as we look at inflation that five percentage point increase from 5% to 10%.
Going to contribute $50 million to $60 million of top line, we talked about the M&A at about $15 million contribution with the remainder coming from the Q2 beat So you are right and we've talked about this in prior years, where we're at the doorstep of season and so we've largely less the go forward look unchanged.
Just updated guidance for those three discrete factors.
Great. Thank you and you mentioned no signs yet of consumer response as far as the macro is still positive tailwind.
I forget if you mentioned, if any any signs of either trade down or pull back.
What are you guys looking for as far as whether that may or may not happen recognizing the vast majority of your business is non discretionary are there areas, where the consumer could still choose to either trade down or pull back in certain ways and I guess, how would you kind of thinking about that given the.
The well publicized stress on the consumer what right now thank you.
Yes, I think what youre seeing in our business is non discretionary in nature.
Majority of it and.
And recurring demand and I know, we say that a lot, but it really starts to prove itself in situations like this.
If we have one business that is underperforming the others currently it would be our rack business and recreation products floats.
Pads.
Basketball games that sort of thing we have seen some weakness there, but that's a single digit percentage of our total business and in the core businesses of chemicals and equipment and parts and repair and maintenance, we have not seen any indication of.
The decrease in demand.
Yeah.
Great. Thank you good luck rest of the year.
Thanks.
Our next question is from Steven Forbes of Guggenheim Securities. Please go ahead.
Good evening Steve.
I just wanted to focus on loyalty member behavior, where maybe data.
Let's start with we'd love to hear an update on average spend per member maybe average wallet share penetration.
Any insight as we think about how your member base specifically your loyalty member base is.
Is is leaning into the Leslie value proposition in terms of the dollar spend.
Yes, let me.
Thanks for the question, Steve Let me call. It a couple of numbers on the file.
Ex the Texas impact because it was it was pretty extraordinary in terms of dynamics as well as <unk>.
Comp sales.
For the quarter ex Texas, the target file growth was.
Just north of 8%.
And the loyalty file growth was just north of 6%.
So not not that double digits that we've had in the past.
But we have spoken about those two particular initiatives.
Starting to moderate at some point, we came out with some opportunities low hanging fruit opportunities I would say the switch to digital marketing early from direct mail and we got some outsized performance in the first eight quarters, that's moderating a little bit still very satisfied with the results.
In terms of the loyalty file spend is still about two times, our non loyalty file and it's helping grow customer lifetime value grew another 7%.
In the quarter on the.
Three year look back so we feel we feel good about the dynamics with the loyalty customer.
The one thing that we are tweaking and our loyalty program.
And this was a little bit self inflicted.
Endless aisle operations from the stores, which drives a nice chunk of business had what I'm going to call. It.
Non optimal loyalty sign up and we saw that.
You used loyalty sign up rate some some impact in the stores that's since been corrected.
Much smoother operation now and I think that'll that'll pay that'll be very well received by consumers.
Pay some dividends in customer loyalty sign up in store as we go forward.
But overall.
I feel.
I feel good about where we are with loyalty.
Maybe just a quick follow up on the pro affiliate program given the growth that we saw here in the number of agreements.
Any any update on the volume commitments.
All of those partners and then any updated thoughts on the optimal number of affiliate affiliates you see across the network.
Yes, we haven't we haven't quoted the pro affiliate.
And then your agreements terms in terms of in terms of sales specifically, but they are unchanged.
And we see good momentum here, we said 2100 in the at the end of the quarter. We're seeing that continue to build I think today, we're somewhere north of 2300.
And the only thing I would say about the <unk> business is the demand is very strong if we have had some supply chain constraints.
Specifically with equipment.
Has been in the pro channel. So that's something we're working very diligently on with our vendor partners.
Our equipment, we could use to give us a little bit more supply there.
Thank you best of luck.
Thanks.
Next question is from Andrew Carter of Stifel. Please go ahead.
Hey, Thanks, Good evening first thing I wanted to ask about is kind of the gross margin you did give some product higher occupancy leverage against kind of the business mix anyway to quantify how big the business mix drag is and within that kind of a product I am guessing private label penetration overall, it's still growing but I would also.
A year ago, you comped higher equipment sales because of Texas. Therefore, a margin benefit if any extra added color you can give us there yes.
Yes, Great question, Andrew interesting looking back to last year second quarter actually inverse happens so we exercised less.
Label penetration as a result of the need for any and all equipment available in that in that Texas market to get equipment pads back up and running so we saw a good kind of normalization such increase over 2020 levels from a penetration perspective for proprietary products in the second quarter of this year.
'twenty two.
And then from a overall perspective on occupancy versus product margins that you kind of point you back.
Roughly $25 million per quarter from a overall.
Occupancy perspective, and so you can kind of do the math on the occupancy impact for second quarter again, remember first half first and second quarter lower volume sales quarters.
It's an outsized impact and as we get to the back half of the year. It will certainly moderate from a magnitude perspective.
Switching gears, just a little bit to the days of inventory I think I've got 116, its up from the prior year some of that deflation I would assume the 10% product, but what is kind of the right level and I know, it's kind of a mixed bag you are carrying a lot of strategic inventory, but theres probably areas you wish you could any kind of right level what you.
I think the right level of days inventory is for this business.
Yes, it's a great question as well I think in the current environment.
Inventory is better so we're pleased with being up almost $70 million year on year up about 24%.
As Mike stated there have been some opportunities for us to.
We would have wanted more inventory.
And if we can strategically identify opportunities with our vendors to bring inventory in quicker, we're certainly going to do that.
You look at that through the seasonality and look at that inventory number at the end of the second quarter, we are pre buying and pulling inventory in the to get it through our self distributed network. It's one of our competitive advantages we have the inventory either sitting in our distribution centers or moved out to our store locations.
Allows us to more quickly replenish stores and direct inventory to where it can meet the most consumer demand.
And again, that's whether that's through physical locations or through digital channels as well.
And so when you look at.
The second quarter.
From a days sales on hand, and more on operating efficiency to get as much.
Channel as possible. So that we can manage through kind of the start of season and then when we get into kind of mid to the tail end of Q3 and into Q4 as when we're working through replenishment cycles.
Inventory down towards the end of the year. So hopefully that's helpful. As you think about the cadence of inventory coming into the system and then selling through.
Thanks, I'll pass it on.
Our next question is from catch mice of loop capital. Please go ahead.
Hi, This is Jeff Stevenson on for Gary Thanks for taking my questions today.
Yes. My first question was about mix previously highlighted hot hubs and pro being more front half of the year weighted.
My question is how was mix in the second quarter and does that front half weighted and it's still the right way to think about it.
Yeah. That's a good question I, absolutely still true when you think about both pro as well as hot tub its going to be a little more consistent through the year. When you think of professionals taken care of bodies of water are more likely to get open year round.
A more stable business throughout the year as well.
So it's going to have a outsized weight in the first half of the year, we certainly growing that that part of the business at a faster rate. So that has had some impact.
Not overly material.
Yes, Mr support our growth and then the add backs that you can see in our earnings release related to stock comp costs Third party project cost and other items.
So when you think about the back half of the year, we do expect to get leverage our on our operating leverage on our SG&A, it's baked into our guidance, which you know 17 to 20 per cent top line growth fairly similar metrics from somebody EBITA perspective.
Great Thanks, and congrats on the great quarter.
Thank you thank.
Thank you.
Next question is from Jonathan <unk> of Jeffrey Please go ahead.
Thanks for taking my questions and thanks for all the color in the prepared remarks first question. Your average sales per customer is growing faster than inflation, maybe if you could just unpack that a little bit on the chemical side. It makes me think that the frequency of water testing.
<unk> is likely rising at a faster rate than active file growth and you you you rolled out accu blue water testing in the stores you know several quarters ago, but is that kind of the the gift that keeps on giving her or just if you could elaborate that on on that a little bit.
Yeah happy to the.
The average ticket in Q2 average order value is up 18%.
Transaction count was up 1%, that's why we get to the 19% sales growth.
And I think where we see <unk> home.
Is the impact there is that average order value.
As a component of product cost inflation in it.
Your pricing.
It also has U P T driving their units per transaction.
And we have a growing increased use the vacuum home or excuse me back you're blue in stores.
<unk> was that can be at home not there yet icky blue in stores.
Tests were up <unk>.
Double digit strong double digits.
And we know from tracking the prescriptions that there is almost invariably almost 100% multiple.
Components to the prescription and with the conversion rate, we have prescription that's helping drive <unk> so more.
More people testing the water, but more of that test the water. They more they continue to and the prescription is driving a total solution that that has multiple components in it.
That's really helpful. And then just a related question on consumer behavior last quarter, you alluded to some customers buying 20 or 35 pound chlorine buckets, maybe instead of 50 pound buckets, maybe it's because the sticker shock or or whatnot.
Did that dynamic happen at all in this past quarter.
So it would make me think that the business is almost seen the antithesis of pull forward in that more future trips would be required to appropriately sanitize pools any color there would be great.
Yeah.
This is a little bit.
But I'll put up our supply we've been in better inventory positions.
And smaller bucket of tabs.
We've been probably tightest in 50 pound buckets on our digital business and.
In the digital business.
When they are tied on 50 pound tabs.
That we typically I convert that to a 35 pound bucket with a buy online and pick up in store.
So in some respects our supply chain has traded people down a little bit.
And I think as we saw in Q1, they're still anecdotal evidence from the stores that some people come in and think Wow. That's.
<unk> got an expensive all by a little bit smaller bucket. So yeah I would agree I started with the first question, saying, we don't see any evidence.
Of any significant pull forward and in fact with <unk> I think we're seeing kind of just the opposite.
Buying more items, but perhaps a smaller quantities.
Great. Thanks, so much.
She's from Pizza Timothy.
But starting with eight please.
Please go ahead.
Alright, you guys. Thanks for taking the question I.
I guess, you had mentioned kind of systems as part of your rest of your day discussion that doesn't sound like it's a it's a big number of dollars, but I I just thought.
I'd ask you about maybe what you're doing on the system's front and.
And what what you're investing in.
And what maybe some of the payouts are expected to be I don't know new stuff's coming on for next year or what have you, but that's my first question.
Yeah, great. Thanks, Peter for the questions. Some of the systems were investing in or are still related the omni some the improvements from a the loveliest connect.
Certainly continue to work on <unk>.
Working on merchandising as information systems as well both planning is inventory planning as well as financial systems for inventory.
And then finally spiting so looking for opportunities to continue to invest behind a supply chain technology to improve efficiencies and manage.
Manage the the volume of business that we're doing in the current environment.
That's great. Thank you and then like I guess your comments on the on the on the.
The corner in the Tri Corp, pricing outlook and Spiderman It was very helpful.
Curious on the volumes.
You've been able to secure I guess as you are looking to next year.
23, and a perspective on that how that may be compares to wear what you were able to do for this season. That's my next question.
Yeah. Peter Thanks appreciate the question I'm Gonna I'm gonna be a little vague because if you'll remember on this year whenever we asked about how much more joy Clara we had procured.
We kind of held our answer at more and I'm going to say, we're happy with our current supply, though the flow of it.
Could be a little more front frontloaded still pleased with the supply.
We're in line to buy even more next year no need to to.
The machinery created for chemical consumption and the growing consumer file and we're in the process of preparing that right now with the discussions.
And I would say look with our suppliers are primary suppliers, which are long term partners, we've talked before about contracts.
Current situation I'm going to say that relationships are more important than contracts and we have a great relationship with our suppliers there and look forward to two again being able to significantly increase our supply of Treichler attempts for next year.
That's helpful and then I guess just <unk> my last question.
Have you talked about the accurate <unk>.
Repeat rates in the stores clearly, it's getting used and you talked about.
What's driving.
Units per transaction et cetera that any perspective on Ah repeat rates have been.
On that thank you.
Yeah, I think more than repaid right. So we just we track the number of tests.
And I will tell you that in the stores.
Traffic or the second quarter relatively flat.
But we saw very nice increase an acura blue testing so.
Getting a higher percentage of people coming in the door that are testing and overall testing like I set up a.
Strong double digits versus the prior year.
And I think it points back too.
We talk about the increased heightened attention to safety and standardization.
And.
Thankfully the pandemic I'm Gonna say is under more control, but it has not gone away and one of the lasting effects as people are still very vigilant about safety in general and specifically about safety of the pools when it involves friends and family.
So that's that's why we see an increase in testing.
I believe.
Gotcha, Okay. Thanks, so much.
Yep.
Our next question is from Pizza, Keith a 5%, let's just go ahead.
Hey, thanks, so much good afternoon.
You had mentioned in a script about a 30% increase in marketing spend maybe with more specifically digital marketing spend either way that's a pretty sizeable increase so I was wondering if you could highlight some of the dynamics you're seeing some of the benefits.
Is the market getting more competitive or is it purely a function of good ROI on on what you've been spending so far to date.
Yeah. Good question, Peter and it's a combination of the two.
We had set in previous calls we were going to increase the marketing budget, 30% with a success. We are seeing in the wrong is we're achieving.
We're actually increasing it up and over that 30%.
I will say at the same time the market is becoming more competitive.
Cost per click have gone up but we're in an enviable position to both have the means to invest and the ability to various specifically track or Roy So the way we look at modern marketing. We think is a is a modern take on it which is we start with a budget.
But when we're in season and really starting in the month of April as we look at the <unk> achieving on our different tactics digital social still do some direct mail, we track that as well then we will go up and over what our original budgets were plan to feed <unk> Hi, Roy.
<unk> and that's that's what we're doing right now.
Okay, that's great.
And then we look at the the the pro stores and I guess, maybe specifically the pro Remodels, you'll have 79 going into the pro season.
It should be going into the pool season.
What is the the comp lift that you're seeing maybe both the year, one and now that you've got some in the second year. Maybe is there also year to benefit overall.
Yeah, we haven't quoted a specific comp lift, but what we referred to as that they are rather handling handily performing are pro forma.
And they are outperforming the residential stores and their corresponding districts.
So we're quite we're quite.
Quite pleased with how they're performing it and we had said we were gonna do 25 conversions, we're actually doing 29.
Found for more we think great locations that lend themselves to.
A pro conversion.
And also frankly on that we were somewhat constrained potentially by the amount of extreme that's available in their supply chain issues and putting his store together as well. The teams have worked really hard to be able to get to the materials to allow us to take it from 25 to 29.
Okay very good thanks, so much.
Yep.
My next question is from your checking of Bank of America. Please go ahead.
Thank you for taking my question does the <unk> offer Lisicki Uhm. My first question is about Paul installation and how many new policy you estimate were installed in 2021, and how does that compare to 2020th of nations and Uhm what is the new poll backlog look like.
<unk>.
There will be a net increase.
And the total number of presidential polls by the end of the year versus pre pandemic. Thank you.
Yeah. Thanks for thanks for the question I'm.
I'm Gonna start the answer by saying this.
Does that kind of simultaneously for the pool information, but.
Pool.
New pool builds.
Gonna run about 2%, we believe we're rant about two per cent and 21.
And the same this year, that's up a base of about five and a half million installed so 110 to one.
15, maybe as high as 120000, new pools each year.
And that's a nice tailwind to our business.
We maintain our market share should see about a 2% lift to that but we don't we don't build pools.
We don't sell a lot of the components that go into a new pool build outside of equipment and chemicals and some of the white goods. So it's a nice tailwind to our business, but it's not essential to our business <unk> business.
<unk> $14 million bodies of water that are out there that need ongoing non discretionary maintenance. So that's what we're that's what we're really focused on.
The data point for 2021 is 117000, new residential and ground pools.
And a lot of others in the industry have talked about the poor backlog continuing to extend.
Posted this year even into 2023, so it might be sitting on the right point, we take care of the residential aftermarket. So after that Poolesville, you've got 30 your acid in the ground that you need to take care of it from a sanitization perspective, you're in you're out and that's for our biggest opportunity.
Yeah, and I would.
Sorry for rustling around pay per se, but paid page 10 and.
In the supplemental <unk>.
Lays out the most current data, we have which we get from PK data, which is probably the most comprehensive source for pool and spa industry.
Okay got it and my question.
Question is about shifts to salt water.
And what percentage up to current base of support hotline and history repeat an increase in saltwater conversion and and do you see that.
<unk> net positive or negative for your business.
Yeah, I don't see maybe you do or or we can get a number on saltwater pools, but but the way. We think about this question is.
We sell salt systems, and salt cartridges and.
And actually a salt pool owner consumer is worth slightly more to us than a tab consumer.
So the way, we think about us we're agnostic to whether you want to sanitize your pool with chlorine tabs.
Or with assault generator.
Actually there's a slight upside to us if you go to the salt generation route.
Yeah that being said, we have seen solid cells grow at a faster rate than they have in the past, but it's a it's a tough economic support for a lot of people to convert new pool builds yeah.
More than half of them are salt, which which like I said, we're fine with agnostic too.
Terms of putting a salt system in.
The purchase and installation runs 2000 $2500 plus.
Even with the increased price of chlorine tabs like I said from $90 million to 100 and $999 for 35 pounds bucket.
Medium sized pool.
Needs one bucket for the pool season. So when you think about it a consumer Scott typically a nice home, a big asset and a pool and it cost them $100 more to sanitize. It for the season, they're not happy about that but.
But the alternative is a 2500 dollar Ah salt cell system.
Don't see.
We see a lot of people.
Not like the price increase in tabs, but I understand it's the most economic decision.
Okay. Thank.
Thank you yeah.
A final question is from Dana Telsey off Telsey Advisory group.
<unk>.
Good afternoon, everyone.
Think about the chlorine market and the percentage of.
That's coming from international.
What is that percentage how has it changed and it sounds like that price differential is much higher is that accounted for in the price increases may I taking.
Do you expect to be in a comfortable spot.
Thank you.
Yeah, great questions.
Our take on the amount of imported.
<unk> that came to the market. This year is about somewhere between 90 and 100 million pounds.
We don't have exact data on that but we think it's pretty close working with a different manufacturer.
And the <unk>.
Across what is the total supply of somewhere between 230 million pounds.
Hundred 50 million pounds.
So not.
Not not.
Quite a third of the of the <unk>.
Accurate.
And.
As we've said in the past.
Some tricolore imports.
Could come down when additional track where capacity comes up in the U S. But the kind of newer information that we have is what I went through within the script that the Coremium put from North America is now a limiting factor and coring imports.
From China.
Big the biggest export or or Spanish or.
Tough economics.
So what I would say is that.
Pricing in the market.
Reflects where people become comfortable with margins.
At those higher imported prices.
So I think.
When we look out to next year supply will continue to be tight.
Inputs will continue to be high.
They could potentially go higher.
Certainly don't see them coming down.
Thank you.
Yeah, Dan at the one thing I'll add cause we <unk>.
Sometimes get this question as well.
What if just more chlorine.
Manufacturing capacity it comes on one.
Globally.
And from what we understand it takes about four years and $1 billion.
Build a core alkaline plant.
So I'm sure there's some in the design phase.
Potentially domestic but we don't know of any but I would say probably overseas, but it takes time, there's no. There's no quick remedy to the.
To the supply side.
Okay helpful. Thank you.
Yep.
Ladies and gentlemen, you have reached the end of the Christian and non physician and I would like to turn the call back to management for closing remarks.
Thank you operator, thank you everybody for joining us.
We're really looking forward to pull season 2022, as we talked about we feel that we're in a great position with our inventory.
We just had a bit of a town hall in her retail store leadership in here everybody's fired up.
We're getting great returns as we mentioned on our digital marketing. So we feel like we're set in certain looking certainly looking forward to the season and for sharing the Q3 results when we get them.
Thank you.
This concludes today's conference. Thank you for joining US you may now disconnect your lines.
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