Q2 2023 Leslie's Inc. Earnings Call

Speaker 1: And V.

Speaker 1: I.

Speaker 2: Greetings and welcome to the Lesley's Inc Q2 2023 Earnings Conference call.

Speaker 2: At this time, all participants are in a listen-only mode.

Speaker 2: A brief question and answer session will follow the formal presentation.

Speaker 2: If anyone should require operator assistance during the conference, please press star and then 0 on your telephone keypad.

Speaker 2: As a reminder, this conference is being recorded.

Speaker 2: It is now my pleasure to introduce your host, Caitlin Churchill of MoonVista Relations. Thank you and you may proceed, ma'am.

Speaker 2: 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.

Speaker 2: 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.

Speaker 2: During the call today, management may 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 to the Investor Relations section of Leslie's website at ir.lesslieschool.com.

Speaker 2: On the call today from Leslie's is Mike E. Jack, Chief Executive Officer and Steve with L. Chief Financial Officer. With that, I'll turn the call over to Mike.

Speaker 3: Thanks, Caitlin, and good afternoon, everyone. Thank you for joining us today. Please note that we have posted a Q2 2023 earnings deck to the Leslie's IR site, and that we will be referring to certain pages met deck during our call. I'd like to start by saying that Q2 came in at the low end of our expectations for the top and bottom line.

Speaker 3: As the performance of our non-comp business only partially offset, it returned to more normalized, pre-pandemic seasonal consumer purchase patterns as well as unexpected weather headwind.

Speaker 3: With regard to consumer purchase patterns, the seasonal normalization was anticipated, but not to the degree we saw in the quarter. As a result, it had a more significant impact on con sales and gross margin.

Speaker 3: Prior to the pandemic, Q2 historically contributed about 12 to 12 and a half percent of our total year sales.

Speaker 3: And the first half contributed about 25% of total year sales.

Speaker 3: However, last year Q2 2022 represented an outsized contribution of 14.6% of total year sales as pandemic-driven supply chain disruptions and product shortages resulted in consumers buying earlier than normal.

Speaker 3: We estimate this 210 basis point shift in contribution increased last year's Q2 sales by about 33 million and created a corresponding 14% comp headwind in this year's Q2.

Speaker 3: With supply chain issues largely behind us, and inventory for most products in the pool industry now readily available, we believe we are seeing a return to a more normalized pre-pandemic revenue contribution breakdown with 25% in the first half of the year and 75% in the second half.

Speaker 3: To be clear, we believe this change in seasonal consumer purchasing behavior is a timing shift and not a reduction in underlying demand for the year.

Speaker 3: With regard to weather, in Q2 we saw the continuation of challenging weather conditions across the west and southwest, which includes the important California, Arizona, and Nevada markets.

Speaker 3: As you will be called from our Q1 call, our weather reporting service calculated that whether it was a 5% headwind to COPS in the first quarter.

Speaker 3: At the time, we also shared that we were projecting more normalized weather for fiscal Q2.

Speaker 3: That prediction proved to be incorrect, and the impact of whether to our Q2 comms was negative 3% or 7 million in the quarter.

Speaker 3: We are encouraged that in Texas and Florida, where weather followed more normal seasonal patterns, we had double digit positive comps.

Speaker 3: Moving to our Q2 results.

Speaker 3: Sales for the quarter decreased 7% to 213 million.

Speaker 3: First app sales of 408 million decreased 1%.

Speaker 3: Transactions for the quarter grew 1%, and average order value was down 8%. Our customer file is flat, and average revenue per customer was down 7% in the quarter.

Speaker 3: By consumer group, pro pool grew 3%, residential hot tub sales decreased 8%, and residential pool sales decreased 9%.

Speaker 3: Comp sales decreased 14% for the quarter, resulting in a flat two-year stack comp and a three-year stack comp of 35%.

Speaker 3: The column for the first half was minus 9%, inclusive of a 4% weather headwind.

Speaker 3: The two-year council stack was 7%, and the three-year stack was 38%.

Speaker 3: Gross profit for the quarter was $71 million, and gross margin rate was down 410 basis points. In total, 210 basis points of our gross margin decline was related to the de-labourage of fixed costs resulting from our comp sales decline.

Speaker 3: Adjusted EBITDA for the quarter was negative 8 million, and adjusted diluted earnings per share for negative 14 cents.

Speaker 3: As we know that our investor day in November .

Speaker 3: and during our Q1 earnings call, we expected Q2 in the first half to generate negative comps, reduce gross margin rates, and they're going to be the dot.

Speaker 3: Given that our second quarter and first half results were in line with the low end of the range, contemplated by our initial full year guidance.

Speaker 3: And that we expect that 75% of our annual performances in front of us.

Speaker 3: Our outlook for the full year remains unchanged.

Speaker 3: Moving to the Shardom page 9 of the deck.

Speaker 3: For the quarter, total cond sales were down 31 million or 14 percent due to weather and the shift back to normalize seasonal consumer purchase patterns.

Speaker 3: Sales for non-discretionary products, X-TryCore, were down 3 million or 2% in the quarter.

Speaker 3: Trichlor sales were down 10 million for 29% in the quarter. As a reminder, trichlor sales were comping against plus 96% in Q2 2022 as customers bought early in anticipation of in-season shortages.

Speaker 3: Tri-core retail pricing remains stable.

Speaker 3: Discretionary product sales were down 18 million or 38 percent.

Speaker 3: The decrease in discretionary product sales has driven my hot tub and above ground pools as consumer confidence, weather, tax refunds, and interest rates all impacted demand for these high ticket items.

Speaker 3: And non-con sales contributed plus 16 million or 7% to the quarter, driven by the performance of our programmatic M&A initiatives and new store builds as we continue to invest in our opportunity for increased location count.

Speaker 3: Page 10 had the same bridge for the first half.

Speaker 3: Total Tom sales were down 39 million or 9%, few by 4% weather headwind, and the normalization of seasonal purchase patterns. So we believe we are seeing.

Speaker 3: Non-discretionary product sales X-Triq will over down 8 million or 3%.

Speaker 3: Trichlor sales were down 9 million or 17%.

Speaker 3: discretionary product sales were down 22 million or 25 percent.

Speaker 3: and non-con sales contributed plus 34 million or 8% of sales in the house.

Speaker 3: Moving to the industry backdrop.

Speaker 3: Dales across the pool and hot tub industry were down in a quarter.

Speaker 3: As you can see on page 11 of the deck, third party aggregated credit card data indicates especially pool retailers experienced a sales decline of 11% in the quarter.

Speaker 3: This was due to three primary drivers.

Speaker 3: First, as we discussed concerning our own results, weather was a significant negative factor year over year for key markets.

Speaker 3: Second, we believe the specially pool of retail industry is experiencing the same shift to normalize seasonal consumer purchase patterns that we are seeing in our business.

Speaker 3: Third, consumers were less confident based on the challenging macroeconomic backdrop, which included higher interest rates, materially reduced tax refunds, and concerns around the instability of the banking system.

Speaker 3: Again, this backdrop of lower demand, we grew market share again.

Speaker 3: The competitive advantages derive from our integrated system of physical and digital assets, and our associate's strong execution of our diversified growth initiatives.

Speaker 3: Drove nearly 500 basis points of sales out performance in the quarter. Turning out of the performance of our strategic growth initiatives.

Speaker 3: First, despite the macroeconomic and weather challenges in the quarter, our customer file was flat versus the prior years quarter.

Speaker 3: Average revenue per customer is down 7% in the quarter, driven primarily by decreases in big ticket items.

Speaker 3: specifically hot tub and above ground pools.

Speaker 3: The number of loyalty members increased 14% over the prior year's quarter as consumers continue to react favorably to the benefits of our pool perv loyalty program.

Speaker 3: With regard to our pro-initiative, we ended the quarter with more than 3,300 pro-crown tracks in place and completed the conversion of 15 residential stores to our pro-format.

Speaker 3: In addition, we often tune new pro locations in the quarter and remain on track to open the third.

Speaker 3: We are currently operating 98 Pro locations. Bro consumer group sales grew 3% in a quarter with comp sales down 10%.

Speaker 3: Our pro-coms were impacted by the same factors we discussed for our overall business. We also saw some softening and tri-clothal cell prices from certain distributors.

Speaker 3: Given the 2023 tri-core cost structure and the industry history of rational pro pricing.

Speaker 3: We expect prices to firm up as we move into pool season.

Speaker 3: M&A with the strong contributor to the quarter, accounting for 14 million in non-com sales.

Speaker 3: Year to date we have closed on four acquisitions that added 10 locations and we have another two acquisitions under L.O.I.

Speaker 3: Our DL pipeline is robust and we plan to continue to accelerate this initiative.

Speaker 3: Regarding residential white space. In the quarter we opened four new stores and in April we were pleased to announce the opening of our 1000th store, an important and gratifying milestone for our business and team members. Thank you.

Speaker 3: For Accu Bill Home, we have received our first production shipments of the version 2.0 device and look forward to launching this initiative later this month. Now I'll turn it over to Steve to share more detail on our Q2 financial results.

Speaker 3: Thank you, Mike, and good afternoon, everyone. For the second quarter, we reported sales of $213 million, a decrease to 7%, or $15 million, when compared to the second quarter of fiscal 2022. Our comparable sales decreased 14%, or $31 million. Our comparable sales growth on a two-restack basis was flat.

Speaker 3: and on a three-year stack basis was positive 35%. Our non-comparable sales totaled 16 million in the second quarter of fiscal 2023, which was driven by eight completed acquisitions that added 27 stores, as well as 11 net new store openings since the end of the first quarter of fiscal 2022. Our comparable sales decreased by 11% for residential

Speaker 3: of unfavorable weather and more normalized seasonal customer-pursuiting patterns.

Speaker 3: With product more available across the industry this year, we believe consumers are more closely aligning their purchases with their needs for product during the primary pull season, which runs from May to September .

Speaker 3: This behavior would be more consistent with seasonal purchasing patterns prior to supply chain challenges created by the pandemic.

Speaker 3: It's important to note that we believe this behavior impacts the timing of sales, not the absolute dollars expected to be generated this year.

Speaker 3: Gross profit decreased 17% or 14 million when compared to the second quarter of fiscal 2022. In gross margin rate was down 410 basis points to 33.4% from 37.5% in a prior year period.

Speaker 3: Page 12 of our supplemental deck illustrates our Q2 gross margin rate bridge in more detail.

Speaker 3: During the quarter, Chris Martins were impacted by the following.

Speaker 3: First, business mix lowered gross margins by 45 basis points, primarily related to M&A completed during the last 12 months.

Speaker 3: Second, lower product margins due to higher input cost had a 60 basis point impact.

Speaker 3: During the quarter, promotional activity was stable and did not material impact gross margins.

Speaker 3: Third, incremental distribution expenses lowered gross margin by 75 basis points, which 55 basis points was due to the decline in comparable sales.

Speaker 3: Similar to the first quarter, distribution expenses were elevated as we executed on our plans to receive in and distribute more product to our store network earlier than last year.

Speaker 3: And finally, occupancy and other costs be leveraged by 230 basis points of which 155 basis points was due to the decline in comparable sales.

Speaker 3: Now we'll turn to S-GNA. S-GNA increased 8% or 7 million when compared to the second quarter of fiscal 2022.

Speaker 3: We have been focused on maximizing efficiencies in the business and driving an ongoing organizational optimization.

Speaker 3: As a result, in Q2, we reduced core SGNA cost by 4 million, which was offset by 5 million of non-comparable costs associated with acquired businesses, higher inflationary costs of 4 million primarily related to increased investments in our associates, and 2 million of costs associated with the organizational optimization.

Speaker 3: Adjusted Yvada was negative 8 million for the second quarter of fiscal 2023.

Speaker 3: Adjusted net loss was 26 million in the second quarter of fiscal 2023 compared to an adjusted net loss of 3 million in the second quarter of fiscal 2022.

Speaker 3: Interest expense increased to 17 million during the quarter from 7 million in the second quarter of fiscal 2022 and our effective tax rate decreased to 25.7% compared to 33.0% in the second quarter of fiscal 2022.

Speaker 3: Adjusted deluded loss per share was 14 cents in the second quarter of fiscal 2023 compared to an adjusted net loss of 1 cent in the prior year.

Speaker 3: And basic and diluted weighted average shares outstanding were 184 million in the second quarter of fiscal 2023 compared to 183 million shares in the second quarter of fiscal 2022.

Speaker 3: Now I'll turn to year-to-date results. Total sales for the 26-week period decreased $5 million or 1% to $408 million from $413 million in the prior year.

Speaker 3: Our comparable sales decreased 9% or 39 million. Our first half comparable sales growth was positive 7%, and positive 38% on a 2- and 3-year stack basis respectively.

Speaker 3: Gross profit decreased 11% or $16 million to 136 million from 152 million in the first half of fiscal 2022. Gross margin rate decreased by 360 basis points to 33.5% from 37.0% in the prior year of which 145 basis points was due to negative.

Speaker 3: HIST expense increased the 31 million during the first half of 2023 from 14 million in the prior year.

Speaker 3: and adjusted the limited loss per share was 28 cents in the first half of fiscal 2023 compared to an adjusted net loss of 7 cents in the prior year.

Speaker 3: Moving to the balance sheet. We finished the second quarter of fiscal 2023 with cash of 9 million and we had 172 million outstanding on a revolver compared to cash of 52 million and 45 million outstanding on our revolver at the end of the second quarter of fiscal 2022.

Speaker 3: The reduction in net cash was primarily due to investments in inventory and higher M&A activity during the past 12 months. We ended the second quarter of fiscal 2023 with 492 million of inventory and increase of 147 million as compared to the second quarter of fiscal 2022. This is a lower increase in inventory in both dollars and percentage terms on a sequential and on a year.

Speaker 3: Our first priority has been to put the company in a position to meet consumer demand for the upcoming pool season and the decision whether to invest in inventory ahead of the season or as the season progresses was a question of timing.

Speaker 3: We continue to view our current inventory position as appropriate to deliver on our full year plan and believe that inventory levels of peak for fiscal 2023.

Speaker 3: At the end of the second quarter of fiscal 2023, we had $794 million outstanding on our secured Termal Unfacility compared to $802 million at the end of Q2 last year.

Speaker 3: The applicable rate on our term loan for the second quarter was liboard plus 250 basis points and our effective interest rate was 7.2% compared to an effective interest rate of 3.0% for the prior year quarter. In March 2023, we amended our ABL credit facility to replace the existing liboard-based rate.

Speaker 3: with a term sulfur-based rate as an interest rate benchmark and to increase our evolving credit commitments to 250 million from 200 million to account for our growth over the last few years.

Speaker 3: Other material terms of the facility remain substantially unchanged, including the maturity date of August of 2025.

Speaker 3: At the end of the second quarter, we had availability of 67 million on a revolver. We believe borrowings on a revolver have peaked, and we expect to fully repay all ABL borrowings during the third quarter.

Speaker 3: Before I wrap up on our year-to-date performance, I'd like to share a final preseason update on our supply chain readiness. In November , we discussed specific actions we were taking to improve our supply chain across three key areas.

Speaker 3: Before I wrap up on our year-to-date performance, I'd like to share a final preseason update on our supply chain readiness. In November , we discussed specific actions we were taking to improve our supply chain across three key areas. First,

Speaker 3: Expanding capacity by implementing a two-shift, seven-day-a-week model during pool season for our distribution centers, and by adding an additional three PLs to our network.

Speaker 3: Second, stocking more inventory across our network. And third, diversifying our supplier base. Based on the efforts of our associates and in collaboration with our vendor partners, we've significantly improved our preparedness for pool season by executing these initiatives and our team is focused on and well prepared to meet consumer demand across our entire network.

Speaker 3: Before I turn to our outlook, I want to put our first half performance in context and speak to the natural seasonality within our business.

Speaker 3: Our primary celling season occurs during our fiscal third and fourth quarters, which stand April through September . We invest in our business throughout the year, including an operating expenses, working capital, and capital expenditures related to our initiatives.

Speaker 3: While investments made during the first half of the fiscal year impact reported earnings in cash flow.

Speaker 3: They are critical for driving performance and share gains during our primary selling season in the third and fourth quarter. Based on performance to the first half of the year, which is in line with historical seasonal trends prior to the pandemic, we are reaffirming our outlook. And while we are tracking within the dollar ranges on the line items included in our

Speaker 3: execution for pool season 2023.

Speaker 3: We're excited to kick off the whole season and we're grateful for our team who continues to tirelessly execute against our initiatives and focus on serving our customers.

Speaker 3: And with that, I'll hand it back over to Mike. Thank you.

Speaker 3: Thank you, Steve. The pool and spy industry has proven over time to be one of the most durable and advantage consumer products categories.

Speaker 4: carous complex. Pools require routine, ongoing needs-based maintenance.

Speaker 4: And the install base of pools in the US has grown every year for 51 years and continues to grow.

Speaker 4: Also importantly, there are second or tailwinds that will continue to drive industry growth.

Speaker 5: Es.

Speaker 4: working from home, increasing attention to safety and standardization and adopting new technologies.

Speaker 4: Despite the fundamental long-term advantages of our industry and the ongoing secular tailwinds.

Speaker 4: Q2 in the first half performance for Leslie's and the industry were influenced by unfavorable weather and the greater than anticipated normalization of consumer purchase behavior.

Speaker 4: the latter which we believe is simply a timing factor. These dynamics notwithstanding, we are encouraged that applying a normalized pre-pandemic first-half-second-half contribution split to our first-half results indicates our full year sales and earnings guidance is still appropriate.

Speaker 4: We feel good about our first app execution and the continued market share gains we have delivered in the face of an unpredictable backdrop for our industry.

Speaker 4: Our results are a testament to our teams continuing to form at a high level, the competitive advantages of our integrated ecosystem, and to the ability of our diversified strategic initiatives to drive market share gains even against a very dynamic backdrop. Importantly, we feel very good about the investments we have made in preparation.

Speaker 4: for the 2023 pool season. Specifically, investments in inventory. After three years of intermittent out of stocks, our teams are thrilled to have their stores full and to know that we have replenishment stock ready to go. Investments in our supply chain.

Speaker 4: new leadership, new talent, new processes such as two ships, seven day a week operation at our distribution centers.

Speaker 4: new talent, new processes, such as two-ship, seven-day-a-week operation at our distribution centers. New infrastructure.

Speaker 4: A three-pail partner for the Northeast region, an additional chemical warehousing in Texas. And investments in our marketing initiatives that have given us more customers, more pro partners, and more loyalty members to serve.

Speaker 4: With these investments and the return to more normalized industry conditions.

Speaker 4: Our store and digital teams are confident about winning this pool season and the leadership team and I share that confidence. With that, I will hand it back to the operator for Q&A.

Speaker 6: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation tone will indicate your question is in the question queue.

Speaker 6: Please limit your questions to one question and one follow-up question.

Speaker 6: You may press STIRE and then TOO if you would like to remove your question from the Q4 participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the STAR keys. One moment please while we pull for questions.

Speaker 6: The first question comes from Stephen Forbes from Goofy and High Empathnos. Please proceed with your questions, Stephen.

Speaker 7: Good afternoon Steve Mike.

Speaker 7: I wanted to start with customer file trends. So, curious if you could sort of talk about the file performance during the quarter, because I think flat was better than the internal expectation. Maybe confirm that.

Speaker 7: And then Stevie, if you can, in my just comment on what gives you confidence right to reiterate the sales guidance, because I also believe the expectation for file growth or the expectation was file growth returning in the back half of the year. So just any comments on file growth and the trajectory of it? Yeah, sure, Stephen. Thanks. Thanks for the question. Yeah, we're pleased with the customer file being flat for the quarter.

Speaker 4: You know, whether it was a headwind, but not a significant headwind as was the shift in consumer purchase patterns. So to be flat, we feel good about.

Speaker 4: I think what we're seeing is that

Speaker 4: what we're seeing is that people continue to come into the stores.

Speaker 4: And on the sites, traffic is down slightly, but not anything significant.

Speaker 4: And what we're seeing instead is smaller purchases and that you can see that reflected in the average order value. The bigger question, I think the question for the quarter is your second one on why do we feel confident in the...

Speaker 4: in maintaining our outlook. And, well, framing up this way, we expected some return to a more normalized purchase behavior. Once the supply chain issues were handled in the industry. And for sure, pool owners have said,

Speaker 4: Pandemic supply chain issues are over. They see that the stores have plenty of inventory. Online has plenty of inventory from us and from our competitive set.

Speaker 4: So given that return, I think the best proxy to how we're thinking about our year and what gives us confidence in delivering it is to go back and look at 2019, the last year pre-pandemic. That's public information in our S-1.

Speaker 4: And what you'll see there is a first half, second half split on sales, 25% to 75%.

Speaker 4: And you'll see a first half, second half split to EBIDA of minus 7 and 107.

Speaker 4: And if you apply those splits to our first half results, you'll see that we're solidly in the range of our outlook.

Speaker 4: Steve, I don't know if you want to end more to that explanation.

Speaker 3: Yeah, that's well said. I think we'll put a finer point on it when you think about the shift that we saw in the second quarter last year. It was about 14.6% of the year and you compare that to pre-pandemic probably closer to 12 to 12 and a half. So we look at it being about a 200 basis point shift.

Speaker 3: on a 1.6 billion R rounded number for the year that gets you about $33 million. So those are purchases we expect to get. But as Mike said, that purchases are likely going to occur closer to pool season. And what we've seen year to date is folks buying some of the smaller sizes as they buy to the need.

Speaker 7: And then just a quick follow up, Steve, the caveat on gross margin is potential for some incremental pressure. Can you provide some additional context on what sort of pressure points that would be? It seems like it may be occupancy.

Speaker 3: and merge margin, but any color on what you're trying to call out there? Sure, thanks for the question. So fairly consistent with how we talked about the second half back in February . As we look at and all go through the four main components we always talk about. Business mix, we expect that to get you into moderate as we get into the second half given the acquisitions.

Speaker 3: become a much smaller part of the overall business in the second half. DC expense in the second half of last year was elevated to the challenges we had in the New Jersey Distribution Center and the vendor delivery cadence overall. This year we brought in a lot of that inventory early in position to cross the network. So we're not going to have the same cadence of the spend from a distribution perspective. We can.

Speaker 3: Occupancy normalizes as well as we get into the back cavity or larger sales and improved comps that will help that moderate. And then the final piece is really around product rate. And this is the area that we can highlight it as potentially driving some of the exposure.

Speaker 3: Our expectation is that we'll continue to see some pressure, really, to the industry cost increases based on current retail pricing levels. Expectation is that we will see some retail price increases part of season, but we've not seen it occur. And so it's too early to update the formal guide given we're not to memorial day yet and we haven't kicked off season, but that's where we would see potential pressure in the back half of the year.

Speaker 4: And then in terms of the change in consumer purchase patterns for the half, that's about an 8% headwind. And in our range of outcomes for the quarter, we had expected that return to normalized purchase behavior. We weren't sure if we'd get all of it in the quarter or not. Looks like it all moved, which is fine in our estimation. And that we do expect to recover in the second half. The weather to date, we should also be able to recover from.

Speaker 4: the second half. So it's a good indicator of that shift. We'll recover, we'll be up in our pool opening business for the year. We feel quite confident about that. In terms of the weather, if weather continues to be poor into the pool season, then we do run the risk of losing some pool days, if you will. But the best historical context for this I'd say would also be 2018-2019, a somewhat similar dynamic, and we expect to recover most of that in the second half. Understood. That's helpful. And maybe as a quick follow-up, you mentioned some softness in those high-ticket durables, which we're kind of seeing across a lot of sectors. What are some of the things that you're seeing in the

Speaker 2: Would you think that's being driven by consumer weakness maybe high inflation and that the that demand is maybe being pushed out Or is this kind of a continued digestion of demand that was pulled forward during kind of peak pandemic time?

Speaker 4: Our comp for hot tubs and above ground pools in the first half last year was plus 46%, which is outside of the seasonal norm. First half this year, we're down 11%. So didn't give all of it back, but gave some of it back. And with striving the decreases in half for a big ticket item like this, a good portion of our hot tubs, which have an average price point of over $8,000, are actually financed. And with interest rates where they are, we have seen that be a headwind to the business.

Speaker 6: Thank you. The next question comes from Dana Tofy from Tofy Advisory Group. Please proceed with your question, Dana. Dana, you may proceed with your question. If your line is muted, please unmute your line so that we can hear your question. Unfortunately, we cannot hear anything from Dana's line. We will move on to the next question, which comes from Gary Schmois from Glute Capital Markets. Please proceed with your question, Gary. Oh, hi. Thanks for taking my question. I wanted to ask on some of the starter markets because you cited Texans in Florida. I think I heard you correctly. Those were not weather-adapted markets and you had double-digit comps there. I was wondering what was driving some of the growth and some de-stronger markets and if there was any reads that you could.

Speaker 4: provide from the markets that might have been up to the overall maybe ongoing health for the business. Yeah, Gary, great question. Like I said in our prepared remarks, we're very encouraged by what we saw in Texas and in Florida where whether it was what I would call normal.

Speaker 4: You know, those are significant markets for us. And we saw sales in those markets, given some of our M&A, actually up in the low teens on a comp basis, they were a double digit. And I think what it's telling us is, and what we're seeing as the season progresses is, where we get normalized weather, we're seeing nice reaction from our consumers and nice, healthy growth.

Speaker 4: Okay, thanks for that. And the next question is just, I don't know if you could provide an update on how April has progressed and if there's any recent data points that could support your sales outlooks. Yeah, I would say April is...

Speaker 4: April is responding like Florida and Texas did in the second quarter. Where there's been good weather, the results have been good. But to be clear, April , April weather, first three weeks in particular, was not favorable. It got better in the last week.

Speaker 4: but we saw some turnarounds. You know, California had been very challenged in... It was down 21 percent in the first... Excuse me, in the second quarter. We saw that turnaround some in April , but then the weather in Texas got more challenging with the storms.

Speaker 4: So I think the conclusion that we're drawing is that whether it's definitely been a headwind, but where we've had good weather, we have seen good results.

Speaker 6: Thanks for the help, that's the market.

Speaker 4: Thank you. The next question comes from Jonathan Matizewski from Jeffries. Please proceed with your question, Jonathan. Hey, good afternoon. Thanks for taking my question. First one was on inventory, just related to the end of quarter balance there. It sounds like pro customers seem still resolute in believing, you know, tri-cler prices will come down. Presumably, they've been, you know, maybe relying more on safety stock until that happens. Do you have a sense of how much safety stock your pro customers have to run through before they need to purchase in greater quantities? And I guess similar questions for the homeowner, although I presume safety stock is less of a relevant concept here, but just trying to get a sense of kind of...

Speaker 4: You know, it sounds like this is going to be the peak for inventory and you're going to kind of focus on working down that inventory and convert to cashflow. So just trying to get some sense around that dynamic. Thanks.

Speaker 3: Yes, Steve, why don't you take inventory then I'll address the probe tri-clarar situation. Sure. So yeah, so inventory settled at 492 million for the quarter, up 147 million over last year. That's actually a smaller decline than we saw, sorry, smaller increase than we saw in the first quarter. And if you look at the sequencing of inventory increases in the back half of last year, we saw positive increases in inventory in both Q3 and Q4, highly unusual. And if you go back in the years I've been here, we have never increased inventory in the back half of the year.

Speaker 3: because of the supply chain challenges and the shortages, we accepted that inventory and began to build up for the season. Feel very good with where we're at going into season. If you look at the year on year change in Q2, primarily around chemicals. So if we go back to the last couple quarters, a lot of the discussions we were having was around the increase in inventory related to equipment. So...

Speaker 3: At this point, going into season, heaviest use from a chemical perspective, we feel very good with our current inventory balances. The top two contributors, the inventory increase, we're still chemical and equipment categories, which we've talked a lot about being non-discretionary in nature. So feel good with where we're at. And as you stated, I absolutely believe that we're at peak and we have an opportunity to materially decrease

Speaker 3: prior year, very hard for us to tell how much that would be. But I think that dynamically we see is, with higher costs, we actually expect pro-try-claw pricing to go up as we get into season. The pros themselves are expecting tricler prices to go down.

Speaker 4: So we have a little bit of a stare off going, I think, in the industry there. And it will work itself out as we get into season. But for right now, it is meeting results, I would say. Gotcha, that's helpful. And I guess just a quick follow up on that last point, you know, that the midpoint of your guide assumes tri-core pricing down, I think around 12.5%.

Speaker 4: It looks like a 50-pound bucket of three-inch tabs is still sitting around $250 today, so not far off from all-time peak prices. So I guess, should we anticipate a revision to guidance, maybe?

Speaker 4: you know, going into next quarter just given, you know, expectations for trichloride desolation across all three scenarios? Yeah, the answer Jonathan is we're really not going to have great insight into pricing until we get into Memorial Day weekend.

Speaker 3: You know, that's that's true of every season. I'd say particularly true of this season. However, year to date, we've seen very stable pricing in Tri-Core in the residential markets.

Speaker 3: And we haven't seen any reason for that not to continue. As I said, in the pro markets, we would actually expect now trichloro to potentially go up some. It hasn't. So, we'll have to wait to see how the season plays out. But right now we're feeling very positive about the direction of trichloro pricing, both residential.

Speaker 6: And we believe pro as we get into season. That's helpful. That's the lock. Thank you. Thank you. The next question comes from Kate Mkshein from Goldman Sachs. Please proceed with your question, Kate.

Speaker 2: Hi, good afternoon. Thanks for taking our question. We wanted to ask a question around market share gains. I think you had mentioned in the prepared comments you had gained around 500 basis points of market share during the quarter. We wondered if you could help us understand what the assumption is in your guidance for market share gains if you've seen any kind of acceleration.

Speaker 4: And is this a like-for-like comparison, meaning you're not incorporating M&A when accounting for the market share gain? Yeah, thanks, Kate. This is Mike. Thanks for the question. I'll answer the second part of the question first. We do count M&A as market share gains.

Speaker 5: The, and just for a slight correction, the 500 basis points is sales outperformance versus industry.

Speaker 5: doesn't exactly correlate to market share gains, but it does definitively say that we are gaining share. So we look at a little bit differently, and that's based on aggregated credit card data that we receive for the industry and specifically for specialty pool retailers.

Speaker 5: So I think that answers questions on how we look at it.

Speaker 5: sales versus sales outperformance that leads to market share gains and then also the inclusion of M&A. And in terms of our outlook, we don't intrinsically assume market share gains in our outlook.

Speaker 5: But clearly our intent is to grow faster than the market each year.

Speaker 5: clearly our intent is to grow faster than the market each year. Thank you.

Speaker 5: Thank you. The next question comes from Peter Keet from Piper Sandlove. Please proceed with your question, Peter. Hi. Thanks. Good afternoon, everyone. I wanted to ask about inflation. So obviously there's always a lot of focus on trichlor. But I guess I was curious around other pockets of your business.

Speaker 5: overall inflation and we can talk about inflation on the cost side which Steve mentioned around margins. We had put in our outlook about 5% inflation over the course of the year. We expected it to come out a little higher than that and moderate during the year. That's what we're seeing. In the first half we had inflation saying that.

Speaker 3: high single digits, it's coming down and we do expect our 5% inflation factor in our outlook to still be a reasonable assumption for the full year.

Speaker 3: So, from a product category perspective, Peter, it primarily centers around chemicals this year. There were some, I think, more routine price increases on the equipment side, but the large increases from a product perspective were really around Tricor and Cal-Hypo.

Speaker 3: On the cost side, fairly consistent themes. You've seen increases from a labor perspective or payroll. I've seen increases from a marketing perspective as you think about digital marketing costs. And again, when we look at the last 12 months, recall that most of the costs below the line, SG&A increases from an inflation perspective, really started in the third and fourth quarter. And so we're going up against in the first half here, kind of a lower compares.

Speaker 5: So while we saw some increased inflation in the second quarter on the SG&A side, would expect that to moderate as we get into the back half. Okay, that's helpful. I wanted to pivot back to inflation. I'm sorry, I had a question. The other I word inventory. A little bit on the heels of what Jonathan was asking. So supply chains have normalized, you've maintained elevated inventory on risk.

Speaker 3: from an inventory position today versus you know pre-pandemic certainly elevated and you know very intentional. As we typically think about buying in the season we typically would buy into early June enough supply I should say when we kick off season to get us through early June and then work on replenishment.

Speaker 3: This year we've effectively bought through June into early July . We still have a substantial amount of replenishment required to get through the end of the year. So when we think about the $492 million relative to call it 900 plus million of cost of goods for the full year, we have plenty to go from a procurement perspective.

Speaker 3: We have brought inventory in earlier, so we control our own destiny and we control the replenishment cycle, particularly early in the season, which is where we saw some challenges last year. As we think about what our targets are going forward, we've just implemented a new inventory system, as well as a merchandise financial planning system, and so we expect to get significant dividends out of that investment, which will help with the procurement and purchasing.

Speaker 3: as well as the analytics at a category and skew level, you know, ultimately down to kind of a gross margin recurrent investment. So for today, what I would tell you is that, you know, we see opportunity to get below, materially below where we finished last year. The cadence of purchases for inventory will look very different than they did last year. And I made the comment earlier that,

Speaker 3: In the second half of last year, we increased inventory, which is just not typical from a seasonal perspective in our business. So, the team is reviewing on a weekly and monthly basis and very focused on recouping some of the investment that we've made, now that we're on the doorstep of season. Thank you very much. Oh, go ahead. No, Peter, I was going to say, I didn't have anything to add, so.

Speaker 3: second half last year we increased inventory which is just not typical from a seasonal perspective in our business. So the team is reviewing on a weekly and monthly basis and very focused on recouping some of the investment that we've made. Now that we've we're on the doorstep of season. Thank you very much. Oh, go ahead. No Peter I was excited and I'm ending that so thank you.

Speaker 3: we increased inventory which is just not typical from a seasonal perspective in our business. So the team is is reviewing on a weekly and monthly basis and very focused on recouping some of the investment that we've made now that we've we're on the doorstep of season. Thank you very much. Oh go ahead. Peter I was going to say I didn't have anything to add so thank you. Okay thank you both appreciate it.

Speaker 3: Thank you. The next question comes from Andrew Carter from Stiffle. Please proceed with your question, Andrew. Hey, thanks. I just wanted to ask about the product margin. I know that it's early in the season, but if I'm not mistaken, product margin actually deteriorated from 1Q to 2Q. Was that mix-driven or a greater imbalance between price and inflation? And I know that you stated Tricor has been steady, but the other side of it is there's a lot of inflation on other chemicals. I know your plans are to get pricing in that, but you're also very market by market. So are there a lot of markets out there where you're just not seeing the pricing and not taking it?

Speaker 3: the country and as you talk about from a market by market perspective that that's generally more from a pro perspective from an overall company perspective on the residential side based on the omni-channel approach we've got more consistent pricing. Pricing will deviate when when we go on promotion but it's typically more consistent across the country. We've been very proactive raising prices testing into prices but you know one of the comments we made back in November as well.

Speaker 3: was that our expectation was that prices would increase, but if they don't, we've got the ability to compete, and that's what we're doing. So, taking a very tactical approach, as you say, market by market, to ensure that we are not, we're price leaders on the way up, not on the way down, but making sure that we remain competitive in the markets in which we operate. So I'll pass it on. Yeah, Andrew, just for a little more color on that, our chemical business in the first half.

Speaker 5: based on cost structures for pricing to get a little firmer as we get into the the meat of the pool season. Thank you, I'll pass it on.

Speaker 6: The next question comes from David Billinger from MKM Roth. Please proceed with your question, David.

Speaker 5: Going back to the full year guidance, you mentioned the normalization back to 2020 levels, expectations for 75% of sales still less ahead of you this year. If that's the case, full year revenues could be tracking towards the upper end of your guidance range. If that's the case, you mentioned the normalization back to 2020 levels, expectations for 75% of sales still less ahead of you this year. If that's the case, full year revenues could be tracking towards the upper end of your guidance range. If that's the case, full year revenues could be tracking towards the upper end of your guidance range.

Speaker 5: Can you just help us square all that away and what it means in terms of the guide for the balance of the year? Yeah, David, the first thing I'd like to clarify is I was quoting 2019.

Speaker 5: So, the last of the pre-pandemic years, if you would, and the last year that was, unlike the last three, you know, really impacted in terms of purchase timing due to supply chain challenges and product shortages.

Speaker 5: of the pre-pandemic years, if you would, and the last year that was, unlike the last three, really impacted in terms of purchase timing due to supply change challenges and product shortages.

Speaker 5: 21 and 22 consumers were very concerned about scarcity of product during pool season, as were we. And we at one point last year in the first quarter actually sent a letter to our loyalty file saying, you know, we couldn't guarantee product availability in the second half and encouraged them to purchase early prior to the pool season.

Speaker 5: and whether on their own or because of that letter, we saw a lot of that, and that was that, you know, 210 to 260 basis point increase in last year's Q2 in terms of the total year's contribution. So when we're thinking about this year, we really need to go back to 2019.

Speaker 5: Product's readily available now, and pool owners are buying to need. And that is historically, and we have multi, multi years, decades of a very similar contribution pattern on sales of 2575. And as we talked about before, last year was the first year.

Speaker 5: in Q1 that the company had positive evada. That's also not the norm. The first half historically has been a minus 7% range and the second half has been plus 107.

Speaker 5: So as I said to the first question of this afternoon, was that if you apply our first half results to those ratios for a normalized, pre-pandemic year, yeah, that does give us quite a bit of confidence in our current outlook despite.

Speaker 5: some of the challenges we're seeing early in the season with regard to weather. A whole clarification. I want to follow up on the smaller purchase size, the smaller AOVs. So what's missing in the basket now? Is it simply some of those...

Speaker 8: the splurgy discretionary items we saw the last couple years are

Speaker 5: Are you seeing some kind of pull back to the lower price items? Maybe delaying some maintenance or buying closer to need like we've been talking about. Anything in that nature starting to play out is Q2 progressed. Yes, I think the way to think about Q2 and the A will be being down 8 percent is about half of it. Is the decrease we saw in the quarter which was about 30 percent in above ground pools and hot tubs.

Speaker 5: You know, those carry an $8,000 plus average selling price. So when those go down on that magnitude it brings, you know, an impact they'll be for the entire assortment. That's about half of it. The other half of it is purchases of smaller sizes of chemicals. The other half of it is the other half of it.

Speaker 5: And, you know, a good example of that is trichlor. The penetration of 35-pound buckets of tabs versus 20-pound buckets of tabs has changed about 1,000 basis points over the last few years. And now we're seeing that back to the same type of contribution level that we saw again 2019.

Speaker 5: Now, to think about it last year, you're going into season. You know what you probably need for the full season. You're assuming there's going to be some shortages, you're seeing shortages. So you're buying the bigger bucket. You're buying a 35 pound bucket or maybe even a 50 pound. And all you need to buy at that time to need was a 20 pound. Then you'd come in later in the year and get another 20 pounder. So.

Speaker 5: It's that type of thinking and that type of purchase behavior that is driving that 200 plus basis point shift out of Q2 and Q3 and getting us back to that, again, the 2019 pre-pandemic pre-product shortage. I'm going to call a normalized purchase cycle from the pool owner. That's all.

Speaker 6: Thank you very much for joining us. You may now disconnect your lines.

Speaker 1: The.