Q3 2023 Leslie's Inc Earnings Call
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Good afternoon, and welcome to the third quarter of fiscal 2023 conference calls for at least Inc.
At this time all participants are in a listen only mode.
Following the prepared remarks management will conduct a question and answer session.
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As a reminder, this conference call is being recorded and will be available for replay later today on the company's website.
And I'll turn the call over to Tempt Me 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 FCC.
During our call today management may refer to certain non-GAAP financial measure.
A reconciliation between the GAAP and non-GAAP financial measure can be found in the company's earnings press release, which was furnished to the FCC today and posted to the Investor Relations section of Leslie website at IR adopt Love's leap tall dot com.
On the call today from Lovelace are Mike <unk>, Chief Executive Officer, Steve Wardell, Chief Financial Officer, and Scott Bowman, Chief Financial Officer designate.
With that I will turn the call over to Mike Mike.
Thanks, Caitlin and good afternoon, everyone. Thank you for joining us.
Please note that we have posted a Q3 2023 earnings deck doesn't let at least IR site and that we will be referring to certain pages in that deck during our call.
As we shared in our pre released three weeks ago, It was a difficult quarter.
Oh double digit traffic declines resulted in a 12% comparable sales decline and a 9% total sales decline.
In addition to fixed cost deleverage associated with these sales we faced unexpected in season product cost increases and higher distribution expenses that significantly impacted gross margins for the quarter.
Our ongoing analysis points to three primary drivers of our Q3 traffic and sales results.
The first is whether whether reporting service planalytics calculated that weather was a 5% year over year headwind to sales in the quarter.
But there are headwinds were felt across most of our store base and most significantly in California, Texas and Arizona.
The weather in Florida was relatively normal in the quarter as it has been all year and our business in Florida has significantly outperformed in the quarter and year to date.
Sales in Florida were plus high single digits in the quarter and are close to mid teens year to date.
The second driver was increased consumer price sensitivity after three years of significant price inflation consumers, we're not willing to absorb price increases during the quarter.
Then at us from taking the pricing actions required to maintain margins as product cost increases and also prevented us from maintaining our pre June 1st pricing on core chemicals.
As we have discussed before we generally aim to maintain our relative price point that is above math and just below the specialty that relative price position was out of balance for some weeks in the third quarter, which we addressed with our June 1st price action.
Those actions resulted in essentially flat year over year chemical pricing despite higher costs.
And the third driver was that a portion of our customers had a greater than normal amount of chemicals leftover from last year.
This driver was validated by two separate consumer surveys one conducted on our behalf and another that was conducted on behalf of one of our chemical partners.
As consumer behavior is not something we have seen before and was surprising given the hazardous nature and useful life of these chemicals.
Transactions were down 12% in the quarter, reflecting double digit traffic declines that offset solid conversion rate.
Average order value increased 3%.
Traffic decline was broad based and impacted both non discretionary and discretionary product sales.
For the quarter non discretionary sales were down 6% and discretionary sales were down 24%.
Total chemical sales for the quarter were down 6% as increases in Cal Hypo and select specialty chemicals, partially offset a 16% decrease in core sales.
Equipment sales were down 8% this quarter driven primarily by ball.
A decrease in discretionary product sales was driven by hot tubs antibody pool as macro factors continue to impact demand for these highly discretionary high ticket items.
Non comp sales contributed close to 3% for the quarter driven by acquisitions and new store builds.
The data we analyze suggest that the top line trends, we are seeing an industry wide issue.
I agree with your credit card data for the pool supplies retail category on slide seven indicates that the industry sales ex lessees were down seven 1% from Corp base.
Based on total company sales are the clients were 220 basis points more than the category for Q3.
That said aggregate of credit card data for the pool supplies retail category does not include hot tubs, our marketplaces and when we adjust out those two categories from ourselves for a more comparable view lateral.
He's performed slightly better than the industry.
We are clearly experiencing a highly unusual cool season, following three years of strong growth.
However, in the long term fundamental advantages at the pool industry remains the same.
Pools continue to be built and the growing installed base of pools needs to be maintained.
As you can see on slide eight industry has a long track record of consistent growth and Leslie used has consistently grown faster than the industry.
We remain the leading direct to consumer pool, and spa retailer with scale capabilities and brand awareness that our competitors do not have.
So while our team navigate the current industry headwinds. We also remain focused on executing the key strategic initiatives that underpin our competitive advantages and that will continue to drive our long term success as industry conditions normalize.
Turning to our strategic growth initiatives.
Given the traffic challenges in the quarter.
My father was down 8% versus the prior year's quarter.
That kind of average revenue per customer was down 1% in the quarter driven primarily by decreases in big ticket items, specifically hotdogs and above ground pools.
Our pool perks loyalty members continue to outperform loyalty member sales were down 3% in the quarter.
With regard to our pro initiatives, we ended the quarter with more than 3700 pro contracts in place and completed the conversion of 15 residential stores to our pro format. Prior to this started the season weaker.
We currently operate 98 co locations.
Pro consumer group sales declined 3% in the quarter with comp sales down 13%.
Our pro comps were impacted by the same factors as our overall business.
In addition, crack where pricing has been more pressured on the pro side as compared to the residential channel and contributing to the outsized headwind to our overall gross margin performance.
Our guidance for the remainder of the year assumes no change from current pricing levels.
M&A and new store growth remain an important initiative for less lease, though we will be prudent with the pace of this initiative in the near term as we balance it against our other capital allocation priorities.
M&A and new stores drove $16 million in non comp sales in the quarter.
We also completed two acquisitions in the quarter that added five locations in the sunbelt.
Year to date, we have closed five acquisitions that added 12 locations and we have another acquisition under LOI.
In the quarter, we opened seven new stores, bringing our year to date total to 12.
We remain confident in the total store expansion opportunity available to libraries over the long term and have identified over 800 opportunities for store Densification.
We will continue to address each of these opportunities when they buy or build analysis.
Brachia go home, we were pleased to launch the program in May and they've been very pleased with consumer response and demand we have seen to date all despite nominal marketing.
While demand has been strong we are facing supply chain constraints as we ramp up and we.
We are working with our vendor to increase production in order to meet consumer demand.
With regards to our outlook our guidance for Q4 assumes no improvements to the top line trends we experienced in Q3.
For gross margin, we expect Q4 to have a full quarter impact from the chemical price actions. We took on June 1st which will be partially offset by the wind down of distribution costs associated with our peak inventory levels.
We are also aggressively initiated cost management actions that coupled with some unique SG&A comparisons should result in Q4, SG&A being approximately $15 million to $20 million lower versus the prior year quarter.
In summary, we continue to have confidence in the long term outlook for the industry and we remain focused on prudently executing our strategic initiatives to capture the opportunities in front of us and further our industry leadership.
At the same time, we are focused on taking immediate actions to improve our performance.
Let me reiterate the actions we are taking.
Number one we have adjusted pricing to reflect current market conditions and are now at a relative historical price position, which is slightly above mass and home improvement and at or slightly below specialty retailers.
Number two we are aggressively managing inventory receipt reductions.
Number three we are focused on cost management throughout the P&L, including being disciplined on our marketing investments utilizing strict criteria.
Number four we continue to evaluate develop and elevate our processes and people.
And number five we are enhancing our consumer insight efforts to further improve our understanding of evolving consumer behavior.
Before Steve discusses our results and outlook I want to acknowledge our CFO transition.
I'm very pleased to welcome Scott Bowman as our new CFO effective August .
Scott the depth and breadth of public company experience spans both financial and operational areas.
A huge asset as we returned the business to grow.
I would also like to thank Steve for his leadership and partnership as well as his commitment to ensuring a smooth transition.
I'll turn it over to Scott to say a few words.
Thank you Mike legislation, that's carved out an admirable leadership position in an attractive industry and based on my initial observations I see plenty of areas, where I can leverage my experience to help drive lifestyle strategic priorities.
As I continue getting up to speed on the business I look forward to digging into areas such as supply chain product margin management forecasting and capital allocation to help deliver continuous improvement in the business.
It's an exciting time to join the team as we drive the next chapter of the company's growth and I look forward to speaking with all of you in the coming weeks and months.
Now I will turn it over to Steve to share more detail on the Q3 financial results and outlook.
Good afternoon, everyone and thank you, Mike and Scott I know I'm, leaving the team in good hands and I look forward to ensuring a smooth transition over the next few months.
Mike noted it was a challenging quarter.
We have seen slow starts to pool season in prior years due to unfavorable weather conditions. Historically performance has improved around memorial day. This year, our third quarter performance was impacted by industry wide headwinds due in part to continued unfavorable weather along with atypical consumer purchasing behavior.
For the third quarter, we reported sales of $611 million, a decrease of 9% or 63 million when compared to the third quarter of fiscal 2022.
Our comparable sales decreased 12% or $79 million.
Our comparable sales on a two year stack basis decreased 4% and on a three year stack basis grew 15%.
Our non comparable sales totaled $16 million in the third quarter of fiscal 2023, which was driven by nine completed acquisitions that added 25 stores as well as 19 net new store openings since the end of the second quarter of fiscal 2022.
With respect to trends by consumer group comparable sales declined 10% for residential pool.
13 per cent for protocol and 23% for residential hot tub.
On a two year stack basis comparable sales declined 5% for residential pool increased 4% for pro ball and declined 7% for residential hot tub.
While our third quarter sales declines were unprecedented they were in line with industry trends.
Gross profit decreased 17% or 52 million compared to the third quarter of fiscal 2020 two.
Gross margin rate was down 390 basis points to 41, 2% from 45.1% in the prior year period.
Page 11 of our supplemental deck illustrates our third quarter gross margin rate bridge in more detail.
During the quarter gross margins were impacted by four primary factors.
First incremental distribution expenses, including those related to capitalized distribution costs and investments in labor Offsite storage and transportation costs lowered gross margins by 150 basis points.
Approximately 50 basis points of this rate decline was due to deleverage of fixed distribution costs from lower comparable sales.
Regarding higher capitalized costs as we built up inventory in prior periods, we capitalize more distribution costs and during this quarter. We recognized some of those costs as we sold through the inventory.
We are also continuing to invest in our distribution network to ensure it operated smoothly at significantly higher capacities with improved service levels to support better in stock positions across our businesses.
We expect the gross margin headwind from distribution expenses to be smaller in the fourth quarter.
Second higher product costs had a 140 basis point impact on gross margins in the quarter.
While we experienced higher product costs across categories, the largest impact was in our chemicals categories.
We initially increased our selling prices for chemicals or the start of the season, but we were unable to successfully maintain those higher pricing levels and as Mike discussed we reduced prices on June 1st.
We expect greater product margin rate pressure in the fourth quarter as we experienced a full quarter impact of those price changes.
Third occupancy.
Occupancy and other costs Deleveraged by 70 basis points predominantly due to the decline in comparable sales.
We expect continued rate pressure in the fourth quarter related to occupancy and other costs deleverage given our comparable sales expectations.
And finally business mix impacted gross margins by 30 basis points, primarily due to M&A completed during the last 12 months.
We expect a smaller impact on rate from business mix in the fourth quarter.
Looking at the numbers in a different way deleverage of fixed costs impacted gross margin rate by 115 basis points in the quarter with the remaining 275 basis points of margin compression due to lower product margin higher distribution cost and business mix.
Now I'll turn to SG&A.
SG&A increased 3% or 4 million compared to the third quarter of fiscal 2022.
We continue to focus on managing costs in the business generating cost savings and driving ongoing organizational optimization.
During the quarter, we were able to partially offset higher SG&A from acquired businesses and new stores investments in our associates and nonrecurring costs with 6 million of like for like expense reductions compared to last year.
We have taken additional actions to reduce our SG&A in the fourth quarter and into fiscal 'twenty 'twenty four.
Adjusted EBITDA was 129 million compared to 183 million in the prior year.
Interest expense increased to $18 million during the quarter from 7 million in the prior year and our effective tax rate increased to 26, 1% compared to 25, 7% in the prior year.
Adjusted net income was 76 million in the third quarter of fiscal 2023 compared to adjusted net income of 126 million in the prior year.
And adjusted diluted earnings per share was 41 cents in the third quarter of fiscal 2023 compared to 68 cents in the prior year.
Diluted weighted average shares outstanding were $185 million in both the third quarter of fiscal 'twenty, 'twenty, three and fiscal 2020 two.
Now I'll turn to year to date results.
Total sales for the first nine months of fiscal 2023 decreased 68 million or 6% to one point or one 9 billion from 1.087 billion in the prior year.
Our comparable sales decreased 11% or $118 million.
On a two and three year stack basis, our comparable sales were flat and up 23% respectively.
Gross profit for the first nine months of fiscal 2023 decreased 15% or 69 million.
388 million from 457 million in the prior year.
Gross margin rate decreased by 390 basis points to 38, 1% from 42.0% in the prior year of which 140 basis points was due to negative comparable sales growth in the first nine months of fiscal 2023.
Adjusted EBITDA was $109 million in the first nine months of fiscal 2023 compared to 193 million in the prior year.
Interest expense increased to $48 million during the first nine months of fiscal 2023 from $21 million in the prior year.
Adjusted net income was 25 million in the first nine months of fiscal 2023 compared to 112 million in the prior year.
And adjusted diluted earnings per share was <unk> 14 cents in the first nine months of fiscal 2023 compared to 60 cents in the prior year.
Moving to the balance sheet. We finished the third quarter of fiscal 2023 with cash of $19 million and we had 31 million outstanding on our ABL.
This compares to cash of 193 million and no amounts outstanding on our ABL at the end of the third quarter of fiscal 2022.
The reduction in net cash was primarily due to investments in inventory and higher M&A activity during the past 12 months.
Currently we do not have any amount outstanding on our ABL and we.
Availability of approximately $240 million.
We ended the third quarter of fiscal 'twenty, and 'twenty, three with $437 million of inventory.
An increase of 75 million compared to the third quarter of fiscal 2020, two and a sequential decrease of $56 million compared to the second quarter of fiscal 2023.
Term loan credit agreement to replace the existing LIBOR based right with a term sulfur based rating as an interest rate benchmark.
Other material terms of the facility remains substantially unchanged, including the maturity date of March 20th 28.
R. A b L in term loan agreements and do not have quarterly financial maintenance covenants.
Our outlook remains unchanged from the revised out look we shared on July 13th the details of which are in today's earnings press release.
We only have one more quarter left in the fiscal year I will be discussing each metric in the context of or implied fourthquarter outlook.
Our fourth quarter outlook assumes a sales decline in the range of 9% to 14% with comparable sales declines of 12% to 16%.
Our outlook also assumes that gross margin range of 39.1% to 39.7 per cent compared to 45.7% in the prior year period.
And the fourth quarter, we expect additional rate pressure from product costs continued impact from occupancy cost you leverage.
Lower impact from distribution costs and business mixed compared to what we experienced in the third quarter.
We expect fourthquarter, just EBITDAR to be in the 61 million to 71 million range and adjusted diluted earnings per share to be in the 14 to 18 cent range.
Our outlook for the fourth quarter includes interest expenses 17 million.
And are diluted weighted average shares outstanding does not assume any incremental share repurchases.
On capital allocation or privatization has not changed our first priority is and has been our capital structure and we are targeting the leverage ratio of approximately three turns.
Our second priority is to invest in growth both organically and through M&A.
In the first nine months of fiscal 2023, we invested 27 million and capital expenditures and we deployed 16 million towards acquisitions.
As Mike noted, we will continue to be prudent in our pursuit of M&A opportunities.
Our focus remains in acquiring pool supply retailers in the sunbelt and.
And we will be disciplined around acquiring high quality businesses at attractive purchase multiples.
Our final priority is to return excess cash to shareholders.
While we do not expect to repurchase shares in the near term under our existing authorization as we focus on our other priorities. We will continue to evaluate opportunities to repurchase shares based on available investment opportunities are financial position and market conditions.
And with that I will hand, it over to Mike. Thank you.
Thank you Steve.
Despite the challenging headwinds we are navigating and is highly unusual pool season, the aftermarket cooling spine history has proven over time to be one of the most durable and advantage to consumer product categories, and we have a long track record of profitable growth in the industry.
We remain laser focused on the execution of a longterm growth initiatives market share games and shareholder returns.
With that hand, it back to the operator Q&A.
Thank you.
Well now because that's a question and answer session. If you would like to ask a question.
510, no telephone keypad, a confirmation founded will vindicate your line. It seems my question. Thank you.
<unk>, if you would like to move your question from the queue.
For breakfast it E. As in is because I mean, it may be made for somebody to pick up your handset before pressing they starkey.
One moment, please why with both of my questions.
And our first question comes from.
I'm Good man with Martin slowly. Please go ahead.
Good afternoon, everyone. My first question.
Mike You mentioned some market share from credit card data. Thanks for that we don't see that data.
So you adjusted your price you said prices June 1st.
So my first question related to that is you know your product costs are much higher you try you know you've you've taken price down because you weren't getting the sell through does that mean that a lot of the industry is just accepting a much lower margin for selling product or chemicals.
And then related to it as if you were a holding her growing share even in that scenario, which you know maybe you can parse out then why even take down the price.
Yeah. So you mean, thanks, thanks for the questions and and good questions first on the margins.
As were active in M&A with specialty retailers.
We do see that we operate at higher margins than they do and we can Baghdad in pretty specifically to product cost and feel comfortable that we still have a cost advantage versus specialty retail.
Though we do need to say that that gap has narrowed from 21 and 22, when we had some I would say extra ordinary advantage to prices on some core chemicals.
With regards to market share you know, we look at market share in a couple ways. The aggregate credit card data. We use is bank of America.
Cause you can see them on the slide that shows were basically flat to the industry.
<unk>.
You know, we also listened very carefully to our pool peers.
And the largest distributor in the industry showed cell in to their pool specialty retail at minus 11 per cent. So also a flat comparison to that.
I'd say, a flat growth rate and flat top market share based on that comparison.
Yeah.
Look that is a that's a deceleration from the market share gains we've had consistently for the last eight quarters. So we're not pleased with that but.
That's the situation we are in the fourth quarter.
And then a quick follow up on on margin.
Pre Covid, we had a couple a couple of years the Vegas pre Covid history.
Looks like our models as a 13% EBIT margin and.
And now you have $500 million more in sales.
So you know I know this is.
You've had a deceleration and it's hard to commit to where the clearing margin of this businesses I assume a tyre at least 13 on the sales base, but is there any reason why it shouldn't be or you know or is there any reason it should be even higher than that 13.
Well look I think we it's early to talk about 24, but.
In terms of where we were pre pandemic with our gross margins in our operating margins.
We feel that the headwinds we've got this year and particularly in this quarter do a bait and feel like we've got a pretty clear path to recover it to those levels at.
At least those levels.
Right. Okay. Thank you.
Yep.
Our next question comes from Steven FARB Guggenheim. It security. Please go ahead.
Good evening, Mike Steve Scott.
I wonder if it maybe expand on some means question, but in particularly focused on the customer file dynamic.
Some like maybe if you could just expand on your learning from the quarter as it pertains to the customer file down 8%.
And specifically looking for any insight into what's really driving the reduction.
Alright, you know is it is it the consumer is migrating back to maybe its legacy provider or outlet is it is it marketplace disruption is at mass.
And and on that also like when <unk> when should we expect less leaves to return to positive file growth.
Stephen Thank thanks for the question the.
I think the way, we're thinking about the the file or the lack of file growth file shrinking 8%.
Has a lot to do with.
The two surveys that we ran which showed a larger than normal amount of product leftover in the in the industry and the consumers hands.
We've turned to calling it the garage and shed inventory internally.
And one of those one of those surveys we conducted on our on our own through third party.
And one after we pre release, we were contacted by whenever a chemical partners could run a similar survey of a similar size and come up with remarkably similar results. So we have some idea of what that size is now and they'll they came at the number in different ways again, the the the the final impact in terms of.
A headwind is is quite similar so there's definitely some of that going on and when you think about.
Needs based industry right, that's predominantly non discretionary spend.
The question is will how can not discretionary spend down and nondiscretionary spin for the quarter was down 6%.
Well, it's down because it's only down if need is impacted.
And two things impacted needed in the corner of the first was whether.
Coldest weather in a decade.
According to plan the legs coldest weather in 19 years in June to start at the pool season from whether <unk> International.
So.
Colder weather means less need for Sanitizers means less people, maybe in to come in and purchase and that impacts our file because our file is active members.
And then when you look at the surveys that were conducted.
And found leftover inventory, which is first of all highly unusual I'm gonna say unprison unprecedented in our experience that also decreases the need to purchase we've got some.
We got some feedback from our stores that they were hearing that from customers as they were coming in particularly with regards to our water tests.
Even in a down quarter, we ran more water twist the prior year's period, but the conversion off those tests was lower than what we are hearing from the stores. When we question. It. It was that they were hearing that people had already had those chemicals. So.
It's a a highly unusual situation when we think of what the duration might be I will say that both of those surveys.
There was no mention.
From consumers and their self reporting that they had supplies that with my <unk> past the season.
So we believe this is a one season occurrence based on you know three years of highly unstable supply and price inflation, leading people to stockpile.
Now the truth is we we won't be able to know that for sure are are are way the size that will be with additional consumer surveys will do them at the end of the season and will do him before the start of next season and that'll be our way of confirming.
That what we believe which is which which is that that extra inventory, but he out of the out of consumers' hands by next pool season.
And they're like Oh, well you've answered the question with regard to Nondiscretionary items, given a discretionary to client as well at a material impact on overall traffic. So.
That's a another contributor if you get outside of the the the Nondiscretionary product and look at the total declining and and customer accounts.
Yeah, that's a good point.
Sorry, <unk>, maybe just a quick follow up on on prom right sort of.
A similar question it down three per cent.
But as soon as we think about the growth and pro stores and you think about the growth and pro partner contracts on a yearly basis.
Any.
Anything specifically to note that helps explain what's transpired approach segment is that just.
Chemical mix or or are you seeing some.
Oh, you seem less engagement from your <unk> ability to contact any any color on the proceedings.
Well I would say that the business has become more competitive and.
Some others have reported we have seen tricolore deflation in that category and that was a pretty significant headwind to the to the pro business in the quarter.
And year to date.
Thank you.
[laughter].
Our next question comes from Zion Nerco William Blair. Please go ahead.
Thanks, Good afternoon, Mike I was hoping you could address the risk that chemical prices keep falling and have you seen competitors cut prices when you cut in June .
Yeah, right and thank thanks for the question Yeah, I think it's important to understand that the price actions. We took on six one word to get ourselves level with specialty.
And since we've done that we haven't seen any reaction from specially retail to take prices lower.
List prices and in addition, we haven't seen any any outsiders promotional activity in the business. So right now it looks like we have a stable pricing situation and a stable promotional promotional environment.
In the residential pool space.
Okay, that's good to hear.
And then my follow up do you have any goals for inventory reduction cost savings and Cox cost savings and SG&A that you can share with us.
Yeah, we're not we're not sharing any specific inventory.
Goals at this moment.
Yeah, as we said Steve said in a script will be lower than we were last year. We're obviously working at work that number down as low as we can but we haven't they're not gonna come in and what are our internal targets are.
With regards to add okay.
As we talked about SG&A in in my comments in the script, we look to be $15 million to $20 million lower in queue for this year versus the prior year.
Also working diligently on reducing costs <unk>.
Run rate as we go into 2024, and we think we have we have a pretty good path there as well obviously the inventory build up and the associated costs with that Offsite storage additional labor increased transportation those costs are in our margin build also were flexed up given the.
Rather extraordinary inventory levels, we took to ensure supply and we're unwinding knows now it'll start in the fourth quarter and it should be completed by the end of the year.
That's helpful Best of luck.
Thanks.
Our next question comes from <unk>, Firstly Advisory group. Please go ahead.
Hi, Good afternoon, everyone. As you think about the sales decline of around 9% this quarter and you think about the cadence going through as we go into the next fiscal year.
Are there any puts and takes of how you're planning the business and how you're thinking about what its traffic whether it's.
<unk> I E transaction or discretionary Nondiscretionary, how you plan to market it or how you re of sorting the stores in order to Minimise gross margin erosion in and working to drive demand and seeing demand. Thank you.
[noise] Yeah Dana. Thanks for the question you know look we start out each year planning whether to be normal. This year was clearly an aberration of that we do believe that whether it should be at least neutral and a comparable base. So it should be a bit of a tailwind going in next year.
The same with consumer inventory that gets worked through the channel that should be a tailwind for us as well.
The headwinds into next year in terms of sales is you know we got a we got a little out of our normal lane in terms of pricing going into the quarter.
A bit above, especially retail we've.
We've done that in the past and had those prices come up we've been able to move up in price and have others, followed that didn't happen. This year. So I think that's a that's a good learning from us and we will keep our historical price position or just blow or equalled, especially in just about mass.
And then as we think about additional puts and takes in the next year.
You know in a needs based industry the way, we think about marketing.
Is it doesn't it doesn't drive need meat comes from the installed base It drive drive market share gains the.
The challenge we've had with marketing this year is with the headwinds of weather and some excess inventory and the consumer channel we weren't getting our typical ROI on Martin expand and therefore haven't been as aggressive we would expect that to normalize next year and then our ability to <unk>.
Market at a heart spend marketing invest emerging sorry at a high R Y should drive.
Should get us back on track with Marketshare games.
Got it and then just as he finished out this quarter was there any change in the quarterly progression or the cadence of the quota.
The.
June June was very tough.
Q3 for US you know I quoted that it was the toughest quarter overall in terms of whether they're from Planalytics in a decade and weather trends international headed as the coldest June 19 years, so weak.
We came into the season as we always do waiting to see what kind of reaction we get over the memorial day weekend and it was very disappointing just to see no lift in the business and that's when we started both serving customers.
As well as speaking more directly to our district managers and store owners about what was going on and I'm starting to take the.
The price actions that we did on six one.
So it was.
It was a challenging traffic situation for the entirety of the quarter.
Got it thank you.
Yeah.
Alright next question comes from Elizabeth with.
<unk> Bank of America. Okay go ahead.
Great. Thank you very much so I guess that you mentioned, you're saying some of the same factors impacting the pro business.
<unk> business I mean does that include the pantry loading behavior of folks using chemicals. They start up from last year, I mean, I'm <unk> doing that too and then is there anything you can do add to educate the customer about issues that they might experienced if they're using expired chemicals.
Yeah, well. Thanks, good good questions. We did <unk> did not see that behavior on the pro side.
You know now our survey was just to residential consumers.
But I don't believe we're seeing that on the pro side I think the pros went into the season, believing that tricolore pricing should come down and.
And they weren't correct. Thank.
Thank residential consumers came out of last you're wondering where price and wear availability would be and ended up stockpiling based on the prior two years that they had experienced.
I'm sorry, what's that.
Was there a second part to your question sorry.
Oh, no just about like educating the customer about you know.
What what could happen you know if they're using these older chemical within this if there's anything from a marketing standpoint, you can do to kind of get that message across.
Yeah, very good very good point and yes, we're doing that in our blogs and.
That's why this is so unprecedented it's not <unk>.
These are not chemicals, you want a store and look it's predominantly tricolore and Cal hypo and Tricolore loses its efficacy if not stored properly and lose it you know.
Within a year, depending on temperature and ventilation.
Cal Hypo.
A little more dramatic because the granular turns to solid and it also has combustible properties. So <unk>.
Not something that consumers should be storing and that's something we've seen them store in the past.
Alright, great. Thank you.
Oh.
Our next question comes from <unk> wait Oops capital market. Please go ahead.
Oh, Hi, Thanks, you touched on E. S. P N a reductions that you're expecting to the fourth quarter.
The hours and lower cost compared to the prior year period. Just wondering if you could provide you know maybe some more color on the stuff. So you're taking in how you're viewing SG&A at this point has been moving closer to this 124.
Yeah, Gary Good question were looked away, we're thinking about SG&A is.
We're going to reduce it.
Q for in our in our run right into 2024 to help make our P&L more durable against some of the shocks that we experienced this quarter and in terms, specifically, a SG&A areas, where we're addressing in the fourth quarter in the next year you know I can tell Ya overall, it's it's up and down the P N L.
Spoke a little bit earlier about marketing marketing comes down naturally when we can't get the R. Y that we expect our investments marketing has come down in Q3, and Q4 and for the year that we would expect that to recover in the next year when the consumer inventories is absent.
With traffic being down as much as it has driven by weather and consumer inventory, we've taken out labor hours in the stores accordingly.
In terms of just being more efficient.
<unk> R Delayering, our corporate organization more more efficiency more optimization.
And then the little things like you know travel supplies all out all out push across those categories.
And then finally, you know big chunk of it is is performance compensation. This is not a year, where we will be paying ourselves for associates.
Understood I wanted to follow up on an organic growth does the challenging environment right now changed your view on either M&A or or <unk>.
Store expansion.
No. It doesn't because we think you know whether overtime tends to normalize.
And if consumers that I've inventory in their garages and sheds as it appears they do that's a very unusual inventory.
Unusual situation and a catalyst for it which is three years of spotty availability and increasing price that catalyst is gone you know inventories readily available.
Ready available across all sizes. So we would expect that to be transitory.
Transitory as well.
And the challenges that we're facing.
And a quarter and this year so his specialty retail.
Thank you can see that in some of the distributors results. So.
It actually makes M&A more attractive in terms of the multiples that we were able to execute against.
Given the results in this quarter and our outlook for the year as we said in and are prepared remarks, you know, we're gonna be prudent about it and we're gonna watch the pace of M&A, but we still think it's an important initiative for Leslie is over the long term.
Okay understood. Thanks again.
Yeah.
Our next question comes from Jonathan Mothers' Iced tea with Jeffrey Please go ahead.
Hey, good afternoon. Thanks for taking my question. The first one was on pricing action, Mike I think you mentioned the guidance system no change in pricing is there anything that would would lead you to deviate from current pricing.
Another way of asking you know if traffic or a transaction is softer would you further ado pricing to try and damn the excess transaction decline. Thanks.
Yeah, well when I said no change in in current pricing in the prepared remarks that was specifically for four Crow, where we have seen some some treichler pricing come down I'll settle a bit by Cal Heiple, which which is up <unk>.
In terms of residential.
I think.
Currently.
We view the demand in the industry.
At this moment as fairly inelastic.
Now when we think about what's driving the traffic declines and the traffic declines. We don't think are being driven by price sensitivity, there being driven by weather and consumer inventory, which we believe are transitory. So we need we need to we need to wait those out.
The price section. So we took was because we had gotten as I mentioned above specialty retail and that's not a position that our consumers are used to seeing S. N.
And not one that we want to be in so.
Took her actions on six one you lined up with the industry <unk>, we are where we want to be from a price standpoint, and now I need to let tissue or play out the weather normalized consumer inventory normalize and we should be back to our our regular cadence of growth.
Gotcha. That's helpful. And then just my follow up it sounds like the customer insights work picked up on some some price sensitivity.
Curious to what extent, you think equipment upgrades and related and that didn't materialize in the second half of this year could potentially benefit revenue next year. Thanks.
Yeah. It's also a good question you know just the general Mac macroeconomic situation.
Your pets customer price sensitivity across industries in the surveys and the survey that we did in the one that we got access to it was also mentioned very specifically by customers.
Just think that.
Look I think the entire industry took an awful lot of price over the last three years.
And there is still cost pressures, so there's some opportunity to take price.
The industry has gotta be very mindful and thoughtful about how much price we take because we certainly don't want to create any demand destruction.
I think when you look at the equipment business.
We reported ours was down 8% named pull corporate ported there's was down 8% has well that's predominantly volume at the moment and I think the the read on that is that yes people with a certain heightened.
Heightened sense of price sensitivity might be delaying some upgraded purchases, but certainly the break fix business that is that is durable and continuing on.
Best of luck.
Thanks.
Our next question comes from Andrew Carter.
Please go ahead.
Yeah, Hey, Thank you. So a couple of questions I wanted to ask are really about visibility into the business first is in terms of pricing like you know getting out over your skis relatives, especially retail I mean, how good are your realtime insights into kind of your price levels. I know you do channel checks, but is you know is.
<unk> <unk> <unk> Ah Diyer I don't know that they get listened to if they say hey, it's cheaper down the street and second to that how quickly they respond to feedback and then just a second kind of point.
Putting all the consumer survey work aside have you have you looked at considering how many pounds of chemicals went out the door you know from various locations over the last four years four years and what a reversion to the mean would look like considering market share gains just to kind of give you a sense of.
You know, where you actually where you could land. Thanks.
Yeah. Thanks, Andrew So a few questions and they're talking about price visibility first and and how we think about price.
You know we.
In 2021, and 22, we were able to influence pricing in the residential market.
We came into the preseason I would say April may period kind of pushing price, taking price and had the market followers.
When we went in this year, our pricing coming into the quarter and into the year was their queue for pricing.
So our intent was to hold that pricing for the balance of this year.
We we knew prior to memorial day that our pricing was a little Bud specially we thought specially might come up meet us they did not and.
And it was after that on six one that we do we took our price actions and we have good visibility into pricey I mean, we we we understood what that dynamic was we thought we'd be able to move price up and we weren't we weren't able to we use a combination of web scraping and you know with over 1000 stores in store managers and D.
MS out there we have a a fairly fulsome.
Ability to track, our mom and pop competitors that as well.
And then I think on the on the last question about the the pounds analysis.
We we are looking at that.
Thank the survey, we did where the survey we did were not specific to legislation.
We think that a unimportant component of how we think about.
The headwind created for this year, because you know our growth as you know is is a combination of comp.
<unk> in a typical year, but also market share gains and both become more difficult when there is excess inventory in the channel.
I'll go ahead and pass it on to vast too. Thanks.
Yep.
Our next question comes from painted Timothy with Robert W. But let me go ahead.
Yeah. Good afternoon, guys with Justin Claver on prepaid Mike I, just wanted to ask I imagine you're having discussions today with your vendors.
Regarding the 24 coffees I'm just curious what does the costing backdrop.
Look like sitting here today, particularly on the non discretionary products.
Do you think product costs are still gonna move higher next year I'm just trying to understand you know this product margin pressure.
Couldn't linger, if if you're in the industry just can't pass through.
Any more price that's my first question.
Yeah, just I appreciate the question. It it's it's too early for us to talk about that we have.
We have not really started price discussions with our vendors yet.
That takes place.
Place.
It's 30 to 60 days from now.
Yeah, I think it's important for both sides to understand kind of how the season wraps up.
A little further through our queue for in their Q3, and then we will sit down and talk about the dynamics that we see.
There's certainly some cost pressure, but I think there's also you know after three years of consumers absorbing a lot of inflation.
There's there's definitely some more price sensitivity from customers.
We have an 85000 <unk>.
Consumers a day coming through our doors in our stores. We are we are ears to the ground I would say.
The first line on hearing from consumers.
Yeah, and I think the message has been pretty clear that their appetite for continuous price increases is.
It's a little more nuanced than it has been in the past.
Got it okay now that makes sense I mean, an unrelated follow up on leverage the mentioned the three times target.
Just in terms of the path to get there is that is that more about natural deleverage as as EBITDA recovers and starts to grow again R. R.
Are you for going you know some star growth and M&A opportunities in the near term N and deploying <unk>.
Capital into debt pay down.
Yeah. Thanks for the question Justin Thank her a couple of different ways to think about it what we would expect to reduce leverage like combination of gross and the business. So just not naturally and potentially allocate some some cash towards debt pay down.
If you think about cash flow for for this year, it's bent been impacted by working capital primarily if you look at our our Capex that's kind of in line with Ah how he talked about it you know we talk about kind of a three per cent of total sales probably come in a little shy of that this year went from an M&A perspective, certainly slower pace this year from $1 perspective by.
Continuing to do attractive deals that and an acquired businesses that great multiples I expect that to continue throat Q for as well at at at a modest club and so you know when it comes down to 2023, I think about the cadence for working capital last year, we were buying a lot of inventory late in the season led to accounts pay.
<unk> and other critics senses that ended up getting paid off in in the first quarter of 2023.
At this point, we've talked about bringing inventory down pretty aggressively and into your and but as a result, we will have a lower accounts payable and certainly some of crews from performance incentives. So don't expect a big cash flow urine twenty-three, but do see opportunity for improvement in 2024, which could lead us to continue to deploy capital.
Towards that pay down as well as invest in stores and in M&A last comment to make on that as you think about new store growth fairly modest capital requirements for a new store location or your conversion.
We convert stores to prose.
And if you look at the M&A that we're we're executing and in the current environment. It's a it's a lot, especially retailers in the sunbelt smaller locations is not not a big cash trained from an M&A perspective, so, but you know clear opportunity to continue to deploy capital towards growth.
But it'll probably look a little different than it has the last couple of years.
Alright. Thanks, So that's the best of luck.
Yeah, I know I have a question at this time.
Would like to turn to fly back also to the management so closing comment.
Go ahead.
It's like thank everybody for joining us today and your continued interest in <unk> and we look forward to sharing their queue for on your end results.
Thanks.
Okay Cocos today's conference call you may disconnect your lines at this time.
Thank you for your participation and have a good day.
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