Q3 2024 Leslie's Inc Earnings Call

Good afternoon and welcome to the third quarter of fiscal 2024 conference call for Leslie Zink.

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

Operator: At this time, all participants are in a listen only mode. Following the prepared remarks, management will conduct a question and answer session. If you should require any operator assistance during the conference call, please press star zero.

Operator: Following the prepared remarks, management will conduct a question-and-answer session. If you should require any operator assistance during the conference call, please press star zero on your telephone keypad.

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

Speaker Change: Following the prepared remarks, management will conduct a question-and-answer session. If you should require any operator assistance during the conference call, please press star zero.

Operator: As a reminder, this conference call is being recorded and will be available for replay later today on the company's website.

Speaker Change: on your telephone keypad. As a reminder, this conference call is being recorded and will be available for replay later today on the company's website. I will now turn the call over to Matt Skelly, Vice President of Investor Relations. Please go ahead, sir.

Matthew Skelly: I will now turn the call over to Matt Skelly, Vice President of Investor Relations. Please go ahead, sir.

Matt: Thank you and good afternoon. I would like to remind everyone that comments made today may include forward-looking statements that are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today and will not be updated in the future if circumstances change. Please review the cautionary statements and risk factors contained in the company's earnings press release and recent filings with the SEC.

Matthew Skelly: 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 uncertain needs 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.

Speaker Change: 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.

Matthew Skelly: Please review the cautionary statements and risk factors contained in the company's earnings press release and recent filings with the SEC.

Speaker Change: 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.

Matthew Skelly: During the call today, management will fervid a certain non-GAAP financial measures. A reconciliation between the gap and non-gap 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. Leslie's Pool.com.

Matt: During the call today, management will refer to certain non-GAAP financial measures. 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.lesliespool.com. We have also posted our Q3 2024 earnings presentation on our IR website, and we'll make references to it during this earnings call. On the call today are Mike Egeck, Chief Executive Officer, and Scott Bowman, Chief Financial Officer. With that, I will turn the call over to Mike. Thank you, Matt.

Speaker Change: During the call today, management will refer to certain non-GAAP financial measures. A reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was furnished to the SEC today and posted to the investor relations section of Leslie's website at ir.lesliespool.com.

Matthew Skelly: We have also posted our Q3 2024 earnings presentation to our IR website and will make references to it during this earnings call.

Speaker Change: We have also posted our Q3 2024 earnings presentation to our IR website, and we'll make references to it during this earnings call. On the call today are Mike Egeck, Chief Executive Officer, and Scott Bowman, Chief Financial Officer. With that, I will turn the call over to Mike.

Matthew Skelly: On the call today are Mike Eject, Chief Executive Officer, and Scott Bowman, Chief Financial Officer.

Mike Egeck: With that, I will turn the call over to Mike. Thank you, Matt, and thank you all for joining us this afternoon. Before we address our third quarter results, I'd like to put some context around our current and expected future performance. For more than 50 years prior to the pandemic, Leslie's was a consistent, predictable business with mid-single digit sales growth and Zippadot margins in the mid to high teams. During the pandemic, the pool industry experienced unprecedented growth and profitability as more consumers installed pools and pool owners invested more time and money in their pools. As the industry leader, Leslie's participated in this outsized period of growth, both gaining market share and reaching record levels of profitability.

Mike Egeck: Thank you, Matt, and thank you all for joining us this afternoon.

Mike Egeck: Before we address our third quarter results, I'd like to put some context around our current and expected future performance.

Speaker Change: For more than 50 years prior to the pandemic, Leslie's was a consistent, predictable business with mid-single-digit sales growth and EBITDA margins in the mid-to-high teens.

Speaker Change: During the pandemic, the pool industry experienced unprecedented growth and profitability as more consumers installed pools and pool owners invested more time and money in their pools.

Speaker Change: As the industry leader, Leslie's participated in this outsized period of growth, both gaining market share and reaching record levels of profitability.

Mike Egeck: Over the course of 2023 and into this year, the pool industry has gone through a challenging period of demand normalization, and Leslie's has been part of this as well. In our presentation, we compare 2023 actual and 2024 guided sales for select publicly traded pool industry companies. Although the timing varies by year over the two-year period, all of the companies have performed similarly. The correction in demand and sales is representative of industry trends and is not unique to Leslie's. Over the last two years of industry correction, our adjusted EBITDA margin has declined through a combination of fixed expense de-leverage, as well as discrete items which have negatively impacted gross margin.

Speaker Change: Over the course of 2023 and into this year, the pool industry has gone through a challenging period of demand normalization, and Leslie's has been part of this as well.

Speaker Change: In our presentation, we compare 2023 actual and 2024 guided sales for select publicly-traded pool industry companies. Although the timing varies by year, over the two-year period, all of the companies have performed similarly.

Speaker Change: The correction in demand and sales is representative of industry trends and is not unique to Leslie's.

Mike Egeck: Over the last two years of industry correction, our adjusted EBITDA margin has declined through a combination of fixed expense deleverage as well as discrete items which have negatively impacted gross margin. Fixed components of SG&A have also delevered.

Speaker Change: Over the last two years of industry correction, our adjusted EBITDA margin has declined through a combination of fixed expense deleverage as well as discrete items which have negatively impacted gross margin.

Mike Egeck: During this time period, gross margin has decreased over 300 basis points from de-leverage of occupancy and distribution costs, as well as the industry demand normalizes. Returning to our long-term margin targets will entail a combination of sales leverage, as well as continued progress on cost efficiencies. Our performance over the last two years of unprecedented industry challenges is inconsistent with the long-term fundamentals of our business and our historical performance, and does not diminish our view of the long-term potential of our company, which is not reflected in our current share price.

Speaker Change: During this time period, gross margin has decreased over 300 basis points from deleverage of occupancy and distribution costs, as well as the expensing of capitalized DC costs as we reduced inventory.

Speaker Change: Six components of SG&A have also delevered. As industry demand normalizes, returning to our long-term margin targets will entail a combination of sales leverage as well as continued progress on cost efficiencies.

Mike Egeck: Our performance over the last two years of unprecedented industry challenges is inconsistent with the long-term fundamentals of our business and our historical performance and does not diminish our view of the long-term potential of our company, which is not reflected in our current share price, gross margin of 40%, SG&A of 28%, operating margin of 12%, and adjusted EBITDA margin in the mid-chain. Now moving to our results for the third quarter, our third quarter performance met our revised expectations as outlined in our July 17th press release. Compared to the prior year quarter, cold and wet weather in April and May reduced the number of pool days in non-seasonal markets and delayed the start of the pool season in seasonal markets.

Speaker Change: Our performance over the last two years of unprecedented industry challenges is inconsistent with the long-term fundamentals of our business and our historical performance and does not diminish our view of the long-term potential of our company, which is not reflected in our current share price.

Speaker Change: When industry demand does normalize, we believe we are well positioned to meet our performance targets, including sales growth in the mid-single digits driven by two to three percent comps and two to three percent store location growth.

Speaker Change: gross margin of 40%, sGNA of 28%, operating margin of 12%, and adjusted EBITDA margin in the mid-genes.

Mike Egeck: Now moving to our results for the third quarter, our third quarter performance met revised expectations as outlined from our July 17th press release. Versus the prior year quarter, cold and wet weather in April may reduce the number of pool days in non-seasonal markets and delayed the start of the pool season in seasonal markets. Sales improved in June with warm and dry weather, but it was not enough to make up for the lost pool days in the first two months of the quarter. We also continue to see weakness in large-ticket categories as the cumulative effect of high inflation and interest rates weighed on household spending.

Speaker Change: Now moving to our results for the third quarter. Our third quarter performance met our revised expectations as outlined from our July 17th press release.

Speaker Change: versus the prior year quarter, cold and wet weather in April and May reduced the number of pool days in non-seasonal markets and delayed the start of the pool season in seasonal markets.

Mike Egeck: Sales improved in June with warm and dry weather, but it was not enough to make up for the lost pool days in the first two months of the quarter. We also continue to see weakness in large ticket categories as the cumulative effect of high inflation and interest rates weighs on household spending.

Speaker Change: Sales improved in June with warm and dry weather, but it was not enough to make up for the lost pool days in the first two months of the quarter.

Speaker Change: We also continue to see weakness in large ticket categories as a cumulative effect of high inflation and interest rates weighed on household spending.

Mike Egeck: Later in our call, Scott will provide more detail on the full-year outlook from last month's press release. As weather improved in June, we were encouraged by the improvement we saw in certain categories. Total sales improved to down 7% and third quarter from down 11% in the first half. Within the quarter, sales in June improved to down 2%. Chemical sales improved to down 1% in the quarter and up 5% in June, or chemical sales volume is now positive year to date. Pro sales improved to down 2% in the quarter from down 8% in the first half.

Mike Egeck: Later in our call, Scott will provide more detail on the full year outlook from last month's press release. Total sales improved to down 7% in the third quarter from down 11% in the first half, and pro sales improved to down 2% in the quarter from down 8% in the first half. Moving to our financial results for the quarter, total fiscal third quarter sales were $570 million, down 7% year over year.

Speaker Change: Later in our call, Scott will provide more detail on the full year outlook from last month's press release.

Scott Bowman: As weather improved in June , we were encouraged by the improvement we saw in certain categories.

Scott Bowman: Total sales improved to down 7% in the third quarter from down 11% in the first half.

Scott Bowman: Within the quarter, sales in June improved to down 2%.

Scott Bowman: Chemical sales improved to down 1% in the quarter and up 5% in June . Our chemical sales volume is now positive year-to-date.

Scott Bowman: Pro sales improved to down 2% in the quarter from down 8% in the first half.

Mike Egeck: Hot tub sales improved to down 4% in the quarter, which drove total discretionary products from down mid-teens in the first half to down 10% in the quarter. Traffic improved to down 5% in the quarter, a sequential improvement from down 10% in the second quarter. So while the pool industry continues to deal with unfavorable weather, a challenging macro environment, and an ongoing post-pandemic demand normalization, we are beginning to see encouraging trends into business. Moving to our financial results for the quarter, total fiscal third quarter sales were 570 million, down 7% year over year. This includes an approximate 230 basis point headwind from our June 2023 chemical price actions, which did not fully anniversary until the end of the quarter.

Scott Bowman: Hot Tub sales improved to down 4% in the quarter, which drove total discretionary products from down mid-teens in the first half to down 10% in the quarter.

Scott Bowman: Traffic improved to down 5% in the quarter, a sequential improvement from down 10% in the second quarter.

Scott Bowman: So while the pool industry continues to deal with unfavorable weather, a challenging macro environment, and ongoing post-pandemic demand normalization, we are beginning to see encouraging trends in the business.

Mike Egeck: This includes an approximate 230 basis point headwind from our June 2023 chemical price actions, which did not fully anniversary until the end of the quarter. As noted earlier, total chemical sales were down 1%, inclusive of a 440 basis point headwind from our June 2023 chemical price action. Equipment sales were down 15% in the quarter. We believe this was driven by cautious consumers delaying big-ticket purchases due to the macro environment.

Scott Bowman: Moving to our financial results for the quarter.

Scott Bowman: Total fiscal third quarter sales were $570 million, down 7% year-over-year. This includes an approximate 230 basis point headwind from our June 2023 chemical price actions, which did not fully anniversary until the end of the quarter.

Mike Egeck: Residential pool was down 8%; probe pool was down 2%; and residential hot tub was down 4%. Total transactions were down 2% year over year. Our focus on customer service, product availability, competitive pricing, compelling assortments, and value messaging drove increases in customer conversion that offset a majority of the 5% traffic decline in the quarter. Average order value was down 5% year over year, consistent with the first two fiscal quarters of this year. Nondiscretionary product sales were down 6% versus a year ago but improved to down 1% in June. As noted earlier, total chemical sales were down 1%, inclusive of a 440 basis point headwind from our June 2023 chemical price actions.

Speaker Change: Residential Pool was down 8%, Pro Pool was down 2%, and Residential Hot Tub was down 4%.

Speaker Change: Total transactions were down 2% year-over-year. Our focus on customer service, product availability, competitive pricing, compelling assortments, and value messaging drove increases in customer conversion that offset a majority of the 5% traffic decline in the quarter.

Speaker Change: Average order value was down 5% year over year, consistent with the first two fiscal quarters of this year.

Speaker Change: Non-discretionary product sales were down 6% versus a year ago but improved to down 1% in June.

Speaker Change: As noted earlier, total chemical sales were down 1%, inclusive of a 440 basis point headwind from our June 2023 chemical price actions.

Mike Egeck: Equipment sales were down 15% in the quarter. We believe this was driven by cautious consumers delaying big ticket purchases due to the macro environment. Discretionary product sales were down 10%, an improvement of 300 basis points from Q2. June outperformed and was down 5% versus a year ago. On page 11 of our deck, you can see that our analysis of third-party credit card data shows that Leslie's sales growth in the third quarter was better than that reported by specially pool retailers and that we outperformed the industry in June. Additionally, our analysis of third-party pool industry e-commerce traffic indicates that we grew digital traffic share during the quarter.

Speaker Change: Equipment sales were down 15% in the quarter. We believe this was driven by cautious consumers delaying big-ticket purchases due to the macro environment.

Speaker Change: Discretionary product sales were down 10%, an improvement of 300 basis points from Q2. June outperformed and was down 5% versus a year ago.

Mike Egeck: On page 11 of our deck, you can see that our analysis of third-party credit card data shows that Leslie's sales growth in the third quarter was better than that reported by specialty pool retailers and that we outperformed the industry in June. Additionally, our analysis of third-party pool industry e-commerce traffic indicates that we grew digital traffic share during the quarter. Moving to page 12 of the deck, the table presented is a comparison of Leslie sales performance to other select pool industry public companies for 2023 actual results in current 2024 guidance. Turning to profitability for the quarter, Gross margin was 40%, down 101 basis points year over year, which includes a 112 basis point impact from the June 2023 chemical price action.

Speaker Change: On page 11 of our deck, you can see that our analysis of third-party credit card data shows that Leslie's sales growth in the third quarter was better than that reported by Specialty Pool retailers and that we outperformed the industry in June .

Speaker Change: Additionally, our analysis of third-party pool industry e-commerce traffic indicates that we grew digital traffic share during the quarter.

Mike Egeck: Moving to page 12 of the deck, the table presented as a comparison of Leslie's sales performance to other select pool industry public companies for 2023 actual results in current 2024 guidance. We believe this comparison highlights three important points. First, Leslie's performance over the last two years is in line with other pool industry public companies. Second, sales performance for pool industry manufacturers, distributors, and retailers have all been impacted by some combination of unfavorable weather, a challenging macro, and the unwind of the industry demand spike associated with the pandemic. Third, although the total performance of all three groups has been similar over a two-year view, the timing of the impact is reflective of the differences in manufacturing, distribution, and retail operating models, and their position in the supply chain relative to the end consumer.

Speaker Change: Moving to page 12 of the deck, the table presented is a comparison of Leslie's sales performance to other select pool industry public companies for 2023 actual results and current 2024 guidance.

Speaker Change: We believe this comparison highlights three important points.

Speaker Change: First, Leslie's performance over the last two years is in line with other pool industry public companies.

Speaker Change: Second, sales performance for pool industry manufacturers, distributors, and retailers have all been impacted by some combination of unfavorable weather, a challenging macro, and the unwind of the industry demand spike associated with the pandemic.

Speaker Change: Third, although the total performance of all three groups has been similar over a two-year view, the timing of the impact is reflective of the differences in manufacturing, distribution, and retail operating models, and their position in the supply chain relative to the end consumer.

Mike Egeck: Turning to profitability for the quarter, gross margin was 40%, down 101 basis points year-over-year, which includes a 112 basis point impact from the June 2023 chemical price actions. Occupancy, D leverage on lower sales, and the expense of capitalized DC costs. Adjusted EBITDA was 109 million, and adjusted diluted earnings per share was 34 cents. With regard to the industry backdrop, pricing is largely stable, and promotional activity is typical for the season. Chemical prices in both the residential and pro markets held relatively steady throughout the quarter. Supply chains are operating well, and inventory levels are seasonally appropriate.

Speaker Change: Turning to profitability for the quarter, gross margin was 40%, down 101 basis points year over year, which includes a 112 basis point impact from the June 2023 chemical price actions.

Speaker Change: occupancy deleverage on lower sales and the expensing of capitalized DC costs.

Speaker Change: Adjusted EBITDA was 109 million and adjusted diluted earnings per share was 34 cents.

Speaker Change: With regard to the industry backdrop, pricing is largely stable and promotional activity is typical for the season.

Speaker Change: Chemical prices in both the residential and pro markets held relatively steady throughout the quarter. Supply chains are operating well and inventory levels are seasonally appropriate.

Mike Egeck: While industry demand continues to normalize post-pandemic, Leslie's remains the leading direct investment were pool and spa retailer with unmatched scale, capabilities, and brand awareness. We are leveraging our unique position to further pursue and execute on our strategic growth initiatives, which we expect to drive long-term sustainable top-line growth and profitability, share gains, and operational efficiency.

Mike Egeck: While industry demand continues to normalize post-pandemic, Leslie's remains the leading direct-to-consumer pool and spa retailer with unmatched scale, capabilities, and brand awareness. We are leveraging our unique position to further pursue and execute on our strategic growth initiatives, which we expect to drive long-term sustainable top-line growth and profitability, share gains, and operational efficiency. Third, with regard to our pro-initiative, we ended the quarter with 4,254 pro-contracts and 108 pro-locations. Pro sales were down 2% for the quarter, a sequential improvement from down 8% in the first half, driven by the effectiveness of our Pro Partner Program.

Speaker Change: While industry demand continues to normalize post-pandemic, Leslie's remains the leading direct-to-consumer pool and spa retailer with unmatched scale, capabilities, and brand awareness.

Speaker Change: We are leveraging our unique position to further pursue and execute on our strategic growth initiatives, which we expect to drive long-term sustainable top-line growth and profitability, share gains, and operational efficiency.

Mike Egeck: Turning to those strategic initiatives. First, we are encouraged that our customer file was flat versus a year ago, and we believe we are now positioned to deliver customer file growth.

Speaker Change: Turning to those strategic initiatives.

Speaker Change: First, we are encouraged that our customer file was flat versus a year ago, and we believe we are now positioned to deliver customer file growth.

Mike Egeck: Ralph. Second, average revenue per customer was down to 7% in the quarter, driven primarily by decreases in big ticket items such as equipment and above ground pools. Our pool per soil tea customers outperformed, with transactions of 2%, and average revenue per customer down 4%. Third, with regard to our pro-initiative, we ended the quarter with 4,254 pro-contracts and 108 pro-locations. This compares to 3,704 pro-partner contracts and 98 pro-locations at the end of the fiscal third quarter last year. Pro sales were down 2% for the quarter, a sequential improvement from down 8% in the first half, driven by the effectiveness of our pro-partner program.

Speaker Change: Second, average revenue per customer was down 7% in the quarter, driven primarily by decreases in big-ticket items such as equipment and above-ground pools.

Speaker Change: Our Pool Perks loyalty customers outperformed with transactions up 2% and average revenue per customer down 4%.

Speaker Change: Third, with regard to our pro-initiative, we ended the quarter with 4,254 pro-contracts and 108 pro-locations.

Speaker Change: This compares to 3,704 pro-partner contracts and 98 pro-locations at the end of the fiscal third quarter last year.

Speaker Change: Pro sales were down 2% for the quarter, a sequential improvement from down 8% in the first half, driven by the effectiveness of our Pro Partner Program.

Mike Egeck: Fourth, M&A and new-store growth continued to be a meaningful component of our long-term growth algorithm, and we are confident in our long-term store expansion opportunities. Year-to-date, we have opened 13 new stores and expect open to additional stores in fiscal 2024. While we continue to build a pipeline of store expansion opportunities, our highest capital allocation priority remains strengthening our balance sheet.

Mike Egeck: Fourth, M&A and new store growth continue to be a meaningful component of our long-term growth algorithm, and we are confident in our long-term store expansion opportunities. Year to date, we have opened 13 new stores and expect to open two additional stores in fiscal 2024. While we continue to build the pipeline of store expansion opportunities, our highest capital allocation priority remains strengthening our balance sheet. The Smart Device and Associated Membership Program is resonating strongly with customers as it gives them industry-leading testing capabilities and step-by-step instructions to maintain a clean, safe, and beautiful pool without having to leave their home, all powered by the expertise garnered from more than 50 million water tests. Although AccuBlue Home is still in its early stages of adoption, we remain excited about its future and continue to scale production.

Speaker Change: Fourth, M&A and new store growth continue to be a meaningful component of our long-term growth algorithm, and we are confident in our long-term store expansion opportunities.

Speaker Change: Year-to-date, we have opened 13 new stores and expect to open two additional stores in fiscal 2024.

Speaker Change: While we continue to build the pipeline of store expansion opportunities, our highest capital allocation priority remains strengthening our balance sheet.

Mike Egeck: Finally, we continue to be encouraged by the adoption and positive member response to our Acubu home smart tech water testing device. The smart device and associated membership program is resonating strongly with customers as it gives them industry-leading testing capabilities and step-by-step instructions to maintain a clean, safe, and beautiful pool without having to leave their home, all powered by the expertise garnered for more than 50 million water tests. We consistently get five-star reviews, and our members continue to spend at a rate of more than $1,000 per year. Although Acubu home is still in its early stages of adoption, we remain excited about its future and continue to scale production.

Speaker Change: Finally, we continue to be encouraged by the adoption and positive member response to our AccuBlue Home smart tech water testing device.

Speaker Change: The Smart Device and Associated Membership Program is resonating strongly with customers as it gives them industry-leading testing capabilities and step-by-step instructions to maintain a clean, safe, and beautiful pool without having to leave their home, all powered by the expertise garnered from more than 50 million water tests.

Speaker Change: We consistently get five-star reviews, and our members continue to spend at a rate of more than $1,000 per year.

Speaker Change: Although Akibu Home is still in its early stages of adoption, we remain excited about its future and continue to scale production.

Scott Bowman: I will now hand it over to Scott to discuss our results and that look in more detail. Scott? Thank you, Mike.

Speaker Change: I'll now hand it over to Scott to discuss our results and outlook in more detail. Scott. Thank you, Mike, and good afternoon, everyone. I'd like to remind everyone that my comments on our quarterly performance are on a year-over-year basis, unless otherwise indicated.

Scott Bowman: Thank you, Mike, and good afternoon, everyone. I'd like to remind everyone that my comments on our quarterly performance are on a year-over-year basis unless otherwise indicated. Comparable sales decreased 7%, and non-comparable sales contributed $2.6 million in the quarter. With respect to trends by consumer group, sales for the residential pool declined 8%, pro pool declined 2%, and residential hot tub declined 4%.

Scott Bowman: Good afternoon, everyone. I'd like to remind everyone that my comments on our quarterly performance are on a year-over-year basis unless otherwise indicated. As Mike mentioned, this has been an unusual year in our performance has been affected by several factors, which led to our July 17 revised outlook. For this reason, we add additional bridges in our earning presentation that we don't normally include to provide more detail in our adjusted EBITDA performance. As you can see in the bridges, our challenge has been volume-related. This was due to traffic challenges by a combination of weather, the macro environment, and the ongoing normalization of industry demand.

Scott Bowman: As Mike mentioned, this has been an unusual year, and our performance has been affected by several factors which led to our July 17th revised outlook.

Speaker Change: For this reason, we add additional bridges in our earnings presentation that we don't normally include to provide more detail on our Adjusted EBITDA performance.

Speaker Change: As you can see in the bridges, our challenge has been volume related. This was due to traffic challenges by a combination of weather, the macro environment, and the ongoing normalization of industry demand.

Scott Bowman: For the fiscal third quarter, we reported total sales of $570 million, a decrease of 7% driven primarily by unfavorable weather and continued weakness in discretionary product sales. Comparable sales decreased 7%, and non-comparable sales contributed $2.6 million in the quarter. With respected trends by consumer group, sales for residential pool declined 8%, pro pool declined 2%, and residential hot tub declined 4%.

Speaker Change: For the fiscal third quarter, we reported total sales of $570 million, a decrease of seven percent, driven primarily by unfavorable weather and continued weakness in discretionary product sales.

Speaker Change: Comparable sales decreased 7% and non-comparable sales contributed 2.6 million in the quarter.

Speaker Change: With respect to trends by consumer group, sales for residential pool declined 8%, pro pool declined 2%, and residential hot tub declined 4%.

Scott Bowman: We were encouraged by the strong sequential improvement in pro pool sales in residential hot tub sales in the quarter.

Speaker Change: We were encouraged by the strong sequential improvement in pro pool sales in residential hot tub sales in the quarter.

Scott Bowman: Carter. There are two factors to note when looking at our sales for the quarter versus the prior year. First, as previously discussed in our second quarter call, the fiscal third quarter this year ended on June 29th versus July 1st last year. And as a result, we lost two high volume selling days during the core pool season and gained two lower volume selling days at the end of March in early April. The resulting negative sales impact of the shift was approximately $7 million or 120 basis points in the quarter. Second, our June 2023 chemical price actions were an approximate 230 basis point headwind in the quarter.

Scott Bowman: First, as previously discussed in our second quarter call, the fiscal third quarter of this year ended on June 29th versus July 1st last year, and as a result, we lost two high-volume selling days during the core pool season and gained two lower-volume selling days at the end of March and early April. The sequential improvement from the second quarter decline was mainly due to improvements in inventory adjustments. SG&A was $131 million, a reduction of 3% or $5 million as we continue to make solid progress on our cost management initiatives. Suggested EBITDA was $109 million compared to $129 million in the same period last year, and adjusted EBITDA was $63 million compared to $76 million in the same period last year.

Speaker Change: There are two factors to note when looking at our sales for the quarter versus the prior year.

Speaker Change: First, as previously discussed in our second quarter call, the fiscal third quarter this year ended on June 29th versus July 1st last year, and as a result, we lost two high-volume selling days during the core pool season and gained two lower-volume selling days at the end of March and early April .

Speaker Change: The resulting negative sales impact of the shift was approximately 7 million or 120 basis points in the quarter.

Speaker Change: Second, our June 2023 chemical price actions were an approximate 230 basis point headwind in a quarter.

Scott Bowman: Gross profit was 229 million compared to 252 million in the same period last year, and gross margin rate declined 101 basis points to 40.2%. The year-over-year decline was mainly due to a 112 basis point headwind from the June 2023 chemical price actions and 85 basis point headwind due to the expensing of previously capitalized DC cost, and 46 basis points of delivery, an occupancy cost. This was partially offset by 90 basis points of favorability due to reduction in inventory adjustments and DC cost. This compares to a decline of 464 basis points in the second quarter of fiscal 2024.

Speaker Change: Gross profit was $229 million compared to $252 million in the same period last year, and gross margin rate declined 101 basis points to 40.2%. The year-over-year decline was mainly due to a 112 basis point headwind from the June 2023 chemical price actions.

Speaker Change: an 85-basis point headwind due to the expensing of previously capitalized DC costs and 46-basis points of deleverage on occupancy costs.

Speaker Change: This was partially offset by 90 basis points of favorability due to reduction in inventory adjustments and DC costs.

Speaker Change: This compares to a decline of 464 basis points in the second quarter of fiscal 2024.

Scott Bowman: The sequential improvement from the second quarter decline was mainly due to improvements in inventory adjustments, a favorable mix from a higher percentage of chemical sales, lower delivery on occupancy costs, and a ramp up enchantments of new lower cost inventory. As we look to the fourth quarter, we expect more favorable comparisons as we continue to ship new, lower-cost inventory. We have now fully lapped the June 2023 chemical price actions and as we cycle the higher inventory adjustments and distribution costs that impacted last year's fourth quarter profitability. As GNA was 131 million, the reduction of 3% or 5 million as we continue to make solid progress on our cost management initiatives.

Speaker Change: The sequential improvement from the second quarter decline was mainly due to improvements in inventory adjustments, a favorable mix from a higher percentage of chemical sales, lower deleverage on occupancy costs, and a ramp-up in shipments of new lower-cost inventory.

Speaker Change: As we look to the fourth quarter, we expect more favorable comparisons as we continue to ship new lower-cost inventory.

Speaker Change: We have now fully lapped the June 2023 chemical price actions, and as we cycle the higher inventory adjustments and distribution costs that impacted last year's fourth quarter profitability.

Speaker Change: SG&A was $131 million, a reduction of 3% or $5 million as we continue to make solid progress on our cost management initiative.

Scott Bowman: Just a EBITDA was 109 million compared to 129 million in the same period last year, and adjusted that income was 63 million compared to 76 million in the same period last year.

Speaker Change: Adjusted EBITDA was $109 million compared to $129 million in the same period last year. And adjusted net income was $63 million compared to $76 million in the same period last year.

Scott Bowman: Page 9 of our earnings presentation illustrates our Q3 adjusted EBITDA bridge in more detail. Interest expense with 18 million in the quarter approximately flat to the same period last year, and our effective tax rate was 23.8% compared to 26.1% in the same period last year. Adjusted the looted earnings per share was 34 cents compared to 41 cents in the same period last year. The looted weighted average shares outstanding were 185 million. Moving to the balance sheet, we ended the quarter with 784 million outstanding on our secured term loan and no amounts outstanding on our revolving credit facility.

Speaker Change: Page 9 of our earnings presentation illustrates our Q3 adjusted EBITDA bridge in more detail.

Speaker Change: Interest expense was $18 million in the quarter, approximately flat to the same period last year, and our effective tax rate was 23.8% compared to 26.1% in the same period last year.

Speaker Change: Adjusted diluted earnings per share was $0.34 compared to $0.41 in the same period last year.

Speaker Change: The Looted Weighted Average Shares Outstanding were $185 million.

Speaker Change: Moving to the balance sheet, we ended the quarter with $784 million outstanding on our secured term loan and no amounts outstanding on our revolving credit facility. This compares to $792 million on our term loan and $31 million on our revolver in the prior year quarter.

Scott Bowman: This compares to 792 million on our term loan and 31 million on our revolver in the prior year quarter. Overall, our debt levels were 39 million lower than a year ago, and our leverage ratio was 5.7 times. The effective interest rate on our term loan was 8.2% for the quarter compared to 8% in the prior year quarter. Cash and cash equivalents were 74 million at the end of the quarter compared to 19 million for the same period last year.

Speaker Change: Overall, our debt levels were $39 million lower than a year ago, and our leverage ratio was 5.7 times.

Scott Bowman: The effective interest rate on our term long was 8.2% for the quarter compared to 8% in the prior year quarter. Cash and cash equivalents were $74 million at the end of the quarter, compared to $19 million for the same period last year.

Speaker Change: The effective interest rate on our term loan was 8.2% for the quarter compared to 8% in the prior year quarter.

Speaker Change: Cash and cash equivalents were $74 million at the end of the quarter, compared to $19 million for the same period last year.

Scott Bowman: Peter. Inventory ended the quarter at $302 million, the decrease of $134 million or 31% compared to the prior year quarter, even as our in-stock position, service metrics, and net promoter scores remained very strong. Our outlook on today's earnings release remains unchanged from the revised outlook we've provided on July 17th.

Speaker Change: Inventory ended the quarter at 302 million, a decrease of 134 million or 31% compared to the prior year quarter, even as our in-stock position, service metrics, and net promoter scores remained very strong.

Scott Bowman: Our outlook in today's earnings release remains unchanged from the revised outlook we provided on July 17, with sales at the midpoint down 7% and gross margin at approximately 39% compared to 37% in the prior year period. We expect year-over-year gross margin improvement due to the cyclicality of higher DC costs and inventory adjustments in the fiscal fourth quarter last year and the cyclicality of the June 2023 chemical price action. And third, we have seen sequential improvement in discretionary product sales.

Speaker Change: Our Outlook in today's earnings release remains unchanged from the revised Outlook we provided on July 17th.

Scott Bowman: Our fourth quarter sales performance to date is supportive of a revised outlook, inclusive of weather disruptions such as Hurricane Burl and Tropical Storm Debbie. The midpoint of our fourth quarter outlook assumes an extension of Q3 trends through the quarter, with sales at the midpoint down 7%, and gross margin at approximately 39%, compared to 37% in the prior year period. We expect year-over-year gross margin improvement due to the cycling of higher DC cost and inventory adjustments in the fiscal fourth quarter last year in the cycling of the June 2023 chemical price actions. Regarding S-GNA, we expect continued year-over-year improvement in the fourth quarter as we make improvements in our cost structure.

Speaker Change: Our fourth quarter sales performance to date is supportive of a revised outlook, inclusive of weather disruptions such as Hurricane Beryl and Tropical Storm Debbie.

Speaker Change: The midpoint of our fourth quarter outlook assumes an extension of Q3 trends through the quarter.

Speaker Change: with sales at the midpoint down 7% and gross margin at approximately 39% compared to 37% in the prior year period.

Speaker Change: We expect year-over-year gross margin improvement due to the cycling of higher DC cost and inventory adjustments in the fiscal fourth quarter last year and the cycling of the June 2023 chemical price action.

Speaker Change: Regarding SG&A, we expect continued year-over-year improvement in the fourth quarter as we make improvements in our cost structure.

Scott Bowman: We have reduced expenses every quarter this year and will continue our reduction efforts into Fiscal 2025.

Speaker Change: We have reduced expenses every quarter this year and will continue our reduction efforts into fiscal 2025. We expect fourth quarter adjusted EBITDA to be in the range of $51 million to $65 million and adjusted diluted earnings per share to be in the range of $0.06 to $0.12.

Scott Bowman: We expect fourth quarter adjusted EBITDA to be in the range of $51 million to $65 million, and adjusted diluted earnings per share to be in the range of six to 12 cents.

Scott Bowman: Regarding our longer-term outlook, we have seen some recent positive signs. First, the equipment is now back to 2019 unit volumes as we start the fourth quarter. Second, chemical volume for positive been the third quarter in our positive year to date. And third, we have seen sequential improvement in discretionary product sales, specifically in our hot-tubs business.

Speaker Change: Regarding our longer-term outlook, we have seen some recent positive signs.

Speaker Change: First, equipment is now back to 2019 unit volumes as we start the fourth quarter.

Speaker Change: Second, chemical volumes were positive in the third quarter and are positive year-to-date.

Speaker Change: And third, we have seen sequential improvement in discretionary product sales, specifically in our hot tubs business.

Scott Bowman: Although early, these are encouraging signs as we plan for 2025. From a balance sheet perspective, we expect the end of the year with cashing cash equivalents in the range of 75 to 80 million compared to 55 million in the prior year period. We continue to prioritize efforts to improve our cash position in the future in order to enhance liquidity and pay down debt and have identified several initiatives to achieve this goal. First, we have significantly reduced inventory to improve tools in management of our supply chain and continue to see opportunities to make incremental reductions in the future.

Speaker Change: Although early, these are encouraging signs as we plan for 2025.

Speaker Change: From a balance sheet perspective, we expect the end of the year with cash and cash equivalents in the range of $75 to $80 million compared to $55 million in the prior year period.

Scott Bowman: We continue to prioritize efforts to improve our cash position in the future in order to enhance liquidity and pay down debt and have identified several initiatives to achieve this goal. First, we have significantly reduced inventory through improved tools in the management of our supply chain. I will now hand it over to Mike for closing remarks.

Speaker Change: We continue to prioritize efforts to improve our cash position in the future in order to enhance liquidity and pay down debt and have identified several initiatives to achieve this goal.

Speaker Change: First, we have significantly reduced inventory through improved tools in management of our supply chain and continue to see opportunity to make incremental reductions in the future.

Scott Bowman: Second, we have made significant improvements in our cost structure, which we believe will enhance our profitability as we grow sales in a more normalized environment. Third, we have the ability to manage our capital expenditures, especially our growth capex, open above our annual maintenance needs of approximately 20 million.

Speaker Change: Second, we have made significant improvements in our cost structure which we believe will enhance your profitability as we grow sales in a more normalized environment.

Speaker Change: Third, we have the ability to manage our capital expenditures, especially our growth capex, over and above our annual maintenance needs of approximately $20 million.

Scott Bowman: And finally, we continue to evaluate other options to generate additional cash while maintaining our strategic priorities. Moving to capital allocation, our first priority continues to be the pay down of debt, with a longer term goal of reaching a leverage ratio of three times or less. Based on our current outlook, we expect to end fiscal 2024 with a leverage ratio in the range of 5.4 to six times. We also continue to invest to support the business in our strategic store opening plans. Regarding new stores, we have opened 13 locations year to date and planned to open two additional stores by the end of the year.

Speaker Change: And finally, we continue to evaluate other options to generate additional cash while maintaining our strategic priorities.

Speaker Change: Moving to capital allocation.

Speaker Change: Our first priority continues to be the paydown of debt with a longer-term goal of reaching a leverage ratio of three times or less. Based on our current outlook, we expect to end fiscal 2024 with a leverage ratio in the range of 5.4 to 6 times.

Speaker Change: We also continue to invest to support the business in our strategic store opening plans. Regarding new stores, we have opened 13 locations year-to-date and plan to open two additional stores by the end of the year.

Scott Bowman: We are not planning any M&A activity for the remainder of fiscal 2024.

Speaker Change: We are not planning any M&A activity for the remainder of fiscal 2024.

Mike Egeck: I will now hand it over to Mike for closing remarks. Thanks, Scott. To sum up the fiscal year through three fiscal quarters, it has been anything but normal in the pool industry. It is clear the demand correction from the pandemic spike is taking longer than we anticipated. We underestimated the length and magnitude of the correction, which, together with unfavorable weather and a cautious consumer, resulted in our July 17th guidance revision.

Speaker Change: I will now hand it over to Mike for closing remarks.

Scott Bowman: Thanks, Scott.

Mike Egeck: To sum up the fiscal year through three fiscal quarters, it has been anything but normal in the pool industry.

Mike Egeck: It is clear the demand correction from the pandemic spike is taking longer than we anticipated. We underestimated the length and magnitude of the correction, which together with unfavorable weather and a cautious consumer, resulted in our July 17th guidance revision.

Mike Egeck: That said, in current industry dynamics, notwithstanding, we believe the long-term pool industry fundamentals and secular tailwinds that drive industry demand are intact, and that the scale, capabilities, and brand awareness that has made Leslie the advantage leader in pool supplier retail for the past 60 plus years have only been strengthened. We expect a pool industry to normalize, and while we are not there yet, we are seeing positive signs. In the meantime, our teams remain focused on controlling what we can control, including reducing SG&A. SG&A costs are down 7% year to date. Managing inventory; inventory is down 31%, and inventory adjustments are down 45%.

Scott Bowman: That said, in current industry dynamics notwithstanding, we believe the long-term pool industry fundamentals and secular tailwinds that drive industry demand are intact.

Scott Bowman: and that the scale, capabilities, and brand awareness that has made Leslie's the advantage leader in pool supply retail for the past 60 plus years have only been strengthened.

Mike Egeck: We expect the pool industry to normalize, and while we are not there yet, we are seeing positive signs, providing superior customer service, and NPS scores remain at all-time highs. Continuing to execute our strategic initiatives.

Scott Bowman: We expect the pool industry to normalize, and while we are not there yet, we are seeing positive signs.

Scott Bowman: In the meantime, our teams remain focused on controlling what we can control, including reducing SG&A. SG&A costs are down 7% year-to-date. Managing inventory. Inventory is down 31% and inventory adjustments are down 45%.

Mike Egeck: Improving conversion. Conversion is up across all our channels year to date, driven by compelling assortments, competitive pricing, strong in-stock positions, and acutely water testing. Providing superior customer service, NPS scores remain at all-time highs, continuing to execute our strategic initiatives, and improving gross margin through product costing and retail price optimization, and the lapping of our June 2023 chemical price actions. Taken together, we anticipate these actions to yield significant long-term operating margin expansion and drive shareholder value.

Scott Bowman: Improving conversion. Conversion is up across all our channels year-to-date, driven by compelling assortments, competitive pricing, strong in-stock positions, and AccuBlue water testing.

Scott Bowman: Providing superior customer service, NPS scores remain at all-time highs.

Scott Bowman: continuing to execute our strategic initiatives and improving gross margin through product costing and retail price optimization and the lapping of our June 2023 chemical price actions.

Scott Bowman: Taken together, we anticipate these actions to yield significant long-term operating margin expansion and drive shareholder value.

Mike Egeck: I remain confident that when industry demand patterns normalize, we are well prepared to service that demand and capture an increased share of a growing market with improved profitability.

Speaker Change: I remain confident that when industry demand patterns normalize, we are well prepared to service that demand and capture an increased share of a growing market with improved profitability. I will now turn it back to the operator to open the line for questions.

Operator: I will now turn it back to the operator to open the line for questions. Thank you.

Operator: We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. We ask an analyst to format yourself to one question and a follow-up so that others may have an opportunity to ask questions. You may, for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

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

Speaker Change: You may press star 2 if you would like to remove your question from the queue. We ask that analysts limit yourselves to one question and a follow-up so that others may have an opportunity to ask questions. You may...

Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions.

Operator: One moment please, while we pull for questions.

Justin Kleber: Our first question comes from Justin Clever. Beard, please proceed with your question. Yes, thanks. Good afternoon, guys. I appreciate all the incremental disclosures in the deck and script. I thought that was very helpful. First, I would just like to better understand, looking backwards, the shortfall in 3Q versus your prior guidance, whether that is by customer type or by product category. Can you just help us bridge the gap there?

Operator: Our first question comes from Justin Kleber. Baird, please proceed with your question.

justin clever: Our first question comes from Justin Kleber, Baird. Please proceed with your question.

Justin Kleber: Yeah, thanks. Good afternoon, guys. I appreciate all the incremental disclosures in the deck and script. I thought that was very helpful. First, I'd just like to better understand

Justin Lever: Yeah, thanks. Good afternoon, guys. I appreciate all the incremental disclosures in the deck and script. I thought that was very helpful. First, I'd just like to better understand

Justin Kleber: Looking backwards, the shortfall in 3Q versus your prior guidance, whether that is by customer type or by product category, can you just help us bridge the gap there?

Mike Egeck: Yeah, Justin, this is Mike. Thanks for the question. It's a good question. It's not something we covered in the deck. Our Q3 guide was flat for sales, and we came in at down seven. So we're looking at bridging that 7% miss. The transaction miss was driven entirely by traffic. It came in at minus five. April to June traffic improved by 1,300 basis points. During the quarter when this was all going on, we had no significant changes in assortment, no changes in pricing, promotions, staffing, or competition, similar to web digital traffic reporting. Justin, sorry, it's kind of a long answer, but it's an important question.

Mike Egeck: Yes, Justin, this is Mike. Thanks for the question. It's a good question. It's not something we covered at a deck.

Speaker Change: Yeah, Justin, this is Mike. Thanks for the question. It's a good question. It's not something we covered in a deck.

Mike Egeck: Jack. Our Q3 guide was flat for sales, and we came in at down 7. So we're looking at bridging that 7% miss. Underneath that, flat guide was our assumption of transactions plus 4, an average order value minus 4%. Actual average order value came in at minus 5%, so that's a one point of the miss driven by lower sales of equipment and high-ticket discretionary products. Actual transactions were down 2%, so that's a six-point miss from our guide and most all of the total miss. The transaction miss was driven entirely by traffic. Conversion was nicely positive for the quarter.

Speaker Change: Our Q3 guide was flat for sales, and we came in at down 7. So we're looking at bridging that 7% miss.

Speaker Change: Underneath that flat guide was our assumption of transactions plus four and average order value minus four percent.

Speaker Change: Actual average order value came in at minus 5%, so that's a one point of the miss driven by lower sales of equipment and high ticket discretionary products.

Speaker Change: Actual transactions were down 2%, so that's a 6-point miss from our guide, and most all of the total miss.

Speaker Change: The transaction miss was driven entirely by traffic. Conversion was nicely positive for the quarter.

Mike Egeck: To hit our guide, you need traffic to be up 1%. It came in at minus 5, which is again the 6% difference we're bridging. We believe the decreases in traffic is some combination of weather, cautious consumer dealing with inflation and high interest rates, and ongoing pool industry normalization. And as much as I'd like to not be talking about weather, and to be clear, we do not think the challenges we're seeing are all over there, but the difference in Europe or traffic for April, May, and June are striking. April to June, April to June traffic improved 1,300 basis points.

Speaker Change: To hit our guide you need traffic to be up 1%.

Speaker Change: It came in at minus 5, which is, again, the 6% difference we're bridging.

Speaker Change: We believe the decreases in traffic is some combination of weather, cautious consumer dealing with inflation and high interest rates, and ongoing pool industry normalization.

Speaker Change: And as much as I'd like to not be talking about weather, and to be clear, we do not think the challenges we're seeing are all weather.

Speaker Change: But the difference in year-over-traffic for April , May, and June are striking.

Speaker Change: April to June traffic improved 1,300 basis points.

Mike Egeck: May to June traffic improved 600 basis points, and June foot traffic was positive overall. During the quarter when this was all going on, we had no significant changes in assortment, no changes in pricing, promotions, staffing, or competition. So the only real change that we saw was a warm and dry June after a cold April and a very wet May.

Speaker Change: May to June traffic improved 600 basis points.

Speaker Change: and june foot traffic was positive overall

Speaker Change: During the quarter when this was all going on, we had no significant changes in assortment, no changes in pricing, promotions, staffing, or competition.

Speaker Change: So the only real change that we saw was a warm and dry June after a cold April and a very wet May.

Mike Egeck: So that's how we're thinking about bridging the mist of guidance. I'll add one other comment because the follow-up question and question typically get when we talk about traffic is, do you think you're losing share? And I want to be clear, we do not believe we are losing share. We're basing that on the BNA credit card data, the SimilarWeb digital traffic reporting comparing our growth over a two-year period with other pool industry public companies and discussions with our vendors.

Speaker Change: So that that's how we're thinking about bridging the mystic guidance. I'll add one other comment because the follow-up question

Speaker Change: We typically get when we talk about traffic is, you know, do you think you're losing share? And I want to be clear, we do not believe we are losing share, and we're basing that on the BNA credit card data, the similar web digital traffic reporting.

Speaker Change: comparing our growth over two -year period with pool other pool industry public companies

Mike Egeck: So just sorry, it's kind of a long answer, but it's an important question, and I think it needed a full sum response. So thanks.

Speaker Change: and discussions with our vendors.

Speaker Change: So...

Speaker Change: Justin, sorry it's kind of a long answer but it's an important question and I think it needed a fulsome response so thanks.

Justin Kleber: Oh, that's appreciate all the color, thanks for that. And then a question on gross margin: you mentioned 40% when you were kind of walking through your long-term targets, 41%, 40% below where you were pre-COVID, around 41%. So I assume occupancy as a percentage of revenue is still below 2019. So I'm trying to understand the headwind versus 19, that would prevent the business from returning to 41% over time as opposed to just 40%. Yeah, I'll start with that in Scott; you can add on. The answer comes down to me. Alex, and with our pro-business growing, that business operates, you know, structurally at a lower margin than our residential business.

Justin: Oh, that's, um, appreciate all the color. Mike, thanks for that. And then a question on gross margin. You mentioned 40%.

Speaker Change: When you were kind of walking through your long-term targets, I guess 40% below where you were pre-COVID, around 41%. So I assume

Speaker Change: Occupancy as a percentage of revenue is still below 2019 so I'm trying to understand the headwinds versus 19 that would prevent the business from returning

Speaker Change: to 41% over time as opposed to just 40%.

Speaker Change: Yeah, I'll start with that, and Scott, you can add on. The answer comes down to mix.

Speaker Change: And with our pro-business growing, that business operates structurally at a lower margin than our residential business.

Scott Bowman: Same is true to a lesser degree with our hot tub business, and our digital businesses. The one on an EBITDA basis, are very strong contributors. On a gross margin business, they're slightly underneath our residential businesses as well. So that, the difference between 41 and 40 really has to do with the change in business mix since 2019. Yeah, I just, I'll add on to that, Justin. You know, as we kind of set our size to higher margin targets. You know, some of it, you know, we've already, you know, seen some improvement. So, for example, you know, made some big improvements in inventory adjustments and, you know, DC cost.

Mike Egeck: The same is true to a lesser degree with our hot tub business. And our digital businesses, though on an EBITDA basis are very strong contributors, on a gross margin basis, they're slightly underneath our residential businesses as well. So the difference between 41 and 40 really has to do with the change in business mix since 2019.

Speaker Change: Same is true to a lesser degree.

Speaker Change: with our hot tub business. And our digital businesses, the one on a EBITDA basis are very strong contributors. On a gross margin business, they're slightly underneath our residential businesses as well. So that the difference between 41 and 40 really has to do with the change in business mix since 2019.

Speaker Change: Yeah, just I'll add on to that, Justin, you know, as we kind of set our sights to higher no margin targets.

Speaker Change: Yeah, some of it, you know, we've already, you know, seen some improvement. So, for example, you know, made some big improvements in inventory adjustments and, you know, DC costs.

Scott Bowman: And so, you know, that will get a little bit incremental improvement even next year. And we have to new, you know, lower cost inventory flowing through, you know, that'll help us in the future. You know, and I think the other thing is, is just we have better tools, you know, right now than we had. And you know, that's helped lower the DC cost to help lower inventory with those tools, which, you know, lead just to a little better margin than what we would have otherwise. We've also improved some processes in the DC. Just handling inventory and scrap needs some really good changes there, which will pay dividends, you know, in the future.

Speaker Change: and so that will get a little bit incremental improvement even next year and we have some new lower cost inventory flowing through that p'will help us in the future

Speaker Change: You know, and I think the other thing is, is we have better tools, you know, right now than we had and, you know, that's helped lower the DC cost, it's helped lower inventory with those tools, which, you know, leads us to a little better margin than what we would have otherwise.

Speaker Change: We've also improved some processes in the DEC, just handling inventory and scrap. Made some really good changes there, which will pay dividends in the future. So although the structure is different...

Scott Bowman: So, although the structure is different from a business line of business standpoint, we do have a lot of things in our favor as well. You know, just the things that I mentioned, you know, the bigger scale that we have, the relationships with our suppliers. And so, you know, as we kind of go to each of those, we definitely see some improvement from where we are today.

Speaker Change: From a line of business standpoint, we do have a lot of things in our favor as well.

Speaker Change: The things that I mentioned, you know, the bigger scale that we have, the relationships with our suppliers. And so, you know, as we kind of go through each of those, we definitely see some improvement from where we are today.

Justin Kleber: Frank, well, I appreciate all that color, guys. Thank you, and best of luck. Thanks.

Justin Kleber: Great. Well, I appreciate all that color, guys. Thank you and best of luck.

Justin Kleber: Thanks, Justin.

Speaker Change: Great. Well, I appreciate all that color, guys. Thank you, and best of luck.

Jonathan Matuszewski: Our next question comes from Jonathan, much, much riskier with this case. Please proceed with your question. Great. Good afternoon, everyone. Looks like your full perks, loyalty customers outperformed this quarter. Transactions often an average revenue per customer, not down as much as the active file. So, just wanted to zoom out a little bit. Is this spread your scene with your loyalty members versus nonmembers consistent with, you know, years ago? I think it used to be around the, you know, the spending double. And maybe you could just update us on where loyalty penetration is today and the playbook to move that higher.

Jason: Thanks. Thanks, Justin.

Speaker Change: Our next question comes from Jonathan Matuszewski.

Speaker Change: Please proceed with your question.

Jonathan Matuszewski: Great. Good afternoon, everyone. Looks like your Fool Perks loyalty customers outperformed this quarter transactions up in average revenue per customer.

Speaker Change: Not down as much as the active file. So, just wanted to zoom out a little bit. Is the spread you're seeing with your loyalty members?

Speaker Change: versus non-members consistent with, you know, years ago. I think it used to be around, you know, them spending double. And maybe you could just update us on where loyalty penetration is today and the playbook to move that higher. That's my first question, thanks.

Jonathan Matuszewski: That's my first question.

Mike Egeck: Thanks. Yeah, thanks for the question, Jonathan. The, you know, the pool perks members have consistently outperformed non pool perks members since we introduced the program. Typically, they're doing about twice the volume that had come down a little bit during the kind of spike in industry demand. And as we brought new customers on, but it's not settled in a very, in a very similar range.

Speaker Change: Yeah. Thanks for the question, Jonathan.

Speaker Change: The Pool Perks members have consistently outperformed non-Pool Perks members since we introduced the program.

Speaker Change: Typically they're doing about twice the volume that had come down a little bit during the kind of spike in industry demand and as we brought new customers on but it's now settled in in a very in a very similar range.

Mike Egeck: Page. And from a transaction standpoint, loyalty customers are about 75, a little bit more of our transaction total. But overall, when you look at it, yeah, pool perks, just like our pro partner partners in the pro business, outperform, and we're very focused on continuing to add and grow to that file given the returns we get from both the pool perks members and the pro partner members. That's a helpful thing.

Mike Egeck: And from a transaction standpoint, loyalty customers are about about 75, a little bit more of our transaction total. Partners in the pro business outperform, and we're very focused on continuing to add and grow to that file given the returns we get from both the pool perks members and the pro partners.

Speaker Change: And from a transaction standpoint, loyalty customers are about 75, a little bit more of our transaction total.

Speaker Change: But, overall, when you look at it, yeah, Pool Perk's just like our pro partner.

Jonathan Matuszewski: partners in the pro business outperform and we're very focused on continuing to add and grow to that file given the returns we get from from both the pool perks members and the pro partner members.

Justin Kleber: That's helpful, thanks. And then I just have a follow-up question.

Jonathan Matuszewski: And then just a follow-up question.

Jonathan Matuszewski: I think you know, leading into pool season last year, you know, there was some talk around, you know, chlorine imports, you know, that didn't have EPA approvals. And, you know, I think you were encouraging consumers, you know, to, you know, not buy those on third party, you know, seller marketplaces. Just wanted to get your updates in terms of, you know, what you're seeing there in terms of pool season 2024 so far, any indications that consumers are increasingly gravitating towards those cheaper alternatives that be helpful. Thanks.

Speaker Change: That's helpful, thanks. And then just a follow-up question.

Justin Kleber: I think, you know, leading into pool season last year, there was some talk about chlorine imports that didn't have EPA approvals. And, you know, I think you were encouraging consumers to not buy those on third-party, you know, seller marketplaces. Just wanted to get your updates in terms of, you know, what you're seeing there in terms of pool season 2024 so far. Any indications that consumers are increasingly gravitating towards those cheaper alternatives?

Speaker Change: I think, you know, leading into pool season last year, you know, there was some talk around, you know, chlorine imports, you know, that didn't have EPA approvals.

Speaker Change: You know, I think you were encouraging consumers, you know, to, to, you know, not buy those on third party, you know, seller marketplaces.

Speaker Change: Just wanted to get your updates in terms of, you know, what you're seeing there in terms of pool season 2024 so far. Any indications that consumers are increasingly gravitating towards those cheaper alternatives? That'd be helpful. Thanks.

Mike Egeck: Yeah, another good question. I'm going to say that Amazon's been a pretty good partner in helping clean up the marketplace from these unregistered chlorine providers. So we're seeing, I'm going to say less impact than we saw in the prior years, but certainly something we keep an eye on and a little bit of whack-a-mole, honestly. They tend to pop up and we point them out to Amazon. And get them removed. So it's an ongoing process, but we don't see it as a significant headwind in this pool season. Thanks so much.

Mike Egeck: That'd be helpful. Thanks. Yeah, another one

Speaker Change: Yeah, another good question. I'm going to say that Amazon's been a pretty good partner.

Speaker Change: in helping clean up the marketplace from these unregistered chlorine providers. So we're seeing, I'm going to say, less impact that we saw in the prior years, but certainly something we keep an eye on.

Speaker Change: A little bit of whack-a-mole, honestly. They tend to pop up, and we point them out to Amazon, and they then get them removed. So it's an ongoing process, but we don't see it as any significant headwind in this pool season.

Katharine McShane: Our next question comes from Kate McChain with Goldman Sachs. Please proceed with your question. Hi, good afternoon. Thanks for taking our questions.

Operator: Our next question comes from Kate McShane with Goldman Sachs. Please proceed with your question.

Speaker Change: Thanks so much.

Speaker Change: Our next question comes from Kate McShane with Goldman Sachs. Please proceed with your question.

Katharine McShane: Our first question was really just on the performance of pro and hot tub versus residential pool. Why the difference there? And if there was any difference in the product mix between chemicals, equipment, and discretionary by the different segments.

Kate Mcshane: Hi, good afternoon. Thanks for taking our questions. Our first question was really just on the performance of pro and hot tub versus residential pool. Why is the difference there? And if there was any difference in the product mix between chemicals, equipment, and discretionary by the different segments?

Mike Egeck: Yeah, great question, Kate. Thank you. The look we're really encouraged by the progress we're seeing on hot tubs. You know, as you know, that was really, really balanced business for us all of last year. And it's still not what we want it to be, but improving nicely. And I think one of the things we're seeing in hot tubs is, you know, low temperatures, unseasonably cool weather, not so much a headwind to hot tubs; wet weather is. And that really kind of hurt the business in May in particular, but in June, when things dried out and back yards were in a position, decks were in a position where we could actually get tubs installed.

Mike Egeck: Look, we're really encouraged by the progress we're seeing on hot tubs. You know, as you know, that was a really, really challenging business for us all of last year. And, and it's still not where we want it to be, but improving nicely.

Speaker Change: Yeah. Great question, Kate. Thank you.

Speaker Change: Look, we're really encouraged by the progress we're seeing on hot tubs, you know, as you know, that was really, really challenged business for us all of last year. And it's still not where we want it to be, but improving nicely. And I think one of the things we're seeing in hot tubs is

Mike Egeck: And I think one of the things we're seeing in hot tubs is low temperatures. Unseasonably cool weather. Not so much a headwind for hot tubs, but wet weather is. For the pro-business, you know, I'm going to say the pro-business is not as impacted by weather, and they pay for that whether it's raining outside or whether it's hot or it's cold or whether they are using their pool or not. So there's a little bit of built-in buffer, if you would, against absolute weather.

Speaker Change: is, you know, low temperatures.

Speaker Change: Unseasonably cool weather. Not so much a headwind to hot tubs. Wet weather is.

Speaker Change: And that really kind of hurt the business in May in particular. But in June , when things dried out, and backyards were in a position, decks were in a position where we could actually get

Mike Egeck: We saw a nice lift in the business. And we're seeing that lift in two ways. We're working, we're working off the order book that we had built up while we weren't able to install tubs, but we're also adding to that order book. And the demand incoming demand flows much, much better. So, despite some of the macro challenges, we're encouraged by what's going on with hot tubs.

Speaker Change: Tubbs installed.

Speaker Change: We saw a nice lift in the business.

Speaker Change: And we're seeing that lift in two ways. We're working off the order book that we had built up.

Speaker Change: While we weren't able to install tubs, but we're also adding to that order book and the demand incoming demand flow is much, much better. So, despite some of the macro challenges, we're encouraged by what's going on with hot tubs.

Mike Egeck: For the pro business, you know, I'm going to say the pro business is not as impacted by weather in the Sun Belt, in particular. You know, when you think about the pro customer, those are pool professionals going out predominantly cleaning pools on a weekly basis, and consumers pay for that monthly. And they pay for that, whether it's raining outside or whether it's hot, or it's cold. Or whether they are using their pool or not. So there's a little bit of a little bit of built-in buffer if you would to absolute weather. The residential business, on the other hand, is most highly correlated to weather and, you know, cool weather.

Speaker Change: For the pro-business, you know, I'm going to say the pro-business is not as impacted by weather.

Speaker Change: In the Sunbelt in particular, when you think about the pro-customer, those are pool professionals going out.

Speaker Change: predominantly cleaning pools on a weekly basis and consumers pay for that monthly.

Speaker Change: and they pay for that whether it's raining outside or whether it's hot or it's cold or whether they are using their pool or not. So there's a little bit of

Mike Egeck: The residential business, on the other hand, is highly correlated to weather. And in cool weather, people aren't using their pools. When it's raining, they're really not using their pools. And in addition to that, they're not burning the chemicals they would in warm and dry weather. So we don't see any shift from DIY to DIFM. We think that's been pretty steady. It's just a little bit of the nuances in how weather impacts each of those categories.

Speaker Change: A little bit of a built-in buffer, if you would, to absolute weather. The residential business, on the other hand, is most highly correlated to weather. And you know, cool weather.

Mike Egeck: Okay, thank you. And is there any difference in trend between like chemicals and equipment by customer with the pro and residential? No, the chemicals aren't.

Mike Egeck: There are people aren't using their pools when it's raining. They're really not using their pools in addition to that. They're not not burning the chemicals they would with warm and dry weather. So part of the make, we don't see any shift from like DIY to D.I.F.M. We think that's been pretty steady. It's just a little bit of the nuances in how weather impacts each of those categories.

Speaker Change: People aren't using their pools when it's raining. They're really not using their pools and in addition to that They're not not burning the chemicals they would with warm and dry weather so

Speaker Change: Part of the make, we don't see any shift from like DIY to DIFM. We think that's been pretty steady. It's just a little bit of the nuances in how weather impact each of those categories.

Katharine McShane: Okay, thank you.

Scott Bowman: And any difference in trend between like chemicals and equipment by customer with the pro and residential? No, the chemical. Go ahead. Sorry. Yeah. Yes. Sorry. I jumped in there. The look we're really encouraged by chemicals, right? They went plus five in the month of June. Our volume volume of chemical sales is now positive for the year when we consider that a real a real inflection point. Very, very pleased to see that equipment has continued to be tough. You know, we're down 15% in the quarter. We're down about 15% for the year. We really think that is indicative of a challenged macro.

Speaker Change: Okay, thank you. And any difference in trend between like chemicals and equipment by customer with the pro and residential?

Mike Egeck: Go ahead. Sorry. Yeah. Yes. Sorry.

Speaker Change: No, the chemicals didn't work.

Speaker Change: Go ahead, sorry. Yeah. Yeah. Sorry, I jumped in there.

Speaker Change: Look, we're really encouraged by chemicals, right? They went plus five in the month of June . Our volume of chemical sales is now positive for the year. We consider that a real inflection point, very pleased to see that.

Speaker Change: Equipment has continued to be tough. You know, we're down 15% in the quarter. We're down about 15% for the year. We really think that is...

Scott Bowman: I mean, we actively see people, you know, trying to conserve money on equipment. And where that's manifesting itself is our equipment sales, like I said, are down 15%, and they're down across residential and pro. And where we're seeing that offset is in equipment parts and services, which ran flat for the quarter. So, so pretty clear to us. People have a problem with their pump. They're looking first to see if they can fix it before they replace it or upgrade it at the moment. And that's we consider that a bit of a short-term situation. And as Scott said, we consider very encouraging that the equipment unit sales have kind of are back to like 2019 levels, which means.

Speaker Change: indicative of a challenged macro.

Speaker Change: I mean, we actively see people, you know, trying to conserve money on equipment. And where that's manifesting itself is our equipment sales, like I said, are down 15 percent, and they're down across residential and pro.

Mike Egeck: I jumped in there the And where we're seeing that offset is in equipment parts and services, which ran flat for the quarter. So, pretty clear to us. And that's, we consider that a bit of a short-term situation. As Scott said, it is very encouraging that the equipment unit sales have kind of are back to the level of 2019. Another big spike we saw in 21 and 22. Looks like it has worked its way through the supply chains for the industry, and they are at a good solid base to start growing from.

Speaker Change: And where we're seeing that offset is in equipment parts and services which ran flat for the quarter. So pretty clear to us.

Speaker Change: People have a problem with their pump. They're looking first to see if they can fix it before they replace it or upgrade it at the moment. And that's, we consider that a bit of a short-term situation. As Scott said,

Scott Bowman: we consideider very encouraging that equipment unit sales have kind of our back to like two thousand and nineteen levels

Scott Bowman: The big spike we saw in 21 and 22 looks like it has worked its way through the supply chains for the industry and are at a good solid base to start growing from again.

Scott Bowman: which means

Scott Bowman: The big spike we saw in 21 and 22 looks like it has worked its way through the supply chains for the industry and are at a good solid base to start growing from again.

Scott Bowman: Thank you.

Steven Forbes: Our next question comes from Stephen Forbes with Guggenheim Securities. Please proceed with your question. Good afternoon, Mike Scott. I wanted to follow up on the share; you're returning to share gains in June commentary. Can you be expand on the breadth of the improvement, whether it's customer or category wise, you saw in June?

Speaker Change: Thank you.

Speaker Change: Our next question comes from Steven Forbes with Guggenheim Securities. Please proceed with your question.

Steven Forbes: Good afternoon, Mike, Scott.

Steven Forbes: I wanted to follow up on the return of the share gains in June commentary.

Steven Forbes: Can you expand on the breadth of the improvement, whether it's customer or category-wise, you saw in June ? And then as you think forward, given the comments around stable pricing, I just wanted to gauge your confidence that price adjustments are sort of behind us.

Mike Egeck: And then, as you think forward, given the comments around stable pricing, you just want to gauge your confidence that price adjustments are sort of behind us as it pertains to sort of the industry backdrop as a whole, or just where you're sort of thinking about pricing as we look out here over the next 12 to 18 months. Yeah, good questions. I'll start with the second part of that on pricing. We have seen there's always some movement in price, and there tends to be more movement in the pro market. But in general, across the first three quarters, we've seen that we would consider relatively stable and rational pricing.

Speaker Change: as it pertains this sort of the industry backdrop as a whole or just where you're sort of thinking about pricing as we look out here over the next twelve to eighteen months

Mike Egeck: Yeah, good questions. I'll start with the second part of that on pricing. We have seen there's always some movement in price, and I would say there tends to be more movement in the professional market. But in general, across the first three quarters, we've seen what we would consider relatively stable and rational price actions or concessions on a go forward basis, looking at price, and we will, we will continue to sit in our traditional price position, which is, you know, we've talked about it's above mass, but right at, if not slightly below specialty.

Speaker Change: Yeah, good question. I'll start with the second part of that on pricing. We have seen always some movement in price. And I would say there's tends to be more movement in the pro market, but in general, across the first three quarters.

Steven Forbes: we've seen what we would consider relatively stable and rational pricing

Mike Egeck: And that's not for any lack of product. There's plenty of inventory of chemicals and equipment for that matter out in the market, but we've seen pricing hold up, which is typical of the industry, right? Typical of the industry pre-pandemic. During the pandemic, there was a lot of movements in price that looks to have all settled down, and so we're encouraged and feel pretty confident. We believe we're beyond having to make any significant price actions or concessions on a go-forward basis. That being said, we monitor websites; we shop competitors every week looking at price, and we will continue to sit in our traditional price position, which is, you know, we've talked about, it's above mass, but right at, if not slightly below specialty.

Steven Forbes: and it's not for any lackof product there's plenty of inventory of chemicals an equipment for that matter out the market but we've seen pricing hold up which is typical of the industry

Speaker Change: Right? Typical of the industry, pre-pandemic. During the pandemic, there was a lot of movements in price. That looks to have all settled down, and so we're encouraged and feel

Speaker Change: You know feel pretty confident. We believe we're beyond You know having to make any significant

Speaker Change: price actions or concessions on a go-forward basis. That being said, we monitor websites, we shop competitors every week.

Speaker Change: Looking at price and we will we will continue to sit in our traditional price position which is you know we've talked about it's above mass but right at if not slightly below specialty.

Mike Egeck: And then in terms of share, you know, we're saying returning the share gains, as we talked about the other quarters. We're always dependent in that the data wasn't aligning with what we were hearing from vendor partners or our stores. So I'm not so sure as a return, as the underlying data now seems to be more reflective of what we were feeling in the business, which was that the industry was down. You know, foot traffic was down, pool use was down, our foot traffic was down, but we didn't feel like we were losing any share. And in this quarter, you know, the Bank of America data that underlies the credit card data that we use lined up with what we were experiencing, as did SimilarWeb data.

Mike Egeck: And then in terms of share, you know, we The underlying data now seems to be more reflective of what we were feeling in the business, which was that the industry was down, foot traffic was down, pool use was down, our foot traffic was down, but we didn't feel like we were losing any share. And in this quarter, the Bank of America data that underlies the credit card data that we use lined up with what we were experiencing, as did similar web data.

Speaker Change: And then in terms of share, you know, we...

Speaker Change: we're seeing returning the share gains

Speaker Change: as we talked about the other quarters.

Speaker Change: we're always of opinion that the data wasn't aligning with what we are hearing from vendor partners or our stores

Speaker Change: So I'm not so

Speaker Change: There is a return as

Speaker Change: The underlying data now seems to be more reflective of what we were feeling in the business.

Speaker Change: Which was that the industry was down

Speaker Change: You know, foot traffic was down, pool use was down.

Speaker Change: our pull our foot traffic was down but we didn't feel like we were losing any share and then this

Speaker Change: and this quarter, you know, the Bank of America data that underlies.

Speaker Change: the credit card data that we use lined up with what we were experiencing asdid similar web data and then the look at the

Mike Egeck: And then, you know, the look at our pool industry public company peers, you know, we think that's a good sign as well that we that we're not losing share, though it's certainly a challenging market. And in terms of, you know, where that shares coming from, that's, you know, it's the same drivers as the top line sales, right? I think the whole industry has a little bit of AOB challenge; ours might be a little heightened through the chemical price actions we took last year. But in terms of traffic, we think the, you know, the pickup and share as just as more people are now using the pools and we have, we have weather that's in line.

Mike Egeck: And then, you know, the look at the Right. I think the whole industry has a little bit of an AOB challenge. Ours might be a little heightened due to the chemical price actions we took last year. But in terms of traffic, we think the, you know, pick-up and share is just as more people are now using their pools, and we have, we have weather that's in line with, you know, we're getting, we're getting our kind of normal, if you would, incremental share capture.

Speaker Change: Our pool industry public company peers, you know, we think that's a that's a good sign as well that we that we're not losing share, though it's certainly a challenging market. And in terms of, you know, where that shares coming from, that's

Speaker Change: You know, it's the same drivers as the top line sales.

Speaker Change: I think the whole industry has a little bit of AOB challenge. Ours might be a little heightened due to the chemical price actions we took last year. But in terms of traffic, we think the pick-up and share is just as more people are now using their pools.

Mike Egeck: You know, we're getting, we're getting our, our kind of normal, if you would, incremental share cap.

Speaker Change: We have weather that's in line, we're getting our kind of normal, if you would, incremental share capture.

Steven Forbes: Richard.

Steven Forbes: And then just a quick follow-up, it might be early. Might I know we talked about this when we caught up in July on just the early buy programs, especially around equipment. Given the performance in the third quarter, just given the backdrop as it stands, right today, can you talk about it? What do you expect the price increases to be this year or decreases, right? Or maybe it's stable, as you said, in the equipment side.

Mike Egeck: And then maybe just a quick follow up. It might, it might be early. Mike, I know we talked about this when we caught up in July on just the early buy program, especially around equipment. As you think about sort of positioning yourself for next year, or if you don't want to expand on all that, just where do you sort of see inventory ending this year?

Speaker Change: And then maybe just a quick follow-up, it might be early, Mike, I know we talked about this when we caught up in July on just the early buy programs.

Speaker Change: especially around equipment.

Mike Egeck: Given the performance in the third quarter, you know, just given the backdrop as it stands right today.

Speaker Change: Can you talk about it, like what do you sort of, what do you expect the price increases to be this year or decreases, right, or maybe it's stable, as you said, in the equipment side, and then what do you really want to hear from the vendor partners?

Mike Egeck: And then what do you really want to hear from the vendor partners as you think about sort of positioning yourself for next year? Or if you don't want to expand on all that, just where do you sort of see inventory ending this year on as? Well, I think we're quite pleased with our inventory management year and feel really good about where we're going to end the year. So no concerns there. In terms of working with our vendor partners on equipment, we're all considering the same things, right? There are cost pressure equipment, like there aren't some other parts of the business.

Speaker Change: As you think about sort of positioning yourself for next year, or if you don't want to expand on all that, just where do you sort of see inventory ending this year on?

Mike Egeck: I think we're quite pleased with our inventory management year and feel really good about where we're going to end the year. So, no concerns there.

Mike Egeck: In terms of working with our vendor partners on equipment, we're all considering the same things, right? There is cost pressure equipment like there are in some other parts of the business, not hurting demand creation with too high a price. And look, the early buy programs aren't out yet. So I can't, can't speak to those. Typically, you know, prices go up each season with the equipment manufacturers. I haven't heard or seen anything that would say it would be different this year, but I do think there's a heightened sense from all of us to make sure that we're not destroying any incremental demand.

Speaker Change: in terms of working with our vendor partners on equipment orre all we're all considering the same things right there

Mike Egeck: But we all need to be very aware of not hurting demand creation with too high of pricing. And look, the early buy programs aren't out yet. So I can't speak to those. Typically, prices go up each season with the equipment manufacturers. I haven't heard or seen anything that would say would be different this year, but I do think there's a heightened sense from all of us to make sure that we're not, you know, not destroying any incremental demand.

Speaker Change: There are cost pressures like there are in some other parts of the business.

Speaker Change: But we all need to be very aware of, you know, not,

Speaker Change: not hurting demand creation with too high of pricing. And look the the early buy programs aren't out yet so I can't can't speak to those.

Speaker Change: Typically, you know, prices go up each season with the equipment manufacturers.

Speaker Change: I haven't heard or seen anything that would say would be different this year, but I do think there's a heightened sense from all of us to make sure that we're not, you know, not destroying any any incremental demand.

Simon Gutton: Thank you.

Speaker Change: to

Mike Egeck: Our next question comes from Sean Elmond with Bank of America. Please proceed with your question. Hi guys. Thank you for taking my question. Just first on the implied sales growth in the fourth quarter, I think it's about down mid single digits. So can you just talk about some of the trends you're seeing quarter to date and how that compares to kind of what you were seeing in June, and then you're laughing the chemical price cuts this quarter. So just what's going to drive in that negative outlook? Yeah, the outlook for Q4 is continuation of the Q3 trends we saw at the midpoint; it's down 7%.

Operator: Our next question comes from Sean Hillman with Bank of America. Please proceed with your question.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Sean Ailman with Bank of America. Please proceed with your question.

Sean Hillman: Hi Guys, thank you for taking my question. Just first, on implied sales growth in the fourth quarter, I think it's about down mid-single digits. So can you just talk about some of the trends you're seeing quarter-to-date and how that compares to kind of what you were seeing in June, and then you're lapping the chemical price cuts this quarter? So just what's kind of driving that negative out?

Sean Ailman: Hi, guys. Thank you for taking my question. Just first, on the implied...

Sean Ailman: Sales growth in the fourth quarter, I think it's about down mid single digits. So can you just talk about some of the trends you're seeing quarter to date, and how that compares to kind of what you were seeing in June , and then you're lapping

Speaker Change: The chemical price cuts this quarter, so just what's kind of driving that negative outlook?

Mike Egeck: Yeah, the outlook for Q4 is a continuation of the Q3 trends we saw. At the midpoint, it's down 7%.

Speaker Change: Yeah, the outlook for Q4 is a continuation of the Q3 trends we saw. At the midpoint, it's down 7%.

Sean Elmond: And there's some things, you know, going on here. The we exited June better than that. The June was one month out of the year, very encouraged by what we saw. And we've seen some of those encouraging trends continue, but, you know, we also want to be very aware of what is still, I would say, a very cautious consumer. Still some unwinding of pandemic demand, which is very hard to very hard the size for us. And then whether, so it's much improved, thankfully. We still got anomalies; we had hurricane since the end of Q3.

Speaker Change: And there's some things, you know, going on there. We exited June better than that.

Mike Egeck: June was one month out of the year that we were very encouraged by what we saw, and we've seen some of those encouraging trends continue. But, you know, we also want to be very aware of what is still, I would say, a very cautious consumer. Still some unwinding of pandemic demand, which is very hard to, and then weather. We were thinking about our Q4 guide and

Speaker Change: The June was one month out of the year, very encouraged by what we saw, and we've seen some of those encouraging trends continue, but, you know, we've also want to be very aware of what is still, I would say, a very cautious consumer.

Speaker Change: Still some unwinding of pandemic demand which is very hard to very hard to size for us.

Speaker Change: and then weather, so it's...

Sean Ailman: It's much improved, thankfully. We've still got anomalies. We've had two hurricanes since the end of Q3. So it's...

Scott Bowman: So it's we were thinking about our Q4 guide is we gave a fairly wide range, given some of the unknowns and some of the shortness of the trend we saw coming out of June, but we haven't seen anything in the quarter performance to date that would tell us we need to do anything with our, that we need to change guidance at all. Okay, got it. And then I think you said on the long-term guidance, you're assuming two to three percent location growth, but seems pretty aggressive. How do you think about using capital on store openings near-term versus paying down the debt, especially considering the recent downgrade?

Sean Ailman: The way we're thinking about our Q4 guide is...

Sean Ailman: You know, we gave a fairly wide range given some of the unknowns and some of the shortness of the trend we saw coming out of June .

Speaker Change: Well, we haven't seen anything in the quarter performance to date that would tell us we need to do anything with our, that we need to change guidance at all.

Mike Egeck: Okay, got it. And then, I think you said in the long-term guidance, you're assuming two to 3% location growth, which seems pretty aggressive. How do you think about using capital on store openings in the near term versus paying down the debt, especially considering the recent downgrade?

Speaker Change: Okay, got it. And then I think you said on the long-term guidance, you're assuming two to three percent location growth, which seems pretty aggressive. How do you think about using capital on store openings near-term versus paying down the debt, especially considering the recent downgrade?

Scott Bowman: Yeah, I can cover that one. Our first priority will continue to be paying down debt. But we still want to grow the business in new stores, but we're going to be doing that at a more moderate pace. So until we can get that leverage ratio closer to three, we'll continue that prioritization to make sure that we're using our extra capital cash flow to pay down the debt as the first priority. Got it, thanks.

Speaker Change: Yeah, I can cover that one. Our first priority will continue to be paying down debt. We still want to grow the business in new stores, but we're going to be

Mike Egeck: You know, doing that at a more moderate pace. So, you know, until we can get that leverage ratio closer to three, we'll continue that prioritization to make sure that, you know, we're using our extra capital cash flow to pay down the debt as the first priority.

Speaker Change: you know, doing that at a more moderate pace. So, you know, until we can get that leverage ratio closer to three, we'll continue that prioritization to make sure that, you know, we're using our extra capital cash flow to pay down the debt, you know, as the first priority.

Simon Gutton: Our next question is from Simon Gutton, with Morgan Stanley. Please proceed with your question. Good afternoon.

Operator: Our next question is from Simeon Gutman with Morgan Stanley. Please proceed with your question.

Speaker Change: Got it. Thanks.

Speaker Change: so

Simeon Gutman: Good afternoon. It's Simeon. How are you doing?

Speaker Change: Our next question is from Simeon Gutman with Morgan Stanley . Please proceed with your question.

Mike Egeck: In terms of chemicals, Mike, you mentioned that chemical volume is up year-to-date. But I don't know if that means it's up for the entire quarter. Can you talk about where chemical pricing is? And broadly, if we ask where prices should be, and I say prices broadly, meaning beyond chemicals, but if chemicals are the bulk of it, where will prices be about a year from now? I know it's a guess, but I'm curious where we could be from here.

Simon Gutton: It's him, Ian Sadoin. On terms of chemicals, Mike, you mentioned, I think chemical volume is up year to date. I don't think; I don't know if it means it's up for the entire quarter. Can you talk about where chemical pricing is and broadly, if we ask where prices should be? And I say prices broadly meaning beyond chemicals, but if chemicals is the bulk of it, where is pricing about a year from now? I know it's a guess, but curious where we could be from here.

Simeon Gutman: Good afternoon. It's Simeon. How are you doing? In terms of chemicals, Mike, you mentioned, I think, chemical volume...

Simeon Gutman: is up year-to-date. I don't know if it means it's up for the entire quarter. Can you talk about where chemical pricing is?

Speaker Change: broadly if we ask where prices should be and i say prices broadly meaning beyond chemicals but if chemicals as the bul of it you know where is pricing about a year from now i know it's a guest but curious where you know where we could be from from here

Mike Egeck: Yeah, good question, Simon. I mean, the chemical volume was up for the quarter, up strongly in June, and has been and trended better sequentially April through May through June, as did traffic with improved weather. So we feel good about where we are with chemicals inflecting, if you would. And we consider chemical volumes being up as a nice data point into share. Share is dollars, but share is also how much chemicals are we putting into the market? And we have sold more chemicals this year than we did last year, despite a challenging top line, and despite the chemical price actions.

Mike Egeck: Yeah, good, good question, Simeon. Chemical volume was up for the quarter. Up strongly in June and has been and trended better sequentially April through May through June, a nice, a nice data point, data point into share, you know, shares dollars, but shares is also, you know, how much chemicals we are putting into the market. And we have sold more chemicals this year than we did last year, despite a challenging top line and despite the chemical price actions.

Simeon Gutman: Yeah, good question, Simeon.

Speaker Change: Chemical volume was was up for the quarter.

Speaker Change: up strongly in June , and has been, and trended better sequentially April through May through June .

Speaker Change: As did traffic with improved weather. So we feel good about where we are with chemicals inflecting, if you would, and we consider, you know, chemical volumes being up as...

Mike Egeck: a nice a nice data employe data point into share

Speaker Change: shares dollars with shares is also we know how much chemicals are we putting into the market and we have sold more chemicals to this year than we did last year to sp despite the challenging top line and despite the chemical price actions so

Mike Egeck: So, we think we're in a good place with chemicals. The discussions with chemical vendors and suppliers really start about now in preparation for next year. From a commodity standpoint, we've seen, you know, chloralcoli, urea, all be pretty stable in terms of input. So we're not counting on any price and taking any incremental price next year, but we also don't think that there will be any price deflation situation with chemicals.

Mike Egeck: So, we think we're in a good place with chemicals. So, we're not counting on any price and taking any incremental price increase next year. But we also don't think that there will be any price deflation situation with chemicals.

Speaker Change: We think we're in a good place with chemicals the

Speaker Change: The discussions with chemical vendors and suppliers really start about now in preparation for next year.

Speaker Change: From a commodity standpoint, we've seen, you know, chlor-alkali, urea, all be pretty stable in terms of inputs.

Mike Egeck: So.

Speaker Change: We're not counting on any price.

Speaker Change: in taking any incremental price next year. But we also don't think that will be any price deflation situation with chemicals.

Mike Egeck: Okay, and then I don't know if you want to answer this because the business had gotten softer in the third quarter, but given the issues that we've seen, it sounds like pricing, normalizing volume, certainly normalizing, should this Q3 be the bottom of this normalization? And again, I know you may be hesitant given we've tried to call this a few times, and it's been a little early, but I guess how shocked would you be if this isn't the bottom for the peak season quarter going forward? Yeah, Simeon, you're right; I'm a little reluctant to call the bottom. I will say there are some we think solid indicators that we might be there.

Simeon Gutman: Okay, and then Yeah, I don't know if, you know, you want to answer this, because, you know, the business had gotten softer in the third quarter, but, You know, given the issues that we've seen, it sounds like pricing, you know, normalizing volume is certainly normalizing.

Simeon Gutman: OK, and then.

Speaker Change: i don't know if you you want to answer this because the business had gotten softer in the third quarter but

Speaker Change: You know, given the issues that we've seen, it sounds like pricing, you know, normalizing volume is certainly normalizing.

Speaker Change: Should this Q3 be the bottom of this normalization? And again, I know you may be hesitant given, you know, we've tried to call this a few times and it's been a little early, but.

Speaker Change: I guess, how shocked would you be if this isn't the bottom for the peak season quarter going forward?

Simeon Gutman: Yeah, Simeon, you're right, I'm a little reluctant to call the bottom. I will say there are some, we think, solid indicators.

Mike Egeck: Chemical sales volume, like we talked about, the equipment unit volumes back to kind of pre-pandemic levels, that's considered a positive. Improving discretionary product sales look still down 10% for the quarter, but nice sequential improvement, and we feel much better about where that part of our business is, and then a flat customer file. You know, we're during 2021, 22, particularly 21 and 22; we had a lot of customers to the file that we ended up calling the one-and-done cohorts. They came in and typically bought chemicals when they may not have been available from other retailers. And, you know, that cohort has worked itself through the files; we feel we're at a nice, you know, stable base there with the file.

Speaker Change: that we might be there.

Mike Egeck: Equipment Unit Volumes back to kind of pre-pandemic levels; actually, consider that a positive. 2021-22, particularly 21 and 22, we had a lot of customers on file that we ended up calling the one and done cohorts. They came in and typically bought chemicals when they may not have been available from other retailers. You know, that cohort has worked its way through the files; we feel we're at a nice, you know, stable base there with the file.

Mike Egeck: Chemical Sales volume like we talked about.

Mike Egeck: Equipment unit volumes back to kind of pre-pandemic levels, actually consider that a positive.

Mike Egeck: improving discretionary product sales, you know, look still down 10% for the quarter, but nice sequential improvement. And we feel much better about where that where that part of our business is. And then a flat customer file. You know, we're during

Mike Egeck: 2021-22, particularly 21 and 22, we add a lot of customers to the file that

Mike Egeck: We ended up calling the one-and-done cohorts. They came in and typically bought chemicals when they may not have been available from other retailers and

Speaker Change: that cohort is work us up through the files we feel we're at a ice in a stable base there with the filees so file cretionary product sales

Mike Egeck: So file, discretionary product sales, equipment unit volumes, and chemical unit volumes all could be indicators, right, of a new base for ourselves and for the industry.

Mike Egeck: So discretionary product sales, Equipment Unit Volumes, and Chemical Unit Volumes, all could be indicators of a new base for ourselves and for the industry. And we're very challenged as retailers to pass those on to consumers. That's what's triggered, you know, our chemical price actions. We weren't seeing the demand response, and we were seeing input from our customers, including our loyalty customers, that we were getting outside of our value band. So...

Mike Egeck: Equipment Unit Volumes and Chemical Unit Volumes.

Mike Egeck: All could be indicators, right, of a new base for ourselves and for the industry.

Mike Egeck: And on chemical pricing, just to go back to your question, you know, in 23, the industry took a lot of chemical cost increases. And we're very challenged as retailers to pass those on to consumers. That's what's triggered, you know, our chemical price actions. We weren't seeing the demand response, and we were seeing input from our customers, including our loyalty customers, that we were getting outside of our value band. So I would say even if we see some improved costing for next year and chemicals, I believe the industry and ourselves included will be focused on recapturing some of the margin that we lost in 23 when we weren't able to pass on the increased costs.

Mike Egeck: and I'm.

Mike Egeck: And on chemical pricing, just to go back to your question,

Mike Egeck: The industry took a lot of chemical cost increases.

Mike Egeck: And we're very challenged as retailers to pass those on to consumers. That's what's triggered, you know, our chemical price actions.

Mike Egeck: We weren't seeing the demand response, and we were seeing input from our customers, including our loyalty customers, that we were getting outside of our value band. So

Mike Egeck: I would say even if we see some improved costing for next year and chemicals, a situation where we would see actual retail price deflation in chemicals.

Mike Egeck: I would say, even if we see some...

Mike Egeck: Improved costing for next year in chemicals. I believe the industry and ourselves included will be focused on recapturing some of the margin that we lost in 23 when we weren't able to pass on the increased costs. That's why I don't see it, you know, being a

Mike Egeck: And that's why I don't see it, you know, being in a situation where we see actual retail price deflation in chemicals.

Mike Egeck: It's a situation where we would see actual retail price deflation in chemicals.

Simon Gutton: Hey, thanks for the answer.

Mike Egeck: We have reached the end of our allotted time for question and three. I would let's turn the floor back over to Mikey Jeff. for closing comments. Thank you, Maria. And I'd like to thank everyone for their interest in the Leslie's. We look forward to talking to you again on our fourth quarter earnings call. Thanks.

Operator: We have reached the end of our allotted time for questions and answers. I would now like to turn the floor back over to Mike Egeck.

Speaker Change: Okay, thanks for the answer.

Operator: We have reached the end of our allotted time for questions and answers. I would now like to turn the floor back over to Michael Egeck for closing comments.

Mike Egeck: Thank you, Maria, and I'd like to thank everyone for their interest in Leslie's. We look forward to talking to you again on our fourth quarter earnings call.

Speaker Change: Thank you, Maria. And I'd like to thank everyone for their interest in Leslie's. We look forward talking to you again on our fourth quarter earnings call. Thanks.

Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Thank you.

Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.