Leslie's, Inc.

Good afternoon and welcome to the fourth quarter and fiscal year 2021 conference call for Lesley's Inc. 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 on the telephone keypad. As a reminder, This conference call is being recorded and will be available for replay later today on the company's website. I will now turn the call over to Caitlin Churchill, Investor Relations.

Thank you and good afternoon. I would like to remind everyone that comments made today may include forward-looking statements which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today and will not be updated in the future if circumstances change. Please review the cautionary statements and risk factors contained in the company's earnings press release and recent filings with the SEC. During the call today, management will refer to certain non-GAAP financial measures. A reconciliation between the GAAP and non-GAAP financial measures can be found in the company's earnings press release, which was furnished to the SEC today and posted on the investor relations section of Lesley's website at ir.lesleyspool.com. On the call today from Lesley's Inc. is Mike Ejef, Chief Executive Officer, and Steve Waddell, Chief Financial Officer. With that, I will turn the call over to Mike. Mike?

Thanks, Caitlin, and good afternoon, everyone. Thank you all for joining us. The format and cadence for this call will be a little different than our previous calls. The first thing to note is we have posted a brief deck on the Lesley's IR site. to supplement our scripted comments, and we will be referring you to specific pages as we present. I'm going to start by highlighting our key results and performance drivers for Q4 in the full year. Steve will then walk through our fourth quarter and full year financial results in detail, present our share repurchase program, and introduce our initial guidance for fiscal 2022. Then I'm going to walk through how we bridge our 2021 results to our 2022 guidance. and explain why we believe we are uniquely set up to compete and win given the industry dynamics we see for the year. With that, we'll get started. I'm pleased to report that our Q4 performance resulted in another record quarter and continued the strong results we have delivered throughout the year. Sales for the quarter were a record $409 million. Comp sales increased 16% for the quarter on a shifted calendar basis, and the two-year stack comp for the quarter was 40%. First profit for the quarter was a record $188 million and margin rate expanded 190 basis points. Adjusted EBITDA for the quarter was a record $82 million. Moving to results for the full year, fiscal 2021 represented our 58th consecutive year of growth and produced all-time record sales, margin, and EBITDA. Sales for the year grew 21% to a record $1,343,000,000. Gross profit for the year grew 29% to a record 595 million, and gross margin rate improved 290 basis points. Adjusted EBITDA for the year grew 51% to a record 271 million, and EBITDA rate increased 380 basis points to 20%. In fiscal 2021, we generated 170 million in operating cash flow, up 64% from fiscal 2020, and ended the year with less than two turns of leverage. All this after increasing our investment in CapEx by 40% to support growth. Our commitment to disciplined capital allocation that drives total shareholder return combined with our strong financial position and free cash flow generation and our confidence in our long-term growth prospects are the drivers of the $300 million share buyback authorization we are pleased to announce today. Our Q4 and full-year results reflect the outstanding performance of our associates and vendor partners in managing constrained supply chains to meet strong consumer demand. This is also a testament to the organization's ability to manage a margin in the face of significant cost pressure and to continue to execute our growth initiatives at a high level while operating a direct-to-consumer business in the grip of a global pandemic. Our frontline associates have now been operating under COVID-19 protocols for more than 18 months. Their discipline, diligence, and dedication are a driving force in our performance. Now a few words on the industry. In 2021, the Lesley's business and the pool industry benefited from strong consumer demand. This demand was driven by the macro trends that accelerated with the onset of the pandemic, were further elevated by work from home, and which are showing no signs of slowing. The numbers for pool construction and remodeling are a particularly good sign for us because when a pool is completed, our business of essential maintenance starts and that annuity-like demand continues for the life of the pool. Against this background of robust demand, the competitive advantages derived from our integrated system of physical and digital assets working together with our strategic growth initiatives continue to win share. Our consumer file is showing strong sustained growth. Total target file growth was 15% in the quarter and 18% for the full year. Q4 was our eighth straight quarter of double digit file growth driven by our digital marketing capabilities. We continue to achieve high ROI on our marketing spend and have increased our budget for 2022 by 30% to continue to drive this initiative. Consumers are also responding well to our Lesley's Connect omnichannel capabilities, Opus, Ship from Store, Ship to Store, and Boris. These capabilities allow us to utilize the inventory in our location network to effectively fulfill consumer orders in whatever manner they choose and to increase consumer retention. Lesley's Connect has enabled more than 30% of Lesley's digital orders since launching in February 2021. Our loyalty program, Leslie's Pool Perks, drove loyalty file growth of 14% in the quarter and 18% for the full year, as consumers continue to be drawn to the program's key benefits, a 5% rewards earn rate and free shipping. Our pro initiatives are delivering solid results. The 10 converted and three new pro locations we launched in 2021 continue to outperform, and we plan to convert 25 and built five new locations in 2022. Our pro affiliate program is scaling rapidly. In November, we passed 1,000 plus pro affiliate agreements, and we continue to sign up new affiliates daily. For the year, our pro affiliate partner sales increased 86%. The new and converted pro locations, our expanding pro affiliate program, and our dedicated pro site helped grow our total pro business, which we now define as all of our non-residential B2B business, 42% in the quarter and 44% for the full year. Our pro business now accounts for about 15% of our total sales, but remains a small percentage of the approximately $2.4 billion pro market. Moving to M&A. For the year, we completed three acquisitions that added eight locations and expanded our operations into a 38 state. In October, the first month of our fiscal 2022, we closed on the acquisition of B&L Pools, which operates seven locations in the greater Phoenix area. As we execute our integration playbook, the B&L locations are being rebranded as Leslie's, their assortments are transitioning to the Leslie's model, and we are installing our proprietary AccuBlue water testing system. We continue to see a wealth of acquisition opportunities in the pool and spa industry, and we have staffed up to accelerate our ability to acquire and integrate businesses in 2022. With regard to residential white space, we added 16 new locations in 2021, including residential, pro, and acquired. We ended the year with 952 total locations. With regard to AccuBlue Home, We are encouraged that the initial production of version 1.0 sold out quickly in Q4, and that version 2.0 has completed the prototyping stage. However, we are experiencing deliberate delays in key components, specifically microchips, which are impacting manufacturing. The number of devices we will be able to produce for this pool season is uncertain. Therefore, at this time, we are not planning any significant sales for this initiative in 2022. With regard to corporate governance, we published our inaugural ESG report in the quarter and have started work on our 2021 report. I'm pleased to say that as part of our ESG efforts and in recognition of the contributions of our frontline associates, We have raised our minimum starting wage for Lesley's full-time associates to $15 an hour effective December 26th, 2021. And we have instituted a stock grant program for our store managers. Also of note, our assortment of eco products now numbers more than 1,800 and sales for these products grew more than 40% in 2021. Now I'd like you to refer to the deck that we posted to the Lesley's IR site. On page six, we bridge our 2021 sales growth in two different ways and also isolate the impact of some specific sales drivers. In the first bridge, we estimate the impact of total industry growth from new pool builds to be 2%. The math we use is 110,000 new in-ground pools across a base of 5.5 million. We estimate that retail price inflation for the year is approximately 8%. The balance of the bridge, 11%, is the sales growth impact driven by our strategic growth initiatives. The second bridge illustrates the sales growth impact from our residential pool, pro pool, and residential hot tub consumer groups. As you can see, we had good growth across all three groups, including our core residential pool consumer. We have fielded a number of questions in previous calls and meetings. with regard to the impact of trichlor, above ground pools, and hot tubs on our total sales growth. On page six, we have broken out the impact for each by both price and volume. I will also add that all three categories experienced acute supply chain disruptions that resulted in unmet demand for 2021. We could have sold more. Moving to page seven, We isolate the sales growth impact from each of our six strategic growth initiatives. As you'll recall from our earlier presentations, we guided that over time, each of these initiatives should contribute 100 to 300 basis points of growth per year. Clearly, our marketing capabilities resulted in an outsized impact from growing our consumer file. Our PRO initiative also outperformed, while deeper relationships, M&A, and residential white space performed within the range we had projected.