Leslie's, Inc.

Good afternoon and welcome to the second quarter of fiscal 2022 conference call for Lesley 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 then zero on the telephone keypad. As a reminder, this conference call is being recorded and will be available for replay later on the company's website. I will now turn the call over to Caitlin Churchill, Investor Relations. Please go ahead.

Thank you and good afternoon. I would like to remind everyone that comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations. These statements speak as of today and will not be updated in the future if circumstances change. Please review the cautionary statements and risk factors contained in the company's earnings press release and recent filings with the SEC. 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 Lesleys, Inc. is Mike Ejek, 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. Please note that we have posted a brief deck on the Lesleys IR site to supplement our discussion, and we will be referring to specific pages as we present. I'm going to start by highlighting our key results and performance drivers for Q2, and then Steve will walk you through our financial results and increased full-year guidance. Before we get into our results, I want to remind everyone about the Texas freeze in the second quarter last year. In February 2021, an unprecedented cold weather event damaged thousands of pools and pool pads in Texas. This event spiked sales of several product categories, most specifically equipment, parts, and sanitizers. As you will remember, we estimated at the time that the freeze and accompanying spike in demand increased sales in the quarter by approximately 10 million. It is very gratifying for us to be able to report a positive comp in this year's quarter, despite the extraordinary circumstances in Q2 last year. I would like to thank our team for driving these results with superior execution across the organization. For purposes of demonstrating what we believe to be our core underlying performance, we will be noting in our remarks some key metrics excluding the impact of the freeze. I am pleased to report that our Q2 performance continued our streak of record results and illustrates our competitive advantages in serving the non-discretionary annuity-like demand of the aftermarket pool industry. Sales for the quarter increased 19% to a record $228 million, with broad-based strength across our three consumer groups. Residential pool grew 12% for the quarter, residential hot tub grew 70%, and pro pool grew 17%. Comp sales increased 13% for the quarter, and the two-year stack comp for the quarter was 49%. The comp and two-year stack comp for the quarter, excluding Texas, was 20% and 48%, respectively. Gross profit for the quarter was a record $85.6 million, and margin rate expanded 30 basis points. Adjusted EBITDA was $9 million for the quarter as we continued to make investments to grow our business. Moving to the industry backdrop, we continue to see the pool and hot tub industry benefit from strong consumer demand in the quarter. This demand is being fueled by consumers continuing to invest in their homes and backyards, the desire for a healthy outdoor lifestyle, migration to the Sun Belt, a heightened sense of safety and sanitization, and hybrid and work-from-home schedules. We have seen no evidence of these macro trends abating. With regard to inflation, in the quarter, product cost inflation was more than 10%. We passed those costs through and, as is our practice, implemented additional pricing actions to maintain product margin rates. Consumers have accepted the increased retail prices, and we did not see any associated slowdown in demand, as evidenced by our 20% comp for the quarter, excluding Texas. For the full year, we now expect product cost inflation of 10% and remain confident in our ability to both pass costs through and utilize pricing actions to maintain product margins if inflation trends higher. We were pleased with our performance across product categories in the second quarter. However, several categories stood out. Robotic pool cleaner sales increased 64% in the quarter and 172% on a two-year stack. Variable speed pump sales increased 23% in the quarter and 109% on a two-year stack. Heater and heat pump sales grew 20% in the quarter and 104% on a two-year stack. Hot tub sales grew 82% in a quarter and 284% on a two-year stack. And trichlor sales, including chlorine tabs, increased 96% in a quarter and 159% on a two-year stack. On page eight of the deck, we show the first tap results for these same categories. With regard to chlorine tabs, supply remains constrained and retail prices elevated. Over the last two years, our retail price for a 35-pound bucket of tabs has increased from $99 to $199. We get a lot of questions about what happens if chlorine tab pricing reverses and we have price deflation. We do not believe that is likely in the near or medium term, and let me explain why. What consumers commonly refer to as chlorine tabs are actually trichlor tabs. Trichlor is manufactured by combining chlorine caustic soda, and urea. That combination creates trichloriannuals, which are then compacted into tabs. While domestic trichlor capacity was impacted in 2020 and 2021 by the much discussed plant fire, the industry is also facing very tight chlorine supply conditions, which have created corresponding cost increases. Shortage in chlorine has two drivers. The first is structural. In the last 16 months, chlorine capacity in North America has been reduced by about 7%. The second factor is that chlorine is a key component of PVC. Chlorine use in PVC has a higher value than chlorine use in trichlorine manufacturing. The reduction in total chlorine capacity and the growth in PVC manufacturing has caused the amount of North American-sourced chlorine available to U.S. trichlorine manufacturers to decrease by about 20%. The result is that domestic trichlor capacity is tight and falling short of elevated consumer demand. Imported chlorine and trichlor granules can bridge supply to the market. However, both are very expensive due to a combination of tariff costs, anti-dumping duties, and specially handling and transportation costs. In addition, urea, another primary component of trichlor manufacturing, is also experiencing significant cost increases driven by restricted supply and increasing demand. Over the last 12 months, the cost of urea has increased more than fourfold from less than $200 per standard ton to nearly $900 per standard ton. We have summarized the supply and demand situation on page 11 of the deck. Here is the takeaway. Any absolute increase in trichlor supply will need to come from high-cost imports or new domestic capacity utilizing high-cost imported chlorine, and all trichlor manufacturing will be utilizing high-cost urea. Given these challenging supply dynamics and continued robust demand, we believe it is highly unlikely the cost of trichlor and the retail price of chlorine tabs will go down in 2023. We also get a number of questions with regard to how our business model will perform in different macroeconomic conditions. As you can see summarized on page 14 in the deck, over the last two decades, Lesley's has been successful in profitably growing sales in periods of rising interest rates, inflation, housing industry slowdowns, GDP contraction, declines in consumer spending, and reduced pool build rates. In fact, our business model has proven to be durable in all of the macroeconomic conditions that have existed during our 58 consecutive years of growth. And with the addition of Lesley's Connect, a focus on our six strategic growth initiatives and our investments in talent and capabilities, we believe we are better equipped today to grow profitably in challenging macroeconomic conditions than at any other time in our history. Getting back to our Q2 results. Let's walk through the performance of our six strategic growth initiatives. First, our consumer file continues to grow. Total target file growth was 3% in a quarter. We are pleased with this result given the impact of the Texas freeze in Q2 last year. Second quarter 2022 was our 10th straight quarter of strong file growth. We are driving this file growth with digital marketing and we continue to achieve high ROI on our spend. Accordingly, we have now increased our marketing budget for 2022 by more than 30%. The vast majority of this spend will be deployed in our Q3 and Q4. Next, we continue to deepen our relationships with our consumers. Our loyalty program, Lesley's Pool Perks, drove loyalty file growth of 2% in the quarter, despite the comparison against the Texas Freeze last year. The program's key benefits a 5% rewards earn rate and free shipping continue to resonate with consumers. Average revenue per consumer grew 16% in the quarter, driven by pool perks and our segmented and personalized marketing tactics. The growth in average revenue per consumer exceeded the impact of inflation and reflects our growing wallet share. Third, our pro initiatives are driving strong results. During the quarter, we began converting 29 residential stores to our pro format and building out five new pro stores. We expect all 34 new pro locations will be operating prior to pool season and will bring our total pro store count to 79. The pro affiliate program continues to scale. We now have over 2,100 agreements in place and our pro affiliate partner sales grew 43% in a quarter. The new and converted pro locations Our expanding pro-affiliate program and our dedicated Lesley's Pro e-commerce site helped grow our total pro business 17% in the quarter. Excluding the impact of the Texas freeze, our pro business grew 27% in the quarter. Moving to M&A. In the quarter, we closed on the acquisition of Pool City, which operates seven locations in the greater Pittsburgh area. In addition, we have entered into LOIs with two new targeted acquisitions, that we expect to close in our third quarter. We continue to see a wealth of acquisition opportunities amongst the approximately 8,000 independent specialty retailers in the industry, and we will continue to ramp up our acquisition activity. Based on our acquisitions completed year to date, we are increasing our 2022 forecasted sales for our M&A strategic growth initiative from 30 million to 45 million. With regard to our residential white space initiative, we have added three new locations here to date and remain on track to open at least 10 new residential locations in 2022. Finally, AccuBlue Home. As we discussed, shortages of the microchips required for manufacturing version 2.0 has limited production for this pool season. We expect to receive not more than a couple of thousand units, which will be used primarily for additional consumer testing. we are not planning any significant sales for this initiative in 2022. Now I will turn it over to Steve to share more detail on our Q2 financial results and increased fiscal 2022 guidance.