Leslie's, Inc.

Good morning and welcome to the fiscal 2022 third quarter conference call for Leslie'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 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 with Investor Relations. Please go ahead.

Thank you and good morning. 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 to the investor relations section of Leslie's website at ir.lesliespool.com. On the call today from Leslie's Inc. is Mike Ejec, Chief Executive Officer, and Steve Waddell, Chief Financial Officer. With that, I will turn the call over to Mike Ejec. Mike?

Thanks, Caitlin, and good morning, everyone. Thank you all for joining us. And please note that we have posted a deck on the Lesley's IR site to supplement our discussion. I'm going to discuss three things today. Number one, the overview of our Q3 results and underlying performance drivers. Number two, the execution challenges in one of our distribution centers that was the primary driver of our Q3 sales and margin shortfall and the steps we have taken to correct the issue. Number three, supply chain challenges and increased industry promotions, which also impacted results for the quarter. After that, Steve will review in detail our financial results and change and fill your guidance. Our Q3 performance continued our streak of record results, but it fell short of our internal expectations. Our organization and leadership team fully understand that this outcome is not acceptable and that we missed a significant opportunity to serve more customers in the quarter. There is a heightened sense of urgency and accountability across our organization, and we are hyper-focused on the actions necessary to rapidly and sustainably improve our execution. Despite our disappointment in underperforming our expectations, our year-over-year performance illustrates our continued market share growth driven by our competitive advantages in serving the aftermarket pool industry. Sales for the quarter increased 13% to $674 million, with broad-based strength across our three consumer groups. Residential pool grew 7% for the quarter, pro pool grew 17%, and residential hot tub grew 94%. Comp sales increased 7% for the quarter, and the two-year stack comp for the quarter was 27%. Page 15 of the supplemental deck. utilizes third-party credit card data to compare our year-to-date sales performance by quarter versus our competition. As you can see from the chart, we continue to gain share. Gross profit for the quarter was a record $304 million. However, margin rate decreased 250 basis points driven by business mix, product margin headwinds, and DC expense. Adjusted EBITDA was a record $183 million for the quarter. Moving to the industry backdrop, the pool and hot tub industry continued to benefit from strong consumer demand in the quarter, and the secular trends driving that demand remain intact. First, consumers investing in their homes and backyards. Second, the desire for a healthy outdoor lifestyle. Third, migration to the Sun Belt. Fourth, a heightened sense of safety and sanitization. And finally, hybrid and work from home schedules. With regard to inflation, product cost inflation was approximately 8% in the quarter. For Q4, we are now planning product cost inflation to be in the high single digits, and we will continue to manage our suggested retail prices to offset the increased costs. Now I would ask you please turn to page 7 of the supplemental back. Given the noise in our results this quarter, we've included a bridge between our third quarter expectations and our actual performance to help explain the moving parts. As you can see, a significant driver of the sales and margin miss was the result of challenges at our New Jersey DC. We operate six distribution centers in total, and the New Jersey DC fulfills store and digital demand for our Northeast region. The New Jersey DC shipped about 30% fewer units than planned in the third quarter, which resulted in significant store-out of stocks throughout the Northeast and also impacted our ability to serve digital demand in the region. A confluence of factors contributed to the facility's underperformance. First, the Northeast experienced wet and cold weather through April and May, which resulted in a late start to the pool season and concentrated demand into June at an unprecedented level. Concurrently, supply chain disruptions moderated, which resulted in unforeseen levels of vendor shipments and DC receiving. And quite simply, we didn't have the staffing and plan in place to support this combination of factors. As a result of this concentrated demand and unprecedented volume of receipts, we faced operating challenges that significantly impacted our ability to serve customers. As you can see, relative to our expectations, The challenges in our New Jersey, D.C. impacted sales by 35 million and margin by a total of 21 million in the quarter. We reacted quickly to this situation by increasing temporary headcount and adding work shifts. By the second week of July, the facility was back shipping to plan, but it was operating with twice the headcount of the prior year. Increasing headcount in the facility that quickly is highly inefficient. As a result, the facility both underperformed and added cost. The additional expense was approximately $3 million in Q3, and we have planned an additional $7 million for Q4. We are taking action to ensure that we can manage through potential issues like this in the future. Prior to the start of the 2023 pool season, we plan to implement a seven-day-a-week, two-shift operating model for all of our VCs and add additional 3PL partners in specific trading areas, including the Northeast. This will ensure that we have the additional capacity to navigate potential headwinds like this in the future. Outside the impact of the DC, the balance of the business outperformed our internal sales expectations by approximately 14 million. Two other points to note on the bridges on page 7. First, decreases in product margin rate impacted margin by 8 million and a quarter. The decrease consisted primarily of two factors. supply shortages from planned vendor receipts in season that required higher cost substitutes to serve consumer demand, and an increase in industry promotions. Second, the strong sales performance of our lower margin pro and hot tub businesses resulted in an unfavorable mix that drove an $8 million reduction in gross margin for the quarter. This mixed headwind is not new, but in the past, we've been able to counter it with margin growth in each of our businesses. The current macroeconomic and operating environment is challenging. And while we would certainly prefer a more favorable backdrop, our historical performance during challenging times gives us confidence in our future performance. 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 rates of new pool builds. With the addition of Lesley's Connect, the focus on our six strategic growth initiatives, and our investments in talents and capabilities, we believe we are better equipped today to grow profitably in challenging macroeconomic conditions than at any other time in our history. Now let's review the performance of our six strategic growth initiatives in the quarter. The year-to-date contribution of each initiative is also summarized on page 9 of the supplemental deck. First, our consumer file. Total target file growth was minus 1.7% a quarter. The comparison to last year is distorted by outsized file growth in Q3 2021, driven by the pervasive media coverage of the chlorine shortage. Adjusted for that event, file growth was 5.5%. The unadjusted two-year stack was 14% for the quarter. Next, we continue to deepen our relationship with our consumers. Our pool perks loyalty file grew 1% for the quarter and now has 18.7% more members year over year. The program's key benefits, the 5% reward earn rate and free shipping, continue to resonate with our consumers. Average revenue per consumer grew 13.7% in the quarter. 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 finished converting 29 residential stores to our pro format and building five new pro stores. We are now operating 79 total pro stores. Our pro-affiliate program continues to scale. We now have over 2,600 agreements in place, and our pro-affiliate partner sales grew 38% in the quarter. The new and converted pro locations, our expanding pro-affiliate program, and our dedicated Lesley's Pro eCommerce site helped grow pro pool 17% in the quarter. Moving to M&A. In the quarter, we closed on the acquisition of Spring Dance, which operates four residential hot tub locations in the greater Philadelphia area. Shortly after the end of the quarter, we also closed on the acquisition of Tech Sun, which operates six retail pool locations in the greater Houston area. We continue to see a wealth of attractive acquisition opportunities in the industry, and we have entered into two additional LOIs that we expect to close by the end of our fiscal year. With regard to our white space initiative, year-to-date we have opened a total of 14 new store locations and we continue to successfully address underserved markets with targeted digital marketing. Our current store count, including the recent acquired TechSun locations, is 987. Finally, AccuBlue Home. We are scheduled to receive just over 2,000 units of the version 2.0 devices this year. These devices will be used primarily for incremental refinement of our app interface and additional consumer testing. We are not planning for any significant sales from this initiative in 2022. Now I'll turn it over to Steve to share more detail on our Q3 financial results and revised fiscal 2022 guidance.