Leslie's, Inc.

For those of you I haven't met, I'm Farah Soy with ICR, and on behalf of the Leslie's team, I would like to welcome everyone joining us today here in Arizona and over the webcast for Leslie's investor meeting. We're thrilled to finally meet many of you in person, and the entire leadership team is excited to discuss Leslie's business and growth strategy with you. Earlier this morning, we released our fourth quarter and full year fiscal 2022 results, as well as our guidance for fiscal 2023. Mike Ejek, our CEO, and Steve Waddell, our CFO, will begin today's discussion with a review of those results and the underlying drivers to the FY23 outlook. Following that discussion, the team will provide more detail on Leslie's, the industry in which it operates, as well as its integrated ecosystem. We'll then have a short break and reconvene at 10 a.m. local time to review our growth strategies before opening it up to Q&A. Following Q&A, for those of us who are with us, we will break for lunch, and then we will convene at the entrance to the conference center to meet the buses that will be departing at noon sharp to bring us to Leslie's office and store tour. The same buses will then leave for the airport at 2 p.m. with a drive time of about a half hour. Before I turn the presentation over to Mike and the team, please review our safe harbor statement on page two of the presentation and in our Form 10-K. Throughout this presentation, we may make certain forward-looking statements that pertain to our future. These statements reflect our current forecasts based on our knowledge of our business today, and we're under no obligation to update these statements. In addition, actual results may differ materially from these expectations due to risks and uncertainties as outlined in our public filings. And with that, Mike.

Thank you, Farrah. Good morning, everyone. Thank you all for joining us, particularly those who have made the trip to join us live in Southdale for what is our first ever Investor Day. I'd like to note that we posted today's earnings and investor deck to Lesley's IR site and that a replay of today's webcast will be available on the site within 24 hours. I'm going to start this morning by highlighting our key Q4 results and accomplishments and then move to the same for our full year performance. Steve will then walk you through our fourth quarter and full year financial results in detail and introduce our fiscal 2023 outlook. After that, we'll move to an investor presentation portion of today's agenda, followed by Q&A. 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 increased 16% to a record $476 million, with broad-based strength across our consumer groups. Residential pool grew 10% for the quarter, Pro pool grew 18% and residential hot tub grew 80%. Comp sales increased 10% for the quarter and the two-year stack comp was 27%. Gross profit for the quarter was a record $217 million and adjusted EBITDA for the quarter was a record $100 million. Two points I'd like to make regarding the Q4 performance. First, due to the outstanding efforts of our supply chain team, our New Jersey Distribution Center performed very well during the quarter, became more efficient as the quarter progressed, and is operating to the standards of our other facilities. Second, as we had anticipated, promotions for the quarter normalized to roughly the same levels we saw in Q4 2019, and the supply and cost of certain specialty chemicals remained a challenge. However, our merchant teams were able to offset the impact of both these factors by implementing select retail price increases across key items in our product assortment and aggressively countersourcing product with new vendors. With these actions, product gross margin increased 16 basis points, and the total gross margin decrease was limited to 30 basis points. Moving to our results for the full year, Fiscal 2022 represented our 59th consecutive year of growth and produced all-time record sales, gross profit, and adjusted EBITDA. Sales for the year grew 16% to a record $1.6 billion. Comp sales were plus 11%, and the two-year stack was 32%. Product cost inflation for the year was approximately 9%. Gross profit for the year grew to a record $674 million. Gross margin for the year decreased 120 basis points. The decrease in gross margin was driven primarily by business mix due to the outperformance of our lower margin pro and hot tub consumer groups. And to a lesser extent, by the challenges we experienced in Q3 with regard to specialty chemical costing, our New Jersey D.C. in the industry promotional cadence. Our Q4 and full-year performance reflects the tremendous efforts and contributions of our associates and vendor partners to meet continued strong consumer demand in the face of the discrete operating challenges arising from what remains an unpredictable and constrained supply chain across many of our product categories. It's also a testament to the organization's ability to continue to execute our growth initiatives at a high level in an increasingly unpredictable macro environment. Throughout 2022, Leslie's and the pool industry benefited from the continuation of strong consumer demand. This demand was driven by the macro trends that accelerated with the onset of the pandemic and were elevated by work from home and hybrid work schedules. Those macro trends which we will discuss in more detail later in the presentation, in combination with three years of strong pool builds, equipment cost inflation driven by innovation, and sanitizer cost inflation have created a pool industry that is significantly larger than it was pre-pandemic. Industry research estimates that over the last three years, 340,000 new pools have been built, and that the industry as a whole has grown approximately 30%. Over that same time period, the competitive advantages derived from our integrated system of physical and digital assets working together with our strategic growth initiatives has resulted in sales growth of 68%, a three-year stack comp of 50%, and meaningful share gains. Slide eight of the deck bridges our fiscal year 2022 sales in two ways. First, by consumer group. Our residential pool grew 10% for the year and contributed 8% of total company growth. Our pro pool group grew 20% and contributed 3% of total growth. And our residential hot tub group grew 80% and contributed 6% of our total growth of 16%. Second, by strategic growth initiative. Our consumer file grew 3% on an adjusted basis for the year. and contributed 1% of total growth. On an unadjusted basis, our consumer file has grown 10% over the last two years and 25% over the last three years. As we've leaned into our digital marketing strategies, drove consistently high ROIs, and capitalized a new customer acquisition driven by our advantaged tricolor in-stock positions. With regards to deeper relationships with our customers, Average revenue per customer grew 22% for the year. Our loyalty file ended the year with 17% more members than the prior year, and loyalty members accounted for 74% of Leslie's transactions. Consumers continue to be drawn to the key benefits of pool perks, a 5% earn rate and free shipping. Our pro initiative continues to deliver strong results. We ended the year with 80 pro locations, and 2,750 pro-partner contracts. I've previously referred to our pro-partners as pro-affiliates. This change in naming convention is purposeful and reflects the input of our pro-customers. They prefer the term partner. For the year, sales to pro-partners increased 45%, and our total pro-business grew 20% for the year and now accounts for 15% of our total sales. but remains a small percentage of the approximately $4.4 billion pro-market. Moving to M&A. For the year, we completed six acquisitions that added 27 locations. Earlier this month, we closed on our first acquisition of fiscal 2023, Splash Pools, which adds five locations across Florida and Louisiana. We continue to see a wealth of acquisition opportunities in the pool and spa industry and continue to be able to acquire good businesses at attractive multiples. With regard to our white space initiative, for the year we built 14 new locations and grew our digital sales and underserved markets by 39%. With the 14 new builds and the acquisition of 27 locations, We ended our fiscal 2022 with 38 net new locations and a total of 990 locations. Finally, with regard to AccuBlue Home, I'm very pleased to be able to say that at the end of our presentation, we're going to show you the production version 2.0 device and announce our commercial launch of the program for pool season 2023. Now I'll turn it over to Steve to discuss our fiscal year 2022 results in more detail and introduce our 2023 outlook.

Thank you, Mike, and good morning, everyone. As you can see from our earnings release, we reported record results for both the fourth quarter and full year fiscal 2022. In the fourth quarter, we performed in line with our outlook and our team recovered nicely from the execution challenges we experienced in the third quarter. Today, I'll review our fourth quarter of fiscal 2022 performance, our performance for the full year of fiscal 2022, our outlook for fiscal 2023, and our capital allocation priorities. And I'll start on slide nine. For the fourth quarter, we reported record sales of 476 million, an increase of 16.3% or 67 million when compared to the fourth quarter of fiscal 2021. Our comparable sales increased 10.2% or 42 million. This increase is on top of our calendar adjusted comparable sales growth of 16.3% in the fourth quarter of fiscal 2021 and represents comparable sales growth on a two-year stack basis of 26.5%. Our non-comparable sales increased by 25 million, driven by six completed acquisitions and 14 new store openings in the last year. We continue to see broad-based strength across our three consumer groups in the quarter, as we generated comparable sales growth of 9% for residential pool, 17% for pro pool, and 13% for residential hot tub. On a two-year stack basis, we generated comparable sales growth on a calendar-adjusted basis of 21% for residential pool, 62% for pro pool, and 32% for residential hot tub. Weather for the full quarter was slightly positive. Gross profit increased 15.5% or 29 million when compared to the fourth quarter of fiscal 2021 and gross margin rate decreased by 30 basis points to 45.7% from 46.0% in the prior year. During the quarter, business mix negatively impacted gross margins by 110 basis points and incremental distribution expense by 25 basis points. Partially offset by higher product margins of 15 basis points, and occupancy and other leverage of 90 basis points. Improved product margins resulted from pricing actions taking during the fourth quarter. Now I'll turn to SG&A. SG&A increased 10.9% or $13 million when compared to the fourth quarter of fiscal 2021 and decreased as a percentage of sales by 140 basis points. While we continue to invest to support our growth, we were disciplined with expense management considering the heightened inflationary environment during the quarter. We estimate inflation during the quarter impacted SG&A by approximately $8 million, primarily related to payroll and digital marketing spend. The current quarter also has an additional $5 million of non-comparable SG&A associated with acquired businesses. We generated record adjusted EBITDA of $100 million, an increase of 21.3%, or $18 million when compared to the fourth quarter of fiscal 2021. Adjusted net income increased to $64 million in the fourth quarter of fiscal 2022, an increase of 27.5% or $14 million when compared to the fourth quarter of fiscal 2021. And adjusted earnings per share were $0.35 in the fourth quarter of fiscal 2022, an increase of 34.6% compared to $0.26 in the prior year. Now let's turn to the full year fiscal 2022 results on slide 10. following are a few highlights. For fiscal 2022, we reported sales of $1.6 billion, an increase of 16.3%, or $219 million when compared to the prior year. Our comparable sales increased 10.6%, or $143 million. This increase is on top of our calendar-adjusted comparable sales growth of 21.2% in fiscal 2021 and represents comparable sales growth on a two-year stack basis of 31.8%. Non-comparable sales increased by 76 million. Gross profit increased 13.2% or 79 million when compared to the prior year. And gross margin rate decreased by 120 basis points to 43.1% from 44.3% in the prior year. During fiscal 2022, gross margins were negatively impacted by business mix and lower product margins related to promotions and higher product costs. This decrease in gross margin was partially offset by distribution, as well as occupancy and other leverage for the full year. Adjusted EBITDA improved by 21 million to 292 million from 271 million in the prior year. For fiscal 2022, our effective tax rate was 23.6%, reflecting a statutory rate of 25%, and discrete benefits related to equity-based compensation awards and research and development credits. Adjusted net income was $176 million in fiscal 2022 compared to adjusted net income of $161 million in the prior year. And adjusted diluted earnings per share was $0.95 in fiscal 2022 and $0.85 in the prior year. Moving to the balance sheet, we finished fiscal 2022 with cash and cash equivalents of $112 million compared to $344 million at the end of fiscal 2021. The reduction in cash and cash equivalents was primarily due to share repurchases, investments in inventory, and higher M&A activity during the year. On inventory, we ended fiscal 2022 with $362 million, flat when compared to the third quarter and up $163 million, or 82% compared to $199 million at the end of fiscal 2021. The increase in inventory is primarily related to equipment, chemicals, and M&A activity. Both the equipment and chemical product categories are non-discretionary in nature, and are not subject to technology or fashion risk. We view our current elevated inventory position as appropriate, given the uncertainty of supply going into fiscal 2023. Our number one priority will be to put the company in a position to meet consumer demand. We also need to see industry supply chains become more predictable. And when we feel we can adequately meet consumer demand and we see an improvement in supply chains, then we will pursue opportunities to reduce inventory. On debt, At the end of fiscal 2022, we had $798 million outstanding on our secured term loan facility, compared to $806 million at the end of the prior year. The applicable rate on our term loan during the fourth quarter was LIBOR plus 250 basis points. Our effective interest rate was 4.3%, and the facility matures in March of 2028. Funded debt less cash totaled $686 million at the end of fiscal 2022. Now let me turn to our outlook for fiscal 2023 on slide 12. In fiscal 2023, we're expecting a more uncertain macroeconomic environment up to and including a recession that will pressure industry sales, margins, and earnings growth. Approximately 80% of our sales are non-discretionary products and services, which will mitigate but not eliminate the impact on our business. In light of the macroeconomic outlook for fiscal 2023, we're providing the following annual outlook. We expect sales of $1,560,000,000 to $1,640,000,000, representing flat to an increase of 5% compared to fiscal 2022. And let's turn to slide 13 to walk through our sales build. At the low end of our outlook, we modeled comparable sales growth of approximately negative 5%, which is comprised of the following. A 5% decline in non-discretionary non-trichlor sales, a 15% decline in trichlor pricing, a 20 percent decline in discretionary sales, and 5 percent inflation on all fiscal 2022 sales. The low end also includes non-comparable sales growth of approximately 75 million. At the high end of our outlook, we modeled flat comparable sales growth, which is comprised of the following. Flat non-discretionary non-trichlor sales, a 10 percent decline in trichlor pricing, a 15 percent decline in discretionary sales, and 5% inflation on all fiscal 2022 sales. The high end also includes non-comparable sales growth of $75 million. And to be clear on trichlor pricing, our intent is to maintain pricing at current levels, as we expect increased trichlor costs across the industry in fiscal 2023. We have not seen recent price decreases. However, we're in a position to remain competitive, and we have the ability to match prices to maintain or grow our market share. So let's turn back to slide 12 and cover the rest of our outlook. We expect gross profit of $667 million to $708 million, which implies a decrease of 35 basis points to flat gross margins when compared to fiscal 2022. While we continue to see opportunities to improve margins in each of our businesses as a result of our structural advantages, we expect continued headwinds on margins from business mix and investments in supply chain in fiscal 2023. We expect adjusted EBITDA of $280 million to $310 million, representing a decrease of 4% to an increase of 6% compared to fiscal 2022. We will continue to aggressively manage operating costs in the current environment while continuing to invest in high return opportunities to drive growth in each of our businesses. We've provided additional drivers on gross margin and adjusted EBITDA on slide 16 for your reference. We expect net income of $131 million to $146 million and adjusted net income of $145 million to $160 million. We expect diluted adjusted earnings per share of 78 cents to 86 cents, representing a decrease of 9% to 18% compared to fiscal 2022. Our outlook assumes an average LIBOR rate on our floating rate debt of 4.8% during fiscal 2023. And our outlook assumes interest expense will be approximately $30 million higher than fiscal 2022. Our outlook also includes a higher effective tax rate of 25%. In combined, interest in taxes negatively impact year-over-year net income by approximately $25 million and EPS by 13 cents per share. We estimate diluted share count of 185 million shares to 187 million shares and our outlook does not factor in any potential share repurchases during fiscal 2023. And finally, on our outlook, I want to remind everyone of the natural seasonality within our business. Our primary selling season occurs during our fiscal third and fourth quarters, which span April through September. We invest in our business throughout the year, including in operating expenses, working capital, and capital expenditures related to our growth initiatives. While these investments drive performance during our primary selling season, they reduce our earnings in cash flow during the first half of our fiscal year. In fiscal 2023, we expect negative comparable sales growth and significant gross margin declines in the first half of the year, given the strength of the comparable periods in fiscal 2022 and fixed cost deleverage from negative comparable sales. We also expect to generate all of our adjusted EBITDA and earnings in the second half of the year. More specifically, early on the first quarter, we expect the following to impact results. In the current quarter, we're experiencing significantly less favorable weather when compared to last year. In Q1 2022, we had a more advantaged tri-core position when compared to others in the industry. And in Q1 2022, we realized higher average retail price increases ahead of larger industry cost increases. But as we step back and look ahead, our growth strategies continue to drive an attractive long-term growth algorithm over time. Our algorithm is supported by industry growth, our differentiated market position, and our unique capabilities. First, sales growth in the mid single digit to high single digit range based on industry growth and our strategies to expand market share. Low double digit EBITDA growth based on stable to positive 25 basis point gross margin increase and SG&A leverage. Earnings growth in the mid to high teens range driven by flat depreciation and amortization, modest reductions in interest expense, and a consistent tax rate. And it's important to note that this range does not include potential redeployment of excess cash back into the business, more aggressive debt pay down, or returning cash to shareholders. On capital allocation, we continue to have a balanced and disciplined approach, and our priorities remain as follows. Our first priority is capital structure. We finished the year in a solid position. We had net debt divided by adjusted EBITDA of 2.3 turns. We had $112 million of cash on hand and a $200 million revolving credit facility. And our first debt maturity is a revolver in 2025. Our second priority is to invest in growth through both capital expenditures and M&A. In fiscal 2022, we deployed $108 million towards acquisitions. We invested $32 million in capital expenditures. Over the last year, we accelerated the pace of M&A and our pipeline of M&A opportunities continues to grow. Our final priority is to return excess cash to shareholders, and in fiscal 2022, we repurchase shares totaling $152 million. For fiscal 2023, our outlook includes M&A investments of $15 million, capital expenditures of $50 million, and no share repurchases. In fiscal 2023, our capital expenditures include $15 million associated with the expansion of tableting capacity at Stellar Manufacturing that we expect to be available for the 2024 pool season. Before I turn it back to Mike, I want to address one item that will be covered in greater detail in our Form 10-K that we expect to file later today. In short, we've identified a material weakness in the internal control related to IT general controls. These controls relate to user access over certain IT systems that support our financial reporting processes. We have not identified any misstatements in the financial statements as a result of these deficiencies. We have taken a number of actions to begin remediation, and we'll consider the material weakness remediated when the applicable controls operate for a sufficient period of time, and we conclude through testing that the controls are operating effectively. We expect remediation to be completed during fiscal 2023. And with that, I'll hand it back over to Mike. Thank you.