Leslie's, Inc.

Greetings and welcome to the Lesley's Inc Q2 2023 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star and then zero on your telephone keypad. As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Caitlin Churchill of Investor Relations. Thank you, and you may proceed, ma'am.

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 may 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.leslieschool.com. On the call today from Leslie's is Mike Ejek, Chief Executive Officer, and Steve Waddell, Chief Financial Officer. With that, I will turn the call over to Mike.

Thanks, Caitlin, and good afternoon, everyone. Thank you for joining us today. Please note that we have posted a Q2 2023 earnings deck to the Leslie's IR site. and that we will be referring to certain pages in that deck during our call. I'd like to start by saying that Q2 came in at the low end of our expectations for the top and bottom line, as the performance of our non-comp business only partially offset a return to more normalized pre-pandemic seasonal consumer purchase patterns, as well as unexpected weather headwind. With regard to consumer purchase patterns, the seasonal normalization was anticipated, but not to the degree we saw in the quarter. As a result, it had a more significant impact on comp sales and gross margin. Prior to the pandemic, Q2 historically contributed about 12 to 12.5% of our total year sales, and the first half contributed about 25% of total year sales. However, last year, Q2 2022 represented an outsized contribution of 14.6% of total year sales as pandemic-driven supply chain disruptions and product shortages resulted in consumers buying earlier than normal. We estimate this 210 basis point shift in contribution increased last year's Q2 sales by about 33 million and created a corresponding 14% comp headwind in this year's Q2. With supply chain issues largely behind us and inventory for most products in the pool industry now readily available, We believe we are seeing a return to a more normalized pre-pandemic revenue contribution breakdown with 25% in the first half of the year and 75% in the second half. To be clear, we believe this change in seasonal consumer purchasing behavior is a timing shift and not a reduction in underlying demand for the year. With regard to weather, in Q2 we saw the continuation of challenging weather conditions across the west and southwest. which includes the important California, Arizona, and Nevada markets. As you will recall from our Q1 call, our weather reporting service calculated that weather was a 5% headwind to comps in the first quarter. At the time, we also shared that we were projecting more normalized weather for our fiscal Q2. That prediction proved to be incorrect, and the impact of weather to our Q2 comps was negative 3% or $7 million in the quarter. We are encouraged that in Texas and Florida, where weather followed more normal seasonal patterns, we had double-digit positive comps. Moving to our Q2 results, sales for the quarter decreased 7% to $213 million. First half sales of $408 million decreased 1%. Transactions for the quarter grew 1%, and average order value was down 8%. Our customer file was flat, and average revenue per customer was down 7% in the quarter. By consumer group, pro pool grew 3%, residential hot tub sales decreased 8%, and residential pool sales decreased 9%. Comp sales decreased 14% for the quarter, resulting in a flat two-year stack comp and a three-year stack comp of 35%. The comp for the first half was minus 9%, inclusive of a 4% weather headwind. The two-year comp sales stack was 7%, and the three-year stack was 38%. Gross profit for the quarter was $71 million, and gross margin rate was down 410 basis points. In total, 210 basis points of our gross margin decline was related to deleverage of fixed costs resulting from our comp sales decline. Adjusted EBITDA for the quarter was negative $8 million, and adjusted diluted earnings per share were negative 14 cents. As we noted our investor day in November and during our Q1 earnings call, we expected Q2 and the first half to generate negative comps, reduce gross margin rates, and negative EBITDA. Given that our second quarter and first half results were in line with the low end of the range contemplated by our initial four-year guidance, and that we expect that 75% of our annual performance is in front of us. Our outlook for the full year remains unchanged. Moving to the chart on page nine of the deck. For the quarter, total comp sales were down 31 million, or 14%, due to weather and the shift back to normalized seasonal consumer purchase patterns. Sales for non-discretionary products, xTricor, were down 3 million, or 2% in the quarter. Tricolor sales were down 10 million or 29% in the quarter. As a reminder, tricolor sales were comping against plus 96% in Q2 2022 as customers bought early in anticipation of end-season shortages. Tricolor retail pricing remained stable. Discretionary product sales were down 18 million or 38%. The decrease in discretionary product sales was driven by hot tubs and above-ground pools. as consumer confidence, weather, tax refunds, and interest rates all impacted demand for these high-ticket items. And non-com sales contributed plus $16 million, or 7% to the quarter, driven by the performance of our programmatic M&A initiative and new store builds as we continue to invest in our opportunity for increased location count. Page 10 has the same bridge for the first half. Total comp sales were down 39 million, or 9%, due to a 4% weather headwind, and the normalization of seasonal purchase patterns we believe we are seeing. Non-discretionary product sales, ex-tricolor, were down 8 million, or 3%. Tricolor sales were down 9 million, or 17%. Discretionary product sales were down 22 million, or 25%. And non-comp sales contributed plus 34 million, or 8% of sales in the half. Moving to the industry backdrop, sales across the pool and hot tub industry were down in a quarter. As you can see on page 11 of the deck, third-party aggregated credit card data indicates especially pool retailers experienced a sales decline of 11% in the quarter. This was due to three primary drivers. First, as we discussed concerning our own results, weather was a significant negative factor year over year for key markets. Second, we believe the specialty pool retail industry is experiencing the same shift to normalize seasonal consumer purchase patterns that we are seeing in our business. Third, consumers were less confident based on the challenging macroeconomic backdrop, which included higher interest rates, materially reduced tax refunds, and concerns around the stability of the banking system. Against this backdrop of lower demand, we grew market share again. The competitive advantages derived from our integrated system of physical and digital assets and our associates' strong execution of our diversified growth initiatives drove nearly 500 basis points of sales outperformance in the quarter. Turning now to the performance of our strategic growth initiatives. First, despite the macroeconomic and weather challenges in the quarter, our customer file was flat versus the prior year's quarter. Average revenue per customer was down 7% in the quarter, driven primarily by decreases in big ticket items, specifically hot tubs and above ground pools. The number of loyalty members increased 14% over the prior year's quarter as consumers continue to react favorably to the benefits of our pool perks loyalty program. With regard to our pro initiative, We ended the quarter with more than 3,300 pro contracts in place and completed the conversion of 15 residential stores to our pro format. In addition, we opened two new pro locations in the quarter and remain on track to open a third. We are currently operating 98 pro locations. Pro consumer group sales grew 3% in the quarter with comp sales down 10%. Our pro comps were impacted by the same factors we discussed for our overall business. We also saw some softening in trichlor wholesale prices from certain distributors. Given the 2023 trichlor cost structure and the industry history of rational pro pricing, we expect prices to firm up as we move into pool season. M&A was a strong contributor to the quarter, accounting for 14 million in non-comp sales. Year to date, we have closed on four acquisitions that added 10 locations, and we have another two acquisitions under LOI. Our deal pipeline is robust, and we plan to continue to accelerate this initiative. Regarding residential white space, in the quarter, we opened four new stores, and in April, we were pleased to announce the opening of our 1,000th store, an important and gratifying milestone for our business and team members. For AccuBuild Home, we have received our first production shipments of the version 2.0 device and look forward to launching this initiative later this month. Now, I'll turn it over to Steve to share more detail on our Q2 financial results.