Leslie's, Inc.

Good afternoon and welcome to the fourth quarter of fiscal 2023 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, please press star zero on your telephone keypad. As a reminder, this conference 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 to the investor relations section of Leslie's website at ir.lesliespool.com. On the call today from Lesley are Mike Ejek, Chief Executive Officer, and Scott Bowman, Chief Financial Officer. With that, I will turn the call over to Mike.

Thanks, Kaitlin, and thank you all for joining us this afternoon. I hope that everyone had a good Thanksgiving holiday. To start, I'd like to express my sincere appreciation to all of the Lesley's associates whose contributions allowed us to serve our residential pool pro pool, and residential hot tub customers at a consistently high level throughout fiscal 2023. Because of their efforts, the foundation of Leslie's business remained solid. For the year, our brand awareness, in-stock service levels, and corresponding NPS scores were at all-time highs. Our loyalty program grew for the year, and our customer lifetime value also increased. We remain the largest specialty retailer in our industry with unmatched capabilities and clear long-term growth opportunities. And industry credit card data indicates that we gained market share again in fiscal 2023. While our financial results for fiscal 2023 were not what we expected heading into the year, we are well positioned for future success as the pool industry continues to normalize from the temporary challenges of this year's pool season. We entered the fiscal fourth quarter facing three headwinds, which are the same ones that broadly impacted our full fiscal 2023 results. First, unfavorable weather. Second, a macroeconomic environment that resulted in decreased retail chemical pricing and discretionary spend, especially on high ticket items. And finally, customer stockpiling of core sanitizers resulting from three years of supply uncertainty and price inflation. While the latter two factors were largely in line with our expectations for the quarter, weather was better than we originally anticipated and helped us to deliver sales at the high end that were implied for the quarter revenue guidance. Profitability in the quarter fell short of our expectations, driven entirely by gross margin. Gross margin performance was impacted by larger than expected inventory adjustments made after the completion of our annual physical inventory count. Scott will discuss the inventory adjustments in more detail when he goes over our financial results, but they explain the entire delta between our implied fourth quarter guide and our actual gross margin, and are the reason that EPS came at the low end of our guidance range. As we navigated these dynamics, we remained disciplined on costs and reduced fourth quarter SG&A expenses year over year as planned. Drilling down into our Q4 sales performance, total sales were down 9% in the quarter, with residential pool down 9%, pro pool down 5%, and residential hot tub down 17%. We were up against some tough comparisons from the prior year's quarter, when total sales were up 16%, with residential pool up 10%, pro pool up 18%, and residential hot tub up 80%. As weather normalized, traffic improved to down high single digits in the quarter. Total transactions were down 5%, which was also an improvement from down 12% in the third quarter. Average order value was down 4% versus plus 3% in Q3. Equipment sales were down 17%. We saw continued weakness in high ticket discretionary categories, and we had a full quarter's impact of the chemical retail price decreases we implemented in June of this year. Total chemical sales were down 4%. Discretionary product sales were down 23% and contributed roughly half of the quarter's total sales decline. Non-discretionary product sales were down 6%. Across our geographies, sales remained challenged with the exception of Florida, which saw a 3% increase in sales in the quarter and was up 11% for the year. Our analysis of credit card data shows that our sales underperformed the industry by 250 basis points in the quarter, but outperformed the industry by a total of 130 basis points for the year. Turning to our results for the full year, sales of $1.45 billion were down 7%, with comp sales down 11%. Non-comp sales added 4%. Residential pool sales were down 9%. Pro pool sales were flat, and residential hot tub sales were down 6%. Gross margin decreased 530 basis points, driven by the June chemical retail price actions, year-end inventory adjustments, DC costs associated with higher inventory levels, lower rebates based on decreased equipment purchases, and occupancy deleverage. We believe the majority of these headwinds are specific to this fiscal year, and Scott will discuss how we expect these to significantly abate in fiscal 2024. Adjusted EBITDA for the year was 168.1 million, and adjusted diluted earnings per share was 28 cents. In the face of the transitory headwinds this year, the fundamentals of the industry have not changed. New pools continue to be built, and the growing installed base of pools need to be maintained. In addition, we believe the secular tailwinds that drive industry demand remain intact, including ongoing investment in homes and backyards, migration to the Sun Belt and exurbs, pursuit of outdoor lifestyles, increasing attention to safety and sanitization, and the adoption of new technologies. The pool industry has a long track record of consistent growth, and Leslie's has consistently grown faster than the industry. We remain the leading direct-to-consumer pool and spa retailer with scale, capabilities, and brand awareness that our competitors do not have. While our team navigates the current headwinds, we remain focused on executing the strategic initiatives that underpin our competitive advantages and that we expect to continue to drive our success as industry conditions normalize. Turning to our strategic growth initiatives, first, our customer file was down 6% in the quarter and for the full year due to the weather and traffic trends we experienced. Second, average revenue per customer was down 3% in the quarter and 1% for the year, driven primarily by decreases in big ticket items, specifically hot tubs, heaters, and above ground pools. With regard to our pro initiative, we ended the year with more than 3,900 pro contracts in place and completed the conversion of 15 residential stores to our pro format. We currently operate 98 pro locations. Pro sales were flat for the year, which we consider a solid outcome given the overall environment. Tricor pricing was a more pronounced headwind to our pro sales and to overall company gross margin performance, as competition in the distributor channel drove prices down. Tricor pricing now appears to have stabilized. M&A and new store growth remain important initiatives for Leslie's. For fiscal 2023, M&A and new stores drove $60 million in non-comp sales. During the year, we opened 12 new stores and acquired 12 stores and now operate 1,008 total locations. We remain confident in the long-term store expansion opportunity and have identified over 800 opportunities for store densification. We will continue to address each of these opportunities with a buy or build analysis, though we will be prudent with the pace of expansion as we balance store growth with our other capital allocation priorities. For AccuBlue Home, we were excited to launch the program in May and have been very pleased with the consumer response and demand we have seen to date, even with limited marketing. AccuBlue Home member spend is averaging $1,000 per year, and we believe members see value in the experience, as evidenced by an average review rating of 4.8 out of 5 stars. They comment that the program pays for itself and site convenience. greater confidence in our water treatment routine, and overall water quality as core benefits of the program. While demand during the pool season was strong, manufacturing capacity at our third-party vendor limited sales, and we deferred launching our consumer marketing campaign due to insufficient supply. We have worked with our vendor to ramp up production during the off-season to meet our expected 2024 pool season consumer demand. We continue to have confidence in the long-term industry outlook and remain focused on prudently executing our strategic initiatives to capture the opportunities in front of us and extend our industry leadership. At the same time, we are taking actions to improve our near-term performance. Number one, we are pricing based on current market conditions, and after our June price actions, we are at our relative historical price position of slightly above mass and at or slightly below specialty. We expect this positioning to hold for 2024. Number two, we are aggressively managing inventory and expect to reduce our 2024 peak and year-end inventory by approximately 100 million and 50 million, respectively. Number three, we are managing costs throughout the P&L, including utilizing strict ROI criteria on our marketing investments. Number four, we continue to evaluate, develop, and elevate our processes and people to help improve our efficiency. And number five, we are utilizing consumer insight surveys to further improve our understanding of evolving consumer behavior. I will now hand it over to Scott to discuss our results and outlook in more detail. Scott?