Leslie's, Inc. (LESL) Q4 2021 Earnings Report, Transcript and Summary

00:03 Good afternoon, and welcome to the Fourth Quarter and Fiscal Year twenty twenty one 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. [Operator Instructions] As a reminder, this conference call is being recorded and will be available for replay later today on the company's website. 00:35 I will now turn the call over to Caitlin Churchill, Investor Relations.

00:42 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. 01:04 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 Leslie's website at ir.lesliespool.com. 01:31 On the call today from Leslie's, Inc. is Mike Egeck, Chief Executive Officer; and Steve Weddell, Chief Financial Officer. 01:39 With that, I will turn the call over to Mike. Mike?

01:44 Thanks, Caitlin and good afternoon, everyone. Thank you all for joining us. The format and cadence for this call will be a little different than our previous calls. The first thing to note is we have posted a brief deck on the Leslie’s IR site to supplement our scripted comments, and we will be referring you to specific pages as we present. 02:03 I'm going to start by highlighting our key results and performance drivers for Q4 and the full year. Steve will then walk through our fourth quarter and full year financial results in detail, present our share repurchase program, and introduce our initial guidance for fiscal twenty twenty two. And I'm going to walk through how we bridge our twenty twenty one results to our twenty twenty two guidance and explain why we believe we are uniquely set up to compete and win given the industry dynamics we see for the year. 02:33 With that, we'll get started. I’m pleased to report that our Q4 performance resulted another record quarter and continued the strong results we have delivered throughout the year. Sales for the quarter were record four hundred and nine million dollars. Comp sales increased sixteen percent for the quarter on a shift to calendar basis and the two year stack comp for the quarter was forty percent. Gross profit for the quarter was a record one hundred and eighty eight million dollars and margin rate expanded one hundred and ninety basis points. Adjusted EBITDA for the quarter was a record eighty two million dollars. 03:08 Moving to results for the full year, fiscal twenty twenty one represented our fifty eight consecutive year of growth and produced all-time record sales, margin and EBITDA. Sales for the year grew twenty one percent to a record one billion three hundred and forty three million dollars. Gross profit for the year grew twenty nine percent to a record five hundred and ninety five million dollars and gross margin rate improved two hundred and ninety basis points. Adjusted EBITDA for the year grew fifty one percent to a record two hundred and seventy one million dollars and EBITDA rate increased three hundred and eighty basis points to twenty percent. 03:45 In fiscal twenty twenty one, we generated one hundred and seventy million dollars in operating cash flow, up sixty four percent from fiscal twenty twenty and ended the year with less than two turns of leverage. All this, after increasing our investment in CapEx by forty percent to support growth. Our commitment to disciplined capital allocation that drives total shareholder return combined with our strong financial position and free cash flow generation and our confidence in our long-term growth prospects are the drivers of the three hundred million dollars share buyback authorization, we are pleased to announce today. 04:25 Our Q4 and full year results reflect the outstanding performance of our associates and vendor partners in managing constrained supply chains to meet strong consumer demand. This is also a testament to the organization's ability to manage the margin in the face of significant cost pressure and to continue to execute our growth initiatives at a high level, while operating a direct-to-consumer business in the grip of a global pandemic. Our frontline associates have now been operating under COVID-19 protocols for more than eighteen months. Their disciplined diligence and dedication are driving force in our performance. 05:07 Now a few words on the industry. In twenty twenty one, the Leslie’s business and the pool industry benefited from strong consumer demand. This demand was driven by the macro trends that accelerated with the onset of the pandemic. We're further elevated by work from home and which are showing no signs of slowing. The numbers for pool construction and remodeling are a particularly good sign for us, because when a pool is completed, our business of essential maintenance starts and that annuity like demand continues for the life of the pool. Against this background of robust demand, the competitive advantages drive from our integrated system of physical and digital assets, working together with our strategic growth initiatives continue to win share. 05:54 Our consumer file is showing strong sustained growth. Total target file growth was fifteen percent in the quarter, and eighteen percent for the full year. Q4 was our eighth straight quarter of double-digit file growth driven by our digital marketing capabilities. We continue to achieve high ROI on our marketing spend and have increased our budget for twenty twenty two by thirty percent to continue to drive these initiatives. Consumers are also responding well to our Leslie’s Connect omni-channel capabilities BOPIS, ship from store, ship to store and BORIS. These capabilities allow us to utilize the inventory in our location network to effectively fulfill consumer orders in whatever manner they choose and to increase consumer retention. 06:44 Leslie’s Connect has enabled more than thirty percent of Leslie’s digital orders since launching in February twenty twenty one. Our loyalty program, Leslie’s Pool Perks drove loyalty file growth of fourteen percent in the quarter and eighteen percent for the full year. As consumers continue to be drawn to the program's key benefits, a five percent rewards earn rate and free shipping. 7:11 Our PRO initiatives are delivering solid results. And the ten converted and three new PRO locations we launched in twenty twenty one continues to outperform and we plan to convert twenty five and build five new locations in twenty twenty two. Our PRO affiliate program is scaling rapidly. In November, we passed one thousand plus PRO affiliate agreements and we continue to sign up new affiliates daily. For the year, our PRO affiliate partner sales increased eighty six percent. The new and converted PRO locations are expanding PRO affiliate program and our dedicated PRO site help grow our total PRO business, which we now define as all of our non-residential B2B business, forty two percent in the quarter and forty four percent for the full year. Our PRO business now accounts for about fifteen percent of our total sales, but remains a small percentage of the approximately two point four billion dollars PRO market. 08:14 Moving to M&A. For the year, we completed three acquisitions that added eight locations and expanded our operations into a thirty eight state. In October, the first month of our fiscal twenty twenty two, we closed on the acquisition of B&L Pools, which operates seven locations in the Greater Phoenix area. As we execute our integration playbook, the B&L locations are being rebranded as Leslie’s. Our assortments are transitioning to the Leslie’s model, and we are installing our proprietary AccuBlue water testing system. We continue to see a wealth of acquisition opportunities in the pool and spa industry, and we have staffed up to accelerate our ability to acquire and integrate businesses in twenty twenty two. 9:02 With regard to residential whitespace, we added sixteen new locations in twenty twenty one, including residential, PRO and acquired. We ended the year with nine hundred and fifty two total locations. 09:15 With regard to AccuBlue Home, we are encouraged that the initial production of Version of 1.0 sold out quickly in Q4 and Version 2.0 has completed the prototyping stage. However, we are experiencing deliberate delays in key components, specifically microchips, which are impacting manufacturing. The number of devices we will be able to produce for this pool season is uncertain. Therefore, at this time, we are not planning any significant sales for this initiative in twenty twenty two. 09:51 With regard to corporate governance, we published our inaugural ESG report in the quarter and have started work on our twenty twenty one report. I'm pleased to say that as part of our ESG efforts and in recognition of the contributions of our frontline associates, we have raised our minimum starting wage for Leslie’s full-time associates to fifteen dollars an hour effective December twenty six, twenty twenty one and we have instituted a Stock Grant Program for our store managers. Also note, our assortment of eco products now numbers more than eighteen hundred and sales for these products grew more than forty percent in twenty twenty one. 10:33 Now, I'd like you to refer to the deck that we posted to Leslie’s IR site. On page six, we bridge our twenty twenty one sales growth in two different ways and also isolate the impact of some specific sales drivers. In the first bridge, we estimate the impact of total industry growth from new pool builds to be two percent. The math we use is one hundred and ten thousand new in-ground pools across a base of five point five million dollars. We estimate that retail price inflation for the year was approximately eight percent. The balance of the bridge, eleven percent is the sales growth impact driven by our strategic growth initiatives. 11:18 The second bridge illustrates the sales growth impact from our residential pool – PRO pool and residential hot tub consumer groups. As you can see, we had good growth across all three groups, including our core residential pool consumer. We have fielded a number of questions in previous calls and meetings, with regard to the impact of Trichlor, above ground pools and hot tubs on our total sales growth. On page six, we have broken out the impact for each by both price and volume. I will also add that all three categories experienced acute supply chain disruptions that resulted in unmet demand for twenty twenty one. We could have sold more. 12:02 Moving to page seven, we isolate the sales growth impact from each of our six strategic growth initiatives. As you will call from our earlier presentations, we guided that over time, each of these initiatives should contribute one hundred to three hundred basis points of growth per year. Clearly, our marketing capabilities resulted in an outsized impact from growing our consumer file. Our PRO initiative also outperformed while deep relationships, M&A and residential whitespace performed within the range we had projected. 12:37 AccuBlue Home had… [Technical Difficulty]

13:14 This is the operator. Please hang on as we reconnect Michael Egeck’s line. Michael Egeck, your line is now back in live.

14:38 Thank you. Sorry about that, everyone. I’m not sure why the line dropped. I'm not exactly clear where I stopped. But I'm going to pick up with page seven and my comments on each of the strategic growth initiatives. Clearly, our marketing capabilities resulted in an outsized impact from growing our consumer file. Our PRO initiative also outperformed, while deepen relationships, M&A and residential whitespace performed within the range we have projected. AccuBlue Home had a successful launch, but has not yet contributed meaningfully to sales. We are very pleased with how the initiatives and the team is leading them performed in twenty twenty one. 15:21 Now, I'll turn it over to Steve to share more detail on our financial results, our three hundred million dollars share repurchase program and our twenty twenty two guidance. Steve?

15:32 Thank you, Mike and good afternoon, everyone. As you can see from our earnings release, we reported record results for both the fourth quarter and full year of fiscal twenty twenty one. We're grateful for the contributions of our entire team as they continue to execute at a high level in the current environment. 15:48 Before I get started, I'd like to share a few highlights. Momentum continued throughout the fourth quarter, as we generated a calendar comp on a two year stack basis of forty percent compared to our prior guidance of the low thirties. We again be guidance across the board and finished the year with sales growth of twenty one percent, gross margin improvement of two hundred and ninety basis points, and adjusted EBITDA growth of fifty percent and we ended cash with three hundred and four -- ended the year with cash of three hundred and forty five million dollars. 16:16 We also initiated guidance for fiscal twenty twenty two which reflects double-digit sales and adjusted EBITDA growth, gross margin expansion and earnings growth in the mid to high-teens. This is consistent with or better than our long term growth algorithm. 16:32 And finally, we announced today that we are introducing our first share repurchase program, which includes an authorization for up to three hundred million dollars. Our business generates robust cash flows and even after considering an increase in investment and talent, capital expenditures and M&A for fiscal twenty twenty two. We have excess cash to deploy towards share repurchases. I'll discuss our capital allocation priorities in more detail, but takeaway from this action is that it reflects our confidence in our long term growth prospects. 17:03 Today, I'll review our fourth quarter of fiscal twenty twenty one performance. Our performance for the full year of fiscal twenty twenty one, our guidance for fiscal twenty twenty two and our capital allocation priorities. And before I turn to financial results for the fourth quarter, following as a quick reminder on the calendar shifts, which is consistent with prior quarter disclosures. In fiscal twenty twenty, the fifty third week added approximately eighteen million dollars in sales and three million dollars in adjusted EBITDA. 17:34 Also, as a result of the fiscal twenty twenty having fifty three weeks, there were calendar shifts that impact our quarterly comparisons on a year-over-year basis in fiscal twenty twenty one. In the fourth quarter of fiscal twenty twenty one, we replaced a higher volume week at the end of June with a lower volume week at the end of September. The combination of the fifty third week in the calendar shift negatively impacted fourth quarter comparisons to the prior year, by approximately thirty eight million dollars for sales by approximately eleven million dollars for adjusted EBITDA. I'll discuss the impact of these items on our fourth quarter and full year results as I review comparisons to prior year performance. 18:14 Fourth quarter results, our fourth quarter this year included thirteen weeks ended October two, twenty twenty one. Total reported sales for the thirteen week period increased six point eight percent from the fourth quarter of fiscal twenty twenty, which included fourteen weeks. Our comparable sales growth on a reported or unshifted basis increased ten percent, using a realigned period for twenty twenty for comparability, our comparable sales growth on a shifted basis for the fourth quarter of twenty twenty one increased sixteen point three percent. This increase is on top of comparable sales growth of twenty three point three percent in the fourth quarter of fiscal twenty twenty and represents comparable sales growth in a two year stack basis of thirty nine point six percent. We generated strong results across consumer types and continue to see strong performance in the core sanitizer and equipment product categories during the quarter. 19:08 Retail price inflation remained elevated and primarily related to chemical products, channel management by major equipment manufacturers, higher input costs and promotion management. 19:21 Gross profit increased eleven point three percent and gross margin rate increased by one hundred and ninety basis points from forty six point zero percent from forty four point one percent in the prior year primarily due to product margin improvements across our businesses and occupancy leverage and partially offset by business mix. 19:40 SG&A increased twenty one point six percent driven primarily by our sales increase and investments to support our growth. Drivers of the increase over the prior year included higher equity based compensation, executive transition costs, compensation accruals and other one-time or non-comparable costs, which include public company costs. These increases were partially offset by lower sponsor management fees. 20:05 Adjusted EBITDA increased by two point four percent or one point nine million dollars to eighty two point zero million dollars compared to eighty point one million dollars in the fourth quarter of fiscal twenty twenty. After factoring in the fifty third week in the calendar shift, adjusted EBITDA increased by eighteen point three percent or twelve point seven million dollars when compared to fiscal twenty twenty. 20:27 Adjusted EBITDA on a reported basis as a percentage of sales was twenty point zero percent compared to twenty point nine percent in the prior year period. And adjusted net income increased by fourteen point zero percent or six point two million dollars to fifty point five million dollars compared to forty four point three million dollars in the prior year period. 20:50 Now I'll turn to full year results. Total sales for the fifty two week period increased twenty point seven percent to one point three billion dollars compared to one point one billion dollars in the prior year. Our comparable sales growth on a reported or unshifted basis increased twenty one point five percent. Using a realigned period in twenty twenty for comparability, our comparable sales growth on a shifted basis for fiscal twenty twenty one increased twenty one point two percent. This increase is on top of comparable sales growth of eighteen point zero percent in the prior year and represents comparable sales growth on to two year stack basis of thirty point one percent. 21:26 Gross profit increased twenty nine point two percent to five hundred and ninety five point two million dollars compared to four hundred and sixty point seven million dollars in the prior year. And gross margin rate increased by two hundred and ninety basis points to forty four point three percent primarily due to product margin improvements and occupancy leverage and partially offset by business mix. 21:49 SG&A increased twenty point eight percent to three hundred and eighty six point one million dollars compared to three hundred and fourteen point three million dollars in fiscal twenty twenty. As we disclosed in our earnings release, the net impact of changes in equity based compensation, cost-related to equity offerings, executive transition and other costs, and the change in management fees increased SG&A by approximately twenty nine million dollars in fiscal twenty twenty one, when compared to the prior year. 22:15 Excluding these items that are not indicative of our core operating performance, SG&A increased by forty three million dollars or fourteen percent and as a percentage of sales, SG&A decreased to twenty six point zero percent in fiscal twenty twenty one compared to twenty seven point five percent in the prior year, a decrease of one hundred and fifty basis points. 22:36 Adjusted EBITDA increased by forty eight point zero percent to two hundred and seventy point six million dollars and adjusted EBITDA as a percentage of sales increased three hundred and eighty basis points to twenty point two percent. After factoring in the fifty third week, adjusted EBITDA increased by fifty point six percent or ninety point nine million dollars when compared to fiscal twenty twenty. Adjusted diluted net income per share doubled to zero point eighty five dollars per share compared to zero point forty two dollars per share in the prior year. 23:06 And before I move on, I'll comment on the impact of Trichlor, our primary chlorine-based sanitizer. As shown on slide six of the presentation materials, Trichlor sales grew by seventy million dollars in fiscal twenty twenty one with approximately sixty percent driven by price and forty percent driven by volume. With a more consistent supplier product than others in the industry and we leverage our inventory position to better serve new and existing customers. 23:33 Also, it's important to note that as a result of our efforts to procure and convert more pounds of Trichlor during the year, we did experience an increase in costs related to Trichlor. These cost increases were a key driver of the price component of our Trichlor sales growth in fiscal twenty twenty one. 23:51 Moving to the balance sheet, we finished fiscal twenty twenty one with cash and cash equivalents of three hundred and forty five point one million dollars compared to one hundred and fifty seven point one million dollars at the end of fiscal twenty twenty, an increase of one hundred and eighty eight point zero million dollars. We ended the year with inventory of one hundred and ninety eight point eight million dollars, up thirty three percent compared to one hundred and forty nine point zero million dollars at the end of the prior year. 24:15 We expect inventory conditions in the industry to remain tight throughout fiscal twenty twenty two, particularly for chemicals and equipment. We have an always on procurement strategy at Leslie’s and our team continues to practically work with our vendor partners to manage the flow of inventory as we continue to identify opportunities to strategically invest in inventory to meet heightened consumer demand. As a result, we anticipate our inventory balances to be higher throughout the coming year. 24:42 With regard to debt, at the end of fiscal twenty twenty one, total funded debt was eight hundred and six point zero million dollars compared to one point two billion dollars at the end of fiscal twenty twenty. The three hundred and ninety five million dollars reductions were due to the repayment of our senior unsecured notes, in connection with our IPO and quarterly amortization payments on our outstanding term loan. 25:03 As of fiscal twenty twenty one funded debt divided by adjusted EBITDA totaled three point zero times and net debt divided by adjusted EBITDA totaled one point seven times. During the fourth quarter, our debt rating was upgraded by S&P to BB- from B+ plus and by Moody's to Ba3 from B1. 25:25 Now, let me turn to guidance for fiscal twenty twenty two. Before I get to the guidance figures, 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. In twenty twenty one, the first half of the fiscal year accounted for approximately twenty five percent of our annual sales, while the third quarter represented approximately forty five percent and the fourth quarter represented approximately thirty percent. 25:54 We will continue to invest in our business throughout the year, including an operating expense, working capital, and capital expenditures related to our growth initiatives. While these investments drive performance during our primary selling season, they reduce our earnings and cash flow during the first half of our fiscal year. 26:12 Fiscal twenty twenty two ends on October one, twenty twenty two and includes fifty two weeks. For fiscal twenty twenty two, we're providing the following annual guidance. We expect sales of one thousand four hundred and seventy five million dollars to one thousand five hundred million dollars representing an increase of ten percent to twelve percent compared to fiscal twenty twenty one. This growth rate compares to our long term growth algorithm of mid to high-single digits. Strong industry fundamentals, expected inflation and momentum behind our growth initiatives support our sales guidance. 26:45 Today, we also provided guidance for gross profit. We expect gross profit of six hundred and fifty five million dollars to six hundred and sixty five million dollars, which implies a small improvement to gross margins when compared to fiscal twenty twenty one. This compares to our long term growth algorithm, a flat deposit of twenty five basis points per year and follows two hundred and ninety basis point improvement in gross margins in fiscal twenty twenty one. 27:09 We continue to see opportunities to improve margins in each of our businesses as a result of our structural advantages. Our relationships to leading industry suppliers, our proprietary brand strategies and our vertical integration in both manufacturing and distribution. We continue to expect some headwind on margins from business mix related to higher growth in our PRO pool business. And we also expect inflation in the mid-single digits and we will continue to pass those cost increases through to consumers. 27:41 We expect adjusted EBITDA of two hundred and ninety five million dollars to three hundred and five million dollars representing an increase of nine percent to thirteen percent compared to fiscal twenty twenty one. This growth rate compares to our long term growth algorithm of low-double digits, and it's important to note that we will continue to execute against opportunities to leverage our operating costs and reinvest to drive growth in each our businesses. 28:05 We expect net income of one hundred and seventy million dollars to one hundred and eighty million dollars and adjusted net income of one hundred and eighty million dollars to one hundred and ninety million dollars. We expect diluted adjusted earnings per share of zero point ninety four dollars to one dollar, representing an increase of eleven percent to eighteen percent compared to fiscal twenty twenty one. This compares to our long-term growth algorithm of mid to high-teens earnings growth. 28:30 We estimated diluted share count of one hundred and ninety million dollars to one hundred and ninety two million shares and this range incorporates a reduction of approximately three million dollars related to share repurchases. 28:42 And finally, I'd like to provide an update on capital allocation. Our capital allocation priorities are as follows. Our first priority is capital structure. And we finished the year in a solid position. We had net debt divided by adjusted EBITDA of one point seven times. We had three hundred and forty five million dollars cash on hand, and a two hundred million dollars revolving credit facility. Also, our first debt maturity is our revolver in twenty twenty five. 29:09 Our second priority is to invest in growth and this has two parts. The first is capital expenditures. In fiscal twenty twenty two, we expect to increase our level of investment by approximately fifty percent over fiscal twenty twenty one levels. Our investments will focus on new residential and PRO locations, distribution infrastructure, and merchandising an information technology projects. 29:32 The second part is related to M&A. We plan to continue to focus on acquiring high quality market leading businesses to better serve new and existing consumer types. We have a robust pipeline of opportunities and our sales guidance has approximately thirty million dollars in sales attributed to M&A. 29:50 And our final priority is return of excess cash to shareholders. We're in a unique position, a high growth company with strong cash flow generation and modest maintenance capital requirements. Today, we announced our first share repurchase program as our Board of Directors approved a three hundred million dollars share repurchase authorization. This action is consistent with our balanced and disciplined approach to capital allocation, our commitment to driving shareholder value and demonstrates our confidence in our long term growth prospects. We expect to opportunistically repurchase shares when we believe they are trading at a discount to intrinsic value. 30:27 In summary, the full year and fourth quarter of fiscal twenty twenty one was record periods and we drove strong financial results throughout our P&L. Our entire organization continues to execute against our key growth initiatives with a great partnership of our long term vendors, we're successfully navigating the tight supply chain in this environment of heightened consumer demand. We will continue our relentless focus on enhancing our consumers experience and executing our initiatives to continue to drive growth and market share gains. 30:59 And with that, I'll hand it back over to Mike. Thank you.

31:04 Thanks, Steve. Let's go to page twelve of the deck. As we think about our twenty twenty two performances, the first point I want to make is that every piece of data that we have tells us that the macro trends driving consumer demand in the pool industry, should continue into twenty twenty two and for the next several years. 31:24 Pool Build and Hot Tub backlogs driven by ongoing investment in the home and backyard. Migration to the Sunbelt, the desire for a healthy outdoor livestock, a heightened sense of safety and sanitization, and hybrid and full time work from home schedules. All these macro trends support a forecast for healthy ongoing consumer demand. Against this favorable industry backdrop, we are confident that we can grow the Leslie’s business faster than the industry, across our consumer types and across our growth initiatives. 31:59 On page thirteen is the bridge to our twenty twenty two guidance. We are expecting new pool builds to contribute two percent to our twenty twenty two growth. We are forecasting inflation at five percent and we are expecting our strategic growth initiatives to drive an additional five percent of sales growth. We also expect strong growth to continue across all three of our consumer types, Residential Pool, PRO Pool and Residential Hot Tub. 32:29 Moving to page fourteen, we are forecasting that each of our strategic growth initiatives with the exception of AccuBlue Home will drive one hundred to three hundred basis points of total sales growth, which is in line with our long term view. 32:45 Page fifteen of the deck plays out the primary challenges facing industry for the twenty twenty two pool seasons. And importantly, how Leslie is positioned to mitigate and our benefit from each of them. Your takeaway should be that we feel confident that we are well positioned to compete and win in this environment. 33:06 And then on page sixteen, we would be remiss in not taking this opportunity to reinforce the Leslie’s value proposition. There are three key pillars that make Leslie’s unique and that highlight our compelling competitive position in growth prospects. Number one, we operate on one of the most advantaged consumer products industries. It's large over eleven billion dollars. It has annuity like demand because once a pool is built, it has to be maintained, it has predictable growth. The installed pool base has now grown every year for fifty one years. 33:43 Number two, we have built a consumer-centric integrated ecosystem of physical and digital assets that is unmatched in scale and reach and that allows us to provide total pool and stock air solutions to all consumers, whatever their needs and wherever, whenever and however, they want to engage with this. None of our competitors have that capability. 34:07 Number three, despite being the largest direct-to-consumer brand in the industry, we have significant whitespace opportunities across all the consumer types we serve and all the channels in which we operate. We have new capabilities and talent to address these opportunities and multiple early stage strategic growth initiatives. And finally, we have a pipeline of disruptive information that only Leslie’s can bring to the pool and spa consumers. 34:36 To wrap up, we are pleased with our record results for the quarter and year, and we are encouraged by the durable demand we are seeing from our consumers. The strength of that macro industry trends supporting that demand and the momentum we have across our strategic growth initiatives. In a unique and advantaged industry Leslie’s uniquely positioned and advantaged to win. We hope that the presentation and expanded datasets for this call to help make that point. 35:09 Finally, our confidence in twenty twenty two is expressed in our guidance at the high end of our long term growth algorithm and then our share repurchase program. We look forward to sharing our results throughout the year. 35:23 With that, I'll hand it back to the operator for Q&A.

36:01 Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ryan Merkel with William Blair. Please go ahead.

36:09 Hey, guys. Thanks for taking the questions and all the details in the deck. Very helpful. So, I guess my first half, last quarter, you mentioned select stock-outs of chlorine tabs and equipment. And I guess a two part question, did that impact the current quarter? And then how are you feeling about inventory of key items as you head into next season? And I think we're all pretty interested in chlorine tabs sort of the pricing and volume commitment? How are you feeling about that?

36:40 Yeah. If you'll remember, Ryan, we quoted a comp for tabs in Q3 of one hundred percent. And then said that we wouldn't be able to maintain that Q4 given the scarcity of supply. We did see a deceleration in that comp. The comp on flooring tabs for Q4 was thirty eight percent, so a deceleration based completely on supply. Despite that, we are very pleased with the sixteen percent comp, given the lower rate of sales in chlorine tabs. 37:15 With regard to next year, we are -- as Steve mentioned, we have an always on procurement strategy for key items. And we have definitively procured more Trichlor for next year. It is rolling from our manufacturers and our tolling operations and we should be at above last year's levels in the next week or so. And with regard to equipment, I'm going to say that our equipment partners, they're doing a great job in getting their supply chains back to speed. And we feel very good with regard to our position in key equipment, SKUs and also in Trichlor tabs. 38:05 Now, all that being said, demand also remains very strong. So, there's not a lot of slack in supply chains yet, but we are in better shape and we'll be in better shape for the pool season than were in Q4.

38:20 Got it. That's great to hear. And then my second question on the twenty two outlooks, your sales guide is a little bit above your long term average, but EBITDA growth is more in line. Is there anything to call out there why you wouldn't see a little bit more fall through on the higher sales?

38:40 Yeah. It has a deal with our growth investments. And Steve might expand on this a little bit more, but we're in a position where -- for generally a lot of cash, we have the ability to invest in the business those investments are paying off. And as we look into twenty twenty two, we want to make sure that we're taking the opportunities available to us to set us up not only for growth and profitability in twenty twenty two, but also on a go forward basis.

39:09 No. That's exactly right. I mean, we've managed our expenses very carefully, Ryan and we have to balance the leverage opportunities against our investment opportunities to drive growth and that's what you're seeing in twenty twenty two. Our recognition of momentum against the growth initiatives we have an opportunity to lean in. So, we're going to do just that in twenty two.

39:29 All right. Makes sense. Thanks. I'll pass it on.

39:33 Thanks, Ryan.

39:34 Thanks, Ryan.

39:36 The next question comes from Simeon Gutman with Morgan Stanley. Please go ahead.

39:45 Hey, guys. Thanks for the time. This is actually Hannah Pittock on for Simeon. First a general question on the competitive landscape. It feels like the industry is consolidating at a somewhat accelerated pace. Is that what you're seeing? And can you comment it on the M&A pipeline?

40:05 Yeah. There's a fair amount of activity in M&A, I would say, not sure if it's accelerating. We're certainly looking to accelerate our action in the space because it remains still really highly fragmented. As we've quoted before, eight thousand independent specialty retailers out there are actually the market leaders when combined in the space with just over I would say fifty percent to fifty five percent share. So, lots of opportunity, some acceleration and for us, we'll be looking to accelerate more.

40:42 Makes sense. And maybe a quick follow-up. Could you walk through the drivers that got you to the two percent sales growth from Pro pools next year given how much growth you saw this year and where it's kind of currently sitting with sales penetration and could that be conservative potentially?

40:59 Well, look, every time we quote an initial guide, it's going to be a range. And one thing we're committed to is making sure that we deliver on our guidance. That's a long way of saying that we believe there's some conservatism in there. But we also believe it's prudent given we're still operating in a global pandemic and there are still isolated challenges with the supply chains.

41:32 Makes sense. Thank you.

41:37 [Operator Instructions] The next question comes from Steven Forbes with Guggenheim Securities. Please go ahead.

41:56 Good evening. I want to focus on the outlook for unit growth. If I add up the number of locations M&A PRO, residential targets, I think it's per slide fourteen here, I think you're guiding to have fifty net new locations next year or mid-single digit unit growth. I guess is that correct? Any color on the cadence of openings and then also how the pipeline for each one of those sort of opportunities is expected to sort of evolve as we look out here maybe over a multiyear time period.

42:34 Yeah, Steven. I'll start with that and Steve may add on. We've said before, we believe there is an opportunity for stores in two hundred underserved PRO markets. And in the residential space, seven hundred. So, the numbers you're adding up for total new locations is right in the range that we are thinking. There's a lot of opportunity out there. And in terms of pacing, what's important for us is to get new locations that we plan in a year open for the pool season. So, we really target to get those new locations up and running in the March, April timeframe. That being said, the best time to get the retail space is when it's available. So, also an all always on strategy in terms of looking for good locations, but in general, we really look to get set up for the season in the March April time frame.

43:40 The only thing I would add as you think about for PRO store conversions, obviously, best time to do that is off season. So right now, a great time to be completing those. And from an M&A perspective, it's opportunistic, right? So, as we get opportunities to close on, we'll do so and not necessarily have a point in time at which we will try to close them by. But as Mike talked about for new stores typically do open those in March or April of each year to hit the season and obviously, we're looking at long term locations across the company to serve consumers.

44:15 Thank you.

44:16 The next question comes from Garik Shmois with Loop Capital. Please go ahead.

44:25 Okay. Thanks. Thanks for taking my question and thanks for the detail. The five percent retail inflation outlook, just curious if that assumes new pricing in fiscal twenty two or is it really a function of carrying over our pricing that you secured last year?

44:43 Yeah, Gary. I'm going to say it's a combination of both and clearly, it's a forecast. And I'll note that it's not a cost forecast. It's a retail price forecast. And like anything we're going to forecast. We're trying to be as accurate as we can, but also certainly a certain amount of conservatism and how we think about pricing going forward. I mean there's a lot of inflation currently in the market. We did see a slight slowdown in retail price inflation from Q3 into Q4 and five percent is how we're thinking about next year.

45:31 Great. Thank you.

45:36 The next question comes from Liz Suzuki with Bank of America. Please go ahead.

45:45 Great. Thank you. I was hoping you could actually expand on the competitive environment a little bit in residential pool. There's been some recent M&A of one of your larger commercial competitors acquiring a residential pool chain. I mean, do their markets overlap like yours and does this present any potential margin pressure? And then are some of those thirty five locations is like to add from bolt-on acquisitions likely to be more on the residential side or the pro side?

46:13Yeah, Liz. Good question. We're aware of the acquisition that you are just talking about, we’re quite familiar with both the companies. The acquired company, really good guys, strong operators, it's a regional business in Florida and it has a heavy distribution component, which I think makes sense for the quarter. So, competition is all good. Our business in that region is quite strong. I'm going to assume there is as well. We have not seen any additional franchising activity or any unusual pricing activity since the announcement of the deal. 47:00 And in terms of new locations, we are going to focus on about five PRO locations and at least ten residential locations for twenty twenty two.

47:12 Yeah. And that's for new store openings from an M&A perspective, I think the focus is across the board, right? So, we'll look at residential pool stores, we will look at hot tubs, we'll look at PRO opportunities as well. But as Mike talked about, the biggest opportunity out there is the eight thousand single store operators if you will, or mom-and-pop. So certainly, a lot of opportunities in the pipeline in that area.

47:36 Great. Thank you.

47:40 The next question comes from Jonathan Matuszewski with Jefferies. Please go ahead.

47:49 Great. Hey, Mike. Hey, Steve. Great quarter and helpful supplemental presentation. My question is the two-part. Is there a specific assumption embedded in your twenty twenty two sales guidance regarding pool utilization, whether it's flat or up or down relative to twenty twenty one? And another factor that's going to drive chemical sales, is this growing awareness, regarding cleanliness and recognition that backyard pools have been historically under sanitize. So, is there a way any data you’re seeing that can frame what percentage of pools are still under sanitized even after the last two years? Thanks.

48:30 Yeah. Thanks, Jonathan. I'll take a crack at the first part of that question, and then we can talk about data on under sanitized pools. The assumption of our sales guidance is that utilization of pools in twenty twenty two by PRO customers meaning the commercial side and also residential is that it should be similar to twenty twenty one. Now, we do that because there's a lot of unknowns around the pandemic but we do feel that people use their pools more in both twenty and twenty twenty one. We are really glad to see that in twenty one. I think it speaks to the stickiness of the new behavior as people invest in their homes and their backyard and in hot tubs and pools. So, we're modeling flat. I think that might be a little conservative, but we definitely don't see it reducing. 49:27 Steve, we had some data on under standardization. I cannot recall it off top of my head. I'm not sure if you do.

49:33 Yeah. It was more along the commercial lines and significant level of under standardization. So, one of the opportunities we talked to is getting water test more frequently, right? Doing a consistent ten point test. So, the AccuBlue in our stores, the opportunity with that keeping home is getting that water test more frequently because we do believe that many bodies of water are under sanitized and it's an education process that our store associates go through with consumers on a regular basis. So, it's the opportunity to kind of sell that in that total solution. But no specific metrics on kind of a quarterly or annual basis that I'm aware of.

50:11 Got you. Thanks very much. Helpful.

50:16 The next question comes from Andrew Carter with Stifel. Please go ahead.

50:23 Hey. Thanks. Good evening. I wanted to just come back to the gross margin guidance, because it seems relatively muted in terms of where you stand. I mean, you're going to have pricing essentially matching what your inflation is, which should be a benefit, and I would assume the private label program would gain additional penetration next year and if you don't mind, also could you update us where the private label penetration is overall as well as for chemicals? Thanks.

50:54 I'll start with the second part of that in terms of private label penetration. We went into -- we ended twenty at about fifty five percent. We were looking for growth of one hundred and fifty, two hundred basis points a year, maybe as much as three hundred based on our assortment planning. I would tell you in twenty one, we did not get there in terms of that kind of lift for the year. And that was really driven by a very strong equipment business, where our actual private label penetration is lower. So still definitely on track for our long-term goal there which is to get up over seventy percent by say twenty twenty five. Feel good about that, but this year was a little skewed by equipment sales and particularly by situation in Texas. 51:47 Steve, do you want to talk about margins?

51:49 Yeah. So, it's a great question on margins. And again, the equation that we talked about from a long term algorithm has a few components, right? So structurally, we have unique advantages in our industry. The size of the [indiscernible] relationships that we have with our vendor partners, number one, our ability to grow as Mike just talked about from a proprietary brand strategy, then vertical integration for manufacturing and distribution. When you think about what we saw in twenty twenty one, we see some continuation of that into twenty two, which is we will find opportunities to increase rate kind of across our product categories and across our businesses, there may be some margin headwind from a Trichlor perspective as we procure more pounds some of those pounds come at higher prices. Those higher price pounds are still profitable from a dollar perspective that may have a rate impact. So that will be a headwind. Overall, we believe rate across the business will be up again. We'll have occupancy leverage, which should be to our benefit. 52:48 And then, the final component is growth in businesses like our PRO pool business that will be a business mix headwind. So overall, pleased to be in a position to have guided for gross margin and positive and inside our long term growth algorithm despite the fact that we were up to two hundred and ninety basis points last year.

53:11 Thanks. I'll pass it on.

53:16 The next question comes from David Bellinger with Wolfe Research. Please go ahead.

53:24 Hey, guys. Thanks for taking the question. It's in regard to the three hundred million dollars buyback program announced tonight. So, you're clearly seeing continued momentum in the business much improved cash flows, but we were also dealing quality supply chain issues concerns around inventories and also, you talked about much greater potential for acquisitions to next year/ So just what now in terms of pulling the trigger on three purchases versus building inventories or growing customer rebates further? And do you expect to be active in the market immediately in Q1 just even where shares are trading today?

54:01 Yeah. I think the way to think about what you described this trade-offs is to reiterate Steve's point. Leslie is a very unique business and therefore both a growth business. And we generate really significant and strong cash flow. So, we're in the very fortunate position of not having to make trade-offs between investing and growth while potentially returning money to shareholders. So, that's the reason for the share authorization from the Board. And when we think about how it will be deployed, as Steve said we're going to be opportunistic. If the question is, do you think this stock is currently undervalued, I would say, yes, we do. And we'll be opportunistic in how we deploy those shares repurchase moments by looking at the opportunities over time and we're not looking to do anything within any specific timeframe other than to do it when it has the best return for us.

55:12 Great. Thanks for that. Appreciate it.

55:18 The next question comes from Rudy Yang with Berenberg Capital Markets. Please go ahead.

55:27 Hey, guys. Thanks for taking my question. Just regarding cost inflation for next year and if it possibly grows higher than you’ve anticipated. Can you just comment on how much you believe you can continue to pass on costs before when you think a reduction of demand volumes just especially given that your competitors typically offer competitive prices for similar products?

55:50 Yeah, Rudy. It's a good question. And as we've said before, the pool industry has a long history of passing costs through that continued in twenty twenty one and you could see it in our margin performance. We believe that is still going to be the case into twenty twenty two. We haven't seen anything that would tell us differently. But yeah, there's some pretty strong price increases in the market currently. As you can imagine, we watch it every day, but currently, we're not seeing any resistance.

56:26 The next question comes from Peter Keith with Piper Sandler. Please go ahead.

56:53 Hey. Good afternoon. It's Bobby Friedner on for Peter. Thanks for taking my questions. First, I just wanted to circle back up on gross margin. Steve, you said, you expect it to be up for the full year. Just wondering if you could give any color as to the shape of gross margin expansion to progress through the year should the year-on-year gains be uniform through the year or is there any first half, second half kind of nuance?

57:21 Yeah. It’s good question. I think when you think about, we do have seasonality impacts from a margin perspective. As you think about just the leverage on fixed costs in the first half of the year versus the back half beyond that. I mean, the guidance is on an annual basis and don't have anything further to find that increases on a quarter to quarter basis.

57:42 Okay. That makes sense. Just one other separately so, looking at digital marketing strategies, the company has placed increased folks on this impact once you -- just wondering if you could give any updates on this front and any related KPIs call out that are trending in the right direction?

58:04 I'm not sure Peter we are going to say a lot more than we have, obviously a very competitive situation. But as I did mention in my remarks, we continue to see really favorable ROIs on our digital spend. Favorable to the point that we want to continue to invest as long as we can maintain those. And we've set ourselves up to do that in twenty two by taking our marketing budget and specifically, it's the digital marketing budget, which is predominantly we use, up thirty percent for the year.

58:44 Okay. Sounds good. Thanks, Mike.

58:47 Yes.

58:50 The next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead.

58:58 Thank you. Good afternoon, everyone. As you think about AccuBlue and the Home version, I think which launched in June of this of twenty twenty one, nearly a third of the active members or new customers, can you probably talk about the initial response to that version one? Does it increase your enthusiasm from your launch, number two, which we understand is delayed by equipment shortages? What's your expectation there? Thank you.

59:25 Yeah, Dana. Thanks for this question. We're very encouraged by the response to AccuBlue Home version one. As you said, as we put in the deck, about a third of the customers for at our new two-thirds are obviously already Leslie’s customers. And we're just seeing a really a really nice response. And it's a subscription model as you know, and it's been very, very sticky to date. So very encouraged by that. At the same time, we're leaning in to those first few thousand customers We've got focused groups in flight. We have a real nice feedback mechanism from the users. And we're continuing to learn and refine both how consumers use the device and how we might remove any pain points that they have in using it. One of the big updates we've done recently is to get the pool score on the app that wasn't available in the first release and now we've updated that app for all the current users. So, all good there. And I'm really encouraged by version 2.0 and equally disappointed in the challenges we're having around securing components. 60:44 So, there's nothing in version one, nothing in version two that would quell our enthusiasm for the potential. And we said in earlier call, we didn't think supply chain component delays would impact us and we were wrong. And yes, that's disappointing. But our enthusiasm for the long term potential of AccuBlue Home very, very high.

61:13 One more if I could add just as any comments on the start of this first quarter, anything to keep in mind in framing fiscal twenty two? Thank you.

61:29 Yeah. Thanks, Dana. Not going to comment on performance in the current quarter. We've got a few weeks left in the quarter and we'll report in the coming months.

61:39 Thank you.

61:43 The next question comes from Peter Benedict with Baird. Please go ahead.

61:51 Hey, guys. Thanks. Good job on that deck, a lot of good information. Just as we think about twenty two and the outlook obviously positive on the top line and what providence, but as we think about maybe the cadence, last year in the second quarter, you did have the Texas storm to Steve. I know you're not going to get into specific quarters, but actually we'd be thinking about that it's a low volume quarter that was a big event, just the levels of things, assuming there'd be some softer growth rates in that quarter. Just want to give you an opportunity to address that if you want?

62:27 Sure. We talked about in Q2 that we thought Texas was approximately a ten million dollars impact overall. When you think about the overall year at that two hundred and thirty million dollars increase in sales, fairly small, right? And again, I'm comparing Q2 to the total year. But again, our first half from an EBITDA perspective, we've talked about historically being roughly kind of flat breakeven if you will. And then profits really come in kind of the second half of the fiscal year. So not going to provide any further detail than that typical seasonality that we see. I don't see any reason whether would be material deviation on a quarter-over-quarter basis.

63:09 Got you. Okay. Thank you very much.

63:15 This concludes the question-and-answer session. I would like to turn the conference Michael Egeck for any closing remarks.

63:26 Thank you, operator and thank you all for joining us today on our Q4 earnings call. Be safe and find time to enjoy with your family and friends it’s holiday season. And if you can preferably, do it with a pool and malls. Thanks very much. Bye.

63:46 This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.