Leslie's, Inc. (LESL) Q1 2022 Earnings Report, Transcript and Summary

Good afternoon and welcome to the First Quarter of Fiscal 2022 conference call for Leslie's Inc. At this time all participants are in listen-only mode. Following the prepared remarks management will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay later today on the company's website. It's now my pleasure to turn the call over to Caitlin Churchill, Investor Relations. Caitlin, please go ahead.

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 Leslie's, Inc is Mike Egeck, Chief Executive Officer; and Steve Weddell, Chief Financial Officer. With that, I'll turn the call over to Mike Egeck. Mike?

Thanks, Caitlin and good afternoon, everyone. Thank you all for joining us. I'm going to start by highlighting our key results and performance drivers for Q1. Then Steve will walk you through our financial results and increased full year guidance in more detail. I'm pleased to report that our q1 performance continued our streak of record results. Sales for the quarter were record $185 million as all three of our consumer groups responded positively to our product and marketing offers. Residential pool grew 18% for the quarter, residential hot tub grew 66% and PRO pool grew 40%. Comp sales increased 21% for the quarter, and the two-year stack comp for the quarter was 46%. The comp for the quarter and the two-year stack comp represented and acceleration from our Q4 result. Gross profit for the quarter was a record $67 million and margin rate expanded 70 basis points. And for the first time in our company's history, we generated positive adjusted EBITDA in our first fiscal quarter. Given the seasonality of our business, the first quarter has traditionally been a loss making quarter. During our earnings call in December, we announced that our Board of Directors had authorized a $300 million share buyback program. During the quarter, we put that authorization to work and bought back 7.5 million shares at an average price of $20.25 for a total of $152 million. Moving to the industry backdrop, we continue to see the pool and hot tub industry benefit from strong consumer demand in the quarter. This demand is being fueled by a strong housing market driving investment in the home and backyard, the desire for a healthy outdoor lifestyle, migration to the Sunbelt, a heightened sense of safety and standardization and hybrid and work from home schedules. We have seen no evidence of these macro trends abating. Another trend we see continuing in the industry is inflation. In the quarter, retail price inflation was nearly 12%. This was a little ahead of our expectations, but we didn't see any associated slowdown in demand. As a reminder during fiscal 2021, we saw inflation increase throughout the year. This year, we expect inflation to moderate in the coming quarters. For the full year, we still expect inflation of approximately 5% it could certainly move higher. Against this backdrop of continued robust demand, the competitive advantages derived from Leslie's Connect our integrated system of physical and digital asset. And a strong execution of our growth initiative, by our associates drove the acceleration sales we experienced in the quarter. Now we'll walk through the performance of each of our six strategic growth initiatives. First, our consumer file continues to show strong sustained growth. Total target file growth was 11% in the quarter. Q1, 2022 was our ninth straight quarter of double-digit file growth, driven by our digital marketing capabilities, and compelling assortment. As we mentioned during our last call, we continue to achieve high ROI on our marketing spend, and have increased our marketing budget for 2022 by approximately 30%. Consumers are also responding well to our Leslie's Connect omni-channel capabilities. Buy online pickup in store, ship from store, ship to store and buy online return in store. These capabilities allow us to utilize inventory in our location network to effectively fulfill consumer orders in whatever manner they choose, and to increase consumer retention. Leslie's Connect enable more than 30% of Leslie's digital orders in the quarter. Next, we continue to deepen our relationship with our consumers. Our loyalty program, Leslie's Pool Perks drove loyalty file growth of 7% in the quarter, as consumers continue to be drawn to the programs key benefit with 5% rewards earn rate and free shipping. Pool Perks in conjunction with our targeted and personalized marketing tactics help grow average revenue per consumer 14% in the quarter. Third, our pro initiatives are driving strong results, our plan to convert 25 and build five new pro locations in 2022 remains on track. All three locations are scheduled to be operating by the start of the pool season. During our last call, I noted that we had executed more than 1000 pro affiliate agreements, and had targeted 1,500 Plus for 2022. I'm encouraged to say that as of last week, we have surpassed that target number and that our pro affiliate partner sales doubled in the quarter. The new and converted pro locations are expanding PRO affiliate program, and our dedicated Leslie's pro e-commerce site help grow our total pro-business 40% in the quarter. Moving to M&A, in the quarter we closed on the acquisition of B&L Pools, which operates seven locations in the Greater Phoenix area. In addition, we have entered into an LOI, from an additional pool and spa retailer and we expect to close that acquisition this month. 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 integrate businesses in 2022. With regard to our residential whitespace initiative, we added two new locations in the quarter and remain on track to open at least 10 new residential locations in 2022. Finally AccuBlue Home, due to delays and required microchips, the exact number of devices that we'll be able to produce for this pool season remains uncertain. However, we have confirmed that we'll have enough Version 2.0 production devices to do a small pilot release with a limited number of customers. At this time, we are still not planning any significant sales for this initiative in 2022. We are very pleased with our strategic growth initiatives and the team's leading them performed in the quarter. With regard to corporate governance, our inaugural proxy was published on January 31, 2022. And we look forward to our inaugural shareholder meeting on March 17, 2022. This meeting will be, virtual and you're all welcome to listen in. Now I'll turn it over to Steve to share more detail on our Q1 financial results and increase fiscal 2022 guidance. Steve?

Thank you, Mike and good afternoon everyone. Today, we're pleased to report record results for the quarter. Today I'll review our first quarter of fiscal 2022 performance and our outlook for full year of fiscal 2022. Our first quarter results, our first quarter included 13 weeks and ended on January 1, 2022. Total reported sales increased to $184.8 million, or 27.5% compared to first quarter of fiscal 2021. Our comparable sales growth increased 20.5%. This increase is on top of shifted comparable sales growth of 25.7% in the first quarter of fiscal 2021 and represents comparable sales growth on a two-year stack basis of 46.2%. We generated strong results across consumer types with particular strengths with our pro pool and residential hot tub consumers. We also continue to see strong performance in the core sanitizer and equipment product categories during the quarter. Retail price inflation remained elevated and primarily related to chemical products and equipment. Also, as we mentioned last quarter, we've seen an increase in average cost per pound related to Trichlor as a result of our efforts to procure and convert more pounds of Trichlor this year. We factored these cost increases into our retail pricing for fiscal 2022. Gross profit increased 30.2% and gross margin rate increased by 70 basis points to 36.4% from 35.7% in the prior year, primarily due to product margin improvements across our businesses and occupancy leverage. Gross margin improvement was partially offset by business mix, including strong growth with both our pro pool and residential hot tub consumers. SG&A increased 3.0% over the prior year on a reported basis. In the first quarter of fiscal 2021, we reported non-cash equity-based compensation costs of $12.2 million and certain one-time contractual payments totaling $8.2 million. Approximately $19 million of these costs were non- recurring and primarily incurred in connection with our IPO. Excluding these non-recurring items in fiscal 2021, the year-over-year SG&A increase in the first quarter of fiscal 2022 was driven primarily by our sales increase, investments to support our growth and expenses associated with acquisitions completed after the end of the first quarter of fiscal 2021. As a reminder, we continue to invest in the business throughout the year and this does impact flow through in the first half of the fiscal year when SG&A as a percentage of sales is elevated. Adjusted EBITDA improved by $1.3 million to positive $1.1 million from a loss of $0.2 million in the first quarter of fiscal 2021. During the current year quarter, we converted the increase in sales at a higher gross margin and invested against our key strategic priorities. We generated a positive EBITDA quarter when historically the first quarter has represented approximately negative 5% of annual EBITDA. Adjusted net loss remained relatively flat at $10.9 million in the first quarter of fiscal 2022 compared to a net loss of $10.6 million in the prior year. Adjusted loss per share was $0.06 in both the first quarter of fiscal 2022 and in the prior year. Moving to the balance sheet, we finished the first quarter of fiscal 2022 with cash and cash equivalents of $53 million, compared to $103 million at the end of the first quarter of fiscal 2021. We did not have any borrowings on a revolver at the end of either quarter. We expect inventory conditions in the industry to remain tight throughout fiscal 2022, particularly for chemicals and equipment. As a result of the tireless efforts of our team, we ended the first quarter of fiscal 2022 with inventory of $245 million, up 40% compared to $175 million at the end of the prior year quarter. We have an always-on procurement strategy at Leslie's our team continues to proactively work with our vendor partners to manage the flow of inventory. And we continue to identify opportunities to strategically invest in inventory to meet heightened consumer demand and prepare for the pool season. With regard to debt at the end of the first quarter of fiscal 2022, total funded debt was $804 million, compared to $809 million at the end of the prior year quarter. During the first quarter of fiscal 2022, we announced our first share repurchase program with a $300 million share repurchase authorization. We're in a unique position, a high growth company with strong and consistent cash flow generation. On December 16, we completed the repurchase of 7.5 million shares for a total of $152 million. 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. Before I get to our outlook, I want to remind everyone of the natural seasonality of our business. Our primary selling season occurs during our fiscal third and fourth quarters which spanned April through September. In fiscal 2021, the first half of the year accounted for approximately 25% of our annual sales, while the third quarter represented approximately 45% and the fourth quarter represented approximately 30%. We generate substantially all of our full year profits in the second half of our fiscal year. We are uniquely positioned to invest in our business throughout the year, including in talent, operating expenses, working capital and capital expenditures. All these investments drive performance during our primary selling season. They reduce our earnings and cash flow during the first half of our fiscal year. We're pleased with our strong start to the fiscal year. We're firmly focused on driving our initiatives in preparing for pool season 2022. With regard to our outlook, today, we're raising our full year fiscal 2022 outlook to reflect the first quarter beat to our expectations. We expect sales of $1,495 million to $1,520 million, representing an increase of 11% to 13% compared to the prior year. This is a $20 million increase compared to our outlook in December and the growth rates compared to our long-term growth algorithm of mid to high single-digits. We expect gross profit of $665 million to $675 million, which implies a small improvement to gross margin compared to the prior year. This is a $10 million increase compared to our outlook in December. And the improvement in gross margin over the prior year is in line with our long-term growth algorithm of flat to positive 25 basis points per year. We expect adjusted EBITDA of $300 million to $310 million representing an increase of 11% to 14% compared to the prior year. This is a $5 million increase compared to our outlook in December. And the growth rates compared to our long-term growth algorithm have low double-digits. We expect net income of $170 million to $180 million and adjusted net income of $183 million to $193 million. We expect diluted adjusted earnings per share of $0.97 to $1.03, representing an increase of 14% to 21% compared to the prior year. This represents a $0.03 increase compared to our outlook in December, and the growth rates compared to our long-term growth algorithm of mid to high-teens earnings growth. As a result of our share repurchase completed in the first quarter, we now estimate a diluted share count of 187 million to 189 million shares. This range does not include the impact of any additional share repurchases that may be completed during fiscal 2022. We have a balanced and disciplined approach to capital allocation. And our priorities are as follows. Our first priority is capital structure. Our second priority is to invest in growth through both capital expenditures and M&A. Our final priority is return excess cash to shareholders. We have $148 million remaining under our share repurchase authorization. And we will continue to evaluate opportunities to repurchase shares based on our financial position, investment opportunities to drive growth and market conditions. In summary, during the first quarter of fiscal 2022, we generated record sales, reported positive EBITDA and continue to see strong results from our growth initiatives. And we're grateful for all the contributions of our entire team as they continue to execute at a high level in this environment of heightened consumer demand. And with that, I'll hand it back over to Mike. Thank you.

Thanks, Steve. Answer to the NFL playoff season, I'd like to end with a football analogy. The analogy is that, just like the best NFL teams, Leslie's has a strong offence, and defense. I'll start with our defense and remind you of four key defensive attributes of our business. One, we are benefiting from strong secular macro trends that are driving durable consumer demand and are showing no signs of slowing. Two, we operate in an industry that is able to pass costs through to consumers. Three, 80% of our assortment is non-discretionary. And four, we have a long history of strong and consistent free cash flow generation that enables both continued investment in our business, as well as opportunistic return of capital to shareholders in the form of share buyback. Leslie's also has a high powered offence, which has resulted in nine consecutive quarters of record sales and EBITDA. Our [indiscernible] has four important components. One, we have six tangible strategic growth initiatives that are driving meaningful results and are still early stage in their development. Two, a multi-pronged pro initiative is accelerating rapidly. Three, we have set ourselves up to capitalize on the robust M&A opportunities that we continue to see in the pool and spa industry. And four, great execution by our merchandising team has put us in a favorable and advantaged inventory position. We don't have to rely on just a strong authenticity since we have both. This is why in a unique and advantage industry, we believe Leslie is uniquely position and advantage to continue to win. With that I'll hand it back to the operator for Q&A.

[Operator Instructions] Our first question today is coming from Steven Forbes from Guggenheim Securities. Your line is now live.

Good evening, hi Steve. I wanted to focus on gross margin if I can moving this one for Steve, can you update us on where occupancy costs are running on a quarterly basis or maybe just tell us first quarter this year versus last. And as we think about the gross margin performance in the quarter and the reiteration of the full year performance, maybe to speak to how the inflationary pressures are flowing through the P&L relative to expectations, and just what you're seeing from a competitive standpoint on behaviors, right around managing input cost pressures on an industry basis?

Sure, thanks, Steven, happy to take that. So from an occupancy perspective, running just shy of - about $25 million per quarter with some of the M&A addition of new stores, new locations, as well as some of the new locations we're going to open this year that may pick up a little bit, but not materially higher. So I think that addresses the occupancy point. And then from an inflation perspective, look it's a great question, as we've talked a lot about in our business. We do have that ability to pass on costs. So the way it typically plays out as we get notifications from our vendor partners. We obviously have advanced notice, if we have costs in the business that are rising as well. We're able to package those increased pricing in the form of average resale prices to consumers, typically in advance of we're in connection with the price increases as they come through. And so at a minimum, we can protect the profit dollars on an overall basis. And many times, we have an opportunity to actually maintain margin rates as well. So I think it's fairly consistent when you go back last couple years we've talked through gross margin, we continually talk about our ability to improve margins and each of our businesses. We've done that again, in the first quarter of 2022. And certainly have expectations to do that for the remainder of the year. We do expect to continue to get occupancy leverage as well, which we got in Q1, and we've seen over the last couple years as well. And then again, we're going to see some offset with respect to business mix, right. So 66% growth in residential hot tub, 40% growth in pro pool, those are areas of the business that typically are a larger percentage of the business in the first half of the year. And we saw tremendous growth in both of those consumers - with both of those consumers. So when you think about the mix in Q1, little outsized of an impact, relative to the full year, but again, playing out consistently with how we've seen it play out in the past.

Super, helpful thanks Steven. And then through to Mike or yourself again and a quick follow-up on advertising expenses, you mentioned up 30%. In terms of planning for the year, any sort of comments or thoughts, which were up as it relates to cadence of that spent?

Yes, Steven we'll, the 30% increase will be focused in quarters three and four, where our volume is. We're not - expecting to do anything out of the ordinary or out of sync with the percent of business in the first half.

Thank you, best of luck.

Thanks.

Thank you. Our next question today is coming from Simeon Gutman from Morgan Stanley. Your line is now live.

Hi, everyone. I want to follow-up on the gross margin question from my first question. I think right, the occupancy was helpful, but it seems like gross in general was much better. And the implied run rate for the rest of the year is maybe you know, flattish or up a little like 10 to 20 bps for the full year. Besides occupancy leverage and I think Steve, you just gave a product mix example. It feels like the risk to gross should be to the upside? Obviously, it depends on where sales come in, et cetera. So it seems like, you know, we're getting pricing. Are there any other big buckets of offsets, because it feels like where the business is running versus where you've guided, there's still a pretty big delta.

Yes, so when you look at the guidance, originally back in December, we talked about being up kind of flat to positive 10 basis points. The guidance today is kind of 10 to 15. So it did pick it up when you look at the flow through again, $16 million increase in gross profit on a $40 million increase in sales flowing through at a 40% rate when overall gross margin is in the 36%, 37% range. So certainly saw some improvement. When you think about for the full year, some of the areas that we're focused on is, certainly from cost perspective for products. We've talked about Trichlor. In fact on Q4, we talked about our ability to procure more serve more consumers gain market share, some of that product would come in at a higher price. Certainly, we've seen that in the first quarter and would expect it through the remainder of the year. Again overall, we think we have an ability to protect profit dollar flow through an opportunity to potentially go out and get margin consistency. But that's a unique headwind this year, relative to last year.

Okay, and then a follow-up, can you talk about you know how much Q1 helps you inform the rest of the year granted, it's very small. And you've caveat that there's a lot left. I don't think you'll talk about January. I don't know if you'll talk about the next quarter, but there was volatility with retail, curious - you also seeing that continued stability as any measure that you can talk about, but, and yes, I'll leave it at that. So just, how Q1 could inform the rest of the year?

Yes Simeon, this is Mike. Look Q1 is small and it's a long ways from the heart of the pool season. So last year, we said that really, for us to get a good feel for where we will be both from a pricing situation and our supply situation in the industry. We talked about May and getting closer to the Memorial Day weekend. So Q1 is important. And we're certainly encouraged by the start in the pricing actions we've taken, have stuck with the consumers. And like we said, we've seen no slowdown in demand, but it's awfully early. I mean it's just awfully early for us to comment. And as you might suspect, we're not going to comment any on Q2 at this time.

Okay, thank you. Good luck.

Thanks.

Thank you. Our next question today is coming from Jonathan Matuszewski from Jefferies. Your line is now live.

Great, thanks for taking my question. Nice start to the fiscal year guys. First one is on - if you could share some perspective on how the business has performed historically, during periods of rising interest rates? And I guess relatedly - have you been hearing anything recently from pool builders, or your pro customers regarding higher financing costs, maybe negatively impacting their pipeline for pool builds and things like that, that's my first question? Thanks.

Yes, thanks Jonathan. Good question and I was curious about that myself being newer to the business. So we had the team go back and look at that. And we were founded in 1963. And it's not new news that we've grown every year. But since 1963, there's been nine periods where the federal funds rate has grown in the 40% plus range. So rising interest rates environment, we grew every year, but we average double-digit growth during those periods. And our low period of growth was high single-digit. So, it gave us a lot of comfort that in a high interest rate environment, the company has historically performed very well. With regard to interest rates on pool builds. I think in a typical situation, it may slow, could potentially slow pool builds down. But there's still a very healthy backlog of people waiting to have pools built. And there's been some labor constraints on that, as you know, those seem to be maybe getting a little bit better. But still a very healthy backlog and, we haven't heard anything from builders or consumers about any slowdown associated with rising rates.

That's really helpful. And then, second question, obviously, still have full season 2022 to get through. But big picture, can you help us think about the potential impact of chlorine pricing on the business in fiscal 2023? Not looking for numerical guidance, but just wanted your view on the likelihood of different scenarios playing outlook? I suppose one could be maybe a minor downward reversion in chlorine pricing from 2022 levels, and another could be maybe a more pronounced reversion. You know, maybe toward pre-pandemic levels as industry capacity ramps, how are you thinking about kind of the different scenarios that could play out in 2023? Obviously, awhile way out, but chlorine has been a tailwind for a number of years now?

Yes, and I'll keep this in a very macro, because we won't talk about our own 2023 guidance until December. But you know, what will happen is the factory that was taken down by the hurricane will come back online. The volume that comes out of that plant will replace the domestic import volume that had come in to make up the gap. It should, it will be at a lower price than the imports. But I think most importantly, what the industry has seen is that the current prices on chlorine have not decreased demand at all. So we're not expecting any kind of reversion to pre-2020 pricing. There's a potential that we might see some reduction in prices, but I think the most likely scenario is a stabilized price environment for the industry on chlorine at these new higher levels.

Very helpful, thank you.

Thank you. Our next question today's coming from Ryan Merkel from William Blair. Your line is now live.

Hey, guys, great quarter. I want to unpack price a little bit more. So up 12% in the quarter, but you still think you're going to do 5% for the year. So is the 1Q is that just timing and could there be upside anywhere?

Yes Ryan, I'll take that one. Look, we said we were a little bit surprised by inflation in the first quarter. It did run a little hotter than we thought. But if you look back at last year, and how we reported inflation, the inflation in Q1 last year, was less than half of that for the balance of the three quarters. And the - Q4 pricing that is circled around in the Q1 yes, we expected an increase bigger than the year. If you did it - ran about 4% last Q1. We said five for the year, ran over nine for the last three quarters. And I do that correlation and we thought maybe 10 for first quarter. So we were surprised by the upside by, you know one or 200 basis points.

Got it, okay, so just normalizes the rest of the way. And then I want to go back to gross margins again, so nice 1Q, but we're expecting sort of flat slightly up the rest of the way. Steve, maybe what changes in 2Q, 3Q, 4Q versus 1Q that would drive the smaller year-over-year increase? My guess is its product margin is that 75% of COGS?

Yes, no that's exactly right. And again, I think primary selling season. So from a product perspective for Trichlor, most of that product is going to get sold in third and fourth quarter as well. Funny, that'll be part of it in and again, I think we will expect some of the business mix to kind of level out as we get into three and four. So I would expect that we'll have most of our opportunity in three and four to drive incremental margin. Occupancy won't be as large in three and four based on the guide from a sales perspective again, looking at the overall sales increase at 28% for Q1 certainly helped.

Got it, all right thanks pass it on.

Thank you. Our next question today is coming from Peter Benedict from Baird. Your line is now live.

Hey guys, thanks for taking the question. First just on loyalty, just maybe talk a little bit more about the growth you're seeing in that I think you said up 7% just the nature of that growth any progress engaging with some of the larger spend customers? How do you feel about the growth and loyalty what's your expectation for the year, that's my first question?

Yes, thanks for the question, Peter. I'm going to say I was a little disappointed by only 7% growth in loyalty. We've been running double-digits to low teens there. Looking through the data, in a very small quarter, I'm going to chalk it up to timing. The growth was pulled down actually by new customer growth. But on the flip side of that new customer spend was up 30%. So again, I'm trying not to drive too many conclusions from the smallest quarter of the year - second smallest quarter of the year for us. But it's yes, I would have liked to seen at 10. More encouraged by the growth of the total file, which was up 11% and average revenue per consumer, which was up 14%, those are both very healthy, and in line with what we've been seeing in prior quarters.

Okay, that makes sense. And then I guess the next question, I mean, you've talked about you have not seen really any demand response to the higher prices - I mean in aggregate, you have - are there any pockets of the business where consumers have either while maybe the units haven't changed, or maybe they started to trade down, move to different products, just trying to get a sense for the unit demand response as these - as inflation continues, not just in your business of course, but across most of the market?

Yes, we really haven't seen any drop in demand. In fact, two of the higher inflation categories, equipment and basic sanitizers showed the strongest growth. So, we're encouraged by what we're seeing the continuing very - durable demand, I would say. There's a couple interesting things going on in the file dynamics, our units per transaction are up quite a bit, believe that's being driven by the AccuBlue water testing. ASP is only up couple percent. So that would say, with inflation running 12, we're actually trading down in some prices. And we have seen some evidence of people, Cenobite 50 pound tub, they're going to buy a 35 or a 20. But their need for sanitizers is going to be the same over a season. They could potentially be put it into a little smaller purchase at any one time.

Excellent, now that makes a lot of sense. Thanks so much.

Yes.

Thank you. Our next question today is coming from Liz Suzuki from Bank of America. Your line is now live.

Great, thank you. Yes, thanks for all the details on the growth rates between retail pool, hot tub and pro? Could you talk about outperforming and underperforming categories within those channels? I know you just mentioned your equipment and basic sanitizers, but any network underperforming the average, and also any variation by region that's worth highlighting?

No, I would characterize it as kind of standard deviation among the categories, in terms of growth, they were all up. All regions were up let's say, that's probably the most one of the most encouraging things about the results for the quarter. And it wasn't weather driven, whether it was actually a bit of a headwind for the quarter so, very nicely balanced geography and category performance.

Right and just on that weather question. I mean how much of your business is exposed to pools that are in seasonal markets where the pool itself is actually closed for the winter and then open again in the spring versus markets where pools are open year round? Just thinking about the impact of - spring breaking early or late and how that could impact your profits in the third quarter particularly?

Yes Liz, I'm going to say it I don't know that exact background off the top my head, Steve, I don't know if you do.

Your thinking about the right way, though Liz it can impact around the margins, right, so maybe an April like get a little earlier start to season, or in September, October - towards the tail end of the season. What we've seen last couple years, and I think - probably a good indicator from the first quarter as well, is folks are trying to extend the season, trying to open earlier trying to close later, you typically see that through uptake of heaters, heat pumps, solar covers, other things to kind of warm that water. So that you can have earlier use of the pool or extend the use of the pool so it's a great question to ask. I don't have the specifics either, but it's usually transitory and overall doesn't have a material impact on performance for the year, but certainly a beneficial trend to get pools open earlier and keep them open longer.

Right, thank you.

Thank you. Our next question today is coming from Garik Shmois from Loop Capital. Your line is now live.

Hi thanks. It sounds like the M&A environment slowly picking up for you, just curious how we should be thinking about there's any margin impact as you make an integrate some of these acquisitions and you know recognize that you're investing in staffing to help with that effort?

Yes, Garik the staffing, we've said we were going to add staff there to work on M&A. It wasn't a big staff to start with, we've gone from what amounts to about two full times equivalent to five, and probably add a couple more as we increase the pace. But we've done, you know, since March of 2021, March 15. We've done four acquisitions, like we said, we've got an LOI with another. We'll look to continue that kind of pace, and a little bit depends on what we're buying. As Steve mentioned, in the gross margin discussion, the hot tub businesses run a little lower margin, though, are very, very profitable. And in the pool businesses, we may purchase them at a slightly lower margin, but one of the first things we do is put them on our purchase contracts and get their margins right up with the rest of the chain.

Got it. And then just wondering if you could expand a little bit on the performance in the pro-business, still pretty healthy growth over 40% I think that's fairly consistent to what you delivered in the last fiscal year so, kind of curious if you're seeing any change in trends there or just kind of steady, consistent growth?

Yes, we're seeing, we're just seeing really steady consistent growth. I mean, it's very - we're very, very encouraged. We had said we wanted to get to the 1,500 pro agreements in 2022. And we got over that in the first quarter. And - I've stopped setting targets for the pro team it's an aggressive team. They're on a good roll. And I'm confident they'll go out and optimize the opportunity. But for the quarter, when you look at the pro market, the pro initiative contribution to total growth, it was about 700 basis points of the 2,700.

Great, thank you.

Thank you. Next question today is coming from Andrew Carter from Stifel. Your line is now live.

Hey, thank you very much. I wanted to ask about I think, during December, you said a $30 million expectation for M&A between that new store openings. What is that - total contribution in your guidance? Thanks.

Yes, we guided M&A, as we did all the initiatives to be within you know 100 to 300 basis point range probably at the year.

Okay, second question I wanted to ask and I guess that's the 100 question on gross margin in the quarter, you probably had the worst mix headwind, you're going to have and did 76 basis points, year-over-year, balance of the year is 15 to 25. I mean, can you kind of, I mean I would expect that over the course, you're still going to win on pricing net of inflation. Our inflation costs even, just wanted to ask about that - if there could be some pretty significant upside, or you're going to make some extra investment? Thanks.

Yes that's certainly the goal. I think we started off our conversation back in December, and we talked about guidance being roughly flat. And again, that is the algorithm. But what we do every day, every period is we look for opportunities to expand margins on both gross as well as get leverage on the SG&A side. So I think as I mentioned earlier, we're going to see some moderation from an occupancy leverage perspective as a sales dollars get bigger. And as percentage of sales, occupancy becomes a smaller portion of it. But I think we're in a dynamic environment when we're going to continue to manage kind of pricing aggressively, and work very closely with our vendor partners. So it, I think at this point through the first quarter, I think we're - like I said, we're pleased with the start, lot more of the year left, and I think as we get into season, we'll provide updated guidance.

Thanks, I'll pass it on.

Thank you. Our next question is coming from Peter Keith from Piper Sandler. Your line is now live.

Thanks. Good afternoon, I want to dig a bit more into the pro and Mike specifically around the affiliate program. So you're pretty much ran in the quarter on a full year. Maybe you could look back and talk to us about the ramp that you've seen with affiliates. Does the - spend takes some time to pick up? Are you still ramping and similarly, if you're already at 1,500 I assume you're not stopping? Do you think it will continue to grow that total number?

Yes, we're pretty comfortable that will continue to grow that total number. Our pro partners, comps doubled in the quarter, they've been running to 80% to doubling. So we think we can continue that trend as well, I have to say it's just - it's very encouraging. The response from our target pro customers, which we've said in the past are really the sole operators or perhaps an operator of one or two trucks to our value proposition, which is really predominantly on convenience. Our stores are where the pools are and they work at the pool. So when they need something quick. They can go on their app, go to the pro website, see what store, something's available in, pull up in the front, get in and out very quickly. You know, we've compared it to fast food and that that convenience proposition. There's a lot of value in that, as is the referral programs. And then from a pricing standpoint, we're competitive. We're not competing on price, but we're competitive with price. And that's yes, I'm going to say we've been it's been very gratifying to see the response to that and we don't see it slowing down.

Okay, I think just to verify you were saying that pro partners comp up 80% that's effectively your affiliate dollars?

Yes, that's the comp for pros that were - have joined the affiliate program, pre and pre-affiliate program, posts affiliate program.

Yes, and then I guess it's - just to understand, like the spending ramp, because it's kind of exciting. You're going into this new season now with 1,500 affiliates is that 80% is that been an acceleration from prior quarters?

We've been running in about the 80% to 100% pretty, pretty consistently. The agreements we signed, have some purchase amounts in them. And those ramp up pretty quickly and those have seem to been received very well by the affiliates.

Okay all right. Thanks so much for the feedback and good luck.

Yes, thanks.

Thank you. We reach the end of our question-and-answer session. I'd like to turn the floor back over to management for further closing comments.

Thank you, operator and thank you everybody for joining us for the call today. Just like to end by saying stay safe. All these out there in the storm Landon it's not, doesn't look pretty, but I will say it's nice here in Arizona if you want to come visit. And most importantly, we look forward and hope you look forward to pool season 2022. Thank you.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.