Good afternoon and welcome to the Fourth Quarter of Fiscal 2023 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 is being recorded and will be available for replay later today on the Company's website. I will now turn the call over to Caitlin Churchill, Investor Relations.

Thank you, and good afternoon. I would like to remind everyone that comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause the Company's actual results to differ materially from management's current expectations. These statements speak as of today and will not be updated in the future if circumstances change. Please review the cautionary statements and risk factors contained in the Company's earnings press release and recent filings with the SEC. During the call today, management will refer to certain non-GAAP financial measures. A reconciliation between the GAAP and non-GAAP financial measures can be found in the Company's earnings press release, which was furnished to the SEC today and posted to the Investor Relations section of Leslie's website at ir.lesliespool.com. On the call today from Leslie's are Mike Egeck, Chief Executive Officer; and Scott Bowman, Chief Financial Officer. With that, I will turn the call over to Mike.

Thanks, Caitlin, and thank you all for joining us this afternoon. I hope that everyone had a good Thanksgiving holiday. To start, I'd like to express my sincere appreciation to all of the Leslie's associates whose contributions allowed us to serve our residential pool, PRO pool and residential hot tub customers at a consistently high-level throughout fiscal 2023. Because of their efforts, the foundation of Leslie's business remains solid. For the year, our brand awareness in-stock service levels and corresponding NPS scores were at all-time highs. Our loyalty program grew for the year, and our customer lifetime value also increased. We remain the largest specialty retailer in our industry, with unmatched capabilities and clear long-term growth opportunities. And the industry credit card data indicate that we gained market share again in fiscal 2023. While our financial results for fiscal 2023 were not what we expected heading into the year, we are well-positioned for future success as the pool industry continues to normalize from the temporary challenges of this year's pool season. We entered the fiscal fourth quarter facing three headwinds, which are the same ones that broadly impacted our full fiscal 2023 results. First, unfavorable weather. Second, a macroeconomic environment that resulted in decreased retail chemical pricing and discretionary spend, especially on high-ticket items and finally, customer stockpiling of core sanitizers resulting from three years of supply uncertainty and price inflation. While the latter two factors were largely in-line with our expectations for the quarter, weather was better than we originally anticipated and helped us to deliver sales at the high-end of our implied fourth quarter revenue guidance. Profitability in the quarter fell short of our expectations, driven entirely by gross margin. Gross margin performance was impacted by larger-than-expected inventory adjustments made after the completion of our annual physical inventory…

Good afternoon, everyone, and thank you, Mike. I'll review our fourth quarter and fiscal 2023 performance, and then, provide details about our outlook and assumptions for fiscal 2024. Turning to fourth quarter results. We reported sales of $432 million, a decrease of 9% compared to the fourth quarter of fiscal 2022. Comparable sales decreased 11%. Comparable sales decreased 1% on a two-year stack basis, increased 15% on a three-year stack basis and increased 38% on a four-year stack basis. Non-comparable sales totaled $9 million in the quarter, which was driven by a total of 18 net new stores, including 12 through acquisitions and six net new store openings during fiscal 2023. With respect to trends by consumer group. Comparable sales for residential pool declined 9%, PRO pool declined 13% and residential hot tub declined 23% compared to the prior year period. On a two-year stack basis, comparable sales were flat for residential pool, increased 4% for PRO pool and declined 10% for residential hot tub. These declines were in-line with our expectations and continuation of recent trends in the business. Gross profit was $160 million compared to $217 million in the fourth quarter of fiscal 2022 and gross margin rate declined approximately 860 basis points to 37%. Page 11 of our supplemental deck illustrates our Q4 gross margin rate bridge in more detail. During the quarter, gross margin was impacted by the following factors. First, product gross margin declined 385 basis points in the quarter. This was primarily driven by our June 2023 chemical pricing actions and the negative impact of 70 basis points due to lower rebates. Second, we incurred unexpected incremental inventory adjustment cost that resulted in a 260 basis point headwind in the quarter. This increase was mainly due to excess shrink and scrap due to higher…

Thank you, Scott. After three years of unprecedented growth, the pool industry and Leslie's faced multiple transitory headwinds in fiscal 2023. Despite these headwinds and their impact on our results, we continued to deliver exceptional service to our customers as evidenced by brand awareness, in-stock levels and corresponding NPS scores that are all at all-time highs. Taken together, these serve as a testament to the focus and execution of our team members. As the industry continues to normalize, we remain focused on leveraging the competitive advantages from our scale and capabilities and executing our strategic initiatives to continue to drive growth and market share gains. With that, I'll hand it back to the operator for Q&A.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Ryan Merkel with William Blair. Please proceed with your question.

Hey, everyone. Thanks for taking the questions today. First off, I just wanted to ask about sales guidance for '24. I'm a little surprised with the guidance of flat to down. Mike, can you just walk through some of the pieces there, because it was a pretty rough year in '23, we had horrible weather and your business is largely to non-discretionary aftermarket. So, kind of, explain why we're not seeing a bit more growth in '24?

Yeah. Thanks for the question, Ryan. The first assumption is, we don't see any recovery in discretionary sales, and at the midpoint of our guidance, we have discretionary sales, which, as you know, is about 20% of our business, planned down an additional 10%. Non-discretionary sales, we do have growing plus 1.5%. But we also have the headwind of the chemical price actions we took in June, which through the first seven periods of the year are definitive headwind. So, with the discretionary sales being down, which are predominantly high ticket items and with the headwind from the chemical, we have -- there is about 400 basis points of headwind in those two items prior to any growth. So, that's why we're -- that's why we've got the midpoint and the guidance basically flat for the year.

Okay. That's helpful. And then just a question on trends. It looks like 1Q sales are also coming in a little bit below where the Street was modeling. What do you sort of seeing out there? You've seen consumer slowdown, what's happened with traffic in the last couple of months?

Yeah. The way the quarter played out, September, first of all, let me back up, in Q4, July was the best month, August was a little weaker, and September was tough. October, we saw a continuation of that trend. In November, we are seeing some turnaround on some of the categories and some increases in traffic. So, it's a slow turn, and it's not definitive yet. But the real change in the business has been as traffic has normalized or excuse me, as traffic has improved with improved weather, we are seeing transactions start to recover. But at the same time, we're seeing the average order value down and that's really being driven by the equipment business and the discretionary business, the high ticket items. And equipment is -- it's been a tough trend for equipment, it was down 17% in the quarter, 12% for the year, starting to see it turn now, but the more discretionary parts of the equipment business, particularly our heaters and robotic APCs, has been a little challenging.

Got it. Very helpful. I'll pass it on. Thanks.

Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Hey, good evening, everyone. Hey, the first question, I guess, it could go to either way. I think, Mike, you said that the biggest gap in the guidance you gave was the inventory adjustments. Can you talk about why those were not observable in July?

Yeah. I can start with that, Simeon, and Mike can tag on if needed. The main reason is, as we kind of step back and look at the issue on inventory adjustments, the main issue, we're just having too much inventory. We peaked close to $500 million, then it started to come down, but it's more inventory than we've had in the past, and that required us to use several third-party off-site storage facilities with a lot of movement of product between those facilities. We had some higher and sellable returns. And so, it just created a lot of movement of goods, and goods not in our -- inside of our four walls. And so, that is the root of the problem. And so, as we've kind of thought about it and talked about it, the problems that we had with inventory adjustments are really not systemic. They're fixable and we're kind of on that path to improvement. And the first step in that direction was just to get out of all those off-site warehouses, and kind of get it inside our four walls. And so, we've worked really hard over the last several weeks to do that, and as we stand here today, we're out of those additional off-site storage facilities. And so, that's a great first step for us. So, we can put eyes on the inventory. It's inside of our four walls. We don't have the movement of goods that we had before. And so just the extra visibility and having that there is the first step for us to improve that whole process. Along with that, we -- there's some improvement we can do just to improve controls on our scrap, just outsized, but just the sheer volume of inventory. We had to add to our excess and obsolete reserves on inventory, because we had so much. As we have now brought that inventory down, we should be able to release some of that. And we also just put more focus on kind of monthly processes, just identify any major variances that come along in early warning signs, but before we built up that inventory, we actually controlled it pretty well. And so, now that we're backed down, we have a really good DC team, some new talent, we feel like we're in a much better position to manage it going forward.

Okay. A follow-up, it's maybe a bit broader, it's your approach to your guidance. And I heard some of the components, and then, the answer to the last question. And thinking about the industry, your assumption to the grower contract, the units get better. I heard what Mike said around discretionary stays weak, are you doing that assumption at a prudent or it could happen that way. And then, even in your gross margin, you're not even recouping what you gave back this year on inventory adjustment, right? It's a very mild level of gains. So, your approach seems conservative, but, I mean, it's a tough argument to make given this miss, but curious how you thought about it?

Yeah.

Yeah. Go ahead, Scott.

Yeah, I can start off on the gross margin side and Mike can chime in on the sales side. And a lot of that is driven by just our commentary around discretionary purchases, still constrained, interest rate is still high, especially in the hot tub business, very high ticket items. And so, we just haven't really seen a ton of relief yet from the consumer side. And their ability to ratchet up discretionary purchases, that may happen. We haven't seen meaningful signs of that yet. And so, we're kind of taking it with kind of knowledge that we have today. As we look at gross margin, we feel like we'll recover the lion's share of the inventory adjustments that we saw come through in Q4. So, that is kind of a Q4 benefit. If we kind of fix that problem, we should see a big improvement in Q4. And we fully expect to see that. We do have a couple of other headwinds as well. We've talked about in the chemical price reductions that we took back in June, which was needed just to get our pricing kind of in-line where it needed to be. And so, as we kind of roll into the New Year, we'll see some impacts of that. We did take some prices up in January of last year. So, kind of, coming into Q2, that'll be a little bit even more of an impact. Q1 will be an impact as well. But we'll also have -- with lower sales, we'll have some pretty significant deleverage on occupancy as well. So, we feel like the gross margin will get better as the year goes on. But in the first-half of the year, it will be a constrained.

Thank you.

Simeon, a little more color on, yeah, a little more color on the sales guidance. The -- we are planning transactions positive plus 3% at the midpoint. We have seen a recovery in traffic. We feel good about our conversion rates and we feel good about the chemical business, which, as you know, it's 45%, 50% of our business. And then -- and those trends have turned positive. We are, however, planning AOV down 4% at the midpoint. And that really is driven by the mix and a trend we haven't seen turn yet in discretionary repurchases, hot tubs, above ground pools, and more recently, heaters and robotic APCs. So, that's how we're thinking about the business, a recovery and traffic, recovery and transactions, but pressure on the AOV. That's how we get to the midpoint of the guide.

Yeah. That's helpful. Thank you.

Thank you. Our next question comes from the line of Steven Forbes with Guggenheim Securities. Please proceed with your question.

Good afternoon, Mike, Scott. I wanted to maybe start with the performance of the assets acquired during the past few years. Just trying to get a better understanding of how much of a headwind those newly acquired assets are on both sales and profitability as we look out to 2024 or if you've seen some stability to the point where those assets are sort of neutral, right, to sales and profitability? Any context on just how you think through the more recently acquired assets?

Yeah. Thanks, Steven. Well if we think specifically about the hot tub businesses and I'll talk to those first, because as we've talked about the big ticket discretionary items often financed, that business has been challenging. We were down for -- on a comp basis with the hot tub businesses, 22% for the year. That being said, there is still very good levels of profitability. We feel good about the businesses long-term. And in terms of a mix on our total adjusted EBITDA ratios, they are not a drag on the business.

Helpful. And then maybe just a follow up for Mike or for Scott. I think it was Mike, who mentioned the inventory reduction of $100 million from the peak, right, and $50 million at year end. As we think through the guidance here, any help with sort of working capital needs for the first-half of 2024 just as we sort of think through the interest expense implications and free cash flow sort of on a quarterly basis?

Yeah. Sure. I can take that one. So, just given the seasonality of our business, we typically start to use our revolver usually in the late first quarter, as we start to execute our inventory build. And so, we kind of see this year playing out in a similar way. And so, as we start to get into the end of this calendar year, we'll probably be on the revolver. As we ramp-up -- usually we ramp-up our inventory late March, early April, that's kind of when we hit our peak. And then, we may hit, that's kind of start of the pool season and our peak selling periods, and that's when we draw the revolver down. And then, the last few months of the year is when we build cash on the balance sheet. And so, we see it happening in a similar kind of way this year. I think it will play into our benefit, that our peak inventory, at least what we're planning on. As Mike kind of mentioned, we'll be close to $100 million less than what we saw this past year. And so, that's really a testament to kind of the merchandise planning team, and some new tools we have in-place. But we really have a good plan of how we kind get into the season and come out of it. I mean I think we have some other things, kind of, on our side, the supply chain is operating more normalized, lead times are shorter. So, that's certainly helping us. Our DC team, it's getting more and more efficient. And so, we feel like that's how it's going to play out. And so, from kind of a working capital standpoint, I think one thing to keep in mind is that when we started 2023, we had almost $160 million of payables. We've paid down close to $100 million of payables during the course of 2023. This year, we're starting at less than $60 million in payables. And so, we will not have that huge cash drain that we saw last year on just paying that payables balance down. Reason for that is we reduced inventory towards the end of the year, and in the prior year, at the end of 2022, we were building inventory. And so, that is the cause of that. But it puts us in a much better position to generate free cash flow this year. That, along with higher net income and tight management on working capital, will give us much better free cash flow number than what we saw last year.

Scott, that's super helpful. And maybe just given that you guys provided first quarter guidance, any -- can you sort of marry that together and give us a thought on sort of what the guidance implies for liquidity as of quarter end 1Q?

The quarter end 1Q, yeah, and so, yeah, our total liquidity will be close to $200 million at the end of the quarter.

Thank you, both.

Thank you. Our next question comes from the line of Peter Benedict with Baird. Please proceed with your question.

Hi, guys, good evening. Thanks for taking the question. Well, first, just on -- maybe talk a little bit about inflation. I think I heard Trichlor stabilize. I don't know, but just what's the inflation view that's embedded, I guess, in the outlook for '24? That's my first question.

Yeah, Peter, thanks for the question. It varies by product category this year, like it does most years, but a little more pronounced, we think, going into '24. The pricing -- we have the pricing on '24 from the equipment companies, as is typical their practice, their 3% to 5% increases in price with corresponding increases in MAP prices. So, it's not a -- it's not margin dilutive for us. And that's well-planned and our purchases have been made. So, very easy to follow. On terms of the chemicals, that each of the levels of guidance low, mid and high, we have planned a low-single-digit ASP decline. We're not seeing that at the moment in chemicals. Chemical prices are holding from where they were during the pool season in fourth quarter. But we think it's prudent that, that we plan some slight decrease in prices. And if we don't get that, then we should see a little bit more of a tailwind. So, inflation in the equipment business and slight deflation in the chemical business. Taken all together with the other categories, we think it's a pretty flat year, inflation overall.

That's helpful, Mike. And just related to that, just the promotional tone. I guess, your promotional tone, but also what's happening in the industry, how that's evolved here since -- over the last several months and what you're kind of thinking as you look out to '24 in terms of promotions?

Yeah, again, it differs by section of the business. In the residential business, this last pool season, we think was a very normalized in terms of promotions. We were pleased to see that our promotions were as we planned them. Going into the residential business for fiscal year '24, we again expect normal promotional environment, normal weather, which we've also assumed, should -- make sure that stays intact. We believe we can plan our promos slightly down, but sufficient to move the inventory that we need to move, including any rec items or other items that are a little more price-sensitive. In terms of the PRO side, there was more competition on price, as I mentioned in my script on the PRO side in fiscal year '23. Fiscal year '23 saw, kind of, convergence of domestic production of chemicals, specifically, Trichlor coming back online. At the same time, there was a fair amount of imports in the market, that looks to have stabilized. I think supply and demand on the PRO side now looks to be in pretty good place. Prices have been stable for the last quarter and we expect that, kind of, normalization, if you would, of pricing in PRO now to be set for the next year.

That's great. And then, maybe, one for Scott, just on the margin profile of business. And, obviously, you're just coming on-board here. So, maybe, premature, but pre-COVID, this business was kind of, call it, 17% on the EBITDA line. I think your outlook this year is somewhere mid-12, so I think at the midpoint. How are we thinking about maybe the profitability of the business kind of in a stabilized environment? I mean, you talked about SG&A dollars being down a little bit, I think, for this year. Any more color on kind of your view on the opportunities to build back the margin kind of longer-term? Thank you.

Yeah. Sure. I'll start with just the product gross margin. So has been impacted here lately with some of the price changes that we've made. I think it was the right thing to do to make sure we have that balance, price and volume and positioning. So I think that was definitely the right thing to do. I think our opportunity is in a couple of areas. When you look at DC costs. The inventory adjustments that we talked about, the burden of the excess inventory will improve. And so we were impacted by about over 200 basis points of DC costs for 2023, and that does also include the expensing of capitalized DC cost. And so, the way that, that works is as we draw-down our inventory, we have to bring those capitalized DC cost to the income statement to kind of match with the flow of those goods, okay. And so, as you can imagine, when you're building inventory, you put those costs on the balance sheet until you draw it down. And so, what we're seeing is a big headwind now as we draw down inventory, as we -- and as we expense those capitalized costs, okay. And so, once we get that inventory down, we're still going to draw-down a little further, that headwind will tail-off. I think that is a key issue, because without that, the DC costs are going to be way down in 2024, and that is just better talent and management of those facilities, using more metrics and dialing-in the expenses to run those facilities. And so, the team has done a great job of really getting efficiency out of those DCs. Unfortunately, we haven't seen the full effect of that yet, because we have had the burden of expense of these capitalized costs. As sales improve, occupancy has been deleveraged over 100 basis points in last year. And so, as sales improve, we'll get some natural leverage on occupancy. And then, from an SG&A standpoint, we see a pretty good path on improving G&A. So, we had some non-recurring costs. They came in this past year, those go away. And so, the path to improve SG&A for this next will be really good, because we've kind of delayered the organization, we've streamlined, we've gotten some of these non-recurring items out of the way. And so, we expect that we'll get simply some leverage out of SG&A as well.

All right. Great. That's helpful. Thanks so much, guys. Good luck.

Thank you. Our next question comes from the line of Kate McShane with Goldman Sachs. Please proceed with your question.

Hi. Good afternoon. Thanks for taking our question. We wondered if you could talk a little bit more about any differences you're seeing between demand in the PRO versus residential market and what your survey work is telling you today about the level of stockpiling chemicals? And as a second question, could you maybe comment on your share commentary in the quarter?

Yeah. Thanks for the question, Kate. The -- in terms of demand, residential versus PRO, as we said, there was heightened price competition in chemicals. And our PRO business is really dominated by chemical sales for the most part. So, that pressure in the chemical side of the PRO business impaired as a headwind, more predominantly on the PRO business than it did on our residential business. That's the reason for the differential in performance for both the quarter and the year. For the year, the comp was down 11% in PRO pool, numbers down 9% in residential pool, and it's really the chemical headwind in PRO that drove that difference. We haven't seen any switch from DIY to DIFM. Really over the course of the last decade, that number hasn't moved a lot and we don't see it moving a lot. In terms of stockpiling, it's a good question. We put out surveys -- additional surveys in September and also in November. And our most recent results from that show definitively that fewer consumers have excess carryover chemicals than they did the prior year. I'm going to say, unfortunately, between the two surveys, we're not confident that we can size that. And so, for our guidance, we haven't assumed any tailwind or headwind from customer stockpiling. We're going to continue to test every 60 to 90 days, try to get smarter about how the consumers are acting. But for right now, we can say, doesn't look to be any more of a headwind, could possibly be a tailwind, but we're not able to size it with the current data we have. And then in terms of the share, we mentioned that we did not grow as fast as the industry in fourth quarter, 250 basis points. That's a big miss for us. We bridge all of that with the full quarter of the chemical price reductions that we put in-place. Look, it's a good question is, should we have reduced the chemical prices. So, you understand our thinking on that. There's two things that were very strong signals. One was directly from our consumers through post purchase surveys that we were too expensive. And we were not a good value and we can't have that long-term, that's not the brand positioning. That was one. The second one is, we were seeing our volume in those chemicals dropped. So, we made the decision to take the prices down. We did see an increase in volume, not enough volume to make-up the entirety of the headwind. But I believe it was the right thing to do long-term for the brand and the business. However, it did cost us some sales growth versus the industry in Q4.

Thank you.

Thank you. Our next question comes from the line of Garik Shmois with Loop Capital Markets. Please proceed with your question.

Hi, thanks. Just wondering if you could provide maybe a little bit more hand-holding on how to think about gross margins in the first quarter, just given that you're providing a little bit more near-term visibility and just given all the moving parts just around the business here in the near-term?

Yeah. So, let me kind of break it down, just kind of first-half of the year versus the back-half. So, what I would see in the first and second quarter of the year is some pressure on product gross margin as we kind of lap those chemical price changes that we did back in June. It will be more impactful actually in Q2, because back in January, we raised prices on several items. And so, it will be a little more acute in Q2 on those chemical price changes, but still in effect in Q1. DC costs will be slightly unfavorable mainly because of the expensing of those capitalized expenses that I talked about as we reduce inventory. And then, with a little bit lower sales, we should see some occupancy deleverage mostly in first quarter. Second quarter, not as much deleverage. And then, as we get into the back-half of the year, Q3, probably more flattish. Q4, we should see the biggest improvement as we start to lap those extremely high inventory adjustments that we saw and as DC costs are more moderate without all the off-site storage facilities and movement of goods, and the DC capitalization expensing should be much lower in Q4 as well.

Got it. Thanks for that. And then, just on the discretionary piece. It sounds like you're expecting sales to be down 10% through the year. I mean, you talked a little bit about the buckets there, but any additional color as to how you expect discretionary sales to track and maybe kind of where you're seeing the largest, maybe, incremental change in fiscal '24?

Yeah. Garik, the hot tubs have been soft, and the higher priced hot tubs have been softer. We haven't seen that have any material change either in Q4 or so far through Q1. So that's been relatively consistent. The one change we have seen is, in some of the more discretionary equipment businesses, specifically heaters and some the robotic APCs, that was more challenging in fourth quarter. Equipment sales were down 17% versus 12% for the year, and started out Q1 also relatively soft. We're starting to see some improvement there, which is encouraging, but not enough for us to plan discretionary sales other than we have planned them, which is down 10% at the midpoint.

Understood. Thanks for that and I'll pass it on.

Thank you. Our next question comes from the line of Jonathan Matuszewski with Jefferies. Please proceed with your question.

Great. Thanks for squeezing me in. First question was on the 2024 sales guidance. So, this past year, PRO was an outperforming customer segment, flat relative to kind of residential down in the mid to high-single-digits. So what is your topline guidance assumed in terms of relative performance between PRO and residential?

Yeah, Jonathan, thanks for the question. We've got PRO and residential planned fairly similarly for 2024, really based on the forecast of increased transactions, as I talked about, with some continued pressure on AOV.

Got you. That's helpful. And then just a follow-up in terms of SG&A for next year. Scott, I think you mentioned that the opportunity for slight decline year-over-year. Can you just expand on kind of the areas you see to kind of further rationalize that line-item in a potentially soft demand environment? What are the buckets that you haven't used yet, the levers you haven't pulled? Thanks.

Yeah, so as I kind of look at SG&A for this next year, you know, we've done a really good job of kind of tightening up labor, and so we'll see some benefits from that come through. Our marketing will be a little bit lower this year as we continue to test and learn on marketing and understand kind of best uses of the dollars and continue to optimize that. There's some room to bring that down a little bit. Really the biggest pressure for SG&A that I hope that comes true is incentive compensation. That was extremely low in 2023. So if it would come back to more of a normalized incentive payout, then that's actually the biggest pressure point that we have. Outside of that, our expenses are down, just kind of on the core SG&A. And then we'll have the added benefit of about $14 million of what I would call non-recurring, with some severance costs and some other write-offs. So as we lap that and kind of unadjusted the SG&A, we'll actually be lower than prior year.

Very helpful. Best of luck.

Thank you.

Thanks, Jonathan.

Thank you. Our next question comes from the line of Peter Keith with Piper Sandler. Please proceed with your question.

Hey, good afternoon, everyone. So, it sounds like on the M&A front, you're not anticipating any acquisitions. But could you just comment on what you're seeing with the M&A backdrop? It seems like it's been pretty good the last couple of years. Has anything changed on that front?

Thanks for the question, Peter.

Yeah, I can. Yeah, go ahead.

Yeah, thanks, Scott. I'll start, you can follow-on. Look, we think M&A is still very attractive, and we're pleased with the prices, we're pleased with the returns we're getting. In our current situation and with our debt and with the interest rates, as Scott had mentioned, our first priority is going to be debt pay-down in terms of capital allocation. In terms of M&A, our focus this year is really going to be on building the pipeline and finishing the integration of last year's acquisitions. So we still think it's a big opportunity, going to work on building the pipeline. A lot of these deals with entrepreneurial-minded founders and owners, they take some time to work through. So that will be the focus. And then now, get ourselves in a position from debt levels and leverage where we can get back on the M&A cycle.

Okay. Helpful. And then, I guess, I am intrigued with this 200 basis points of inventory adjustment that you are referencing with regard to Peter Benedict's question for FY'23. It seems like a big recovery opportunity, but I'm trying to size it up, if it's a multi-year. I guess, looking, at Q4 is when we hit the inflection, do you start to see full recovery by Q4 or is this something that, it might take through FY'25 or even longer to fully recoup?

Good question. I would say that we can recoup most of that this year. And the reason I say that is, mainly because just like I was saying about having our inventory inside our four walls is the biggest step that we can take in that process. So, we're not moving product around, we're not an off-site storage, third-party storage, and just having better control of that inventory goes a long way and avoiding a lot of that cost. There is continued improvements will do on scrap. And so but it was in control before we start this big inventory build, it's not a ton of work to do, but just further refinement of that. The one-piece that I didn't really go into a lot, we did have some additional and sellable returns, just returns coming back. And so, that -- those returns were a little bit elevated by a little bit. And so, as we continue to refine our process of going through those returns and making sure that we're taking all -- advantage of all opportunity to sell those products either as new or other outlets, that's a bit of an opportunity for us. And so, the returns did tick-up a little bit. I don't know if that's a long-term thing, or just an anomaly, but that wasn't the major portion of the spend there. And so, what I would say is, basically, 80% of what we saw over the -- this last quarter are fixable in 2024.

Okay. And just to verify that, Scott, there's a recoup this year, but you don't start to recoup it until Q4, and then, I guess, in the following quarters, you'll recoup the rest on an annualized basis?

That's -- yeah, that's the way to think about it. I mean, predominantly, it was the fourth quarter impact for us. And so, as we lap fourth quarter this year, we should see that benefit.

Thank you very much, guys. Good luck.

Thank you.

Thanks.

Thank you. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.

Hi, good afternoon, everyone. On a big picture basis, when you think about the pool season in 2024, are you expecting a positive pool season in the second-half of the year, is that what the guidance infers and how you're thinking about it? And then, breaking down the components of the sales, even compared to last quarter, you talked about equipment sales and what made it more impactful this quarter than last quarter. How you're thinking about AOV and how you're planning AOV going forward? Thank you.

Yeah. Thanks, Dana. The -- look, we expect the 2024 pool season based on what we know right now to be fairly flat. Like, I'd mentioned earlier, we will see some inflation in equipment, but we think the units might be challenged. Likely to see a little bit of deflation in chemicals, but we think the volumes will be higher. And mixing those together, we think it's a fairly flat season. We're showing a big recovery as Scott walked through from first half to second half, that has more to do with our internal decision on the price adjustments and when we made them last year. But overall, for the industry and for ourselves from a demand standpoint, we expect the pool season to be relatively flat. Again, discretionary items in there being down, non-discretionary being positive. In terms of AOV, at the midpoint, we're planning AOV down about 4% for the year and transactions up about 3%. With normal weather, which we've seen now in the fourth quarter and also into the first quarter, we're seeing traffic recover, conversions are holding steady. That's giving us a transaction boost. But the mix out of high-ticket discretionary items and some of the more discretionary equipment categories is challenging AOV.

Got it. Thank you. And just following-up on the competitive front, what are you seeing from your competitors? Any change there in terms of whether it's pricing or store openings, store closings, what are you seeing there?

Yeah, there hasn't been any new scale competitors that have come on the scene, either in the PRO side or on the residential side. On the PRO side, we've got two big distributors, that continue to go about their business, running very nice businesses and little bit challenged this year by their own reporting, but still very healthy businesses. And then, on the residential side, the one scaled competitor, Pinch A Penny in Florida seems to be having a fairly flattish year, and we would expect them to be continue to be good competitors for next year, and can't say how they're thinking about it, but I'm not sure the situation in Florida is much different than the rest of the country in terms of how we're thinking about it.

Thank you.

Thank you. This concludes our question-and-answer session. And with that, this will conclude today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.