Leslie's, Inc. (LESL) Q2 2022 Earnings Call Transcript

Leslie's, Inc. (LESL -6.35%)
Q2 2022 Earnings Call
May 05, 2022, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the second quarter of fiscal 2022 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 -- question-and-answer session. [Operator instructions] As a reminder, this conference call is being recorded and will be available for replay later on the company's website.

I will now turn the call over to Caitlin Churchill, Investor Relations. Please go ahead.

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 on 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. Mike?

Mike Egeck -- Chief Executive Officer

Thanks, Caitlin, and good afternoon, everyone. Thank you all for joining us. Please note that we have posted a brief deck on the Leslie's IR site to supplement our discussion, and we will be referring to -- specific pages as we present. I'm going to start by highlighting our key results and performance drivers for Q2, and then Steve will walk you through our financial results and increased full year guidance.

Before we get into our results, I want to remind everyone about the Texas freeze in the second quarter last year, in February 2021, an unprecedented cold weather event damage thousands of pools and pool pads in Texas. This event spikes sales of several product categories, most specifically equipment, parts, and sanitizers. As you will remember, we estimated at the time that the freeze and accompanying spike in demand increased sales in the quarter by approximately $10 million. It is very gratifying for us to be able to report a positive comp in this year's quarter, despite the extraordinary circumstances in Q2 last year.

I would like to thank our team for driving these results with superior execution across the organization. For purposes of demonstrating what we believe to be our core underlying performance, we will be noting in our remarks some key metrics excluding the impact of the freeze. I am pleased to report that our Q2 performance continued our streak of record results, and illustrates our competitive advantages in serving the non-discretionary annuity like demand of the aftermarket pool industry. Sales for the quarter increased 19% to a record $228 million, with broad-based strength across our three consumer groups.

Residential pools grew 12% for the quarter, residential hot tub grew 17% and PRO pool grew 17%. Comp sales increased 13% for the quarter, and the two year stacked comp for the quarter was 49%. The comp and two year stack comp for the quarter, excluding Texas, was 20% and 48%, respectively. Gross profit for the quarter was a record $85.6 million and margin rate expanded 30 basis points.

Adjusted EBITDA was $9 million for the quarter as we continue to make investments to grow our business. 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 consumers continuing to invest in their homes and backyards, the desire for a healthy outdoor lifestyle, migration to the Sunbelt, a heightened sense of safety and sanitization, and hybrid and work from home schedules. We have seen no evidence of these macro trends abating.

With regard to inflation, in the quarter, product cost inflation was more than 10%. We pass those costs through and as is our practice, implemented additional pricing actions to maintain product margin rates. Consumers have accepted the increased retail prices and we did not see any associated slowdown in demand, as evidenced by our 20% comp for the quarter, excluding Texas. For the full year, we now expect product cost inflation of 10% and remain confident in our ability to both pass costs through and utilize pricing actions to maintain product margins if inflation trends higher.

We were pleased with our performance across product categories in the second quarter. However, several categories stood out. Robotic pool cleaner sales increased 64% in the quarte, and 172% on a two-year stack. Variable speed pump sales increased 23% in the quarter and 109% on a two-year stack.

Heater and heat pump sales grew 20% in the quarter and 104% on a two year stack. Hot tub sales grew 82% in the quarter and 284% on a two-year stack. And Trichlor sales, including chlorine tabs, increased 96% in the quarter and 159% on a two year-stack. On page 8 of the deck, we show the first half results for the same categories.

With regard to chlorine tabs, supply remains constrained and retail prices elevated. Over the last two years, our retail price for a 35 pound bucket of tabs has increased from $99 to $199. We get a lot of questions about what happens if chlorine tab pricing reverses and we have price deflation. We do not believe that is likely in our near or medium-term.

Let me explain why. Consumers commonly referred to as chlorine tabs are actually Trichlor tabs. Trichlor is manufactured by combining chlorine, caustic soda and urea. That combination creates Trichlor granules, which are then compacted into tabs.

While domestic Trichlor capacity was impacted in 2020 and 2021 by the much discussed plant fire, the industry is also facing very tight chlorine supply conditions which have created corresponding cost increases. Shortage in chlorine has two drivers: The first is structural. In the last six months, chlorine capacity in North America has been reduced by about 7%;The second factor is that chlorine is a key component of PVC. Chlorine use in PVC has a higher value than chlorine use and Trichlor manufacturing.

The reduction in total chlorine capacity and the growth in PVC manufacturing has caused the amount of North American sourced chlorine available to U.S. Trichlor manufacturers to decrease by about 20%. The result is that domestic Trichlor capacity is tight and falling short of elevated consumer demand. Imported chlorine and Trichlor granules can bridge supply to the market.

However, both are very expensive to the combination of tariff costs, anti-dumping duties, and especially handling, and transportation costs. In addition, urea, another primary component of Trichlor manufacturing is also experiencing significant cost increases driven by restricted supply and increasing demand. Over the last 12 months, the cost has been increased more than fourfold from less than $200 per standard ton to nearly $900 per standard. We have summarized the supply and demand situation on Page 11 of the deck.

Here is the takeaway. Any absolute increase in Trichlor supply will need to come from high cost imports or new domestic capacity utilizing high cost imported chlorine and all Trichlor manufacturing will be utilizing high cost urea. Given these challenging supply dynamics and continued robust demand, we believe it is highly unlikely the cost of Trichlor and the retail price of chlorine tabs will go down in 2023. We also get a number of questions with regard to how our business model will perform in different macroeconomic conditions.

As you can see, summarized on page 14 in the deck. Over the last two decades, Leslie's has been successful in profitably growing sales in periods of rising interest rates, inflation, housing, industry slowdowns, GDP contraction, declines in consumer spending, and reduced pool build rates. In fact, our business model has proven to be durable in all of the macroeconomic conditions that have existed during our 58 consecutive years of growth. And with the addition of Leslie's Connect, we're focused on our six strategic growth initiatives and our investments in talent and capabilities, we believe we are better equipped today to grow profitably in challenging macroeconomic conditions than at any other time in our history.

Getting back to our Q2 results, let's walk through the performance of our six strategic growth initiatives. First, our consumer file continues to grow. Total target file growth was 3% in the quarter. We are pleased with this result given the impact of the Texas freeze in Q2 last year; Second quarter 2022 was our 10th straight quarter of strong funnel growth.

We are driving this vital growth with digital marketing, and we continue to achieve high ROI on our spend. Accordingly, we have now increased our marketing budget for 2022 by more than 30%. The vast majority of this spend will be deployed in our Q3 and Q4; Next, we continue to deepen our relationships with our consumers. Our loyalty program, Leslie's pool perks, drove loyalty file growth of 2% in the quarter, despite the comparison against the Texas freeze last year.

Programs key benefits a 5% rewards earn rate and free shipping continue to resonate with consumers. Average revenue per consumer room 16% in the quarter, driven by pool perks and our segment and personalized marketing tactics. The growth in average revenue per consumer exceeded the impact of inflation and reflects our growing wallet share; Third, our pro initiatives are driving strong results. During the quarter, we began converting 29 residential stores to our pro format and building out five new pro stores.

We expect all 34 new pro locations will be operating prior to pool season and will bring our total PRO store count to 79. PRO affiliate program continues the scale. We now have over 2,100 agreements in place and our PRO affiliate partner sales grew 43% in the quarter. The new and converted pro locations are expanding PRO affiliate program, and our dedicated Leslie's pro e-commerce site helped grow our total pro-business 17% in the quarter.

Excluding the impact of the Texas Freeze, our PRO business grew 27% in the quarter. Moving to M&A in the quarter, we closed on the acquisition of Pool City, which operates seven locations in the greater Pittsburgh area. In addition, we have entered into [Inaudible] with two new target acquisitions that we expect to close in our third quarter. We continue to see a wealth of acquisition opportunities among the approximately 8,000 independent specialty retailers in the industry.

And we will continue to ramp-up our acquisition activity. Based on our acquisitions completed year-to-date, we are increasing our 2022 forecasted sales for our M&A, Strategic Growth Initiative, and $30 million to $45 million. With regard to our Residential White Space initiative, we have added three new locations year-to-date and remain on track to open at least ten new residential locations in 2022. Finally, AccuBlue Home, as we discussed shortages of the microchips required for manufacturing version 2.0 has limited production for the school season.

We expect to receive not more than a couple of thousand units, which will be used primarily for additional consumer testing. We are not planning any significant sales for this initiative in 2022. Now, I'll turn it over to Steve to share more detail on our Q2 financial results and increased fiscal 2022 guidance.

Steve Weddell -- Chief Financial Officer

Thank you, Mike, and good afternoon, everyone. Today, we're pleased to report strong results for our fiscal second quarter. Our performance illustrates our competitive advantages in serving the non-discretionary, annuity like demand of the aftermarket pool industry. And our business continues to demonstrate a differentiated ability to grow in all economic environments.

Our dedicated team of associates continue to deliver exceptional service to our consumers each and every day. We thank them for their contributions. Today, I'll review our second quarter and year-to-date fiscal 2022 performance and our upward revision to our outlook for the full year fiscal 2022. Second quarter results.

Our second quarter included 13 weeks ended on April 2, 2022. We reported record sales of 228.1 million, an increase of 18.5% or $35.7 million when compared to the second quarter of fiscal 2021. Our comparable sales growth increased 13.3% or $25.5 million. This increase is on top of calendar adjusted comparable sales growth of 35.5% in the second quarter of fiscal 2021, and represents comparable sales growth on a two-year stack basis of 48.8%.

You will recall in Q2 last year we explained the shifts created by the 53rd week in fiscal 2020 and spoke to comparable sales growth on both a reported and shifted basis given that dynamic. As Mike mentioned, in the second quarter of last year, the Texas freeze positively impacted performance by approximately $10 million. After excluding the impact of the Texas freeze in fiscal 2021, sales grew 25% and comparable sales grew 20% in the second quarter of fiscal 2022. We generated strong results across all consumer types, and we continue to see solid performance in the core sanitizer and equipment product categories during the quarter.

Inflation remained elevated and primarily related to chemical products and equipment. We expect higher retail prices and costs to continue. We remain confident in our ability to pass costs through annualize pricing actions to maintain product margins. Gross profit increased 19.5% and gross margin rate increased by 30 basis points to 37.5% from 37.2% in the prior year, primarily due to occupancy leverage and product margin improvements.

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 27.3% over the prior year on a reported basis. The year-over-year SG&A increase was primarily driven by our sales increase and investments in information technology, merchandizing systems, and supply chain to support our growth. We also incurred a higher SG&A 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 given the seasonality of our business. Total SG&A spend and SG&A as a percentage of sales in the first half of fiscal 2022 was favorable to our internal expectations. We generated adjusted EBITDA of $8.7 million compared to $9.5 million in the second 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.

With positive adjusted EBITDA performance in each of the first and second quarter of this year, we're on track to generate positive adjusted EBITDA in each quarter of fiscal year for the first time in Leslie's recent history. This is a testament for our business strategy and execution by our entire team. Adjusted net loss remained relatively flat at $2.7 million in the second quarter of fiscal 2022, compared to a net loss of $2.8 million in the prior year. Adjusted diluted loss per share was $0.01 in both the second quarter of fiscal 2022 and in the prior year.

Now we'll turn to year-to-date results. Following are a few highlights. Total sales for the 26-week period increased 22.4% to $412.9 million, from $337.4 million in the prior year, an increase of $75.5 million. Our comparable sales increased 16.4% or $55.2 million.

This increase is on top of the shifted comparable sales growth of 31.1% in the first half of fiscal 2021, and represents comparable sales growth on a two-year stack basis of 47.5%. Gross profit increased 23.9%, or $29.5 million to $152.9 million from $123.4 million in the first half of fiscal 2021. Gross margin rate increased by 40 basis points to 37% from 36.6% in the prior year. Adjusted EBITDA improved by $0.5 million to $9.8 million from $9.3 million in the first half of fiscal 2021.

Adjusted net loss remained relatively flat at $13.7 million in the first half of fiscal 2022, compared to a net loss of $13.4 million in the prior year. An adjusted diluted loss per share was $0.07 in both the first half of fiscal 2022 and in the prior year. Moving to the balance sheet. We finished the second quarter of fiscal 2022 with cash and cash equivalents of $52 million compared to $89 million at the end of the second quarter of fiscal 2021.

We also had $45 million drawn on our revolver at the end of the second quarter of fiscal 2022, and our current outstanding balance is zero. On inventory, we continue to expect inventory conditions in the industry to remain tight throughout fiscal 2022, particularly for chemicals and equipment. We ended the second quarter of fiscal 2022 with inventory of $345 million, up 24% compared to $278 million at the end of the prior year quarter. 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 full season.

With regard to debt, at the end of the second quarter of fiscal 2022, funded debt less cash was $795 million compared to $721 million at the end of the prior year quarter. The increase was primarily related to a reduction in cash and cash equivalents as we executed share repurchases in the first half of fiscal 2022. In the first half of fiscal 2022, we repurchased $7.5 million shares for a total of $152 million. And we deployed $30 million toward acquisitions.

We're in a unique position, high growth company with strong and consistent cash flow generation. This allows us to pursue a balanced and disciplined approach to capital allocation and demonstrates our commitment to driving shareholder value, and 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 the fiscal third and fourth quarters, which span 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're uniquely positioned to invest in our business throughout the year, including in talent, operating expenses, working capital, and capital expenditures.

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. We were pleased with our strong start to the fiscal year, and we are firmly focused on driving our initiatives and executing in pool season 2022. With regard to our outlook. Today, we're raising our full year fiscal 2022 outlook to reflect three discrete items.

First, our updated views on inflation for the full year; Second, contribution related to M&A transactions closed in the first half of the year; And finally, our second quarter beat our internal expectations. We expect sales of $1,575 million to $1,610 million, representing an increase of 17% to 20% compared to the prior year. At the midpoint, this is an $85 million increase compared to our outlook in February, and the growth rates compare favorably to our long-term growth algorithm of mid to high-single digits. Our outlook reflects an expectation for 10% inflation for the full year compared to 5% previously.

In our outlook now includes $45 million in sales related to M&A compared to $30 million previously. We expect gross profit of $700 million to $715 million, which implies a small improvement to gross margin compared to the prior year. At the midpoint, this is a $38 million increase compared to our outlook in February, 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 $315 million to $330 million, representing an increase of 16% to 22% compared to the prior year.

At the midpoint, this is an $18 million increase compared to our outlook in February and the growth rates compare favorably to our long-term growth algorithm of low double-digits. We expect net income of $178 million to $190 million. And adjusted net income of $193 million to $205 million. We expect diluted adjusted earnings per share of $1.02 to $1.10, representing an increase of 20% to 29% compared to the prior year.

At the midpoint, this represents a $0.06 increase compared to our outlook in February and the growth rates compare favorably to our long-term growth algorithm of mid to high teens earnings growth. There is no change to diluted share count, which we estimate to be between $187 million to $189 million shares. This range does not include the impact of any additional share repurchases that may be completed during the second half of fiscal 2022. With regard to capital allocation, we have a balanced and disciplined approach, and our priorities remain as follows.

Our first priority is capital structure; Our second priority is to invest in growth through both capital expenditures and M&A. We continue to execute our fiscal 2022 capital expenditure program and as demonstrated by our updated outlook, we continue to make progress on our pipeline of potential M&A opportunities. Our final priority is to 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 in market conditions.

In summary, during the second quarter of fiscal 2022, we generated record sales, reported positive EBITDA, and continued to see strong results from our growth initiatives. And we're grateful for the contributions of our entire team as they continue to execute at a high level in the current environment. And with that, I'll hand it back over to Mike. Thank you.

Mike Egeck -- Chief Executive Officer

Thanks, Steve. I'm going to wrap up by reiterating the strength of Leslie's offense and defense. I'll start with our defense and remind you of four key 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, and we have the ability to take pricing action to protect product margins; Three, more than 80% of our assortment is non-discretionary and benefits from recurring annuity like demand; 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 buybacks.

To ensure we continue our track record of the growth, Leslie's has a high powered offense with four important attributes. One, we have tangible strategic growth initiatives and unique to our industry omni capabilities that are driving meaningful results and are still early stage in their development; Two, our multi-pronged PRO initiative continues to scale; Three, we have set ourselves up to capitalize on robust M&A opportunities we continue to see in the pool and industry; Four, great execution by our merchandizing team has put us in a favorable and advantaged inventory position. With both a strong defense and a strong offense operating in a unique and advantaged industry, and with a track record of 58 consecutive years of growth in all types of macroeconomic conditions, we believe Leslie's is uniquely qualified, positioned, and advantaged to continue to win in the market. With that, I'll hand it back to the operator for Q&A.

Questions & Answers:

Operator

Thank you. At this time, we will be conducting a question-and-answer session. [Operator instructions] Our first question is from Ryan Merkel of William Blair. Please go ahead.

Ryan Merkel -- William Blair -- Analyst

Hey, guys. Congrats on the quarter.

Mike Egeck -- Chief Executive Officer

Thanks, Ryan.

Steve Weddell -- Chief Financial Officer

Thanks, Ryan.

Ryan Merkel -- William Blair -- Analyst

So first off, thanks for all the details and the deck. It's really helpful. I was hoping you could address the pull forward question again. Because from a high level, it looks like you're a COVID winner, your top line has been very strong, stronger than typical history.

So have you tried to calculate a potential pull forward estimate? Or is this just not your view because of the macro drivers and share gain in price?

Mike Egeck -- Chief Executive Officer

Yeah. Ryan, I would say it's not our view, both for the reasons you stated. And also, due to the fact that we track that very carefully. We're able to see by consumer what they purchased prior years versus what they purchased year-to-date.

It's one of the things that we try to pay a lot of attention to, and we just haven't seen any indication of any meaningful pull forward.

Ryan Merkel -- William Blair -- Analyst

Ok. You see robotic cleaners up 74%. That sort of jumps off the page. You don't think people are pull forwarding some of that?

Mike Egeck -- Chief Executive Officer

I think, look, robotic cleaners are just a much better product. And all the manufacturers have done a great job with them. My neighbor just calls me and says, "new cleaner what I need." And I gave them, pointed them to our website, of course, with no discount, I might add. And I said, "you want one of these robotics?" And first thing they said, "Well, they seem expensive." I said, "you got to see it work." And he got it.

And then literally sent me, texted me a short video of him watching his robotic cleaner work. So that robotic cleaners. That's just it --there's a natural replacement cycle for cleaners. And I think it's been accelerated by it's just it's just a much better product.

Ryan Merkel -- William Blair -- Analyst

OK. Well, thanks for that. Still a question I guess I wanted to ask. And then weather hasn't been great here in the north.

Was there any impact to April there? And if so, is that something you can make up through the season?

Yeah. April. Well, let me speak to the quarter. Right.

In quarter two, I think the weather was -- slightly positive and I think I would call April slightly negative, but not a big impact either way.

Steve Weddell -- Chief Financial Officer

Yeah. Not a typical, Ryan. Shorter season, right. So late March and April.

And then when we get into late September, early October, you're going to have some weekly weather trends that have impact week-to-week. The one thing we always talk about is, it always gets warm and pools always open up, and it always gets cold and pools are always closed down. And in some of those seasonal markets. But, again, from a base maintenance perspective, it's about the core season, not necessarily the single day that it opens, the pool opens or starts getting used or closes.

Ryan Merkel -- William Blair -- Analyst

Great. Thanks. Best of luck.

Mike Egeck -- Chief Executive Officer

Thanks, Ryan.

Operator

Next question is from Simeon Gutman of Morgan Stanley. Please go ahead.

Michael Kessler -- Morgan Stanley -- Analyst

Hi, guys. This is Michael Kessler on for Simeon. Thank you for taking our questions. First, I wanted to ask about the updated and raised guidance.

On top line, I think if you add the updated inflation view plus the M&A view, that -- I think basically gets you to the updated sales and raise sales guide. It gets --number one, is that right? And I guess that would imply relatively unchanged. I guess go forward underlying volume consumption, I guess assumptions, is that just, I guess, general prudent conservatism as we move through the year? Or anything the call out as far as thinking about ex those two discrete factors?

Steve Weddell -- Chief Financial Officer

Yeah. Great. Thanks for the question. Yes.

So as we look at inflation, that five percentage point increase from 5% to 10% is going to contribute $50 million to $60 million of top line. We talked about the M&A at about $15 million contribution with the remainder coming from the Q2 beat. So you're right and we've talked about this in prior years where we're at the doorstep of season. And so, we've largely left the go forward look unchanged in just updated guidance for those three discrete factors.

Michael Kessler -- Morgan Stanley -- Analyst

Right. Thank you. And you mentioned no signs yet of consumer response as far as the macro still positive tailwinds. And I forgot if you mentioned if any any signs of either trade down or pull back? What are you guys looking for as far as whether that may or may not happen, recognizing the vast majority of your business is non-discretionary? Are there areas where the consumer could still choose to either trade down or pull back in certain ways? And I guess how are you thinking about that the well-publicized stress on the consumer world right now? Thank you.

Mike Egeck -- Chief Executive Officer

Yeah. I think what you're seeing in our business is non-discretionary nature, the vast majority of it, and recurring demand. And I know we say that a lot, but it really starts to prove itself in situations like this. We, if we have one business that is underperforming the others currently, it would be our rec business and, recreation products, floats, pads, basketball games, that sort of thing.

We have seen some weakness there. But that's a single digit percentage of our total business and in the core businesses of chemicals and equipment and parts and repair and maintenance. We have not seen any indication of a decrease in demand.

Michael Kessler -- Morgan Stanley -- Analyst

Great. Thank you. Good luck for the rest of you.

Operator

Our next question is from Steven Forbes of Guggenheim Securities. Please go ahead.

Steven Forbes -- Guggenheim Securities -- Analyst

Good evening, Mike, Steve. I just want to focus on loyalty member behavior and maybe data. Let me start with, we'd love to hear an update on average spend per member, maybe average wallet share penetration. Really, any insight as we think about how your member base, specifically your loyalty member base, is leaning into the [Inaudible] value proposition in terms of their their dollar spend.

Mike Egeck -- Chief Executive Officer

Yeah. Let me -- thanks for the question, Steven. Let me quote a couple of numbers on the file ex the Texas impact. Because it -- was pretty extraordinary in terms of all file dynamics as well as comp and sales.

So for the quarter, x Texas the target file growth was just north of 8% and the loyalty file growth was just north of 6%. So not the double-digits that we've had in the past, but we have spoken about those two particular initiatives starting to moderate at some point. We came out with some opportunities, low hanging fruit opportunities, I would say, to switch to digital marketing early from direct mail. And we got some outsized performance in the first eight quarters that's moderating a little, but still very satisfied with the results.

Terms of the loyalty file, spend is still about two times our non loyalty file and it's helping grow customer lifetime value grew another 7% in the quarter, on a three year look back. So we feel we feel good about the dynamics with the loyalty customer. The one thing that we are tweaking in our loyalty program is, and this was a little bit self-inflicted, our endless aisle operations from the stores, which drives a nice chunk of business, had -- what I'm going to call a non optimal loyalty signup, and we saw that disloyalty sign up rate some impact in the stores that's it's been corrected. Much smoother operation now, and I think that'll pay -- that'll be very well received by consumers and should pay some dividends in customer loyalty sign up in store as we go forward.

But overall, I feel good about where we are with loyalty.

Steven Forbes -- Guggenheim Securities -- Analyst

And maybe just a quick follow up on the PRO affiliate program, given the growth that we saw here in the number of agreements. Any update on the volume commitments from those partners? And then any updated thoughts on the optimum number of affiliate -- affiliates you see across the network?

Mike Egeck -- Chief Executive Officer

Yeah. We haven't quoted the PRO affiliate vendor agreements terms in terms of -- in terms of sales specifically, but they're unchanged. And we see good momentum here. We said 2,100 in at the end of the quarter.

We're seeing that continue to build. I think today, we're somewhere north of 2,300. No, I think I would say about the PRO business is the demand is very strong. If we have had some supply chain constraints, specifically with equipment, it has been in the PRO channel.

So that's something we're working very diligently on with our vendor partners for PRO equipment. We could use could use a bit more supply there.

Steven Forbes -- Guggenheim Securities -- Analyst

Thank you. Best of luck.

Mike Egeck -- Chief Executive Officer

Yeah. Thanks.

Operator

Next question is from Andrew Carter of Stifel. Please go ahead.

Andrew Carter -- Stifel Financial Corp. -- Analyst

Hey. Thanks. Good evening. First thing I wanted to ask about is the gross margin.

You did give some product higher occupancy leverage against the business mix. Any way to quantify how big that business mix drag is? And within that products, I'm guessing private label penetration overall is still growing, but I would also guess a year ago you comp to higher equipment sales because of Texas, therefore a margin benefit. So any extra added color you'd give us there?

Steve Weddell -- Chief Financial Officer

Yeah. Great question, Andrew. Interesting. And looking back to last year second quarter, actually inverse happened.

So we actually saw less private label penetration as a result of the need for any and all equipment available -- in that Texas market to get equipment pads back up and running. So we saw a good normalization, such increase over 2020 levels from a penetration perspective for proprietary products in the second quarter of this year, 2022. And then from a overall perspective on occupancy versus product margins that you point you back to your roughly $25 million per quarter from a overall occupancy perspective. And so, you can do the math on the occupancy impact for second quarter.

Again, remember first half, first and second quarter, lower volume sales quarters. And so has an outsized impact. And as we get to the back half of the year, it'll certainly moderate from a magnitude perspective.

Andrew Carter -- Stifel Financial Corp. -- Analyst

Thanks. Switching gears just a little bit to the days inventory. I think I got 116. It's up from the prior year.

Some of that's inflation, I would assume the 10% product. But what is the right level and I know it's a mixed bag. You're carrying a lot of strategic inventory, but there's probably areas you wish you could. Any kind of right level, what you think the right level of days inventory is for this business?

Steve Weddell -- Chief Financial Officer

Yeah. It's a great question as well. I think in the current environment, more inventory is better. So, we're pleased with being up almost $70 million year-on-year, up about 24%, as Mike stated, there have been some opportunities for us to where we wanted more inventory and if we can strategically identify opportunities with our vendors to bring inventory in quicker, we're certainly going to do that.

As you look at through the seasonality and look at that inventory number at the end of the second quarter, we are pre buying and pulling inventory in that to get it through our self-distribution network. It's one of our competitive advantages. We have the inventory either sitting in our distribution centers or moved out to our store locations, allows us to more quickly replenish stores and direct inventory to where it can meet the most consumer demand. And again, that's whether through physical locations or through digital channels as well.

And so, when you look at the second quarter, it's less from the sales on hand and more on operating efficiency to get get as much in the channel as possible so we can manage through the start of season. And then when we get into mid to tail end of Q3 and into Q4 is when we're working through replenishment cycles, more the management area down toward the end of the year. So hopefully, that's helpful as you think about the cadence of inventory coming into the system and then selling through.

Andrew Carter -- Stifel Financial Corp. -- Analyst

Thanks. I'll pass along.

Operator

A next question is from Garik Shmois of Loop Capital. Please go ahead.

Jeffrey Stevenson -- Loop Capital Markets -- Analyst

Hi. this is Jeff Stevenson on for Garik. Thanks for taking my questions today. Yeah.

My first question was about mix. Previously highlighted hot tubs and PRO being more front half of the year weighted. My question is, how was mix in the second quarter? And is that front half waiting still the right way to think about it?

Steve Weddell -- Chief Financial Officer

Yeah, that's a good question. Absolutely. Still true. When you think about both PRO as well as hot tub, it's going to be a little more consistent through the year.

When you think of professionals taking care of bodies water, more likely to open year round. I have more stable business through -- throughout the year as well. And so, it's going to have a outsize weight in the first half of the year. We certainly grow in that, that part of the business at a faster rate.

So that has had some impact -- not overly material. And then when you look at hot tubs, you know, primary selling season in late fall and through early spring. So certainly has an impact as well. Still the right way to think about it from a seasonality perspective and with the growth in both of those businesses, and some acquisitions that we've completed, a little more heavily weighted than in the first half, but no more than a few percent.

Jeffrey Stevenson -- Loop Capital Markets -- Analyst

OK. Great. That's helpful. And then how should SG&A track the rest of the year?

Steve Weddell -- Chief Financial Officer

It also a great question. So if you look at SG&A for the quarter, it was relatively high at $19 million increase are up 27%. And we've talked a lot about how we invest through the entire year that includes investments in the first half where it can have an outsized impact on overall performance. If you break down that SG&A increase of $19 million at sales growth drove about $11 million of that, including non comp from M&A transactions.

Together, that's $11 million incremental costs which generated cost leverage of about 80 basis points to get to the $19 million, just to other items that accounted for about $4 million each. These are basically investments to support our growth. And then the add backs that you can see in our earnings release related to stack comp costs, third party project costs and other items. And so when you think about the back half of the year, we do expect to get leverage on our operating leverage on our SG&A, it's baked into our guidance which 17% to 20% top line growth fairly similar metrics from an EBITDA perspective.

Jeffrey Stevenson -- Loop Capital Markets -- Analyst

Great. Thanks, and congrats on the great quarter.

Steve Weddell -- Chief Financial Officer

Thank you.

Operator

Our next question is from Jonathan Madejski of Jefferies. Please go ahead.

Jonathan Matuszewski -- Jefferies -- Analyst

Thanks for taking my questions, and thanks for all the color in the prepared remarks. First question, average sales per customer is growing faster than inflation. Maybe, if you could just unpack that a little bit. On the chemical side, it makes me think that the frequency of water testing is likely rising at faster rate than active file growth, and you rolled out AccuBlue water testing in the stores several quarters ago, but is that kind of the gift that keeps on giving? Or just if you could elaborate that on that a little bit?

Mike Egeck -- Chief Executive Officer

Yeah. Happy to. The average ticket, Q2 average order value was up 18%. Transaction count was up 1% until we get to the 19% sales growth.

And I think where we see AccuBlue Home is the impact there is that average order value has a component of product cost inflation in it, our pricing, it also has a UPT driver in there, units per transaction, and we have a growing increased use of AccuBlue Home, excuse me, AccuBlue in-stores. I wish it was AccuBlue Home. Not there yet. AccuBlue in-stores tests were up double-digits, strong double-digits.

And we know from tracking to prescriptions that there is almost invariably, almost 100% multiple components to the prescription. And with the conversion rate we have on prescription, that's helping drive UPT. So more people testing the water, the more they test the water, the more they continue to. And the prescription is driving a total solution that, that has multiple components in it.

Jonathan Matuszewski -- Jefferies -- Analyst

That's really helpful. And then just a related question on consumer behavior. Last quarter, you alluded to some customers buying 20 pound or 35 pound chlorine buckets, maybe instead of 50 pound buckets. Maybe it's because of sticker shocker or whatnot.

Did that dynamic happen at all in this past quarter? If so, it would make me think that the business is almost been the antithesis of pull forward and that more future trips would be required to appropriately sanitize pools. Any color there would be great.

Mike Egeck -- Chief Executive Officer

Yeah. This is a little bit an output of our supply. We've been in better inventory positions in smaller bucket of tabs, and we've been probably tightest in 50 pound buckets on our digital business. And the digital business, when they're tied on 50 pound tabs, that we typically convert that to a 35 pound bucket for the buy online pickup in-store.

So in some respects, our supply chain has traded people down a little bit. And I think as we saw in Q1, there's still anecdotal evidence from the stores that some people come in and think, "Wow, that's quarry's gotten expensive. I'll buy a little bit smaller bucket." So yeah, I would agree. I started with the first question saying, we don't see any evidence of any significant pull forward.

And in fact with UPT, I think we're seeing just the opposite, people buying more items, but perhaps a smaller quantities.

Jonathan Matuszewski -- Jefferies -- Analyst

Great. Thanks so much.

Operator

Our next question is from Peter Benedict of Robert W. Baird. Please go ahead.

Peter Benedict -- Baird -- Analyst

Hi, guys. Thanks for taking the question. I guess, you'd mentioned systems as part of your discussion. It sounds like it's a big number of dollars, but I just thought I'd ask you about maybe what you're doing on the systems front and what you're investing in, and what maybe some of the payouts are expected to be at all? New stuff coming on for next year or what have you? that's my first question.

Steve Weddell -- Chief Financial Officer

Yeah. Great. Thanks, Peter, for the question. So some of the systems we're investing in are still related to omni.

Some of the improvements from a lot of these Connect. Certainly, continue to work on AccuBlue Home, and working on merchandizing information systems as well, both planning, as inventory planning as well as financial systems for inventory. And then finally, supply chain. So looking for opportunities to continue invest behind supply chain technology to improve efficiencies and manage the volume of business that we're doing in the current environment.

Peter Benedict -- Baird -- Analyst

It's great. Thank you. And then, Mike, I guess your comments on the chlorine and Trichlor. Pricing outlook in supply demand was very helpful.

Just curious on the volumes that you've been able to secure, I guess, as you look to next year, 2023 and any perspective on that, how that maybe compares to what you were able to do for this season? That's my next question.

Mike Egeck -- Chief Executive Officer

Yeah. Peter, thanks. Appreciate the question. I'm going to be a little vague, because if you'll remember on this year, when we asked about how much more Trichlor we had procured, we held our answer at more.

And I'm going to say, we're happy with our current supply. So the flow of it could be a little more front. Front loaded. Still pleased with the supply.

We're in line to buy even more next year. No need to feed the machine we've created for chemical consumption and the growing consumer profile. And we're in the process of procuring that right now, the discussions. And I would say, with our suppliers, our primary suppliers, which are our long-term partners, we've talked before about contracts.

In the current situation, I'm going to say that relationships are more important than contracts. And we have a great relationship with our suppliers there and look forward to, again, being able to significantly increase our supply of Trichlor tabs for next year.

Peter Benedict -- Baird -- Analyst

That's helpful. And then I guess just my last question. Have you talked about the AccuBlue repeat rates in the stores? I mean, clearly, it's getting used. And you talked about how it's driving more units per transaction, etc., and any perspective on how the repeat rates have been on that? Thank you.

Mike Egeck -- Chief Executive Officer

Yeah. I think more than repeat rates, we just, we track the number of tests. Right. And I will tell you that in the stores, traffic for the second quarter, relatively flat.

But we saw a very nice increase in AccuBlue testing. So, getting a higher percentage of people coming in the door that are testing, and overall testing, like I said, up a strong double-digits versus the prior year. And I think it points back to, we talk about the increased heightened attention to safety and sanitization. And thankfully, the pandemic, I'm going to say, is under more control, but it's not going away.

And one of the lasting effects is people are still very vigilant about safety in general and specifically about safety and the pools when it involves friends and family. So that's why we see an increase in testing. I believe.

Peter Benedict -- Baird -- Analyst

Got you. OK. Thanks so much.

Operator

My next question is from Peter Keith of Piper Sandler. Please go ahead.

Peter Keith -- Piper Sandler -- Analyst

Hey, thanks so much. Good afternoon. You had mentioned in the script about a 30% increase in marketing spend. Maybe with more specifically digital marketing spend.

Either way, that's a pretty sizable increase. So I was wondering if you could highlight some of the dynamics you're seeing, some of the benefits, is the market getting more competitive? Or is it purely a function of good ROI and what you've been spending so far to date?

Mike Egeck -- Chief Executive Officer

Yeah. Good question, Peter. It's a combination of the two. You know, we had said in previous calls, we were going to increase the marketing budget 30%, with the success we're seeing and the ROI we're achieving, we're actually increasing it up and over that 30%.

I will say at same time, the market is becoming more competitive. Costs per click have gone up, but we're in an enviable position to both have the means to invest and the ability to very specifically track ROI, So the way we look at modern marketing, we think is a modern take on it, which is we start with a budget, but when we're in season and really starting in the month of April. As we look at the ROIs that we're achieving on our different tactics, digital, social, still do some direct mail. We track that as well.

Then, we'll go up and over what our original budgets we're plan to feed our high ROI tactics. And that's what we're doing right now.

Peter Keith -- Piper Sandler -- Analyst

OK. That's great. And then, we look at the the PRO stores and I guess maybe, specifically the PRO remodels. You'll have 79 going into the PRO season, excuse me, going into the pool season.

What is the comp lift that you're seeing? Maybe both year one and that you've got some in the second year maybe, is there also a year to benefit overall?

Mike Egeck -- Chief Executive Officer

Yeah. We haven't quoted a specific comp list, but what we've referred to is that, they are rather handling -- handily performing our pro forma. And they are outperforming the residential stores in their corresponding districts. So we're quite pleased with how they're performing it.

We had said we were going to do 25 conversions. We're actually doing 29,000 [Inaudible] for more we think great locations that lend themselves to a PRO conversion. And also, frankly, on that, we were somewhat constrained potentially by the amount of extreme that's available. And there's supply chain issues and putting a store together as well.

The teams have worked really hard to be able to get to the materials to allow us to take it from 25 to 29.

Peter Keith -- Piper Sandler -- Analyst

OK. Very good. Thanks so much.

Operator

Our next question is from [Inaudible] of Bank of America. Please go ahead.

Unknown speaker -- Bank of America Merrill Lynch -- Analyst

Thank you for taking my question. This is [Inaudible] on for Liz Suzuki. My first question is about pool installation. And how many new pools do you estimate were installed in 2021 and how did that compared to 2020 installations? And what does the new pool backlog look like? Do you think that there will be a net increase in the total number of residential pools by the end of the year versus pre-pandemic? Thank you.

Mike Egeck -- Chief Executive Officer

Yeah. Thanks. Thanks for the question. I'm going to start the answer by saying this, as I kind of simultaneously -- for the pool information.

But the pool -- new pool builds are going to run about 2%. We believe, were ran about 2% in '21 and the same this year. That's up a base of about 5.5 million installed. So 110 to 115, maybe as high as 120,000 new pools each year.

And that's a nice tailwind to our business. Now, if we maintain our market share, should see about a 2% lift to that. But we don't -- we don't build pools and we don't sell a lot of the components that go into a new pool build outside of equipment and chemicals and some of the white goods. So, it's a nice tailwind to our business, but it's not essential to our business.

Our [Inaudible] business is the 14 million bodies of water that are out there that need ongoing non-discretionary maintenance. So that's what we're -- that's we're really focused on.

Steve Weddell -- Chief Financial Officer

The data point for 2021 is 117,000 new residential in-ground pools, and a lot of others in the industry have talked about the pool backlog -- continuing to extend post this year even into 2023. So it makes sitting on the right point. We take care of the residential aftermarket. So after that pools built, you've got a 30 year asset in the ground that you need to take care of from a sanitization perspective, year in, year out.

And that's our biggest opportunity.

Mike Egeck -- Chief Executive Officer

Yeah, I would -- sorry for ruffling around, papers there, Page 10, and the supplemental SEC lays out the most current data we have, which we get from [Inaudible], which is probably the most comprehensive source for pools by industry.

Unknown speaker -- Bank of America Merrill Lynch -- Analyst

OK. And my follow on question is about shift to saltwater. And what percentage of the current base of pools for saltwater? And has there been an increase in saltwater conversion? And do you see the conversion a net positive or negative for your business?

Mike Egeck -- Chief Executive Officer

Yeah. I don't -- Steve, maybe you do or we can get a number on saltwater pools? But the way we think about this question is, we sell salt systems and salt cartridges. And actually a salt pool owner consumer is worth slightly more to us than a tab consumer. So the way we think about it is we're agnostic to whether you want to sanitize your pool with chlorine tabs or with a salt generator.

And actually, there's a slight upside to us if you go to salt generation route. Now, that being said, we have seen salt cells grow at a faster rate than they have in the past. But it's a tough economics for a lot of people to convert. New pool builds.

Yeah. But more than half of them are salt, which like I said, we're fine with agnostic too. In terms of putting a salt system in, the purchase and installation runs $2,000, $2,500 plus. Even with the increased price of chlorine tabs, like I said, from $99 to -- $199 for a 35 pound bucket, medium sized pool only needs one bucket for the pool season.

So when you think about it, the consumer's got typically a nice home or a big asset in a pool, and it costs them $100 more to sanitize it for the season. They're not happy about that. But the alternative is a $2,500 salt sell system. We don't see -- we see a lot of people, not like the price increase in tabs, but understand it's the most economic decision.

Unknown speaker -- Bank of America Merrill Lynch -- Analyst

OK. Understood. Thank you.

Operator

Our final question is from Dana Telsey of Telsey Advisory Group. Please go ahead.

Dana Telsey -- Telsey Advisory Group -- Analyst

Good afternoon, everyone. As you think about the chlorine market and the percentage of Trichlor that's coming from international, what is that percentage? How is it changed? And it sounds like that price differential is much higher. Is that accounted for in the price increases they are taking? And when do you expect to be in a comfortable spot with the availability of chlorine? Thank you.

Mike Egeck -- Chief Executive Officer

Yeah. Great questions. Our take on the amount of imported Trichlor that came to the market this year is about somewhere between 90 million pounds and 100 million pounds, and we don't have exact data on that, but we think it's pretty close working with the different manufacturers and the importers. Tabs across, what is a total supply of somewhere between 230 million pounds to 250 million pounds.

So you see not quite a third of the of the above [Inaudible] And as we've said in the past, some Trichlor could come down when additional Trichlor capacity comes up in the U.S., but the kind of newer information that we have is what I went through in the script that the chlorine input from North America is now a limiting factor in chlorine imports from China. This is a big-- the biggest exporter or Spain are tough economics. So what I would say is that, the current pricing in the market. Reflects where people have become comfortable with margins at those higher imported prices.

So I think when we look out to next year, supply will continue to be tight, inputs will continue to be high. They could potentially go higher, but we certainly don't see them coming down.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

Mike Egeck -- Chief Executive Officer

Yeah. Dana, the one thing I'll add because we sometimes get this question is, well, what if just more chlorine manufacturing capacity comes online globally? And from what we understand, it takes about four years and $1 billion to build a core alkaline plant. So I'm sure there's some in the design phase, potentially domestic, but we don't know of any. But I would say probably overseas.

But it takes time. There's no quick remedy to the supply side.

Dana Telsey -- Telsey Advisory Group -- Analyst

Very helpful. Thank you.

Mike Egeck -- Chief Executive Officer

Yep.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to management for closing remarks.

Mike Egeck -- Chief Executive Officer

Thank you, operator, and thank you, everybody, for joining us. We're really looking forward to pool season 2022. As we talked about, we feel we're in great position with our inventory. We just had a bit of a town hall and our retail store leadership in here.

Everybody's fired up. We're getting great returns, as we mentioned, on our digital marketing. So we feel like we're set and -- certainly looking forward to the season and for sharing the Q3 results when we get them. Thank you.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

Caitlin Churchill -- Investor Relations

Mike Egeck -- Chief Executive Officer

Steve Weddell -- Chief Financial Officer

Ryan Merkel -- William Blair -- Analyst

Michael Kessler -- Morgan Stanley -- Analyst

Steven Forbes -- Guggenheim Securities -- Analyst

Andrew Carter -- Stifel Financial Corp. -- Analyst

Jeffrey Stevenson -- Loop Capital Markets -- Analyst

Jonathan Matuszewski -- Jefferies -- Analyst

Peter Benedict -- Baird -- Analyst

Peter Keith -- Piper Sandler -- Analyst

Unknown speaker -- Bank of America Merrill Lynch -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

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