Operator:

Good day, and welcome to the Pool Corporation Second Quarter 2024 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's remarks, there will be opportunity to ask question. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Melanie Hart, Vice President and Chief Financial Officer. Please go ahead.

Peter Arvan:

Thank you, Melanie and good morning, everyone. As we reported this morning we generated $1.8 billion in net sales during the second quarter, reflecting a solid performance in the maintenance portion of our business during the busiest time of the year. This performance showcases our crisp execution, progress on strategic initiatives and our ability to continue gaining share by providing an unmatched value proposition. As we discussed in our June release the trends we observed in discretionary spending for new pool construction and large renovation projects and some larger discretionary items based continued economic headwinds, while the nondiscretionary demand is solid and in line with our expectations. Our customers who primarily focus on new pool construction and renovation and remodel continue to report lower demand for low to mid-range pools, while demand remained solid at the higher end. The trend remains unchanged from recent quarters. A similar pattern is seen in renovations. High-end renovation project interest is reported to be solid although the summer when people are using their pool is the slow season for renovation. Similar to new construction of low-end pools to smaller renovation projects are being deferred frequently in this environment. Dealers are reporting more inbound calls. However, many consumers remain hesitant to pull the trigger in the current economic cycle. We view this as a positive sign for the future. So far this year, we have made progress in several strategic areas of our business that excite us and to drive our ability to capture future industry opportunity and extend our leadership position going forward. We remain deeply focused on our customers and areas of our business where we can position ourselves for sustainable future growth as we leverage the power of our widespread and highly integrated distribution network. We have strengthened our commitment to providing our customers exceptional service and value-add tools to grow their business, while advancing our digital ecosystem development. Adoption of our POOL360 tool continues to increase. We closed the second quarter with 14.5% of our sales completed on our POOL360 digital platform, which is our highest level to-date as our customers experience next level service and convenience, which ultimately creates capacity not only for POOLCORP, but for our customers as well. Our new digital marketing programs continue to gain traction as our dealers experience unmatched capabilities in driving demand for the brands that they carry and lead generation for their core business function. We are also increasing utilization rates at our chemical packaging facility. Since we acquired the chemical packaging operation from Porpoise Pool & Patio we have increased the production at the plant by almost 60% which gives us again unmatched capabilities and drives incremental profitability for our business. We continue to expand our sales center network adding both convenience and needed capacity to support our growth as the industry's installed base continues to grow and we continue gaining share. So far this year we have opened eight new sales centers in line with our strategic plan. Now moving to our second quarter results. Total sales in the second quarter declined 5%, which is an improved trend compared to the year-over-year changes that we have seen in recent quarters. As we mentioned in our press release the last week of June showed a notable improvement in the daily sales which was sparked by favorable weather and strong execution from the team. Our maintenance business is strong. Our software platforms are gaining traction and our building material products performed better than new pool construction trends and external permit data would suggest. While we take some encouragement from this slightly improved trend, we are maintaining our top line guide along with our year-to-date results sales trend. Once we pass the midpoint of the third quarter and into the fourth quarter, the discretionary portion of our business can have a greater impact on our total sales based on the seasonality of the industry. So we also considered this dynamic in our full year guide. Our gross margin for the second quarter finished at 30%, down 60 basis points from the prior year. Remember that last year we were still selling through our strategic excess and lower cost inventory in the second quarter. Lower levels of our higher margin in building material sales also inhibited the gross margin in the quarter. So our ability to deliver 30% gross margin under these circumstances, highlights some of the underlying structural improvements on supply chain value-added pricing and our strategic priorities. From a profitability standpoint, we produced an operating income of $271.5 million and operating margin of 15.3%. Although down from the 17.6% operating margin from the same period last year, it reflects continued strategic investment in technology, a continuation of planned new sales center openings, acquisitions and further expansion of our Pinch A Penny network. Melanie will give you a more detailed commentary on expenses. While we are without a doubt managing controllable expenses, we also continue to invest in the long-term success of our business recognizing that we are working through an economic cycle and that the business is getting stronger. We finished the quarter reporting diluted earnings per share including the $0.01 tax benefit at $4.99 per share. Looking at sales by geography. Florida saw the strongest performance with sales being down just 1%. In Texas, sales declined 6%, as we observed incredibly wet conditions through May making construction difficult and impeding maintenance spend. California and Arizona were down 5% and 8% respectively with a similar overall trend of solid maintenance and aftermarket sales dragged by lower new construction and remodel. In total, our year-round markets were off 5%, while the seasonal markets were down 6%. Europe was down 11% and remains challenged with a tough consumer sentiment and was further impacted by cold and rainy weather and late pool openings this season. We continue to make operating improvements that will position us well in this area when sentiment improves. For Horizon, net sales declined 6% compared to the second quarter last year and at the same level of sales decline as we saw in the first quarter. Our irrigation business is more impacted by commodity pricing than the swimming pool business, and has seen some irrigation project deferrals in both commercial and residential during the quarter. Moving to our product and end market details. The 1% increase in chemicals reflects a 3% growth in volume with a 2% deflationary impact on price, still primarily driven by trichlor. We see the positive effects of our efforts in this area, particularly noting that our private label chemical sales grew at double-digit rates and outpaced the growth of the rest of our chemical portfolio. On Building Materials, the 10% quarterly sales decline is better than what we are seeing in overall new pool builds and our remodel expectations. Equipment sales ended flat for the quarter and is an area that we have seen improvement, particularly around lights pumps heaters and parts. Remember that our equipment results exclude cleaners which is a discretionary area that remains challenged. The equipment performance is noteworthy considering the new pool construction trends and the maintenance of our aftermarket business. As an example, we estimate that pumps used for maintenance versus new pool construction is 4:1. So we expect our maintenance and repair business on equipment to continue to hold up well. Price on equipment came in at up 2% to 3%. Related to price in other areas, we did see some pressure during the quarter on certain commodities like pipe and rebar which show up in our building materials and irrigation business results and on chemicals as discussed. Commodity prices moved with the market and represent a relatively small portion of our overall business. Looking at our end markets and commercial business. Sales increased 16%, rising after a flat first quarter and in line with another travel-rich summer and openings of community pools. Sales to independent retail pool customers declined close to 6%, which represents sell-in to those stores. We believe that this is reflective of consumers being more selective on some discretionary purchases and a later start to the season in some markets. Our Pinch A Penny franchisee sales to their end consumers collectively increased 4%, which reflects a high concentration of stores in year-round markets and a strong customer value proposition. Circling back to POOL360. We are pleased with our progress since launching our POOL360 service platform in February and the POOL360 water test application last summer. As we have discussed these tools ultimately link into our enhanced B2B POOL360 platform, the foundation for our digital ecosystem. Our POOL360 water test tool provides optimal water chemistry recommendations to ensure safe water and an enhanced swimming environment directly tied to our private label products. To date, we are very pleased with the number of retail stores using the software, which we soft launched after the season began in 2023. Our retail solutions team has been fully engaged with water test in the first half of this year and continues to onboard dealers. As peak season comes to a close and customers have more time to schedule onboarding, we will again be focused on driving our technology and offering in conjunction with our 2025 retail and service programs. POOL360 service allows our customers to expand their businesses by automating manual tasks like quotations, scheduling, routing, billing and collections, all while providing direct purchase access to the POOL360 tool. Orders processed through the traditional B2B POOL360 platform increased to 14.5% of total sales this quarter, growing from 13% in the second quarter of last year and 11% in the first quarter of this year. Technology is a key source of differentiation and continues to be an effective tool to grow sales and create stronger partnerships with our customers. We continue to strategically expand our network opening another three sales centers in the second quarter and acquiring one. Our second quarter acquisition offers us a premier presence in the Atlanta market with a central location combined with our established presence in the market this gives us the greater ability to serve the entire metro to fulfill demand in this major Sunbelt market. These additions bring our global sales center network to 445 locations. Our Pinch A Penny franchise network added three new stores each in the strategic Texas market ending the quarter with a total of 292 franchise stores. Continuing to build on our franchise network along with expanding support offerings provided to our independent retail dealers will allow us to expand our reach and continue to capture the do-it-yourself maintenance market. Taking all of this into consideration in view of the peak season activities and our current outlook, we are confirming our full year diluted EPS guidance range of $11.05 to $11.45 including an updated $0.20 estimated benefit from ASU. Even under somewhat challenging operating conditions, our strong cash flow allowed us to return a total of $173 million to our shareholders through dividends and share repurchase so far this year. During the quarter, our Board increased our quarterly dividend to 9%, marking the 14th consecutive year of dividend rate increase and increased our repurchase authorization to $600 million, reflecting our commitment to generating returns for our shareholders. For the remainder of 2024, we plan to center our focus on execution and our strategic growth initiatives. From an industry perspective, pools and expanded outdoor living space remains highly attractive to homeowners. Pools remain one of the most frequently searched terms in the online real estate sites. Home values remain strong. Demographic trends such as southern migration to the large millennial population we're driving household formation and continued new home builds all support the long-term industry dynamics even during the period of higher interest rates and suppressed existing home turnover. As we have seen for well over a year now, high-end consumers appear to be making up a large portion of the new pool build again in 2024. It is unclear when the mix will shift based on the amount and timing of interest rate reductions and the economic indications needed for consumers to feel less pressured. We are best positioned to provide the widest product offering in the industry, support enhanced outdoor living, features and aesthetics through our NPT branded products and partner with our vendors to unveil the latest available automation offerings. We remain ready to serve our customers with everything they need to help them create the outdoor living oasis that people want while providing the tools and support to grow their business. Although we expect a lower number of new pools to be built this year at roughly 60,000 new units, this still represents a 1% increase in the installed base of pools that will need to be maintained going forward. We remain relentless in expanding our network to best serve the professional and do-it-yourself maintenance customer and improving the customer experience enhancing our capacity creation and launching our industry-leading digital ecosystem. I will now turn the call over to Melanie Hart, our Vice President and Chief Financial Officer for her detailed commentary.

Operator:

We will now begin the question-and-Answer Session. [Operator Instructions] And our first question today will come from Susan Maklari with Goldman Sachs. Please go ahead.

Peter Arvan:

Good morning.

Peter Arvan:

Sure. As you know, Susan, there's a lot of components related to gross margin. If you just look at the simple transaction count that we'll have between now and the end of the year, it's going to be several million transactions made up a variety of products. So, of course, you have mix that plays into that. And as Melanie mentioned, and I think I mentioned in my comments, mix as it relates to construction material, which is typically a higher-margin product is not particularly helping us this year with a decline in new pool construction and renovation and remodel. So that would be a headwind. But I don't think it gets any worse than what it is right now. I think that just kind of continues. And then we mentioned that there are things that we've done around our strategic pricing and I think things that we have done related to our private label programs and our supply chain initiatives that help. So as I mentioned, the gross margin rate that we saw for the quarter of 30%, I think is a admirable. We're very pleased with the outcome for the quarter. So between now and the end of the year, I mean we would maintain that it is going to be approximately 30%. Might get stray a little bit up or down depending on mix. It could, but I think it's generally going to be in that range. And I think that's supported by the activities that we've been working on as I mentioned.

Peter Arvan:

Sure. So, I'll talk about the three separate applications and they all basically, as I mentioned, are part of the POOL360 ecosystem. So if I start with the water test software that we have, that is tied to our private label program. So the dealers that are on that, they're full line stocking distributors of our private label chem programs. They have kind of best-in-class water testing and prescription developing solutions that they can give the consumer when they come in. There's also a CRM function in there where they can capture the data about the pool and about the consumer, which helps them every time the consumer goes into the store. But as you can imagine, there is a selling season for that, right? So during the season right now when typically the pool retail stores are very, very busy, is not the time that any of them are going to convert. So, this is the season where the people that signed up before are leaning into the software and they are using it. And frankly, they're helping us with feedback on features and functionality, which we're using to develop our software, because as you know, with software you're never done. There will be a constant stream of enhancements that continue to improve the user's experience. So good progress on the water test. We still believe it or not there are still some dealers that are onboarding even this time of the year but we expect that as the season winds down that we'll see a much larger number of dealers that onboard during the off-season. Similarly, if I refer to the POOL360 service, it's really the same cycle. So everybody in the pool industry right now is busy. So the service folks that would have to onboard on the software and load their data into the software, so that they could derive the benefits as I mentioned, which is scheduling, it's routing, it's onetime service, it's pricing. It's everything that they need to essentially run their business. This is again not the time of year when we expect to see a lot of people onboarding. But we are doing some selling this time of year. So we have a road show that's basically going around the country and going into several key markets where we are spending time with the customers. And frankly, the feedback we're getting on that is extremely positive because people see the benefit in the tool and that unlike the original version of POOL360, which didn't have nearly the same benefits for the customer as it did for us that tool is in particular designed to provide most of the benefit for the pool service company, which again expands their capacity allows them to grow, allows them to tap into our digital marketing program, and frankly, become stickier with us. And then of course, you have just our POOL360 platform, which we talked earlier -- we talked about on the last quarter call that we have updated significantly to improve the user experience. That's really kind of a year-round tool that allows people to put their order in put an order and priority pick avoid the lines at our sales center. And again, we're seeing more adoption on that as well. So, overall very pleased. We never expected that this was going to be an overnight success. We thought that it was going to be something that was going to take time to get the customers comfortable with. And then frankly, the more people are on it then their voices are the best form of advertising that we can have. So overall very pleased.

Operator:

And our next question will come from David Manthey with Baird. Please go ahead.

Melanie Hart :

Yes. I think that range within 20 or 30 basis points. As Pete mentioned, there are some many different components that go into gross margin. It's certainly very hard to pinpoint it this early in the year. We know that the full year margins are going to be impacted by those building materials that lower level of building materials, and we've seen that so far to date. And I expect that that would continue throughout the rest of the year. We are -- because of our purchasing higher purchasing from last year we're seeing slightly higher vendor incentives, but a good portion of that is being offset by -- the flip side to that is higher purchases also include higher freight in. So that's impacting it. And then we do still expect to see that chemical pricing coming in lower year-over-year for the rest of the year. And then we are continuing to see as we had mentioned last quarter that our larger customers are really outperforming some of the smaller customers. So I think with all of those factors in play your estimates there winds up in a very reasonable range.

Melanie Hart :

So assuming that the mix doesn't change with we certainly we don't know when but we are hopeful and we know that it will change at some point and we'll get those benefits that we're missing out on in the current year related to the building materials. But outside of that what we're really focused on right now are things that we manage and we control. So we're very much focused on our efforts around pricing. We're continuing to focus on our expansion of our private label chemicals as well as some additional actions that we're taking on the supply chain side.

Operator:

And our next question will come from Scott Schneeberger with Oppenheimer. Please go ahead.

Peter Arvan:

Yes. I think we are -- that's a good question. And one as you can imagine that we spent a lot of time discussing here and discussing frankly with our dealers. So on one hand I look at the new construction activity. If I look at permits and then I look at our building material sales it appears that we're doing better than the market would indicate in terms of new pool construction meaning that my sales of building material products are not down nearly as much as the permit data would suggest. I think overall permits are down about 17%. I think our building material sales as we reported are much better than that albeit still off double-digit. So the comments we're getting back from dealers which I mentioned is that there's a lot of -- I'm not saying a lot. There are more inbound calls than they've seen earlier in the year and towards the end of last year. So inquiries are good. I think people are waiting for a sign to say, all right the Fed is actually serious about cutting interest rates. The economy is going to expand a bit and the consumers get a little bit healthier. You know, when -- as I mentioned if you look at the online real estate sites and you look at the words that are being searched the word pool comes up near the very right top of the list. So people still want a pool. I think this year was a tough year. Frankly it was worse than what we anticipated in the beginning of the year hence the guidance update that we put out in June. But at this point I think we are -- we're fairly comfortable with the level that we see and dealers are not telling us that it is getting any worse. And I think we're slightly outperforming the industry in our participation in the number of pools that are being built.

Melanie Hart:

Yes. So the $1 million was the number for the quarter as it related to those three sales centers that we closed. So that was the expense in the quarter that will be non-recurring throughout the remainder of the year. And then on the supply chain there's multiple different things that we're focused on there. There are areas that we're focused on around product costs that will impact the gross margin. But specifically as it relates to the operating margin the biggest driver there is going to be fleet and delivery expenses. And so we're very much focused on that. As we look to expand in different markets -- we are able to leverage our vehicles and leverage our drivers and leverage our deliveries. So that's one of the things that our competitors don't really -- they don't have the ability for that same model that we have. So particularly as we continue to expand our MPT branded building material offerings we have the ability within a market to utilize one location to do those deliveries. And so the freight expense which is a significant side of our overall expenses is an area that we've been focused on as well as we've also continued to expand our CFL. So that's, for us, our central shipping location, of which we have four within the network. And that allows us to bring in product at a lower cost from our vendors, and then redistribute it within the network. It allows us to better manage our inventory over time as well as to have lower cost and lower delivery, and then more product availability on a quicker basis to our customers.

Operator:

And our next question will come from David MacGregor with Longbow Research. Please go ahead. Hello, David, perhaps your line is muted.

Peter Arvan:

Yes. As you know, David, the hallmark of Pool is, we're an organic growth company. So if you look at the acquisitions that we've done this year, they're important, but they're relatively small, certainly in the grand scheme of things or in context of the whole company. So the growth that you're seeing is really driven from a share perspective. It's driven organically. It's driven by our new sales centers that opened up in the critical areas and the places that we need better capacity and quite frankly, where we improve the value proposition for our customers. If you look at the concentration that we have of locations in the market, and frankly, the focus on customer experience, you won't find that same concentration or focus on customer experience with anyone. So if I look at -- so you're probably wondering what's might? How do you think and where does it show up? And if I look at our chemical business, our volumes on chemicals are up 3% this year. And that is with a late start to the season, tougher weather in many key markets and the fact that the volumes are up 3% when the installed base is not up 3% is an indication that we continuing to take share because we are the places that people need product, and we are focused on customer experience is second to none. And then when you add the private label capabilities that we have on chemicals, that's certainly a big differentiator. As I mentioned on new pool construction when we look at our building material sales, I mean, nobody would be happier if they build more pools this year than me, maybe Melanie. But certainly, I'd be happy. But if I look at the permit data and what I believe to be the drag in new pool construction and then I look at our building materials, where certainly there's not a big lift in price that it certainly shows that, again, we are getting a bigger slice of the pie. And then again, when I look at equipment sales, which were pleased equipment sales overall, are flat. Heater's is a key area for us where our heaters were one of the first areas that took off during the pandemic, and they also had one of the biggest corrections. That is a product that we're starting to see growth again and which is very encouraging as well as things like pumps and light and coronation and such. So overall, I just think that there has been a tremendous focus on customer experience and making sure that nobody does it better for the customer, and that we continue to provide those value-added services that there is no equal to in the industry.

Peter Arvan:

I mean there's a few groups, right? So certainly, even in the focused locations, even in a down market, there is certainly an opportunity to continue to improve operating margins, and it's really a function of execution, right? It's a function of doing things right in the sales center and managing the inventory, managing the customer experience and managing our costs and ultimately, growth. I mean the biggest lever you have for operating margin improvement is growth. And as you can imagine, the -- I would imagine that our focus centers are the ones that are going to be trailing the rest of the business in terms of sales growth. Now, there's a couple of reasons for that. One is, every new sales center that we open by definition goes on the focus list to make sure that it gets the appropriate attention given the investment that we just made. Virtually every acquisition that we make operates well below the fleet average, so those two go on the focus list. So -- and if you look at our overall operating margin, if you look at a continuum, it's not like the mean and the median are the same number. There's a fairly wide distribution in operating margins. So we see even in a down market at the individual sales center level, there's still plenty of things we can do. Having said that, overall the biggest lever that there is sales growth, right? And sales growth in a down market becomes much more difficult, but it is achievable and we have some locations that are up year-over-year. But getting back to the cadence of continuing to expand on a predictable basis the operating margins really comes with when the market turns and the market starts to grow and we get back to that long-term growth algorithm that we talked about which is a 6% to 9%, which won't come really until we see the reversion in new pool construction. Do we think that's coming? Yes. Do I think it's going to happen between now and the end of the year? As we mentioned, we do not.

Operator:

And our next question will come from Lauren Rivoli [ph] with William Blair. Please go ahead.

Peter Arvan:

Yes. I would tell you that the results that we see in July so far are encouraging. They're strong similar to the last week that we saw in June and that's really a function of we're in season. It's hot. We have -- we think the best value proposition in the industry and that's what's driving the business.

Unidentified Analyst:

Thanks.

Steve Volkmann:

Hi. Thank you, guys. I don't know if I missed this or maybe you didn't or don't want to say it, but if we have kind of the recurring revenue business sort of flat this year and the Building Products, I don't know let's call it down 15% or something, is there any way to ballpark the impact that has on the gross margin the dilutive impact?

Steve Volkmann:

Okay. And I guess maybe a longer-term bigger picture question maybe for Pete. But pre-COVID and I guess for you Pete, the long-term algo here was kind of growth the way you guys have kind of laid it out, but it included sort of a flattish gross margin with leverage on SG&A over time. But it sounds like you're talking more about gross margin upside than over the past -- over the next I don't know call it 5, 10 years. I don't want to put words in your mouth, but is the new algo actually include a positive trend in gross margin as well as leverage on SG&A?

Steve Volkmann:

Okay. Thank you guys.

Trey Grooms:

Hi, good morning. Thanks for taking my questions. I think the first one that I have is kind of on cash flows and maybe the flow-through there. You pulled back inventory a bit in the quarter. As we look at the full year, should the year-over-year improvement in working capital should we continue to see an improvement there? Or is there anything on the working capital front that we should be aware of in the back half Melanie?

Trey Grooms:

Perfect. Thanks for that. And I guess one last one for me is on the pricing side, you mentioned that you were seeing some lower pricing clearly on commodity. But is there any other area where you're seeing any kind of pricing pressure outside of like what we were saying on the commodity kind of impacted front?

Trey Grooms:

Yes. That's super helpful, and thanks for the color on that, Pete. But the one question we still get from time to time is -- and I know you touched on this on the last call kind of with your thoughts, but -- maybe any update on if you're seeing any kind of change in behavior out of heritage now that Home Depot has had them under their umbrella for I guess a month or so? But it sounds like the answer to that is no.

Trey Grooms:

Okay. Thanks, Pete. Make sense to me. Good luck.

Garik Shmois:

Hi. Thank you. Just on OpEx growth. I think if I heard you right, the growth rate is moderating in the third quarter, but then an increasing somewhat in Q4. I'm just wondering as to the variance there for modeling purposes. And then it might be earlier, but do you think operating expense leverage could revert back to more normalized levels in 2025?

Garik Shmois:

Got it. Follow-up question is just more very short term. Just with the pickup in June -- the last week in June and that's continued here into July. Is it primarily on the non-discretionary piece products that you likely would have sold, if not for the weather delays earlier in the second quarter? Or are there any other green shoots that you're seeing that could point to maybe a little bit more optimism on a broader-based recovery?

Garik Shmois:

Understood. No. Thanks for that. I'll pass it on.

Operator:

And our next question will come from Sam Reid with Wells Fargo. Please go ahead.

Melanie Hart:

Yeah. So certainly, we would expect that looking at kind of what we've seen on the impact from the new build and the remodel activity this year those are kind of collectively bringing down sales expectations kind of four to five. And so if that -- let's say that, flat next year then you would see no impact kind of positive or negative from that activity kind of year-over-year. And then you would see the positive impact coming through from the maintenance activity on the incremental 60,000 or so new tools that you have built this year.

Peter Arvan:

Yeah. I think it's a piece of the margin improvement that we have seen and the margin profile is really different by product. So there are certain products to that, a much better margin profile. Others are going to be certainly better, but not as much. We really don't parse that out. And the one thing I would remind you is that, our view on the chemical packaging operation is we need our chemical partners. We will never be sole sourced in that plant on our chemicals, because of surety of supply and redundancy. So even if I could supply the entire business out of that facility and have incremental basis points of gross margin by doing that I wouldn't do it, because I wouldn't put all of the eggs of the company in one basket. So our chemical business is going to be a blend of our partner suppliers and the Suncoast facility. Certainly the things that we run through the Suncoast facility are margin accretive to the business. They vary by product. It would be at the high-end is going to be your liquids and some of the balancers. And then when you get into trichlor there's certainly an advantage but nowhere near the differentiation that we see on the other products.

Peter Arvan:

Thank you.

Peter Arvan:

Yes. Thank you all for joining us today. We look forward to our next call, which will be on October 24th, when we release our third quarter 2024 results. Thank you for your support. And enjoy the rest of your summer.

Operator:

Good day and welcome to the Pool Corporation First Quarter 2024 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Melanie Hart, Vice President and Chief Financial Officer. Please go ahead.

Peter Arvan:

Thank you, Melanie and good morning to everyone on the call. We released our first quarter results this morning, reporting $1.1 billion in net sales, our fourth consecutive year of achieving the $1 billion mark in a seasonally slower quarter. This was down 7% from the previous year but up 6% from 2021. Overall demand for pool-related maintenance products in the quarter was solid with sales ending roughly flat, which is a good result considering the poor weather that we experienced in Florida for almost the entire quarter. As you can imagine, in the first quarter, Florida is our largest market.

Melanie M. Hart:

Thank you, Pete. Starting on Page 3 of our presentation, you will see our first quarter 2024 results at a glance, as reported in our press release. I'll begin my comments on Slide 4 as we discuss the components impacting net sales and gross margin in the quarter.

Operator:

[Operator Instructions] The first question comes from David Manthey with Baird.

Melanie M. Hart:

Sure. The EPS benefit was $0.24 in the quarter and you are correct. So our review of the tariff classification issue has been open and ongoing since December of 2022, when we originally recognized and recorded the potential liability. As we mentioned back on our call, we accrued the additional expense based on uncertainty regarding the classification of certain products that we imported and related to their tariffs that would be assessed. We have completed a review and a determination with -- working with U.S. customs. So we did learn that favorable determination earlier this month, which was after we gave our previous guidance for margins for the quarter.

Melanie M. Hart:

Yes. So the 2 things specifically related to the guidance that we gave on our year-end call, kind of excluding the impact from the import taxes that were different from our original expectations were; one, the mix on the building materials. So our guide contemplated that new construction would be down in kind of that flat to down 10% range. So it was a little bit worse than that for first quarter. We are seeing some positive trends in permits in a couple of our key states. As Pete mentioned, it typically takes around 60 days from permitting for that to turn into meaningful sales for us. So we are still expecting, as part of the full year that we would see those declines on the new construction side moderate. And so with that, once we get to that kind of down 10%, we'll get some improvements in our mix, our product mix.

Operator:

The next question comes from Ryan Merkel with William Blair.

Melanie M. Hart:

Yes. So second quarter, we are expecting it to be less than last year because we'll have a little bit of a tail of that lower cost inventory just kind of early in second quarter. So we would expect it to be less than last year. But I would say that it would be pretty close to our kind of full year guide of around 30%. So we'll see. I think the biggest change is kind of from first to second quarter, which we receive in a typical year. A lot of that is going to be the mix of products. So as we start mixing up into the chemicals and the maintenance components that are more heavy in the second quarter as well as we get some benefits overall from a geographic mix and the higher sales that peak within the [indiscernible] market.

Ryan Merkel:

Okay. That makes sense. And then want to follow up on sales. You also mentioned you expect sales to improve in the second quarter. I'm just curious, what does a return to seasonal buying mean for the second quarter sales? And then have you seen April improve with better weather?

Susan Maklari:

Maybe just sticking on this gross margin point for a bit longer. You did mention, Pete, that you've identified some initiatives in order to drive that over time. Can you talk a bit more to those efforts? And I guess how you're thinking about them coming through and especially given the fact that we could see a tougher macro perhaps over the next couple of quarters? Just the ability to continue to execute on those?

Susan Maklari:

Okay. That's helpful. And then maybe turning to the new construction in the R&R side. You mentioned that permits in a lot of these key markets came in lower than where you had anticipated in the first quarter. I guess, what are you seeing or what gives you the confidence that we could see that moderation through the year? And I guess, how are you thinking about both of those R&R and new construction, if we do see rates continue to move higher?

Operator:

The next question comes from Scott Schneeberger with Oppenheimer.

Peter Arvan:

Sure. We saw the -- obviously, we saw the announcement last month on or, I guess, maybe earlier this month, on The Home Depot intending to acquire SRS. I don't know that much really changes. They have -- they've made a point, both SRS and Home Depot have made a point to say that they're going to run the business separate. And when I think about the impact on our business, I think there's going to be a change. So there's going to be some folks perhaps that are in that business that are affected by the sale that may cause them to consider what they're doing. But as far as the impact on us, if I'm pragmatic about it and I step back, I say, well, there's no new competition. It's not like that this brings a lot more distributors into the market because there at this point, we don't see the channel to market changing. We'll see a long-term player owning it versus private equity, which tends to be shorter-term focused, which I think is a positive thing.

Scott Schneeberger:

Great. I appreciate that. And Melanie, just one -- quick one on SG&A. Just curious how much of -- you've been targeting $20 million tech initiative this year, $15 million on performance-based comp, $12 million new greenfield locations. Is that going to be ratably through the year? Did you do what you expected to do in the first quarter? Any cadence mix shift to that versus what you've been saying just a quarter ago.

Operator:

The next question comes from Garik Shmois with Loop Capital.

Melanie M. Hart:

Yes, that is what we're saying. So our original guide was for flat to kind of low single-digit sales growth. Embedded in that low single-digit sales growth did include some of that weather recovery. And so at this point, we'll really kind of look to see really how quickly the season ramps and then more importantly, does the late start to the season cause it to either extend over into -- late into the third and fourth quarter. And so if we see any of that recovery, it would be later in the year at this point.

Peter Arvan:

What I would tell you is it really -- it kind of goes by market. So you've seen that we have -- we've leaned very heavily into the aftermarket and the maintenance business. And I think our POOL360 ecosystem is kind of leading the way there for us and the software that makes the service providers more efficient. And I think our expanded footprint makes us more convenient. So we always look at from a long-term growth perspective, share gain as part of our model. And we never really give it back. Now when I say that, the thing you have to remember is that in any given market, I'm certain, I mean, we're practical in that, I'm certain in any given market. We may lose a customer here and there. But by and large, share gain has been part of our long-term growth model. And it will remain as part of our long-term growth model.

Operator:

The next question comes from David MacGregor with Longbow Research.

Peter Arvan:

Yes. I mean I would tell you, we're always very mindful of the balance sheet and making sure that we are responsible allocators of capital. We look at -- when we look at acquisitions, we look for a strategic fit and we also look for a cultural fit. And then we also look for an economic equation that makes sense. So the good news about POOLCORP is we have a tremendously strong balance sheet. And we also have a very strong leadership team, both of which are required, not only to execute an acquisition but to execute and integrate an acquisition and realize the savings. But with that very talented management team and a very strong balance sheet, it also gives us the ability to look at deals and say, if they make sense financially, then we would do them. But if not, we also have the ability and, frankly, a superior value proposition in almost all cases to say if we need additional capacity that we can do it from a greenfield perspective.

Melanie M. Hart:

And I'm just going to add to that. So the 1.5 to 2x is really our conservative philosophy, but we have up to 3.25x under our debt arrangements. So we consider that we have substantial capacity.

Stephen Volkmann:

Most of my questions have been answered. But Pete, I'm curious, are you hearing anything or drawing any conclusions around kind of the average cost of a pool build project or a pool remodel contract project. Do you think that's changed much?

Stephen Volkmann:

Got it. Okay. Interesting color. And then maybe just real quick for Melanie. If we're having this conversation in 3 months and we haven't seen some sense of recovery or reasonable volumes on new build and retrofit, how does that impact your gross margin for the second quarter?

Operator:

Our last question comes from Andrew Carter with Stifel.

Melanie M. Hart:

Yes. So the guide for the year, just kind of slightly positive, would not include the weather recovery as we had mentioned. And then for the first quarter, we did see the positive impacts in the quarter for the normalized weather in California. You'll note in Pete's comments that California outperformed kind of the rest of our big 4 markets. But where we saw weather for this year in first quarter was primarily in Florida, which for the quarter, the proportion of those Florida sales is the highest of the big 4 states. So it had a larger impact as it relates to that.

Peter Arvan:

Andrew, what I would tell you is that when we open up new branches, as we mentioned during Investor Day, we always do a 5-year pro forma. And we have to be very comfortable with the reason and the rationale for us opening the branch and the quality of the pro forma. Certainly, if you look at the branches and their ramp, in a market that is more challenged from a new construction basis, they would be impacted and perhaps the slower growth but many of the branches that we open are really not for new construction, there could be much more maintenance tied to maintenance and those tend to perform well. So overall, when I look at the performance of the class, really, nothing is alarming. I'm actually pretty happy with the results on the greenfields, especially given the number of greenfields that we've done.

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to Peter Arvan, President and CEO, for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good day and welcome to the Pool Corporation Fourth Quarter 2023 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Melanie Hart, Vice President and Chief Financial Officer. Please go ahead.

Peter Arvan:

Thank you, Melanie, and good morning to everyone on the call. For the full year 2023, we generated over $5.5 billion in revenue, the second largest in company history, and over $2 billion higher than 2019, a year with a similar number of new pools constructed and the last year and before the pandemic. We generated $747 million in operating income, more than double our operating income in 2019, an operating margin of 13.5%, a 280 basis point expansion above 2019 operating margin. These results highlight the larger installed base available for us to serve post pandemic and our ability to fulfill our customers maintenance, remodel, and renovation and new construction product needs. Even in a challenging environment our customer service outshined our competitors through our powerful distribution network, the largest, most integrated in the pool industry, and we continue to make wise investments to promote our future growth. We were up against tremendous comps throughout most of the year, yet the team at all levels worked extremely hard to deliver very solid results. The year began with us lapping 33% sales growth in the first quarter of 2022 over 2021. Sales declined 15% in the first quarter of 2023 compared to 2022 amidst unusually poor weather conditions in key year round markets. Delayed pool openings in many of our seasonal markets followed, and higher than normal inventory levels across the industry contributed to an abnormal selling environment during the first half of the year. Macroeconomic constraints and uncertainties, primarily in the form of elevated and escalating interest rates and recent inflation, resulted in new pool units declining from 98,000 units in 2022 to an estimated 70,000 to 75,000 units in 2023, or 25% to 30% decline. These evolving external factors made it extremely difficult to forecast underlying demand at the start of the year. As 2023 progressed, clarity around the market improved and we adapted accordingly. We focused on specific customer needs and opportunities, particularly those related to maintaining the ever growing 5.4 million swimming pools in the installed base. Given our broad reach, unmatched capabilities, it is in situations like this that our team shines. We continue to invest in expanding our footprint and in technology tools that improve our customers ability to grow their business and be more productive. We continued our focus on customer experience and being the best channel to market for our suppliers. These efforts combined allowed us to continue growing our share and outperforming the industry. Our disciplined execution enabled us to generate $888 million in operating cash flow in 2023, a company record. This result positively demonstrates our working capital management capabilities, capital capacity, and insightful and opportune investments in inventory. Now I'd like to recap our full year and fourth quarter results. Total sales for the year came in at $5.5 billion, which was down 10% from the record of 2022 and in line with our third quarter guidance. For the fourth quarter of 2023, total sales came in at $1 billion, compared to $1.1 billion in the fourth quarter of 2022, or down 8%. Geographically, the sales declines were fairly consistent in three of our major markets and improved sequentially as the year progressed. For the full year and the fourth quarter, we saw sales in California come in at -12% and 8% respectively. In Texas, sales were consistent and down 10% in both periods. Arizona experienced similar results as we recorded sales down 9% for the full year and down 8% for the quarter. Florida performed a bit better for the full year at down -5% but declined 12% in the fourth quarter of 2023 against very strong comps of 20% to 22% growth in the fourth quarter of 2022. For the full year and the fourth quarter, our sales declined 9% and 10% in our year round markets and 13% and 7% in our seasonal markets, showing improvement in the season and most of our year round markets as the year progressed. For perspective, in 2022 our seasonal markets were up 8% for the year and up 15% in our year round markets. I will now provide some color on our key product category sales compared to the full year and fourth quarter of last year. Chemical sales were down 1.5% for the year but up 1% for the fourth quarter. Considering the significant trichlor deflation that hit during the 2023 pool season and the softer start to the year in the first quarter, driven by excess inventory in the channel and the challenging weather pattern, we considered the full year results of down only 1.5% a clear indication of us further expanding our share in this critical maintenance category. We believe the significant price volatility exhibited from 2021 to 2023 will be behind us after we pass the first quarter of 2024 and that excess channel inventory has normalized. As it relates to our chemical supply initiatives. We made great progress on expanding our usage of SunCoast chemical packaging facility that we acquired as part of the Porpoise acquisition. In 2023, our teams more than tripled the amount of chemicals produced and sourced from this strategic and very capable facility compared to 2022. These actions not only improve our surety of supply, but also improve our profitability. Building material sales declined 9% for the full year and 8% in the fourth quarter. Considering that new pool construction was down an estimated 25% to 30% and that renovation and remodel was down around 12%, we are quite pleased with how the team performed in this highly profitable product group. Our proprietary NPT branded products, expanded building material offering and convenient nationwide sales center and design center network remain the go to source for discerning pool owners and our outstanding dealer base. No one has a more complete product offering or more capable team that caters to the best builders and remodelers in the industry. We look towards the equipment pad. Equipment sales decreased 9% for both the year and for the fourth quarter, demonstrating the resilience of the maintenance related equipment demand and our best in class customer service despite lower new pool construction activity in 2023. Demand for heaters and cleaners, the most discretionary product within the equipment category, saw continued headwinds as we cycled through the demand that was pulled forward during the pandemic and cautious consumer spending on more discretionary pool item purchases. We remain confident that the ever increasing install base of the pools and the need to modernize the older equipment pads and the desire to move towards the connected backyard will present many years of incremental growth opportunities going forward. Turning to end markets our commercial business continued to grow at 9% for the full year and 5% for the fourth quarter. The growth in 2023 is on top of 27% growth for both the full year and the fourth quarter of 2020. We continue to invest in resources to expand our reach in the commercial pool market. In 2023 this investment included acquiring a commercial products wholesale distribution company, furthering our competitive efforts to serve the commercial pool market's new construction and install base equipment needs and utilize our expansive distribution infrastructure to service commercial pool operators. We continue gaining wholesale distribution market share in this growing specialty area of the pool industry. Sales to our independent retail customers declined 11% for the full year and 8% in the fourth quarter. Unfavorable weather resulting in less chemical and maintenance needs and supply normalization affected our sales to independent retailers in the first half of 2023. We have a high concentration of retailers that operate in seasonal markets that were adversely impacted by the late start to the year. Additionally, this category is heavily impacted by products like cleaners, above-ground pools, and spas, which are all returning to pre pandemic levels. Keep in mind this represents the sell to the retail channel. Retail sales by our independent Pinch A Penny retail stores, which are highly concentrated in Florida and Texas and represent sell through the retail channel, increased 3% for the full year in 2023 compared to 2022 and declined 4% in the fourth quarter. We are pleased with this result given the dynamic market and the tough comps we had. For reference, Pinch A Penny grew 17% in both the fourth quarter and the full year of 2022. Turning to Europe, as we previously reported, following record results, in 2021, Europe sales declined 15% in 2022 under the backdrop of the war affecting Eastern Europe, resulting in rapidly escalating energy costs and an economic slowdown in customer or consumer caution. In 2023, European sales declined 11% in local currency for the full year and 7% in the fourth quarter. We began to see some signs of inflection towards the end of the swimming pool season and believe our long term growth opportunity in Europe remained strong. Keep in mind, this market makes up about 4% of our total revenue. For horizon net sales declined 4% for both the full year and the fourth quarter throughout 2023, stronger sales from commercial irrigation projects buffered weaker residential market sales. We continue to focus on expanding our reach, primarily through the Sunbelt and through greenfield expansion in growing markets, and on leveraging our distribution operating model to support the long term growth opportunities within the irrigation landscape and equipment needs. Now, let me talk a little about gross margins. Our gross margins finished at 30% for the full year, consistent with our recent guidance and long term expectations. We are proud of this accomplishment, which highlights our capabilities on supply chain optimization, our growing portfolio of private label products and value-added pricing initiatives. For the fourth quarter of 2023, our gross margins improved 50 basis points to 29.3% compared to the fourth quarter of 2022. Melanie will provide more details on gross margins in her prepared remarks. Operating expenses reflected a 0.6% increase in 2023 in line with our previous guidance. Despite the cyclical sales trends, we continued investing in our talent and on our employer of choice initiatives to make sure that we retained the best team in the industry and continued to separate ourselves from the competition. Additionally, we continued opening new locations, conducting customer facing events and training, and expanded capacity at our chemical packaging facility. In 2023, we opened 14 new locations and added five locations through acquisition, bringing our total count to almost 440 sales centers. We also expanded our Pinch A Penny distribution capabilities. Our Pinch A Penny franchise network added 15 new stores, over two times the number of stores added to the franchise network last year, which is the most stores that the franchise has ever added in a year. Taking advantage of our synergies, we now serve the Pinch A Penny Texas stores through our localized distribution network. Our wide footprint and integrated distribution network opened the door for us to expand quickly throughout the Sunbelt. While we continue to invest in growth driven initiatives, we applied intense focus to controllable and variable expenses without compromising customer experience or service. Orders processed through our B2B POOL360 platform continued to grow in total lines, increasing 3% in 2023, growing from 11% of total lines in 2022% to 14% of total lines in 2023 or a nearly 30% increase in total lines. We also increased total revenue dollars through the tool by 1% in 2023, showing sales through our digital tool growing faster - growing at a rate faster than our overall net sales. These results demonstrate significant progress, particularly in this year's environment and the customers' benefit it provides. We have put significant time and effort into improving this critical user feature like products search, product information, and the overall user experience. With a renewed innovative approach to our customer facing solutions, we marched towards transforming POOL360 from a B2B tool to a complete customer facing digital ecosystem. Last year, we revamped the POOL360 ordering platform in 2023 building on our next generation POOL360 application, we launched our POOL360 water solution software and just last week launched our POOL360 service platform. These are all incredible tools for our customers that will continue to gain traction for years to come. POOL360 Water provides best in class instore and mobile water analysis and offers solutions that help us grow our private label chemical products and improve brand awareness. Water testing from a variety of methods from liquid titration to digital are all fed into the tool, delivering a proprietary diagnosis and chemical dosage recommendation that will ensure a safe and healthy swimming pool. POOL360 Water allows all of our dealers to offer consistent, accurate advice to pool owners and operators while creating demand for our tremendous chemical offering. This tool also has embedded in it a CRM that will help the stores provide an unparalleled customer experience. POOL360 Service designed for our service customers large and small, includes a CRM and applications to better manage their business through facilitating daily routes, quoting and securing one-time service requests, automating, invoicing and collections, enhancing electronic ordering and integrating procurement with their already established POOL360 account. Over the next few years, we plan to add more phases to this digital ecosystem to further add productivity and help our customers grow their business more quickly. For all three platforms, customers can leverage our proprietary best in class digital marketing resources that will help them drive profitable growth for their business. Recognize we are in the early stages of customer adoption, but we see tremendous opportunity to help our retail and service customers expand their offering, provide unique professional services, and connect directly and easily to our products. Moving on, let me comment on our operating income performance. We recorded $747 million in operating income in 2023, down from a record $1 billion in 2022, but up $405 million from 2019. For the quarter, we recorded $79 million in operating income, a 26% decline from 2022 but over three times the operating income of the fourth quarter of 2019. Operating margins for the full year of 2023 was 13.5% compared to a record 16.6% in 2022 and expanded 280 basis points from 2019, demonstrating our ability to leverage fixed costs and effectively manage variable expenses, generating enhanced operating margins while making growth oriented investments in our business. With 2023 behind us, let me comment on the future. I remain excited and very confident in the long term growth potential for our industry and specifically POOLCORP. The growing and aging installed base drives 85% of our revenue through continual maintenance and periodic renovation and upgrading needs. We will continue to do what we do best in serving the non-discretionary maintenance needs which made up over 60% of our business in 2023. We expect slight growth from our maintenance product components in 2024 assuming normal weather conditions. Further, no one is better positioned to serve the pool professional considering our scale, industry leading talent, and digital platform and tools. For the DIY market we have added considerable capabilities to enhance our independent retail products and service offering and will continue to expand Pinch A Penny network to grow share in this important aftermarket and maintenance and repair category. We expect inflationary increases to benefit our consolidated business again in 2024 with an estimated 2% to 3% added to our overall top line. We believe chemical pricing to have largely stabilized. Equipment pricing remains solid as expected and that we will see some fluctuations on commodities that make up a very small portion of our sales. New pool construction represented just under 15% of our business in 2023. Currently, we expect that new pool construction in units could be flattened down 10%. Although likely to reflect higher pool values, the number could vary broadly by market and geography. While the full impact of the interest rate hikes over the past couple of years and timing of future interest rate cuts remain uncertain, the long term outlook for outdoor living products growth remains strong. As higher borrowing rates and recent inflation have increased the cost of building a swimming pool to approximately $80,000. We expect budget conscious consumers will likely stay on the sidelines and more affluent consumers seeking pools with enhanced features and products content will drive the mix of new pools towards the higher end again in 2024. Millennials are outpacing other generations seeking homes, and with the slowdown of existing home sales, new construction is making up for the housing shortage, creating new available backyards for swimming pools in the future, but at a slower rate than we have seen for the last several years. We carefully watch this trend and consider it as part of our expansion strategy to ensure that we are located to effectively serve where the new pools will be. Automation and connected products remain a high priority for all and particularly for this generation, driving how we work with our vendor partners to provide the most efficient channel to market for introducing new technology enabled products. Renovation and remodel activity should be stable in most markets, with about 10% of the installed base contemplating a renovation on an annual basis. Surfaces wear out or in need of a more modern look. Equipment gets outdated and becomes uneconomical to operate, maintain, or repair. As we have discussed, we consider this market to be semi-discretionary, so larger R and R sales could potentially be flat to down 10% if higher interest rates persist, but this too will cycle with the economy and borrowing costs. We consider this not an if market but a when market as all pools will need renovation periodically during their normal lifecycle. Considering these sales variables, we are estimating an EPS range for 2024 to be $13.10 to $14.10 on a per share basis, including an estimated $0.10 benefit from ASU. Melanie will provide additional comments on gross margin and expenses in her comments that will help you understand our view. We expect that cash flow from operating activities will be in line with net income and our capital allocation priorities remain unchanged. We will use our robust cash flow to invest in our operations, growth, and expansion. We will fund strategic acquisitions and with the approval of our board, continue to pay dividends and consider share repurchases while maintaining a prudent debt structure, ultimately providing exceptional returns to our shareholders. Our competitive position has never been stronger. We remain approximately five times larger than our nearest competitor and have a history of being relentlessly focused on execution. This execution focus is further enhanced by a new spirit of innovation that will allow us to provide unmatched customer value and support which will enable us to continue gaining share. No doubt the rate of new pool construction has slowed. Consumers are more cautious today than in the last few years, but there is a desirability of pool ownership and outdoor living is strong and will get even stronger. It is imperative that we continue investing, that we continue our focus on the customer and on investments in the future to ensure we get stronger. The demand environment will change as the economy changes and monetary policy evolves, but that impacts only the smaller portion of our business, which is one of the most unique things about the industry. Don't lose sight of the fact that this industry continuously grows upon itself and no other company is better positioned to weather the cycles and continuously improve. Like POOLCORP. I am proud of the continued progress. I am proud of our continued progress as the clear leader of our industry and confident in our superior value proposition of which each of our 6000 plus employees work hard to improve each and every day. In closing, I want to say thank you to the POOLCORP team. As I reflect on this year, it has been a tough one, but because of you, we are a better and stronger company than ever. I also want to thank our supplier partners and most importantly, our customers for helping millions of people enjoy the benefits of healthy outdoor living and making the memories of lifetime. I will now turn the call over to Melanie Hart, our Vice President of Finance and Chief Financial Officer for her detailed commentary.

Operator:

[Operator Instructions] The first question comes from Ryan Merkel of William Blair. Please go ahead.

Peter Arvan:

Good morning.

Melanie Hart:

Yes. We would expect that margins in the first quarter would be much more seasonally compared to what we saw in 2023. So I would expect it would be down in the range of that for first quarter.

Melanie Hart:

Yes. So typically, we would expect that the top line would return more to like historical seasonal levels and not compared to what we've seen in the last couple of years. But generally, kind of that first quarter is within that 18% to 20% range and then with slightly less overall margins and well-controlled operating expenses, I think it will be a reasonable consistent contribution to overall EPS for the year.

Peter Arvan:

Yes. Thanks for the question, Ryan. As we were trying to put together our guidance for the year, obviously, the beginning of last year, we came out a bit stronger because we didn't contemplate the number of interest rate increases that we were going to see in the size of those rates and the impact that, that was going to have on construction. So as I - as we look at guidance for this year. If I step back and I break the business down into the 60% of our business kind of the maintenance and repair, that's going to go. We get a little better with that business every year. We provide better service. We take a little bit of share. The biggest impact that's going to be felt in that area is the - is what the weather can do to us, right? So if the weather is better, pools open sooner, that business will shine for us. If it's slower for the year or if the weather turns less favorable, then that's going to have a negative impact. As we look through the first six weeks of the year - I guess, we're seven weeks of the year so far, it's really kind of the inverse of what we saw last year. So last year's first quarter weather was better in the beginning and then March was very tough. I mean California already this year has had over 12 inches of rain. So I think we're - we wanted to make sure that we were appropriately conservative with our outlook, given the uncertainties on weather. And as I look at and the impacts on the maintenance and repair business and I would also tell you, as I look at the two semi-discretionary and discretionary parts of the business, with new pool construction being the topic that most people want to talk about is, I don't think the economic conditions are really going to change all that much until probably we get through this year and get through the election cycle. So I can't really say that I believe that if the Fed cuts interest rates in the third quarter of the year by 0.25 point that the HELOC rate, which is approximately 12% now that - somebody that needed financing for a new pool that 0.5% or 0.25% rate reduction. So 11.75% or 11.5% would say, okay, I'm totally in now, I'm going to build that pool. So I think we're just looking for the demand environment as it relates to new pool construction to be fairly consistent. The more affluent buyers that are less subject to financing, that business will be good. We think the average price of the pool is going to increase because of the slanting of the business that way. And on the renovation and remodel, the phenomena that's going on there is, as I mentioned in my comments, every year, the - about 10% of the homeowners are pool owners decide - think about, "Hey, should I be doing a renovation?" Renovations now could be in the $20,000 to $30,000 range depending on what you're doing. So I think what we're seeing is some of our builders saying - remodeler are saying, okay, maybe we can do this in stages because there is still a big impact of borrowing costs on those larger renovation products. So I think normal maintenance products, pumps, filters, cartridges, chemicals, that business is good. We are investing in improving our value proposition, making it easier for our customers to do business with us and providing an exceptional focus on customer experience. I think that's good. If I look at our portfolio of products on building material for the renovation and remodel and I look at our expansive network of design centers and building materials, I think that's going to be good, but we have to play the cards we're dealt in terms of what the demand environment is going to be for new pools. So overall, I think we viewed the year in context of what we got for the first six weeks of weather and what the ongoing economic environment looks like.

Peter Arvan:

Thank you.

Susan Maklari:

Thank you. Good morning everyone.

Susan Maklari:

My first question, Pete, is, I'd like to talk a little bit about the operating environment as you're coming into this year. Can you talk a bit to just the competitive dynamics and how you're thinking that may come through for '24? And then I guess, relative to that, any updates on the ability to hold the share gains that you've realized in the last couple of years and perhaps to continue to even gain some share as we move through '24?

Susan Maklari:

Okay. That's very helpful color. And then I wanted to dig a little deeper into the semi discretionary products and the demand there, the heaters and the cleaners, those kinds of things. You've talked about the weakness there for the last several quarters. As you think about people that had delayed those purchases in the last 12 months or so, coming into the pool season, do you think that they could start to come back into the market that while maybe that does remain a headwind for the full year, as we move through '24, we do start to see some move off of the trough in that. And then, I guess, with that, do you think that any change in the macro environment, whether it comes late this year or next year could help to drive more of that demand? Is it enough to offset the tough comps and the pull forward that we saw during the pandemic?

Susan Maklari:

Okay, I appreciate those thoughts, and thank you and good luck with everything.

Operator:

The next question comes from David Manthey of Baird. Please go ahead.

Melanie Hart:

And is that for the full year is that what you're looking for?

Melanie Hart:

For the quarter. Yes, so for the quarter, pricing was - we saw about 1% to 2% for price in the quarter. We thought base business was relatively the same as consolidated because there was very little contribution - meaningful from acquisitions. It was less than 1%. And then on the green side, we did see that it was down 4% in the quarter, so it contributed about negative 1% to revenue in the quarter. And international was - it had - it didn't have a significant impact because it was kind of relatively flat.

Melanie Hart:

The price in green was closer to the higher end. So it would have been for the quarter closer to 3. And then - I'm sorry, it will be closer to two with one overall.

Melanie Hart:

Yes. So when you look at the guide for next year, you will see kind of that similar formula as what we've always consistently achieved over time. And so specifically, I kind of called out the three areas where we would expect those incremental investments as we move into 2024. As we get kind of out past that, we wouldn't necessarily see those larger fluctuations in the performance-based compensation depending upon how many sales centers we open each year could indicate kind of what that expense burden is in any particular year. And at this point, we would expect that the - for kind of the near term, we would expect that those continuing dollars that we're spending on IT would be part of the expense base as well.

Melanie Hart:

Yes. So it's going to be higher than the 60% when you consider the technology investments.

Peter Arvan:

Yes. As we said, Dave, we're trying to invest in our capabilities, which will allow us to keep growing for many, many years to come. The technology platforms that we are investing in are real - they're real differentiators for us, but they take investment. So we know that we're going to spend ahead of the benefits on that. So early on, I would expect that if I looked at that ratio on technology, I'm going to spend more in the beginning that I'm going to get back, but I'm going to get that back in the outer years. And that's really the way investing in technology cycles would work for us.

Peter Arvan:

Thank you.

Scott Schneeberger:

Thanks very much and good morning.

Scott Schneeberger:

I guess, Melanie, probably more for you than Peter. On weather, it sounds like in the guidance, you said maybe one or two percentage points benefit year-over-year. But then Peter had those comments at the beginning that California has actually started with tough weather this year. So it's very unpredictable. But just want to get a sense of where - really how you're looking at that versus last year and the opportunity to make up that ground. Thanks.

Scott Schneeberger:

Okay. Thanks for that. And then as a follow-up, inventory is down. I think it was 14% year-over-year in 2023. I believe you quantified it around $230 million. Is - and then I think your guidance was a bit of a challenge in the first quarter, but much lower levels in second, third and fourth. Do you still have room to reduce inventory overall by a lot? Did you get it all done in '23? Or is there more opportunity with how you're managing that? Thanks.

Peter Arvan:

Our inventory management is one of those functions that is we treat like continuous improvement. We look at inventory at the individual sales center. We look at it at the market level. And we're always looking for ways to be more efficient and making sure that we do the best job representing our supplier partners to take those new products to market. So I think last year, we demonstrated a tremendous ability to deliver on our commitments and manage inventory, and we'll do that this year as well in line with what the volume activity is.

Operator:

The next question comes from David MacGregor of Longbow Research. Please go ahead.

Peter Arvan:

Well, I think we've added more things to the deck in terms of what our contribution is. I think the technology platforms that we are working on today, as I said, the way the cycles work as you - actually you invest ahead of those things. And if I go back a couple of years and I looked at what we were doing from a technology perspective and where we are today and where we're investing money, the deck is actually very different. At the same time, as I mentioned in my comments, we are also relentlessly focused on our productivity initiatives across the branches, looking at all of our controllable expenses and also our capacity creation initiatives. But there's a couple of things, too. If I look at the rent levels today versus what they were a couple of years ago, the rental rate renewals that we are seeing are significant. If I look at the labor costs today that we are seeing as compared to a couple of years ago, they are significant. But I think the business is doing a very good job digesting those increases by continually focusing on capacity creation. But as I look at operating margin, it's a longer view. So I don't look at it and say, "Wow, I have to make sure that I get exactly to what we did last year or a little bit better this year because if I did that, then I would probably forego our ability to invest in longer-term programs." Our view is that we're going to be here for the long haul. We're not going anywhere. We're the biggest industry - or biggest company in this industry, which we believe has very good long-term growth characteristics. So when we invest, we invest for the long term. So am I concerned that our level of spending this year is up? No, I'm not because I think if you look at where we're investing that money and what the longer-term returns are for the business, I think it's a very wise investment. And I think we would be shortsighted if we said, okay, we got to stick to that ratio every year because I think we would pigeonhole ourselves and inhibit our ability to grow over the long term.

Peter Arvan:

I think if you look at our history on operating margins, I mean, if new pool construction was back up to 120,000 units, all things considered, I think we could be back in close to the numbers that we saw at our peak. Obviously, a lot of variables to consider. But the structural fundamentals of the business are there, the company's ability to execute and history of delivering on those things is there. So obviously, volume is our largest lever in terms of operating margin improvement. So if the volume comes back because new pool construction goes through the roof and renovation goes through the roof, then I would certainly expect our operating margins to expand at a rapid rate.

Peter Arvan:

Thank you.

Sid Ramesh:

Good morning everyone. This is actually Sid Ramesh on for Trey. Thanks for taking my questions today. Sorry to go back to more SG&A, but could you give us some more color on what these investments are in the tech and their impact longer term?

Sid Ramesh:

Got it. And then as a follow-up, kind of switching gears, could you give us kind of an updated commentary on backlogs and what you're seeing there in terms of new construction versus remodel?

Sid Ramesh:

Got it. Appreciate the color. Thanks a lot.

Andrew Carter:

Hi, thanks. Good morning. I wanted to ask if, in your guidance, are you kind of contemplating any kind of elevated level of deferrals? Or could you say with definitive conclusion that any kind of deferrals was kind of completely done in 2023? Also within kind of the equipment and the mix, there's been an ongoing story of trade up, replacing lower value analogs with higher value, recognizing variable speed pumps can't go backwards. Anything you're seeing that's saying that's a risk of that going backwards this year as a headwind to guidance? Thanks.

Andrew Carter:

Sure. And then kind of final question, just kind of wrap a bow - my final question, wrap a bow around weather. I mean, quarter-to-date, can you give you trends, but a reminder how much of March kind of dictates 1Q? Is the kind of swing this year versus last year really determined in March versus April? And was there any weather - would you call out any weather benefits in the fourth quarter? Thanks.

Peter Arvan:

Obviously, you know, March is a much more important month for us than January, and it grows sequentially through April, May and June. So it would be great if March was - March had fantastic weather, right? Because I had a choice of getting - having great weather in March or great weather in January, I'd take it in March.

Peter Arvan:

Thank you.

Sam Reid:

Thanks so much guys for taking my question. This is actually a follow-up to an earlier question. You guys gave some helpful color around Q1 topline contribution to the full year. I believe it was around kind of 18% to 20% of total annual revenues is what you're anticipating. So first, I just want to make sure that's the correct way to think about that? And then can we talk through the flow-through on the P&L in a little bit more detail. The reason why I asked is because I think it would imply a pretty meaningful pullback in year-over-year EPS. Thanks.

Sam Reid:

Got you. And then maybe one more follow-up, and this ties back into your Q4 results. So I want to maybe bridge the down 8% that you ultimately printed kind of versus the mid- to high single-digit down guide. And what I want to understand specifically sort of what transpired intra-quarter that got you to the low end of that range, especially when you consider weather was perhaps a moderate tailwind?

Sam Reid:

Got you. Thanks so much. I will pass it on.

Garik Shmois:

Hi, thank you. I was wondering if you could go over in a little bit more detail just for modeling the cadence of the SG&A investments this year with the increases, follow normal seasonality? Or should we expect any lumpiness?

Garik Shmois:

Got it. Follow-up question is, I wonder if you could speak to just the expectations for seasonal versus year-round markets in 2024. It looks like year-round actually performed a little bit better last year. Just curious if you're expecting that to be the case as well.

Garik Shmois:

Understood. Thanks for that. Best of luck.

Joe Ahlersmeyer:

Hi, good morning - well, good afternoon everybody. I'll keep it quick since we're a little over here. I just want to be very clear about what I'm hearing on the 1Q maybe with some numbers around it, I'm getting to something like down 5% to down 17% on 1Q sales. Is that right? Or is there something wrong with my math here?

Joe Ahlersmeyer:

Okay. But maybe at the midpoint, it is something like high single to low doubles down year-over-year?

Peter Arvan:

Joe, it's just so hard to say given the - if you look at the relative size of March compared to like - compared to January, and the uncertainty that we've seen on weather, I think your minus 17 is very much at the high end. But I think that the overall demand environment is still solid. It's just a question of when does the season open. So I don't know that I would overcorrect on anything.

Melanie Hart:

Certainly, approximately within 50 basis points.

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to Peter Arvan, President and CEO for closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good day. And welcome to the Pool Corporation Third Quarter 2023 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Melanie Hart, Vice President and Chief Financial Officer. Please go ahead.

Peter Arvan:

Thank you, Melanie, and good morning to everyone on the call. Our third quarter results came in largely as expected. As the 2023 swimming pool season winds down, we consider our results to be solid on a standalone basis, particularly when considering the dynamic conditions we have been operating in. The third quarter carried down with typical summer weather conditions overall, allowing us to evaluate our performance in the industry environment on a mostly weather-neutral basis. Our third quarter 2023 sales of $1.5 billion is a 9% decline compared to 2022, with one less selling day, but exceeded 2021 third quarter sales by 63 million or 4%. As expected, sales declines continue to moderate in the third quarter, showing sequential improvement versus the 10% and 15% declines we saw in the second quarter and first quarter of 2023. In view of the neutral weather conditions during the third quarter, our sales trends across our major markets were relatively consistent. Starting with year-round markets, sales declined 5% for the quarter in Florida compared to the third quarter last year, with Arizona finishing down 8%, California down 10% and Texas down 11%. For context, last year in the same quarter, Florida sales were up 20%, Arizona was up 18%, California was up 16% and Texas was up 10%, respectively, versus the third quarter of 2021. This simply highlights the difficult comps that we were up against this year. Year-round base business declined 8%, while seasonal base business markets declined 10%, a slight sequential improvement from the 9% and 11% decline in the second quarter of 2023. Again, for comparison, last year in the same period, we saw growth in our year-round base business markets of 15% and 5% in our seasonal base business markets. Moving on to product category results. Chemical sales increased 5% in the third quarter, mostly driven by increased volume as chemical pricing came in relatively flat for our collective offering. Our strong footprint, leading proprietary products and enhanced technology tools gives us an unmatched value proposition and contributed to our share growth. Building material sales for the quarter were down 13%. This category includes products necessary for both new pool construction and renovation and remodel projects. The building material trend continues to suggest that renovation and remodel demand is stable and outperforming new pool construction and our NPT footprint and product offering enables us to outperform the industry in this category. Equipment sales declined 9% in the quarter. As you can see, this implies solid demand for maintenance and repair despite the softer demand for new pool construction and renovation and remodel. Looking at end markets, commercial pool product demand remained strong in the third quarter, with sales up 10%. Sales to our independent retail customers were down 8% for the third quarter, an improvement from the 11% decline and 16% decline we saw in the second and first quarters of this year. Pinch A Penny franchisees collectively reported sales growth of 1% for the quarter. The franchisees generated solid sales for their maintenance products, but weaker sales of discretionary items in line with what we are seeing across our distribution business. Europe’s third quarter sales showed a 2% decline in local currency, a notable improvement from the 7% and 22% decline in the second and first quarters of 2023. Europe has been challenging for the past 15 months to 18 months and we are encouraged by this more favorable trend. For Horizon, sales declined 7% during the quarter. Consistent with prior quarters, sales activities for commercial projects remained stronger than residential. Moving on to gross margins, where we ended the third quarter at 29.1%, consistent with our past thinking, we believe gross margins for the full year will be an approximate -- will be approximately our long-term guidance of the 30% range. As is typical, Melanie will provide more details on what to expect in the fourth quarter gross margins in her comments. Even while continuing to invest in new locations, acquisitions and technology during the quarter, we reduced operating expenses by 2% compared to last year. The team did a good job managing expenses that typically ramp up during the season in light of the softer demand environment. Thankfully, the team has been focused on capacity creation for many years and that helps us offset inflationary headwinds and leverages our fixed expenses, leading to a 15.9% operating expense percentage. POOL360, our B2B tool, saw sales increase 5% over the prior year, a higher growth rate than our overall sales activity. The line volume growth for the same period was 3% and demonstrates the tool’s contribution to our capacity creation effort, while also improving the customer experience and productivity and adding value to our business and our customers. We view this tool as best-in-class, providing multiple benefits for both our customers and the local operating teams. Operating income for the third quarter of 2023 was $194 million, down $69 million compared to last year. This however represents an 85% improvement over 2019. Our reported third quarter operating margin of 13.2% is 10-basis-point expansion from 2019 and a 20-basis-point expansion from 2020, showing the sustainability of our fixed cost leverage initiatives. During the third quarter, we added two new greenfield locations. This puts us at 10 new greenfield locations for the 2023 season, a further testament to our strong bent and refined expansion process. In addition to our organic openings, we added four new locations through acquisitions this year. Additionally, we expanded our Pinch A Penny franchise network by adding two new franchise customers in the quarter, bringing the new franchise store count to 11 for this year. We continue to prioritize organic growth investment as the future of the business, which not only expands our customer reach, but also creates capacity for additional products and service offerings at our existing locations. Melanie will be commenting on most of the balance sheet items, but I would like to highlight one significant accomplishment that is the work that the team did on rightsizing our inventory. Because of the tremendous effort of our team, in conjunction with our vendor partners, the team surpassed our inventory reduction goal and delivered a reduction of over $216 million year-to-date. This was done while expanding our footprint, integrating acquisitions and maintaining best-in-class inventory availability. This achievement helped us generate $750 million in operating cash flow through September 30th, a company record and nearly 2.5 times that of this time last year. As we move into the final quarter of the year, we have proven that even in the most difficult operating conditions, our experienced team delivers an unmatched value proposition, which enables us to outperform the industry and expand our share. We have built the largest fully integrated network of sales centers in the industry and we are adding new locations faster than anyone with a proven process that delivers a solid ROI. We have a vertically integrated chemical packaging operation and the broadest selection of proprietary building material products from pool tile to finish, over 135 NPT showrooms and design centers, four centralized shipping locations for importing consolidation, industry-leading technology solutions for our customers and our own use and best-in-class retail franchise development and support operations, perhaps most importantly, we have over 6,000 employees that operate in a performance based culture that know how to compete and win. While new pool construction is likely to finish down with -- with units down 30% in 2023, we still expect about 70,000 additional pools will be [Technical Difficulty] expanding ever growing installed base of pools where we derive over 80% of our revenue. No doubt, the current macroeconomic environment is tough, but the desirability of swimming pools and outdoor living has never been stronger and we do not see that changing. We firmly believe that even with fewer pools being built, our share and the value of our products on a per pool basis has grown. We know that renovation activity will continue as homeowner’s upgrade both services and pool technology to enhance their backyard oasis. We believe that our relentless focus on delivering a second-to-none customer experience positions us better than anyone in the industry to serve the pool professional and support the specialty retailers that cater to the DIY owner. In short, we believe in the long-term growth characteristics of the industry, the strength of our company and we believe in our team. As I look back on the pool season, I am very proud of our team that has remained focused on innovation, execution and collaborative partnerships to deliver a customer experience that, as I said, is second to none. Lastly, with over three quarters of the year behind us, we have narrowed our annual earnings guidance and now expect diluted earnings per share in the range of $13.15 to $13.65, including the impact of year-to-date tax benefits of $0.15. Melanie will now provide additional details in our financial commentary. Melanie?

Operator:

Thank you. [Operator Instructions] Our first question comes from Ryan Merkel with William Blair. Please go ahead.

Peter Arvan:

Good morning.

Peter Arvan:

Yeah. Sure. So, 2023 was no doubt a kind of a crazy year, which followed a couple of years crazy, but for different reasons. So it was -- we had bad weather in the beginning of the year, we had interest rates that continue to rise and that we think put a crimp on new pool construction, which was actually -- is turning out to be lower than what we thought it was when I was talking to you a year ago, and frankly, when we initiated guidance at the beginning of the year. I think new pool construction this year, as I mentioned, is going to be down 30%. I think it depends on the -- that’s an average, right? So I think if you look at entry level pools in some markets, it’s actually down more, and in some cases, significantly more. The flip side is that the higher end pools remain solid. The builders that build the higher end pools for the more affluent people that have less financing connected or no financing connected to, that business is good. So when I look at the steps back and look at the macro economic environment, based on what we see today, I would tell you that, I don’t think new pool construction is going to drop much more. Could it drop a thousand -- a couple of thousand, it could, way too soon to tell because the builders are frankly just putting together their plans and pricing and starting their selling season for next year. But I have talked to many builders in the last couple of months and everybody is fairly optimistic that this year the new pool count is down. They don’t really expect it to fall much more than where it is today. The other comment I would make on the market is on renovation. Renovation is again that plays a little bit of that same pattern, right? The renovations that would require financing are going to be under the most pressure because of interest rates. Now I read the same things that you guys do on interest rates. If there is moderation in interest rates next year, then that will bode well for both new pool construction and for large renovations. Smaller renovations, most of those are paid for in cash and it really doesn’t have a big impact on whether the jobs get done or not. From a maintenance perspective, maintenance is maintenance. It has to happen. The overall desirability of the pool, outdoor living is still very high, people still want pools. There would be more pools being built if they were frankly more affordable. So those that have a pool, like them, use them when the weather is good, then they are in them. If I look back at the beginning of the year, a couple of the headwinds we had was very tough weather in the beginning of the year and we also had some of the inventory hangover from the previous year that was in the channel. So as I look forward, and again, too early to give you a guidance, but I am more optimistic about next year than this year, but I also want to be clear with the setting expectations. I am not looking for a material, it’s -- new pool construction, it’s not going to take off, it’s not going to grow, but I look at the headwinds that we faced, the stability of the market and I remain confident that I think next year will not be another year of down, down, down.

Peter Arvan:

I would say that our early buys, Ryan, we are going to participate in early buys as is normal, because now we have created the headroom in the inventory where we can participate. So that certainly helps, and as does the price increases, that will be rolling out effectively next month. So for the first half of the year, I mean, remember, our gross margin, as Melanie said, our gross margins are not consistent quarter-to-quarter. They vary from quarter-to-quarter. So they are generally higher peak in the -- towards the middle of the season and then they come down. What I would also say is, I would draw your attention to the comment Melanie made about gross margins and the inventory drawdown. When you draw down inventory like we did and you are buying less product like we are that’s also going to impact volume related incentives. So we don’t anticipate inventories dropping significantly from where we are, therefore we would expect volume incentives to be more in line with what we would see traditionally. But again, very early. I can tell you, from a macro perspective, we will be participating in early buys, but we will give you guidance on how that should flow through the P&L when we initiate guidance next year.

Operator:

Our next question comes from Susan Maklari with Goldman Sachs. Please go ahead.

Melanie Hart:

Good morning.

Susan Maklari:

Good morning. Can you talk a bit about the competitive landscape now that we are sort of through the bulk of the pool season? How you are thinking about the different dynamics on the ground, your ability to react to those and any thoughts on the setup as we think about next year?

Susan Maklari:

Okay. That’s helpful. And then any thoughts on capital allocation, perhaps, your willingness to step up on the buybacks, just given the improvement you made in the inventories and the cash flows that we saw during the quarter as we think about the full year here and any other sort of thoughts around some of the strategic initiatives and investments there?

Susan Maklari:

Okay. Thank you for all the color and good luck.

Operator:

Our next question comes from David Manthey with Baird. Please go ahead.

Peter Arvan:

Good morning.

Peter Arvan:

Yeah. No. I think that’s a fair question, Dave. I think the maintenance business should be normal. The only thing that I would tell you, impacted -- we started to see an impact in the fourth quarter that carried a little over into first quarter from a maintenance perspective is the storm in Southwest Florida, but relatively minor from the total company perspective. But when I look at normal demand patterns for everything, I would tell you the maintenance and repair business has the highest predictability and stability, where it gets a little bit subjective is when it comes down to a repair versus an upgrade. So, and again, it really kind of depends on the market that you are talking about. In some cases, repairs may be choice number one. In other cases, repair and replace or replace would be choice number one. But by and large, I don’t really see much different. In fact, I look at it and say that there’s -- as I mentioned in my comments, there’s 70,000 new pools that are in the ground that have to be maintained next year that didn’t exist this year. There was likely some things that were put off this year that next year are going to have to be done. So the good news about a swimming pool in the market is there are certain things that I have to do every week, as you know, as a pool owner. There are some things that I could defer, but you can only defer things for so long when they turn into I’d like to a must have. So that part of the market, we remain confident in.

Peter Arvan:

Yeah.

Melanie Hart:

Yeah. Well, it certainly was able to allow us to clear out physical space or pre-buys and make the determination really on a vendor-by-vendor basis, depending upon what their individual incentives were of what we wanted to participate in. And so, I would say, if you had to characterize it compared to 2019, we would say that early buying season was relatively normal and so when you look at what that benefit that might bring for margin for next year, certainly, we will have better color on that once we take a look at what we have received kind of first quarter. We typically will receive early buys either in fourth quarter or first quarter. So we will have a better sense for that when we talk again in February. So the one thing that we did mention that will be slightly ahead of where it has been historically is typically, we would be looking at those kind of one to two price increases in the pre-2019 period, and so for next year, we are looking at those being slightly higher at kind of the 2% to 3% range.

Operator:

Our next question comes from Scott Schneeberger with Oppenheimer. Please go ahead.

Peter Arvan:

Sure. As I mentioned, we believe that the renovation and remodel business is holding up better than new pool construction and that’s for a couple of reasons. People with pools tend to be more affluent in general than people that are deciding whether they want a pool or not certainly at the entry level. So our survey of the builder community would say, builder remodel community, because most people do both, right? Most of our customers that are builders are also doing remodel. And I think there with probably very few exceptions, our builders would tell you that their remodel business is better than the new construction business. I think there was a bigger backlog in renovation and remodel a year ago, 18 months ago, because of people that were focused on building new, new, new. I think with new pool construction being down 30%. I think the backlog of new pool renovation and remodel has been worked down. But also remember, we -- the industry kind of views renovation and remodel is about 10% of the industry, right? So if you have 5.4 million in-ground pools, there might have been a little more than 10% in pent-up demand and backlog that today may be back down in the 10% range. So that business is good. It was probably a little bit ahead of itself addressing the backlog, now I would tell you that it’s probably back down to more normal and I think that’s good and that’s healthy for the industry. Your question on the technology adoption, again, it comes down to, I guess, during the height of COVID when people were home and they said, hey, I am spending a lot of time. I am staring at a swimming pool with no technology. I want, I want, I want. We saw a big request where I want technology, I want technology. We see with new pool construction, the trend towards higher ticket items and technology is still continuing, right? People are still -- the pools that are being built today still have the new features and the new technology behind it. Oftentimes, when there’s a replacement necessary, again, it is an opportunity for an upgrade. So maybe during COVID, some of the upgrades were pulled forward, meaning the time clock still works, but I’d actually like to do this from my phone versus going out to the pad. So now when there is failures of equipment we still see adoption of the higher tech product, because frankly, it’s just -- it’s a better experience for the consumer. When pumps fail and they are putting in a variable speed pump, there’s still a lot of single speed pumps in the industry that we are working and people weren’t going to change them. But when they do change them, because of the DOE regulations, they are going to variable speed and they are recognizing a significant benefit in their energy cost. The same opportunity exists when it comes to the heaters, high efficiency heaters versus standard efficiency heaters, and cleaners, there’s types of cleaners that are far more efficient. And again, the consumer trends for those products continue, they are -- when people are spending money, those that are replacing most often are replacing for the newer product versus looking at old technology.

Melanie Hart:

Yeah. We are very proud of what we have been able to do on the expense side and it’s a really good indicator of the quality of management and their ability at each individual sales center level to adjust expenses according to the volumes at each location. So as we look forward for next year, we would certainly continue to do that, regardless of whether or not is a significant upswing or just kind of a continued moderating of where we are from a sales standpoint. And so we continue to have work throughout the season, and one of the things that we said earlier on, that we weren’t cutting the base of our expenses, because we wanted to take the opportunity from a volume standpoint and reinvest in our employees in our operational initiatives and our training, and we have been very successful in those things that we wanted to do for this year and so our expectation would be that, that would be a benefit for us as we move forward.

Operator:

Our next question comes from Noah Merkousko with Stephens. Please go ahead.

Peter Arvan:

Good morning.

Melanie Hart:

Yeah. So thank you for acknowledging that we are still consistently stating that our long-term margins will be -- will approximate 30%. When we look at kind of the structural things that made up those margins, we are continuing to benefit from the acquisition-related margins that we did from the Pinch A Penny and Corpus acquisition. And as Pete mentioned in his comments, they are trending overall very well as it relates to kind of compared to the traditional retail market within our industry. We have also seen some benefits from our private label products. That is an area where we would expect to continue to expand as we move forward. We are continuing to add capacity there to serve more of our locations. We have been -- had made great strides in what we have done on our procurement and our logistics and so that continues to provide benefits, as well as pricing. We would say that we are definitely not done from the pricing area. We have some new things that we will talk about when we talk again in February and what we are doing as it relates to pricing. And so really, the only thing this year that will be a little bit out of what we have seen historically is kind of that product mix, particularly as it relates to the building materials. So we are seeing a little bit more of a drag on the new construction on the sell-through of some of those products, which we did talk about that has been a significant growth opportunity for us. So as that normalizes, we would see that, that normalizes as part of our overall longer term margins, and then again, we did also mention the vendor incentives for this year will be less than what they would be in a normalized year.

Noah Merkousko:

Got it. That’s helpful. And then for my follow-on, just a clarifying question. The language in the press release noted the low end of the revised EPS guidance range $13.15 would be a solid result. Should we read into that to mean that you are pointing to the low end of the guidance?

Peter Arvan:

Yeah. The fourth quarters are seasonally…

Peter Arvan:

Yeah. The fourth quarters are seasonally least significant quarter. It also is the quarter that has affected the most in terms of a percentage of the quarter by things like weather. So if the season shuts down early and construction drops off sooner, because it gets cold, it magnifies itself because of the size of the quarter. So I think all we were pointing to is the potential variability.

Melanie Hart:

So we had 3 to 4 from an equipment vendor standpoint. We are expecting on the -- based on the current run rate on trichlor, we still will have a first quarter and second quarter that we will be lapping some year-over-year pricing. So it could blend kind of within that. We are also still waiting to get kind of final pricing on Horizon. The current look is that, that will probably be something less than what we are seeing on the blue side on the equipment. So we will have a better definitive answer for that when we talk again in February.

Peter Arvan:

Thank you.

Andrew Carter:

Yeah. Hey. Thanks. Good morning.

Andrew Carter:

I think you said this is more of a weather neutral quarter, but I kind of wanted to understand the jump in chemicals, because I would assume had to be volume related, because I think the pricing was steady. So was there any weather impact in that? And then regarding, I know that you called out product mix as a headwind, but would chemicals be accretive or dilutive to gross margin overall? So I will stop there.

Andrew Carter:

Got it. Switching gears a little bit. I know you kind of talked a little bit in sales and not kind of putting a firm line in the sand. But as far as like EPS goes next year, do you have other drivers to grow EPS in a more tepid environment? I know this year has been a story about maintaining SG&A investment. Do you see a world where you can get more flex on SG&A? Do you see perhaps more meaningful gross margin increases, anything along those lines? Thank you.

Andrew Carter:

And finally, just real quickly, you said something about increased competitive activity during the script. Was that isolated to chemicals or were there any other significant pockets out there beyond just normal course of business that you kind of talked about?

Andrew Carter:

That’s all I got. Thank you, guys. I will pass it on.

Operator:

Our next question comes from Joe Ahlersmeyer with Deutsche Bank. Please go ahead.

Peter Arvan:

Hey, Joe. Good morning.

Melanie Hart:

Are you looking at kind of a typical change from second quarter to third quarter and then suggesting that the individual items that we listed out accounted for about 70 basis points? Is that what your question is?

Melanie Hart:

Yeah. I would say that we don’t quantify each of the individual items specifically. Once we get to the end of the year, we will be better able to quantify kind of the full impact of, specifically, as it relates to the building materials on the margins. The customer mix, that does vary quarter-over-quarter, because you will see from -- depending upon the first quarter or the second quarter, some of those early buy purchases and the shift from a timing from that. So I think that, that definitely impacts the comparison quarter-over-quarter. So those types of things are very hard to in visually at that detailed level assess. Yeah, when we actually -- when we go through the list of things that we talked about today, when we look at margins internally, there’s probably 20 things that we are seeing that fluctuates quarter-to-quarter, year-over-year and so we are really just trying to kind of narrow it to the things that are more impactful to be able to give you a better picture of what’s going on with the business.

Peter Arvan:

Yeah. I would tell you the probability of that is really low. Let me expand a little upon my comment about the affordability. As I mentioned, I believe on the second quarter call. What we -- where we are seeing the biggest headwind on swimming pool construction in terms of units is in the entry level pools, right? The smaller pools, the cheaper pools, which the builders will tell you that the conversation takes place at the kitchen table to close that deal. Prior to the run-up in interest rates. So for the previous couple of years, when interest rates were very low, a pool could be had for $750 a month to $800 a month and homeowners were signing deals based on that as their monthly payment. But with a significant increase in interest rates, and frankly, less lending in that area in the last 12 months to 18 months, it has driven up the cost -- of borrowing cost and availability of that -- of those funds to build a swimming pool. So that has really taken a chunk out of the lower end pools. As it relates to the higher end pools, which are paid for, as we have mentioned many times in cash, those tend -- those -- the demand for those pools is good. Now it was good before and the builders are telling me that the outlook for that is still strong. So that really is the comment as it relates to affordability of new pools. Now remember, the inflation that we are seeing. So Melanie is talking about, she had mentioned that prices could be up 3% to 4% this year. So 3% to 4% on the rest of the industry on something that is non-discretionary in nature doesn’t really change the demand curve. So if -- and frankly, if the price of a swimming pool, if you said that an equipment set for swimming pool is in the $15,000 range now, if the equipment set came down 5%, which we are not suggesting and I don’t think that’s going to happen at all. In fact, I think, there’s virtually zero chance of that, in my opinion. But if it were, that really isn’t going to change the homeowner’s decision on whether they should start building pool, because in the grand scheme of things, material makes up 25% of the project. So it just isn’t enough to move the needle. It’s really everything else that factors in. And on non-discretionary items, it doesn’t really -- if there was a decline from the manufacturers, which we have had zero indication of, if there were, it wouldn’t change the demand curve for the non-discretionary purchases, because nobody buys any of those items until such time as they need them.

Melanie Hart:

Yeah. I am sorry, but as you think we are over our time for the call. Do you want to follow back up with me?

Melanie Hart:

Okay. Thank you. Pete, did you want to close this up?

Melanie Hart:

Thanks, everyone.

Operator:

Good morning, and welcome to the Pool Corporation Second Quarter 2023 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would like now to turn the conference over to Melanie Hart, Vice President and CFO. Please go ahead.

Peter Arvan:

Thank you, Melanie, and good morning. Three months ago, you will recall that we said the year was off to a challenging start driven primarily by weather, but we cautiously believe at the time that as the year progressed, things would improve. Although, things did improve sequentially, allowing us to post the second best quarter in our company's history, they did not improve as much as we would have liked as weather continued to provide headwinds and new construction remains under pressure. One notable exception to this is for high-end new construction where demand remains solid. The weather change that we count on to initiate the start of the pool season came later than what we have seen for the last couple of years. This effectively shortened our season as homeowners delayed openings into cooler weather kept water temperatures lower, which negatively impacts our maintenance business, particularly chemical usage. Higher interest rates and uncertain macroeconomic conditions continue to weigh heavily on new pool construction, particularly at the lower end of the market. Additionally, we have seen some indication that more discretionary purchases like heaters and high-end cleaners have been deferred, but we are seeing resiliency in the remodel market. Dealers are reporting that demand for renovation is outpacing demand for new construction in many markets. Despite the challenging market conditions, POOLCORP recorded a strong quarter, demonstrating the power of the brand and tremendous execution by the team. We continue to invest in our growth and focus on the customer experience, which is helping us retain and grow our market share. We have opened eight new sales centers since the beginning of the year, far more than the rest of the industry combined. In Japan, we added nine new stores since the beginning of the year, adding to our already impressive network of over 275 franchise stores. Our ability to manage operating expenses in a declining demand environment is noticeable as our operating expenses declined 3% on a year-over-year basis in a quarter even though we continue to invest in our new locations, new technology and our people. POOL360 adoption is growing as dealers are recognizing the added benefit and time savings that they receive by using the latest release of the tool. Additionally, we are launching our POOL360 water test application at our independent retailers, which is a best-in-class online water testing solution that helps dealers provide water chemistry excellence and drive sales of our private label chemical brands. Our strong balance sheet has gotten even stronger as we have generated over $377 million of cash from operations, paid down debt, reduced inventory while providing best-in-class service. As in past recessionary periods, we get stronger and we'll exit this cycle stronger than ever. When I step back and look at the revised earnings outlook that we reported this morning and put it in context to historical results, not just 2022, I'm proud of how the team is performing and all that we have accomplished. Our market share is improving. The team is more focused than ever on providing best-in-class service. Of course, we are disappointed to report a year-over-year decrease in sales. But when you put things in perspective in this environment, we have achieved a 93% growth in sales and EPS growth of almost 200% from 2019 to 2022. Our North American market has been expanded by over 311,000 new pools built in the last three years. Over 30% product inflation has passed through the channel, market growth from new products, strategic acquisitions, continued market share gains and consistent renovation and remodel activity of the aging installed base all gives us confidence in the future. Our size, scale and unmatched experience in the industry allows us to excel in each of these areas and outperform the competition because we have the broadest footprint, the best talent in the industry and the swiftest access to capital, allowing us to prudently and responsibly invest during all business cycles. Even with these negative impacts, our second quarter 2023 sales of $1.9 billion exceeded 2021 second quarter sales by $70 million or 4% as adverse weather carried over into April, then varied in impact by geography for the rest of the quarter, the negative trend on top line moderated in the second quarter to minus 10% compared to the first quarter where sales declined 15%. When we look at our year-round base business markets, the impact of varying weather patterns are apparent. For the second quarter, we saw California sales declined 8%, which is a sequential improvement when compared to the weather-driven down 24% that we saw in the first quarter. For reference, California sales increased 9% in the second quarter of 2022 and 33% in the second quarter of 2021. Moving to Arizona. Sales declined 7%, which again is a significant improvement over the 14% decline that we saw in the first quarter. For historical context, sales in the second quarter of 2022 and 2021 were up 20% and 24%, respectively, in Arizona. Texas experienced cooler temperatures throughout the second quarter and significant precipitation in May, resulting in a 13% decrease over last year and trending down from the 6% first quarter decrease. For perspective, sales in Texas increased 17% in the second quarter of 2022 and 30% in the second quarter of 2021. Florida sales decreased 7% over last year, where for the quarter, we observed typical weather for this time of year other than a wetter June. You will remember that Florida sales was up 7% in the first quarter, bringing the year-to-date number to essentially flat. We have seen a slowdown in Florida new construction, but we must keep in mind that Florida experienced a 23% and 35% growth for the second quarter of 2022 and 2021, respectively, so it remains significantly higher than pre-pandemic levels. Turning to our seasonal markets. Our sales declined 11% in the second quarter, in contrast to the 23% decrease we experienced in the first quarter. Although we observed some improvement as the ground began to thaw, key areas such as Canada, the Northeast and Midwest still experienced temperatures below swimming standards through June. Sales in our seasonal markets grew 5% and 32% in the second quarter of 2022 and 2021, respectively. Pricing on equipment continues to hold with overall sales down 8% for the quarter and less unfavorable than the declines in new construction. Chemical sales in the quarter were down 3%, driven by the weather patterns I discussed earlier and trichlor pricing came down more than we saw in the first quarter, resulting in a 1% drag on consolidated sales for the quarter. Building material sales for the quarter were down 8%, continuing to indicate renovation and remodel numbers are faring somewhat better than anticipated despite the lower new pool construction. As consumers take advantage of leisure travel, our commercial swimming pool sales continue to see an uptick with net sales for the quarter increasing 8%, following a 12% increase in the first quarter over last year. Pinch A Penny franchisees collectively reported relatively flat sales for the quarter compared to last year. The franchisees have seen overall impact from less sales of discretionary items such as equipment and recreational items, but non-discretionary sales are steady. Sales to our independent retail customers were off 11% and improvement over the 16% decrease that we saw in the first quarter. Europe’s second quarter sales remained challenged and were down 6% compared to the prior year, but also saw a seasonal increase in trend improvement from the 25% decrease they reported in the first quarter. In the Horizon business, base business sales were flat for the quarter, an improvement over the 7% decrease we reported in the first quarter. Our Irrigation and product category as strength for us performed well, particularly boosted by commercial projects, but growth was offset by some pricing pressures on commodities, which have seen higher levels of inflation over the last couple of years. POOL360, our B2B tool saw sales increase 3% over prior years, which continues to be better than total sales activity. Line volume growth for the same period was 4%, which indicates an accelerating adoption rate as our customers find value in the tool. We are encouraged by the resiliency of our gross margins, which came in at 30.6% in the quarter where competition has increased due to softer new pool construction and current market conditions. Melanie will provide more detail on this topic in her comments. During the quarter, our operating expenses were 13% of net sales, an improvement over the 18.6% of net sales we reported in the first quarter. We still have good leverage on our fixed expenses and continue to add new sales centers opening three during the quarter to expand our market presence. We also continued to invest in and expand our employer of choice initiatives and customer facing programs to ensure we can expand our service offering to our customers. Operating income for the second quarter of 2023 was $327 million, down $92 million compared to last year, and almost 90% increase over 2019. With our reported operating margins of 17.6%, you can see that we’ve held onto the majority of the benefits we realized as the business rapidly grew over the last three years due to our disciplined execution. During the second quarter, we added five new locations, two acquired and three greenfield. This puts us at eight new greenfield distribution locations to date, keeping us on track to open around 10 for the full year. We also expanded our Pinch A Penny franchise network by adding four new franchise customers in the quarter. We continue to invest in the future of the business as we expect the return to steady historical growth after lapping the swift ramp that we have seen over the last several years. Last quarter, we began to experience the impact of weather, heightened interest rates, lower consumer spending in the end of COVID tailwinds. As part of our full year expectations, we believe we could see new pool construction down 30% with around 70,000 new pools being added to the install base in 2023. We expect some increases in the average spend on new pools built this year as lower price pools are experiencing stiffer headwinds than higher priced units that typically are less dependent on financing. Our product offering continues to expand and we are adding additional capabilities to our sales centers. Similarly, on remodel and renovation activities in a typical year, we would see around 10% or 550,000 pools upgrading their pad equipment and taking advantage of new automation, more efficient pumps, alternative sanitizers, all of which increase the ease of pool ownership. Renovation and remodel activities often involve changing the look of the pool in the backyard using our proprietary tile pool finish and deck material selections. The owners of the 5.4 million in-ground pools are continuing to spend approximately $1000 or more on pool maintenance annually, although, some may choose to defer installation of more discretionary items in times of economic stress. Chemical and minor repairs will continue on these bodies of waters, along with the above ground pools and spas that also saw accelerated growth over the last few years. While we are expecting a decline in sales in the current year mostly due to tough comps, we are comparing again on a year-over-year basis, the long-term outlook of the industry as a whole remains strong. The install base is bigger than 2019 and continues to grow. Equipment and most all other product inflation is holding and continues to buoy the top line. As I mentioned earlier, some trichlor pricing is under pressure as supply conditions have returned to historical normal levels following a period of significant supply disruptions, but this is largely being offset by inflation of other chemicals. Looking ahead, we expect these dynamics to stabilize and reflect consistent pricing and supply characteristics. Everything that we love about this industry and our numerous competitive advantages are every bit as true today as they were in the past and give us great confidence in the future. Lastly, with almost seven months of the year behind us providing an even clearer picture, we have adjusted our full year guidance for 2023 to $13.14 to $14.14 delivering solid teens EPS in the face of unfavorable weather early on macroeconomic headwinds, higher interest rates and market normalization show the cumulative benefit from exceptional execution by a very dedicated and talented team. Melanie will now provide additional comments in her financial commentary.

Operator:

[Operator Instructions] Our first question comes from Ryan Merkel of William Blair. Go ahead.

Peter Arvan:

Sure. That's a good question, Ryan. And we spent considerable time on it. I guess the difference between now and when we guidance out at the end of the last quarter is that we have passed the most seasonally significant part of the year, and we're three weeks through the month of almost three weeks through the month of July, which gives us much better visibility into how the year is going to trend. So nothing new to report on new pool construction. We had said last time we thought new pool construction was going to be up 30%. We still think it's going to be often in neighborhood of 30% skewed more heavily towards the lower-priced pools with higher priced pools doing better. Our ability to gain share as evidenced by our analysis of our new pool sales is consistent with what we thought before. So we're down slightly less than the industry as we believe in new terms of new pool construction, so nothing new to report. The weather provided significant headwinds in the second quarter. The season started late. And as you know, we basically contemplate normal weather in our guidance. We didn't get the normal weather that we were counting on and the seasonal markets opened late. And then, frankly, the poor weather moved around some of the year-round markets too and presented significant headwind. The other thing that we saw and we have better visibility to now is the consumer buying patterns and what we see there. We are – the non-discretionary spend is good. I mean we talked a little about the spend on chemicals with the pricing on chemicals that trichlor is down, everything else is up a little, it's about the same. Chemical sales are going to be higher when the weather is hotter. So the hotter water and hotter weather came later than anticipated. We are now getting good weather in terms of heat and that is that's having an impact on the chemical spend. So the non-discretionary portion of our business is doing well. What we've seen is that a continuation really of the, we'll call semi-discretionary purchases by consumers. So the consumer that has a heater that may need to be repaired. Well, this time of the year, nobody is thinking about heating their pools because most of them are too hot as it is. But those that would consider buying a new cleaner given the current economic environment, we're – what we're seeing is some people deferring some of those expenses to next year and not doing – not making the purchase this year. So we've got 6.5 months, almost seven months of visibility into the year. So we have a better view of what the consumer buying pattern is and the idea that we think it would significantly improve over what we have seen based on the macroeconomic conditions and the weather pattern, we baked into our guidance. The only thing I didn't touch upon in my commentary just now with the renovation and remodel market. And as I said, the renovation and remodel market is doing better than what we see in new construction. If you look at I mentioned our building materials being off a two products to consider when we look at new pool construction and renovation and remodel would be tile and pool finish. Pool finish is down 2% for the year and tile is down 9% for the year. We think that the backlog on renovation was higher in the beginning of the year, and we expect that to moderate. So we think it was more favorable than the full year – our full year outlook at the beginning of the year, but we think that's going to moderate as dealers work through the backlog. We consider normal weather for the balance of the year. So we're not counting on an extended season. And I think we've captured most of our possibilities in terms of market demand, pricing considerations, supply chain interruptions within our guidance. So I just think we have more clarity now with a large portion of the year behind us and a good look at what July is going to bring.

Peter Arvan:

Yes, certainly. The great part about this business is that, most of the spend is non-discretionary. So when the weather cooperates and it is hot and people are using their pools then the demand for maintenance items such as chemical and parts and service is good. So when things heated up, we are encouraged by the uptick in sales. However, one thing I got to point out though is we have very stiff comps in the third quarter, too. The third quarter is by no means a layup given the growth that we saw in the third quarter of last year. The comps really don't moderate until the fourth quarter. So business is good. The sales centers are busy. But when we look at the comps that we have from last year, which was – weather was good, sales centers were busy and consumers were certainly a bit more confident and new pool construction was stronger. We have to take that into consideration.

Peter Arvan:

Thank you.

Susan Maklari:

Thank you. Good morning.

Susan Maklari:

My first question is, Pete, can you just expand a bit on consumer sentiment. And what you're hearing from some of your larger customers? It sounds like there's, to some extent, a mix shift that's happening with the higher end versus the lower end consumer. Is that fair? And then what do you think it's going to take from a macro perspective to get some of these consumers back into the market on the discretionary or the semi-discretionary side?

Susan Maklari:

Yes. Okay. That's very helpful color. And then just following up, you mentioned that there was some increased competition earlier in the season as things were slow to get started in some parts of the country. As things have picked up in the summer, are you seeing that, that competition is eased? And how are you thinking about your ability to hold the market share gains that you've realized in the last couple of years against that? And I guess, finally, with that, any thoughts on or updates to your inflation expectations for this year?

Susan Maklari:

Okay, thank you for all the color, Pete, it’s very helpful and good luck with everything.

Operator:

Our next question comes from David Manthey from Baird. Go ahead.

Melanie Hart:

Yes. So we are seeing probably an impact in the second quarter on the new pool construction. It was about the negative five and the renovation was around a negative three. And then price contribution, we are – on the green side, it's a little bit less than blue. So we said three to four in total. The green would trend to the lower end of that because they did have some more of the commodity, particularly the piping. That was overall impacting their sales, but their sales for the quarter actually did, how they came in relatively flat.

Melanie Hart:

Well, I thought you were asking for the walk between kind of last year and this year.

Melanie Hart:

The revenue related to new pools, yes.

Peter Arvan:

Yes. I think, Dave, as I mentioned, what you're going to see is basically stability at the mid and upper end, the families that have the financial means to do it without financing that are seeing stability in their home values that say, I want a pool, I think that's going to happen. At this point, I don't see an acceleration in new pools yet because I don't see the – what I think it would be the indicators that we would see that the lower end pools come back into favor and a lot of that is going to have to do with, as you mentioned, movement in the housing market. So I'm moving, so I might have freed up some equity, so I have some cash that I can use to build a pool and/or lower interest rates that would encourage me to move forward with a project if I had to finance most of it.

Operator:

Our next question comes from Trey Grooms from Stephens. Go ahead.

Melanie Hart:

Yes. No. So if you're backing into that for the full year, I think that's pretty reasonable. When you look at just kind of top line, the comps that we'll have in the third quarter, where we were still up 10% for base business year-over-year are going to be more difficult than the fourth quarter where we were just up 1%. We did start to see some of the slowdown in new construction in – starting out in the fourth quarter, primarily kind of November, December of last year. So when you look at kind of the year-over-year comps, those should get relatively easier in the fourth quarter. And then third quarter, we'll also have that one less selling day, as well.

Melanie Hart:

The biggest driver there is going to be where we end up on the top line, kind of within that range bracketing that down 10%. So that will get us to the high and low end of the range. There'll be some expense offsets that will depend on the actual volume, but margins should be relatively similar in both case scenarios.

Trey Grooms:

Yes, that’s all. Super helpful. Thank you, I’ll pass it on. Good luck.

Operator:

The next question comes from Scott Schneeberger of Oppenheimer. Go ahead.

Melanie Hart:

We have estimated for second quarter around $30 million. .

Melanie Hart:

Yes. That's correct.

Peter Arvan:

Yes. I looked at – we looked at the permit activity and what we believe is happening on new pool construction and how we triangulated on that, we look at those two products that I mentioned, new pool finish – our pool finish and tile, knowing that those two products only go into two things. One is a renovation and new pool construction. So the new pool finish, as I mentioned in the second quarter was up 2%. And that number for – earlier in the year, was – I'm sorry, new pool finish was down 2% for the second quarter, kind of similar to what it was in the first quarter, but it was skewed. So when I looked at how – the end of the second quarter plays out with pool finish and tile, like it's moderating a little bit, meaning that it started out better and then has moderated a little bit. And given that we don't really see a big movement in new pool construction, my only conclusion is, is that – some of that has to do with renovation and remodel. Now keep in mind, when we look at renovation and remodel, what I'm not saying is that our expectations are any different. I just think that when you look at the guide we gave related to new pool construction – I'm sorry, related to renovation and remodel, being down 15% to 20%. I think that it's going to be skewed more heavily towards the beginning of the year being better. And then as they work through the backlog, we think it will be weaker towards the back half.

Operator:

The next question comes from Joe Ahlersmeyer from Deutsche Bank. Go ahead.

Melanie Hart:

From a top line, if you kind of walk through – so our initial guidance was flat to negative 3%. So we did have some expectation that we could see some negative impacts. The biggest thing that changed since that point in time the biggest single indicator is going to be the weather. So when you look at the cumulative weather impact that is around $90 million as we talked about. The other things that we called out that are – it’s not – there’s nothing else kind of significant in an individual standpoint, but the things that were kind of new for this quarter was the impact on the trichlor pricing. And so that was about 1% for the quarter. We do think that that’ll continue for the rest of the year. So overall not that significant. The other thing the deferred sales activities, so we don’t think the consumer sentiment, we don’t see that that will continue as we get into next year. But that is something that was not considered in our initial guide as part of that. And then we also – when you look at the change in our early buy activity, which from our customer standpoint, which we equate to channel inventory that did come in higher this year, then we had originally anticipated as well as part of our initial guide.

Operator:

The next question comes from Andrew Carter from Stifel. Go ahead.

Melanie Hart:

Yes. Incentive comp in the current guide is less than what we originally at the beginning of the year we had kind of talked about $10 million to $15 million. So it’s a little bit too early to call the final number because when we look at the balance of the year, we are continuing to aggressively pursue various different sales actions and programs. And so, there’s still quite a bit left to the year to determine what that final number will be. But we will expect that to be a little bit higher than kind of our original $15 million estimate. And so as we go into next year, we would expect that that to revert back and come back into the expense base, but that the gross profit dollars that will generate from the revenue will more than offset the incremental expense on the incentive comp side.

Melanie Hart:

Yes. So the guide for the full year is that it’ll be up no more than 1%. So the original we had talked about that it could be kind of negative 2% to plus 2% depending upon where the top line fell out. So we’ve – as we’ve gotten further through the year we can more confidently say that it’ll – it won’t exceed a 1% increase.

Peter Arvan:

Yes. Andrew, market share is a – it’s a bit elusive in an industry like ours. So we have to triangulate it on market share, but we also – one of the beauties of this business is that we operate now 432 individual PNLs and we track customers at the local level. So we have a pretty good view of what’s going on from a – at the individual customer level. And then we also get some information from the manufacturers as what’s going on in the channel in total. And then we look at things like, if the permit data and new pool construction is going to be down 30%, we have the ability to kind of back into what is our new pool construction number look like given, we do an analysis, we look at certain items that are sold only on a new pool to triangulate it on that. And we know that we’re trending better than the minus 30% that the industry is likely going to see on new pool construction. So unfortunately, it’s not an exact science, but given industry information that we can see and that we get from our supplier partners, I think we’re very confident in our ability to continue to grow and take share.

Peter Arvan:

Yes. I’m not sure this late in the season, right? So for instance, I don’t have a – nobody’s going to winterize their pool in July or August, right, because it’s still hot. And if you – even if you say, hey, look, the pump broke, I’m not going to fix it. I’m going to just winterize the pool, the pool’s still going to turn green because the water temperature is high. Then that’s going to do damage to the pool finish. So homeowners are not likely to do that. So we don’t really see a change in consumer behavior on essentials, right? The break fix, the things that – you have to move the water filter to water and treat the water. If you have any part of that equation that is bad, you really have no choice but to fix it. And winterizing a pool, pools are not drained. They essentially they put a cover over them, they put a lot of chemicals in there, but if the water temperature is still warm you can’t put enough chemicals in that pool one time dose and cover it in order to keep it from turning green. And green pools, obviously, a lot of bad things come from that. They’re unsightly, frankly, they’re dangerous and they’re going to do damage to the pool. So I don’t really think that’s a big concern.

Peter Arvan:

Thanks.

David MacGregor:

Yes. Good morning. I just had the one question here. I wondered if you just sort of focus in on maintenance and repair business, maintenance and repair spending and talk about the extent to which you’re seeing price elasticity? Where within the various product categories you might be seeing that? And in the aggregate, what percentage of maintenance and repair is really showing kind of elevated levels of price elasticity versus more non-discretionary inelastic pattern?

Melanie Hart:

I think we’re at the top of the hour. We’ll take one more question.

Garik Shmois:

Hi. Thanks for squeezing me in. I know it’s a little early, but I was just wondering how you’re thinking about product inflation into next year. If you’re seeing any indications from your suppliers on how they’re thinking about pricing if we’re returning more to kind of a normal 1% to 2% inflation environment? Any color you might have a bit early into next year, it would be great.

Garik Shmois:

Okay. Thanks. And my follow-up question is just on Pinch A Penny, just because we had a retail competitor speak of the need to draw down inventories and accelerated pricing pressure. As a result, it looks like your results in Pinch A Penny held in quite well in the quarter. Are you seeing any of those similar dynamics with respect to incremental pricing and inventory de-stocking that has to occur?

Garik Shmois:

Yep. Make sense. Thanks again.

Peter Arvan:

Yes. I just want to thank everybody for your continuing interest and support in Pool Corp. And thank you for joining us today. We look forward to continuing to lead the industry for the remainder of the year and beyond and providing the highest level of value for – service for our customers and our suppliers. We’ll be discussing our third quarter 2023 results on October 19th of this year. And look forward to talking to you all then. Thank you very much.

Operator:

Good morning and welcome to the Pool Corporation First Quarter 2023 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Melanie Hart, Vice President and Chief Financial Officer. Please go ahead.

Peter Arvan:

Thank you, Melanie, and good morning to everyone on the call. This morning we released our first quarter results which were adversely affected by challenging weather patterns across most of the North American market, and we were up against extremely difficult comparisons from 2022. Despite cooler and extraordinarily wetter weather across many of our year round markets, we posted revenue of $1.2 billion, down 15% for both total and base business revenue when compared to 2022. As a reminder, in the first quarter of 2021, our base business sales grew 51%. In the first quarter of 2022, we saw sales grow by an additional 26%, which makes a quarter-over-quarter comparison tough in and of itself, but especially when confronted with unprecedented weather some of our major markets. What is encouraging though is that in the areas where the weather was normal, our business performed in line with expectations. Looking specifically at our year round base business markets, we saw sales decline 9%. California, as you well know, saw historic amounts of rain and cooler temperatures in the quarter, which curtailed both construction and maintenance spending, and led to a sales decline of 24% in this very important market. This compares with the same quarter last year where we saw sales increase by 31%. In Arizona, we saw sales decline 14% as they too experience above average rain and cooler temperatures as compared to the normal seasonal patterns and what we saw in 2022. Again, by way of comparison, for the same quarter last year, Arizona saw sales increased by 31%. Texas, which experienced a more normal weather pattern, saw sales 6% following a 7% gain for the same period last year, which is in line with expectations set earlier. Florida, which experienced favorable weather in the quarter, saw sales increase 7% on top of the 30% growth that we saw last year in the same quarter. Our seasonal markets, which include Canada saw sales decrease 23%, but this compares with the 28% growth that we saw in the first quarter of 2022. As has always been true in our industry, the biggest single external variable that can impact our business is the weather. Early in the quarter, we were encouraged by the weather conditions, but that quickly changed to a headwind and became more impactful as the quarter progressed and the sales effects became more meaningful. All in, we believe that the historic weather pattern that we have seen so far this year, particularly in the Western U.S., negatively impacted revenue by approximately $60 million to $70 million. Typically speaking, adverse weather delays, pool and outdoor living construction, which may be made up on the shoulders of the season if the weather allows. Maintenance and repair spending are mostly lost as the pools go unused during the inclement weather, limiting some equipment usage, which may lower postpone repair spending, and definitely curtails chemical needs. After assessing initial permit data, demand for new pool construction is clearly down. The decline ranges from a high negative teens percent to over 50% in some markets. In total, we believe the overall pool permit number is down approximately 30% so far. This is worse than we had contemplated in our previous guides, driven mostly by the weather and some additional economic headwinds. However, when comparing 4Q 2022 levels to the first quarter of 2023, we see permits up 4%, which is encouraging. Weather, interest rates, consumer spending and the end of COVID tailwinds all contributed to lower pool construction activity on a year-over-year basis, but we are encouraged that the sequential quarterly permit level is up. We continue to see lower end pools that typically our finance under the most pressure as consumers grapple with the higher cost of borrowing and higher pool construction costs. We estimate that our sales into the pool construction segment are down 25%, which implies that we continue to take share, which is consistent with our past performance. Our unmatched value proposition and commitment to an unparalleled customer experience continue to make us the supplier of choice for the industry. For context, new pool construction accounts for approximately 15% of our business. Approximately 60% of the business is driven by maintenance and repair with the remaining 25% being driven by renovation and remodel. As you can see, approximately 85% of our business is driven by pools that already exist. As we had anticipated renovation -- the renovation business appears to be holding up much better than new pool construction. This is based on our estimates that our new pool construction sales are off approximately 25%. However, sales of key construction products that are used only in construction and renovation are down only 3%, which implies that renovation activity is solid. Turning to end markets. Commercial swimming pool product sales, which tend to be less weather dependent, are up 12%. Base business sales to the retail channel were off 16% for the quarter, reflecting a return to more normal buying patterns as supply chains have normalized. We believe normalized supply, cooler weather and a later spring across most of the country also delayed some shipments to the stores to align with a later start to the season and normal material availability. Pinch A Penny franchisee revenue is our indicator for retail sell through. Here, we saw sales increase 10% in the quarter, which we believe is a good indication of the resilience of demand in markets where the weather is more typical for this time of year. Moving on to specific product categories. It should be no surprise to see that equipment sales were down 14% in the quarter, which is attributable to construction unit volume declines based on lower backlogs, unfavorable weather, and smaller and later customer early buys. As previously noted, we saw no change in pricing as all the increases in this category are holding and are expected to hold as is normal. Chemical sales in the quarter were down 11%, which is also expected with a cooler and wetter weather. Of note, Florida, which had favorable weather throughout the quarter saw chemical sales increase 12%. Building material sales for the quarter were down 7%, reflecting lower new builds offset somewhat by higher renovation and remodel numbers. Let me now provide some context on Europe. We continue to see the demand in Europe remains soft. The general economic outlook that -- the effects of the war, and again, the weather have combined to create headwinds that resulted in our sales decline in 25%. For context, last year and the first quarter, sales were up 5% as the effects of the war had yet to begin and the general economic outlook was more stable. For reference, the first quarter of 2021 saw sales increase 115%, so the two year stack is quite difficult. Turning to Horizon based business results. The first quarter sales decreased 7% with residential activities declining most prevalent in the Western states, offset somewhat by commercial project demand and stronger demand in Florida and Texas. Weather implications are being felt in this business as well, delaying some projects, but we are optimistic that some of this loss can be made up. Moving down the income statement, let me briefly cover gross margin. We are very pleased with the 30.6% that we posted reflecting the work that we have done in this area related to mix, pricing and inventory investments. Melanie will provide additional color in her prepared remarks. Operating expenses came in at 18.6% of net sales. Although, this is higher than we have seen the previous two years, this is largely attributable to investments that we continue to make towards our long-term growth, inflation and the effects of a softer weather driven revenue quarter. As we have previously discussed, our cost model is somewhat variable, but we do not want to take structural actions that would impede our ability to fulfill future demand. As you know, the first quarter is our seasonally least significant, especially given the unprecedented weather headwinds. It would be premature to read too much into the quarter. We, however, continue to invest in new sales centers and customer programs that we believe allow us to continue to provide best-in-class service and value for our customers and suppliers. For the quarter, we added seven new locations, two acquired, and five greenfields. For the balance of the year, we expect to add another five to seven. Additionally, Pinch A Penny welcomed five new franchise new locations in the quarter. With respect to customer tools, POOL360 saw online order activity decreased by only 3%, indicating deeper penetration and increased usage within our customer base. Completing the income statement, we reported operating income of $146 million, which reflects strong execution in the weather constrained environment. It is noteworthy that although this represents the 38% decline at the shoulders of the season, it is 13% higher than what we posted in the first quarter of 2021 and significantly higher than pre-pandemic levels. Before I turn the call over to Melanie for her financial commentary, let me address our guidance update. In any given year we face challenges with the weather and uncertainties in the economy and how that can affect customer behavior, labor costs and availability and operating expenses. Competitive pressures and of late geopolitical events can also impact our results. Some of these we can foresee and prepare for while others we cannot, but still have a significant short-term impact on financial results. In a typical year, it is not uncommon to be impacted by one or more of these conditions. The implications on short-term operating results vary with each, but experience tells us that the more prominent impact are felt with significant changes in the weather, which can produce immediate impacts on operating results that will vary based on the weather event, the market size, where they occur in timing. This is nothing new and we have seen it frequently in the past. Changes in economic factors can be as significant, but generally the effects are felt more slowly across the business. In 2023, we saw significant weather impacts in two of our largest year round markets, Arizona and California, which were most prevalent later in the quarter where the effects are more pronounced. At the same time, we saw and expected the expiration of COVID tailwinds, which favorably impacted 2020 through the 2022 season results and were contemplated in our previous guidance. Individually, each will cause notable variances in results on a year-over-year basis. But when they stack up in very large year round markets and are combined with return to normal buying patterns in the rest of the markets, it can meaningful change our operating results in the short-term. We want to remind our investors that the fundamentals of this business remain unchanged over the long-term. Pools and outdoor living remain highly desirable. The southern migration will continue and the resilience of our industry, which is driven by the install base of pools, is very much -- as true today as it was pre-COVID, just larger and more valuable. Flexible work from home arrangements remained in place for many pool and homeowners. The inflation that has made its way through the channel is here to stay making the size of the industry larger. The install base of products continue to grow and age, and the opportunity to upgrade and modernize existing pools and backyard continues, and our ability to take share based on our unmatched competitive profile gets stronger every year. Taking a short-term view of the business and reacting to short-term issues like weather with structural changes or deviating from our proven strategic plan would be a disservice to our investors. We remain committed to being the best supplier in the industry. We see the value in investing in our capabilities to broaden our product and service offering that will enable us to continue share gains, while remaining focused on discipline and execution and capital allocation. The weather issues will pass, but their effects on the first quarter results will mostly stay. The economic pressures related to interest rates will affect new pool construction in the short-term, but the desirability of pools and outdoor living will remain strong in the long-term. Our installed base will continue to grow in size and value. Capacity creation continues. Our investment in our people and our focus on being the employer of choice is ongoing and helping our customers grow and be more efficient is what we focus on each day and gives us the confidence that short-term issues that we see will have no bearing on the continued and long-term success of our business. With this in mind, we have elected to lower our guidance and increase the size of our estimated range for 2023 to $14.62 to $16.12 to account for the recent challenges, but remain incredibly proud of what the team has done and very confident in the future. I will now turn the call over to Melanie for her financial commentary.

Operator:

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Ryan Merkel with William Blair. You may now go ahead.

Peter Arvan:

Morning.

Ryan Merkel:

First off, can you comment on trends so far in April? And specifically I'm wondering how California and Arizona, if that's bouncing back at all.

Ryan Merkel:

Got it. That's helpful. And then you change the guidance for the year to down mid single digits. Is this what you're expecting in the second quarter? And really, what I'm getting at is can we be confident that the first quarter is mostly weather versus demand falling apart in a bigger way?

Ryan Merkel:

And then just on the second quarter, is mid single digits kind of the right framework, or how should we think about the cadence of the year?

Ryan Merkel:

Got it. Very helpful. Thank you.

Susan Maklari:

Thank you. Good morning everyone.

Susan Maklari:

My first question is thinking a bit about the changes in the lending environment, especially as it relates to regional banks during the quarter. Do you think that that's had any implications on consumers' willingness or the ability to take on new pools? And also with the projects that were delayed in the quarter because of weather, are you seeing that they're still in the backlog, or has the cancellation rate changed at all there?

Susan Maklari:

Okay. That's helpful. And then, can you talk a bit about the maintenance part of the business? How are you thinking of the share gains that you've seen there in the last couple years, the mix shift that has benefited the business? Has there been any change in that in the last couple of months?

Susan Maklari:

Okay. That's very helpful color, Pete. Thank you and good luck with everything.

Operator:

Our next question will come from David Manthey with Baird. You may now go ahead.

Melanie Hart:

Yeah. So for the Horizon business, we didn't make any changes within our top line assumptions to what we had put out at the beginning of the year. So that will stay at a decline of 5% to 10% is the range on the green business.

Melanie Hart:

Well -- and the only thing just to mention, the -- on the maintenance side, that was the volume related versus our expectation on inflation, still remains around 4% for the full year.

Peter Arvan:

Yeah. I think -- so we think that the industry, and again, it's still very, very early to call the year, right? Because what we saw last year was, declining permits sequentially quarter-over-quarter. And as I mentioned, the permits from fourth quarter to first quarter have actually improved. So today, I would tell you that permit activity implies a 30% decline. I think what I also mentioned is that we have our own internal measurement, which is what our sales are into that channel, by looking at specific products that are used only in new pool construction. I think that our performance is better than the market. And I think -- so the market -- permit data today would show minus 30. And I think our performance, as we measure it in new pool construction would be minus 25. And yes, if the number of -- if you look in aggregate, the number of pools, the number of pools are going to be affected much more dramatically at the lower end. And the higher end would be more stable. So logical to think that the ASP on an average -- on the average pool for 2023 would be higher than 2022.

Melanie Hart:

So the SG&A dollars will follow volumes. So kind of within our range. It could be -- you could look at it as kind of negative two to plus two compared to last year, depending upon where the top line falls. The key to that is, when you look at first quarter, we talked about some of the activities that we had related to some of our customer events and our investments in our POOL360 technology and some advertising and marketing things that we've been focused on. And really first quarter gives us the ability to manage those special projects from a strategic standpoint. So when we get to second and third quarter, that's when you're going to see the larger increases from a staffing, from freight overtime. So those are really where we see a lot of those more variable expenses come into play. So we would certainly expense that -- expect that the expense growth when you look at kind of a 6% in first quarter going down to something significantly less than that for the full year that we would see that leverage come through in the second and third quarters.

Operator:

Our next question will come from Joe Ahlersmeyer with Deutsche Bank. You may now go ahead.

Melanie Hart:

So what are you starting with the base is, well, it's also going to be impacted by the new pool construction side as well. And then we also had the early buys where last year the first quarter benefited about 2% from early buys.

Melanie Hart:

So within kind of the top level of our range versus the bottom level of the range, there is some variability and kind of our top expectations. So depending upon which way you model to, you'll get a point or a couple of points.

Operator:

Our next question will come from Andrew Carter with Stifel. You may not go ahead.

Melanie Hart:

Yeah. So inflation overall for the quarter was a little bit higher than the 4% that we're expecting for the year, because we did have some carryover, when you're doing just a comparison first quarter over first quarter. So I would say 4% to 5% total inflation for the quarter. With that, the equipment's on the higher end. Inflation for chemicals actually wind up right around four. So when you look at the negative 11, it's plus four for inflation and negative 15 for volumes as it relates to the weather. But our overall expectation for the year on inflation, it's still going to be about four. So we'll catch a little bit higher at the beginning of the year. And then as we get to fourth quarter, we'll see that moderate from a comparison standpoint. Built into that 4% on the chemicals, we are seeing some pressures on the trichlor, but that is being offset and really offset to the positive because we saw the 4% for the year or for the quarter, excuse me, on other product categories.

Peter Arvan:

Yeah. The way we think about the Suncoast Chemical business and our ability to package, that the facility doesn't have capacity to do the entire business, right? So we actually are blending -- we are blending what Porpoise does for us, or the Suncoast does for us with what we're purchasing in the open market. So as a blend together, I think we are better off than if we were buying everything in the open market. What I would tell you is that the trichlor pricing part of it is a function of supply demand, and that there was a lot of trichlor that came into the market towards the back half of last year. And as that inventory sells through, then what you're going to see is some deflation on the trichlor pricing. But as Melanie said the important part is that being offset with CalHypo and bleach pricing and of the other balancers, right? So I don't know that our thinking is all that much different on chemicals. It really is in line with what we had contemplated at the beginning of the year. The industry had more product on the ground. Let's call it a quarter or two ago, significantly more than there is today. So the oversupply is coming down, which is only going to help pricing stability going forward.

Peter Arvan:

Yeah.

Scott Schneeberger:

Thanks very much. Good morning. Peter, could you just comment on Florida and Texas as well? Just Florida seemingly better than what we would've expected on the good weather. How much do you read into that in your overall takeaway? I know it's early in the year. But did extrapolate that at all to other markets if we have a good weather year throughout the rest of the year.

Scott Schneeberger:

Great. Thank you. And Melanie, on inventory management, could you just speak to, how you're starting the year there? It sounds like that is exactly where you want to be. But just maybe some discussion about how that's being managed. What was ordered early in the season? Is it where you want it to be? And will we continue to see inventory declines at the pace you previously expected? And what should that pace look like? Thanks.

Scott Schneeberger:

Appreciate that color. Thanks.

Trey Grooms:

Hey, good morning.

Trey Grooms:

I think you mentioned modest growth in the second half. It's kind of in the expectations. If you could maybe give a little color around what you guys are seeing there that maybe gives you some confidence in seeing that back half improve some versus first half, excluding weather. So kind of the puts and takes there for the second half top line and clearly your comps get easier in 4Q, but still pretty tough in 3Q. Just wanting to understand the driver behind your expectations there.

Trey Grooms:

Got it. Okay. That makes sense. And then, it sounds like you guys are still gaining share in some of these harder hit -- well, you pointed out California. And are you seeing similar kind of share gains in other hard hit markets, maybe like Arizona? And then just as a point of clarity, kind of back to the guide, I know your prior guide didn't have any market share gains baked in, I don't believe, but is that still the case with the updated guide given today?

Trey Grooms:

And the guide, any share gains in that down kind of mid singles?

Trey Grooms:

Okay. Thanks for taking the questions. Very helpful.

Peter Arvan:

Thank you.

Garik Shmois:

Hi. Thanks for having me on. Wanted to ask first on operating expense in the first quarter. Just hoping you could provide, how much of the increase was driven by some of the things you had previously called out, like the rent and facility cost inflation versus the marketing expense in the first quarter versus the lower fixed cost leverage that you saw on the weaker volumes?

Garik Shmois:

Got it. Follow up question is just on the maintenance revenue guidance going from flat to down one. Just not that big of a change, but just want to confirm that it was primarily weather. Are you seeing any change in customer behavior on maintenance, given the choppier macro at all?

Garik Shmois:

Got it. Thanks again.

Melanie Hart:

You're welcome.

Stephen Volkmann:

Great. Good morning guys. Still morning, I guess. Thanks for fitting me in here. Just a couple of cleanups from me if I could. I know this is not going to be scientific, Peter, but I'm wondering if you have a view of sort of where we are with backlogs, because we've talked about that in some previous calls, backlogs on new and refurbishment projects.

Stephen Volkmann:

Okay. Great. And you teed me up perfectly because I wanted to ask how should we think about the mix between sort of high end and low end. Because you've mentioned that difference a couple of times.

Stephen Volkmann:

Okay. Sorry. And just to push that, is it like 50/50? Is that the way to think about the high and low end mix normally or something different?

Stephen Volkmann:

Got it. Okay. We'll hold you to it. I'm just trying to understand. So thank you. And then a quick one for Melanie, if I could. I think the cash flow from operations number that you gave greater than 800, if I'm not mistaken. I think that's the same as what we were talking about before. So how should we think about that? A little bit lower net income, a little bit higher inventory liquidation, is that--?

Stephen Volkmann:

Okay. Thank you guys.

Operator:

[Operator Instructions] Our next question will come from Shaun Calnan with Bank of America. You may now go ahead.

Peter Arvan:

I think it's a combination of things, right? I would tell you that, dealers now realize that the supply chain have essentially returned to normal for almost all items. So whereas a year ago they were saying, I need to get my order in because I need to have product, because when the season opens and pools are being used and my phone is blowing up, I need to have product. Now, we've assured them that, hey, I have inventory -- there's plenty of inventory in channel. So they've said, okay, I don't need to take that product in earlier. So a portion of it is supply chain related. A portion of it is a later start to the season, right? So if the -- I would tell you, if you were to survey dealers in the seasonal markets, they essentially in the last week or so have just started opening pools. So if inventory is available and I don't need it until the middle of April and I know that I can enter an order on POOL360 and have it shipped directly to my branch or to my service or warehouse, I'm not going to have to put that order in, and take it earlier in the year. I think that's a portion of it. As far as your comment on inventory, some people have called that shadow inventory. Again, I think it really depends in aggregate, they don't think it's a very large number. Because if you look in aggregate, most of our customers don't have the ability to store a lot of product. Might there be a little more product left over in the system from last season if they knocked off earlier. And the answer to that is maybe, but we don't view that as a significant amount of product. The early buy headwind, I think has more to do with product availability and timing of when the season starts. And the reason I would tell you that is if you look at the markets like Florida and Texas, to me, it's illogical to think that there was more or less shadow inventory in those markets or that the early buys were significantly different. I really think it's a function of when I need product to use and whether product is available.

Operator:

This concludes our question-and-answer session. I would like to turn the conference over to Peter Arvan, President and CEO, for any closing remarks.

Peter Arvan:

Yes. Thank you all for your continued support, and we look forward to discussing our second quarter 2023 results on July 20th. Have a great day. Thank you.

Operator:

Good day, and welcome to the Pool Corporation Fourth Quarter 2022 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Melanie Hart, Vice President and Chief Financial Officer. Please go ahead.

Peter Arvan:

Thank you, Melanie, and good morning to everyone on the call, and thank you for joining us. 2022 was another extraordinary year for POOLCORP. We achieved results in revenue and earnings. We grew our market share. Our focus on the customer experience and execution has never been stronger, and we continue to enhance our capabilities as we integrated Porpoise Pool & Patio. For the first time ever, we exceeded $6 billion in net revenue, ending the year at $6.2 billion and generated just over $1 billion of operating income. When compared to 2019, the last pre-pandemic year, our revenue has almost doubled and our operating income has tripled. We now operate over 420 sales centers, and we are continuing to expand our footprint and capabilities. In 2022, we opened 10 new location, and Pinch A Penny added seven new stores to the franchise network. The industry has grown substantially, and POOLCORP has significantly outpaced the industry by providing best-in-class service to our customers and helping them grow their business and being the best channel to market for our suppliers. Let me now recap the full year and quarterly results. As I previously mentioned, total sales for the year came in at $6.2 billion, which represents a 17% increase over 2021, where we saw sales grow an incredible 35%. In the fourth quarter of 2022, we grew revenue 6%, and this is on top of the 23% growth that we saw in 2021. From a base business perspective, fourth quarter revenue grew by 7% in our year round markets and fell by 6% in the seasonal markets. Certainly, the less favorable weather impacted the business in both markets contributing to fewer pools being built and lower usage in the quarter as compared to last year. For the full year, our base business grew by 15% in our year round markets and 8% in the seasonal markets. Our growth was driven by the resilience of the industry and the larger installed base, inflation, greater adoption of higher end features and technology, share gains and expansion of our powerful sales center network, both organically and by acquisitions. POOLCORP has built a tremendous team and a footprint that is not only focused on execution but also providing an unmatched customer experience, which enables us to be the preferred supplier to the swimming pool industry trade. Our execution focused and unmatched capabilities have allowed us and will continue to enable us to outperform the industry. Our culture and people, our performance driven, our investments in capabilities and new facilities drive revenue growth and incremental profitability, and our track record is unmatched. Simply put, we could not be prouder of our team. Now let me provide some details on base business sales in our four largest markets. For the total year, California grew by 14%. Florida grew by 24%. In Arizona, we saw 18% growth, and our Texas business grew by 8%. It is worth noting that Texas in 2021 had the benefit of the freeze, which made the comps much more difficult for 2022. For the fourth quarter, California grew by 5%. Florida continued to show significant growth with sales up 22%. Arizona sales were largely flat for the quarter, and Texas saw sales decline 5%. Turning to end markets. Our commercial business continues to gain momentum with the fourth quarter and full year growth coming in at 27%. This is on top of 26% growth in the fourth quarter of 2021 and 24% growth for the full year. We continue to gain share and capture the demand in growing municipal and leisure and travel related spending. Shipments to our base business retail customers in the fourth quarter were up 1% and for the full year up 9%. This is on top of the 18% fourth quarter 2021 growth and a 20% increase that we posted for the full year of 2021. We believe that weather and some change in buying habits as the supply chain returns to normal affected the fourth quarter. We feel that, with the supply chain issues in 2021, many dealers placed larger orders in the fourth quarter of 2021 to make sure they had product available when the 2022 season began. With product availability almost back to normal level, most dealers reverted to more normal ordering patterns by the end of 2022. Pinch A Penny retail sales, unlike our shipments to dealers and contractor customers, represent through to the end customer saw sales increased 17% for the quarter and year. Keep in mind that the footprint for the Pinch A Penny franchise store network is highly concentrated in Florida, with an expanding presence in Texas and a small number of stores in Gulf states. We continue to gain synergies where significant value is being derived for both the franchise and wholesale business. With one-year of ownership now under our belt, we remain confident and on track with our initial expectations. Now let me add some commentary on specific product sales in the quarter and year. Equipment, which represents about a third of our sales, increased 9% for the year and 2% for the quarter. With lead time and availability of equipment mostly back to historic levels, our dealers changed their buying habits back to a more normal practice of purchasing equipment as needed during the construction and repair process as most availability concerns have abated. Demand in units for equipment, which surged last year and early this year has retracted some but remains higher than pre-pandemic levels. Pricing has held with no weakness, so the overall impact on our revenue was positive for the quarter and for the year. Base business chemical sales for the quarter were up 19% and 32% for the year, reflecting share gains, installed base growth and inflation. Product availability has improved dramatically over the previous year, and we are now well stocked for the upcoming season. We have refreshed our brands, and we'll begin launching our POOL360 water solution software in 2023 for our independent retail dealers, which we believe will be a best-in-class growth tool for our retailers. This will allow us to continue to take share in the very important maintenance and repair market. This is our next generation offering in our software solutions for the trade. POOL360 usage continues to grow and now makes up about 11% of our total lines. Building materials, which are used in both new construction and renovations were flat in the quarter as compared to the 20% growth of this category in the same quarter of 2021 and 42% in the fourth quarter of 2020. For the full year, Building materials sales were up 18% on top of the 28% growth that we saw for the full year in this category in 2021 and 23% growth in 2020. Clearly, the reduction in new pool construction in 2022, these results illustrate that a solid remodel market, and our share gains are fueling our growth. It is particularly obvious in the fourth quarter when we believe that new construction was the slowest in 2022 and compares to a much stronger build level in the fourth quarter of 2021. Now I'd like to provide some insight on Europe. As we have seen all year, the market in Europe has been affected not only by less favorable weather, but the Russia-Ukraine war, elevated energy costs, inflation and a slower economy. Europe's fourth quarter 2022 net sales were down 22.5%. For reference, the same quarter in 2021 was up 18% and 48% in 2020. For the full year, we saw sales decline 15% in U.S. dollars. Net sales in Europe for the full year of 2021 were up 39%. Looking across the continent, the eastern and northern countries were affected much more by the factors that I listed above. We believe in the longer-term growth opportunities in Europe and our team's ability to manage the business while providing best-in-class service in a very dynamic environment. Let me now provide some comments on Horizon's performance for the quarter and for the full year. In the fourth quarter, net sales increased 5%, and for the full year, net sales increased 15%. In 2022, we opened five new locations, one in the first quarter and four in the fourth quarter. Our strategy for this business remains unchanged. We are investing in areas where we need additional capacity and expanding our footprint further into the Sunbelt primarily through new sales center development activities. Our operating model is solid. The team continues to execute at a high level, and we are encouraged by the long-term growth opportunities of this business. Although this business is more tied to residential construction than the blue business, we also have a large commercial business that is holding up quite well and is also benefiting from inflation. As you saw in this morning's release, for the full year, our gross margins increased 80 basis points to 31.3%. This follows the 180 basis point increase that we realized in 2021 over 2020. For the fourth quarter and in line with our previous guidance, our gross margins declined 230 basis points, ending at 28.8%. Given the seasonality of our business, with margins fluctuating quarter-over-quarter, we believe that the full year number is far more indicative of where we are from this -- for this metric. Melanie will provide some more detail on our gross margins in her comments. Moving on to operating expenses. We continue to show that we can improve our operating leverage through our relentless focus on capacity creation and execution. Base business operating expenses decreased by 1% for the quarter and increased by 6% for the full year. In both cases, we continue to show that our expense growth is about half of our revenue growth contributing to our improved operating leverage. Wrapping up the income statement. We were very proud to post operating income of just over $1 billion. This compares with $833 million that we recorded in 2021 and $464 million that we recorded in 2020. For the quarter, we recorded $107 million in operating income, a 16% decline, most of which is driven by the seasonality of our business and magnified by the relative size of the quarter. Here, again, I would point you to full year results as a better indicator of performance, on which Melanie will provide additional comments. Operating margin for the full year of 2022 was 16.6%, which is 90 basis points better than our previous record high that was posted in 2021. Looking ahead, I'd like to provide some color and context on how we expect to see 2023 taking shape. There is no doubt that our industry and POOLCORP have benefited from several factors over the last few years that will have a lasting impact on our industry. Desire for swimming pool and outdoor living has increased with both viewed more favorably and desirable for homeowners today versus the past. This is especially true as more people are migrating to the Sunbelt in search of a comfortable year round climate and a healthy outdoor living lifestyle. New connected product adoption rates are increasing. The value of the goods and services related to the maintenance, renovation and construction of swimming pools and outdoor living has increased, propelled by unprecedented inflation that is now embedded in the industry. We are continuing to expand our footprint and leverage our capacity creation activities to anticipate and improve the customer experience, and we remain closely aligned and partnered with our key suppliers working together to improve the industry and homeowners' ability to enjoy their pool and outdoor living spaces. At the same time, and underpinning our results is a growing and aging installed base that will need to be maintained and remodeled. As new construction levels will likely decline in 2023, the wholesale value of the pools built should, in fact, be at least 4% higher on a per unit basis driven by inflation alone. Add to this, the specific competitive advantage is unique to POOLCORP, and it gives us the confidence that 2023 will be a solid year. Our people and network are second to none. Our balance sheet is strong, giving us flexibility to take advantage of dynamic market conditions and investing in the future. Our CSL's vertically integrated chemical facility, PLEX programs, technology applications for the customer and our proven team will enable us to get the most out of whatever market conditions present themselves. Our seasoned leadership team has been -- has seen many cycles and is quite skilled at managing the business in line with volume realities. As of right now, we expect that new pool construction in units could be down approximately 15% to 20%, although this number will likely vary broadly by market and geography. Higher end markets will be stronger, while lower end and entry-level pools will continue to see headwinds. Renovation and remodel should be solid in most markets as we believe renovation activities may see only a modest decline in 2023. These considerations are baked into our guidance. Inflation at this point looks to be in the 4% to 5% range for the year. We see little to no risk of deflation except for trichlor but movement in that chemical will likely be offset by others. Overall, we expect the chemical sales in line with the installed base growth and, of course, weather, which is the largest driver of chemical needs, particularly in the seasonal markets. With supply chains returning to normal, we expect that customers' buying habits largely have and will continue to return to normal. With all of this in mind, we would expect that our EPS range for 2023 will be $16.03 to $17.03 on a per share basis, including an estimated $0.03 benefit from ASU. Again, for context, I'd like to remind our listeners that the bottom of our range is, in fact, over 2.5 times our full year 2019 results. From a cash generation perspective, we would expect that free cash flow will exceed net income as inventories return to a more normal level, and our capital allocation model remains unchanged. As is typical, we will use our cash flow to [Technical Difficulty] approval of our Board, continue to pay dividends in accordance with our policy, fund acquisitions and continue to buy back our shares to provide returns to our shareholders. In closing, I would like to thank the POOLCORP team, our incredible customers and our invaluable supplier partners for their unyielding support. I will now turn the call over to Melanie Hart, our Vice President and Chief Financial Officer for her detailed commentary. Melanie?

Operator:

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

Melanie Hart:

Yeah. So top line volume is going to be flat sales to negative 3, and it's comprised of -- when we look at the maintenance business, we would expect volume to be relatively flat with the benefits coming there from the inflationary price increases from vendors. So we would expect about a 4% pickup in the maintenance side of the business primarily from inflation. And then for the new construction side of the business, we would -- we're expecting that to be down 15% to 20%. And so that could range down to about negative 3 on the top line. And for the remodel activity, that is 10% to 15%. So we would expect that, that could be around probably less 1 to 3, if you will, on the top line. We are expecting the -- both Horizon and the international operations to be a drag. So for the Horizon, we would expect that to be possibly up to a 1% drag, and then Europe could also be a 1% as well.

Melanie Hart:

Yeah. The bulk of that is going to be the price cost give-back. So you'll see that, historically, our margins have been -- we picked up 100 basis points. And so the portions that were related to the things that we've been doing internally as it relates to supply chain and pricing, we would expect that those would continue into 2023. But the 100 basis point give-back is primarily due to the inflation benefits we got on pricing.

Melanie Hart:

Yeah. That's correct. Coming off of a 26% base business increase, for 2022, we would expect that tough comp to kind of in line with our overall guidance for the year that we could see some negatives to that tough comparable.

Operator:

Our next question comes from David Manthey with Baird. Please go ahead.

Peter Arvan:

Yes, Dave. What I would say is, as I mentioned in my comments, at the end of 2022, people were still buying in anticipation of supply chain disruptions. So that kind of returned back to normal at the end of the fourth quarter. So I guess, we're expecting in the first quarter early buys to be at a more normal level.

Peter Arvan:

Yeah. So the initial number that the industry tracks is that 2022 will turn out at plus or minus 98,000 pools. So it will be firmed up in the next couple of months. That's the initial look. And that would compare with the 117 from 2021. So that represents about a 16% decline. Our new construction numbers because we track it for what we are selling in terms of concrete pools, fiberglass pools and kits. So while the industry was down about 16%, give or take, it will be, as I mentioned, the final number is not final yet. While the industry was down about 16%, we believe that our new pool construction in units was down somewhere between 12% and 13%. So we think we actually picked up share from that perspective, and that's supported by the growth numbers that we have. The other part I would tell you to think about and answer to your question is, in terms of the value per pool. Because of the inflation that went through the system, which we've talked about many times, it is the value of a pool depending on where you are, has also increased. Now, to do an average really is not going to do anybody any service because it really depends on where you build that pool. I can tell you that an average pool now is probably in the $70,000 range. But if you pick a different geography, I'll probably give you a different number. And then based on the number of pool builds, as we mentioned, the business in the seasonal markets was much slower than it was in the Sunbelt. So the Sunbelt markets held up much better. So the new pool construction numbers in the Sunbelt are not nearly off as much as they are in the seasonal markets.

Peter Arvan:

Yeah. And that's a conservative range.

Peter Arvan:

Thank you.

Susan Maklari:

Thank you. Good morning, everyone. My first question is around the competitive dynamics. As you think about supply chains that have normalized and order rates that also seem to be following that path, how are you thinking about the ability to gain share in this kind of an environment? And how does it perhaps compare to the levels that we've seen in the last few years.

Susan Maklari:

Okay. That's very helpful. And then, as a follow-up, can you talk about what your suppliers are telling you as it relates to their inflation? What are the key sources of that pricing that you're expecting for this year? And how are you thinking about how that may trend through the year? And then I guess, similarly, what are you hearing from your customers on the ability to continue to get that price through and how that may work itself through the supply chain?

Susan Maklari:

Okay. That’s very helpful color, Pete. Thank you and good luck.

Andrew Carter:

Hey. Thank you. Good morning. I wanted to ask about the tariffs, the $13 million because I'm confused about that being such a big headwind in the quarter. Was that -- first off, was that included in kind of the more pronounced pressure for the fourth quarter gross margin guidance you kind of outlined last quarter? The second thing I would ask about that is, why is it all hitting in one quarter. And are you pricing to that? Is that -- I know you said that supply chains are normalizing. You don't expect that as much next year. But are you pricing that or is that something that you don't feel like you can price for this incremental kind of source of product inflation? Thanks.

Andrew Carter:

Thank you. Second question I would ask is kind of looking at your guidance and I apologize if my math is wrong here, but I'm getting your SG&A absolute dollars down $15 million, $18 million year-over-year. I think you said incentive comp just from regression is $30 million. Of course, your initial cut here is also below long term. So help us understand kind of the flex there, if there's additional room, if kind of -- if you consider your network if managers are able to quickly adjust and actually require to adjust. And I guess one more piece in there, you do mention wage inflation. We see that on warehouse employees. Are you seeing any increased competition or increased turnover for managers out there as you kind of consider other platforms and is that kind of an extra source of investment you have to consider? Thanks.

Andrew Carter:

Thanks. I’ll pass it on.

Joe Ahlersmeyer:

Yeah. Thanks, guys and congrats on the quarter and the outlook.

Joe Ahlersmeyer:

I just want to make sure I'm really clear on the sales and gross margins for 1Q. If I'm using a normal type seasonality number even on the flattish outlook, it seems like sales in the first quarter could be down in the range of mid-teens for the base business. First of all, is that right?

Joe Ahlersmeyer:

Okay. Got it. And then just remind us about the seasonality of gross margin in the first quarter. If you adjust that fourth quarter, again, to the 30%, should we see them sequentially down in the first quarter? And then I have one more follow-up.

Joe Ahlersmeyer:

Okay. Great. And then just my final one here. Bigger picture, what's your level of confidence that this outlook, if you execute upon it, represents the reasonable baseline to return to the growth formula you've detailed in the past? I guess, in other words, does 2023 largely reflect a return to trend line growth in demand, stable share, normalized cost structure, all those things?

Joe Ahlersmeyer:

Very encouraging. Thanks a lot.

Noah Merkousko:

Good morning. This is actually Noah Merkousko on for Trey. Thanks for taking my questions.

Noah Merkousko:

So first, I wanted to touch on the maintenance piece of your business. I know it's the largest part. And historically, it's been highly non-discretionary, nobody wants a green pool, but in this more uncertain backdrop, could have you begun to see any pool owners potentially delay or push off any maintenance spending? And could that kind of show up later in the year? And then along the same line of thinking, I know there's a lot of tough weather in the 4Q, kind of especially cold in Texas. Should we expect that to be a benefit to maintenance sales later in the year?

Noah Merkousko:

Got it. Thank you. That all makes sense. And then for my follow-up, I appreciate all the color on the guide and the moving pieces between the end markets. But just a point of clarification, when you're looking and I think total sales, you're looking to be flat to maybe slightly down for '23. When you're walking through that math, does that include any new branches that you might add or continued market share gains?

Noah Merkousko:

Got it. That makes sense. Thanks for taking my questions and good luck for the rest of the year.

Operator:

Our next question comes from David MacGregor with Longbow Research. Please go ahead.

Melanie Hart:

Good morning.

Joseph Nolan:

Good morning. I just had -- I apologize if this was already addressed on the call, but I had a little choppy connection earlier. But what are you guys assuming for free cash flow conversion in your '23 guidance?

Joseph Nolan:

Great. Okay. Thanks. And then just as a follow-up. The demand ends up being a little bit weaker than you guys initially expected. Where do you guys have the ability to flex your model in 2023 if you see that occur?

Joseph Nolan:

Great. Thank you. I’ll pass it on. Thanks.

Shaun Calnan:

Hi, guys. Thank you for taking my questions. Just going back to marketing. So it's been a significant driver of growth since 2019. And some of our recent channel checks indicate that, over the last two years or so, dealers were unable to purchase equipment directly from manufacturers. So they turn to distribution to make these purchases. So I'm just curious, do you have an estimate of the impact of those purchases? And are you assuming any market share reversals there or do you expect to hold those gains?

Shaun Calnan:

Got it. Thanks. And then just on spending for more discretionary products like heaters, hot tubs, above-ground pools, lighting, just things in that category, what are you forecasting for those products and which bucket does that fall under? Is it part of the maintenance or renovation -- or remodeling if they're just adding a heater or buying a hot tub?

Shaun Calnan:

Okay. Thank you.

Operator:

And our next question comes from Garik Shmois from Loop Capital. Please go ahead.

Peter Arvan:

Yeah. That's a very good question. I would tell you the answer lies in it depends, right? So that we have seen and we will always see markets act individually. So in a particular market, if a distributor or a dealer or a retailer, whatever, wants to run a special, they can do it. When I look at the overall price of trichlor, there's -- I would say they're largely steady. My belief is that it will probably come down some. And when some, I'm talking slight and meaning that I think the way I look at chemicals on the overall basis because remember, sanitizers are going to be cal-hypo (ph) or liquid shock and a tablet. You can use a tablet for daily sanitization. And you can also use chlorine or cal-hypo with a stabilizer to essentially do the same thing. The trade, I think, moved back and forth. So I think when the price of trichlor moved up for the last couple of years, we saw more people move over to cal-hypo and liquid shock. The price of those products has come up and continues to rise. So I think if there is a there's movement on the trichlor side, down slightly, I think it's going to be offset by prices on the other side. By and large, I think chemical pricing is going to be fairly stable, maybe some downside. But at this point, I wouldn't say anything significant.

Peter Arvan:

I think what we saw this year or for the 2022 year, and I don't know any reason that it would be any different but for weather, so I think the beginning of the 2022 season started off cooler. So the builders -- the Sunbelt markets have the southern -- they're being fueled by the southern migration and year round. So if I had to place a bet on the markets that we're going to fare better in this next coming year, I think the economies are generally stronger in the Sunbelt and year-round markets than they are in the seasonal markets in many cases. So I would expect that the Sunbelt markets are going to fare better than the seasonal markets for the upcoming season as well

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to Peter Arvan for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

- :

Joe Ahlersmeyer - Deutsche Bank Stephen Volkmann - Jefferies Ken Zener - KeyBanc Garik Shmois - Loop Capital

Melanie Hart:

Welcome to our third quarter 2022 earnings conference call. Our discussion, comments and responses to questions today may include forward-looking statements, including management's outlook for 2022 and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and variables that could cause actual results to differ from projected results are discussed in our 10-K. In addition, we may make references to non-GAAP financial measures in our comments. A description and reconciliation of our non-GAAP financial measures is included in our press release and posted to our corporate website in our Investor Relations section. I will now turn the call over to our President and CEO, Peter Arvan.

Melanie Hart:

Thank you, Pete, and good morning, everyone. Third quarter finished with a record $1.6 billion in sales, representing 14% growth over the 24% growth realized in 2021 for a two year cumulative increase of 42%. In comparing the quarterly growth of 14% to the full-year expectations of 17% to 19%, we saw third quarter growth of approximately 10% on pricing, 4% on acquisitions, and net overall domestic volume growth. This was offset by unfavorable impact of 1% each for Europe operations, foreign currency, and one last selling day in the quarter. We also had some sales center closures during Hurricane Ian during the last few days of the quarter. Historically, big weather events have resulted in short-term disruption with a slight positive impact in the subsequent quarters. Gross margins at 31.2% came in slightly below prior year margin of 31.3%. Base business margin decreased 80 basis points over prior year, where we saw a 250 basis point increases in the third quarter 2021 over 2020 level. Focused pricing efforts, supply chain initiatives, and product mix all contributed to sustaining higher margin levels during the quarter, as prior year benefited from our strong ability to pass-through price, as we saw multiple in-season price increases from our vendors. Base business operating expenses as a percentage of net sales decreased from 14.5% in prior year to 14.2%, as our capacity creation efforts continue delivering operating margin leverage, as we manage through the inflationary cost impacts of our business. Acquisitions added $20 million in expenses during the third quarter compared to last year. Overall, our quarterly operating margins remained strong at 16.3%. We continue to invest in growth strategies while being focused on our disciplined expense management. Interest expense for the quarter increased $9.4 million as we have higher debt levels compared to the same time last year, reflecting our investment in acquisitions, share buybacks and working capital. Our average interest rate increased from 2.8% to 3.2% reflecting higher borrowing cost. We continue to maintain a conservative trailing fourth quarter leverage ratio of 1.25. They are well below our target leverage range of 1.5x to 2x. For the quarter, we recorded an ASU benefit of $0.6 million or $0.02 per diluted share. The same quarter last year had a higher level of activity, resulting in a $4.2 million or $0.10 per diluted share benefit. With our current stock price, we estimate that we would recognize approximately $0.04 in additional benefits in either the fourth quarter 2022, or the first quarter 2023, for remaining options that expire in first quarter 2023. The effective tax rate excluding ASU for the quarter was 24.9% compare to 23.2% for the prior year period consistent with our historically slightly lower rates in third quarter than for the full-year. Net income for the quarter represents an improvement of $5.4 million. Excluding the ASU it reflects an improvement of $9 million or 5%, driven by revenue growth, healthy gross margin and continued strong execution. This resulted in a 7% earnings per share growth excluding the ASU in both periods. Moving into our balance sheet and cash flow discussion. Accounts receivable increased consistent with sales growth compared to last year. Days sales outstanding finished the quarter at 27 days a quite improvement when compared to more historical levels that were in the 28 to 30 day range. Inventory increased to $1.5 billion, compared to slightly over $1 billion in Q3 2021. We have seen incremental growth and inventory year-over-year decrease from 77% at second quarter to 48% or 43% base business, as we wrapped up third quarter. Approximately a $140 million of the year-over-year increase relates to inflation, $52 million was added to support acquisitions, and $13 million for the five new U.S. locations that were not open in third quarter of last year. We have realized strong returns from our investments in inventory and supply chain initiative. And the value of the inventory on hand will continue to provide incremental gross margin benefits as we have seen additional vendor cost increases in the 4% to 5% range heading into next season. During fourth quarter 2022 and first quarter 2023 we expect to begin receiving inventory placed on early buy terms consistent with 2019 and prior years to prepare for the upcoming season. Our resulting inventory balances at year-end will vary depending upon the timing of shipments of those orders by the vendors. However, any orders placed on early buys have all been strategically evaluated. We have reduced the dollar value of both POs by approximately 60% from peak level as lead times have improved from vendors. Year-to-date cash flow from operations was $307 million compared to $359 million in 2021. The increase in net income of $134 million was offset by increases in working capital. Recall that 2022 cash flow also reflects $80 million of income tax payments that we deferred from 2021 as a result of Hurricane Ida. In the fourth quarter 2021 we continue to add to basis of inventory. And so this year's fourth quarter we would expect to generate more cash as the number of our inventory receipts expected in fourth quarter will include extended early buy payment terms. We anticipate finishing the year with solid adjusted cash flows around 80% of net income excluding the IDA tax payment, while positioned to benefit from inventory investments going into 2023. Our inventory balance at year-end could range from plus 10% to plus 25% depending on the timing of vendor early buy shipment. This is slightly ahead of the plus 5% we were expecting earlier in the year before we have the opportunity to evaluate the early buys. We have paid $112 million to-date in dividend to shareholders, a 27.50% increase over last year, three third quarter. Additionally, we have purchased 192 million worth of shares on the open market during the quarter for a total of $461 million year to-date and have $230 million available under our current authorization. Leverage at the end of third quarter was 1.25x and is well managed within our dated capital allocation model, while investing first in the working capital of the business and providing strong returns to our shareholders. We expect to be at or below our target range at the end of the year. As we look out for the balance of the year with just the fourth quarter remaining, we still expect our sales growth to range from 17% to 19%, reflecting a 5% contribution from acquisitions and 10% from inflation. We are not expecting Europe to recover during the remainder of the year, so we project that to be a 1% drag on the full-year with an additional 1% from foreign currency. Weather and the extent of repair activity that takes place in the Florida area may impact how we close out the year. Inflation impacts for fourth quarter are expected to be approximately 8% compared to the 10% for the full-year. Selling days for fourth quarter and the full-year will be the same as last year. As we lapped the 260 basis point gross margin improvement realized in fourth quarter 2021, we would expect gross margins in the fourth quarter to decline sequentially due to seasonal timing, and also be negatively impacted by lower inflation from vendor price increases this year in fourth quarter compared to last year. And lower incentive earned under volume-based vendor program, resulting in a 150 to 200 basis points decline in Q4 gross margin compared to last year. We focus mainly on full-year gross margin and will finish the year up from prior year. Considering future expected rate increases during the balance of the year and our higher borrowing levels interest expense for the fourth quarter is expected to be significantly higher than last year, resulting in interest expense for the year of $43 million to $44 million up from our previously estimated $40 million. Consistent with our overall capital allocation we have a conservative position on debt management and currently have in place $300 million or 20% of our outstanding debt covered under interest rate swap agreement. That converts our line of credit debt to fixed rate that are currently below market rate mitigating the full impact of our debt exposure to rising interest rates. The share repurchase activity during the year reduced overall shares outstanding and we expect full-year weighted average diluted shares to be approximately $40.1 million including participating securities. Any further share repurchase activity in the fourth quarter is not expected to have an impact on our share forecast for the year based on the time remaining in the year. We have narrowed our earnings guidance range and reflected the additional ASU benefits recorded during third quarter. This brings our guidance range for the year to $18.50 to $19.05, including the $0.02 ASU tax benefit added in the quarter or $0.24 year-to-date. This represents expected earnings per share growth of 20% to 24%, excluding the impact of ASU benefits. As mentioned above, the impact from expiring options in first quarter will be expected to provide a $0.04 benefit. However, timing is uncertain and that's not considered in the guidance range for Q4, but will be included in the 2023 guidance for any unexercised amounts as of year-end. As we wrap up another successful pool season, we are extremely proud of the hard work the team has done to continue to grow the industry, and we look forward to finishing the year strong. We will now begin our Q&A session.

David Manthey:

First off, Melanie, I think you just said that the fourth quarter gross margin would be somewhere in the 29%, and that you did say that you're focused on the annual amount. I just wanted to gauge your current confidence in that prior view about holding the line on the 30% annual gross margin in 2023 and beyond.

David Manthey:

Right. Okay. And then as a follow-up, how should we think about earnings leverage in the model? I mean, you've had years of successful capacity creation and this recent inflation taking things to a higher price level. And now your operating margins at least this year are probably shake out in the 17% range. Will contribution margins in the future be higher than the mid to upper teens level you've typically seen in the past? Just trying to understand earnings leverage from this point given contribution margins versus reported margins.

Operator:

Our next question is coming from Ryan Merkel from William Blair. Ryan, please go ahead.

Peter Arvan:

Yes. Good question, Ryan. As we said, we're forecasting at this point that new pool construction is going to be down, as I said in the 10% to 15% range. A little bit the shoulders of the year, as you know, are the time that are most affected by weather. That it may be at the higher end of the decline if weather closes up sooner and maybe a little bit better if the seasonal weather stays buildable. I guess what I would say is that when I look at volumes considering the decline in new pool construction, when you look at what we posted for the quarter, I'm actually pretty happy with the fact that volumes are holding up. And that remember they're holding off of an elevated level compared to where we have historically grown. And that's partially because the installed base is growing partially because we believe that there was some pent-up demand in renovation. And it's offsetting at the client in new pool construction. So on balance, to say that new pool construction is going to be off likely at least double digits. The fact that volumes are still flattish is actually a pretty good position we think.

Peter Arvan:

What I would say is that the -- it is on -- to your first question is, it is in units and dollars will be higher of course because of the structural inflation. And I think the backlogs really are -- you really have to kind of take that apart. So first of all, we had a slow start to the season especially in the northern climates where builders got a late start, right? So they got less pools in the ground. And as you know, when you loop those days early on, you typically don't get those back. I think that we -- the builders would tell you that there's -- they are seeing more pressure in the seasonal markets and the year round markets I think are in better shape. And I think higher end pools tend to be in better shape than the lower end pools. I think that any pullback will be skewed in my mind to the lower end pools. The higher end pools I think are in good shape. So if you look across the -- our customer base, I think there is an adequate backlog as it as high as it was last year, no, but I think given the state of the economy I think that there is plenty of work out there, exactly how many again we're -- we still have a almost a quarter to go, so we're estimating the minus 10, the minus 15. But I think most builders would tell you that the frenzy has died off, but there's still plenty of work out there.

Peter Arvan:

Yes, good question. If you look at our -- if you look at the new -- let's start with the maintenance and repair of the installed base of pools. Historically, that segment has grown with the installed base plus inflation because as you know, and we've said it many times, once you have a pool, you have to move the water, filter the water and treat the water. Whether you're using it seven days a week or whether you're using it two days a week, those activities have to happen. So we would consider that that portion of the business, which has historically been the norm that that, that part of the business is going to continue to grow as the installed base of pools grows. So, new pool construction, we think is going to be down this year as we said. And I think we started the year saying we felt based on input from our dealers that there was a backlog in renovation and remodel projects that people were waiting to have done as the builders focused on new pool construction. I think that portion of the business is -- has held up well and I think has benefited from the available labor as evidenced by the fact that even with new pool construction down, volumes are still flattish. So we like that. And I would tell you that the new pool construction is down this year, could it be down next year. I suppose it could. I mean we're certainly not forecasting that, Ryan, but I guess when we think about it from a macro perspective; new pool construction makes up roughly 20% of our business. Renovation and remodel make up roughly 20% of the business. And the balance is the maintenance and repair the 60% that continues to grow. So really, we're certainly not forecasting to this, but let's say new pool construction fell another 20% next year. If new pool construction falls 20%, that's 20% of 20%, so that's 4% of revenue. And if you said, well that same pain would be felt broadly across the renovation market 20% on another 20% is an additional 4%. And then if you take the inflation, which from the major equipment guys has already been announced in the 4% to 5% range. And I think if you look across the -- our portfolio in total, that's probably a good number to look at. If you look at plus 4% to 5% on the 60% of the business, that gives you a minus one or a plus one there, right? And then a, a plus one net, right? Because you're up five minus four. So even with a 20%, I mean, to be conservative, if those two markets are down 20%, I think you're still looking at a flattish sales number.

Susan Maklari:

My first question is, I want to follow-up a little bit about the inflation point. You made the comment that you see the 4% to 5% for next year. Can you talk about the sources of those inflationary items, how we should think about them going forward and how we should think about that relative to perhaps some commodities or some other areas that may deflate on a relative basis next year?

Susan Maklari:

Okay. That's very helpful color. I also wanted to dig into the balance sheet a little bit. Can you talk about inventory, how you're thinking of the ability to work through that as we get to the end of this year and then into next year? And perhaps with that too, just in general, as we move to the sort of newer macro environment that we may be in over the next couple quarters, how you're thinking about the balance sheet and leverage and the relative opportunities there?

Operator:

Our next question is coming from Andrew Carter from Stifel. Andrew, please go ahead.

Melanie Hart:

Yes. So gross margins will be better positioned to be able to provide a little bit more color on that when we talk again in February. But as we look at the expense line item, we've already talked about specifically we've called out incentive compensation as one of the areas over the last two years with our higher than historical growth or where we've seen some increases in there. And so we talked about that moderating on a normal growth year from a 6% to 8%. But if sales expectations are lower than that we would have some additional money -- additional ability to flex that. But really, outside of just the incentive compensation, there's several areas when you look at the overall contributions to our expense line. The biggest expense is really in the people area. And so where we are from a staffing standpoint with the 17% to 19% growth that we have this year, we've certainly added some temporary and encouraged some overtime expenses that in a time where sales would not be growing as they are this year, we would have the ability to flex that as well. And then really kind of after those two components there's just many of the natural items as it relates to delivery expenses and even discretionary expenses when you start getting into travel and entertainment. I think that when we looked at kind of our expectations and the expense flex that we did in 2020 to me is just kind of a good model to show that we do have the ability to take some of those discretionary expenses out of the business.

Peter Arvan:

Yes. Andrew, here's what I would say, we have -- we have -- we're very fortunate to have very experienced operators that have been through many cycles. So if you look at our management team, really all the way down to the branch level it's a very, very experienced, years of experience, when you look at our the depth of experience at our general manager level and our regional manager level some degree, the sales center manager level, we've been developing the team for many, many years. So this is not a new thing for them. They've been through the cycles. So they understand the tradeoffs on expenses. They don't -- they don't typically wait and say, well, I'll wait if it -- if things look like they're going to cool. They have a) the experience and frankly, every incentive because with basically the POOLCORP system, the operating systems are total add them up. The way that the whole company is like, frankly, the way Melanie and I are measured is really is that same way all the way down to the individual P&L level. So there is no incentive for them to be late. There is no incentive for them not to capitalize on a sales opportunity and the flip side is there is no incentive for them to wait and say, wow, if things are going to cool off, I'll just carry this incremental expense that I don't know that I -- that I need. I mean, the operating model is, is time tested and well sought out, and it is executed by a very experienced team. So, if -- and again, we're not suggesting that the environment next year is going to be bad. Frankly, we don't know at this point. But are we prepared for, any occurrence. So as I said, we -- I kind of gave you a worst case model, from a revenue perspective, if new construction were to really drop off again, which basically would take you back to 2019 levels. If that were to happen, and the renovations followed, the top-line sell then, as Melanie mentioned, there are numerous areas that we would see immediate benefits, from an SG&A perspective, whether it's people, whether it's incentive comp, whether it is transportation, trucks, fuel, you name it, the model will flex almost immediately with those.

David MacGregor:

Yes. Good morning, everyone and thanks for taking the question. I guess just again, thinking about 2023, how much of a drag could Horizon or SCP Europe be?

David MacGregor:

Right.

David MacGregor:

Okay. Thanks for addressing that. My follow-up question is really around Porpoise Pool & Patio, the acquisition and just how you're thinking about accretion next year. And I guess I'm wondering, it's kind of at a higher level. If your pool owners that are feeling tight economic pressure, do they switch from having a pro maintain the pool to going DIY? And if so does that create maybe a stronger sense of optimism around what that accretion might look like next year?

Operator:

Our next question is coming from Trey Grooms from Stephens, Inc. Trey, you may proceed.

Peter Arvan:

Yes. It's about -- I think in total, it's in the 4% to 5% range. And that business is -- remember, it went through a really tough spot during COVID, right, when people stopped traveling. And people are back to traveling. They're back to vacation. So there is a considerable amount of money being spent in those areas as evidenced by our sales growth, right? So we are up 28% for the year. The project deck that we get to look at -- because remember, there's two parts for that business, right? There is the project, right, new construction, major renovation. Those are -- that's typically a bid-and-spec. They're larger, many times municipal projects. So there's a lot of visibility to those. So we get a pretty good look at the pipeline of that, and I can tell you that the pipeline is very healthy in that area. And then there's just the maintenance and repair that's tied to using of those pools. And given the fact that travel -- the travel season this year was very good, don't really see that letting up all that much anytime soon. And the fact that it's a relatively small part of the business, when I look at it, I think that there is upside there. Is it tremendously going to reshape our future? No, but I'm encouraged by the -- by our ability to continue to grow and take share in that market as well.

Peter Arvan:

No. Not at all, really. I think our -- we're a very strategic acquirer. If you look historically back on the acquisitions that we made, we have been very prudent and judicious and also strategic. So am I willing to overpay for an asset? And the answer is absolutely not. And the reason is, is because in most cases, those acquisitions, we don't -- we're not in a position where we have to overpay for every -- for anything because, frankly, in most markets, we're already there. So it is perhaps some additional capacity that we would be picking up and some additional business and then a synergy opportunity on the backside. But when asset prices become inflated, we get the choice to sit back and say, am I willing to pay an inflated price for an asset that I probably don't really need to acquire because if I need additional capacity, we have the muscle memory, if you will, and the capabilities to greenfield very quickly. So this year, we're going to open up approximately 10 new greenfields. Next year, we're looking at a similar number of greenfields. If I made an acquisition in some markets that I had teed up for a greenfield, might that change my appetite to greenfield if there was something that made sense strategically from a business perspective and from a cultural perspective because that was one of the other things that we look at when we do acquisitions is what is the culture that we're acquiring. Because we have a very good culture in the company, and there has to be a fit there. So I think we have an appetite. We certainly have the balance sheet to do it. We have a strategic plan that is really done at an individual MSA area. So if good assets become available and their value perspective, it makes sense, then absolutely, we would move forward. The flip side is that if we needed additional capacity in an area, there was no asset that made sense to acquire, then we would simply do what we've always done and that is greenfield, and we can do that relatively quickly. And if you look at our success rate with greenfield, it is just tremendous.

Peter Arvan:

Joe?

Joe Ahlersmeyer:

Yes. Can you hear me?

Joe Ahlersmeyer:

Okay. Sorry about that. Yes, I'd like to go back to the gross margin guide for 4Q, if I could. I think it might be helpful [indiscernible]?

Joe Ahlersmeyer:

Okay. I'll take it off-line.

Joe Ahlersmeyer:

Sorry about that.

Stephen Volkmann:

Great. Hi guys, I'm here. Most of my questions have been answered actually, but I was just hoping you could maybe explain to me a little bit how sort of the vendor rebates work. And I guess I'm trying to figure out -- I assume they're probably volume-related rather than price-related. So if we had maybe a base case of sort of flat volumes next year, what would be -- how should we think about the headwind from vendor rebates?

Stephen Volkmann:

Right. I guess that's where I'm going. Because I'm assuming you benefited from that over the past couple of years and maybe as we normalize, you won't going forward. I'm just trying to figure out what kind of headwind that might be.

Peter Arvan:

Yes. And Steve, the programs are negotiated on an individual basis, and we're just in that process right now. So hard for us to quantify that because, again, we haven't guided from a revenue and volume perspective and the programs are still in flux. But I mean, rest assured, this is part of the normal business practice for us. There are some years, obviously, that vendor rebates are better than others, and it really depends on the individual vendor and how the programs are constructed. But we'll have more color for that when we provide our full-year guidance into -- for next year. But I can tell you that it's contemplated in our long-term guidance, which is really the way that we would ask you to think about it.

Peter Arvan:

Yes. I think as we mentioned, we certainly have some great retailers in the -- our traditional independent retail business. I think if you look at our retail business from a geographic perspective, it would be very similar, right? Pinch A Penny is a great operator. We certainly have great operators that perform equally as well. But I would also tell you, look at the footprint that where Pinch A Penny operates. It's primarily Florida, Texas, some Louisiana and a location in Georgia as compared to our entire retail basket, which goes all the way up into the seasonal markets, which, as you know, had a much tougher year given the late start to the season, the large early buys that they made, hence my comment on inventory correction.

Ken Zener:

Just good morning to you guys. How are you?

Ken Zener:

Well. Melanie, the interest expense, I believe you said $17 million in 4Q implied?

Ken Zener:

The -- no. No, no. The interest expense, you said $43 million for the year. If my model is correct, that implies roughly $17 million in the fourth quarter. Is that correct?

Ken Zener:

And should we annualize that, so over $68 million next year?

Ken Zener:

Okay. But obviously, even sequentially, it was a pickup. In terms of -- Peter, you talked about valuations and your ability to do greenfields, et cetera, et cetera. Could you maybe give us some parameters how you think about valuation in the space of EBITDA easy to sales, if you would, within the context of deals that you guys have done?

Ken Zener:

Yes. And I was just kind of -- just taking a look back obviously, the stocks had a large decline of which by our estimates, a good chunk of that 60%, 70% valuation, right, so that -- which you're kind of referring to in the broader market. But the revenue ladder, if you will, 60% maintenance discretionary new, whether it's down 10%, 25%, it doesn't seem to be that's the issue in terms of what is in investors' mind so much as much as perhaps the -- and I know you guys went over this at your -- at the Analyst Day, Melanie, you talked about to gross margin just recently at 30% drop. But I mean, it seems to be that margin is really the big mover for this valuation, is quite a bit lower for the group. And I -- at the Analyst Day, you guys did a very good job outlining why you think the dramatic margin expansion is sustainable. Could you maybe talk to your understanding of how -- you've obviously gained a lot of share. Fluidra, other companies have talked about down volumes. Can you talk about perhaps how the competitive landscape might -- if we do get these? And I don't know if it's a worst-case scenario, but what you kind of laid out. How do you think smaller operators -- what's your experience with how smaller operators respond to kind of a Draconian demand world versus in terms of the margins versus you guys, just so we can understand how the competitive landscape might shift if demand does decline significantly?

Ken Zener:

Right. And you wouldn't see discounting similar to your old roofing industry perhaps, where they would go for cash flow and create extra pressure as they liquidate their inventory?

Ken Zener:

So your gross margins were fairly stable in 2007. I mean you did 27.5%, down from 28.3%. It's kind of in that -- didn't compress so much back then, your gross margins.

Ken Zener:

Right, right.

Ken Zener:

Right. They can't weather it. And I apologize about pursuing this line of questioning with you. But I mean your margins in 2006 were about -- about 2005, 2006 were about 9%. They fell to about 6%. Would you say those margin ranges are consistent with the comments you made about competitors in the environment today?

Operator:

We have a question from Garik Shmois from Loop Capital. Garik, go ahead.