POOL - NASDAQ

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.

And welcome to our second quarter 2023 earnings conference call. Our discussion, comments and responses to questions today may include forward-looking statements, including management's outlook for 2023 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 the Investor Relations section. Peter Arvan, our President and CEO, will begin today's call. Pete?

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.

Thank you, Pete and good morning everyone. This morning we reported $1.9 billion in net sales for the second quarter of 2023. This was the second best top line in history after the exceptionally strong results we generated in 2022. Inflation in the quarter was approximately 3% to 4%, slightly higher for equipment products and a marginal overall pricing benefit from chemicals. We saw some pressure on trichlor prices in the quarter offset by inflation and other chemical products. The pricing impact of trichlor was around a 1% drag on net sales for the quarter. As we had anticipated, gross margin of 30.6% saw a 180 basis point decline compared to second quarter 2022. The benefit from lower cost inventory on hands have largely been sold through and contributed nominally to the second quarter gross margin. Current gross margin primarily reflects replacement cost and the seasonal benefit we would typically expect to see in the second quarter. Gross margin was somewhat negatively impacted by sales concession activity in our response to competitors reacting to the slower start to the season. Operating expenses declined by 3% year-over-year in the quarter. SG&A cost as a percentage of net sales was 13% for the quarter, significantly better than the 18.6% we recorded in first quarter, as we realized improved expense leverage on our fixed costs in the higher sales quarter. Our field teams did an excellent job in managing through the seasonal expense growth between the first quarter and the second quarter. Last year, we increased expenses by $36 million from first quarter to second quarter, and we were able to moderate that to only $17 million in the current quarter compared to Q1. We remain focused on compensation and freight-related bearable expenses, while continuing our investments in new locations and tools and technology to support our long-term growth. The 13 new locations opened since June 2022 added incremental expenses and were a moderate drag on operating income. We completed three acquisitions year-to-date, each providing unique strategic benefits and once pulled into the network will contribute profitable growth going forward. Together, these added less than 1% to net sales for the quarter. So for us, it was not significant to break out separately in the press release. Our second quarter operating margin was 17.6% versus 20.4% last year, but continues to be above the 15.4% in 2019. Looking back to 2019, we ended the year with a 10.7% full year operating margin. That expanded almost 600 basis points to 16.6% for the full year 2022 as we realize benefits of around 150 basis points from inflation-driven price increases and inventory gains that have now largely normalized. We are experiencing some pullback in our operating margin from last year, but we believe the margins we will achieve in 2023 well above the pre-pandemic levels are setting a good baseline and will be sustainable as we hold on to the 30% to 35% industry growth from inflation, combined with our strategically beneficial acquisitions, increased scale, product expansion and improved operating efficiencies. We reported diluted EPS, excluding ASU of $5.89 compared to $7.59 in second quarter 2022. While 22% below last year, this is comparable to 2021 second quarter EPS and is 94% higher than the $3.03 excluding ASU, we reported in second quarter 2019. Many changes have affected our historically stable and growing industry since then, which bring positive opportunities for our future growth and profitability. Receivables continue to be well managed. Day’s sales outstanding was 26.2 days compared to prior year of 27.2. We have made excellent progress on rightsizing our inventory by vendor and by location now that supply chains have normalized. I guess [ph] one of the metrics we monitor to ensure a great customer experience and analyzed for lost sales opportunities continue to trend well. We have reduced inventory year-over-year by $186 million against the $260 million inventory reduction we estimated at year-end. We are continuing to aim toward the end of the season or end of third quarter to achieve these inventory levels. As we accomplish this, we will be uniquely positioned to work with our channel partners on early buys to best position us for the 2024 season. With acquisitions, new locations and expanded product line offerings at many of our sales centers, our capabilities in managing work at capital is another indicator of our focus on capacity creation and the value we continue to provide to our customers while generating strong returns for our shareholders. We reduced debt outstanding by $411 million from June of 2022. And although we had lower average debt outstanding during the quarter, an increase in our average interest rate resulted in a rise of $8 million in our quarterly interest expense. Cash flow from operating activities was $377 million, an increase of $348 million compared to last year as strong earnings and working capital reductions contributed to increased cash flow. We have completed $44 million of share buybacks in the open market during the first half. Our Board increased our authorization under our share repurchase program to $600 million during the quarter. Our full year cash flows are expected to be about $800 million, benefiting from cash generated due to reductions in inventory. From a timing standpoint, our cash flow is strongest in the second half of the year after building preseason inventory in first quarter and paying for early buy inventory purchases in the second quarter. Moving to our outlook. For the full year, we expect sales compared to 2022 to be down in the range of negative 10%. We're down 12% through the first half with a 15% year-over-year decrease in Q1 and a 10% decline in Q2. Last year for base business, we realized a 10% increase in Q3, which was the same as Q2 and a 1% growth in fourth quarter. We will have one less selling day in the third quarter and for the full year, which we typically add or subtract around 1% to 2% for the quarter. Gross margin is expected to return to seasonally normalized level in the second half of the year as inventory gain benefits have now fully passed through. As we have stated previously, we expect full year 2023 gross margins to be around 30%. Operating expense growth moderated in the second quarter for year-to-date growth over prior year of 1% and will continue to be well managed for the full year. With continued investments in the business, we will maintain certain core expenses and limit full year base business expense growth to 1%. This will have us well positioned for in top line growth returns. When we look at potential uses for the increased cash flows, we expect to generate this year, we anticipate spending around $25 million to $50 million on acquisitions, $50 million to $60 million on capital expenditures, $170 million on cash dividends and the remaining approximately $550 million on a combination of debt reductions and share buybacks. We continue to maintain our leverage ratio at the low end of our target rate of 1.5 times to two times with the mix of floating and fixed rate debt, reflecting a strong and flexible financial position to take advantage of future growth opportunities. Interest expense for the full year is expected to be between $55 million and $62 million, including slightly higher interest rates in the second half. Our annual tax rate should be in line with last year's tax rate of 25.2%, excluding ASU. We expect the third quarter rate to be slightly lower than the annual rate. Our Board increased the quarterly dividend payout by 10% this quarter, increasing the quarterly dividend to $1.10. We expect to pay full year 2023 dividends of around $170 million, more than double the $84 million paid to shareholders in 2019. As Pete commented earlier, we have updated the range for our EPS guidance for the full year 2023 to $13.14 to $14.14, which includes the $0.14 ASU tax benefit realized to date. This assumes a share count of 39.4 million shares consistent with June 30. We based our guidance on the assumption of normal historical weather conditions as the midpoint. We issued our second annual corporate responsibility report during the quarter. We are proud to have expanded our disclosures in the areas that we are focused on as part of our capacity creation efforts. These initiatives and activities are paying off through more efficient water usage and the benchmarking of our electricity usage in our continued efforts to lower our overall emissions. Our results for the second quarter, while somewhat less favorable than we had hoped, through the resilience of our industry and the sustainability of much of the pricing and market growth components we realized over the 2019 to 2022 period prior to this period of market stabilization. Our financial position is strong, and we are well situated to support the return of industry growth. I will now turn the call over to begin our Q&A session.

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

Good morning. Thanks for taking the questions. I wanted to start off with a question I’m getting from clients this morning, which is how can we be comfortable that this is the last cut to guidance. So Pete, maybe just walk us through how you approach guidance, what's changed and why you're comfortable that the new guidance range is achievable?

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.

Got it. That's very helpful. Thank you for that. And for my follow-up, I was hoping you could comment on what you're seeing in June and what you're seeing in July? Have you seen trends improve a bit as the weather has got a bit hotter in some of the key pool markets?

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.

Makes sense. I'll pass it on. Thank you.

Thank you.

Our next question comes from Susan Maklari of Goldman Sachs. Go ahead.

Thank you. Good morning.

Good morning.

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?

So I think your sentiment on – your observation on mix shift is accurate. We – when I talk to our dealers, I talked to a lot of dealers across the country from very, very large dealers to small dealers. What we're hearing is that at the higher end, and we have some customers that frankly specialize in very large projects. They're actually doing quite well. I believe it or not, I've had a couple tell me that they're sold out for this year and into next year, but they are the very high-end specialty builders. As you work down the chain from very high end to more entry-level pools, there is a phenomenon that happens and that is – has to do with how that pool is paid for. The very high-end pools are typically purchased by more affluent families and the percentage of those that have really any concern about financing cost is actually very low. The flip side to that is if you go to the opposite end of the spectrum, the entry-level pools, which is what we think drove a lot of the new pool – the increase in new pool activity through the pandemic, there was a lot more entry-level pools built. So I think the mix of pools was skewed towards the entry-level pools. And the reason is because financing cost was actually quite low. And if you talk to the dealers, what they would tell you is that many of those conversations, many of the closes happened at the kitchen table. And they were basically – they were selling a – they were selling a backyard resort, but they were basically selling that as a monthly payment. And monthly payments when the interest rates and finance rates and HELOCs were very low and lending was free flowing, monthly payments for those projects and the fact that a few years ago, you had less inflation. So the overall price of the pool was lower. They were selling that based on – some of those were $700 to $750 a month payments. That was a very achievable number for folks that wanted a pool and decided to invest and become pool owners. As interest rates have come up as inflation has worked its way through the system, as labor rates have come up – that same payment, in many cases, dealers are telling me is now $1,200 to $1,400, which simply puts it out of the range for many of the families that would be stretching at frankly, a $700 to $750 level. So if you ask me what I think it's going to take to change that, I really think it would be – it would have to be one of two things or a combination. One is if interest rates were to moderate, it's just math that brings down the price of the, the financing costs and brings down the monthly payment. That would make pools more affordable for those folks that are sitting on the sidelines waiting for that to happen. The other thing that happens over time is the memory of 2% interest and 3% interest fades in people's mind and they become more accustomed to, well, okay, if I'm going to do a HELOC, it's going to cost me 6% or 7% or 8%. And as wages continue to catch up to inflation, then it becomes more acceptable. And I think you'll see some more pools at the entry level start to come back in. I think your follow-on question was – or the second part of the question had to do with consumer sentiment. And I think I briefly mentioned that with Ryan's question. What dealers are telling us is that certainly, break-fix things, it is – if the pump isn't working, if the filter is leaking, if the salt cells stopped working. If – in some cases, if the light stopped working, it's going to get fixed. Consumers really don't have a choice because remember, with the pool, you have to move the water, filter the water and treat the water in order to make sure that it doesn't turn green. So that's a given. I think over the last couple of years, we've seen people trade up in terms of technology. They've gone from pressure cleaners and suction cleaners, which were once the industry standard. Now we've seen people move towards the, the higher-end product, the robotic cleaners and such and higher levels of automation. I think in many of those cases, consumers are saying, well, I'd like a new robot, but given the macroeconomic conditions, inflation of everything from groceries, perhaps additional leisure travel being done and general household expense increase, they're saying, I'll probably going to wait and I'll get the new cleaner next year as opposed to this year and we'll live with the pressure cleaner or suction cleaner one more year. I just think it's a matter of just kind of how the consumer is feeling about everyday spending.

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?

Yes. Great question. So there's really nothing new about the competition. If I go back, I've been in the pool industry now this is my seventh year, I believe. And I can tell you that from the very first – my very first month when I went out and was meeting the team and trying to learn about the market and what would happen, and I would hear these stories about competitors that would go after a piece of business that we would have or we would hear about hypercompetitive pricing at a particular account or a particular product. That was basically the norm, all the way up to the pandemic. We kind of got a break during the pandemic when inventory was scarce and it was more of a question of, do you have it versus how much is it? So we got a little bit of a reprieve during that period of pandemic spending when people just said, I want I want, I want and those that had it certainly had an advantage. And you know what we did from an investment perspective to make sure that we had product and that allowed us to take share. It allowed us to gain new customers that in the past might not have had a reason to try us as a supplier that we're perhaps happy with who they were using before that now tried us and got exposure to the vast network and the tools and resources that we offer, which pale in comparison to those of our competitors. So what I would say is that I still hear stories every day about a competitor that is going after a piece of business or trying to liquidate some inventory or trying to raise some cash, putting a ridiculous price into the market. I think it is isolated. I don't think it's anything new, and it's nothing, quite frankly, that we are worried about. When I consider what we've done over the last three years to widen the base of our business, and improve the quality of our value proposition. I think it gives me great confidence in our ability to maintain the share that we gained and continue to gain. Since 2019, through acquisitions and greenfield openings, we have 59 new locations. So there's 59 more locations today than they were in 2019. If you look at our – what differentiates our network compared to the others, we have about 100 NPT centers, which allow the smaller builders to use our showrooms to have their customers pick out the finishes for a new pool or renovation and remodel. We have product trainers that teach new customers, new plaster crews, new tile crews, how to apply and how to install our proprietary products. If you look at our private label capabilities, those that we had before the pandemic and then with the addition of Pinch A Penny and Suncoast Chemicals and the fact that we're vertically integrated from a chemical packaging perspective. Again, nobody that we compete with on the wholesale distribution side has capabilities like that. We think that gives us flexibility. We think that gives us additional capabilities to serve customers. Our focus on speed at the counter and the customer experience. Our focus on – we've invested in digital tools in POOL360, as you can see, is gaining traction. The POOL360 water test software that we've begun rolling out as a great tool for the independent retailers to improve their chemical business, which, at the same time, will improve our chemical business of our private label chemicals because that is the chemical solution that the software will recommend and takes that variability out of the dealer's hands in terms of what chemicals to recommend and how much it's all done through a digital platform. We've invested in marketing capabilities, specific marketing capabilities that help our dealers grow that help drive demand creation, all things that none of our competitors do. So certainly, the market is – I don't want to paint a picture that the market is not contested. You have competitors, we have good competitors that are trying to grow just as well as we are. But when I look at the tools and resources that we have including, frankly, the best team in the industry, when you look at the – how seasoned our management team is and their years of experience in the multiple sites that they have seen as compared to some of our competitors that are relatively new to the space, I would put our team up against any other team, and they will win that race hands down.

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

Thank you.

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

Hi, good morning, everyone. First question, Pete, or Melanie, could you estimate the second quarter year-to-year change by new pools renovation and maintenance revenues that you experienced? I know it's not an exact size, but could you give us an idea there? And then also, I don't know if you mentioned price contribution across blue and green, if you could give us that as well.

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.

Your answer to the first question, Melanie, was that – I'm asking about total revenues?

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

Right. You're saying your new pools were down, what, 5%.

The revenue related to new pools, yes.

Okay. Okay. All right. And then second, speaking of new pools and new pool construction, can that segment reaccelerate in the absence of an improvement in turnover in the housing market and maybe more specifically, a resumption of the Southern migration?

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.

Great. Thank you.

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

Hi, good morning, everyone. I guess, first on the guide, I'm backing into an EBIT margin kind of in that low teens range. Melanie, is there anything we need to be aware of as far as kind of the cadence here as we look at the balance of the year?

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.

Yes. Okay. Got it. And then kind of sticking with the guide. As we kind of look at the revised EPS guidance range here and Pete, I understand why you would have confidence in the guide given where we are in the year, and I appreciate the color you gave around that prior question. But looking at that range, what would kind of drive us to be more at the top end or the bottom end of that range? Is that – given that confidence you have, do you think that, that would be more of a top line driven swing or potential fluctuations in margins that could get us there.

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.

Volume, as you know, volume leverage is by far our biggest lever.

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

Thank you.

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

Thank you very much. Good morning. Pete or Melanie, could you – you covered weather very well on the first question from Ryan. But I'm curious, you mentioned it was a $60 million to $70 million impact in the first quarter. When we're at this point next year, looking back on 2023, how much would you say is the – will have been the weather impact from this year on a year-over-year basis? I guess, is there an update to $60 million to $70 million is what I'm asking?

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

Incrementally, so $90 million to $100 million, Melanie?

Yes. That's correct.

Okay. Thanks. I appreciate that. And then, Peter, you had said, I think it was your part in the prepared remarks, that remodeling was trending ahead of what you had originally expected for the year. Now that you're halfway through the year and had a chance to look at it. But then you kind of softened the commentary and said, but it looks like it's getting worked through pretty well. Could you elaborate on that, please?

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.

Okay, great. Thanks so much.

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

Thank you very much. Just a couple of questions from my end. First, on the – just a follow-up from earlier, I think you said negative 5% was the 2Q impact from new construction. That's not that the category was down 5%. It's that it was a five-point impact to the consolidated number. Is that correct? And then just thinking about the cumulative change in the sales guide from earlier in the year, let's take sort of the initial midpoint down 1% to 2% and then now we're at 10%. Can you maybe bucket that eight to nine point change in sort of – and I know this is a lot, but four different buckets, kind of one, things that are pushed to next year, so that maybe is the deferrals that you talked about things that are current year circumstances like weather that really have nothing to do with next year. And the things that are worse this year but may improve next year, I'm thinking maybe the pool construction economics impacts there. And then things that are worse than expected that likely won't recover. So are in structural impairments to your business, like share loss or pricing, which I think both of which you said you're not experiencing. And if you're not going to bucket it, maybe just the way to think about the question is if you're still investing behind growth, the question that I'm getting from investors is thinking about earnings next year, is there really any impairment to next year's earnings power between the beginning of the year and now? And so maybe just if you could take the opportunity to explicitly say that from February to July, actually very little has changed in your mind about what your earnings power is next year.

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.

Understood. Thank you very much.

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

Thanks. Going into the guidance, looking at it here, did you say SG&A would be modestly up this year and that would be a change from minus 2%? And within that given the kind of guidance reductions this year, is incentive comp meaningfully lower, therefore, there’ll be a reset next year?

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.

And then back to like – I’m sorry, did I catch that SG&A is going to be up this year, and that might be just because of new branches and acquisitions?

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.

Okay. Thank you. And then kind of thinking about like kind of harp on the kind of the share perspective. I know you wait for the markets, but if you look out there and think about like unique customers that have come in, in 2021, 2022. If you look at that activity, do you have a firm sense that you know you’re at least holding market share or that they’re not going elsewhere? Anything more granular that you have real time that tells you that, hey, you’re still outperforming the market, holding your market share gain or maybe not – maybe you’re receiving some market share? Thanks.

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.

One last question on the deferrals that you talked about, you mentioned that’s been pretty steady. Something breaks, it gets fixed. I guess when we go into these later months and something breaks in August and you have the option to winterize or whatever. Do you think there could be an added risk that you see deferrals pick up this season and that might be something that could cut you off guard? Or is that just something that as I say that it’s just too small, it doesn’t even matter. Thanks.

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.

Thanks. I’ll pass it on.

Thanks.

The next question comes from David MacGregor with Longbow Research. Go ahead.

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?

I guess, the way I would approach that is, when it comes to maintenance and repair, it really depends on the item. So for instance, when we talk about maintenance, big portion of the maintenance business is chemicals. And there we’ve seen a decline in trichlor pricing in some areas, frankly, because of inventory that was purchased in anticipation, frankly, of higher usage that people are trying to get rid of before the end of the year. Because you don’t want to end – you don’t want to winter over a bunch of chemicals because every month they sit on a shelf and in a bucket they become less potent. So we’ve seen certainly some heightened activity to get rid of some chemicals. But frankly, right now the demand for chemicals is very strong. And we’re seeing an offset in that in terms of the other chemicals, which would be balancers, shock and specialty. And then again, when it comes to an equipment, my pump quit or the motor fails, I have a choice. I can fix it or I can replace it. We haven’t seen a big shift in the customers’ behavior as it relates to, well, I’m not going to fix – I’m not going to replace it anymore, I’m going to fix it. Because we look at our median order value, we look at our median line value and then we look at our parts sales, whole bid sales, and we haven’t really seen anything materially change there. So when it comes to a break fix item the only thing in terms of price elasticity, if one of those components fails, it has to be replaced. And chances are that when that happens, that’s not something that is negotiated at the distributor that says, hey, I can buy this cheaper here or there. They’re in, they pick up what we have because they’re there for many other reasons other than we may be a nickel cheaper or more expensive. So I don’t really see a lot of price elasticity on non-discretionary items. Discretionary items a little bit different story. So, as I mentioned, robots for instance, which are a great product for pools, have gone up in value. And that’s where some people are looking at it saying, maybe I’ll wait till next year on that.

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

Our last question comes from Garik Shmois of Loop Capital. Go ahead.

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.

Yes, very early to give you an accurate answer to that question. I can tell you that where my head is at right now is I believe that it’s going to be above normal once again. And the reason is, is because everybody’s SG&A costs and operating costs, whether it is rent, whether it is trucks, people, labor being obviously the biggest component, none of those – there’s been no retreat in anybody’s operating expenses. So I can’t see manufacturers only passing on the historic 1% to 2%. I would expect it to be higher, I could be wrong, but I would expect it to be higher.

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?

Yes. The Pinch A Penny franchisees is – they operate a great business and our model is different than most of our competitors as it relates to the publicly traded entities. So, we’re happy with the performance. But as I mentioned, they’re seeing a similar pattern in that the non-discretionary business is holding up quite well. But some of the equipment has – specifically like cleaners and such that are more discretionary. I should have one. I don’t have to have one. If I have an older one, I might be able to get by another year with it. Though they’re seeing some hesitation for the consumer at that point, but that frankly is baked into their performance, which is why that they’re flattish and given the underlying conditions, we’re actually pretty happy with that.

Yep. Make sense. Thanks again.

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

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.