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..

Welcome everyone to our first 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 the call with his comments..

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..

Thank you, Pete, and good morning everyone. We have exceeded $1 billion in sales in the first quarter for the third year in a row, as we continue to see the cumulative 30% to 35% inflation realized over the last several years remain a part of our base.

Our first quarter revenue decrease of 15% compares to first quarter 2022, where we realize 33% top line growth and 26% base business growth and still represents a 14% increase over 2021. Inflation is in line with our expectations and the pricing that took place at the beginning of the season on equipment remains intact.

At this time, we are not aware of any additional price increases to come through during the season. Chemical inflation overall was around 4% for the quarter with trichlor pricing seeing some pressures offset by increases in other chemical product lines.

Gross margin of 30.6% was 110 basis points less than prior year and reflects a strong margin for the first quarter from a historical comparison standpoint. Prior year gross margin included benefits from multiple price changes amid higher levels of inflation.

As expected, first quarter gross margin benefited from the sell through of our lower cost inventory investments made last year, and also reflects the higher base we would anticipate toward our full year longer term guidance of 30% gross margins, which includes the continuing benefits from acquisition related accretion.

Operating expenses increased $12.5 million or 6% over prior year. Fixed costs impact our first and fourth quarters more significantly as the higher sales quarters of second and third provide us more ability to leverage non-variable costs and is also where we would typically see higher correlations to sales for volume related expenses.

During the quarter, we continue to invest in strategic projects that we anticipate will drive long-term growth and profitability, specifically those around our customer experience offerings.

Our overall cost related to facilities, freight, insurance, IT, advertising and marketing, and people have increased from a year ago, and we are focused on increasing productivity in the network to offset the inflationary increases we are seeing in these areas. Therefore, limiting the total year-over-year expense dollar increases.

We have also added five new locations during the quarter, which will increase our overall capacity and ability to gain market share and expanded geographic areas.

These new locations will be an initial drag on earnings and represent higher operating cost growth, but will generally be neutral to earnings in year two and generate normalized profitability by year four.

For the full year, we still plan to open the 10 new locations anticipated as our longer term view has not been impacted by short-term market considerations. This is in addition to a similar number of franchise locations to be added as part of the Pinch A Penny network.

We realized operating margin for first quarter of 12.1%, which was consistent with the 2021 first quarter margin and a meaningful step up over the prior five years as we have become larger and more efficient.

The quarters in the shoulder of the season provide less of an opportunity for leverage, but the results achieved in the first quarter of 2023 are a good indication of the benefits we would expect to see longer term as we continue to leverage our scale for increased profitability.

Interest expense for the quarter increased $10.6 million over prior year as we saw our average interest rates increase from 1.5% in prior year to 4.8% for the current quarter. We have held our debt upstanding consistent with year-end, while also making $44 million in open market share repurchases year-to-date.

We continued to remain under our stated target leverage ratio and have more than adequate capacity to fund our capital priorities. Next, I'll discuss our balance sheet and cash flows. Days sales outstanding was 26.5 days compared to 26.4 days in 2022.

Net receivables decrease consistent with overall sales changes, and we continue to utilize our credit function as a valuable resource to our customers as we work with them to support their sales activity. Inventory level increases have continued to improve from third quarter 2022 when we saw supply chains and lead times normalized.

We have reduced our base business inventory growth from 43% year-over-year in third quarter 2022 to 18% in fourth quarter 2022, and again to 3% at first quarter 2023. Our focus on inventory is by sale center and by SKU, which ensures that we have optimal levels of inventory and can provide the highest level of service for our customers.

We are making progress on moving through the safety stock inventory levels we had at this same time last year and are continuing to target the end of the season as a return to normal inventory levels. Our efforts on managing working capital are evident and the improvement in cash flows from operations of $311 million over first quarter last year.

We are expecting higher payments in the second and third quarter on vendor early by seasonal payment terms compared to last year where these programs were generally not offered. However, full year cash flow from operations is expected to exceed $800 million.

We completed $44 million of share buyback during the quarter and have $186 million remaining under our share repurchase program authorization. Typically review our capital allocation plan with our Board of Directors at the time of our upcoming annual meeting and will announce any changes shortly thereafter.

We have updated our EPS guidance for the full year 2023. Our new range is $14.62 to $16.12, including the $0.12 ASU tax benefit realized to date. Our range considers the results to date and at the low end impacts from a mild recessionary environment.

Continuing unfavorable weather throughout the remainder of the year or a worsening economic climate could impact our expected outlook. We are now expecting to see sales compared to 2022 to be down mid single digits versus the flat to down 3% from our initial guidance.

Based on current trends, it is possible that new pool construction could decline up to 30% in view of the number of permits issued year-to-date and the less available buildable dates.

Maintenance revenue is also expected to see a 1% lower increase than previously expected from the use of less consumable stemming from the unfavorable weather in the first quarter. Our overall expectations related to renovation and remodel activity, our Horizon business in Europe remain relatively unchanged.

We continue to pursue four to five tuck-in acquisitions for the year with a minimal impact on the current year results. We completed our first acquisition of 2023 by purchasing Pro-Water Irrigation & Landscape Supply, adding two locations to our Horizon network during the quarter.

Looking at the trends on base business growth last year, we saw 26% growth in the first quarter, followed by 10% growth in Q2 and Q3 and modest growth in Q4. The largest year-over-year impact is expected to be seen in the first quarter and first half. We have one less selling day in the third quarter, and for the full year compared to 2022.

We continue to forecast gross profit margins for the full year in line with our longer term guidance of around 30%. Second quarter will be a difficult comparison as prior year gross margins increase 150 basis points from 2021.

So we would expect the 2023 margin for second quarter to be slightly higher than the full year projection as is normal for the second quarter. Inflationary pressures on operating costs will be partially offset by our continued efforts in capacity creation and our ability to manage variable costs.

Growth on expenses will be significantly less than the inflationary cost input we are challenged with. Our management teams will make decisions to manage costs while continuing to invest in valuable programs and team members that will be necessary to support our long-term growth.

Reduced volumes would allow for more field focus on our ongoing operational projects, such as expansion of our priority pick express order programs, thin replenishment, velocity sliding and delivery optimization. These initiatives will increase available capacities longer term across the network without more significant capital spend.

There have not been any changes to our expectations on interest expense for the full year. We still anticipate interest expense will range from $50 million to $60 million. With exceptional cash flow generation, we expect debt balances to decrease throughout the year.

We also plan to complete the transition from LIBOR to SOFR on our available rate debt agreements before the end of second quarter. This change will not materially impact our results or financial position. Our overall borrowing rate continues to benefit from the portion of our debt currently tied to fixed rate, interest rate swap agreements.

Estimated weighted average share outstanding that will be applied to net income will be approximately 39.5 million shares at each remaining quarter and 39.5 million for the full year. This number was 39.4 million shares at March 31st. We will update our forecast quarterly to reflect the impact of any future sharer purchases.

As we continue to focus on our four key operating priorities, our ability to integrate our ESG framework into those priorities has expanded.

We expect the benefits not only to expand our efforts around sustainability and governance, but also to assist in our capacity creation efforts as we utilize the same practices to grow our operating margins over the long-term.

Our second annual corporate responsibility report will be issued during the quarter and will provide more detail on what we have accomplished.

Our first quarter 2023 reflects a transition period as we exit time of uncharacteristic growth coupled with supply chain disruptions only to navigate challenging weather and macroeconomic conditions, while generating strong current year operating results and focusing on the long-term stable growth nature of our business.

We will now begin our Q&A session..

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..

Hey, good morning everyone. Thanks for taking the question..

Morning..

Morning..

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..

Yeah. The beginning of the month of April, Ryan, the weather wasn't all that much different. But as the month has progressed, California and Arizona, we had -- we've seen improvement.

On the construction side, think about it this way, between construction and renovation, in California, if the yards are still soaked and the builders can't build that's simply going to forestall the construction renovation. As long as there's a pool there, the renovation work can typically work regardless of temperature and rain.

So we're seeing some improvement in that area. As it relates to the maintenance spend, maintenance, the biggest component on maintenance, as you know, is chemicals. Chemicals are really going to be tied to water temperature. So we're encouraged that the Sun is out, temperatures are heating up.

And if you look this week and next week, Arizona's going to be in the mid to high nineties. So, we like the trend and we think things are turning in our favor..

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?.

Yeah. I think we would -- we're very confident that first quarter was significantly driven by weather. And I say that because if I look at the results in Texas, which in my prepared remarks, and I also mentioned Florida, where we had pretty good weather, in those areas the business did well and was very much in line with expectations.

So we've never seen the water problem that we have in California and combine that with very cold temperatures. The same thing in Arizona. The Phoenix market has had more rain than I think they've seen in a 10-year period before they've had anything like this. So I would tell you that in those areas, very confident that it's weather related.

If I look at the seasonal markets, it really -- if you look at the quarter in total in the seasonal markets, it doesn't look terrible, but you really have to look at it in context of when the weather happened. So in the seasonal markets, the beginning of the quarter, actually the weather wasn't bad.

The weather deteriorated in the seasonal markets towards the end, which simply delayed the opening of pools and delayed construction projects. So I think that we're comfortable that the weather played a major role in the way the season is opening up..

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?.

Yeah. So our expectations just for kind of the revenue over the year is not changed significantly from where we talked about when we gave kind of our original guidance. Although, obviously we didn't have the impact of the weather on the first quarter.

So from a comp standpoint, when you're just doing the comparison, the first quarter base business last year was at 26% growth, and then that up was only 10% for second quarter. So when you look at the comparison for second quarter, it's not as difficult of a comparison.

So our original guidance was that we would see a larger decline kind of in the first half of the year, and then that would move to kind of modest growth for the second half. And so we would expect that to play out pretty similarly to that just with the larger decline in the first half because of the weather on the first quarter..

Got it. Very helpful. Thank you..

Our next question will come from Susan Maklari with Goldman Sachs. You may now go ahead..

Thank you. Good morning everyone..

Good morning..

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?.

Very good questions. So I would tell you that as it relates to consumer lending and the banks and the questions around that, certainly that's nothing that we had contemplated as we were looking at how the year would going to play out. What I would tell you is that there's a couple of common themes.

One is that we have always said, or at least for the last 12 months, that we're seeing pressure in at the lower end pools. What you have to consider with lower end pools is that the rate of financing versus cash buyers goes up significantly.

Entry level pools much more higher percentage of financing, larger projects, much lower percentage, that are financed versus paid for with cash.

So the way the year is, is playing out, the uncertainty in the lending environment is exacerbating an already pronounced issue with entry level pools, but I don't really think it's affecting much at, let's call it the mid-level and certainly not at the upper end..

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?.

Yeah. And I apologize, I didn't respond to your -- the second part of your first question without touch on. So your question about cancellations, because of weather delays, we've not really seen that. The cancellation rate really hasn't changed. I don't think it's significant.

So people that generally put down deposit and they were put off by the weather had essentially already arranged their financing, it's still very early in the season. So if your pool happens 30 days, 45 days or 60 days later than it was anticipated, I think you're still going to have a fairly happy homeowner.

Your next question as it relates to the maintenance and share gain.

Part of our value proposition has to do with providing an absolutely unparalleled customer experience that has to do with the locations of our sales centers, the inventory profiles that we carry, the speed at which we're able to get people in and out of our business, the knowledge of our salespeople, and certainly, our B2B tool with POOL360 helps.

All of those things right along with our focus on execution have allowed us to continue to gain share in that we provide what we believe is to be best-in-class service. I don't really think that that that's going to change. POOLCORP has historically gained share. We typically don't give that share back.

Now we can't tell you that in individual market there may be a customer here or there. Certainly, that has been part of normal operations forever. But in aggregate, we believe that the share gains will continue..

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

Thanks..

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

Good morning, everyone. First question is on the new 2023 top line algebra. I believe you said new construction down 30%, maintenance down 1%, renovation down 10% to 15%. And I didn't catch what you said on green.

Could you just make sure I have those numbers right?.

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..

Okay.

And the other numbers were right?.

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..

Okay. 4% for the year? And on that 30% decline in new pools, is that revenues or volumes? It seems like you're implying that with the bottom end dropping out that ASPs could actually be higher..

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..

Okay. And then, second on SG&A, it seems like what you're saying is in a declining top line environment, you hope to offset the investments that you're making with your capacity creation and efficiency efforts.

Is that to say that you're budgeting SG&A dollars to be flat for the year?.

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..

Makes sense. Thank you..

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

Yeah. Thanks for the question, guys. So I think I caught -- I heard you say $60 million to $70 million impact from the weather in the quarter. And if we take that out of the base business decline, you're still down sort of around 11%. And I think before you had said mid singles to high singles was your expectation for the decline in the quarter.

Is there a way to bridge the rest of that gap, or am I thinking about that incorrectly?.

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..

Okay. And so then incorporating this mid teens decline in the first quarter and your update to the full year, it looks like really only about a point of growth comes out of the remaining three quarters.

Is that also sort of the right way to think about the update in light of what you did in the first quarter?.

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..

Okay. Great. Appreciate that. Thank you..

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

Yeah. Hey, thank you. Good morning. Wanted to ask, I didn't catch it, if you gave a product inflation number for the quarter.

Have your expectations are they the same as before on that? I know you said equipment pricing, what about chemical pricing? What are you seeing there and how does kind of the chemical in that down 11% in the quarter breakout between price and volume? Thanks..

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..

Got it.

And with some pressure on trichlor, I know that the initial guidance did contemplate the packaging initiatives from Porpoise coming online, offsetting that, is that still the case in terms of that, or do you expect greater productivity from that side? Or -- and do you have any worry about where chemical deflation could go on trichlor potentially disrupting the product margin for the year? Thanks..

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..

Thanks. I'll pass it on..

Yeah..

Our next question will come from Scott Schneeberger with Oppenheimer. You may now go ahead..

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..

Yeah. I think it's a function of -- the install base continues to grow. We're happy with that when the Sun is out. I mean, the crazy thing is pools are in no less favor today than they were a year ago, but what we were faced in the first quarter, because of the weather conditions made the first quarter very tough.

But where the weather was good, I would say Florida. I would also tell you that the almost the entire Southeast was also in very good shape and in line with expectations. And if I look at Texas, again, we cited the business, Texas was down 6% or so, and that was after being up 7% last year. So again, the market, the market really hasn't changed.

What does change is people's ability to work on construction projects in particular. And what does change is the amount of maintenance that is necessary. Now, when there is a significant amount of rain, certainly when the rain stops, there's a -- at times there's a bit more chemical that is required.

But frankly, that happens more during the warm part of the year because it has to do with water temperature. So if you have water temperatures in Texas, for instance, they were -- a month ago, they were basically in the high fifties. Water temperature in the high fifties whether it rains a lot or not, doesn't require a lot of chemicals.

So we think that the markets are behaving as we would expect. I don't think we're reading into it and saying, hey, it's going to be -- there's significant growth coming. I think we're looking at saying that the maintenance business is going to be in line with the installed base and accented or influenced by weather.

And construction is going to be a function of demand in new pool construction and the buildable days to do it. And the offset really, which we again, we had contemplated, is the renovation business that has been good..

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..

Yeah. We were very pleased with our ability to be able to right size inventory in the first quarter. It did increase from year-end, but that is very typical from a seasonal standpoint, and we want to make sure that all of the sales centers are stocked up for the season.

If you go back and look at it historically, the dollar amount of what we increase from year-end to first quarter was significantly less than what we would've normally needed to do, because of the inventory that we had on hand.

So from a management standpoint, we have corporate resources that look at that and evaluate what we have on hand by sales center, as well as also local resources in each of the markets that are responsible for the management of the overall inventory levels. So we are definitely pleased with the progress that we've made.

When you look at the dollar increase this year, first quarter compared to last year first quarter, and you look at it by product line, we are really exactly where we want to be. The two areas where we have more inventory this year versus last year is on controls and variable speed pumps.

And that's because we were still short in first quarter on those two particular product lines. So we've made really good progress.

As we get through second quarter, we will continue to bring that down from both a number and a growth standpoint year-over-year with the kind of full expectation that by the end of third quarter, would be when we would be more in line with our historical levels from a days inventory on hand.

And that'll prepare us to really go forth in the fourth quarter and evaluate the early buy opportunities from the vendors and make the appropriate decisions that'll set us up for 2024..

Appreciate that color. Thanks..

Our next question will come from Trey Grooms with Stephens. You may now go ahead..

Hey, good morning..

Good morning..

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..

Yeah. Mostly it is going to be focused on the comps when you're looking at it. So we would expect that the trend on the daily sales would continue on a good pace. But we do start to see some of the new pool construction permits and the construction activities start to slow down really at the beginning -- the beginning of fourth quarter.

Kind of started a little bit in the end of third quarter. So the comps there, certainly will get easier on the new construction side. We did see that the remodel activity did remain very strong in fourth quarter of last year, kind of offsetting some of that on the new full construction side.

So I think it's going to be -- it's going to be comps, it's also going to be a weather in the seasonal markets. The biggest thing that will impact us in fourth quarter, similar to first quarter is going to be how favorable the weather is and if the season kind of extends out and our customers are able to continue to work..

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?.

Yeah. I would say that our share gains really are happening across the country. And as I mentioned that's really product of a tremendous amount of work and frankly investment that the business is making and very talented people that provide an unparalleled service.

So I'm very comfortable that our ability to gain share, because if I look at it really across the country, we can see it in virtually every market that we play in.

Now, as I mentioned there will be a branch here or there where that may not be true, but on balance certainly for the network, we're very confident in our ability to continue to take share..

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

Nothing significant at this point. We want to be cautious as we see what the weather looks like in second quarter..

Okay. Thanks for taking the questions. Very helpful..

Welcome..

Thank you..

Our next question will come from Garik Shmois with Loop Capital. You may now go ahead..

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?.

Yeah. So the rent increases that we saw are not going away. So that is something as we go out through the rest of the year -- I mean, we did see some incremental rent increases from the new locations that we opened in the quarter, but the inflationary increases in rent are -- will continue through the rest of the year for the most parts.

So we have renewal account throughout the year, but really no changes in expectations. So the increase there year-over-year does -- from a percentage of expense to revenue does impact the first and fourth quarter more significantly. So that will not go away.

What we did see in first quarter is we did focus very much on some activities that we did with our customers.

So there were a couple million dollars of expenses related to some customer facing activities, as well as a couple million dollars of incremental investments in some of the other projects that we're working on to be able to expand capacity in some of our operating initiatives as well..

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?.

Yeah. It really is a function of weather. As we've said many times one of the best parts about our industry is that the maintenance is really non-discretionary. You have to move the water filter, the water and treat the water. And again, the -- it has to do with the amount of precipitation and the water temperature and how much the pools are used.

Obviously, if the weather is cooler and it's raining, people aren't using it, then that's going to curtail some of the maintenance spend.

So we're very comfortable that the maintenance spending is really a function of the size of the installed base and the implications of the weather and how much the pools are used and the chemical load that would be associated with that..

Got it. Thanks again..

Thanks..

You're welcome..

Our next question will come from Steve Volkmann with Jefferies. You may now go ahead..

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..

Yeah. As you can imagine, we spend a great deal of time talking to our customers and you're a hundred percent right, it's not scientific. So a year ago, I was comfortably telling you that many of the builders are booked out through the end of the year.

I would tell you now, depending on the type of builder, and the part of the country I've heard backlogs of two months to six months tends to be much more common. Two months related to the lower end pools, right? There's certainly more capacity there.

And depending on what part of the country you're in, of course, and at the upper end your high quality builders that build the very large projects they were and are and remain in very high demand. So their backlogs really haven't changed much at all, right? So most of them are booked out for the season, for the high end guys, but certainly capacity.

But if you needed a number for -- how to contextualize it, I would tell you if you thought about two to six months, you wouldn't be wrong..

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..

Yeah. I think what we're seeing, what the builders are reporting is the most challenging pool for them to sell right now is the price point pool. The family that is going to have to stretch and going to have to be, where there's higher degree of financing. So the lending costs play a bigger role in whether that project is affordable or not.

So I would tell you that similar to what we started to see last year, the lower end pools will be under the most pressure and the mid to higher end, we don't really see much demand. So I think it was fine.

And ask the question, does that imply that the ASP will likely creep up for the average pool? And I think that's a fairly safe assumption based on the mix that we see..

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?.

I would tell you that I think it's probably at the lower end. It's probably a little more than 50/50. I would tell you that the lower ends probably end very unscientific number, Steve. So I guess, I would tell you it's probably in the 60% to 65% would be at the lower end..

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--?.

Yeah. No, that's right on. That's the way I would think about it as well..

Okay. Thank you guys..

Thank you..

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

Hi, guys. Just one question from me. So you mentioned that there was a 2% headwind from lower early buy activity.

Do you have any feedback from the dealers on what drove that slowdown? Is that weather related? Is it weaker expectations coming into the year, or anything to do with inventory levels at the dealers?.

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..

Okay. Thank you..

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..

End of Q&A:.

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..

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