Pool Corporation

Good morning and welcome to the Poole Corporation second quarter 2023 conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone. 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. Mr. Arvan, our president and CEO, will begin today's call.

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 believed 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 and the 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, Pool Corp reported 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, he has 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 in our people. Pool 360 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 Pool 360 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 drives 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 will exit this cycle stronger than ever. When I step back and look at the revised earnings outlook that they 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 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 install 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 impacts of varying weather patterns are apparent. For the second quarter, we saw California sales decline 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 tricolor 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. Hinchapenny 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%, an 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 product category, a 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. Tool 360, our B2B tool saw sales increase 3% over prior years, which continued 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 saw 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 continue 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, an almost 90% increase over 2019. With our reported operating margins of 17.6%, you can see that we've held on to 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 greenfields. 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 a 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, and 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 priced 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 the 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 $1,000 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 against on a year-over-year basis, the long-term outlook of the industry as a whole remains strong. The installed 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 tricolor 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 teen ZPS 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.