Pool Corporation

Good day and welcome to the Poole Corporation third 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. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Melanie Hart, Vice President and Chief Financial Officer. Please go ahead.

Thank you, and welcome, everyone, to our third 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. We will begin today's call with comments from Peter Arban, our president and CEO. Pete?

Thank you, Melanie, and good morning to everyone on the call. Our third quarter results came in largely as expected. As the 2023 swimming pool season winds down, we consider our results to be solid on a standalone basis, particularly when considering the dynamic conditions we have been operating in. third quarter carried down with typical summer weather conditions overall allowing us to evaluate our performance and in the industry environment on a mostly weather neutral basis our third quarter 2023 sales of 1.5 billion is a nine percent decline compared to 2022 with one less selling day but exceeded 2021 third quarter sales by 63 million or four percent as expected sales declines continue to moderate in the third quarter, showing sequential improvement versus the 10% and 15% declines we saw in the second and first quarter of 2023. In view of the neutral weather conditions during the third quarter, our sales trends across our major markets were relatively consistent. Starting with year-round markets, sales declined 5% for the quarter in Florida compared to the third quarter last year, with Arizona finishing down 8%, California down 10%, and Texas down 11%. For context, last year in the same quarter, Florida sales were up 20%, Arizona was up 18%, California was up 16%, and Texas was up 10%, respectively, versus the third quarter of 2021. This simply highlights the difficult comps that we were up against this year. Year-round base business declined 8% while seasonal base business markets declined 10%, a slight sequential improvement from the 9% and 11% declines in the second quarter of 2023. Again, for comparison, last year in the same period, we saw growth in our year-round base business markets of 15% and 5% in our seasonal base business markets. Moving on to product category results, chemical sales increased 5% in the third quarter, mostly driven by increased volume as chemical pricing came in relatively flat for our collective offering. Our strong footprint, leading proprietary products and enhanced technology tools gives us an unmatched value proposition and contributed to our share growth. Building material sales for the quarter were down 13%. This category includes products necessary for both new pool construction and renovation and remodel projects. The building material trend continues to suggest that renovation and remodel demand is stable and outperforming new pool construction, and our NPT footprint and product offering enables us to outperform the industry in this category. Equipment sales declined 9 percent in the quarter. As you can see, this implies solid demand for maintenance and repair, despite the softer demand for new pool construction and renovation and remodel. Looking at end markets, commercial pool product demand remained strong in the third quarter, with sales up 10 percent. Sales to our independent retail customers were down 8 percent for the third quarter, an improvement from the 11 percent decline and 16 percent decline we saw in the second and first quarters of this year. Pinch of any franchisees collectively reported sales growth of 1% for the quarter. The franchisees generated solid sales for their maintenance products, but weaker sales of discretionary items in line with what we are seeing across our distribution business. Europe's third quarter sales showed a 2% decline in local currency, a notable improvement from the 7% and 22% decline in the second and first quarters of 2023. Europe has been challenging for the past 15 to 18 months, and we are encouraged by this more favorable trend. For Horizon, sales declined 7 percent during the quarter. Consistent with prior quarters, sales activities for commercial projects remained stronger than residential. Moving on to gross margins, where we ended the third quarter at 29.1 percent, consistent with our past thinking, we believe gross margins for the full year will be approximate will be approximately our long-term guidance of the 30% range. As is typical, Melanie will provide more details on what to expect in the fourth quarter gross margins in her comments. Even while continuing to invest in new locations, acquisitions, and technology during the quarter, we reduced operating expenses by 2% compared to last year. The team did a good job managing expenses that typically ramp up during the season in light of the softer demand environment. Thankfully, the team has been focused on capacity creation for many years, and that helps us offset inflationary headwinds and leverages our fixed expenses, leading to a 15.9% operating expense percentage. Pool 360, our B2B tool, saw sales increase 5% over the prior year, a higher growth rate than our overall sales activity. The line volume growth for the same period was 3% and demonstrates the tool's contribution to our capacity creation effort while also improving the customer experience and productivity and adding value to our business and our customers. We view this tool as best in class, providing multiple benefits for both our customers and the local operating teams. Operating income for the third quarter of 2023 was $194 million, down $69 million compared to last year. This, however, represents an 85% improvement over 2019. Our reported third quarter operating margin of 13.2% is 160 basis point expansion from 2019 and a 20 basis point expansion from 2020, showing the sustainability of our fixed cost leverage initiatives. During the third quarter, we added two new Greenfield locations. This puts us at 10 new Greenfield locations for the 2023 season, a further testament to our strong bent and refined expansion process. In addition to our organic openings, we added four new locations through acquisitions this year. Additionally, we expanded our pinch-a-penny franchise network by adding two new franchise customers in the quarter, bringing the new franchise store count to 11 for this year. We continue to prioritize organic growth investment as the future of the business, which not only expands our customer reach, but also creates capacity for additional products and service offerings at our existing locations. Melanie will be commenting on most of the balance sheet items, but I would like to highlight one significant accomplishment that is the work that the team did on right-sizing our inventory. Because of the tremendous effort of our team in conjunction with our vendor partners, the team surpassed our inventory reduction goal and delivered a reduction of over $216 million a year to date. This was done while expanding our footprint, integrating acquisitions, and maintaining best-in-class inventory availability. This achievement helped us generate $750 million in operating cash flow through September 30th, a company record, and nearly two and a half times that of this time last year. As we move into the final quarter of the year, we have proven that even in the most difficult operating conditions, our experienced team delivers an unmatched value proposition, which enables us to outperform the industry and expand our share. We have built the largest fully integrated network of sales centers in the industry, and we are adding new locations faster than anyone with a proven process that delivers a solid ROI. We have a vertically integrated chemical packaging operation, the broadest selection of proprietary building material products from pool tile to finish, over 135 NPT showrooms and design centers, four centralized shipping locations for import and consolidation, industry-leading technology solutions for our customers and our own use, and best-in-class retail franchise development and support operations. Perhaps most importantly, we have over 6,000 employees that operate in a performance-based culture that know how to compete and win. While new pool construction is likely to finish down with units down 30% in 2023, we still expect about 70,000 additional pools will be expanding the ever-growing installed base of pools where we derive over 80% of our revenue. No doubt the current macroeconomic environment is tough, but the desirability of swimming pools and outdoor living has never been stronger, and we do not see that changing. We firmly believe that even with fewer pools being built, our share and the value of our products on a per-pool basis has grown. We know that renovation activity will continue as homeowners upgrade both services and pool technology to enhance their backyard oasis. We believe that our relentless focus on delivering a second to none customer experience positions us better than anyone in the industry to serve the pool professional and support the specialty retailers that cater to the DIY owner. In short, we believe in the long-term growth characteristics of the industry, the strength of our company, and we believe in our team. As I look back on the pool season, I'm very proud of our team. and that has remained focused on innovation, execution, and collaborative partnerships to deliver a customer experience that, as I said, is second to none. Lastly, with over three-quarters of the year behind us, we have narrowed our annual earnings guidance and now expect diluted earnings per share in the range of $13.15 to $13.65, including the impact of year-to-date tax benefits of 15 cents. Melanie will now provide additional details in her financial commentary. Melanie?