Pool Corporation

Good day and welcome to the Poole Corporation first quarter 2024 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 to our first quarter 2024 earnings conference call. Our discussion, comments, and responses to questions today may include forward-looking statements, including management's outlook for 2024 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 included in our press release are posted to our corporate website in the investor relations section. In order to assist our investors and analysts in following along with our earnings call comments, We have posted a brief presentation on our investor website. It will summarize key points from our press release and call comments. We are now ready to begin the call with comments from Pete Arvan, our President and CEO.

Thank you, Melanie, and good morning to everyone on the call. We released our first quarter results this morning, reporting $1.1 billion in net sales, our fourth consecutive year of achieving the $1 billion mark in a seasonally slower quarter. This was down 7% from the previous year, but up 6% from 2021. Overall demand for pool-related maintenance products in the quarter was solid, with sales ending roughly flat, which is a good result considering the poor weather that we experienced in Florida for almost the entire quarter. As you can imagine, in the first quarter, Florida is our largest market. We were also pleased with early buy activity, much of which we attribute to share gain given the return to more normal supply chain conditions. On the new construction side of our business, a continuation of economic uncertainty combined with elevated interest rates have further weighed heavily on new pool starts. Our builders are reporting that consumers remain interested in pools, but as we have noted previously, lower end pools remain a challenge while demand for higher end pools is steady explaining the increased permit value on a per-pool basis. Overall, we saw permits down 15 to 20 percent for the quarter, which is more than we anticipated for the year. We believe that easier comps and signs of the bottom of the trough that we are seeing in some markets will allow the full-year construction level to be more in line with our previously stated full-year expectation of flat to down 10 percent. We have seen similar results in the first quarter on renovation and remodel, but our builders are telling us that interest from consumers may be starting to rebound in key markets. Normally, we would expect it to take 60 days from the time we see permits improve to any meaningful change in purchase trends from the customer base in the affected areas. Keep in mind that historically, the first quarter has represented just under one-fifth of our total annual sales in a typical year. With the all-important second quarter ahead of us, our teams remain keyed into the start of the swimming pool season with their ability to fulfill demand needs better than anyone in the industry in any environment. We all remain intensely focused on providing our best-in-class customer experience, expanding our integrated network, and enhancing our industry-leading technology solutions. Looking at our sales by major geographic market, sales declined 9% each in Florida, Arizona, and Texas, while California sales declined 4%, showing overall sequential improvements from the fourth quarter of 2023. As we mentioned on our year-end call, we saw a lot of rain in January and February in key markets. While March weather somewhat improved, it still carried above average rain in many areas. For the first quarter last year, we estimated approximately 60 to $70 million impact from unfavorable weather, particularly in the western US. We clearly see the weather recovery in California's first quarter results, which outperformed the other areas of the country. Conversely, in markets that experience unfavorable weather comparisons this year, such as Florida and the southeast region of the U.S., we observed sales headwinds due to the limited ability for pools and outdoor living activity to jump off to a robust start or continue usage in the year-round markets. Across the company, we participate in numerous trade shows and partner with our suppliers and customers to prepare for the season. From what we are hearing, there has been some consolidation amongst builders. Some newer builders are exiting due to the challenging construction environment. This is resulting in some of our larger builders gaining share, as you would expect. Typically, the newer builders were more heavily focused on entry-level pools, which, as we have said, have been the most pressured. Related to our product sales mix, chemical sales were essentially flat for the quarter, up 1% in volume, with a 2% deflationary impact on price, primarily from trichlor and commodities. This result reinforces our expectation that maintenance volumes will perform well, even with the weather patterns and the industry conditions that were not ideal in many markets. With a slow start, we did see instances of lower selling prices on trichlor, around 5% lower than at the end of the year. At the current cost positions, we see these occurrences as minor top line pressure for the remainder of the year. Building material sales were down 11% versus prior year following the declining trend in new cool construction and deflationary impacts across several categories as freight costs passed down from the manufacturers have decreased. Although the number of new pools is down, our superior value proposition and extensive NPT network allow us to continue to expand our share in this strategic product category. Equipment sales showed an improved trend, decreasing 3% for the quarter versus the 9% decline in the fourth quarter of 2023, and showed some early signs of recovery in discretionary product demand like heaters and lights. Looking across the major equipment categories, we see that despite a slow start to the pool construction season, our sales trends for equipment seem much healthier than what new construction alone would dictate. Looking at our end markets, our commercial business sales came in flat compared to last year's 12 percent growth in the first quarter and better than the overall business as we further integrate our recent investments in our widespread distribution network and enhance our service to commercial pool operators. Sales to our independent retail customers declined 4 percent in the first quarter, improving from an 8 percent decline in the fourth quarter of 2023, as we extend our reach and resources available to these customers. For our Pinch-a-Penny franchisee group, sales came in flat for the quarter. Collectively, these results provide additional indication that maintenance remains stable and that our focused efforts in this critical area of the market support our ability to continue to gain share. In Europe, challenging weather and continued geopolitical uncertainty constrained sales in the first quarter, which declined 17 percent in local currency and 16 percent in U.S. dollars. We completed important supply chain projects at the beginning of the year that will position us well in improving our overall product costs and fulfillment as we work to gain scale in Europe. For Horizon, net sales declined 6% in the quarter. Our irrigation business is more impacted by commodity pricing than the swimming pool business, and the growth in our commercial irrigation continues to support our distribution business during the first quarter. Those margins came in at 30.2% versus the 30.6% in the first quarter of 2023. Going into the quarter, we expected about a 60 basis point headwind compared to last year, primarily related to the sell-through of lower cost inventory in the first quarter of 2023. Melanie will walk you through the various components impacting margins as part of her financial commentary. Both our field and support teams did a good job managing expenses as the operating expenses increased just 2.5% in the first quarter. As we discussed on our fourth quarter call, we have several key areas where we continue to invest this year, including our technology initiatives, customer experience enhancements, and continued footprint expansion. At the same time, we continue to work on capacity creation. In mid-February, we launched our Pool360 service platform. At our investor day, I was excited for my team to provide a deep dive into this innovative tool and demonstrate the power that our customers will see from using the Pool360 ecosystem. Our technology and sales teams were on the ground doing exactly that during the quarter for both our customers and our field teams in preparation for the season. Orders processed through our traditional B2B Pool360 platform continue to expand at close to 11% of total sales in the first quarter of 2024, growing from 10% in the first quarter of last year. Related to our Pool 360 water test, we finished the first quarter with two and a half times the number of customers on board than at the end of 2023, and this is translated into a similar increase in water tests performed versus the fourth quarter of 2023. Our analysis of customer buying behavior confirms our assumptions of the power of pool 360 water test with our pool 360 water test customers private label chemical purchases up significantly versus the rest of the customer base. While in the very early stages, we are already beginning to see the positive impacts of our pool 360 service tool through volume growth in our private label chemical brands and revenue dollar growth in other products. Our customers are reporting very favorable feedback on the ecosystem and all it provides. Driving adoption of our Pool360 service application not only provides a meaningful differentiator and deeper relationships with our customers, but also adds capacity for our customers to grow their business, which we believe will drive additional growth for PoolCorp. The progress among these tools reflects the collaborative efforts of our sales field and technology teams to roll out the new software and educate our customers and teams on its enhanced abilities. We continue to expand our network, opening three new locations in the first quarter and acquiring one, bringing the total sales center network to 442 locations. Our pinch-a-penny franchise network added five new stores, including two as part of our focus expansion in the Texas market, ending the quarter with a total of 290 franchise locations. Continuing to expand our franchise footprint geographically and our retail edge programs are critical elements of our strategy to reach the attractive do-it-yourself maintenance market. We recorded $108.7 million in operating income in the first quarter of 2024, operating margins of 9.7% decline when compared to the 12.1% in the first quarter of 2023, but well exceed the pre-pandemic first quarter operating margins that ranged from 5.7% to 6.5%. Our increase in scale since that time shows the immense leverage attainable from top-line growth, focused cost management, and disciplined execution. With the first quarter behind us, we are reiterating our full-year EPS guidance range of $13.19 to $14.19, including an updated 19-cent estimate from the benefit of ASU. Looking forward, We see the primary challenges affecting our industry as being the macroeconomic picture. Without a doubt, the decline in new pool construction creates a complex operating environment, but we are confident that this is just a cycle that will change just as we have seen in the past. Remember, pools are still highly desirable. The installed base continues to grow, and the aftermarket upgrade opportunities are sizable. Demographic shifts will only help power these important trends for years to come. We are intensely focused on improving the customer experience, capacity creation, and building and launching our industry-leading digital ecosystem. We will continue to expand our network to position us to best serve the pros and support the retailers that cater to the DIY market. Gross margins remain the top priority for the team as well. We have identified comprehensive plans to achieve our goals and enhance our performance in this area. Our teams are committed and focused on supply chain efficiencies private label product growth and pricing optimization, along with our proven track record on execution. With our robust cash flow generation, capital capacity, and strong balance sheet, we will continue to be a disciplined capital allocator and a strategic growth investor. Through our team, we collectively work to provide the best service to our customers and exceptional returns to our stakeholders. I would like to wrap up by thanking the Pool Court team for their continued persistence. Through our collaboration with our supplier partners and our customers, we aim to provide, we aim towards executing a successful 2024 swimming pool season. I will now turn the call over to Melanie Hart, our Vice President and Chief Financial Officer for her detailed commentary.