Pool Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2023

There are 12 speakers on the call.

Operator

Good morning, and welcome to the Pool Corporation Second Quarter 2023 Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Melanie Hart, Vice President and CFO. Please go ahead.

Speaker 1

And welcome to our Q2 2023 earnings conference call. Our discussion, comments and responses to questions today may include forward looking statements, including management's Information regarding the factors and variables that could cause actual results to differ from projected results are discussed in our 10 ks. In addition, we may make references to non GAAP financial measures in our comments. A description and reconciliation of our non GAAP financial measures It is included in our press release and posted to our corporate website in the Investor Relations section. Mr.

Speaker 1

Arvan, our President and CEO, will begin today's call.

Speaker 2

Thank you, Melanie, and good morning. 3 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 2nd 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 The start of the pool season came later than what we have seen for the last couple of years.

Speaker 2

This effectively shortened our season as homeowners delayed openings and the Additionally, we have seen some indication that more discretionary purchases like heaters and high end cleaners have been deferred, but we are seeing resiliency in the remodel market. Dealers are reporting that demand for renovation is outpacing demand for new construction in many markets. Despite the challenging market conditions, POOLCORP recorded a Our growth and focus on the customer experience, which is helping us retain and grow our market share. We have opened 8 new sales centers since 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 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 POOL360 water test application at our independent retailers, which is a best in class online water testing solution that helps dealers over $377,000,000 of cash from operations, paid down debt, reduced inventory while providing best in class service.

Speaker 2

As in past recessionary periods, we get stronger and we'll exit this cycle stronger than ever. When I step back and look at the revised earnings outlook that 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 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 3 years.

Speaker 2

Over 30% product inflation has passed through the channel. Market growth from new products, strategic acquisitions, continued market share gains allowing us to prudently and responsibly invest during all business cycles. Even with these negative impacts, Q2 2023 sales of $1,900,000,000 exceeded 20 21 second quarter sales by $70,000,000 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 2nd quarter to minus 10% compared to the 1st quarter where sales declined 15%. When we look at our year round base business markets, the impacts of varying weather patterns are apparent.

Speaker 2

For the Q2, we saw California sales decline 8%, which is a sequential improvement when compared to the weather driven down 24% that we saw in the Q1. For reference, California sales increased 9% in the second 7%, which again is a significant improvement over the 14% decline that we saw in the Q1. For historical context, sales in the Q2 of 2022 and in May resulting in a 13% decrease over last year and trending down from the 6% 1st quarter decrease. For perspective, sales in Texas increased 17% in the Q2 of 202230% in the Q2 of You will remember that Florida sales was up 7% in the Q1 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% 35% growth for the Q2 of 2022 2021 respectively, so it remains significantly higher than pre pandemic levels.

Speaker 2

Turning to our seasonal markets. Our sales declined 11% in the 2nd quarter in contrast to the 23% decrease we experienced in the 1st 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% 32% in the Q2 of 2022 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.

Speaker 2

Chemical sales in the quarter were down 3% driven by the weather patterns I discussed earlier and trichlor pricing came down more than we saw in the Q1 resulting in a 1% drag 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 Q1 over last year. Inchipenny franchisees collectively reported relatively flat sales for the quarter compared to last year. The franchisees have seen overall impact from less sales of were down 6% compared to the prior year, but also saw a seasonal increase in trend improvement from the 25% decrease they recorded in the Q1. In the Horizon business, base business sales were flat for the quarter, an improvement over the 7% decrease we reported in the Q1.

Speaker 2

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 We have seen higher levels of inflation over the last couple of years. Tool 360, our B2B tool saw sales increase 3% over prior years, 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 Q1. We saw good leverage on our expenses and continue to add new sales centers, opening 3 during the quarter to expand our market presence.

Speaker 2

We also continue to invest Operating income for the Q2 of 2023 was $327,000,000 down $92,000,000 compared to last year, an almost 90% increase over 2019. With our reported operating margins of 17.6 percent. You can see that we've held on to the majority of the benefits we realized as the business rapidly grew over the last 3 years due to our disciplined execution. During the Q2, we added 5 new locations, 2 acquired and 3 greenfields. This puts us at 8 new greenfield distribution locations to date, swift ramp that we have seen over the last several years.

Speaker 2

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 can see new pool construction down 30% with around 70,000 new pools being added to the installed base in 2023. We expect some increases in the average Our product offering continues to expand and we are adding additional capabilities to our sales centers. Similarly, on remodel and renovation 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, proprietary tile, pool finish and deck material selections. The owners of the 5,400,000 in ground pools 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.

Speaker 2

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 continues to buoy the top line. As I mentioned earlier, some Tricor pricing is under pressure as supply conditions have returned to historical normal levels following a period in the future. Lastly, with almost 7 months of the year behind us providing an even clearer picture, we have adjusted our full year guidance for 2023 to $13.14 to $14.14 delivering solid teens EPS in the face of unfavorable weather early on, Macroeconomic headwinds, higher interest rates and market normalization show the cumulative benefit from exceptional execution by a very dedicated and talented team. Melanie will now provide additional comments in her financial commentary.

Speaker 1

Thank you, Pete, and good morning, everyone. This morning, we reported $1,900,000,000 in net sales for the Q2 of 2023. This was the 2nd best top line in 3, after the exceptionally strong results we generated in 2022. Inflation in the quarter was approximately 3% to 4%, slightly hire for equipment products and a marginal overall pricing benefit from chemicals. We saw some pressure on TRIPOR prices in the quarter, offset by inflation in other chemical products.

Speaker 1

The pricing impact of Tricore was around a 1% drag on net sales for the quarter. As we had anticipated, gross margin of 30.6 percent saw a 180 basis point decline compared to Q2 2022. The benefit from lower cost inventory on hand have largely been sold through and contributed nominally to the 2nd quarter gross margin. Current gross margin primarily reflects replacement costs and the seasonal benefit we would typically expect to see in the 2nd quarter. Gross margin was somewhat negatively impacted by sales concession activity in our response to competitors reacting to the slower start to the season.

Speaker 1

Operating expenses declined by 3% year over year in the quarter. SG and A cost as a percentage of net sales was 13% for the quarter, Significantly better than the 18.6% we reported in Q1 as we realized improved expense leverage on our fixed costs in the higher sales quarter. Our field teams did an excellent job in managing through the seasonal expense growth between the Q1 and the Q2. Last year, we increased expenses by $36,000,000 from Q1 to Q2, and we were able to moderate that to only $17,000,000 in the current quarter compared to Q1. We remain focused on compensation and freight related variable expenses, while continuing our investments in new locations and tools and technology to support our long term growth.

Speaker 1

The 13 new locations opened since June 2022 added incremental expenses and were a moderate drag on operating income. We completed 3 acquisitions year to date, each providing unique strategic benefits, and once folded into the network, will contribute profitable growth going forward. Together, these added less than 1% to net sales for the quarter, so for us, it was not significant to break out separately in the press release. Our 2nd quarter operating margin was 17.6% versus 20.4% last year, but continues to be above the 15.4% 2019. Looking back to 2019, we ended the year with a 10.7% full year operating margin.

Speaker 1

That expanded almost 600 basis points to 16.6 percent for the full year 2022 as we realized benefits of around 150 basis points We believe the margins we will achieve in 2023, well above the pre pandemic levels, are setting a good baseline and will be sustainable as we hold on to the 30% to 35% industry growth from inflation, combined with our strategically beneficial acquisitions, increased scale, Product expansion and improved operating efficiencies. We reported diluted EPS, excluding ASU, of $5.89 compared to $7.59 in Q2 2022. While 22% below last year, This is comparable to 2021 second quarter EPS and is 94% higher than the $3.03 excluding ASU We reported in Q2 2019. Any changes have affected our historically stable and growing industry since then, which brings positive opportunities for our future growth and profitability. Receivables continue to be well managed.

Speaker 1

Days sales outstanding was 26.2 days compared to prior year of 27.2. We have made excellent progress on rightsizing our inventory by vendor and by location, now that supply chains have normalized. Stock out, one of the metrics we monitor to ensure a great customer experience analyze for lost sales opportunities continue to trend well. We have reduced inventory year over year by $186,000,000 against the $260,000,000 inventory reduction we estimated at year end. We are continuing to aim toward the end of the season or End of Q3 to achieve these inventory levels.

Speaker 1

As we accomplish this, we will be uniquely positioned to work with our channel partners on early buys to best position us for the 2024 season. With acquisitions, new locations and expanded product line offerings at many of our sales centers, Our capabilities in managing working capital is another indicator of our focus on capacity creation and the value we continue to provide to our customers generating strong returns for our shareholders. We reduced debt outstanding by $411,000,000 from June of 2022. And although we had lower average debt outstanding during the quarter, an increase in our average interest rate resulted in a rise of $8,000,000 in our quarterly interest expense. Cash flow from operating activities was $377,000,000 an increase of $348,000,000 compared to last year, as strong earnings and working capital reductions contributed to increased cash flow.

Speaker 1

We have completed $44,000,000 of share buybacks in the open market during the first half. Our Board increased our authorization under our share repurchase program to $600,000,000 during the quarter. Our full year cash flows are expected to be around $800,000,000 Benefiting from cash generated due to reductions in inventory. From a timing standpoint, our cash flow is strongest in the second half of the year after building pre season inventory in Q1 and paying for early buy inventory purchases in Q2. Moving to our outlook.

Speaker 1

For the full year, we expect sales compared to 2022 to be down in the range of negative 10%. You're down 12% through the first half with a 15% year over year decrease in Q1 and a 10% decline in Q2. Last year for base business, we realized a 10% increase in Q3, which was the same as Q2 and a 1% growth in 4th quarter. We'll have one less selling day in the Q3 and for the full year, which would typically add or subtract around 1% to 2% for the quarter. Gross margin is expected to return to seasonally normalized levels in the second half of the year as inventory gain benefits have now fully passed through.

Speaker 1

As we have stated previously, we expect full year 2023 gross margins to be around 30%. Operating expense growth moderated in the second quarter year to date growth over prior year of 1% and will continue to be well managed for the full year. With continued investments in the business, We will maintain certain core expenses and limit full year base business expense growth to 1%. This will have us well positioned for when top line growth returns. When we look at potential uses for the increased cash flows we expect to generate this year, we anticipate spending around $25,000,000 to $50,000,000 on acquisitions, $50,000,000 to $60,000,000 on capital expenditures, dollars 170,000,000 on cash dividends and the remaining approximately $550,000,000 on a combination of debt reductions and share buybacks.

Speaker 1

We continue to maintain our leverage ratio at the low end of our target rate of 1.5 times to 2 times, with a mix of floating and fixed rate debt, reflecting a strong and flexible financial position to take advantage of future growth opportunities. Interest expense for the full year is expected to be between $55,000,000 $62,000,000 including slightly higher interest rates in the second half. Our annual tax rate should be in line with last year's tax rate of 25.2%, excluding ASU. We expect the 3rd quarter rate to be slightly Our Board increased the quarterly dividend payout by 10% this quarter, increasing the quarterly dividend to 1 $0.10 We expect to pay full year 2023 dividends of around $170,000,000 more than double the $84,000,000 paid to shareholders in 2019. As Pete commented earlier, we have updated the range for our EPS guidance for the full year 2023 to $13.14 to $14.14 which includes the $0.14 ASU tax benefit realized to date.

Speaker 1

This assumes a share count of 39,400,000 shares consistent with June 30. We base our guidance on the assumption of normal historical weather conditions as the midpoint. We issued our 2nd annual corporate responsibility report during the quarter. We are proud to have expanded our disclosures in the areas that we are focused on as part of our capacity creation efforts. These initiatives and activities are paying off through more efficient water usage and the benchmarking of our electricity usage in our continued efforts to lower our overall emissions.

Speaker 1

Our results for the Q2, while somewhat less favorable than we had hoped, show the resilience of our industry and the Our financial position is strong and we are well situated to support the return of industry growth. I will now turn the call over to begin our Q and A session.

Operator

We will now begin the question and answer session. Our first question comes from Ryan Merkel of William Blair. Go ahead.

Speaker 3

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

Speaker 2

Sure. Ryan, and we spent considerable time on it. I guess the difference between now and when we guidance out At the end of the last quarter is that we have passed the most seasonally significant part of the year and we're 3 weeks through the month of almost 3 weeks through the month of which gives us a much better visibility into how the year is going to trend. So Nothing new to report on new pool construction. We had said last time we thought new pool construction was going to be off 30%.

Speaker 2

We still can think it's going to be Our ability to gain share as evidenced by our analysis of Our new pool sales is consistent with what we thought before. So we are down slightly less than the industry We believe in terms of new pool construction, so nothing new to report. The weather provided significant headwinds In the Q2, the season started late. And as you know, we basically contemplate normal weather in our guidance. We didn't get the normal weather that we were counting on and the seasonal markets opened late and then frankly the The spend on chemicals or the pricing on chemicals that Triflowers down, everything else is up a little, it's about the Same.

Speaker 2

Chemical sales are going to be higher when the weather is hotter. So the hotter water and hotter weather came later We are now getting good weather in terms of heat and that is that's having an impact on the chemical spend. So the non discretionary portion of our business is doing well. What we've seen that is that Continuation really of the we'll call semi discretionary purchases by consumers. So the consumer that has A heater that may need to be repaired, well, this time of year nobody is thinking about heating their pools because most of them are too hot as it is.

Speaker 2

But those that would consider buying a new cleaner, given the current economic environment, we're what we're seeing is some people deferring some of those almost 7 months of visibility into the year. So we have a better view of what the consumer buying pattern is and the idea That we think it would significantly improve over what we have seen based on the macroeconomic conditions and the weather pattern, we've baked into our guidance. The only thing I didn't touch upon in my commentary just now is renovation and remodel market. And as I said, the renovation and remodel market is doing better than what we see in new construction. If you look at I mentioned our building materials being off 8, Two products to consider when we look at new pool construction and renovation and remodel would be tile and pool finish.

Speaker 2

Pool finish is down 2% for the year, and tile is down 9% for the year. We think that the backlog on renovation was higher in the beginning of the year and we expect that to moderate. So we think it It was more favorable than the full year our full year outlook in the beginning of the year, but we think that's going to moderate as dealers work through the backlog. We consider normal weather for the balance of the year, so we're not counting on an extended season. And I think We've captured most of our possibilities in terms of market demand, pricing considerations, supply So I just think we have more clarity now with a large portion of the year behind us and a good look at what

Speaker 3

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

Speaker 2

Yes, certainly. The great part about this business is that Most of the spend is non discretionary. So when the weather cooperates and it is hot, and people are using their pools, then the demand And for maintenance items such as chemical and parts and service is good. So when things heated up, We are encouraged by the uptick in sales. However, one thing I got to point out though is we have very stiff Comps in the Q3 too.

Speaker 2

The Q3 is by no means a layup given the growth that we saw in the Q3 of last year. The comps really don't moderate until the Q4. So business is good. The sales centers are busy. But when we look at the comps that we have From last year, which was weather was good, sales centers were busy and consumers were certainly a bit more confident and new pool construction was stronger, We have to take that into consideration.

Speaker 3

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

Speaker 4

Thank you.

Operator

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

Speaker 5

Thank you. Good morning.

Speaker 2

Good morning.

Speaker 5

My first question is, Pete, can you just expand a bit on consumer sentiment? And what you're hearing from some of your larger customers? It sounds like there is to some extent a mix shift that's happening with the higher end versus the lower end consumer. Is that Fair. And then what do you think it's going to take from a macro perspective to get some of these consumers back into the market on the discretionary or the semi discretionary side?

Speaker 2

So I think your sentiment on your observation on mix shift is accurate. We when I talk to our dealers, I mean, I talk A lot of dealers across the country from very, very large dealers to small dealers, what we're hearing is that at the higher end and we have some customers that frankly specialize Very large projects. They're actually doing quite well. I believe it or not, I've had a couple tell me that they're sold out for this year and into next year, but they're the very high end phenomenon that happens and that is has to do with how that pool is paid for. The very high end pools are typically purchased by more affluent families and the The entry level pools, which is what we think drove a lot of the new pool, the increase in new pool activity through the pandemic, There was a lot more entry level pools built.

Speaker 2

So I think the mix of pools was And the reason is, is because financing cost was actually quite low. And if you Talk to the dealers, what they would tell you is that many of those conversations, many of the closes happened at the kitchen table. Payment. And monthly payments when the interest rates and finance rates and HELOCs were very low and lending was free flowing, Monthly payments for those projects and the fact that a few years ago you had less inflation, so the overall That was a very achievable number for folks that wanted a pool and decided to invest and become pool owners. As interest rates have come up, as inflation has worked its way through the system, as labor rates have come up, That same payment in many cases dealers are telling me is now $1200 to $1400 which simply puts it out of the range for many of Families that would be stretching at frankly a $700 to $7.50 level.

Speaker 2

So if you ask me what I think it's going to take To change that, I really think it would be it would have to be

Operator

1 of

Speaker 2

2 things or a combination. 1 is, If interest rates were to moderate, it's just math that brings down the price of the financing costs and brings down the monthly payment. That would make Pool is more affordable for those folks that are sitting on the sidelines waiting for that to happen. The other thing that happens over time is The memory of 2% interest and 3% interest fades in people's mind and they become more accustomed to well, okay, if I'm Then it becomes more acceptable and I think you'll see some more pools at the entry level start to come back in. I think your follow on question was or the second part of the question had to do with consumer sentiment.

Speaker 2

And I think I briefly mentioned that with Brian's question. What dealers are telling us is that certainly, break fix It is if the pump isn't working, if the filter is leaking, if the salt cell stopped working, if the in Cleaners and suction cleaners, which were once the industry standard, now we've seen people move towards The higher end product, the robotic cleaners and such and higher levels of Automation. I think in many of those cases, consumers are saying, well, I'd like a new robot, but given the macroeconomic expense increase, they're saying I'm probably going to wait and I'll get the new cleaner next year as opposed to this year and we'll live with the pressure cleaner or suction cleaner, 1 more year. I just think it's a matter of just kind of how the consumer is feeling about everyday spending. Yes.

Speaker 5

Okay. That's very helpful color. And then just following up, you mentioned that there was some increased competition earlier in the season as things were slow to get Started in some parts of the country. As things have picked up in the summer, are you seeing that that competition is eased? And how are you thinking about your ability to hold the market share gains that you've realized in the last couple of years against that?

Speaker 5

And I guess finally, with that, any thoughts On or updates to your inflation expectations for this year?

Speaker 2

Yes. Great question. So There's really nothing new about the competition. If I go back, I've been in the pool industry now. This is my 7th year, I believe.

Speaker 2

And I can tell you that from the very first my very first month when I went out and was meeting the team and trying to learn about the market and what would happen and I would hear these stories about That would go after a piece of business that we would have or we would hear about hypercompetitive pricing at a particular account For a particular product, that was basically the norm, all the way up to the pandemic. We kind of got a break during the pandemic when inventory was scarce and it was more of a question of do you have it versus how much is it. So we got a little bit of a reprieve during that period of pandemic spending when people just said I want, I want, I want and those that At it, certainly had an advantage. And you know what we did from an investment perspective to make sure that we had product And that allowed us to take share. It allowed us to gain new customers that in the past might not have had a reason to try Us as a supplier that were perhaps happy with who they were using before that now tried us and got exposure to the vast network And the tools and resources that we offer which pale in comparison to those of our competitors.

Speaker 2

So what I would say is, is that still hear stories every day about a competitor that is going after a piece of business or trying to liquidate some inventory or trying to raise some cash, Putting a ridiculous price into the market. I think it is isolated. I don't think it's anything new and it's nothing quite Frankly that we are worried about. When I consider what we've done over the last 3 years to widen the base of our business and improve the quality of our value proposition. I think it gives me great confidence in our ability to maintain the share that we gained and continue to gain.

Speaker 2

Since 2019 through acquisitions and greenfield openings, we have 59 locations. So there's 59 more locations today than there were in 2019. If you look at our what differentiates Our network compared to the others, we have about 100 NPT centers, which allow the smaller builders to use our showrooms to have their customers pick out the finishes for a new pool or a renovation and remodel. We have product trainers that teach new customers, new plaster crews, new tile crews how to apply and how to install our proprietary products. If you look at our private label capabilities, those that we had before the pandemic And then with the addition of pinch a penny and Suncoast Chemicals and the fact that we're vertically integrated from a chemical packaging perspective, Again, nobody that we compete with on the wholesale distribution side has capabilities like that.

Speaker 2

We think that gives us Flexibility, we think that gives us additional capabilities to serve customers. Our focus on speed at the counter and the customer experience. Our focus on we've invested in digital tools and POOL360 as you can see is gaining traction. The POOL360 water test software that we've just begun rolling out as a great tool for the independent retailers To improve their chemical business, which at the same time will improve our chemical business, of our private label chemicals Because that is the chemical solution that the software will recommend and takes that variability out of the dealers' hands in Specific marketing capabilities that help our dealers grow, that help drive demand creation, All things that none of our competitors do. So certainly, the market is I don't want to paint a picture that the market is not, contested.

Speaker 2

We have competitors. We have good competitors, that are trying to grow just as well as we are. But when I look at the tools and resources that we have, Including frankly the best team in the industry. When you look at the how seasoned our management team is And their years of experience in the multiple cycles that they have seen as compared to some of our competitors that are relatively new to the space, I would put our team up against any other team and they will win that race hands down.

Speaker 5

Okay. Thank you for all the color, Pete. It's very helpful and good luck with everything.

Operator

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

Speaker 6

Hi, good

Speaker 7

morning everyone. First question, Pete or Melanie, could you estimate the 2nd quarter year to year change by new pools, renovation and maintenance revenues that experienced I know it's not an exact size, but could you give us an idea there? And then also, I don't know if you mentioned price contribution across blue and Green, if you could give us that as well.

Speaker 1

Yes. So, we are seeing probably an impact in the second quarter On the new pool construction, it was about a negative 5%, and the renovation was around a negative 3%. And then price contribution, we are on the green side, it's a little bit less than blue. So we said 3 to 4 in total. So green would trend to the lower end of that because they did have some more of the commodity, particularly the piping, that was overall impacting their sales.

Speaker 1

But Their sales for the quarter actually did well, they came in relatively flat.

Speaker 7

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

Speaker 1

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

Speaker 7

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

Speaker 1

The revenue related to new pools, yes.

Speaker 7

Okay. All right. And then 2nd, speaking of new pools and new pool construction, can that segment reaccelerate in the absence of an improvement In turnover in the housing market and maybe more specifically a resumption of the Southern migration?

Speaker 2

Yes. I think Dave as I mentioned what you're going to see is basically stability at the mid and upper end. The families that have the financial means to do it without financing that are seeing stability in their home values that say I want a pool. I think that's going to happen. At this point, I don't see an acceleration in new pools yet, because I don't see What I think it would be the indicators that we would see that the lower end pools come back into favor and a lot of that is going to have to do with as you mentioned Movement in the housing market, so I'm moving, so I might have freed up some equity, so I have some cash that I can use to build a pool and or lower interest rates that would encourage me to move forward with the project if I had to finance most of it.

Speaker 8

Great. Thank you.

Operator

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

Speaker 8

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

Speaker 1

Yes. No. So if you're backing into that For the full year, I think that's pretty reasonable. When you look at just kind of top line, the comps that we'll have in Q3 where we were still up 10 For base business year over year are going to be more difficult than Q4 where we were just up 1. We did start to see some of slowdown in new construction starting out in the Q4, primarily kind of November, December of last year.

Speaker 1

So when you look at kind of the year over year comps, those should get relatively easier in the Q4. And then Q3, we'll also have that one less selling day as

Speaker 8

Yes. Okay. Got it. And then kind of sticking with the guide, As we kind of look at the revised EPS guidance range here and Pete, I understand why you would have confidence In the guide given where we are in the year, and I appreciate the color you gave around that prior question. But looking at that range, what would kind of drive us Swing or potential fluctuations of margins that could get us there?

Speaker 1

The biggest driver there is going to be where we end up on the top line, kind of within that range, Bracketing that down 10%. So that will give us get us to the high and low end of the range. There'll be some expense offset that'll Depending on the actual volume, but margins should be relatively similar in both case scenarios.

Speaker 2

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

Speaker 8

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

Operator

Thank you. The next question comes from Scott Schneeberger Oppenheimer, go ahead.

Speaker 4

Thank you very much. Good morning. Peter or Melanie, could you you covered weather very well on First question from Ryan, but I'm curious, you mentioned it was a $60,000,000 to $70,000,000 impact in the Q1. When we're at this point next year looking back on 2023, how much would you say is the will have In the weather impact from this year on a year over year basis, I guess, is there an update to 60 to 70 is what I'm asking?

Speaker 1

We have that estimated for Q2 around $30,000,000

Speaker 4

Incrementally, so $90,000,000 to $100,000,000 Melanie?

Speaker 1

Yes, that's correct.

Speaker 4

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

Speaker 4

Could you elaborate on that please?

Speaker 2

Yes. I looked at we looked at the permit activity and what we believe happening on new pool construction And how we triangulated on that, we look at those two products that I mentioned new pool finish or pool finish and tile, Knowing that those two products only go into 2 things, 1 is a renovation and new pool construction. So the new pool finish, As I mentioned in the Q2, was up 2%. And that number for earlier in the year Was I'm sorry, new pool finish was down 2% for the 2nd quarter, Kind of similar to what it was in the Q1, but it was skewed. So when I looked at how the end of the second Quarter plays out with pool finish and tile.

Speaker 2

It looks like it's moderating a little bit, meaning that Some of that has to do with renovation and remodel. Now keep in mind, when we look at renovation and remodel, what I'm not saying is that our expectations are any different. I just think that when you look at the guide we gave related to new pool construction I'm sorry related to renovation and remodel Being down 15% to 20%, I think that it's going to be skewed more heavily towards the beginning of the year being better. And then As they work through the backlog, we think it will be weaker towards the back half.

Speaker 4

Okay, great. Thanks very much.

Operator

The next question comes from Joe Ehlersmaier from Deutsche Bank, go ahead.

Speaker 9

Thank you very much. Just a couple of questions from my end. First On the just a follow-up from earlier, I think you said negative 5% was the 2Q impact from new construction. That's not that the category was down 5. It's that it was a 5 point impact to the consolidated number.

Speaker 9

Is that correct? Okay. And then just thinking about the cumulative change in the sales guide from earlier in the year, let's take Sort of the initial midpoint, down 1% to 2%, and then now we're at 10%. Can you maybe bucket that 8 to 9 point change in sort of and I know this is a lot, but 4 different buckets, kind of one things that are pushed to next year, that maybe is the deferrals that you talked about, things that are current year circumstances like weather that really have nothing to do with next year The things that are worse this year, but may improve next year, I'm thinking maybe the pool construction economics impacts there. And then things that are Worse than expected that likely won't recover.

Speaker 9

So are in structural impairments to your business like share loss or pricing, which I think both of which you said you're not experiencing. And If you're not going to bucket it, maybe just the way to think about the question is, if you're still investing behind growth, The question that I'm getting from investors is thinking about earnings next year, Is there really any impairment to next year's earnings power between the beginning of the year and now? And so maybe just if you could Take the opportunity to explicitly say that from February to July, actually very little has changed in your mind about what your earnings power is next year.

Speaker 1

So from a top line, if you kind of walk through, so our initial guidance was flat to negative 3%. So we did have some expectation That we could see some negative impact. The biggest thing that changed since that point in time, the biggest single indicator is going to be the weather. So when you look at the cumulative weather impact, that is around $90,000,000 as we talked about. The other things that we called out That are it's not there's nothing else kind of significant in an individual standpoint, but the things that were kind of new for this quarter What is the impact on the TRICORE pricing?

Speaker 1

And so that was about 1% for the quarter. We do think that, that will continue for the rest of the year. So overall, not that significant. The other thing, the deferred sales activity, so we don't in our initial guide as part of that. And then we also when you look at the change in our early buy activity, which from our customer standpoint, which we equate to channel inventory, that did come in higher this year than we had originally anticipated as well as part of our initial guide.

Speaker 9

Understood. Thank you very much.

Operator

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

Speaker 10

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

Speaker 1

Yes. Incentive comp in the current guide is less than what we originally at the beginning of the year, we had kind of talked about $10,000,000 to 15,000,000 So it's a little bit too early to call the final number because when we look at the balance of the year, we are continuing to aggressively pursue various Sales actions and programs. And so there's still quite a bit left of the year to determine what that final number will be, But we will expect that to be a little bit higher than kind of our original $15,000,000 estimate. And so as we go into next year, We would expect that to revert back and come back into the expense base, but that the gross profit dollars that we'll generate The revenue will more than offset the incremental expense on the incentive comp side.

Speaker 10

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

Speaker 1

Yes. So the guide for the full year is that it will be up no more than 1%. Yes. The original we had talked about, that it could be kind of negative 2% to plus 2%, depending upon where the top line fell out. As we've gotten further through the year, we can more confidently say that it won't exceed a 1% increase.

Speaker 10

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

Speaker 10

Thanks.

Speaker 2

Yes. Andrew, market share is It's a bit elusive in an industry like ours. So we have to triangulate it on market share. But we also One of the beauties of this business is that we operate now 432 individual P and Ls and we track customers at the local level. So we have a pretty good view of what's going on from a at the individual customer level.

Speaker 2

And then we also get from the manufacturers as what's going on in the channel in total. And then we look at things like If the permit data and new pool construction is going to be down 30, we have the ability to kind of back into what is our new Number look like given we do an analysis, we look at certain items that are sold only on a new pool to try and triangulate in on that. Not an exact science, but given industry information that we can see And that we get from our supplier partners, I think we're very confident in our ability to continue to grow and take share.

Speaker 10

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

Speaker 2

Yes. I'm not sure this late in the season, right? So for instance, I don't have a nobody is going to winterize their pool in July or August, right, because it's still hot. And if you Even if you say, hey, look, the pump broke, I'm not going to fix it, I'm going to just winterize the pool. The pool is still going to turn green because the water temperature is high.

Speaker 2

And that's going to do damage to the pool finish. So homeowners are not likely to do that. So we don't really see a change in consumer behavior on essentials, right? Break fix, the things that you have to move the water, filter the water and treat the water, if you have any part of that equation that is bad, You really have no choice but to fix it. And winterizing a pool, pools are not drained.

Speaker 2

They essentially, they put a cover over them. They put a lot of chemicals in there. But if the water

Speaker 10

Thanks. I'll pass it on.

Speaker 4

Thanks.

Operator

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

Speaker 11

Yes. Good morning. I just had one question here. I wonder if you just sort of focus in on maintenance and repair business, maintenance repair spending and talk about the extent to which you're seeing price elasticity, where within the various product categories you might be seeing that? And in the aggregate, what percentage of maintenance repair is really showing kind of elevated levels of price elasticity versus More nondiscretionary inelastic pattern?

Speaker 2

I guess the way I would approach that is, when it comes to maintenance and repair, It really depends on the item. So for instance, when we talk about maintenance, big portion of the maintenance business is chemicals. And there we've seen a decline in trichlor pricing in some areas, frankly, because of Inventory that was purchased in anticipation frankly of higher usage that people are trying to get rid of before the end of the year because you don't Want to end you don't want to winter over a bunch of chemicals because every month they sit on a shelf and in a bucket they become less potent. So we've seen certainly Some heightened activity to get rid of some chemicals, but frankly right now the demand for chemicals is very strong. And we're seeing an offset in that in terms of the other chemicals which would be balancers, shock and specialty.

Speaker 2

And then again, when it comes to an equipment, my pump quit or the motor fails, I have a choice, I can behavior as it relates to well, I'm not going to fix I'm not going to replace it anymore, I'm going to fix it. Because we look at our median order value, You look at our median line value, and then we look at our parts sales, credit hold good sales and we haven't really seen anything materially change there. So when it comes to a break fix item, the only thing that in terms of price elasticity, if it's if one of those components fails, it has to be replaced. And chances are that when that happens, that's not something that is negotiated At the distributor that says, hey, I can buy this cheaper here or there. They're in.

Speaker 2

They pick up what we have because they're there for many other reasons other than we may be a nickel cheaper So I don't really see a lot of price elasticity on non discretionary items. Discretionary items, A little bit different story. So as I mentioned, robots for instance, which are a great product for pools have gone up in value. And that's where some people are looking at us saying, maybe I'll wait till next year on that.

Speaker 1

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

Operator

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

Speaker 6

Hi. Thanks for squeezing me in. I know it's a little early, but I was just wondering how you're thinking about product inflation into next year, if you're seeing any indications From your suppliers on how they're thinking about pricing if we're returning more to kind of a normal 1% to 2 Percent inflation environment or any color you might have a bit early into next year would be great.

Speaker 2

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

Speaker 2

I could be wrong, but I would expect it to be higher.

Speaker 6

Okay, thanks. And my follow-up question is just on a pinch and penny, just because we had a retail competitor speak of the need to draw down inventories and accelerate pricing pressure, as a result, it looks like your results in Page A Penny held in quite well in the quarter. Are you seeing any of Those similar dynamics with respect to incremental pricing and inventory destocking that has occurred?

Speaker 2

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

Speaker 6

Yes, makes sense. Thanks again.

Operator

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

Speaker 2

Yes. I just want to thank everybody for the remainder of the year and beyond and providing the highest level of value for of service for our customers and our suppliers, we'll be discussing our Q3 20

Operator

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

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Earnings Conference Call
Pool Q2 2023
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