Q2 2022 Pool Corp Earnings Call

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Good day and welcome to the Pool Corporation second quarter 2022 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 a touchtone 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 Heart.

<unk>, President and Chief Financial Officer. Please go ahead. Thank you and welcome to our second quarter 2022 earnings Conference call. Our discussion comments and responses to questions. Today may include forward looking statements, including management's outlook for 2022 and future periods.

All 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 our Investor Relations section I'll now turn the call. It retired president and CEO Peter are there Pete.

Thank you Melanie and good morning to everyone on the call. This morning, we proudly reported another record quarter with net sales coming in at $2 1 billion, an increase of 15%, marking our first ever $2 billion quarter and beating last years very strong second quarter, where we saw sales increase by 40%.

These results prove exceptional given the challenges that we faced this past quarter and whether the supply chain and recognizing.

Quarter is where growth capacity industry wide is most limited.

There were many factors that came into play this quarter that when taken in totality demonstrate the strength of the company and the resilience of the industry.

First off I would say that demand for new pools is solid and not surprisingly the backlog are new pool construction is somewhat smaller than this time last year. Our builders are reporting lease had slowed a bit but that they have plenty of work on new construction and renovation projects on the ever expanding installed base of pools.

Second following two years of very favorable weather in the second quarter, we experienced a cooler and wetter start this year.

Seasonal markets that delayed many projects impacting the demand a timing of sales of many products from packaged pools and equipment to chemicals.

As we would've expected when the weather improved later in the quarter sales for these products increased to fulfill the strong demand.

Third supply chain constraints have improved in many areas, but persist in several products that contain computer chips like the variable speed pumps and automation.

<unk> inventories have improved tremendously, but the availability of granular count hypo used to shop swimming pools is very tight affecting sales for that product.

Fourth we have seen a continuation of the demand for connected and smart technology products like automation stop coronation variable speed pumps, robotic cleaners, and customization, which positively impact revenue on repair and replacement as well as new construction and remodel and we expect that will continue.

Without a doubt our inventory management program has helped us keep pace with the strong demand and fluctuating lead times as the installed base of pools grows and favorable market dynamics continue at the same time, we have seen a decline in the demand of some categories that were super charged by the pandemic such as above ground pools and heaters as mentioned on previous calls.

Fortunately the decline represents a very small percentage of our total sales.

Lastly, the inflation that has worked its way into the industry is passing through the channel, which is reflected in our revenue and gross profit performance. We believe that most of the inflation that we're seeing is driven by structural cost increases by our suppliers, making these new price levels permanent in nature.

Summarize we would characterize the current situation and near term outlook is positive with mix and price more than offsetting some declines in unit volumes that are driven by supply chain constraint items and weather related delays for both construction and pool maintenance products.

As I mentioned the reported backlog, maybe returning back to more normal levels, but the installed base, which is where we derive over 80% of our revenue continues to grow ensuring that demand for our products, including maintenance and repair and remodel items remained strong.

Acquisitions, most notably corpus cooling patio as projected are performing extremely well, 85% to our revenue during the quarter. Excluding revenue from new franchise locations are acquired pinch operations grew by 14% in the quarter interest a very proven and unique value pinch has a very proven and unique value prop.

Opposition, which allows the individual owners to operate best in class stores, while the business continues to attract new franchisees.

Looking at the base business in our four largest markets, California saw sales increased 9% in the quarter. This is on top of the 33% growth that we saw last year in the same quarter, Texas saw revenues grow by 17%, while Arizona saw sales grow by 20%, our Florida business continues to benefit from a very.

Robust economy and grew by 23% overall, our year round markets grew by 16% and our seasonal markets by 5% as they were impacted by the weather pattern that I mentioned above.

Continuing with the base business product sales results. We were very pleased with what we saw during the quarter equipment, which grew by 35% in the second quarter of 2021 grew by an additional 7% in the second quarter of 2022 as mentioned supply chain disruptions and shortages of key components continue to impact this area and it is worth noting.

That last year in the same quarter, we were still working through the Texas freeze impact. Additionally, keep in mind the seasonal markets experienced unfavorable weather this year, which is very different than the favorable weather in early start that positively impacted their results in the previous two years.

Yeah.

Chemical sales increased by 25% in the quarter, a better inventory position on Treichler helps but we were hampered by the shortage in Cal Hypo. This year not surprisingly with this year's weather pattern volumes, particularly in the retail sizes were softer in the quarter when compared to last year as mentioned retail sales improved as the weather.

Turned more favorable as the quarter progressed.

Building materials sales increased by 22%, which is on top of the 33% growth in this category that we saw in the second quarter of 2021, our ability to grow. This category is strong we are adding and refreshing NPT centers and capabilities to bring the most complete product offering in this category closer to our customers.

And help them showcases product to the millions of pool owners and thousands of new or perspective pool owners across North America.

Our capabilities in this area are unmatched as we offer the most complete line of product expert advice and training and the best customer experience in the industry. Additionally, our digital catalog and augmented reality tool called the N. P. T backyard app helped bring the showroom to the homeowners own backyard virtually.

Retail sales, which.

Retail sales, excluding pension penny grew by 7% in the quarter clearly feeling the effects of the weather in our seasonal markets for comparative purposes. We grew retail sales 20% in the same period last year. It is noteworthy that the results on a year to date basis or up 13%.

Looking at the results on a regional basis, we see a clear bifurcation that is weather driven with a year round markets posting results similar to pinch it a penny which is highly concentrated in Florida and Texas.

Commercial pool product sales are up 23% and that is on top of the 45% growth that we saw in the same period of 2021 with leisure travel bouncing back and strong demand in this category. We are encouraged with this trend and no one is better positioned to serve this and pull for.

We have deep expertise and an expensive expansive inventory.

The critical time sensitive nature of this business.

Now, let me add some color on our European business results. After a tremendous 2021 Europe is facing a difficult 2022.

Driven by very unfavorable weather uncertainty on the continent, because of the war in Ukraine, and a slowing economy that is rapidly with surging energy and food costs, we saw sales declined 18% in the quarter.

On a constant currency basis, it was negative 8%.

For perspective. This compares with the same quarter in 2021, where we thought sales surged, 42%. Our European team is very seasoned and is managing the business appropriately and we remain very committed to our European strategy over the long haul.

To horizon. Once again, we are very pleased with our results base business sales grew by 14% and total sales, including acquisitions increased by 15% once again I'd like to point out that this compares with 2021, which in the same period, we saw sales increased by 31% definitely and his team continued to execute our strategic plan.

Very strong results, we remain very committed to the industry and highly confident in our team's ability to grow and take additional share.

At this juncture, let me add some commentary on gross margin.

Fences and operating income starting off with gross margins I am very pleased to show that overall gross margin percent increased 150 basis points to 32, 4%. This marks the first time that we've ever exceeded 32%. So yet another milestone for the pool 14 for our base business gross margin percent increased 100.

Basis points to 31, 9% many factors combined to drive the increase pricing management, our supply chain activities product and customer mix all helped drive the increase in gross margin percent. Additionally, we are in the early stages of vertically integrating certain chemical lines with corpus pool, and patio, which is helping.

The increase.

Conversely, we faced headwinds in some of our vendor incentive programs as growth tiers are impacted by the timing of our purchases. Furthermore, the rapid pace of vendor price increases has subsided again, none of this is a surprise and we have planned and executed accordingly as you can see our gross margin improvement is driven by a multitude of Loeb.

Or is that when combined more than offset the headwinds that we face.

Looking at operating expenses, we are very pleased to see that our capacity creation activities continued to drive results. Our operating expenses as a percentage of sales in our base business fell 40 basis points. While overall operating expenses increased 20 basis points, reflecting the acquisition of purpose in our results considering the tremendous inflation that we have.

Seen almost across the board from wages and salaries to fuel leases in transportation. We are very happy with how the team has remained focused on executing at the highest levels for.

360 sales grew by 9% in the quarter, making up 12% of total sales I would also like to point out that we have released our next generation of pool 360, which contains a long list of customer driven enhancements that we believe will result in higher adoption rates of this capacity creating tool.

Wrapping up the income statement, we posted operating income of $419 million and operating margin of 24% respectively. These results reflect a 24% increase in operating income and 150 basis point improvement in operating margin. We are extremely proud of these spectacular results all made.

Hospital by the combined efforts.

Our extraordinary team here at pool Corp are dedicated and loyal vendor partners and our tremendously creative and hard working customers all of whom work together to help more people enjoy outdoor living who could not be more thankful for this teamwork.

<unk> is a unique well managed company in a resilient industry technology to modernize the millions of pools that make up the installed base and build pools of the future continues to be developed and released by our supplier partners and adoption of such as in the early stages at best our own technology to make the entire supply.

Train from the manufacturers to the customers more productive and bring us closer together, giving everyone back valuable time continues to get better the future is bright and more connected than ever.

We are balanced in our approach and have always been very strategic with capital allocation and investments looking out at the changing landscape and positioning the company to have a value proposition that is second to none and create additional capacity for growth our latest investment in porpoise pool and patio is only just starting to realize its true potential now that we have in.

<unk> and our one team we will continue to expand the footprint extract the synergies and leverage the industry, leading technology to improve our value proposition to the thousands of independent specialty retail stores that we serve giving them a world class capabilities. This is a very powerful combination that we know accelerates our growth.

And the ability to gain share even in an uncertain business environment, because each business is made better by the combination.

We have always been an organic growth oriented company with the ability to select acquire and integrate accretive businesses, where we see value. Additionally, no. One is better or has a more proven track record with greenfields than pool Corp. We have successfully opened in 31 locations in the last four years and will open an additional 10 to 12.

This year we are.

Our performance based company that attracts retains and develops industry, leading talent, creating vibrant career paths for our employees.

We have a deep boil or we have deep and loyal customer relationships and strong vendor partnerships that when combined with our team produced great financial results that are durable.

Unlike most other building products distributors pool Corp enjoys a unique advantage of essentially maintaining a lifelong relationship with every pool that is built and remains of service, we provide the construction material and the maintenance supplies and the remodeling products required during the entire existence of each pool, whether it is a DIY maintained pool or one that has served.

Just by one of our professional customers.

Isn't the annuity industry and business model that grows upon itself as more pools are built more products are demanded forever.

With all of this in mind and half of the year behind US we are raising our full year guidance to $18.38.

To $19.13.

Per share I will now turn the call over to Melanie for her financial commentary and balance sheet update.

Thank you Pete and good morning, everyone as expected the second quarter of 2022 continued with robust 15% sales growth over 2021, Comping last year's phenomenal growth in our seasonally significant quarter, which is a tremendous accomplishment. This represents a 22% sales growth increase year to.

A date.

Inflation impact for the quarter was around 10% additional vendor price increases primarily in the equipment area occurred during the quarter, having just a partial impact on the current quarter due to the timing of the increase at our recent acquisitions added 5% to our sales growth in the quarter.

Overall volume growth was in line with our expectations lapping the remaining impact of the Texas freeze that benefited sales growth in 2021. However, we did see negative impact on sales activity from weather in Canada, the upper Midwest and the northeast, which we believe slowed sales growth by 1% to 2% during the quarter.

Sure.

Weather impact was evident in the April sales growth rate being the lowest month of the quarter, but as Pete mentioned the growth rate improved throughout the quarter with sales growth in the year round markets continuing to be strong Europe experienced a negative weather and macro impact, resulting in an 8% local currency decline from 2021 during the quarter.

Compared to a local currency, 31% in Q2 2021 as they represented only 5% of net sales in 'twenty one the estimated impact on the consolidated financials for the quarter is approximately 2% and.

And negative 1% impact from foreign currency also brought down was up.

In summary for the quarter Q1 included the biceps of approximately 1% of sales that would have normally taken place in Q2, we experienced a negative one to two per cent from north American weather to prevent drag in Europe from weather and macro events and a 1% foreign currency impact.

Gross margin hit an impressive 32, 4% for the quarter and 32, 1% year to date during the second quarter, we realized a 100 basis point improvement on base business activity with 150 basis point consolidated increase over <unk> 2021 second quarter typically has higher gross margin.

And then we report for the full year as a result of seasonality. This increase over prior year moderated in Q2 from the increase reported in Q1 as we faced significant improvements achieved in the same quarter last year.

We reported an accretive benefit from our acquisitions.

Also continued to see gross margin dollar benefit from product mix as items, such as variable speed pumps at least be like automation and custom features experienced higher sales growth than their more traditional non automated counterpart.

The increase activity there are C. S. L. Our centralized shipping locations. This provides a significant benefit to our network in order to manage inventory and a tight supply environment and ensure we can replenish our locations timely to avoid lost sales from stock out while enhancing our gross margin on certain products.

And our inventory positions on fast moving products and increased selling prices made necessary. Some vendor cost increases also provided an incremental benefit.

Operating expenses increased only 16% on a gross profit dollar increase of 21% as our continued ability to manage seasonal sales volume coupled with our capacity creation efforts resulted in increased operating leverage even while experiencing above historical levels inflationary increases and compensation expense.

Rent and freight costs. This includes an additional $21 million and operating expenses in the quarter from recent acquisition.

Operating margin increased 150 basis points in the quarter and operating income increased to $419 million.

For all of our operating model is that it provides us the ability to make incremental and prevents as we grow and also the flexibility to ensure that we sustain operating margin as a significant portion of our compensation expense is comprised of our performance based incentive program. So that our employees are rewarded along with our shareholders serious.

Operating income improvement.

Dziedzic planning process and proven operating capabilities and management discipline developed over our 40 year history, and 27 years as a public company provides us the agility to respond and changing macro economic time.

Interest expense for the quarter increased $6 6 million from prior year second quarter to $8 5 million due to higher debt levels compared to last year, our trailing four quarter leverage ratio was one one times our continued conservative possession, even with higher average debt from working capital investments acquisitions and increased.

Share repurchasing activity and remains well below our overall targeted range of one and a half to two times.

We recorded an ASU benefit of $1 6 million or four cents per diluted share compared to $7 7 million or <unk> 19 per diluted share that we realized in the same period in 2021.

The timing of when these benefits are realized are related to restricted stock vesting and option exercises and computed based on the stock price and in fact at the time of the transaction. This tax benefit has and will continue to fluctuate from quarter to quarter and year to year.

I'd now like to turn out that discussion over to our balance sheet and capital allocation.

<unk> increased 29%, reflecting higher sales growth in June than the full quarter additional amounts due from vendor programs as a result of higher sales year to date and 5% from acquisition.

Product inventories have decreased from our peak in March 2022, and we prepared well in order inventory early to be fully stocked for this season inventories that were in short supply at this time last year in particular track where tablets are now in a position to allow for a consistent supply to customers versus the rolling stock outs, we experienced.

Last year as a result, we have realized approximately 20% increase sales volume for these products.

The overall balance includes approximately $90 million and higher cost inventory from inflation, which we expect to realize an additional selling price and approximately $50 million from acquisitions.

We're pleased with the quality of the inventory on hand, and do not expect any negative margin impacts, resulting from managing inventory.

We actively monitor inventory levels related to chemical pipe and rebar areas, but we have seen higher inflation, we review inventory levels and turns lifestyle center at the individual SKU level and believe current on hand amount are appropriate in relation to expected future sales.

Net cash provided by operations was $28 7 million year to date down from 187 to 80.

$87 2 million generated in the same period last year.

Current year period includes an $80 million cash payment that was deferred from 2021 as a result of hurricane Ida and 136 million more cash outlays in the first half of the year on inventory.

2021, we continue to build inventory through the second half of the year in order to keep up with demand and added approximately 430 million in base business inventory in the second half of 2021.

We have seen improved lead times, we would expect a seasonally bring down inventory in third quarter 2022 in order to take advantage of early buy opportunities that we expect to arise as normal in fourth quarter 2022 for the year, we are expecting to generate significant free cash flows.

The board authorized a 25% increase to our quarterly dividend rate beginning in the second quarter of 2020 to our quarterly dividend rate of one dollar per share represents the 12th consecutive year. We have increased our dividend rate. We now expect to return approximately $150 million to shareholders in cash dividends for the year.

Also in May the board increased our share buyback authorization to $600 million from the 404 million available under our previous share repurchase authorization. We have taken full advantage of the increased authorization and completed 216 million and share repurchases during the quarter acquiring 547000 shares and bringing.

Our year to date total share repurchases to 268 million.

This is the highest ever commitment from the company on both the dollars invested in the annual period and the number of shares per day.

Our earnings guidance for the year increased to $18.38 to $19 13 that includes.

Includes 22 cents ASU tax benefit realized to date. This reflects a growth range of 20% to 25% excluding the impact of the tax benefit.

Inflation expectation for the year are largely unchanged and an estimated 10% to 11% inflation in the second half of the year will moderate from what we have reported year to date as we begin lapping the increases that were realized in the second half of 2021.

Our sales growth expectation for the year remain consistent with the net sales guidance range of 17% to 19%. We discussed on our February call additional vendor price increases and second quarter not factored into our previous guidance are offset by slight decreases in volume as a portion of the business related to consumables was impacted by negative weather.

In Q2.

Our guidance also factors in update for Europe , and foreign currency impacts.

Our estimate for the 5% contribution from acquisitions is unchanged.

Also had one less selling day in third quarter and with the additional selling day, we reported in first quarter. We will have the same net number of days of the year.

Forecasted gross profit margin for the full year, maybe slightly up from our previous guidance of comparable to 2021 as part of the revised inflation announced in Q2.

We realized 240 basis points, and 260 basis points improvement in margin in third quarter and fourth quarter 2021, and so expect these gross margin numbers in the back half of the year to moderate more in line with our longer term guidance.

The increases we have interest rate environment, along with our revised average debt outstanding resulted in an updated estimate of the interest expense line of $35 million to $40 million, we expect our year end leverage to be less than one and a half times.

No changes are expected in our income tax rate for the full year and we continue to expect the third quarter rate to be slightly lower than the annual rate.

With the effect of the shares we have repurchased to date, we are updating our year end estimate for share that same thing to approximately $40 3 million shares.

We continued adding to our future growth capacity with five greenfield still centered openings year to date and an acquisition completed early in second quarter and West Virginia, a state we haven't previously had a physical presence in with it.

This acquisition, we now have sales centers operating in 40 states.

Also added one new Pinchpenny franchise store during the quarter, bringing year to date, new franchise openings to three stores, we still expect to open around 10, new franchise locations. This year.

One area that has been in the headlines lately is a significant shortage of lifeguards across the country, preventing some community pools from opening this season.

We're passionate about expanding the enjoyment from Fleming and the outdoor living lifestyle as part of our ongoing partnership with the YMCA. We recently donated $1 million to eight ymca's choosing locations throughout the country with strong aquatic program here.

These donations will provide training for more than 900, lifeguards and swimming lessons for 8600 children, who otherwise would not have had the opportunity to learn basic water scale.

We are very pleased with our results for the first half of 2022 and expect continued growth in the second half as our industry began to see some relief from the supply chain challenges.

I will now turn the call back over to the operator to begin our Q&A session.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys you said anytime. Your question has been addressed and you would like to withdraw your question. Please press Star then two please.

Limit yourself to one question and one follow up.

And then re queue for additional questions at this time, we will pause momentarily to assemble our roster.

Okay.

The first question comes from.

Ryan Merkel with William Blair. Please go ahead with your question.

Hey, Thanks, and good morning, everyone. Good morning.

So I wanted to start with unpacking sales guidance a little bit.

So it sounds like I think 5% volume growth was your original guide it sounds like maybe that's a bit lower the main drivers there being weather in Europe .

Do I have that right and what is the new outlook for volumes for <unk>.

Yeah. So if you look at it we were originally at 4% to 5% kind of included in that 17% to 19% guidance.

So we believe we lost a little bit too whether in Q2 as well as we've updated for Europe .

You know as we go through the year you know when we updated the guidance for first quarter.

Kind of reiterated that the overall a range for the year would be similar to what we had originally indicated.

Igniting that we had higher greater than that in Q1, and so the two other factors that play into that is when we look at Q3, we will have one less selling day and then also when we get to Q4, the overall expectation for inflation for the year at 10% to 11% will be less in the fourth quarter.

Because we'll be lapping some of those costs are already embedded in the prior year numbers for fourth quarter.

Got it that's helpful. Okay, and then maybe you could comment on July and how organic volumes are tracking my sense is based on the guide that it would be kind of low single digits and if I'm right. There could you just rank order. The main drivers of why volumes it'd be a bit lower I think Europe might be at the top of the list.

It would be helpful to get that color.

Yeah. So you know we haven't seen a significant change other than you know Europe is having a heat wave. So are we seeing a little bit of favorable promising the weather over in Europe .

Yeah, but overall when we updated our guidance for the full year, we do expect Europe to be down and be a contributor to that from a volume standpoint, but as we look at at the rest of the business July activity is coming you know coming in pretty much in line with June .

And so it looks like you know a lot of the unfavorable weather that we saw in April is behind us.

A little too soon to call for the rest of the quarter, but we're hoping that hoping that things remain a warm and dry and and we have you know good weather for the third quarter.

It's encouraging right.

Okay, good well, thanks I'll pass it on.

Our next question comes from David Manthey with Baird. Please go ahead with your question.

Thank you good morning, everyone.

Melanie Thanks for giving us a rough update on the full year gross margin, but I believe last quarter, you said that third quarter and fourth quarter gross margin would be lower year over year is there any update you can provide us with a finer point on the third and fourth quarter.

Yeah, no. So we do still looking at the Comparables from last year, we had that significant growth stands at 240, and 260 basis point and said, we will expect those margins to kind of moderate off of those levels, but certainly be well above the the 2020 levels.

Mhm Okay.

And then in the case that if sales were lower in 2023 could you remind us you've given us some numbers in the past about incentive comp.

It would automatically kind of reverse out and could you also talk about the percentage of SG&A that would flex down with sales.

Sort of your variable costs and they are in the cost stack.

Yeah. So if we look at the breakout between the variable and fixed cost.

So primarily about 50 50 mm yeah, and we take a look at the when we look at compensation, we consider that to be component the variable piece.

And then as we look at the incentive comp that is included in.

In the current numbers with the the higher growth that we've seen where if you do if and when we returned to kind of that relative normal growth. We would expect the compensation expense will decrease by about $30 million.

Okay 30 million, but the 30 is in the 50%.

Yes.

Oh yeah.

Thank you very much.

Yeah.

Our next question comes from Susan Mcclary.

With Goldman Sachs. Please go ahead with your question.

Thank you good morning, everyone. Good morning.

My question is I'm, just thinking about underlying consumer demand as the macro shifts in housing potentially moderates a bit can you just talk a little bit about what youre hearing from your customers in terms of consumer interest in new pool construction and even some of the R&R projects in there and any thoughts on how that <unk>.

The trend is home prices potentially flattening out.

Sure.

What we're hearing from the from the builders right now is as I said in my prepared comments that backlogs are smaller which is to be you know to be expected given the flurry of activity during the pandemic I need a pool anyone need a pool right now right now right now, but I think what people sometimes don't understand is because backlogs are smaller.

It doesn't translate into less work being done so the builders that we talk to them on a obviously on a daily basis are still very busy there's still plenty of work out there for new pool construction and as I mentioned, the the renovation and remodel project backlog is also very strong.

I think one of the biggest contributing factors to that is from a renovation and remodel perspective, frankly and new construction is housing values. So housing values are strong. So although housing sales are maybe flattening out because of the rising interest rates everybody that has a home today that purchases and all that.

Several years is sitting on a tremendous amount of of equity as the home values have appreciated so that makes the likelihood of investing in the home whether it's the addition of a pool or renovating and remodeling a pool that's already there very good and that's essentially the feedback that we're getting.

<unk> from builders. So there's the installed base of pools, which as you know is in excess of $5 3 million most of which has a very little technology on it right. So there's nothing there yet.

Most especially newer homeowners are looking for a connected backyard experience to be similar to the you know the the way the inside of your home operates. Additionally, you know when you look at the age of the installed base of pools being.

Approximately 25 years across North America. It shows that there is a need when you look at the timing on when those pools were built it shows that there is a lot of pools that are in need of and will be in need of modernization and update so whether our builders are building new pools or whether they are remodeling and renovating.

They are busy and the guidance that we're getting from them is that that they will stay busy now having said that as I mentioned the lease has slowed so but that doesn't translate into hey, we're going to build less pools. In fact, I would tell you that the biggest limiting factor on new pool construction right now is weather during the.

During the second quarter, which is a prime building pool starts are in especially.

Especially in the upper Midwest and through the northeast that's prime time for to get projects started and in Canada as well.

New pool constructions are behind in those areas because the weather was not conducive to construction, especially early in the quarter. So most of our builders in those areas.

Are there they are behind in the number of units that they have constructed but they're not behind in the amount of work that they have now how many of those are completed in the 2022 season really is going to be a function as you know of the shoulders of the season right Theres more kept surplus capacity typically in the first and fourth quarter that will dictate.

How many pools are actually getting done so although it's too soon with only six months into the year to tell you. How many pools I think youre going to get built I think that will largely depend on the amount of the amount of buildable days that exists between now and year end.

Okay. That's incredibly helpful color Peter Thank you and my follow up question is you know you're clearly bought a lot of stock back this quarter I think that you bought more back this quarter than you ever have on a full year basis.

You know as you think about the inventories normalizing your commentary that you plan to work that down through the third quarter can you give us any update on how youre thinking of uses of cash I'm, you know anything around maybe a programmatic sort of repurchase approach or anything else, especially as the valuations are where they are for the stock.

Yeah, I mean, we have we mentioned that our our share repurchase program. This year has been very strong and it's strong because we have tremendous confidence in the company in any industry and we look at the price and say, it's a very attractive price and and we're a buyer we were granted an additional authorization by the board.

Which we've taken advantage of as Melanie mentioned and we still have additional authorization left which we will continue to use the rest of our capital allocation model is really unchanged. We have always been very disciplined in how we how we deploy capital.

Whether it is for expansions in Greenfields and operating the business, whether it's new trucks new facilities, we improved we increased our dividend program.

We're still active in the M&A market, although I don't know that there's any big deals out there that would consume a tremendous amount of cash.

And then there is the then there's the share buyback and as Melanie mentioned, we believe that as we bring down inventories between now and year end that our free cash flow is going to be tremendous this year and with that we will take advantage of the opportunities that were given.

Okay, great. Thank you very much for that and good luck. Thank you.

Our next question comes from Andrew Carter with Stifel. Please go ahead with your question.

Hey, Thanks, I, just wanted to unpack Europe , I realize a small portion of the business, but ex weather constant currency down 6% in the quarter.

Where do you project that goes throughout the year in terms of terms of the decline that's in your guidance and just could you remind us.

Is how different Europe is versus kind of the U S. Blue business is that a good proxy or just the buckets are two very different to where that kind of decline. If we did endure some pretty pretty heavy every macro pressure here in the U S. We couldn't see those kind of numbers. Thanks.

Okay. Thank you.

So Europe , we said on a constant currency basis, Europe is down 8% and that comps off of a very very very strong quarter second quarter and year that they had last year. So the European market is as strong nearest there is about 5 million pools across Europe . There are different pools than they are in North America, they tend to be smaller pools with.

Less features and less automation because the real estate.

It surrounds most homes in Europe tends to be smaller than what you find in North America, having said that there still is a there still is a nice opportunity, but as I mentioned Europe had some tremendous headwinds. This year first it started with the it started with the war and the uncertainty that that creates on the on the continent, it's kind of crazy to think about in 2000.

22 that we have another war in Europe , but there is there is a war in Europe that is on peoples mind number one number two you would compound that with.

Tremendous inflation on energy and frankly uncertainty on energy prices, which makes the inflation even worse than that that extends onto food and other basic items in Europe , which is on peoples mind and then lastly.

If that's not enough for the Europeans to contend with their weather this spring.

<unk>.

Through the second quarter was just dreadful.

What I'm very encouraged with though is that when the heat wave that heat them that is over there in North America that has now extended into Europe when that hit.

We saw an immediate.

A reversal of the sales trend in Europe and sales picked up nicely. So we are very encouraged we're very.

We were very.

What is it about the future prospects in Europe , but we're having to work through some some market dynamics that we had anticipated. However, our team in Europe is rock solid.

Our management team knows what to do they're operating the business appropriately and as I mentioned, we are no less optimistic about the future in Europe than we were before we think we have a tremendous opportunity to continue to grow and take share and bring new products to the market.

Second question I wanted to shift gears, a little bit I know that you mentioned that the inventory situation is is still tight and that's kind of reflected in what you're doing.

Thanks.

From a transitory inflation, it's actually a very small portion of our business I made the point in my in my comments that most of the inflation that we have seen from our suppliers on products is structural.

With labor being a huge component in and everything that our manufacturers make and with the increase in labor cost.

That translates likely into what we believe to be a permanent.

Price level I don't see a scenario where for the vast majority of our business, we're going to see any deflation, having said that there are a couple of items in our inventory, whether it's rebar or whether it's PVC pipe, where we there are more commodity in nature, So obviously less labor more raw material and and.

City pricing, driven where there could be some movement, but it represents such a small portion of our inventory that it's really not anything that we contemplate and and it's dull. It's a small portion of the inventory and dollars and just the percentage of the inventory in total is so small that even if it swings one way or the other I don't really.

See.

That happening as it relates to oversupply of inventory I think what what happened is last year. When you had hang ups into supply chain and you had lead times extending that led to our.

Distributors ordering because you were ordering your restart your stocking levels and distribution are typically a function of your lead time usage plus your safety stock will it lead time continues to get bigger than you are having to order more and more product because you think it's going to take you longer to get it. The good news is is that.

On many products that were in short supply last year. The lead times have come down considerably, which is allowing us to bring down inventory, but I did mention though is that there are still several products out there that are in very short supply both on the equipment side and on the chemical side. So last year I was essentially flushed with Cal Hypo and <unk>.

Short on Tricor this year I'm flushed with trichloride I'm short on Cal Hypo when it comes to.

Equipment. It was it's a similar dynamic so last year, we were short on heaters. This year I have I have plenty of heaters, but the backlog on chip.

Items that have a chip embedded in them, whether it's a small cell or whether it's a motor variable speed motor or drive or whether it's an automation center or an OLED light.

It's still we still see significant supply chain issues and inconsistency in deliveries.

Thanks ill pass it on thanks.

Our next question comes from Trey Grooms with Stephens. Please go ahead with your question.

Hi, Good morning, this is actually knowing what counts grow on for Trey.

Yes.

So my first question I was hoping you could talk about the sustainability.

Ability of EBIT.

Longer term you know we've seen significant improvement over the last couple of years, but.

You know longer term you know.

Topline growth may moderate to more normal levels.

Less inflation from some suppliers et cetera.

How do you get confidence in and sustaining this level of profitability.

Okay. It's two items so first of all as it relates to our capacity creation initiatives that we focus on them. We know that as we continue to roll that out to additional sales centers as we continue to expand what we're doing in those areas that we continue to.

Work and operate more effectively and so we can push more volume growth through the South center based on the model that we have in place.

The other component that is probably the one item that is kind of most significant individually is going to be the reference to the performance based compensation that you know the additional dollars that are included in the current expense line at.

At a kind of a normalized level within our 69% long term organic growth would be about $30 million less than where it is currently.

Right right.

Makes sense and then.

For my follow up.

What are you seeing on the commercial side in terms of demand I know, it's a smaller part of the overall business but.

There's been some recent forecast calling for big growth in hotel construction next year I'm, just curious what what percentage of your overall business would go into hotel pools.

It's a it's still a very small percentage and honestly, it's one of the one of the larger opportunities that we have because our market share in commercial pool is smaller than what we would see in the residential area. So.

We're very encouraged by the demand that we see the amount of projects that are that are being bid and are put out to bid right now and with the frankly with the boom in travel and as everybody has seen by watching the news there's a ton of people traveling in the resorts are all busy.

They are investing money in their aquatic and there are quite a few areas, which is very good for us so whether it's maintenance and repair whether it's new construction we.

We see a we see a significant opportunity to continue to grow in that area. We've invested heavily in inventory, we've invested in specialist and programs, which we think positions us best to capitalize on the on the rebound that we've seen after.

At the beginning of the pandemic certainly that part of the business slowed considerably, but we were very happy with the bounce back in the outlook.

Thanks, that's really encouraging I'll leave it there. Thank you.

Sure.

Our next question comes from David Macgregor with Longbow Research. Please go ahead with your question.

Yes, good morning, everyone.

Can you just talk about vendor programs and what changes you may be seeing if any with the.

Vendor offers on rebate programs volume thresholds dollar rebates for certain unit volumes, how is that evolving in this environment.

Yeah. The the programs really don't change in structure right. There, they're all predicated upon you know there is a baseline and then there isn't then theres growth, which is what I mentioned in my comments one of the one of the tailwind that we had last year as it related to our gross margin has turned into a headwind this year and that has to do with the timing of the purchases and when we buy so.

Obviously as lead times come down I'm going to buy less so if I'm going to buy less than then that's certainly going to affect the vendor programs. The construct of which really doesn't change so but again as I mentioned that wasn't a surprise to us we knew if we contemplated it it was in our in our calculus of what we're going to do to manage our gross margins.

And we would expect that next year, you know as the season winds down and we burn off some inventory and we get into our normal early buy season that the opportunities from a vendor program will will continue to.

To be attractive to us.

Okay.

Question for me, we've talked a little bit about price cost here in a couple of different questions, but maybe coming at a slightly different way and just ask you.

Maybe Pete how your view on second half price cost maybe different now from where it was 90 days ago, what's changed since your last earnings call.

Yeah, you know I would say.

You asked if you asked me on the on the last call what I thought the likelihood of future price increases was going to be I would have said it was more likely than not and from where I sit today I don't think we're going to see much more inflation at least until the until the early buy program. So I think the pricing environment.

<unk> is is more stable, which is a which is not necessarily a bad thing I think predictability and stability certainly for our customers is a good thing, but that would be the major change.

I don't think.

We don't think it's affected demand right.

So I mean, that's the good news it hasnt affected demand, but I don't really see much change between now and the early buy programs in the fall.

Got it great. Thanks, very much thank you.

Our next question comes from Steve.

Stephen Volkmann with Jefferies. Please go ahead with your question.

Hi, Thanks for squeezing me in I appreciate it just a couple of follow ups. If I could is it possible to quantify what you think mix and share have added to growth over the last couple of years.

And so as we go as we look at those two different components.

Really as you look at mix, we look at that in two different pieces.

So some of the mix is kind of on the traditional products, where we can see that we're selling them selling more of certain products. In particular are the individual quarters only call out we're building material I'd, rather it is higher than our growth quarter chemicals, where those are.

A thing.

But as you look at the other way that we look at it is the gross margin dollar impact.

And so that as it relates to a lot of the the variable speed pumps to led lighting and really that more automated those automated product that are coming out and more readily available and certainly lower than they were several years ago. We see the increase in sales activity in those particular products that is actually driving a.

A portion of the gross margin dollar increases.

Okay.

Yeah.

Okay, Thanks, and any any thoughts on how much share you have gained through this kind of COVID-19 situation.

Yeah, you know, we look at that by market and so the other component of that when we look at the share gains.

When we go back and reference the number of Greenfields that we've opened.

As part of every Greenfield opening the expectation there that we're continuing to capture market share.

And so that is one of the strategic purposes behind opening the new location.

So the expansion of the you know kind of our overall share gains or you know have been very favorable but we've done that through our increased investments and then also our focus on serving the new customers that have come to us looking for the product and so with that we focus on the options that we have.

In particular, our <unk> software is appropriate <unk> that some of our competitors don't have and making sure that those relationships are sticky as we go forward.

I think it's pretty balanced Steve.

<unk>.

How much of our growth is product mix.

I think it's pretty balanced and as Melanie says it varies it varies by market.

Okay, Alright fair enough.

And maybe a quick follow up for you Pete I know, it's not your view here, but obviously the market is taking a sort of a risk often view of 23 and 24. So if if there were a downturn and I would characterize that as meaning a down year or two for pool Corp, what would be your playbook.

How do you get more aggressive on M&A do you put more greenfields out there or do you kind of batten down the hatches and wait for the storm to pass how do you view sort.

Managing through a downturn and again with the caveat that I don't think that's your view, but I'm. Just curious you must have a playbook.

Yeah, I mean, as I mentioned I think I think pool Corp is a very unique company in a very unique industry.

And.

A downturn in one industry doesn't translate to the same results as another and as we as we mentioned and I'm not sure everybody is appreciated.

Is that most of our business is derived from the installed base of pools, which has to be maintained.

So whether the new pool construction turns out to be 115000, and 110090 5000 or 120000, he's going to have some impact on our business, but most of our business is non discretionary over 60% of our business is non discretionary and it's tied to.

The maintenance and repair of the existing installed base, which has to happen and even during the great recession that didn't move so even if there is some apocalypse scenario from a from an economic environment. We would expect that part of the business to continue to perform and if I look at the other two portions of our business. The second one being what we would call semi disk.

Accretionary that that portion of the business given home values, which I don't think are going to drop very much because I think home values are being driven as much by supply demand as anything else. There is a net housing shortage. Most people that have purchased the house and in the last five years or in at very attractive interest rates that would they.

We pay a significant amount of money if they were to sell their house and refinanced. So I don't really think we're going to see a lot of houses change hands, given the current interest rate environment, but that translates into stable home equity values. So the people that are in a home.

We think we're going to continue to invest in home. So we think that our renovation and renovation market is again going to be.

Very very stable if I look at the new construction business I would tell you that new construction could swing one way or the other based on a variety of factors. Some economics, whether is a is always going to be a big factor in how many pools get built and labor, which the labor environment given the current unemployment statistics that we all see every <unk>.

Months wouldn't lead to any of us to believe that there's going to be a bunch more capacity brought into the industry for new pool construction. So I would say that that portion of the business is is good.

And stable so opportunities that may may persist, we're going to continue to run our playbook. So we have a very disciplined.

Capital allocation strategy, we're going to continue to invest in the portions of our business necessary to add capacity, where we need it.

And we don't we don't invest ahead of the capacity need we Max we use our capacity creation to expand capacity as much as we possibly can and when we need more then we go out and invest in additional capacity. So that portion of our business will continue we will continue to invest in technology, which we think is going to improve the customer experience, we think it's going to get.

Tying back to everybody involved whether it's the dealers or whether it's us. So that's also an important part of our capital allocation strategy.

From an M&A perspective.

We are we are a very strategic buyer.

We also are very well capitalized buyers. So we're always on the lookout for businesses that I think our values are valuable.

And could be valuable to us and we certainly have the balance sheet strength to execute on anything out there that we see makes sense. We have a very proven track record of being very disciplined with our acquisitions, we don't have to buy anything simply because of our expansive footprint and the infrastructure and the knowhow that we have if we.

See something that is attractive we certainly have the balance sheet to do it from a valuation perspective, if we if we think it's a it makes sense. We do it if we think that the value that is being requested is beyond what the business is worth in our minds, we certainly have the option unlike others to simply.

A greenfield to capitalize on the opportunity. So we are mindful of the economic environment, we've been leaning into capacity creation before the pandemic during the pandemic and we'll continue to lean into capacity creation. After the pandemic because we think that makes us a better business, we're focused on the customer experience.

And making sure that we provide the best level of service so that even in a market that may be less robust in the future. We continue to we.

We continue to take share and we're rewarded for taking care of our customers. So.

Could there be opportunities on the M&A side, certainly are we in a position to jump on them, if we like them absolutely, but our overall plan doesn't really change.

Super I appreciate all the detail thanks, so much.

Again, if you have a question. Please press Star then one our next question comes from Garik <unk> with loop capital. Please go ahead with your question.

Oh, hi, thanks. Thanks for squeezing me in first question is I'm wondering if you could provide how much seasonal market sales progressed throughout the quarter I'm wondering to the degree they are back to more comparable levels. After weather improved after April .

Yeah. So so here's what happens you have to look at the nature of the business in the seasonal markets right. So the portion of the business that you you won't get back is the is the consumables right for when the pool is being use of the pool opens up a month later than it would have because it was cold and rainy or people are you.

<unk> at less than your maintenance and repair products are going to be less in those days when they're gone. They're gone you typically don't get those back unless on the end of the season that you end up with a with an extended summer or a late fall then you sometimes can get those days back which is why for us it's.

Very early to call the year and say well here's what the seasonal markets are going to look like because so much of it depends on the beginning and the and the good news is in the Middle you know the capacity is almost at Max anyway, and there's very little growth capacity. So most of our growth comes on the shoulders of the year on the construction side.

These days you can get back so if the weather stays good and there is certainly demand for renovation and remodel and new construction if.

If the weather stays good later in the fall early in the winter in some cases in our builders are going to keep are going to keep working because they have backlogs and customers that they need to satisfy.

Okay got it I appreciate that my follow up question is just on the upcoming early buy you referenced a few times I know, it's a little bit early but just.

Hoping for some of your thoughts on the level of inflation you could see into next year would it be in the more normal 1% to 2% range would it be above normal or could you see deflation.

<unk> worked through by your upcoming negotiations due to some of the Destocking that's occurring.

Yeah, I wish I could tell you more clearly what I think inflation is going to be next year, but unfortunately, I don't think anybody knows what's important is what I mentioned is that I think the inflation that we got meaning that the price I'm paying for products today.

<unk> is a it's not going to get any cheaper, meaning that what I'm paying this year is probably cheaper than I am and I'm ever going to pay going forward, because I think prices will continue to escalate how much. They escalate going forward remains to be seen remember this is an industry that typically would move prices, 1%, sometimes 2% on the inflation side.

And then we went through a couple of years, where inflation was obviously well above the well above the industry norm.

The same factors that affect us are affecting our manufacturers as it relates to their operating costs.

Whether it's people, whether it's real estate, whether it's raw material. So I would tell you I guess the thematic Lee that I think inflation next year is going to be above the norm.

I guess I'm not convinced that it's going to be as much as we saw this year.

But it's again very.

Very soon to tell but I think that inflation is going to be well above the norm next year as well.

Great No I appreciate that thanks.

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

Thank you everyone for joining the call today, we look forward to reporting our third quarter 2022 results on October 20th have a great day, and we will talk to you then thank you.

Yeah.

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

Yeah.