Q2 2023 Pool Corp Earnings Call
Dealers are reporting the demand for renovation is outpacing demand for new construction in many markets. Despite the challenging market conditions pool Corp reported a strong quarter, demonstrating the power of the brand and tremendous execution by the team.
We continue to invest in our growth and focus on the customer experience, which is helping us retain and grow our market share. We have opened eight new sales centers since the beginning of the year far more than the rest of the industry combined and shipped.
And he has added nine new stores since the beginning of the year, adding to our already impressive network of over 275 franchise stores, our ability to manage operating expenses in a declining demand environment is noticeable as our operating expenses declined 3% on a year over year basis in a quarter.
Even though we continue to invest in our new locations, new technology and our people.
Full 360 adoption is growing as dealers are recognizing the added benefit and time savings that they receive by using the latest release of the tool. Additionally, we are launching our pool 360 water test application at our independent retailers, which is a best in class online water testing solution that helps dealers provide water chemistry excellence and drive sales.
All of our private label chemical brands, our strong balance sheet has gotten even stronger as we have generated over $377 million of cash from operations paid down debt reduced inventory, while providing best in class service as in past recessionary periods, we get stronger and we will exit this cycle stronger than ever.
When I step back and look at the revised earnings outlook that they reported this morning and put it in context to historical results not just 2022 I'm proud of how the team is performing and all that we've accomplished our market share is improving the team is more focused than ever on providing best in class service.
Of course, we are disappointed to report a year over year decrease in sales, but when you put things in perspective in this environment, we have achieved 93% growth in sales and EPS growth of almost 200% from 2019 to 2020 to our North American market has been expanded by over 311000, new pools built in the last three.
Three years over 30% product inflation has passed through the channel.
Market growth from new products, and strategic acquisitions continued market share gains and consistent renovation and remodel activity of the aging installed base all gives us confidence in the future.
Our size scale and unmatched experience in the industry allows us to excel in each of these areas and outperformed the competition because we have the broadest footprint the best talent in the industry and the swiftest access to capital, allowing us to prudently and responsibly invest during all business cycles.
Even with the negative impacts our second quarter 2023 sales of $1 9 billion exceeded 2021 second quarter sales by $70 million or 4% as adverse weather carried over into April then varied in impact by geography for the rest of the quarter the negative trend on topline moderated in the second quarter.
Two minus 10% compared to the first quarter, where sales declined 15%.
When we look at our year round based business markets the impact of varying weather patterns are apparent for the second quarter. We saw California sales declined 8%, which is a sequential improvement when compared to the weather driven down 24% that we saw in the first quarter for reference, California sales increased 9% in the second quarter of 2022.
33% in the second quarter of 2021.
Moving to Arizona sales declined 7%, which again is a significant improvement over the 14% decline that we saw in the first quarter for historical context for sales in the second quarter of 2022, and 2021 were up 20% and 24% respectively in Arizona.
Texas experienced cooler temperatures throughout the second quarter and significant precipitation in may resulting in a 13% decrease over last year and trending down from the 6% first quarter decrease for perspective sales in Texas increased 17% in the second quarter of 2022 and 30% in the second quarter.
2021.
Florida sales decreased 7% over last year were for the quarter. We observed typical weather for this time of year other than a wetter June .
You will remember that Florida sales was up 7% in the first quarter, bringing the year to date number two essentially flat we have seen a slowdown in Florida, new construction, but we must keep in mind that Florida experienced a 23% and 35% growth for the second quarter of 2022 and 2021, respectively. So it remains significant.
Higher than pre pandemic levels.
Turning to our seasonal markets, our sales declined 11% in the second quarter in contrast to the 23% decrease we experienced in the first quarter, although we observed some improvement as the ground began to thought key areas such as Canada, the northeast and Midwest still experienced temperatures below swimming standards through June sales in our seasonal markets grew five <unk>.
Were sent and 32% in the second quarter of 2022 and 2021, respectively.
Pricing on equipment continues to hold with overall sales down 8% for the quarter and less unfavorable than the declines in new construction.
Chemical sales in the quarter were down 3% driven by the weather patterns I discussed earlier and Treichler pricing came down more than we saw in the first quarter, resulting in a 1% drag on consolidated sales for the quarter building materials sales for the quarter were down 8% continuing to indicate renovation and remodel numbers are feeling somewhat better than anticipated despite the lower new pool construction.
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As consumers take advantage of leisure travel our commercial swimming pool sales continue to see an uptick with net sales for the quarter, increasing 8% following a 12% increase in the first quarter over last year.
Hey, chip any franchisees collectively reported relatively flat sales for the quarter compared to last year. The franchisees have seen overall impact from less sales of discretionary items, such as equipment and recreational items, but non discretionary sales are steady sales through our independent retail customers were up 11% an improvement over the 16.
Cent decrease that we saw in the first quarter.
Europe's second quarter sales remain challenged and were down 6% compared to the prior year, but also saw a seasonal increase in trend improvement from the 25% decrease reported in the first quarter.
And the horizon business base business sales were flat for the quarter an improvement over the 7% decrease we reported in the first quarter, our irrigation product category of strength for us performed well, particularly boosted by commercial projects, but growth was offset by some pricing pressures on commodities, which has seen higher levels of inflation over the last couple of years.
<unk> hundred 60, <unk> saw sales increased 3% over prior years, which continues to be better than total sales activity line volume growth for the same period was 4%, which indicates an accelerating adoption rate as our customers find value in the tool.
We are encouraged by the resiliency of our gross margins, which came in at 36% in the quarter.
Where competition has increased due to softer new pool construction in current market conditions, Melanie will provide more detail on this topic in her comments.
During the quarter, our operating expenses were 13% of net sales an improvement over the 18, 6% of net sales we reported in the first quarter. We still have good leverage on our fixed expenses and continued to add new sales centers opening three during the quarter to expand our market presence. We also continued to invest in and expand our employer of choice initiatives and customer phase.
<unk> programs to ensure we can expand our service offerings to our customers.
Operating income for the second quarter of 2023 was $327 million down $92 million compared to last year.
And almost 90% increase over 2019.
With a reported operating margins of 17, 6% you can see that we've held onto the majority of the benefits we realize as the business rapidly grew over the last three years due to our disciplined execution.
During the second quarter, we added five new locations two acquired in three Greenfield. This puts us at eight new Greenfield distribution locations to date, keeping us on track to open around 10 for the full year. We also expanded our pinch of Fannie franchise network by adding four new franchise customers in the quarter, we continued to invest in the future of the business.
As we expect a return to steady historical growth after lapping the swift ramp that we've seen over the last several years.
Last quarter, we began to experience the impacts of weather heightened interest rates lower consumer spending and the end of Covid tailwind as part of our full year expectations. We believe we could see new pool construction down 30% with around 70000, new pools being added to the installed base in 2023, we.
We expect some increases in the average spend on new pools built this year as lower priced pools are experiencing stiffer headwinds than higher priced units that typically are less dependent on financing.
Our product offering continues to expand and we are adding additional cap capabilities to our sales centers. Similarly on remodel and renovation activities in a typical year, we would see around 10% or 550000 pools upgrading their pad equipment and taking advantage of new automation more efficient pumps alternative sanitizers all of which increased.
The ease of full ownership renovation and remodel activities often involve changing the look of the pool in the backyard using our proprietary tile pool finish and deck material selections the owners of the $5 $4 million in ground pools are continuing to spend approximately $1000 for more on pool maintenance annually, although some may choose to defer installation of <unk>.
Discretionary items in times of economic stress chemical and minor repairs will continue on these bodies of water along with the above ground pools and spas that also saw accelerated growth over the last few years.
While we are expecting a decline in sales in the current year, mostly due to tough comps we are comparing against on a year over year basis. The long term outlook of the industry as a whole remains strong the installed base is bigger than 2019 and continues to grow equipment and most all other product inflation is holding and continues to buoy the top line.
As I mentioned earlier some try for a pricing is under pressure as supply conditions have returned to historical norm normal levels. Following a period of significant supply disruptions, but this is largely being offset by inflation of other chemicals. Looking ahead, we expect these dynamics to stabilize and reflect consistent pricing and supply characteristics.
Everything that we love about this industry and our numerous competitive advantages are every bit as true today as they were in the past and give us great confidence in the future.
Lastly, with almost seven months of the year behind us providing an even clearer picture we have adjusted our full year guidance for 2023 to $13.14 to $14.14 delivering.
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 and her financial commentary.
Thank you Pete and good morning, everyone. This morning, we reported $1 9 billion and net sales for the second quarter of 2023. This was our second best topline in history. After the exceptionally strong results we generated in 2020 to inflation in the quarter. It was approximately 3% to 4% slightly higher.
Our equipment products and a marginal overall pricing benefit from chemicals.
You saw some pressure on track where prices in the quarter offset by inflation and other chemical products the pricing impact of Tri color was around a 1% drag on net sales for the quarter.
As we had anticipated gross margin of 36%, So 180 basis point decline compared to the second quarter 2022, the benefit from lower cost inventory on hand have largely been sold through and contributed nominally in the second quarter, our gross margin.
Our gross margin primarily reflects replacement costs and the seasonal benefit we typically expect to see in the second quarter.
Gross margin was somewhat negatively impacted by sales concession activity and our response to competitors reacting to the slower start to the season.
Operating expenses declined by 3% year over year in the quarter SG&A costs as a percentage of net sales was 13% for the quarter significantly better than the 18, 6%. We reported in first quarter as we realized improved expense leverage on our fixed costs and the higher sales quarter.
Our field teams did an excellent job in managing through the seasonal expense growth between the first quarter in the second quarter last year, we increased expenses by $36 million from first quarter to second quarter, and we were able to moderate that to only $17 million 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.
13, new locations opened since June 2022 added incremental expenses and we're a moderate drag on operating income.
We completed three acquisitions year to date, each providing a unique strategic benefit and one fold it into the network contribute profitable growth going forward together.
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 second quarter operating margin was 17, 6% versus 24% last year, but continues to be about the 15, 4% in 2019.
Looking back to 2019, we ended the year with a 10, 7% full year operating margin that expanded almost 600 basis points to 16, 6% for the full year 2022.
Realized benefits of around 150 basis points from inflation, driven price increases and inventory gains that have now largely normalized.
We're experiencing some pullback and how operating margin from last year, but we believe the margins we will achieve in 2023, well above the pre pandemic levels are setting a good baseline MLB sustainable as we hold onto the 30% to 35% industry growth I'm inflation.
Combined with our strategically beneficial acquisitions increased scale product expansion and improved operating efficiency.
We reported diluted EPS, excluding ASU, $5 89, compared to $7.59 and second quarter of 2022.
While 22% below last year. This is comparable to 2021 second quarter EPS and is 94% higher than the $3 three excluding ASU, we reported in second quarter 2019.
Changes have affected our historically stable and growing industry, since then which bring positive opportunities for our future growth and profitability.
Receivables continue to be well managed days sales outstanding was $26 two days compared to prior year of 27.2.
Have made excellent progress on right sizing our inventory by vendor Andi location now that supply chain has normalized.
One of the metrics, we monitor to ensure a great customer experience and analyze for loss sales opportunities continue to trend well.
We have reduced inventory year over year by $186 million against the 260 million inventory reduction we estimated at year end.
We are continuing to aim towards the end of the season or end of third quarter to achieve these inventory level.
As we accomplish that we will be uniquely positioned to work with our channel partner, it's quite early buys to best position us for the 202004 season with.
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 while generating strong returns for our shareholders.
We reduced debt outstanding by 411 million 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 million and our quarterly interest expense.
Cash flow from operating activities was 377 million, an increase of 348 million compared to last year as strong earnings and working capital reductions contributed to increased cash flow we.
We have completed $44 million of share buybacks in the open market during the first half.
Our board increased our authorization under our share repurchase program to 600 million during the quarter.
Full year cash flows are expected to be about 800 million benefiting from cash generated due to reductions in inventory from a timing standpoint, our cashflow, it's strongest in the second half of the year after building preseason inventory in first quarter and paying for early buy inventory purchases in second quarter.
Moving to our outlook for the full year, we expect sales compared to 2022 to be down in the range of negative 10%.
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 fourth quarter.
Have one less selling day in the third quarter 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 level in the second half of the year as inventory gain benefits have that fully pass through.
As we have stated previously we expect full year 2023 gross margins to be around 30%.
Operating expense growth moderated in the second quarter for year to date growth over prior year of 1% and we 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 topline growth for retirement.
When we look at potential uses for the increased cash flows we expect to generate this year, we anticipate spending around $25 million to $50 million on acquisition.
The $60 million on capital expenditures $170 million on cash dividends and the remaining approximately $550 million on a combination of debt reduction and share buybacks.
We continue to maintain our leverage ratio at the low end of our target rate of one and a half to two 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 and $62 million, 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 third quarter rate to be slightly lower than the annual rate.
Our board increased the quarterly dividend payout by 10% this quarter increase in the quarterly dividend to $1 10.
Expect to pay full year 2023 dividends of around $170 million.
More than double the 84 million paid to shareholders in 2019.
As he commented earlier, we have updated the range of our EPS guidance for the full year 2023 to $13 and 14 to $14 and 14, which.
Which includes the 14th ASU tax benefit realized to date.
This is James a share count of $39 4 million shares consistent with June 30th Rebase.
We base our guidance on the assumption of normal historical weather conditions as the midpoint.
We issued our second annual corporate responsibility report during the quarter. We are proud to have expanded our disclosures in the areas that we're focused on as part of our capacity creation effort.
These initiatives and activities are paying off through more efficient water usage and the benchmarking of our electricity usage and our continued efforts to lower our overall emissions.
Our results for the second quarter, while somewhat less favorable than we had had the resilience of our industry and the sustainability of much of the pricing and market growth component, we realized over the 2019 to 2020 period prior to this period of market stabilization.
So our position is strong and we are well situated to support their retirement of industry growth.
I will now turn the call over 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 you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two we ask that you limit yourself to one question and one follow up at this time, we will pause.
Momentarily to assemble our roster.
Yeah.
Our first question comes from Ryan Merkel of William Blair.
Go ahead.
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.
Maybe just walk us through how you approach guidance, what's changed and why you're comfortable that your new guidance range is achievable.
Sure.
That's a good question Ryan and we spent considerable time on it I guess the difference between now and when we guy.
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 three weeks through the month of almost three weeks through the month of July which gives us 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 up 30%. We still can think it's going to be off in the neighborhood of 30% skewed more heavily towards the lower priced pools with higher price schools doing better our.
<unk> ability to gain share as evidenced by our.
Analysis of our new pool sales.
It is consistent with what we thought before so we were down slightly less than the industry. As we believe in new terms of new pool construction. So nothing new to report the weather provided significant headwinds in the second quarter. The season started late and as you know, we basically contemplate normal weather in our guy.
<unk>, we didn't get the normal weather that we were counting on and the seasonal markets opened late and then frankly, the the poor weather moved around some of the year round markets too and presented significant headwind. The other thing that we saw and we have better visibility to now is the consumer buying patterns and what what we see.
See there you know we are the non.
Question Harry spend is good I mean, we talked a little about the the.
The spend on chemicals with the pricing on chemicals that try fluor's down everything else is up a little it's about the same chemical sales are going to be higher when the weather is hotter. So the hotter water and hotter weather came later than anticipated.
We are now getting good weather in.
In terms of heat and that is a that's having an impact on the on the chemical spin. So the non discretionary report of a portion of our business is.
He is doing well what we've seen that is that a continuation really of the we'll call semi discretionary purchases by consumer. So the consumer that has a heater that may need to be may need to be repaired or this time of year and nobody is thinking about heating their pools, because most of them are too hot as it is but those that would cause.
They're buying a new cleaner given the current economic environment. We're what we're seeing is some people deferring some of those expenses to next year and not not doing not making the purchase of this year. So we've got seven.
Six and a half months almost seven 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 the 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 you know I mentioned, our building materials being off eight two products to consider when we look at new pool, construction and renovation and remodel would be tile and pool finish.
We'll 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 was it was more favorable than.
Then the full year, our full year outlook at the beginning of the year, but we think that's going to moderate as dealers work through the backlog.
We would 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 chain interruptions within our guidance. So I just think we have more clarity now.
With a large portion of the year behind us and a good look at what what July is going to bring.
Yeah.
Got it that's very helpful. Thank you for that and for my follow up I was hoping you could comment on what Youre seeing in June and what Youre seeing in July have you seen trends improve a bit as the weather has got a bit hotter than some of the keep whole markets.
Yes, certainly you know the great part about this business is is that you know more.
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 for maintenance items, such as chemical in parts and service is good so when things heat it up.
We are encouraged by.
The uptick in sales. However, one thing I've got to point out though is we have we have very stiff comps in the third quarter to the third quarter. It is by no means a lay up given the growth that we saw in the third quarter of last year, the comps really don't moderate until the fourth quarter. So.
Business is good the sales centers are busy but when we look at the comps that we have from last year, which was the weather was good sale centers were busy and consumers were certainly a bit more confident in new pool construction was stronger.
We have to take that into consideration.
Make sense I'll pass it on thank you.
Our next question comes from Susan Mcclary of Goldman Sachs Go ahead.
Thank you good morning.
Morning. My first question is can you expand a bit on consumer sentiment and what you're hearing from some of your larger customers. It sounds like there's 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.
You get some of these consumers back into the market on the discretionary or the semi discretionary side.
So I think your sentiment on on your observation on mix shift is accurate, we when I talked to our dealers and I've talked to a lot of dealers across the country from very very large dealers to small dealers. What we're hearing is that at.
At the higher end and we have some customers that frankly specializing in very large projects.
They're actually doing quite well I believe it or not I've had a couple of tell me that they're sold out for this year and into next year, but they are the very high end specialty builders.
As you work down the chain from very high end to core to more entry level pools. There is a phenomenon that happens and that is has to do with how that pool was paid for the very high end pools are typically purchased by more affluent families and the percentage of those that have really any concern about financing cost is actually very low.
The flip side to that is if you go to the opposite ends of the spectrum. The entry level pools, which is what we think drove a lot of the new pool of an increase in nuclear activity through the pandemic.
There was a lot more entry level pools, built who I think the mix the mix of.
Pools was skewed towards the entry level pools, and the reason is because if it gets financing costs was actually quite low and if you talk to the dealers what they would tell you is that many of those conversations many to close this happened at the kitchen table and they were basically they were they were selling a.
They were selling a backyard resort, but they were basically selling that as a monthly payment and monthly payments when the interest rates and finance rates and HELOC were very low and lending was free flowing monthly payments for those.
Those projects and the fact that you know a few years ago, you add less inflation. So the overall price of the pool with lower they were selling that based on some of those were 700 to $750 a month payments.
That was a very achievable number for folks that want to the pool and decided to 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 202 <unk> hundred dollars.
Which simply puts it out of the range for many of the families that would be stretching it frankly of 700 to $750.
Level. 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.
Hmm.
One of two things or a combination one is if interest rates were to where to moderate. It's just math that brings down the price of the the financing costs and brings down the monthly payment that would make pools more affordable for those folks that are sitting on the sidelines waiting for that to happen.
The other thing that happens over time is you know.
The memory of 2% interests in 3% interest.
Fades in People's mind, and they become more accustomed to well, okay. If I'm gonna do a HELOC, it's going to cost me, 6% or 7% or 8%.
And as wages continue to catch up to inflation, then it becomes more and more acceptable and I think youll see some some more pools at the entry level start to come back in.
I think you are correct or are.
Your following question was or the second part of the question had to do with consumer sentiment and I think I briefly mentioned that with with Brian's question with dealers are telling US is that certainly you know break fix things. It is if the if the pump isn't working at the filter is leaking.
Salt sales stopped working you know if if.
In some cases, if the lifestyle working it's going to get it's going to get fixed consumers really don't have a choice because remember with the pool you have to move the water filter the water and treat the water in order to make sure that it doesn't turn great. So that's a given I think over the last couple of years, we've seen people trade up in terms of technology, they've gone from pressure cleaners and suction cleaner.
As you know which were once the industry standard now we've seen people move towards the.
The higher end product the robot 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 conditions inflation of everything from from groceries, perhaps additional leisure travel being done.
In general household expense increase, they're saying I'm, probably going to wait and I'll get the I'll get the new cleaner next year as opposed to this year and will live with the pressure cleaner resection cleaner.
One more year.
So I just think it's a matter it's a matter of just kind of how the how the consumer is feeling about everyday spending.
Yeah. Okay. That's very helpful color and then just following up you know 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 has eased and how youre thinking about your ability to hold the market share.
<unk> that you've realized in the last couple of years against that and I guess finally with that any thoughts on or updates to your inflation expectations for this year.
Yes.
Great question, So you know.
There's really nothing new about the competition.
If I go back I've been in the pool industry. Now this is my seventh year I believe.
And I can tell you that from the very first my very first month, when I went out with meeting the team and trying to learn about the market and what would happen and I would hear these stories about competitors that would go after a piece of business that we would have or we would hear about.
Hyper competitive pricing at a particular account or for a particular product you know that was 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 the during that period of the pandemic.
Spending when people just said I want I want I want and those that had 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.
Two the vast.
Network and the tools and resources that we offer which pale in comparison to those of our competitors.
What I would say is is that I still hear stories everyday about a competitor that is going after a piece of business or trying to liquidate some inventory or trying to raise some cash you know putting a.
Putting a ridiculous price into the market I think it is isolated I don't think its anything new and it's nothing quite frankly that we are worried about.
When I consider what we've done over the last three years to widened 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.
2019 through acquisitions and Greenfield openings, we have 59, new locations. So it's 59 more locations today than there were in 2019, if you look at our what differentiates our network compared to the others that we have about 100 N P.
T centers, which allow the smaller builders to use our showrooms to.
Have their customers pick out the finishes for our new pool or a renovation and remodel we have product trainers that teach new customers, new plaster crews new tile crews how to how to apply and how to install our proprietary products. If you look at our private label.
Capabilities.
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 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 pull 360 as you can see is gaining is gaining traction the pool 360 water test software that we've just begun rolling out as a as a great tool for the independent retailers to improve their chemical business, which at the same time, we will improve our chemical business.
Of our private label chemicals, because that is the that is the chemical solution that the software will.
<unk> will recommend and it takes that variability out of the dealers hands in terms of what chemicals to recommended how much. It's all done through a digital through a digital platform, we've invested in marketing capabilities.
Specific marketing capabilities that help our dealers grow that helped drive demand creation, all things that none of our competitors do so certainly the market is a I don't want to paint a picture that the market is not.
Contested.
You 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 really typically new to the space.
I would put our team up against any other team and they will win.
In that race hands down.
Okay. Thank you for all the color Peter very helpful and good luck with everything.
Our next question comes from David Manthey from Baird go ahead.
Hi, good morning, everyone.
First question Pete.
Or Melanie could you estimate the second quarter year to year change by new pools renovation and maintenance revenues that you experienced I know, it's not an exact science, 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 there.
As well.
Yeah. So yeah, we are seeing probably an impact in the second quarter on via the new pool construction was about a negative five.
And then a renovation was around negative three.
And then you know price contribution.
We are on the green side, it's a little bit less and believes that we've had three to four in total and the green we're trying to the lower end of that because they did have some more of the commodity, particularly the piping that was overall impacting their sales, but their sales for the quarter actually did that.
Came in relatively flat.
Your answer to the first question Melanie was that I'm asking about total revenues.
Well I guess I thought you were asking for the the walk between them kind of last year and this year.
But it wasn't that right youre, saying Youre schools were down one 5%.
See the revenue related to neutral yes.
Oh, okay.
Okay.
Alright, and then.
Speaking of new pools of nuclear 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.
Yeah, I think David as I mentioned, what Youre going to see is basically stability at the mid and upper and 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.
Don't see an acceleration in new pool, yet because I don't see the 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 or I can use.
To build a pool and or lower interest rates that would encourage me to move forward with a project if I had to finance most of it.
Great. Thank you.
<unk>.
Our next question comes from Trey Grooms from Stephens.
Go ahead.
Hey, good morning, everyone.
I guess first on the guide.
I'm I'm backing into an EBIT margin kind of in that low teens range.
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.
Yeah.
You're backing into that for the full year I think that's pretty reasonable.
You look at just kind of top line the comps that we'll have in third quarter, where we were still up 10 for base business year over year are going to be more difficult than fourth quarter, where we were just up one we did start to see some of the slowdown in new construction and starting out in the fourth quarter, primarily kind of November December .
<unk> of last year.
When you look at kind of a year over year comps should get a relatively easier in the fourth quarter and then third quarter will also have that one less selling day as well.
Yeah, Okay got it and then.
Sticking with the guide you know as we kind of look at the revised.
EPS guidance range here and pay down 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 the prior question, but looking at that range, you know what would kind of drive us to be more at the top end or the bottom end of that range is that you know.
Given that the confidence you have you do you think that that would be more of a top line driven.
Wayne or potential fluctuations in margins.
That could get us there, but 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 I'll give it get into the high and low end of the range and there'll be some expense offsets.
Depending on the actual volume.
But margins should be relatively similar similar in best case scenarios.
With volume as you know volume Leverages by far.
Biggest lever Yep Yep, that's all Super helpful. Thank you I'll pass it off good luck. Thank you.
The next question comes from Scott Schneeberger of Oppenheimer.
Go ahead.
Thank you very much good morning, Peter O'malley could you covered whether very well on the first question from Ryan, but I'm curious you mentioned there was a 60 to 70 million dollar impact in the first quarter. When we're at this point next year looking back.
On 2023, how much would you say is the will have been 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.
We have estimated for second quarter around 30 million.
Incrementally so so 90 to 100 Melanie yes.
Correct.
Okay. Thanks appreciate that and then and then Peter you had said I think it was your part in her prepared remarks.
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 it looks like it is getting worked through pretty well could you elaborate on that please.
Yeah, I I looked at you know we looked at the Permian activity and what we believe is happening on new pool construction and how we triangulated on that we'd look at those two products that I mentioned new pool.
Finish our pool finish and tile.
Knowing that those two products only go into two things one is our renovation and new pool construction.
So.
The new pool finish as I mentioned in the second quarter was up 2%.
And that number for earlier in the year.
Was I'm sorry.
We'll finish was down 2% for the second quarter kind of similar to what it was what it was in the first quarter, but it was skewed so when I looked at how the end of the second quarter plays out with with a pool finish and tile it looks like it's moderating a little bit meaning that it started out better.
And then has moderated a little bit and given that we don't really see a big movement in new pool construction and my only my only conclusion is is 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 the.
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 is going to be skewed more heavily towards the beginning of the year being better and then as they work through as they worked through the backlog, we think it'll be weaker.
Towards the back half.
Okay, great. Thanks very much.
The next question comes from Joe Oh, There's Meyer from Deutsche Bank.
Go ahead.
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 <unk> impact from new construction, that's not that the category was down five it's that there was a five point impact to the consolidated number is that correct.
Yes.
Right right.
And then just thinking about the cumulative change in the sales guy from earlier in the year, let's take sort of the initial midpoint went.
Down one to two.
And then now we're at 10% can you maybe bucket that eight to nine point change in sort of.
No. This is a lot, but four different buckets kind of one things that are pushed to next year. So that maybe it was the deferrals that you talked about things that are current your circumstances like whether that really have nothing to do with next year and then things that are worse for sure but may improve next year I'm thinking maybe the pool construction economics impacts there.
And then things that are worse for unexpected that likely won't recover 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 an eye.
If you're not going to bucket it maybe the way to think about the question is if youre still investing behind growth.
Question that I'm getting from investors is.
You know.
Thinking about earnings next year.
Is there really any impairment to next year's earnings power between the beginning of the year in now and so maybe just if you could take the opportunity as well.
I would say that from February to July actually very little has changed in your mind about how what your earnings power is next year.
And so from that from a topline if you kind of walk through and so our initial guidance with flat to negative three so we did have some expectation that we could see some negative impact there.
The biggest thing that changed since that point in time, the biggest single indicator is going to be the weather the way.
And you look at the cumulative weather impact that is around $90 million as we talked about.
The other thing that we called out that our.
It's not there's nothing else can add significant in an individual standpoint, but the things that were kind of new for this quarter.
Does the impact on the Tri core pricing 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 not that significant.
The other thing that deferred sales activities that we don't think the consumer sentiment.
We don't see that that will continue as we get into next year, but that is something that was not considered 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 and that did come in higher this year than we had originally anticipated as well as part of our initial guide.
Understood. Thank you very much.
The next question comes from Andrew Carter from Stifel.
Go ahead.
I think going into the guidance looking at it here did you say SG&A would be modestly up this year and that would be a change from minus two and within that given the kind of guidance reduction. This year is incentive comp meaningfully lower therefore, there'll be a reset next year.
Our incentive comp in the current guide is is less.
Less than what we originally at the beginning of the year, we had kind of talked about 10 to 15 million. 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 different sales actions.
And programs and so there's still quite a bit less 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 million estimate.
And so as we go into next year, we would expect that that to revert back and come back into the expense base, but that the gross profit dollars that we'll generate from the revenue will more than offset the incremental expense on the incentive comp side.
And then back to like I'm, sorry did I catch that SG&A is going to be up this year and that might be just because of the new branches in acquisitions. Yeah. So the guide for the full year is that it will be no more than 1%.
Even though we had talked about that it could be kind of negative two to plus two depending upon where the top line fell out.
He hasn't gotten further through the year.
Can more confidently say that it'll it won't exceed a 1% increase.
Okay. Thank you and then kind of thinking about like kind of harp on the kind of the share share perspective, I know you you wait for the markets, but if you look out there and think about like unique customers that have come in in 'twenty. One 'twenty two if you look at that activity.
Do you have a firm sense that you know you're at least holding market share or that theyre not going elsewhere anything more granular than that you have real time. It tells you that hey, you're still outperforming the market holding your market share gains or maybe not maybe youre ceding some market share. Thanks.
Yeah.
Andrew market share is.
Is a is it.
It's a bit elusive in an industry like ours. So we have to triangulate it on market share, but we also you know one of the beauties of this businesses that we operate now 432 individual p&l's and we track customers at the local level. So we have a pretty good view of what's going on from a from the.
Digital customer level and then we also get.
Some information from the manufacturers as what's going on in the channel in total and then we look at things like if the 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 pool construction number looked like given we do it in.
Alex as we look at certain items that are sold only on a new pool to try and triangulate in on that and we know that we're trending better than the minus 30 that the that the industry is likely going to see on new pool construction. So unfortunately, it's not a it's not an exact exact science, but given.
Industry information that we can see and.
And that we get from our supplier partners I think where we're very confident in our ability to continue to grow and take share.
One last question on 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 the season and that might be something.
It could cut you off guard or is that just something that as I say that is just too small it doesn't even matter. Thanks.
Yeah I'm not sure at this late in the season right. So for instance, I don't have a nobody's going to winterize their pool in July or August right, because it's still it's still hot.
And if you even if even if you say hey look the pump broke I'm not going to fix it I'm gonna just winterize the pool the pool still gonna turn green because the water temperature is high and that's gonna 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 there.
Break fix the things that you have to move the water filter to water and treat the water.
Have a do you have any part of that equation that is bad you really have no choice, but to fix it and winter rising a pool pools are not drained. They essentially are they put a cover over them. They put a lot of chemicals in there, but if the water temperature is still warm.
You can't put enough chemicals in that pool, one time dose and cover it in order to keep it keep it from turning green and Green pools, obviously.
A lot of bad things come from that they're on site leader frankly, they're dangerous and they're gonna do damage to the pool. So I don't I don't really think that that is a that's a big concern.
Thanks, I'll pass it on thanks.
The next question comes from David Macgregor with Longbow Research go.
Go ahead.
Yes, good morning.
The one question here I wondered if you just sort of focusing on maintenance and repair business maintenance repair spending.
Talk about the extent to which you're seeing price elasticity, where within the various product categories, you've already seen the island and in the aggregate what percentage of maintenance repairs really showing kind of elevated levels of price elasticity versus them.
More non discretionary in elastic pattern.
I guess the way I would 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 our tricolor pricing in some areas frankly.
The inventory that is that was purchased in anticipation frankly, a higher usage that people are trying to get rid of before the end of the year. Because you don't want to and 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 some heightened.
Activity to get rid of to get rid of some some chemicals, but frankly right now the demand for chemicals is very strong and.
And we're seeing an offset in that in terms of.
Other chemicals, which would be balancers shock and awe in specialty and then again when it comes to an equipment might pump quit or the motor fails I have a choice I can fix it or I can I can replace it we haven't seen a big shift in the course of.
Behavior as it relates to well I know I'm not going to FIC I'm not gonna replacement anymore I'm going to fix it because we look at our median order value. If you look at our median line value and then we look at our parts sales create whole goods sales and we haven't really seen any anything materially changed there. So when it comes to a break fix item.
The only thing that in terms of price elasticity. If it's one of those components sales that 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 are in they pick up what we have because they are there for many other reasons other than we may be a nickel cheaper more expensive. So I don't really see a lot of price elasticity on.
Non discretionary items discretionary items, you know a little bit different story. So as I mentioned, you know robots for instance, which are a great product for pools have gone up in value.
And that's where some people looking at maybe I'll wait till next year on that.
I think we're at the top of the object take one more question.
Okay.
Our last question comes from Garik <unk> of loop capital go ahead.
Oh, hi, Thanks for squeezing me in I know, it's a little early but 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 are thinking about pricing. If we're returning more to kind of a normal 1% to 2% inflation environment or they don't.
Any color you might have but early into next year would be great. Yeah. Very early very early to give you an accurate answer to that question I can tell you that 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&A costs and opera.
Reading costs, whether it is whether it is rent whether it is trucks people labor being obviously, the biggest component and none of those none that theres been no retreat in any of anybody's operating expenses, So I can't see manufacturers.
Only passing on the historic one to two I would expect it to be higher I could be wrong, but I would expect it to be higher.
Okay. Thanks, and my follow up question is just on pension Penny just because we had a retail competitor speak of.
I need to draw down inventories and accelerated pricing pressure.
As a result, and it looks like your results and pitch study held in quite well in the quarter are you seeing any of those similar dynamics with respect to the incremental pricing and inventory destocking to occur.
Yeah, the pinch of any franchisees is a pet so they operate a great business and our model is different than our than most of our.
Our competitors.
As it relates to the publicly traded entities.
So.
We're happy we're happy with the performance, but as I mentioned, they are seeing a 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 were are more discretionary I should have one I don't have to have one you know if I have an older one I might be able to get by another year with it though theyre seeing some hesitation for the consumer at that point, but that but that frankly is baked into their into their performance.
Which is why that they're flattish and given given the underlying conditions were actually pretty happy with that.
Yeah makes sense. Thanks again.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Peter <unk> for any closing remarks.
Yes, I just want to thank everybody for your continuing interest and support and pool Corp, and thank you for joining us today.
We look forward to continuing to lead the industry for the remainder of the year and beyond and providing the highest level of value for of service for our customers and our suppliers will.
We will be discussing our third quarter 2023 results on October 19th of this year and look forward to talking to you. All then thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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