Q2 2024 Pool Corp Earnings Call

After today's remarks, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note that this event is being recorded I would now like to turn the conference over to Melanie Hart, Vice President and Chief Financial Officer. Please go ahead.

Speaker Change: Second quarter.

Speaker Change: Earnings Conference call.

Katherine kirlin: I guess, Katherine kirlin and responses to questions. Today may include forward looking statements, including management's outlook for 2024 and future periods actual results may differ materially from those discussed today information regarding the factors and vulnerable that could cause actual results differ from projected results.

Katherine kirlin: 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 are included in our press release are posted to our corporate website in the Investor Relations section.

Katherine kirlin: As we introduced last quarter. We have included a brief presentation on our investor website to summarize key points for our press release and call comments, unless otherwise stated within our prepared remarks, all comparisons refer to second quarter 2024 versus second quarter 2012 23.

Pete <unk>: We are now ready to begin with comments from Pete <unk>, our president and CEO.

Pete <unk>: Thank you Melanie and good morning, everyone.

Speaker Change: As we've reported this morning, we generated $1 $8 billion in net sales during the second quarter, reflecting a solid performance in the maintenance portion of our business during the busiest time of the year.

Speaker Change: This performance showcases our crisp execution progress on strategic initiatives and our ability to continue gaining share by providing an unmatched value proposition.

Speaker Change: As we discussed in our June relief the trends, we observed in discretionary spending for new pool construction and large renovation projects and some larger discretionary items based continued economic headwinds while the non discretionary demand is solid and in line with our expectations.

Good day and welcome to the Pool Corporation's second quarter 2024 conference call. All participants will be in a listen-only mode.

Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Speaker Change: Our customers, who primarily focus on new pool construction and renovation and remodel continued to report lower demand for low to mid range pools, while demand remained solid at the higher end the trend remains unchanged from recent quarters.

After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touchtone phone.

To withdraw your question, please press star then 2. Please note that this event is being recorded. I would now like to turn the conference over to Melanie Hart, Vice President and Chief Financial Officer. Please go ahead.

Speaker Change: A similar pattern is seen in renovations high end renovation project interest is reported to be solid although the summer when people are using their pool is the slow season for renovation.

Welcome to our second quarter 2024 earnings conference call.

Speaker Change: Similar to new construction of low end pools of smaller renovation projects are being deferred frequently in this environment.

Our discussion, comments, and responses to questions today may include forward-looking statements, including Management's Outlook for 2024 and future periods.

Speaker Change: Dealers are reporting more inbound calls however, many consumers remain hesitant to pull the trigger in the current economic cycle. We view this as a positive sign for the future.

Actual results may differ materially from those discussed today. Information regarding the factors and variables that could cause actual results to differ from projected results are discussed in O10-K.

Speaker Change: So far this year, we have made progress in several strategic areas of our business that excite us and drive our ability to capture future industry opportunity and extend our leadership position going forward, we remain deeply focused on our customers and areas of our business, where we can position ourselves for sustainable future growth.

In addition, we may make references to non-GAAP financial measures in our comments. A description and reconciliation of our non-GAAP financial measures are included in our press release or posted to our corporate website in the Investor Relations section.

Speaker Change: We leveraged the power of our widespread and highly integrated distribution network.

As we introduced last quarter, we have included a brief presentation on our investor website to summarize key points for our press release and call comments.

Speaker Change: We have strengthened our commitment to providing our customers exceptional service and value added tools to grow their business, while advancing our digital ecosystem development.

Unless otherwise stated, within our prepared remarks, all comparisons refer to second quarter 2024 versus second quarter 2023. We are now ready to begin with comments from Pete Arvan, our President and CEO .

Adoption of our <unk> hundred 60 tools continues to increase we closed the second quarter with 14, 5% of our sales completed on our <unk> hundred 60, <unk> digital platform, which is our highest level to date as our customers experienced a next level service and convenience, which ultimately creates capacity not only for <unk>.

Thank you, Melanie, and good morning, everyone.

As we recorded this morning, we generated $1.8 billion in net sales during the second quarter, reflecting a solid performance in the maintenance portion of our business during the busiest time of the year.

Speaker Change: But for our customers as well.

Speaker Change: Our new digital marketing programs continue to gain traction as our dealers experience unmatched capabilities and driving demand for the brands that they carry and lead generation for their core business function.

This performance showcases our crisp execution, progress on strategic initiatives, and our ability to continue gaining share by providing an unmatched value proposition.

Speaker Change: We are also increasing utilization rates at our chemical packaging facility since we acquired the chemical packaging operation from Corpus pool and patio, we have increased the production at the plant by almost 60%, which gives us again unmatched capabilities and drive incremental profitability for our business.

As we discussed in our June release, the trends we observed in discretionary spending for new pool construction and large renovation projects and some larger discretionary items faced continued economic headwinds while the nondiscretionary demand is solid and in line with our expectations.

Our customers, who primarily focus on new pool construction and renovation and remodel, continue to report lower demand for low to mid-range pools, while demand remains solid at the higher end. The trend remains unchanged from recent quarters.

Speaker Change: We continue to expand our sales center network, adding both convenience and needed capacity to support our growth as the industry's installed base continues to grow and we continue gaining share.

Speaker Change: So far this year, we have opened eight new sales centers in line with our strategic plan.

A similar pattern is seen in renovations. High-end renovation project interest is reported to be solid, although the summer when people are using their pools is the slow season for renovations.

Speaker Change: Now moving to our second quarter results total sales in the second quarter declined 5%, which is an improved trend compared to the year over year changes that we have seen in recent quarters as we mentioned in our press release. The last week of June showed a notable improvement in the daily sales, which was sparked by a favorable weather in <unk>.

Similar to new construction of low-end pools, smaller renovation projects are being deferred frequently in this environment.

Dealers are recording more inbound calls. However, many consumers remain hesitant to pull the trigger in the current economic cycle. We view this as a positive sign for the future.

Speaker Change: Strong execution from the team.

Our maintenance business is strong our software platforms are gaining traction in our building material products performed better than new pool construction trends and external permit data would suggest.

So far this year, we have made progress in several strategic areas of our business that excite us and drive our ability to capture future industry opportunity and extend our leadership position going forward.

Speaker Change: While we take some encouragement from this slightly improved trend we are maintaining our top line guide along with our year to date results sales trend once we pass the midpoint of the third quarter and into the fourth quarter discretionary portion of our business can have a greater impact on our total sales based on the seasonality of the industry.

We remain deeply focused on our customers and areas of our business where we can position ourselves for sustainable future growth as we leverage the power of our widespread and highly integrated distribution network.

Speaker Change: No.

Speaker Change: We also considered this dynamic in our full year guide.

We have strengthened our commitment to providing our customers exceptional service and value-added tools to grow their business while advancing our digital ecosystem development.

Speaker Change: Gross margin for the second quarter finished at 30% down 60 basis points from the prior year.

Remember that last year, we were still selling through our strategic access and lower cost inventory in the second quarter lower levels of our higher margin and building materials sales also inhibited the gross margin in the quarter. So our ability to deliver 30% gross margin under these circumstances highlights of some of the underlying structural improvements on supply chain.

Adoption of our Pool 360 tools continues to increase. We closed the second quarter with 14.5% of our sales completed on our Pool 360 digital platform, which is our highest level to date, as our customers experience next-level service and convenience, which ultimately creates...

capacity, not only for Pool Corp, but for our customers as well.

Speaker Change: Value added pricing and our strategic priorities.

Our new digital marketing programs continue to gain traction as our dealers experience unmatched capabilities in driving demand for the brands that they carry and lead generation for their core business function.

Speaker Change: From a profitability standpoint, we produced an operating income of 271 $5 million and an operating margin of 15, 3%.

Speaker Change: Although down from the 17, 6% operating margin from the same period last year. It reflects continued strategic investment in technology, our continuation of planned new sales center openings acquisitions and further expansion of our Pinchpenny network.

We are also increasing utilization rates at our chemical packaging facility.

Since we acquired the chemical packaging operation from Porpoise Pool and Patio, we have increased the production at the plant by almost 60%, which gives us again unmatched capabilities and drives incremental profitability for our business.

Speaker Change: Tony will give you a more detailed commentary on expenses, while we are without a doubt managing controllable expenses. We also continue to invest in the long term success of our business recognizing that we are working through an economic cycle and at the business is getting stronger.

We continue to expand our sales center network, adding both convenience and needed capacity to support our growth as the industry's installed base continues to grow, and we continue gaining share. So far this year, we have opened eight new sales centers in line with our strategic plan.

Tony: We finished the quarter reporting diluted earnings per share, including the onetime tax benefit at $4 99 per share.

Now, moving to our second quarter results, total sales in the second quarter declined 5%, which is an improved trend compared to the year-over-year changes that we have seen in recent quarters.

Speaker Change: Looking at sales by geography, Florida saw the strongest performance with sales being down just 1% in Texas sales declined 6% as we observed incredibly wet conditions through may making construction difficult and impeding maintenance spend.

As we mentioned in our press release, the last week of June showed a notable improvement in the daily sales, which was sparked by favorable weather and strong execution from the team.

Tony: California, and Arizona were down, 5% and 8% respectively with a similar overall trend of solid maintenance and aftermarket sales dragged by lower new construction and remodel in total our year round markets, which were up 5%, while the seasonal markets were down 6%.

Our maintenance business is strong, our software platforms are gaining traction, and our building material products perform better than new pool construction trends and external permit data would suggest.

While we take some encouragement from this slightly improved trend, we are maintaining our top-line guide along with our year-to-date result sales trend. Once we pass the midpoint of the third quarter and into the fourth quarter, the discretionary portion of our business can have a greater impact on our total sales based on the seasonality of the industry.

Speaker Change: Europe was down 11% and remains challenged with tough consumer sentiment and was further impacted by cold and rainy weather in late pool openings. This season.

Speaker Change: We continue to make operating improvements that will position us well in this area when sentiment improves.

So, we also considered this dynamic in our full year guide.

Speaker Change: For Horizon net sales declined 6% compared to the second quarter last year and at the same level of sales decline as we saw in the first quarter. Our irrigation business is more impacted by commodity pricing in the swimming pool business and has seen some irrigation project deferrals in both commercial and residential during the quarter.

Our gross margin for the second quarter finished at 30%, down 60 basis points from the prior year.

Remember that last year we were still selling through our strategic excess and lower cost inventory in the second quarter.

Lower levels of our higher-margin building materials sales also inhibited gross margin in the quarter, so our ability to deliver 30% gross margin under these circumstances highlights some of the underlying structural improvements on supply chain, value-added pricing, and our strategic priorities.

Speaker Change: Moving to our product and end market details the 1% increase in chemicals reflects a reflects a 3% growth in volume with a 2% deflationary impact on price sale, primarily driven by <unk>.

From a profitability standpoint, we've produced an operating income of $271.5 million and an operating margin of 15.3%.

Speaker Change: We see the positive effects of our efforts in this area, particularly noting that our private label chemical sales grew at double digit rates and outpaced the growth of the rest of our chemical portfolio.

Although down from the 17.6% operating margin from the same period last year, it reflects continued strategic investment in technology, a continuation of planned new sales center openings, acquisitions, and further expansion of our pinch-a-penny network.

Speaker Change: On building materials, the 10% quarterly sales decline is better than what we are seeing in overall, new pool builds and our re model expectations.

Speaker Change: Equipment sales ended flat for the quarter and is an area that we have seen improvement, particularly around light pumps heaters and parts.

Melanie will give you a more detailed commentary on expenses. While we are, without a doubt, managing controllable expenses, we also continue to invest in the long-term success of our business, recognizing that we are working through an economic cycle and that the business is getting stronger.

Speaker Change: Remember that our equipment results exclude cleaners, which is a discretionary area that remains challenged the equipment performance is noteworthy considering the new pool construction trends and the maintenance of our aftermarket business.

We finished the quarter recording diluted earnings per share, including the one cent tax benefit at $4.99 per share.

Speaker Change: As an example, we estimate that pumps used for maintenance versus new pool. Construction is four to one so we expect our maintenance and repair business on equipment to continue to hold up well.

Looking at sales by geography, Florida saw the strongest performance with sales being down just 1%. In Texas, sales declined 6% as we observed incredibly wet conditions through May, making construction difficult and impeding maintenance spend.

Speaker Change: Price on equipment and came in at up 2% to 3% related to price in other areas. We did see some pressure during the quarter on certain commodities like pipe and rebar, which show up in our building materials in the irrigation business results and on chemicals as discussed.

California and Arizona were down 5% and 8% respectively with a similar overall trend of solid maintenance and aftermarket sales dragged by lower new construction and remodel.

Speaker Change: <unk> prices move with the market and represent a relatively small portion of our overall business.

In total, our year-round markets were off 5% while the seasonal markets were down 6%.

Speaker Change: Looking at our end markets and commercial business sales increased 16%.

Europe was down 11% and remains challenged with tough consumer sentiment and was further impacted by cold and rainy weather and late pool openings this season.

Speaker Change: Rising after a flat first quarter and in line with another travel rich summer and openings of community pools sales to independent retail customers.

We continue to make operating improvements that will position us well in this area when sentiment improves.

Speaker Change: Declined close to 6%, which represents sell into those stores. We believe that this is reflective of consumers being more selective on some discretionary purchases and a later start to the season in some markets.

For Horizon, net sales declined 6% compared to the second quarter last year.

and at the same level of sales decline as we saw in the first quarter. Our irrigation business is more impacted by commodity pricing than the swimming pool business and has seen some irrigation project deferrals in both commercial and residential during the quarter.

Speaker Change: Our pinchpenny franchisee sales to their end consumers collectively increased 4%, which reflects a high concentration of stores in year round markets and a strong customer value proposition.

Moving to our product and end market details, the 1% increase in chemicals reflects a 3% growth in volume.

Speaker Change: Circling back to pull <unk> hundred 60, we are pleased with our progress since launching our full 360 service platform in February and the full 360 water test application last summer.

with a 2% deflationary impact on price, still primarily driven by trichlor. We see the positive effects of our efforts in this area, particularly noting that our private-label chemical sales grew at double-digit rates and outpaced the growth of the rest of our chemical portfolio.

Speaker Change: As we have discussed these tools ultimately link into our enhanced <unk> 360 platform the foundation for our digital ecosystem.

Speaker Change: Our core 360 water test tool provides optimal water chemistry recommendations to ensure safe water and an enhanced swimming environment directly tied to our private label products to date. We are very pleased with the number of retail stores using the software, which we thought launched after the season began in 2023.

On building materials, the 10% quarterly sales decline is better than what we are seeing in overall new pool builds and our remodel expectations.

Equipment sales ended flat for the quarter and is an area that we have seen improvement particularly around lights, pumps, heaters, and parts.

Speaker Change: Our retail solutions team has been fully engaged with water tests in the first half of this year and continues to onboard dealers as peak season comes to a close and customers have more time to schedule Onboarding. We will again be focused on driving our technology offering in conjunction with our 2025 retail and service programs.

Remember that our equipment results exclude cleaners, which is a discretionary area that remains challenged. The equipment performance is noteworthy considering the new pool construction trends and the maintenance of our aftermarket business.

As an example, we estimate that pumps used for maintenance versus new pool construction is four to one. So we expect our maintenance and repair business on equipment to continue to hold up well.

Speaker Change: 360 service allows our customers to expand their businesses by automating manual tasks like quotations scheduling routing billing and collections all while providing direct purchase access to the full 360 tool orders process through the traditional <unk> poultry 60 platform increased to 14, 5% of <unk>.

Price on equipment came in at up 2-3%. Related to price in other areas, we did see some pressure during the quarter on certain commodities like pipes and rebar, which show up in our building materials and irrigation business results, and on chemicals as discussed.

Speaker Change: It'll sales this quarter growing from 13% in the second quarter of last year and 11% in the first quarter of this year.

Commodity prices move with the market and represent a relatively small portion of our overall business.

Speaker Change: Technology is a key source of differentiation and continues to be an effective tool to grow sales and create stronger partnerships with our customers.

Looking at our end markets and commercial business, sales increased 16%, rising after a flat first quarter and in line with another travel-rich summer and openings of community pools. Sales to independent retail pool customers,

Speaker Change: We continue to strategically expand our network opening another three sales centers in the second quarter in acquiring one.

Speaker Change: Our second quarter acquisition offers us a premier presence in the Atlanta market with a central location combined with our established presence in the market that gives us a greater ability to serve the entire metro to fulfill demand in this major sunbelt market.

declined close to six percent which represents sell-in to those stores. We believe that this is reflective of consumers being more selective on some discretionary purchases and a later start to the season in some markets.

Speaker Change: These additions bring our global sales Center network to 445 locations are Pinchpenny franchise network added three new stores each in the strategic Texas market ending the quarter with a total of 292 franchise stores.

Our pinch-a-penny franchisee sales to their end consumers collectively increased 4%, which reflects a high concentration of stores in year-round markets and a strong customer value proposition.

Speaker Change: Continuing to build on our franchise network, along with expanding support offerings provided to our independent retail dealers will allow us to expand our reach and continue to capture the do it yourself maintenance market.

Circling back to Pool 360, we are pleased with our progress since launching our Pool 360 service platform in February and the Pool 360 water test application last summer.

As we have discussed, these tools ultimately link into our enhanced B2B Pool 360 platform, the foundation for our digital ecosystem.

Taking all of this into consideration in view of the peak season activities and our current outlook. We are confirming our full year diluted EPS guidance range of $11 five to $11 45 <unk>.

Our Pool 360 Water Test Tool provides optimal water chemistry recommendations to ensure safe water and an enhanced swimming environment directly tied to our private label products.

Speaker Change: Including an updated 20 estimated benefit from ASU.

Even under somewhat challenging operating conditions, our strong cash flow allowed us to return a total of $173 million to our shareholders through dividends and share repurchase so far this year during the quarter, our board increased our quarterly dividend to <unk>, 9%, marking the 14th consecutive year of dividend rate increase and increased our.

To date, we are very pleased with the number of retail stores using the software, which we thought launched after the season began in 2023.

Our retail solutions team has been fully engaged with water tests in the first half of this year and continues to onboard dealers.

As peak season comes to a close and customers have more time to schedule onboarding, we will again be focused on driving our technology and offering in conjunction with our 2025 retail and service programs.

Speaker Change: This authorization to $600 million.

Speaker Change: Reflecting our commitment to generating returns for our shareholders.

Speaker Change: For the remainder of 2024, we plan to center, our focus on execution and our strategic growth initiatives from an industry perspective pool and expanded outdoor living space remains highly attractive to homeowners who has remained one of the most frequently search terms in the online real estate sites.

Pool 360 Service allows our customers to expand their businesses by automating manual tasks like quotations, scheduling, routing, billing, and collections.

all while providing direct purchase access to the Pool 360 tool.

Orders processed through the traditional B2B Pool 360 platform increased to 14.5% of total sales this quarter, growing from 13% in the second quarter of last year and 11% in the first quarter of this year.

Speaker Change: Values remained strong demographic trends such as southern migration to large millennial population, we're driving household formation and continued new home builds all support the long term industry dynamics, even during a period of higher interest rates and suppressed existing home turnover.

Technology is a key source of differentiation and continues to be an effective tool to grow sales and create stronger partnerships with our customers.

Speaker Change: As we have seen for well over a year now high end consumers appear to be making up a large portion of the new pool build again in 2024 it.

We continue to strategically expand our network, opening another three sales centers in the second quarter and acquiring one.

Speaker Change: It is unclear when the mix will shift based on the amount and timing of interest rate reductions and the economic indications needed for consumers to feel less pressured.

Our second quarter acquisition offers us a premier presence in the Atlanta market with a central location, combined with our established presence in the market, this gives us the greater ability to serve the entire metro to fulfill demand in this major Sunbelt market.

Speaker Change: We are best positioned to provide the widest product offering in the industry support enhanced outdoor living features and aesthetics through our NPT branded products and partner with our vendors to unveil the latest available automation offerings, we remain ready to serve our customers with everything they need to help them create the outdoor living oasis.

These additions bring our global sales center network to 445 locations. Our pinch-a-penny franchise network added three new stores, each in the strategic Texas market, ending the quarter with a total of 292 franchise stores.

Speaker Change: That people want while providing the tools and support to grow their business.

Continuing to build on our franchise network along with expanding support offering provided to our independent retail dealers will allow us to expand our reach and continue to capture the do-it-yourself maintenance market.

Speaker Change: Although we expect a lower number of new pools to be built this year at roughly 60000 new units this year.

Speaker Change: <unk> represents a 1% increase in the installed base of pools that will need to be maintained going forward. We remain relentless in expanding our network to best serve the professional and do it yourself maintenance customer and improving the customer experience enhancing our capacity creation and launching our industry leading digital ecosystem.

Taking all of this into consideration in view of the peak season activities and our current outlook, we are confirming our full year diluted EPS guidance range of $11.05 to $11.45, including an updated 20 cents estimated benefit from ASU.

Melanie <unk>: I will now turn the call over to Melanie <unk>, Vice President and Chief Financial Officer for a detailed commentary thank.

Even under somewhat challenging operating conditions, our strong cash flow allowed us to return a total of $173 million to our shareholders.

Melanie: Thank you Pete and good morning again, everyone.

Melanie <unk>: We reported net sales of $1 8 billion and our seasonally largest second quarter, a decrease of 5% from prior year, we experienced an approximate 1% inflation benefit during the quarter from a product perspective price increases on equipment sales continued to hold in the 2% to 3% range while thing.

Through dividends and share repurchase so far this year. During the quarter, our board increased our quarterly dividend to nine percent, marking the fourteenth consecutive year of dividend rate increase and increase our repurchase authorization to six hundred million dollars, reflecting our commitment to generating returns for our shareholders.

Melanie <unk>: Positive volume trends on chemicals that were negative back some pricing on chemicals and other commodities impacting sales by 1%.

For the remainder of 2024, we plan to center our focus on execution and our strategic growth initiatives. From an industry perspective, pools and expanded outdoor living space remains highly attractive to homeowners.

Melanie <unk>: Selling prices, specifically for chemical will likely remain lower than last year for the remainder of the year.

Pools remain one of the most frequently searched terms in the online real estate sites.

From an end market and business line perspective, as we stated in our recent update the trends regarding new pool construction and remodel activity are less than projected at the end of last quarter.

Home values remain strong. Demographic trends such as southern migration, the large millennial population were driving household formation, and continued new home builds all support the long-term industry dynamics, even during the period of higher interest rates and suppressed existing home turnover.

Melanie <unk>: As discussed in our June full season update release, we now expect around 15% to 20% lower levels of new pool construction compared to prior year, which impacted total sales by around 3% for the quarter.

As we have seen for well over a year now, high-end consumers appear to be making up a large portion of the new pool bills again in 2024. It is unclear when the mix will shift based on the amount and timing of interest rate reductions and the economic indications needed for consumers to feel less pressured.

Melanie <unk>: As discussed we believe that remodel activity may be down as much as 15% for the full year and that lower level of remodel activity adversely affected total sales by about 2% from prior year during the quarter.

Melanie <unk>: Declines in sales at Horizon in Europe had an approximate 1% negative impact on total net sales for the quarter.

We are best positioned to provide the widest product offering in the industry, support enhanced outdoor living features and aesthetics through our NPP-branded products, and partner with our vendors to unveil the latest available automation offerings.

Melanie <unk>: Our gross margin for the quarter finished at 30% down 60 basis points from the prior year.

Melanie <unk>: As we expected gross margin in the current year is lower than last year, when we were reducing our inventory levels and selling down lower cost inventory, which for the most part has now been normalized and we do not expect any significant quarter over quarter changes from this effect in the second half of the year.

We remain ready to serve our customers with everything they need to help them create the outdoor living oasis that people want while providing the tools and support to grow their business.

Although we expect a lower number of new pools to be built this year at roughly 60,000 new units, this still represents a 1% increase in the installed base of pools that will need to be maintained going forward.

Melanie <unk>: And if it is realized over the last several years from growth of higher gross margin building materials sales did not occur in the quarter. Although other factors such as acquisition contribution pricing optimization and supply chain actions has benefited gross margin and should continue to support margins going forward.

We remain relentless in expanding our network to best serve the professional and do-it-yourself maintenance customer and improving the customer experience, enhancing our capacity creation and launching our industry-leading digital ecosystem.

I will now turn the call over to Melanie Hart, our Vice President and Chief Financial Officer, for her detailed commentary. Thank you, Pete, and good morning again, everyone.

Melanie <unk>: The expenses this quarter were $259 million $18 million higher than prior year, representing 14, 6% as a percentage of net sales.

We reported net sales of $1.8 billion in our seasonally largest second quarter, a decrease of 5% from prior year.

Melanie <unk>: The year over year increase in the quarter of seven 4%.

Melanie <unk>: Higher than the two 6% increase reported in the first quarter as we had a higher level of spend in the quarter to accelerate our sales center network expansion and technology development.

We experienced an approximate 1% inflation benefit during the quarter. From a product perspective, price increases on equipment sales continue to hold in the 2-3% range.

Melanie <unk>: Specific to the quarter through July we have opened up eight new sales centers and have also rolled out several enhancements to our customer facing technology platform, providing our customers with even better digital tools.

While seeing positive volume trends on chemicals, there were negative effects on pricing of chemicals and other commodities, impacting sales by 1%. Selling prices specifically for chemicals will likely remain lower than last year for the remainder of the year.

Melanie <unk>: During the peak season.

Melanie <unk>: Additionally, we closed three horizon locations two in June and one in July where performance did not meet our return criteria and we did not see appropriate near term improvement opportunity.

From an end market and business line perspective, as we stated in our recent update,

The trends regarding new pool construction and remodel activity are less than projected at the end of last quarter.

As discussed in our June pool season update release, we now expect around 15 to 20 percent lower levels of new pool construction compared to the prior year, which impacted total sales by around 3 percent for the quarter.

Melanie <unk>: This is related to these locations are close to $1 million during the quarter and will not be continuing into the rest of the year.

Melanie <unk>: These locations for project, we used to evaluate different product or location offerings and have characteristics outside of our traditional horizon business and thus does not reflect any changes to our expected results on the remaining part of the business.

As discussed, we believe that remodel activity may be down as much as 15% for the full year, and that lower level of remodel activity adversely affected total sales by about 2% from prior year during the quarter.

Melanie <unk>: In light of the mid season sales trends, we intensified our focus on controllable expenses during the second quarter in an effort to improve cost leverage and we'll see the benefits of these incremental efforts as expenses in the second half of the year are expected to increase in the low single digit range with the third quarter expenses are expected to increase similar to <unk>.

Declines in sales at Horizon in Europe had an approximate 1% negative impact on total net sales for the quarter.

First quarter and slightly higher growth expected in the fourth quarter.

Melanie <unk>: Operating income of $271 million down $56 million or 17% compared to prior year.

And if it is realized over the last several years from growth of higher gross margin building materials sales did not occur in the quarter. Although other factors such as acquisition contribution pricing optimization and supply chain actions has benefited gross margin and should continue to support margins going forward.

Melanie <unk>: We continue to operate with less debt outstanding and were able to reduce interest expense $2 8 million during the quarter compared to the second quarter of last year overall second quarter net income of 192 million compares to $232 million in prior year for.

Melanie <unk>: For the quarter our results reflect a one cent benefit from ASU diluted earnings per share of $4 99.

The expenses this quarter were $259 million $18 million higher than prior year, representing 14, 6% as a percentage of net sales.

Melanie <unk>: Decreased 16% compared to $5 91 in the second quarter of 2023.

The year over year increase in the quarter of seven 4%.

Melanie <unk>: Moving to our cash flows and balance sheet second quarter cash flows remained strong reflecting normalized contribution after early by deferred payment terms, which came due during the quarter.

Higher than the two 6% increase reported in the first quarter as we had a higher level of spend in the quarter to accelerate our sales center network expansion and technology development.

Melanie <unk>: Cash flow from operating activities of $172 million year to date is on pace to meet or slightly exceed our target of approximately 100% of net income for the full year.

Specific to the quarter through July we have opened up eight new sales centers and have also rolled out several enhancements to our customer facing technology platform, providing our customers with even better digital tools.

Melanie <unk>: On the working capital side, our accounts receivable days outstanding of $26 eight days remains consistent with the $26 nine days from last quarter.

During the peak season.

Additionally, we closed three horizon location.

Melanie <unk>: Inventory of $1 3 billion is $97 million less than prior year.

In June and one in July where performance did not meet our return criteria and we did not see appropriate near term improvement opportunity.

Melanie <unk>: As of June 32023, we had completed $186 million of our stated inventory reduction goal of over $200 million. During 2023, that's the prior year second quarter number already reflected some destocking from the end of the prior year.

Related to these locations are close to $1 million during the quarter and will not be continuing into the rest of the year.

These locations for project, we used to evaluate different product or location offerings and have characteristics outside of our traditional horizon business and.

Melanie <unk>: Our inventory days on hand have reduced from 141 to 131, a similar improvement to what we reported in first quarter.

<unk> does not reflect any changes to our expected results on the remaining part of the business.

Melanie <unk>: Our prior year inventory position for normalized as we got to the end of the season at the end of the third quarter.

In light of the mid season sales trends, we intensified our focus on controllable expenses during the second quarter in an effort to improve cost leverage and we'll see the benefits of these incremental efforts as expenses in the second half of the year are expected to increase in the low single digit range with the third quarter expenses are expected to increase similar to <unk>.

Melanie <unk>: Total debt of $1 $1.068 billion less than last year as strong cash flows provided funds for repayment.

Melanie <unk>: Net leverage ratio of one four as of the end of the quarter was just below our one five to two times target, reflecting significant capacity for funding future growth opportunity.

First quarter and slightly higher growth expected in the fourth quarter.

Operating income of $271 million down $56 million or 17% compared to prior year.

Melanie <unk>: Moving to capital allocation, we continue to support the ongoing business and organic growth with $34 9 million of capital expenditures, including New sales center openings.

We continue to operate with less debt outstanding and were able to reduce interest expense $2 8 million during the quarter compared to the second quarter of last year overall second quarter net income of 192 million compares to $232 million in prior year for.

Melanie <unk>: We completed another acquisition during the quarter for a total of two additional sale centers added through acquisition year to date.

Melanie <unk>: Also during the quarter, our board of directors increased our quarterly dividend by 10%.

Speaker Change: Our 9% to $1 20 per share, reflecting our confidence in the future earnings beyond the current economic cycle and expected ongoing strong cash flows.

For the quarter our results reflect a one cent benefit from ASU diluted earnings per share of $4 99.

Decreased 16% compared to $5 91 in the second quarter of 2023.

Speaker Change: <unk> also increased our share repurchase authorization back up to $600 million, adding $316 million in additional repurchase capacity.

Moving to our cash flows and balance sheet second quarter cash flows remained strong reflecting normalized contribution after early by deferred payment terms, which came due during the quarter.

Speaker Change: We made repurchases of $68 million during the quarter and an additional $10 million through today's earnings call.

We currently have $572 million remaining under our share repurchase authorization.

Cash flows from operating activities of $172 million year to date is on pace to meet or slightly exceed our target of approximately 100% of net income for the full year.

Speaker Change: Looking ahead to the second half our expectations for pricing for the remainder of the year are similar to actual results seen to date.

On the working capital side, our accounts receivable days outstanding of $26 eight days remains consistent with the $26 nine days from last quarter.

Speaker Change: The estimated lower number of meaningful bells, and reduce renovation activity are expected to continue to negatively impact sales around 4% to 5% collectively for the year.

Inventory of $1 3 billion is $97 million less than prior year.

Speaker Change: Horizon in Europe are expected to represent an additional 1% decrease.

As of June 32023, we had completed $186 million of our stated inventory reduction goal as over $200 million. During 2023, that's the prior year second quarter number already reflected some destocking from the end of the prior year.

Speaker Change: Seasonal gross margins held up well in the second quarter, although impacted by lower building materials sales year over year.

For the remainder of the year, we expect gross margin to be in a similar range to last year with internal strategic initiatives offsetting the drag from building materials.

Our inventory days on hand have reduced from 141 to 131, a similar improvement to what we reported in first quarter.

Speaker Change: Your gross margins, we anticipate to be approximately 30%.

Speaker Change: Operating expenses for the full year I mentioned above are expected to see a low to mid single digit percentage increase year over year and will include continuing technology investments of approximately $20 million and costs associated with the newly opened greenfield locations estimated to be around $12 million and the acquisitions we've completed.

Our prior year inventory position for normalized as we got to the end of the season at the end of the third quarter.

Total debt of $1 $1.068 billion less than last year as strong cash flows provided funds for repayments.

Net leverage ratio of one four as of the end of the quarter was just below our one five to two times target, reflecting significant capacity for funding future growth opportunity.

Speaker Change: Right.

Speaker Change: Our rate of expense increase after considering inflation and these incremental investments reflect substantial efficiency improvement benefits from our capacity creation and operating initiatives.

Moving to capital allocation, we continue to support the ongoing business and organic growth with $34 9 million of capital expenditures, including New sales center openings. We completed another acquisition during the quarter for a total of two additional sales centers added through acquisition year to date.

Speaker Change: Full year interest expense is expected to come in closer to $50 million from our previous estimated range of 50% to $53 million.

Speaker Change: Our annual tax rate is expected to be approximately 25%, excluding the ASU benefit with a lower rate to be reported in Q3, and a slightly higher rate similar to our second quarter rate in the fourth quarter.

Also during the quarter, our board of directors increased our quarterly dividend by 10.

Our 9% to $1 20 per share, reflecting our confidence in the future earnings beyond the current economic cycle and expected ongoing strong cash flows.

Speaker Change: Excluding the effects of additional share buybacks, we anticipate fully diluted weighted average shares outstanding will be approximately 38 5 million shares for the third and fourth quarter and $38 6 million shares for the full year, reflecting a reduction of approximately 140000 shares from year to date share repurchase.

<unk> also increased our share repurchase authorization back up to $600 million, adding $316 million in additional repurchase capacity.

We made repurchases of $68 million during the quarter and an additional $10 million through today's earnings call.

Speaker Change: Activity.

Speaker Change: Consistent with our June update we expect that our 2024 diluted EPS will range from $11 five.

We currently have $572 million remaining under our share repurchase authorization.

Speaker Change: $211 45 include.

Looking ahead to the second half our expectations for pricing for the remainder of the year are similar to actual results seen to date.

Speaker Change: Including the <unk> of ASU realized year to date.

Speaker Change: We completed our third annual corporate responsibility report last month. This year's report included expanded disclosures in particular around our scope, one and scope two emissions and our workforce.

The estimated lower number of meaningful bells, and reduce renovation activity are expected to continue to negatively impact sales around 4% to 5% collectively for the year.

Speaker Change: Also aligned with the SaaS a framework, a leading framework that identifies important environmental social and governance topics typically and that's relevant to stakeholders.

Horizon in Europe are expected to represent an additional 1% decrease.

Seasonal gross margins held up well in the second quarter, although impacted by lower building materials sales year over year.

Speaker Change: As we wrap up our comments today, we are reiterating our focus on managing the business through the current cycle, while continuing to invest in strategic technology tool sale Center network expansion and selective acquisitions.

For the remainder of the year, we expect gross margin to be in a similar range to last year with internal strategic initiatives offsetting the drag from building materials.

Gross margin, we anticipate to be approximately 30%.

Speaker Change: That will enable our long term growth superior operating performance and attractive shareholder returns.

Operating expenses for the full year I mentioned above are expected to see a low to mid single digit percentage increase year over year and will include continuing technology investments of approximately $20 million and costs associated with the newly opened greenfield locations estimated to be around $12 million and the acquisitions we've completed.

Speaker Change: We will now begin the Q&A portion of our call.

Speaker Change: And we will now begin the question and answer session.

Speaker Change: Ask a question you May press Star then one on your Touchtone phone.

Speaker Change: If youre using a speakerphone please pick up your handset before pressing the keys.

Charlie a question. Please press Star then two.

Right.

Speaker Change: We ask that you. Please limit yourself to one question and one follow up and then you may re queue for additional questions.

Our rate of expense increase after considering inflation and these incremental investments reflect substantial efficiency improvement benefits from our capacity creation and operating initiatives.

Speaker Change: At this time, we will pause momentarily for the first question.

Full year interest expense is expected to come in closer to $50 million from our previous estimated range of 50% to $53 million.

Susan macro: And our first question today will come from Susan macro with Goldman Sachs. Please go ahead.

Our annual tax rate is expected to be approximately 25%, excluding the ASU benefit with a lower rate to be reported in Q3, and a slightly higher rate similar to our second quarter rate in the fourth quarter.

Speaker Change: Thank you good morning, everyone.

Susan macro: Good morning, Good morning, Pete My first question is.

Speaker Change: Maybe talking about pricing in the gross margin.

Susan macro: You mentioned that you are seeing some success on some often optimization initiatives. There can you talk a bit about how we should think about that coming through over the next couple of quarters and what it could mean for the gross margin over time.

Excluding the effects of additional share buybacks, we anticipate fully diluted weighted average shares outstanding will be approximately 38 5 million shares for the third and fourth quarter and $38 6 million shares for the full year, reflecting a reduction of approximately 140000 shares from year to date share repurchase.

Susan macro: Sure.

Susan macro: As you know Susan Theres, a lot of components related to related to the gross margin. If you just look at the simple transaction count that we will have between now and the end of the year, it's going to be several million transactions made up a variety of products. So of course, you have mix that plays into that.

Activity.

Consistent with our June update we expect that our 2024 diluted EPS will range from $11 five.

$211 45 and.

Including the <unk> of ASU realized year to date.

Speaker Change: And as Melanie mentioned that I think I mentioned in my comments.

Speaker Change: We completed our third annual corporate responsibility report last month. This year's report included expanded disclosure in particular around our scope, one and scope two emissions and our workforce.

Speaker Change: Mix as it relates to construction material, which is typically a higher margin product is not particularly helping us this year with the decline.

Speaker Change: In new pool, construction and renovation remodel so that would be a headwind, but I don't think it gets any worse than what it is right now I think that just kind of continues and then we mentioned that there are things that we've done around our strategic pricing and I think things that we.

Also aligned with the SaaS a framework, a leading framework that identifies important environmental social and governance topics typically and that's relevant to stakeholders.

Speaker Change: As we wrap up our comments today, we are reiterating our focus on managing the business through the current cycle, while continuing to invest in strategic technology tool sale Center network expansion and selective acquisitions.

Speaker Change: Have done.

Related to our private label programs and our supply chain initiatives that help so.

Speaker Change: As I've mentioned, the gross margin rate that we saw for the quarter.

Speaker Change: That will enable our long term growth superior operating performance and attractive shareholder returns.

Speaker Change: 30% I think is a very admirable.

Speaker Change: We will now begin the Q&A portion of our call.

Speaker Change: We're very pleased with the outcome for the quarter. So between now and the end of the year I mean, we would maintain that it is going to be approximately 30% minded stray a little bit up or down depending on mix.

Speaker Change: And we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

Speaker Change: If youre using a speakerphone please pick up your handset before pressing the keys.

Charlie: Charlie a question. Please press Star then two we ask that you. Please limit yourself to one question and one follow up and then you may re queue for additional questions.

Speaker Change: It could but I think it's generally going to be in that range and I think that's supported by the activities that we've been working on as I mentioned.

Charlie: At this time, we will pause momentarily for the first question.

Speaker Change: Okay. That's helpful and then it sounds like the pool of 360 investments are gaining some nice traction as we think about the first half of this year can you give a bit more color there on how some of that is coming through and how youre thinking about that as we think of the back half of this year and then maybe even into 2025.

Susan Marie Maklari: And our first question today will come from Susan macro with Goldman Sachs. Please go ahead.

Susan Marie Maklari: Thank you and good morning, everyone.

Susan Marie Maklari: Good morning, Good morning, Pete My first question is.

Speaker Change: Sure.

Susan Marie Maklari: Maybe talking about pricing in the gross margin.

Speaker Change: So I'll talk about the three separate applications and they all basically as I mentioned are part of the full 360 ecosystem. So if I start with the water test.

Susan Marie Maklari: You mentioned that you are seeing some success on some often optimization initiatives. There can you talk a bit about how we should think about that coming through over the next couple of quarters and what it could mean for the gross margin over time.

Speaker Change: Software that we have that is tied to our private label program. So the dealers that are on that there are full line stocking distributors of our private label programs. They have kind of best in class water testing and prescription.

Susan Marie Maklari: Sure.

Susan Marie Maklari: As you know Susan Theres, a lot of components related to related to gross margin. If you just look at the simple transaction count that we will have between now and the end of the year, it's going to be several million transactions freed up a variety of products. So of course, you have mix that plays into that.

Speaker Change: Developing solutions that they can give the consumer when they come in there is also a CRM function in there where they can capture the data about the pool and about the consumer which helps them every time to consumer flows it goes into the store, but as you can imagine.

Susan Marie Maklari: And as Melanie mentioned that I think I mentioned in my comments.

Melanie: Mix as it relates to construction material, which is typically a higher margin product is not particularly helping us this year with the declining.

Speaker Change: There is the selling season for that rate. So during the season right now when typically the pool retail stores are very very busy is not the time did any of them are going to convert.

Melanie: In new pool, construction and renovation remodel so that would be a headwind.

Speaker Change: I think it gets any worse than what it is right now I think that's just kind of continues and then we mentioned that there are things that we've done around our strategic pricing and I think things that we.

Speaker Change: So this is the season, where the people that signed up before.

Speaker Change: Leaning into the software and they are using it and frankly, they are helping us with feedback on features and functionality, which we are using to develop our software because as you know with software you are never done.

Melanie: Have done.

Melanie: Related to our private label programs and our supply chain initiatives that help so as I've mentioned, the gross margin rate that we saw for the quarter.

Speaker Change: There'll be a constant stream of enhancements that continue to improve the users' experience. So.

Melanie: 30% I think is a very admirable.

Speaker Change: Good progress on the water test, we still believe it or not there are still some dealers that are onboarding. Even this time of year, but we expect that as the season winds down.

Melanie: We're very pleased with the outcome for the quarter. So between now and the end of the year I mean, we would we would maintain that it is going to be approximately 30% minded stray a little bit up or down depending on mix.

That we will see we will see a much larger number of dealers that onboard during the during the off season.

Melanie: It could but I think it's generally going to be in that range and I think that's supported by the activities that we've been working on as I mentioned.

Speaker Change: <unk>, if I referred to the full 360 service, it's really the same cycle. So everybody in the pool industry right now is busy so the service folks that would have to.

Speaker Change: Okay. That's helpful and then it sounds like the pool of 360 investments are gaining some nice traction as we think about the first half of this year can you give a bit more color there on how some of that is coming through and how youre thinking about that as we think of the back half of this year and then maybe even into 2025.

Speaker Change: Onboard on the software and load their data into the software.

Speaker Change: So that they can derive the benefits as I mentioned, which is which is scheduling as routing it's onetime services pricing, it's everything that they need to essentially run their business.

Speaker Change: This is again not at the time of year, when we expect to see a lot of people.

Sure.

Speaker Change: So I'll talk about the three separate applications and they all basically as I mentioned are part of the <unk> hundred 60, <unk> system. So if I start with the water test.

Speaker Change: Onboarding, but we are doing some selling this time of year. So we have a road show, that's basically going around the country and going into several key markets, where we are spin.

Melanie: Software that we have that is tied to our private label program. So the dealers that are on that there are full line stocking distributors of our private label programs. They have kind of best in class water testing and prescription.

Speaker Change: Spending time with the customers and frankly the feedback we're getting on that is extremely positive because people see the benefit in the tool and that.

Speaker Change: Unlike the original version of <unk> hundred 60, which didnt have nearly the same benefits for the customer as it did for US. This that tool is in particular designed to provide.

Melanie: Developing solutions that they can give the consumer when they come in and Theres also a CRM function in there where they can capture the data about the pool and about the consumer which helps them every time to consumer.

Speaker Change: Most of the benefit for the full service.

Speaker Change: Which again expands their capacity allows them to grow allows them to tap into our digital marketing program.

Melanie: It goes into the store, but as you can imagine.

Speaker Change: And frankly become stickier with US and then of course, you have just our 360 platform, which we talked earlier, we talked about on the last quarter call that we have updated significantly to improve the user experience.

Melanie: There is the selling season for that rate. So during the season right now when typically the pool retail stores are very very busy is not the time that any of them are going to convert.

Melanie: So this is the season, where the people that signed up before.

Speaker Change: That's really kind of a year round a year round tool that allows people to put their order input in order and priority pick award the avoid the lines at our sales center and again.

Speaker Change: Leaning into the software and they are using it and frankly, they're helping us with feedback on features and functionality, which we are using to develop our software because as you know with software you are never done.

Speaker Change: We're seeing more adoption on that as well. So overall very pleased we never expected that this was going to be an overnight success. We thought that it was going to be something that was going to take time to get the customers comfortable with.

Melanie: There'll be a constant stream of enhancements that continue to improve the users' experience.

Melanie: So.

Speaker Change: Good progress on the water test, we still believe it or not there are still some dealers that are onboarding. Even this time of year, but we expect that as the season winds down.

Speaker Change: And frankly, the more people are on it than their voices are the best form of advertising that we can have so overall very pleased.

Speaker Change: That we will see we will see a much larger number of dealers that onboard during the during the off season.

Speaker Change: Okay. That's great color. Thank you for everything and good luck with the quarter.

Speaker Change: And our next question will come from David Manthey with Baird. Please go ahead.

Speaker Change: <unk>, if I refer to the full 360 service, it's really the same cycle. So everybody in the pool industry right now is busy so the service folks that would have to.

David Manthey: Thank you and good morning, everyone.

Melanie quick question for you on the gross margin. So I think you said in your monologue that.

Onboard on the software and load their data into the software.

Melanie <unk>: The back half of this year would be similar to the back half of last year and if we just run that through we're coming in a little bit below 30, 29 729 eight range is that what you mean by approximately 30%.

Speaker Change: So that they can derive the benefits as I mentioned, which is which is scheduling as routing it's onetime services pricing, it's everything that they need to essentially run their business.

Speaker Change: This is again not at the time of year, when we expect to see a lot of people.

Melanie <unk>: Yeah, I mean, I think that range within 20 to 30 basis points.

Speaker Change: Onboarding, but we are doing some selling this time of year. So we have a roadshow thats basically going around the country and going into several key markets, where we are spin.

Melanie <unk>: No.

Speaker Change: You mentioned there are so many different components that go into gross margin.

Speaker Change: Very hard to pinpoint at this early in the year and we know Thats a full year margins are going to be impacted by those building materials that lower level of building materials and we've seen that.

Speaker Change: Spending time with the customers and frankly the feedback we're getting on that is extremely positive because people see the benefit in the tool and that.

Speaker Change: Unlike the original version of <unk> hundred 60, which didnt have nearly the same benefits for the customer as it did for US. This that tool is in particular designed to provide.

Speaker Change: So far to date and I expect that that would continue throughout the rest of the year.

Speaker Change: We are because of our purchasing higher purchasing from last year, we're seeing a slightly higher vendor incentives, but good.

Speaker Change: Most of the benefit for the full service company, which again expands their capacity allows them to grow allows them to tap into our digital marketing program.

Speaker Change: A good portion of that is being offset by the flip side to that is higher purchases also include higher freight in so that's impacting it.

Speaker Change: And then we do still expect to see that chemical pricing coming in in a lower year over year for the rest of the year and then we are continuing to think as we had mentioned last quarter that our larger customers are really outperforming some of the smaller customers. So so I think with all of those factors in play.

Speaker Change: And frankly become stickier with.

Speaker Change: And then of course, you have just our 360 platform, which we talked earlier, we talked about on the last quarter call that we have updated significantly to improve the user experience.

Speaker Change: That's really kind of a year round a year round tool that allows people to put their order input in order and priority pick award the avoid the lines at our sales center and again.

Speaker Change: Your estimate there windup being very reasonable range.

Yeah, Okay and then.

Speaker Change: I know, it's too early to maybe talk about 2025, but when we're thinking about that 30% Mendoza line.

Speaker Change: We're seeing more adoption on that as well. So overall very pleased we never expected that this was going to be an overnight success. We thought that it was going to be something that was going to take time to get the customers comfortable with.

Speaker Change: If new pools and major renovation and building materials are roughly in line with the maintenance as we go forward here.

Speaker Change: And frankly, the more people are on it than their voices are the best form of advertising that we can have so overall very pleased.

Speaker Change: Again, I think you've picked up a bit of a benefit in the first quarter from a reversal of an accrual or something but.

Speaker Change: Okay. That's great color. Thank you for everything and good luck with the quarter.

Speaker Change: As you think about that 30% into 2025, maybe just.

Speaker Change: And our next question will come from David Manthey with Baird. Please go ahead.

Speaker Change: Qualitatively what are the factors that could improve gross margins from this year relative to next year.

David John Manthey: Thank you and good morning, everyone.

David John Manthey: Melanie quick question for you on the gross margins. So I think you said in your monologue that.

Speaker Change: Assuming that the mix doesn't change all that much.

Melanie: The back half of this year would be similar to the back half of last year and if we just run that through we're coming in a little bit below 30. The 29 729 eight range is that what you mean by approximately 30%.

Speaker Change: So assuming that the mix doesn't change.

Speaker Change: No.

Speaker Change: Certainly we don't know when but we are hopeful and we know that it will change at some point and we will get those benefits that we're missing out on in the current year related to the building materials.

Speaker Change: But outside of that what we're really focused on right now are things that we manage and we control.

Speaker Change: Yeah, I mean, I think that range within 20 to 30 basis points.

No.

Speaker Change: You mentioned there are so many different components that go into gross margin.

Speaker Change: Much focus on our efforts around pricing.

We're continuing to focus on our expansion of our private label chemicals.

Speaker Change: Very hard to pinpoint at this early in the year and we know that the full year margins are going to be impacted by those building materials at lower level of building materials and we've seen that.

Speaker Change: As well as some additional actions that we're taking on the supply chain side.

Speaker Change: I appreciate it thank you.

Speaker Change: So far to date.

Speaker Change: And our next question will come from Scott Schneeberger with Oppenheimer. Please go ahead.

Speaker Change: And I expect that that would continue throughout the rest of the year.

Speaker Change: We are because of our purchasing higher purchasing from last year, we're seeing a slightly higher vendor incentives.

Scott Schneeberger: Thanks, very much good morning, Pete one for you and then one for Melanie.

Speaker Change: Pete.

Speaker Change: A good portion of that is being offset by the flipside to that is higher purchases also include higher freight in so that's impacting it.

Scott Schneeberger: <unk> question is just the confidence in its tough post pandemic on anticipating.

Scott Schneeberger: Here's what we're going to see with regard to new pool build and renovation and so the heart of the question is how confident are you here with this reset guidance level for the remainder of the year and maybe a little bit of a discussion and the visibility you have into that thanks.

Speaker Change: And then we do still expect to see that chemical pricing coming in are lower year over year for the rest of the year and then we are continuing to think as we had mentioned last quarter that our larger customers are really outperforming some of the smaller customers. So so I think with all of those factors in play.

Scott Schneeberger: Yes, I think we are.

Speaker Change: Our estimate there wind up in a very reasonable range.

Speaker Change: That's a good question and one as you can imagine that we spent a lot of time discussing here in discussing frankly with our with our dealers and so on.

Speaker Change: Yeah, Okay and then.

Speaker Change: No. It's too early to maybe talk about 2025, but when we're thinking about that 30% Mendoza line.

Scott Schneeberger: On one hand, I look at the I look at the the new construction activity. If I look at permits and then I look at our building material sales.

Speaker Change: If new pools and major renovation and building materials are roughly in line with the maintenance as we go forward here.

Scott Schneeberger: It appears that we are we're doing better than the market would indicate in terms of new pool construction, meaning that my sales of building material products are not down nearly as much as the permit data would suggest I think overall permits are down about 17% I think our building materials.

Speaker Change: Again, I think you've picked up a bit of a benefit in the first quarter from a reversal of an accrual or something but.

Speaker Change: As you think about that 30% into 2025, maybe just.

Speaker Change: Qualitatively what are the factors that could improve gross margins from this year relative to next year.

Scott Schneeberger: As we've reported our.

Speaker Change: Much better than that I'll, albeit still off double digit.

Speaker Change: Assuming that the mix doesn't change all that much.

Speaker Change: So the comments, we're getting back from dealers, which I mentioned is that there is a lot of there's a lot of mixing a lot. There are more inbound calls than they seen earlier in the year and towards the end of last year. So inquiries our inquiries are good.

Speaker Change: So assuming that the mix doesn't change.

Speaker Change: Certainly we don't know when but we are hopeful and we know that it will change at some point and we will get those benefits that we're missing out on in the current year related to the building materials.

Speaker Change: But outside of that what we're really focused on right now are things that we manage and we control.

Speaker Change: People are waiting for a sign to say alright. The fed is actually serious about cutting interest rates. The economy is going to expand a bit in the consumers get a little bit healthier.

Speaker Change: Much focus on our efforts around pricing.

Speaker Change: We're continuing to focus on our expansion of our private label chemicals.

Speaker Change: When as I mentioned, if you look at the online real estate sites and you look at the words that are being searched the word pool comes up near the near the very top of the list. So people still want a pool I think this year was a tough year frankly, it was worse than what we anticipated in the beginning of the year, Hence the guide.

Speaker Change: As well as some additional actions that we're taking on the supply chain side.

Speaker Change: I appreciate it thank you.

Speaker Change: And our next question will come from Scott Schneeberger with Oppenheimer. Please go ahead.

Scott Andrew Schneeberger: Thanks, very much good morning, Pete one for you and then one for Melanie.

Speaker Change: Since the update that we put out in June but at this point I think we are fairly comfortable with the level that we see and dealers are not telling us that it is that it is getting any worse and I think we are we are slightly outperforming the industry and our participation in the number of pools that are being built.

Speaker Change: Pete.

Scott Andrew Schneeberger: <unk> question is just the confidence in its tough post pandemic on anticipating.

Scott Andrew Schneeberger: Here's what we're going to see with regard to new pool build and renovation and so the heart of the question is how confident are you here with this reset guidance level for the remainder of the year and maybe a little bit of a discussion and the visibility you have into that thanks.

Speaker Change: Great. Thanks, appreciate that and not only for you just.

Speaker Change: Just on on managing the margin the operating margin.

Scott Andrew Schneeberger: Yes, I think we are.

Speaker Change: The just a few things here in todays call I think it was three locations closed in horizon.

Speaker Change: That's a good question and one as you can imagine that we spent a lot of time discussing here in discussing frankly with our with our dealers.

Speaker Change: I heard a million dollar impact I didnt get the context or the timing on that if you could repeat that but are you and then you've talked also about supply chain efficiencies I'm. Just curious what if you could take us a little deeper on both as you are pursuing efficiencies in the model, particularly in a year like this where you are.

Speaker Change: On one hand, I look at the look at the the new.

Speaker Change: New construction activity, if I look at permits and then I look at our building material sales.

Speaker Change: It appears that we are we're doing better than the market would indicate in terms of new pool construction, meaning that my sales of building material products are not down nearly as much as the permit data would suggest I think overall permits are down.

Speaker Change: Where you are seeking out some are some cost savings.

Speaker Change: Yes.

Speaker Change: <unk> million dollars was then.

Speaker Change: For the quarter as it related to phase III sell centers that we closed so that was the expense in the quarter that will be nonrecurring dropped the remainder of the year.

Speaker Change: 17% I think our building material sales as we've reported our.

Speaker Change: And then on the supply chain there are multiple different things that we're focused on there.

Much better than that albeit still off double digit.

Speaker Change: Areas that we're focused on around product costs.

Speaker Change: So the comments, we're getting back from dealers, which I mentioned is that there is.

Speaker Change: The impact to gross margin, but specifically as it relates to the operating margin. The biggest driver there is going to be totally in delivery expenses.

Speaker Change: There is a lot of there's a lot of inbound mixing a lot there are more inbound calls than they seen earlier in the year and towards the end of last year. So inquiries. Our inquiries are good I think people are waiting for a sign to say alright. The fed is actually serious about cutting interest rates. The economy is going to expand a bit.

Speaker Change: And so we're very much focused on that as we look to expand in different market.

Speaker Change: We are able to leverage.

Speaker Change: Our vehicles and leverage our drivers and leverage our deliveries. So that's one of the things that our competitors don't really they don't have the ability for that same model that we have.

Speaker Change: The consumers get a little bit healthier.

Speaker Change: When as I mentioned, if you look at the online real estate sites and you look at the words that are being searched the word pool comes up near the near the very top of the list. So people still want a pool I think this year was a tough year frankly, it was worse than what we anticipated in the beginning of the year, hence the guidance.

Speaker Change: Kelly as we continue to expand our MPT branded building material offerings, we have the ability within a market to utilize one location to be those deliveries.

Speaker Change: And so the the freight expense, which is a significant component of our overall expenses.

Speaker Change: Area that we've been focused on as well as we are also continuing to expand our CFO so that for us our central shipping locations of which we have four within the network and that allows us to bring in product at a lower cost from our vendors and then redistributed within the network.

Speaker Change: Update that we put out in June but at this point I think we are we are fairly comfortable with the level that we see and dealers are not telling us that it is that it is getting any worse and I think we are we are slightly outperforming the industry and our participation in the number of pools that are being built.

Speaker Change: <unk> us to better manage our inventory over time.

Speaker Change: As well as to lower cost and lower delivery and then more product availability on a quicker basis to our customers.

Speaker Change: Great. Thanks, appreciate that and not only for you.

Speaker Change: Just on on managing the margin the operating margin.

Speaker Change: Great. Thanks very much.

Speaker Change: The just a few things here in todays call I think it was three locations closed in horizon, and I say I heard a million dollar impact I didnt get the context or the timing on that if you could repeat that but are you and then you've talked also about supply chain efficiencies.

Speaker Change: And our next question will come from David Macgregor with Longbow Research. Please go ahead.

Speaker Change: Hello, David perhaps your line is muted.

David: There you go sorry about that.

Speaker Change: Thanks for taking my questions and good morning, everyone I wanted to just start off by talking about.

Speaker Change: I'm just curious what if you could take us a little deeper on both as Youre pursuing efficiencies in the model, particularly in a year like this where you are where you are seeking out some are some cost savings.

David Macgregor: Some of the share growth and just.

David Macgregor: The extent to which you're exceeding market growth right. Now can you talk about the composition of that.

Speaker Change: That difference in the extent to which some of that might be acquisitions versus other factors.

Speaker Change: And so on.

The million dollars was then.

Speaker Change: Number for the quarter as it related to those three sell centers that we closed so that was the expense in the quarter that will be nonrecurring throughout the remainder of the year.

Speaker Change: Yes, as you know David the Hallmark of pool is we're an organic growth company. So if you look at the acquisitions that we've done this year. They are important but they are relatively small certainly in the grand scheme of things of the context of the whole company. So the growth that Youre seeing is really driven from a share perspective, it's driven organically, it's driven by our new <unk>.

Speaker Change: And then on the supply chain there.

Speaker Change: Multiple different things that we're focused on there.

Speaker Change: Those are areas that we're focused on around product costs.

Speaker Change: It would impact the gross margin, but specifically as it relates to the operating margin. The biggest driver there is going to be totally in delivery expenses.

Speaker Change: Sales centers that opened up in the in the critical areas in the places that we need better capacity and quite frankly, where we improved the value proposition for our customers. If you look at the concentration that we have.

Speaker Change: And so we're very much focused on that as we look to expand in different market.

Speaker Change: We are able to leverage.

Speaker Change: Of locations in the market and frankly, the focus on customer experience you won't find that same concentration or focus on customer experience with anyone so if I look at.

Speaker Change: Our vehicles and leverage our drivers and leverage our delivery. So that's one of the things that our competitors.

Speaker Change: Don't really they don't have the ability for that same model that we have so, particularly as we continue to expand our MPT branded building material offerings, we have the ability within a market to utilize one location to view those deliveries.

Speaker Change: So you're probably wondering how do you think and where does it show up and if I look at our chemical business our volumes on chemicals are up 3% this year.

Speaker Change: And that is with a late start to the season tougher weather.

Speaker Change: That would be the freight expense, which is a significant component of our overall expenses is an area that we've been focused on as well as we are also continuing to expand our CSL. So that's for us our central shipping locations.

Speaker Change: In many key markets and the fact that the volumes are up 3% when the installed base is not up 3% as an indication that we can take share.

Speaker Change: We have four within the network.

We are the places that people need product and we are.

Speaker Change: That allows us to bring in product at a lower cost from our vendors and then redistributed within the network. It allows us to better manage our inventory over time.

Our focus on customer experience is second to none and then when you add the private label capabilities that we have on chemicals that certainly a big differentiator.

Speaker Change: As well as to lower cost and lower delivery and then more product availability on a quicker basis to our customers.

Speaker Change: As I mentioned on new pool construction, when we look at our building material sales I mean, nobody will be happier if they build more pools this year than me.

Speaker Change: Great. Thanks very much.

Melanie <unk>: Maybe melanie but.

Speaker Change: And our next question will come from David Macgregor with Longbow Research. Please go ahead.

Melanie <unk>: Certainly I'd be I'd be happy, but if I look at the <unk>.

Melanie <unk>: Permit data and what I believe to be the drag of new pool construction and I look at our building materials.

Speaker Change: Hello, David perhaps your line is muted.

Melanie <unk>: We're certainly theres not theres not a big lift in price.

David: Here, we go sorry about that.

Melanie <unk>: That it certainly shows that again, we're getting a bigger slice of the pie and then again when I look at equipment sales, which we're pleased equipment sales overall are flat.

David Sutherland MacGregor: Thanks for taking my questions and good morning, everyone.

Wanted to just start off by talking about.

David Sutherland MacGregor: Some of the share growth and just the extent to which you're exceeding market growth right. Now can you talk about the composition of that.

Speaker Change: <unk> is a key area for us where.

Speaker Change: That difference in the extent to which some of that might be acquisitions versus other factors.

Speaker Change: Our heaters, where one of the first areas that took off during the pandemic and they also had one of the biggest corrections.

David Sutherland MacGregor: Yes.

David Sutherland MacGregor: David the Hallmark of pool is we're an organic growth company. So if you look at the acquisitions that we've done this year. They are important but they're relatively small certainly in the grand scheme of things of the context of the whole company. So the growth that Youre seeing is really driven from a share perspective, it's driven organically, it's driven by our new sales centers that opened up in there.

Speaker Change: That is a product that we're starting to see growth again in which is very encouraging as well as things like pumps and light and coronation and such so.

Speaker Change: Overall I just think that there has been a tremendous focus on customer experience.

And making sure that nobody does it better for the customer and that we continue to provide those value added services that there is no equal to in the industry.

David Sutherland MacGregor: Critical areas in the places that we need better capacity and quite frankly, where we improve the value proposition for our customers. If you look at the concentration that we have of locations in the market and frankly, the focus on customer experience you won't find that same concentration or focus on customer experience.

Speaker Change: That's helpful. Thank you.

Speaker Change: Second question really with respect to.

Speaker Change: Operating margins and just what is the opportunity to achieve.

Speaker Change: Operating margin improvement at the store level and I know at the analyst meeting you talked about the focus of those centers and trying to improve four wall profitability at that level in a softer environment like we're in right now.

David Sutherland MacGregor: <unk> with anyone.

David Sutherland MacGregor: If I look at.

Speaker Change: So you're probably wondering how.

Speaker Change: How do you think and where does it show up and if I look at our chemical business our volumes on chemicals are up 3% this year.

Speaker Change: The expectations around that get pushed out a little bit or do you think you can still maintain the momentum.

Speaker Change: And that is with a late start to the season tougher weather.

Speaker Change: I mean, there's.

Speaker Change: Theres a few groups right. So certainly even in the focused locations even in even in a down market.

Speaker Change: In many key markets and the fact that the volumes are up 3% when the installed base is not up 3% as an indication that we can take share.

Speaker Change #100: There is certainly an opportunity to continue to improve operating margins and it's really a function of execution right. It's a function of doing things right and the sale center in managing inventory managing the customer experience.

Speaker Change: We are the places that people need product and we are.

Speaker Change: Our focus on customer experience is second to none and then when you add the private label capabilities that we have on chemicals that certainly a big differentiator.

Speaker Change #100: And managing our costs and ultimately growth I mean, the biggest lever you have for growth for operating margin improvement is growth and as you can imagine the or would imagine that our focus centers are the ones that are going to be trailing the rest of the business in terms of sales growth now there's a couple of reasons for that one.

Speaker Change: As I mentioned on new pool construction, when we look at our building material sales I mean, nobody will be happier if they build more pools this year than me.

Melanie: Maybe melanie but.

Melanie: Certainly I'd be I'd be happy, but if I look at the <unk>.

Speaker Change #100: Is every new sale center that we opened by definition goes on the goes on the focus list to make sure that it gets the appropriate attention given the investment that we just made virtually every acquisition that we make operates well below the fleet average so those two go on the focus list.

Melanie: Permit data and what I believe to be the drag in new pool construction and then when I look at our building materials.

Speaker Change: We're certainly theres not theres not a big lift in price.

Speaker Change: That it certainly shows that again, we are getting a bigger slice of the pie and then again when I look at equipment sales, which we're pleased equipment sales overall are flat.

Speaker Change #100: So and if you look at our overall operating margin. If you look on the continuum, it's not like the mean and the median or the same number theres a fairly wide distribution in operating margins. So we see even even in a down market at the individual sale center level. There is still plenty of things we can do.

Speaker Change: Heaters is a key area for us where our heaters, where one of the first areas that took off during the pandemic and they also had one of the biggest corrections.

Speaker Change: That is a product that we're starting to see growth again in which is very encouraging as well as things like pumps and light and coronation and such so.

Speaker Change #100: Having said that overall the biggest lever that there is is sales growth and sales growth in a down market becomes much more difficult, but it is it is achievable and we have we have some locations that are up year over year, but getting back to the cadence of continuing to expand on a predictable basis the.

Speaker Change: Overall I just think that there has been a tremendous focus on customer experience.

Speaker Change: And making sure that nobody does it better for the customer and that we continue to provide those value added services that there is no equal to in the industry.

Speaker Change #100: The operating margins really comes with when the when the market turns and the market starts to grow and we get back to that long term growth algorithm that we talked about which is 6% to 9%, which won't come really until we see the reversion in new pool construction, we think thats coming in yes.

Speaker Change: That's helpful. Thank you.

Speaker Change: Second question really with respect to.

Speaker Change: Operating margins and just what is the opportunity to achieve.

Speaker Change: Operating margin improvement at the store level and I know at the analyst meeting you talked about the focus of those centers and trying to improve four wall profitability at that level in a softer environment like we're in right now is the expectations around that get pushed out a little bit or do you think you can still maintain the momentum.

Speaker Change #100: Do I think is going to happen between now and the end of the year as we mentioned we do not.

Pete <unk>: Very helpful. Thanks, Pete.

Laurent <unk>: And our next question will come from Laurent <unk> with William Blair. Please go ahead.

Speaker Change: I mean, there's a few groups right. So certainly even in the focused locations even in even in a down market.

Mark: I am Mark <unk> on for Ryan Merkel, So first half sales were better given our stronger elastic adjourn attributable to hotter weather regionally are you seeing these trends continuing into July with hot weather.

Speaker Change: There is certainly an opportunity to continue to improve operating margins and it's really a function of execution right. It's a function of doing things right and the sale center in managing inventory managing the customer experience.

Speaker Change #103: Is demand tracking better than I expected.

Yes, I would tell you that.

Speaker Change: And managing our costs and ultimately growth I mean, the biggest lever you have for growth for operating margin improvement is growth and as you can imagine.

Speaker Change #104: The results that we see in July so far are encouraging there there's strong similar to the last week that we saw in June and Thats really a function of.

Speaker Change: Or would imagine that our focus centers are the ones that are going to be trailing the rest of the business in terms of sales growth now there's a couple of reasons for that one is every new sale center that we opened by definition goes on the goes on the focus list to make sure that it gets the appropriate attention given the investment that we just made.

Speaker Change #105: Your in season, it's hot.

Speaker Change #106: We have we think the best value proposition in the industry and that's what's driving the business.

Speaker Change #106: Thank you I'll take the rest offline and pass it on.

Speaker Change #106: Thanks.

Speaker Change #106: And our next question will come from Steve Volkmann with Jefferies. Please go ahead.

Speaker Change: Virtually every acquisition that we make operates well below the fleet average so those two go on the focus list.

Steve Volkmann: Hi, Thank you guys.

Steve Volkmann: If I missed this or maybe you didnt or don't want to say it but if we have to have the recurring revenue business sort of flat. This year in the building products I don't know, let's call it down 15% or something is there any way to ballpark the impact that has on the gross margin dilutive impact.

Speaker Change: So and if you look at our overall operating margin. If you look on the continuum, it's not like the mean and the median or the same number theres a fairly wide distribution in operating margins. So we see even even in a down market at the individual sale center level. There is still plenty of things we can do.

Speaker Change #108: So I would I would probably ballpark it in this manner. So when you look at the way that we have historically built up the bridge from the 29 to 30, we said that roughly half of that was acquisition benefit and then the remaining half of that 50 basis points with Lilly.

Speaker Change: Having said that overall the biggest lever that there is is sales growth and sales growth in a down market becomes much more difficult, but it is it is achievable and we have we have some locations that are up year over year, but getting back to the cadence of continuing to expand on a predictable basis the.

Speaker Change #108: Made up of a combination of the benefit from the building materials the pricing there.

Speaker Change: The operating margins really comes with Wyndham when the market turns and the market starts to grow and we get back to that long term growth algorithm that we talked about which is 6% to 9%, which won't come really until we see the reversion in new pool construction, we think thats coming in yes.

Speaker Change #108: It's Alex Pham on the private label.

Speaker Change #108: Kind of roughly distributed evenly within that mix.

Speaker Change #108: Okay, so not huge.

Speaker Change #108: And then I guess, maybe longer term bigger picture question, maybe for Pete but pre.

Speaker Change #109: Pre COVID-19 and I guess pretty you Pete.

Speaker Change: Do I think it's going to happen between now and the end of the year as we mentioned we do not.

Pete <unk>: Long term algo here, it was kind of growth or whether you guys have.

Speaker Change: Very helpful. Thanks, Pete.

Pete <unk>: Wait it out but.

Speaker Change: And our next question will come from Laurent <unk> with William Blair. Please go ahead.

Speaker Change #110: But it included sort of a flattish gross margin with leverage on SG&A over time, but it sounds like youre talking more about gross margin upside than over the past year over the next call.

Ryan James Merkel: And finally on for Ryan Merkel, So first half sales were better given our stronger elastic adjourn attributable to hotter weather regionally are you seeing these trends continuing into July with hot weather.

Speaker Change #111: 510 years I don't want to put words in your mouth, but is the new algo actually include a positive trend in gross margin as well as leverage on SG&A.

Ryan James Merkel: Is demand tracking better than I expected.

Ryan James Merkel: Yes, I would tell you that.

Steve Volkmann: I think longer term, Steve the way to think about gross margins as we do believe that there is upside in gross margin, but it's not going to come it's not going to come overnight and frankly, if there isn't a silver bullet that we do this in gross margin goes up.

Ryan James Merkel: The results that we see in July so far are encouraging there there's strong similar to the last week that we saw in June and Thats really a function of.

Speaker Change: Your in season, it's hot.

Speaker Change: We have we think the best value proposition in the industry and that's what's driving the business.

Steve Volkmann: We've talked about the areas that we're focused on that improved gross margin and we've talked about the <unk>.

Steve Volkmann: Work that we're doing around strategic price and we've talked about improving the mix of business that we have we've talked about leaning into our private label.

Speaker Change: Thank you I'll take the rest offline and pass it on.

Speaker Change: Thanks.

Speaker Change: And our next question will come from Steve Volkmann with Jefferies. Please go ahead.

Stephen Edward Volkmann: Hi, Thank you guys.

Steve Volkmann: Products in particular, our chemicals, we've talked about improvements in supply chain and leveraging our CSL, which all contribute to a positive way to the to the gross margin now that's going to be offset.

Stephen Edward Volkmann: If I missed this or maybe you didnt or don't want to say it but if we have kind of the.

Stephen Edward Volkmann: Our recurring revenue business sort of flat this year in the building products, let's call it down 15% or something is there any way to ballpark the impact that has on the gross margin dilutive impact.

Steve Volkmann: By competitive pressures, which are in the market really nothing new there, but they are certainly competitive pressures that we have to deal with every day, but if I were to give you a longer term view.

Speaker Change: So I would I would probably ballpark it in this manner. So when you look at the way that we have historically built up the bridge from the 29 to 30, we said that roughly half of that was acquisition benefit.

Steve Volkmann: Can we continue to leverage SG&A, yes, virtually every facility. We have has the ability to leverage SG&A with sales growth now.

Speaker Change: And then the remaining half of that 50 basis points was really made up of a combination of the benefit from the building materials with pricing.

Steve Volkmann: As we have mentioned when we look at.

Speaker Change #112: Our cost basis, certainly there is upward pressure on wages and there should be.

Stephen Edward Volkmann: <unk> expansion and the private label with the kind of roughly distributed evenly within that mix.

Speaker Change #112: Certainly every time, we renew a lease it is certainly not a.

Speaker Change #112: Not a.

Speaker Change: Okay, so not huge.

Speaker Change #112: A branch or it's not it's not on our side.

Speaker Change: And then I guess, maybe longer term bigger picture question, maybe for Pete but pre.

Speaker Change #112: The landlords have the advantage right now because there's a scarcity of facilities in particular in the areas that we want to grow in so we're having to work hard on the SG&A leverage and I think over time that there is continued upside on gross margin I don't think youre going to see it go 30 31 $32 30.

Pre COVID-19 and I guess pretty you Pete.

Pete: Long term algo here was kind of growth so where do you guys have kind of laid it out but.

Speaker Change: But it included sort of a flattish gross margin with leverage on SG&A over time, but it sounds like youre talking more about gross margin upside than over the past year over the next call.

Speaker Change #112: 334 successively over the next over the next four years, but do I think that we have enough things in our.

Speaker Change: 510 years I don't want to put words in your mouth, but is the new algo actually include a positive trend in gross margin as well as leverage on SG&A.

Speaker Change #112: In our deck that we're working on to continue to drive that number up yes I do.

Speaker Change #113: Okay. Thank you guys.

Stephen Edward Volkmann: I think longer term, Steve the way to think about gross margins as we do believe that there is upside in gross margin, but it's not going to come it's not going to come overnight and frankly, if there isn't a silver bullet, but we do this in gross margin goes up.

Speaker Change #114: Thank you.

Speaker Change #114: And our next question will come from Trey Grooms with Stephens. Please go ahead.

Trey Grooms: Hey, good morning, Thanks for taking my questions.

I think the first one.

Speaker Change #116: That I have is kind of on their own cash flows.

Stephen Edward Volkmann: We've talked about the areas that we're focused on that improved gross margin and we've talked about the work that we're doing around strategic price and we've talked about improving the mix of business that we have we've talked about leaning into our private label.

Trey Grooms: And maybe the flow through there.

Speaker Change #117: Pulled back inventory a bit in the quarter as.

Speaker Change #117: As we look at the full year should.

Speaker Change #117: The year over year improvement in working capital should we.

Speaker Change #117: Continue to see an improvement there or is.

Stephen Edward Volkmann: Products in particular, our chemicals, we've talked about improvements in.

Speaker Change #118: Is there anything.

Speaker Change #119: On the working capital front that we should be aware of in the back half moment.

Stephen Edward Volkmann: Supply chain and leveraging our our CSL, which all contribute too in a positive way to the to the gross margin now that's going to be offset by competitive pressures, which are in the market really nothing new there, but they are certainly competitive pressures that we have to deal with every day, but if I were to give you a law.

Speaker Change #120: Yes, theres nothing unusual in the back half of the year. So as we would typically expect the third and fourth quarters are a very good cash flow year for us.

Speaker Change #119: And.

Speaker Change #119: We do think that for this year.

Speaker Change #119: That we should be able to slightly exceed our target of 100% of net income from the casualty standpoint.

Stephen Edward Volkmann: Longer term view.

Stephen Edward Volkmann: As you know can we continue to leverage SG&A, yes, virtually every facility. We have has the ability to leverage SG&A with sales growth now.

Speaker Change #119: And the biggest benefit certainly the biggest driver of that typically is going to be inventory.

Speaker Change #121: Perfect Thanks for that and.

Speaker Change #121: I guess.

Speaker Change: As we have mentioned when we look at.

Speaker Change #122: One last one for me is.

Speaker Change: Our cost basis, certainly there is upward pressure on wages and there should be.

Speaker Change #123: On the pricing side.

Speaker Change #124: You mentioned that you were seeing some lower pricing clearly on commodity but is there any other areas where.

Speaker Change: Certainly every time, we renew a lease it is certainly not a.

Speaker Change: Not a.

Speaker Change #125: Youre seeing seen any kind of pricing pressure outside of what.

A branch or it's not it's not on our side.

Speaker Change: The landlords have the advantage right now because there's a scarcity of facilities in particular in the areas that we want to grow in.

Speaker Change #126: What we were saying on the commodity kind of impacted.

Speaker Change #127: Yes, I think what we said is.

Speaker Change: So we're having to work hard on the SG&A leverage and I think over time that there is continued upside on on gross margin I don't think youre going to see it go 30, 31 32 to $33 34 successively over the next over the next four years, but do I think that we have enough thing.

Speaker Change #128: That there's a few areas that we are seeing pressure on pricing. So commodities are going to fluctuate as you. As you mentioned there are certainly competitive pressures and we mentioned that on the last call because we had folks that were.

Speaker Change #128: Essentially trying to generate cash to make their early by payments. So we saw some some pretty ridiculous pricing being delivered to the market, which we knew wasn't sustainable and it wasn't so that that.

Speaker Change: <unk> in our.

Speaker Change: In our deck that we are working on to continue to drive that number up yes I do.

Speaker Change: Okay. Thank you guys.

Speaker Change #128: That certainly has abated.

Speaker Change: Thank you. Thank you.

Speaker Change #128: And then I guess overall when I look at just competition I would say larger customers on the construction side as we mentioned.

Speaker Change: And our next question will come from Trey Grooms with Stephens. Please go ahead.

Trey Grooms: Hey, good morning, Thanks for taking my questions.

Speaker Change: I think the first one.

Speaker Change #128: Even though new builds are down there are people that are getting the lion's share of what's being built is the larger customers.

Trey Grooms: That I have is kind of on their own cash flows.

Speaker Change:

Speaker Change: And maybe the flow through there.

Speaker Change: Pulled back inventory a bit in the quarter.

Speaker Change #129: And certainly larger customers have a lower margin profile. So that's certainly from a headwind perspective the areas that we currently see I guess, what's important to point out here is <unk>.

Speaker Change: And as we look at the full year should.

Speaker Change: The year over year improvement in working capital should we.

Speaker Change: Continue to see an improvement there or is.

Speaker Change: Is there anything.

Speaker Change #129: None of this is new right. None of this is new if you go back and you look at our our reports over the last 10 years. The comments I. Just made you will find in every one of them there is nothing new in that.

Speaker Change: On the working capital front that we should be aware of in the back half.

Speaker Change: Yes, there is nothing unusual in the back half of the year. So as we would typically expect the third and fourth quarters are a very good cash flow year for us.

Speaker Change #129: Yes.

Speaker Change: <unk>.

That's super helpful and thanks for the color on that Pete.

Speaker Change: We do think that for this year.

Speaker Change #130: The one question, we still get from time to time is and I know you touched on this on the last call kind of with your thoughts, but maybe any update on if youre seeing any kind of change in behavior out of heritage now that home depot has had them under their umbrella for I guess, a month or so but it sounds like the answer to that is no.

Speaker Change: And that we should be able to slightly exceed our target of 100% of net income from the casualty standpoint.

Speaker Change: And the biggest benefit certainly the biggest driver of that type of thing is going to be inventory.

Speaker Change: Perfect Thanks for that and.

Speaker Change: I guess.

Speaker Change: One last one for me is.

Speaker Change #129: <unk>.

Speaker Change: On the pricing side.

Speaker Change #131: Yes, there really isn't I mean, as you can imagine I'm sure there it's way too soon to have envy.

Speaker Change: You mentioned that you were seeing some lower pricing clearly on commodity but is there any other areas where.

Speaker Change #132: Any impact.

Speaker Change #135: Their new ownership. So nothing is nothing has really changed in that and frankly as I said, if you go back and look at.

Speaker Change: You are seeing seen any kind of pricing pressure outside of what.

Speaker Change: What we were saying on the commodity kind of impacted.

Speaker Change #132: The market over the last 10 years.

Speaker Change: Yes, I think what we said is.

Speaker Change #133: Remember all heritage did was turnaround and buy the <unk>.

Speaker Change: That there is a few areas that we are seeing pressure on pricing. So commodities are going to fluctuate as you. As you mentioned there are certainly competitive pressures and we mentioned that on the last call because we had folks that were.

Speaker Change #133: The distribution that was out there so much of what they have is the same competitors that we had we had before so the same patterns from a competition perspective, and frankly when you don't have the value add that we do the best way to compete with US is on price, but again.

Speaker Change: Essentially trying to generate cash to make their early by payments. So we saw some some pretty ridiculous pricing being delivered to the market, which we knew wasn't sustainable and it wasn't so that you know that.

Speaker Change #133: And I have to point this out to our folks too. It's the same pattern. That's happened for years and I expect that I expect it to continue but it's nothing that we lose a lot of sleep over I'm hopeful that with home depot.

Speaker Change: That certainly has abated.

Speaker Change: And then I guess overall when I look at just competition I would say larger customers on the construction side as we mentioned.

Speaker Change #133: Helping run the show that.

Speaker Change #133: Become a little more responsible.

Speaker Change #133: Yep, Okay. Thanks, Pete makes sense to me.

Speaker Change: Even though new builds are down there are people that are getting the lion's share of what's being built is the larger customers.

Garik <unk>: And our next question will come from Garik <unk> with loop capital. Please go ahead.

Speaker Change: And certainly larger customers have a lower margin profile, so that certainly from a headwind perspective the areas that we currently see I guess, what's important to point out here is none of this is new right. None of this is new if you go back and you look at our our report.

Garik <unk>: Oh, hi, Thank you just on Opex growth think about heard you right the growth rate is moderating.

Garik <unk>: Quarter, but then an increasing somewhat in Q4 I'm just wondering.

Speaker Change #137: Variance there for modeling purposes, and then what might be earlier, but do you think operating expense leverage should revert back to more normalized levels in 'twenty five.

Speaker Change: Over the last 10 years the comments I just made you will find in every one of them there is nothing new in that.

Speaker Change #138: So as it relates to the differences between the third and fourth quarter are the bigger difference there really is that the fourth quarter.

Speaker Change: Yes.

Speaker Change: That's super helpful and thanks for the color on that Pete.

Speaker Change #136: The last variable expenses that we move to Apple to you to take out from an efficiency standpoint. So the percentage increase is really just the fixed cost primarily on the run time.

Speaker Change: The one question, we still get from time to time is and I know you touched on this on the last call kind of with your thoughts, but maybe any update on if youre seeing any kind of change in behavior out of heritage now that home depot has had them under their umbrella for I guess, a month or so but it sounds like the answer to that is no.

Speaker Change #136: It's going to be a bigger driver in the fourth quarter versus the third quarter and as we look forward from an expense leverage standpoint.

Speaker Change #139: We have looked across the network and.

Speaker Change: <unk>.

Speaker Change: Yes, there really isn't I mean, as you can imagine I'm sure there it's way too soon to have envy.

Speaker Change #139: Taking the opportunity as we mentioned some of that is horizon closure to really evaluate our cost structure from the ground up.

Any impact.

Speaker Change #139: And so I believe that the decisions that we've made this year will allow us to be.

Speaker Change: Their new ownership. So nothing is nothing has really changed in that and frankly as I said, if you go back and look at the.

Speaker Change #139: Be quicker on our feet and getting that expense leverage as we move forward with our top line sales growth.

Speaker Change: The market over the last 10 years.

Speaker Change #140: Got it follow up question is just you know just more.

Speaker Change: Remember all heritage did was turnaround and buy the <unk>.

Speaker Change #141: Very short term just with the pick up in June.

Speaker Change: The distribution that was out there so much of what they have is the same competitors that we had we had before so the same patterns from a competition perspective, and frankly when you don't have the value add that we do the best way to compete with US is on price, but again.

Doug: Doug the last week in June and that's continued here into July is it primarily on.

Doug: Non discretionary piece.

Doug: So.

Speaker Change #143: Like we would've sold.

Doug: Not for the weather delays earlier in the second quarters or are there any other green shoots that you're seeing that could point.

And I have to point this out to our folks too. It's the same pattern. That's happened for years and I expect that I expect it to continue but it's nothing that we lose a lot of sleep over I'm hopeful that with home depot.

Speaker Change #144: So maybe a little bit more optimism on a broader base recovery.

No. It's really it's the maintenance spend right. So the more of the equipment gets used the more people that are in the pools and the larger the demand is for those products.

Speaker Change: Helping run the show that.

Speaker Change: They become a little more responsible.

Speaker Change #145: And then we are we're enjoying a.

Speaker Change: Yep, Okay. Thanks, Pete makes sense to me.

Speaker Change #145: A bigger share of that based on the differentiated value proposition that we have but I'd love to tell you that I am seeing green shoots on construction or renovation, but as I mentioned this really isn't renovation season. So we don't really know and on construction I still think theres a lot of people that want a pool.

Garik Simha Shmois: And our next question will come from Garik <unk> with loop capital. Please go ahead.

Garik Simha Shmois: Oh, hi, Thank you just on Opex growth think about would you rate the growth rate is moderating historic.

Speaker Change: Quarter, but then an increasing somewhat in Q4 I'm just wondering.

Speaker Change #145: The dealers are saying hey, the phones are ringing people wanting quotes they want to know, but I just think they are waiting for a little better economic environment pull the trigger.

Garik Simha Shmois: Variance there for modeling purposes, and then what might be earlier, but do you think operating expense leverage could revert back to more normalized levels in 'twenty five.

Speaker Change #146: Understood. Thanks for that I'll pass it on.

Thank you.

Speaker Change: So as it relates to the difference between third and fourth quarter are the bigger difference there really is that the fourth quarter.

Speaker Change #146: And our next question will come from Sam Reed with Wells Fargo. Please go ahead.

Speaker Change: The last variable expenses that we would be able to take out from an efficiency standpoint. So the percentage increase is really just the fixed cost primarily on the run time.

Sam Reed: Awesome. Thanks, so much.

Sam Reed: No it's still too early to be thinking about 2025, but maybe just a quick thought from your vantage point on the topline all go next year.

Speaker Change: Is going to be a bigger driver in the fourth quarter versus the third quarter and as we look forward from an expense leverage standpoint.

Speaker Change #148: <unk> seen it kind of muted new pool construction.

Speaker Change #149: And there obviously are some pools that exit the base due to scrap edge and other dynamics like that so maybe just talk through kind of the achieve ability would be all go next year, if you don't get that.

Speaker Change: We have looked across the network and.

Speaker Change: Taking the opportunity as we mentioned that some of that was horizon closure to really evaluate our cost structure from the ground up.

Speaker Change #150: One to two point contribution from new pool of entering the space.

<unk> believes that the decisions that we've made this year will allow us to be.

Speaker Change #151: Yes so.

Speaker Change #151: Certainly we would expect that we're looking at kind of what we've seen on the impact from the new build and remodel activity this year.

Speaker Change: Be quicker on our feet.

Speaker Change: That expense leverage as we move forward with our top line sales growth.

Speaker Change: Got it.

Speaker Change #152: That is our kind of collectively bringing down sounds expectation kind of four to five.

Speaker Change: All questions just.

Speaker Change: Sure.

Speaker Change: Very short term just with the pick up in June.

Speaker Change #152: And so if that doesn't say that flattening next year, then we would see no.

Speaker Change: The last week in June and that's continued here into July is it primarily on.

Speaker Change #153: No impact positive or negative from that activity kind of a year over year and then you would see the positive impact coming through from the maintenance activity on the incremental 60000 or so neutral.

Speaker Change: Non discretionary piece.

Speaker Change: Alex.

Alex: You likely would have sold.

Speaker Change: Not for the weather delays earlier in the second quarters or are there any other green shoots that you're seeing.

Speaker Change #153: Neutrals that get that this year.

Speaker Change: So maybe a little bit more optimism on a broader base recovery.

Speaker Change #154: Thanks, and then one final one just thinking through your chemical packaging operations. It sounds like you've done a great job of scaling that I think you mentioned up 60% since you purchased that maybe.

Speaker Change: No. It's really it's the maintenance spend right. So the more of the equipment gets used the more people that are in the pools and the larger the demand is for those products.

Speaker Change #155: Maybe just talk through the margin benefit you've gotten from.

Speaker Change: Then we are.

Speaker Change #156: So it's chemical packaging operations, and whether theres any kind of incremental margin beyond that we should be contemplating in our models. Thanks.

Speaker Change: We're enjoying a bigger share of that based on the differentiated value proposition that we have but I'd love to tell you that I am seeing green shoots on construction or renovation, but as I mentioned this really isn't renovation season. So we don't really know and on construction I still think theres a lot of people that want a pool.

Speaker Change #157: Yes, I think it's a piece of the margin improvement that we've seen in the margin profile is really different.

Byproduct, so there are certain products to them.

Speaker Change: The dealers are saying hey, the phones are ringing people wanting quotes they want to know, but I just think they are waiting for a little better economic environment pulled the trigger.

Yeah.

Speaker Change #157: Much better margin profile, others are going to be certainly better, but not as much and we really don't we really don't parse that out and the one thing I would remind you is that.

Speaker Change: Understood. Thanks for that I'll pass it on.

Speaker Change #158: Our view on the on the chemical packaging operation is we need our chemical partners, we will never be sole sourced in that plant on our chemicals because of surety of supply and redundancy. So.

Speaker Change: Thank you.

Speaker Change: And our next question will come from Sam Reed with Wells Fargo. Please go ahead.

Sam Reed: Awesome. Thanks, so much.

Sam Reed: It's still too early to be thinking about 2025, but maybe just a quick thought from your vantage point on the topline all go next year.

Speaker Change #158: Even if I could supply the entire business out of that facility.

Speaker Change #158: And have.

Speaker Change #102: It kind of muted new pool construction.

Speaker Change #158: Incremental basis points of gross margin by doing that.

Speaker Change #104: And there obviously are some pools that exit the base due to scrap edge and other dynamics like that so maybe just talk through kind of the achieve ability would be all go next year.

Speaker Change #159: Wouldn't do it because I wouldn't put all of the <unk> of the company in one basket. So our chemical business is going to be a blend of our partners suppliers and the suncoast facility certainly the things that we run through the Suncoast facility are margin accretive to the business they vary.

Speaker Change #100: You don't get that with call. It one to two point contribution from new pool of entering the space.

Speaker Change #101: Yes so.

Speaker Change #159: Byproduct it would be at the high end is going to be your liquids.

Speaker Change #103: Certainly we would expect that I'm looking at kind of what we've seen R&D the impact from the new builds and the remodel activity this year.

Speaker Change #160: And some of the Balancers and then when you get into Tricolore Theres, certainly an advantage, but nowhere near the differentiation that we see on the other products.

Speaker Change #103: That is our kind of collectively bringing down sounds expectation kind of four to five.

Speaker Change #103: And so if that is in fact flat next year, then we would see no.

Speaker Change #161: That's super helpful I'll pass it on.

Speaker Change #161: Thank you.

Speaker Change #161: And this will conclude our question and answer session for today I would like to turn the conference back over to Peter Robertson for any closing remarks.

Peter Robertson: Yes. Thank.

Peter Robertson: Thank you all for joining US today, we look forward to our next call, which will be on October 24th when we release, our third quarter 2024 results.

Peter Robertson: Thank you for your support and enjoy the rest of your summer.

Speaker Change #163: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.