The Pool Corporation held their second quarter 2023 conference call and discussed their results for the quarter. They reported that the year started off challenging due to weather, but improved sequentially. However, new construction remains under pressure with the exception of high-end new construction which is seeing solid demand. Additionally, the weather change that usually initiates the start of the pool season came later than usual.

POOLCORP had a strong quarter despite challenging market conditions, such as delayed openings due to cooler weather and higher interest rates. They have opened 8 new sales centers and 9 new stores in Japan this year, and have managed to reduce their operating expenses. They are investing in their growth and customer experience, and have also launched their POOL360 water test application at their independent retailers.

The company has generated strong financials and seen a 93% growth in sales and EPS growth of almost 200% from 2019 to 2022. Despite negative impacts, their second quarter 2023 sales of $1.9 billion exceeded 2021 second quarter sales by $70 million or 4%. The company has the broadest footprint, best talent, and swiftest access to capital, allowing them to invest during all business cycles. The varying weather patterns have had an impact on their year-round base business markets.

In the second quarter, sales in California decreased 8%, Arizona decreased 7%, Texas decreased 13%, and Florida decreased 7%. Sales in seasonal markets decreased 11%, which is an improvement from the 23% decrease in the first quarter. Pricing on equipment held steady, with overall sales down 8%. Compared to the second quarter of 2022 and 2021, sales were down in all areas, with the biggest decreases being in California and Texas.

Chemical sales in the quarter were down 3% due to weather patterns and trichlor pricing, while building material sales were down 8%. Commercial swimming pool sales increased 8%, while Pinch A Penny franchisees reported relatively flat sales. Sales to independent retail customers were down 11%, and Europe's sales were down 6%. Base business sales for Horizon were flat, but Irrigation and product category saw strength due to commercial projects. POOL360 B2B tool saw sales increase 3% with 4% line volume growth, indicating an accelerating adoption rate.

In the second quarter of 2023, the company's gross margins were 30.6%, operating expenses were 13% of net sales, and operating income was $327 million. The company opened three sales centers, added five new locations, and expanded their Pinch A Penny franchise network by four new customers. They expect new pool construction to be down 30%, with 70,000 new pools being added to the install base in 2023. They are continuing to invest in the future of the business.

The average spend on new pools this year is expected to increase, as lower-priced pools are struggling more than higher-priced ones. There is a 10% increase in remodel and renovation activities, with owners of in-ground pools spending around $1000 a year on maintenance. The install base is bigger than 2019 and continues to grow, with equipment and product inflation helping to buoy the top line. Supply conditions have returned to normal, leading to some trichlor pricing pressure, but this is being offset by inflation of other chemicals. Overall, the long-term outlook of the industry is strong.

In the second quarter of 2023, the company reported $1.9 billion in net sales, with inflation at 3-4%, and a slight overall pricing benefit from chemicals. Gross margin was 30.6%, down 180 basis points from the same period in 2022, due to lower cost inventory being sold through and sales concession activity. Operating expenses decreased 3% year-over-year. The company has adjusted its full year guidance for 2023 to $13.14 to $14.14.

SG&A cost as a percentage of net sales was 13% for the quarter, significantly better than the 18.6% recorded in the first quarter. The field teams managed to keep expenses from increasing too much from the first quarter to the second quarter. Three acquisitions were completed this year, adding less than 1% to net sales. The second quarter operating margin was 17.6%, down from 20.4% last year but still above the 15.4% in 2019. The 10.7% full year operating margin in 2019 expanded to 16.6% in 2022 due to inflation-driven price increases and inventory gains. The company expects to achieve margins in 2023 that are higher than pre-pandemic levels, due to strategic acquisitions, increased scale, product expansion, and improved operating efficiencies.

The company reported a diluted EPS excluding ASU of $5.89, which is 22% lower than the year prior but 94% higher than the EPS reported in 2019. Receivables are well managed and inventory has been rightsized. The company has also reduced debt by $411 million and increased cash flow from operating activities by $348 million. They are aiming to reduce inventory levels by the end of the third quarter and are focusing on capacity creation and providing value to customers while generating strong returns for shareholders.

The company has completed $44 million of share buybacks in the open market in the first half of the year and has increased its authorization under its share repurchase program to $600 million. Full year cash flows are expected to be around $800 million, with sales down 10% compared to 2022. Gross margins are expected to return to normal levels in the second half of the year and operating expenses will be well managed for the full year. The company plans to use the increased cash flows to spend $25 million to $50 million on acquisitions, $50 million to $60 million on capital expenditures, $170 million on cash dividends, and the remaining approximately $550 million on debt reductions and share buybacks.

The company's leverage ratio is maintained at the low end of its target rate, with interest expense expected to be between $55 million and $62 million. The Board increased the quarterly dividend payout by 10%, and the company expects to pay a full year dividend of around $170 million. The EPS guidance for the full year 2023 is $13.14 to $14.14, and the company issued its second annual corporate responsibility report. The company is proud to have expanded its disclosures in sustainability efforts, and its financial position is strong.

Peter Arvan discussed how the company has better visibility into how the year is going to trend now that the most seasonally significant part of the year has passed. He reported that new pool construction is expected to be up 30%, and that the company is gaining market share. Additionally, he noted that the weather presented significant headwinds in the second quarter, as the season started late and the poor weather affected year-round markets. Lastly, he observed that non-discretionary spending is good.

The hot weather has had a positive impact on chemical sales, as consumers are buying semi-discretionary items such as pool heaters. However, many consumers are deferring the purchase of items like pool cleaners due to the current economic environment. Pool finish and tile sales are down 2% and 9% respectively, but renovation and remodel market is doing better than new construction.

Peter Arvan of the pool business is encouraged by the uptick in sales due to the warmer weather. However, they have to take into consideration the strong sales from the third quarter of last year, which was due to good weather, busy sales centers, and consumer confidence.

Peter Arvan explains that while high-end pool builders are doing well, the lower-end pool builders are seeing an increase in demand due to the lower financing costs. He states that many of the conversations and closes for entry-level pools are happening at the kitchen table, as they are being sold as a monthly payment.

Dealers have reported that monthly payments for pools have gone up from $700 to $750 to $1,200 to $1,400, making it unaffordable for many families. To make pools more affordable, interest rates would have to moderate and consumer sentiment would have to improve. People need to become accustomed to higher interest rates and wages need to catch up to inflation. This would make entry level pools more accessible.

Peter Arvan has been in the pool industry for seven years and has seen people upgrade from pressure and suction cleaners to robotic cleaners and higher levels of automation. However, due to economic conditions, people are waiting to purchase the higher-end products and are instead sticking with their pressure and suction cleaners for another year. Arvan states that the competition has not changed and that there are no updates to the inflation expectations for the year.

The speaker talks about the competitive nature of the market before and during the pandemic, and how their company was able to take advantage of the situation by investing in product and widening their base of business. They have opened 59 new locations since 2019 and are confident in their ability to maintain their market share.

NPT has an advantage over competitors with its 100 NPT centers, product trainers, private label capabilities, focus on customer experience, digital tools, POOL360 water test software, and marketing capabilities. This gives them flexibility and capabilities to serve customers better, although the market is contested by competitors.

Peter Arvan and Susan Maklari discussed the strength of the company's team and resources, and Melanie Hart answered a question from David Manthey about the year-to-year change in new pools, renovation, and maintenance revenues, as well as the price contribution across blue and green. She reported that new pool construction was down 5% and renovation was down 3%, and that green had lower price contribution due to commodity pricing, but sales were relatively flat.

Peter Arvan believes that the mid and upper end of the pool construction market will remain stable, but that there won't be an acceleration in new pools due to the lack of movement in the housing market. Melanie Hart adds that the third quarter of the year will be more difficult than the fourth quarter, as the fourth quarter of last year only saw a 1% increase in base business.

Trey Grooms asked Peter Arvan and Melanie Hart what would drive the company to the top or bottom end of their revised EPS guidance range. Peter and Melanie responded that the biggest driver would be the top line within the 10% range, with some expense offsets depending on actual volume. They also noted that volume leverage is the biggest lever, and estimated a $30 million impact from weather in the second quarter.

Scott Schneeberger asked Peter Arvan to elaborate on his statement that remodeling was trending ahead of what was expected for the year. Peter looked at permit activity and concluded that new pool finish was down 2%, but moderating a little bit. He believes that some of this has to do with renovation and remodel, which is expected to be down 15-20%. He believes that it will be stronger in the beginning of the year and weaker towards the end.

Joe Ahlersmeyer from Deutsche Bank asked about the impact of new construction on the consolidated number in the second quarter and the cumulative change in sales guide from earlier in the year. Melanie Hart answered that their initial guidance was flat to negative 3%, and they expected to see some negative impacts.

The weather has had a cumulative impact of $90 million on the company and there has been a 1% impact from trichlor pricing. Additionally, consumer sentiment and early buy activity have been higher than anticipated, resulting in higher channel inventory. SG&A is expected to be modestly up this year and incentive comp is currently estimated to be lower than initially expected.

Peter Arvan explains that it is difficult to measure market share in their industry, but they have a good view of what's going on at the individual customer level and also information from the manufacturers about what's going on in the channel in total. They are expecting their SG&A to be up no more than 1% for the full year, and are confident that the gross profit dollars generated from the revenue will more than offset the incremental expense on the incentive comp side.

Peter Arvan explains that it is not likely for homeowners to winterize their pool in July or August due to the high water temperature as it would cause damage to the pool finish. He also states that homeowners are not likely to change their behavior when it comes to essential services such as water filtration and water treatment, as they have no choice but to fix any issues that arise.

Peter Arvan discusses how maintenance and repair of pools often includes the use of chemicals, and how the demand for these chemicals is currently very strong. He also notes that prices for trichlor have declined in some areas due to the need to get rid of inventory purchased in anticipation of higher usage before the end of the year, as chemicals become less potent over time.

Peter Arvan believes that product inflation in the coming year will be above normal, but it is too early to give an accurate answer. He notes that customers have not changed their behavior when it comes to break-fix items, as they usually pick up what the distributor has without negotiating price. Discretionary items such as robots have gone up in value, so some people may be waiting to purchase them.

Pool Corp CEO Peter Arvan discussed the impact of SG&A costs and operating costs on manufacturers, noting that he expects them to pass on more than the usual 1-2% to consumers. He then discussed the performance of Pinch A Penny, their retail competitor, noting that their non-discretionary business is holding up well but there is some hesitation for discretionary equipment purchases. He concluded by thanking everyone for their interest and support in Pool Corp.

The company looks forward to continuing to lead the industry and providing the highest level of value for service for customers and suppliers. They will be discussing their third quarter 2023 results on October 19th and invite everyone to join the call. The presentation has now concluded.

This summary was generated with AI and may contain some inaccuracies.