The operator welcomes participants to the Pool Corporation Third Quarter 2023 Conference Call and introduces Melanie Hart, Vice President and Chief Financial Officer. Hart mentions that the discussion may include forward-looking statements and references to non-GAAP financial measures. She then hands the call over to President and CEO Peter Arvan, who discusses the company's solid third quarter results, which were largely as expected. He notes that the weather conditions were mostly neutral and that sales were slightly down compared to the previous year but exceeded the 2021 third quarter sales.

In the third quarter, sales declines showed improvement compared to the previous quarters, with a 5% decline in Florida and larger declines in other year-round markets. The base business declined 8% year-round and 10% in seasonal markets, with chemical sales increasing 5% and building material sales down 13%. Equipment sales also declined 9% in the quarter. The company's strong footprint, proprietary products, and technology tools contributed to share growth in the chemical category, while their NPT footprint and product offering allowed them to outperform the industry in building material sales.

Despite a softer demand for new pool construction and renovation and remodel, there is still solid demand for maintenance and repair. Commercial pool product demand remained strong, while sales to independent retail customers and Pinch A Penny franchisees saw declines. Europe showed improvement after a challenging period, while Horizon's sales declined. Gross margins are expected to be consistent with long-term guidance, and operating expenses were reduced by 2% thanks to the team's focus on capacity creation and expense management.

The company's B2B tool, POOL360, saw a 5% increase in sales, surpassing the overall sales growth rate. The tool has multiple benefits for customers and the company, and the company plans to continue investing in organic growth. The company also opened two new locations and added four through acquisitions. They also expanded their franchise network by adding two new customers. The team successfully reduced inventory by over $216 million, surpassing their goal.

The company has achieved record operating cash flow and outperformed the industry by expanding their footprint and integrating acquisitions. They have a strong team and a vertically integrated network, and despite a decrease in new pool construction, they expect continued growth in their installed base of pools. The company believes that the desirability of swimming pools and outdoor living will remain strong, leading to continued renovation activity and growth in their share and product value.

The company believes their focus on customer experience and partnerships positions them well in the pool industry. They are proud of their team and have narrowed their annual earnings guidance. Net sales for the quarter decreased by 9%, with a decline in new pool construction and a slight decline in other areas such as selling days and commodity prices.

The third quarter saw weakness in discretionary product sales, but maintenance spending remained stable. Inflation provided a 2-3% benefit, while acquisitions and new market openings had a minimal impact. Gross margin decreased from the previous year due to expected inventory gains and other factors such as product and customer mix. SG&A expenses decreased by 2% and were well managed.

The paragraph discusses the operating expenses for the company, which have increased due to acquisitions and new sales center openings. The company also reported a decrease in operating margin compared to the previous year, mainly due to lower revenue. Interest expenses have also increased, but the company has been able to maintain a low tax rate. Despite a decline in earnings compared to the previous year, the company has seen significant growth since 2019. The company's credit and collections process remains a strength, and they have successfully reduced inventory by $332 million. In the fourth quarter, the company plans to participate in strategic vendor early buys.

The company is expecting a 3-4% price increase for the 2024 season, resulting in a growth in inventory. They have generated $750 million in cash flow and have completed $137 million in share repurchases. They have also reduced debt and have a conservative debt leverage ratio. Sales for 2023 are expected to be down by 10%, with the fourth quarter seeing a decrease of mid-to-high single digits. Gross margin for the full year is expected to be around 30%, with the fourth quarter being slightly lower. The increase in average cost compared to last year will affect margins in the fourth quarter.

In summary, the company expects to offset the negative impact of increased import taxes in the fourth quarter of 2022 and continue to face margin pressures due to product mix. However, they anticipate benefits from their gross margin strategies and plan to limit operating expense growth to 1%. Interest expense is expected to be $61 million for the full year and the tax rate will be consistent with previous quarters. The company plans to use excess cash for acquisitions, capital expenditures, dividends, and share buybacks. They have narrowed their EPS guidance for the full year 2023 to $13.15 to $13.65, including a $0.15 ASU tax benefit.

The company is providing a narrower range in the third quarter, which is consistent with their historical process. The third quarter results were in line with expectations and the company's focus on operational improvements and customer experience will continue to support customers and provide them with a wide range of products. The Q&A session will now begin. The first question is about the outlook for 2024, and the CEO explains that 2023 was a challenging year due to bad weather and rising interest rates, leading to a 30% decline in new pool construction. However, higher-end pools are still performing well.

The speaker believes that new pool construction will not decrease significantly in the near future, and that renovations requiring financing may be impacted by interest rates. However, maintenance is necessary and the demand for pools and outdoor living remains high. The speaker is more optimistic about next year, but does not want to set expectations too high.

The speaker is confident that next year will not be another year of decline in the pool construction market, despite facing challenges. The inventory has been adjusted and the company will participate in early buys, which will impact gross margins in the first half of the year. The speaker also mentions that volume incentives may be impacted due to the inventory drawdown, but guidance will be provided in the future. A question is then asked about the early buy and its impact on gross margins, to which the speaker responds that they will participate in early buys and provide guidance on its impact in the future.

The speaker is asked about the competitive landscape and their reaction to it. They mention that they have taken share this year and have a strong presence in the market. They also mention that they will continue to open more locations and have a focus on customer experience, which they believe allows them to win against competitors.

The speaker is discussing the company's capital allocation and willingness to increase buybacks, as well as their strong cash flow and potential for investments. They also mention that they have lapped any unusual factors that may have affected their minor repair and maintenance business, and expect it to return to a normal growth rate next year.

The speaker discusses the impact of a storm in Southwest Florida on the company's maintenance and repair business, but overall, the business is stable and predictable. The speaker also mentions the potential for increased demand in the future due to new pools being built and deferred repairs. The company's efforts to reduce inventory in the second half of the year may affect pre-buy and gross margin next year.

The speaker states that the early buying season was relatively normal compared to 2019. They mention the potential benefit this may bring for margins in the next year, but they will have a better understanding once they receive early buys in the fourth or first quarter. The speaker also mentions that price increases for next year may be slightly higher than in previous years. In response to a question about the trend of new pool construction versus remodels, the speaker notes that they believe the renovation and remodel business is holding up better than new pool construction. They also mention that their survey of the builder community indicates that most builders also do remodels.

The speaker believes that the renovation and remodel business in the pool industry is currently better than new construction due to a backlog being worked down. The industry views renovation and remodel as about 10% of the market, and this backlog may now be back down to more normal levels. The speaker also mentions a trend towards technology adoption in new pool construction, with people wanting more features and upgrades. During COVID, there was a surge in requests for technology, but now it has leveled off. However, when equipment needs to be replaced, there is still a trend towards higher tech products for a better consumer experience.

The speaker discusses the trend of replacing single speed pumps with variable speed pumps due to DOE regulations and the significant energy cost benefits. They also mention the shift towards high efficiency heaters and cleaners. The company has seen improvements in SG&A efficiencies in the second and third quarter, but are unsure about margin sustainability for next year due to uncertain revenue. They plan to continue adjusting expenses according to sales volumes.

The company has been successful in maintaining its expenses and investing in its employees, operations, and training. The long-term gross margin target of 30% remains consistent, but there are potential factors that could lead to higher margins in the medium-term, such as acquisitions and private label products.

The company has made great progress in procurement and logistics, which has led to benefits and improved pricing. However, they are still working on pricing and have some new initiatives to be discussed in February. The product mix, particularly in building materials, has been a drag due to slower new construction. This is expected to normalize in the long term. The company is also focused on margins and has various strategies in place, including an effective supply chain, desirable product offering, and vertical integration. The vendor incentives for this year will be different due to inventory levels. Overall, there are many factors that impact gross margin, but the company is confident in their long-term plan and guide.

The speaker discusses the company's focus on a particular area and its potential for success. They clarify that their statement about the low end of the EPS guidance range was not meant to guide one way or the other. They also mention that the fourth quarter is seasonally the least significant and can be affected by factors like weather. The expected inflation for next year is 3 to 4 from equipment vendors and they will be lapping some year-over-year pricing for the first and second quarters.

The company saw an increase in chemical sales in a weather-neutral quarter, which is a rare occurrence. This growth can be attributed to the company's focus on providing customers with a strong product offering and technology tools to help them sell more chemicals. The company is also focused on taking market share in the chemical business.

The company's private label and exclusive brands are margin accretive, but it depends on the type of chemical being sold. The company is unable to provide an outlook for next year, but they have a relentless focus on growth and have invested in capacity creation to handle the increase in business without adding significant costs.

The company's biggest leverage points for increasing EPS are volume, margin, and reducing SG&A expenses. However, the company also invests in providing excellent customer experience and technology tools, which may not have immediate returns. The company has faced increased competition in various areas due to the changing demand environment, but they are confident in their ability to withstand it.

During a conference call, a question was asked about the company's competitive environment. The speaker responded by stating that their focus is on providing the best customer experience rather than matching desperate prices in the market. The next question was about the company's gross margin, which had a larger sequential decline than usual. The speaker did not provide specific numbers for each individual item, but mentioned that the impact of building materials and customer mix would be better quantified at the end of the year.

The speaker discusses the impact of various factors on the company's performance, including fluctuations in margins and the affordability of pools. They mention that interest rates are a major factor, but believe that the likelihood of a significant price decrease in the industry is low. They also note that the biggest challenge is in selling entry-level pools.

The increase in interest rates and decreased lending has made it more expensive to build swimming pools, particularly at the lower end. However, the demand for higher-end pools, which are typically paid for in cash, remains strong. The expected inflation in prices will not significantly affect the demand for pools, as the cost of materials makes up a relatively small portion of the overall project cost.

The speaker discusses the potential impact of a decline in manufacturer prices on non-discretionary purchases, stating that it would not affect the demand for these items. They also mention that the call is over and invite any further questions to be addressed later. The moderator thanks the participants and ends the call.

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