The Pool Corporation Second Quarter 2024 Conference Call began with an introduction from the operator, followed by a welcome from Vice President and Chief Financial Officer Melanie Hart. Hart reminded participants that the call would include forward-looking statements and references to non-GAAP financial measures. President and CEO Pete Arvan then gave a brief overview of the company's second quarter performance, highlighting $1.8 billion in net sales and strong execution, strategic progress, and market share growth.

The company has observed a decrease in demand for low to mid-range pools and renovations, but high-end projects remain solid. Consumers are hesitant to make purchases in the current economic climate, but the company is focused on providing exceptional service and value to their customers. They have made progress in strategic areas of their business and are leveraging their distribution network and digital platform to drive future growth. Adoption of their digital tool has increased, creating capacity for both the company and their customers.

The company's digital marketing programs and chemical packaging facility are driving demand and profitability. They are also expanding their sales center network and have opened eight new centers this year. Second quarter sales declined 5%, but showed improvement towards the end of June due to favorable weather and strong execution. The maintenance business, software platforms, and building material products performed well. However, the company is maintaining their top line guide and gross margin finished at 30%, down 60 basis points from the previous year.

In the second quarter, the company's gross margin was affected by the sale of excess and lower cost inventory and lower levels of higher margin building material sales. However, the company was still able to achieve a 30% gross margin due to improvements in supply chain value-added pricing and strategic priorities. Operating income and margin were also down from the previous year due to investments in technology, new sales centers, acquisitions, and expansion of the Pinch A Penny network. Sales in Florida were down only 1%, while other markets saw declines due to weather conditions and consumer sentiment. Europe remains a challenging market, but the company is making improvements to position itself well for when sentiment improves.

In the second quarter, Horizon experienced a 6% decline in net sales, similar to the first quarter. The irrigation business was affected by commodity pricing and project deferrals. Chemical sales increased by 1%, mainly due to a 3% growth in volume and a 2% decrease in price. Private label chemical sales saw double-digit growth. Building materials sales declined by 10%, but equipment sales remained flat. The equipment performance was notable, considering the decline in new pool construction. Price for equipment increased by 2-3%. Certain commodities, such as pipe and rebar, saw pressure during the quarter. These commodities make up a small portion of the overall business. The commercial business and end markets were also discussed.

Sales for the company increased by 16% in the second quarter, driven by a strong summer and new store openings. Sales to independent retail pool customers declined, possibly due to consumers being more selective with purchases and a later start to the season. The company's POOL360 service platform and water test application have been successful, with many retail stores using them. The company's retail solutions team will continue to onboard dealers and focus on driving technology and offerings in the future. The POOL360 service allows customers to automate tasks and provides direct purchase access to the POOL360 tool. Orders processed through the B2B POOL360 platform have also increased.

In the second quarter, the company expanded its sales center network and acquired a new location in Atlanta, increasing their global network to 445 locations. They also added three new franchise stores in Texas and plan to continue expanding their franchise network. The company is confident in their full year earnings guidance and has returned $173 million to shareholders through dividends and share repurchases. They plan to focus on execution and strategic growth initiatives for the remainder of the year, as the pool and outdoor living industry remains popular among homeowners.

The home values in the industry remain strong due to demographic trends and continued new home builds. The company is well positioned to provide a wide range of products and support for outdoor living. Despite a lower number of new pools being built this year, there is still an increase in the installed base of pools. The company is focused on expanding their network and improving the customer experience. In the second quarter, net sales decreased by 5% with an inflation benefit of approximately 1%. Price increases on equipment sales were around 2-3%.

The company saw positive volume trends in chemical sales but negative effects on pricing, resulting in a 1% decrease in sales. Lower levels of new pool construction and remodel activity also impacted sales by 3% and 2% respectively. The company's gross margin decreased by 60 basis points from the prior year, but is expected to remain stable in the second half of the year. Operating expenses were $259 million, representing 14.6% of net sales.

The company saw a 7.4% increase in the second quarter compared to the same time last year, due to increased spending on sales center expansion and technology development. They opened eight new sales centers and made improvements to their customer-facing technology platform. They also closed three underperforming locations, resulting in a $1 million expense. The company focused on controlling expenses in the second quarter and expects expenses to increase in the low-single-digit range in the second half of the year. Operating income was down 17% compared to last year, but interest expenses were reduced. Net income for the quarter was $192 million, with a $0.01 benefit from ASU.

In the second quarter of 2023, the company's diluted earnings per share decreased by 16% compared to the previous quarter. However, cash flows remained strong and were on track to meet or exceed their target for the year. The company also reduced their inventory and debt, and their debt leverage ratio was below their target. They continue to invest in the business and have increased their quarterly dividend.

The Board has increased the company's share repurchase authorization to $600 million and has already repurchased $68 million, with $572 million remaining. Sales are expected to be negatively impacted by a decrease in pool builds and renovation activity, as well as a decrease in Horizon and Europe sales. Gross margins are expected to be similar to last year, with operating expenses seeing a low to mid-single-digit increase. Interest expense and tax rates are also expected to be lower than previously estimated.

In the paragraph, the company discusses their anticipated fully diluted weighted average shares outstanding and their expected diluted EPS for the third and fourth quarter and full year. They also mention the completion of their annual corporate responsibility report and their focus on managing the business through the current cycle while continuing to invest in strategic technology tools, sale center network expansion, and selective acquisitions. The company also mentions their success in pricing and optimization initiatives and how it could impact their gross margin over time.

The company expects to have several million transactions by the end of the year, with mix and declining pool construction as potential headwinds. However, strategic pricing, private label programs, and supply chain initiatives have helped maintain a gross margin rate of approximately 30%. The POOL360 investments are gaining traction, particularly in the first half of the year, and are part of a larger ecosystem. The water test software is tied to the private label program.

The dealers who stock the company's private label chemicals have access to water testing and prescription solutions for customers. The software also includes a CRM function for capturing customer data. The busy pool season is not the time for converting new users, but current users are providing feedback for software improvements. The company expects more dealers to onboard during the off-season. A road show is being conducted in key markets to sell the software and services to customers.

The speaker discusses the positive feedback received on the POOL360 tool, which has benefits for both the company and its customers. They also mention the updated POOL360 platform and its increased adoption. The speaker acknowledges that the success of these tools will take time and relies on customer satisfaction. The gross margin for the back half of the year is expected to be similar to last year, around 30%, but may fluctuate slightly due to various factors.

The company expects lower full year margins due to lower building materials sales and higher vendor incentives offset by higher freight costs. Chemical pricing is also expected to be lower. Larger customers are outperforming smaller ones. The 30% gross margin target for 2025 may be achieved through improved pricing strategies, but the company is also hoping for a change in the mix of sales.

The company is focusing on expanding their private label chemicals and taking actions to improve their supply chain. They are confident in their reset guidance for the remainder of the year, as they are seeing better sales of building materials than the market would suggest and are receiving more inquiries from potential customers. They believe that once the economy improves and interest rates are cut, consumer confidence will also improve.

The speaker discusses the demand for pools in the real estate market and how the company is performing in comparison to the industry. The company has closed three locations and is seeking cost savings through supply chain efficiencies, particularly in fleet and delivery expenses.

Pool Corporation's competitors do not have the same model for utilizing one location to do deliveries, which allows them to manage their inventory and have lower costs for freight and delivery. They have four central shipping locations within their network, which helps them bring in products at a lower cost and redistribute them to customers quickly. Pool's growth is mainly organic, driven by new sales centers and improving their value proposition for customers, with acquisitions playing a smaller role.

The speaker discusses the company's success in the market, attributing it to their focus on customer experience and their strong presence in key markets. They have seen an increase in chemical sales and a larger share of the building materials market. They also mention growth in equipment sales, specifically in heaters. The company prides itself on providing excellent customer service and unique value-added services that set them apart in the industry.

David MacGregor asks about the potential for operating margin improvement at the store level in a softer market. Peter Arvan explains that there is still opportunity for improvement through execution and growth, but the focus centers may trail the rest of the business in sales growth. He also notes that overall, sales growth is the biggest lever for operating margin improvement, but it becomes more difficult in a down market.

The company expects to continue expanding operating margins predictably when the market turns and grows, but this is dependent on a reversion in new pool construction. They do not anticipate this happening before the end of the year. The first half of the year saw better sales due to hotter weather, and July's results are also encouraging. The recurring revenue business is expected to be flat this year and Building Products down 15%, which will have a dilutive impact on gross margin. Approximately half of the bridge from 29 to 30 was due to acquisition benefits.

The remaining 50 basis points of the 24th paragraph's discussion was made up of various factors, including benefits from building materials, pricing, CSL expansion, and private label products. The company's long-term goal is to see growth with a potential positive trend in gross margin, but this will not happen overnight. Factors such as strategic pricing, improved mix business, and leveraging the CSL will contribute to this, but there will also be competitive pressures to consider. However, the company believes that it can continue to leverage SG&A with sales growth, although there may be upward pressure on wages.

The company is facing challenges in renewing leases due to a scarcity of facilities in desired areas, giving landlords the advantage. They are focusing on SG&A leverage and expect continued gross margin improvement. Cash flow is expected to be strong in the second half of the year, with inventory reduction being a key driver. The company is seeing pricing pressure in a few areas, including commodities.

The speaker discusses the fluctuations in commodity pricing and competitive pressures in the market. They mention that larger customers have a lower margin profile and this is not a new issue, as it has been present for the past 10 years. They also mention that there has been no change in behavior from heritage since being acquired by Home Depot.

The speaker discusses competition and price, noting that their company has a strong value add that sets them apart. They are not concerned about competition and expect their success to continue. They hope that with Home Depot's help, their competitors will become more responsible. In terms of operating expenses, there will be a difference between the third and fourth quarter due to fixed costs. The company has evaluated their cost structure and believes they will be able to achieve expense leverage in the future. In the short term, there has been a pickup in sales in June and July.

In response to a question about potential green shoots and a broader-based recovery, Peter Arvan, the speaker, explains that the company is primarily seeing a boost in maintenance spend due to increased pool usage. He also mentions that there is interest in new pool construction, but people may be waiting for a better economic environment to make the investment. When asked about the company's top line growth for next year, Melanie Hart, another speaker, notes that the impact of new pool construction and remodel activity is expected to bring down sales expectations by about four to five points.

The speaker discusses the potential impact of maintenance activity on the company's financial results for the upcoming year. They also mention the margin benefit from their chemical packaging operations, which has seen a 60% increase since its purchase, but note that the margin profile varies by product and they will continue to rely on partner suppliers for certain chemicals. The highest margin products are liquids and balancers, while trichlor has a lower margin.

The operator concludes the question-and-answer session and hands the conference back to Peter Arvan for closing remarks. Arvan thanks everyone for joining and announces the next call on October 24th for the release of third quarter 2024 results. The operator ends the conference and thanks attendees for joining.

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