Pool Corporation (POOL) — Q1 2024 Earnings Call Transcript

Thank you and welcome to our first quarter 2024 earnings conference call. Our discussion, comments 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 variables that could cause actual results to differ from projected results 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 included in our press release are posted to our corporate website in the Investor Relations section. In order to assist our investors and analysts in following along with our earnings call comments, we have posted a brief presentation on our investor website. It will summarize key points from our press release and call comments. We are now ready to begin the call with comments from Pete Arvan, our President and CEO.

Thank you, Melanie and good morning to everyone on the call. We released our first quarter results this morning, reporting $1.1 billion in net sales, our fourth consecutive year of achieving the $1 billion mark in a seasonally slower quarter. This was down 7% from the previous year but up 6% from 2021. Overall demand for pool-related maintenance products in the quarter was solid, with sales ending roughly flat, which is a good result considering the poor weather that we experienced in Florida for almost the entire quarter. As you can imagine, in the first quarter, Florida is our largest market. We were also pleased with early buy activity, much of which we attribute to share gain given the return to more normal supply chain conditions. On the new construction side of our business, a continuation of economic uncertainty, combined with elevated interest rates have further weighed heavily on new pool starts. Our builders are reporting that consumers remain interested in pools but as we have noted previously, lower-end pools remain a challenge, while demand for higher-end pools is steady, explaining the increased permit value on a per pool basis. Overall, we saw permits down 15% to 20% for the quarter, which is more than we anticipated for the year. We believe that easier comparisons and signs of the bottom of the trough that we are seeing in some markets will allow the full year construction level to be more in line with our previously stated full year expectation of flat to down 10%. We have seen similar results in the first quarter on renovation and remodel, but our builders are telling us that interest from consumers may be starting to rebound in key markets. Normally, we would expect it to take 60 days from the time we see permits improve to any meaningful change in purchase trends from the customer base in the affected areas. Keep in mind that historically, the first quarter has represented just under one-fifth of our total annual sales in a typical year. With the all-important second quarter ahead of us, our teams remain keyed into the start of the swimming pool season with their ability to fulfill demand needs better than anyone in the industry, in any environment. We all remain intensely focused on providing our best-in-class customer experience, expanding our integrated network and enhancing our industry-leading technology solutions. Looking at our sales by major geographic markets, sales declined 9% each in Florida, Arizona and Texas, while California sales declined 4%, showing overall sequential improvements from the fourth quarter of 2023. As we mentioned on our year-end call, we saw a lot of rain in January and February in key markets. While March weather somewhat improved, it still carried above average rain in many areas. For the first quarter last year, we estimated approximately $60 million to $70 million impact from unfavorable weather, particularly in the Western U.S. We clearly see the weather recovery in California's first quarter results, which outperformed the other areas of the country. Conversely, in markets that experienced unfavorable weather this year, such as Florida and the Southeast region of the U.S., we observed sales headwinds due to the limited ability for pools and outdoor living activity to jump off to a robust start or continue usage in the year-round markets. Across the company, we participate in numerous trade shows and partner with our suppliers and customers to prepare for the season. From what we are hearing, there has been some consolidation amongst builders, some newer builders are exiting due to the challenging construction environment. This is resulting in some of our larger builders gaining share, as you would expect. Typically, the newer builders were more heavily focused on entry-level pools, which, as we have said, have been the most pressured. Related to our product sales mix, chemical sales were essentially flat for the quarter, up 1% in volume with a 2% deflationary impact on price, primarily from trichlor and commodities. This result reinforces our expectation that maintenance volumes will perform well even with the weather patterns and the industry conditions that were not ideal in many markets. With a slow start, we did see instances of lower selling prices on trichlor around 5% lower than at the end of the year. At the current cost positions, we see these occurrences as minor top line pressure for the remainder of the year. Building materials sales were down 11% versus the prior year following the declining trend in new pool construction and deflationary impacts across several categories as freight costs passed down from the manufacturers have decreased. Although the number of new pools is down, our superior value proposition and extensive NPT network allow us to continue to expand our share in the strategic product category. Equipment sales showed an improved trend decreasing 3% for the quarter versus the 9% decline in the fourth quarter of 2023 and showed some early signs of recovery in discretionary product demand like heaters and lights. Looking across the major equipment categories, we see that despite a slow start to the pool construction season, our sales trends for equipment seem much healthier than what new construction alone would dictate. Looking at our end markets, our commercial business sales came in flat compared to last year's 12% growth in the first quarter and better than the overall business as we further integrate our recent investments in our widespread distribution network and enhance our service to commercial pool operators. Sales to our independent retail customers declined 4% in the first quarter, improving from an 8% decline in the fourth quarter of 2023 as we extend our reach and resources available to these customers. For our Pinch A Penny franchisee group, sales came in flat for the quarter. Collectively, these results provide additional indication that maintenance remains stable and that our focused efforts in this critical area of the market support our ability to continue to gain share. In Europe, challenging weather and continued geopolitical uncertainty constrained sales in the first quarter, which declined 17% in local currency and 16% in U.S. dollars. We completed important supply chain projects at the beginning of the year that will position us well in improving our overall product cost and fulfillment as we work to gain scale in Europe. For Horizon, net sales declined 6% in the quarter. Our irrigation business is more impacted by commodity pricing than the slimming pool business and the growth in our commercial irrigation continued to support our distribution business during the first quarter. Gross margins came in at 30.2% versus the 30.6% in the first quarter of 2023. Going into the quarter, we expected about a 60-basis point headwind compared to last year, primarily related to the sell-through of lower-cost inventory in the first quarter of 2023. Melanie will walk you through the various components impacting margins as part of her financial commentary. Both our field and support teams did a good job managing expenses as the operating expenses increased just 2.5% in the first quarter. As we discussed on our fourth quarter call, we have several key areas where we continue to invest this year, including our technology initiatives, customer experience enhancements and continued footprint expansion. At the same time, we continue to work on capacity creation. In mid-February, we launched our POOL360 service platform. At our Investor Day, I was excited for my team to provide a deep dive into this innovative tool and demonstrate the power that our customers will see from using the POOL360 ecosystem. Our technology and sales teams were on the ground doing exactly that during the quarter for both our customers and our field teams in preparation for the season. Orders processed through our traditional B2B POOL360 platform continue to expand at close to 11% of total sales in the first quarter of 2024, growing from 10% in the first quarter of last year. Related to our POOL360 WaterTest, we finished the first quarter with 2.5 times the number of customers on board than at the end of 2023 and this has translated into a similar increase in WaterTest performance versus the fourth quarter of 2023. Our analysis of customer buying behavior confirms our assumptions of the power of POOL360 WaterTest, with our POOL360 WaterTest customers' private label chemical purchases up significantly versus the rest of the customer base. While in the very early stages, we are already beginning to see the positive impacts of our POOL360 service tool through volume growth in our private label chemical brands and revenue dollar growth in other products. Our customers are reporting very favorable feedback on the ecosystem and all it provides. Driving adoption of our POOL360 service application not only provides a meaningful differentiator and deeper relationships with our customers but also adds capacity for our customers to grow their business, which we believe will drive additional growth for POOLCORP. The progress among these tools reflects the collaborative efforts of our sales, field and technology teams to roll out the new software and educate our customers and teams on this enhanced abilities. We continue to expand our network, opening three new locations in the first quarter and acquiring one, bringing the total sales center network to 442 locations. Our Pinch A Penny franchise network added five new stores, including two as part of our focused expansion in the Texas market, ending the quarter with a total of 290 franchise locations. Continuing to expand our franchise footprint geographically and our Retail Edge programs are critical elements of our strategy to reach the attractive do-it-yourself maintenance market. We recorded $108.7 million in operating income in the first quarter of 2024. Operating margin of 9.7%, down compared to the 12.1% in the first quarter of 2023 but well exceeds the prepandemic first quarter operating margins that ranged from 5.7% to 6.5%. Our increase in scale since that time shows the immense leverage attainable from top line growth, focused cost management and disciplined execution. With the first quarter behind us, we are reiterating our full year EPS guidance range of $13.19 to $14.19, including an updated $0.19 estimate from the benefit of ASU. Looking forward, we see the primary challenges affecting our industry as being the macroeconomic picture. Without a doubt, the decline in new pool construction creates a complex operating environment but we are confident that this is just a cycle that will change as we have seen in the past. Remember, pools are still highly desirable. The installed base continues to grow and the aftermarket upgrade opportunities are sizable. Demographic shifts will only help power these important trends for years to come. We are intensely focused on improving the customer experience, capacity creation and building and launching our industry-leading digital ecosystem. We will continue to expand our network to position us to best serve the pros and support the retailers that cater to the DIY market. Gross margins remain the top priority for the team as well. We have identified comprehensive plans to achieve our goals and enhance our performance in this area. Our teams are committed and focused on supply chain efficiencies, private label product growth and pricing optimization, along with our proven track record on execution. With our robust cash flow generation, capital capacity and strong balance sheet, we will continue to be a disciplined capital allocator and a strategic growth investor. Through our team, we collectively work to provide the best service to our customers and exceptional returns to our stakeholders. I would like to wrap up by thanking the POOLCORP team for their continued persistence, through our collaboration with our supplier partners and our customers, we aim towards executing a successful 2024 swimming pool season. I will now turn the call over to Melanie Hart, our Vice President and Chief Financial Officer, for her detailed commentary.

Thank you, Pete. Starting on Page 3 of our presentation, you will see our first quarter 2024 results at a glance, as reported in our press release. I'll begin my comments on Slide 4 as we discuss the components impacting net sales and gross margin in the quarter. Net sales of $1.1 billion declined 7% over the prior year, which shows an improving trend from the 8.4% year-over-year decline in the fourth quarter of 2023. Positive price realization of approximately 2% was offset by continuing though modestly improving trends in new pool construction and remodel activity with estimated volume decreases of 15% to 20% on construction and around 10% on remodels. Those translated into a 3% and 2% decline in consolidated sales compared to the prior year. We estimate weather impacts, primarily in Florida, negatively impacted sales approximately 2% in the quarter. Chemical and commodity pricing continued to normalize and are estimated to have a 1% negative impact on sales for the quarter. Horizon & Europe sales declines in the quarter together had an approximate 1% effect on total net sales. While the quarter had the same number of selling days, March had 2 fewer days, which had some impact on the quarter as we typically see an upward ramp into the season and March is, by far, the largest sales month of the first quarter. Gross margin for the quarter was 30.2% compared to 30.6% in the first quarter of last year. Gross margin in the first quarter of 2024 included a benefit of $12.6 million or 110 basis points related to estimated import taxes previously recorded, which was not considered in our latest discussions of expected first quarter margins as both the timing and the conclusion of this open area were not readily determinable. As referenced on our call discussing fourth quarter 2022 results, with supply chain normalization and a return to our domestic sourcing strategy, we do not expect significant impacts from import tariffs going forward. From a comparative standpoint, net resulting margin of 29.1% was down 150 basis points compared to the prior year including the expected decrease from higher average cost inventory in 2024 compared to 2023. Other impacts include product mix, as lower margin equipment sales outpaced higher margin building materials; customer mix, reflecting a greater proportion of sales to larger customers who participate in customer rebate programs and have volume-based pricing; and an increase in customer early buys sold at special pricing including preseason pricing in a number of major markets, resulting from the rainy and sluggish start to the season. These were offset by a higher volume-based vendor incentives as purchasing patterns normalized in 2024. Main areas different from our expected 60 basis points decline, as previously communicated, were the lower building material sales and the higher mix of preseason pricing. On Page 5, you will see our quarterly financial trends. Due to the seasonal nature of our business, many of these metrics vary sequentially. Operating expenses as a percentage of net sales is typically highest in the fourth and first quarters due to the lower sales volumes. Operating expenses in the quarter were 20.5% and increased by $6 million or just under 3% over the prior year. We continue to manage variable expenses to offset higher inflationary increases in rent, insurance and our first quarter merit wage increases. As discussed, we continue making investments in our strategic technology initiatives, such as our POOL360 ecosystem. We added 4 new sales centers in the first quarter, 3 organic and 1 through acquisition and we are working to add another 5 new greenfield sales centers prior to the peak season. For the quarter, we reported operating income of $109 million compared to prior year operating income of $146 million. Lower levels of debt, even with a higher borrowing rate resulted in a $2.4 million reduction in interest expense versus last year. Net income of $79 million compared to $101 million in prior year first quarter reflects lower operating income, partially offset by lower interest expense and a lower effective income tax rate due to an increase in ASU tax benefit this quarter versus Q1 2023. We realized a $0.19 benefit from ASU in the quarter, up from the $0.10 we estimated in our guidance and compared to a $0.12 benefit in Q1 2023. We also realized a benefit of $0.24 from the reduced import tax amount recorded during the quarter. This resulted in diluted earnings per share for the quarter of $2.04 compared to $2.58 in the first quarter of 2023, a decrease of 21%. Moving to Slide 6. Cash flow from operating activities increased to a first quarter record of $145 million, an increase of $42 million over last year's first quarter. We continue to invest capital in technology development initiatives, sales center network expansion and improvements and acquisitions, closing on during the quarter. Our accounts receivable days outstanding of 26.9 days remain in line with typical preseason activity levels, including customer early buy programs and are in a good position as we enter the peak selling season and exit the portion of the year where our customers are typically more cash constrained. As we planned, inventory levels continue to normalize, finishing the first quarter at $1.5 billion, $190 million lower than Q1 last year. The increase from year-end of $131 million is intended to prepare for the upcoming season and is fully offset by increased accounts payable. Our inventory days on hand have reduced from 142 to 132 and we expect to continue seeing this trend of lower comparative days as we lap last year's higher inventory levels through third quarter. We reduced leverage and borrowings by $387 million compared to Q1 last year and $74 million from year-end, while continuing to make investments in the business. Our debt-to-EBITDA leverage ratio stands at 1.4x as of the end of the quarter, slightly below our 1.5 to 2x target, providing significant growth investment capacity. Our current quarterly dividend of $1.10 per share returned $42 million to shareholders. We also completed $10 million of open market share buybacks during the quarter and $50 million through our earnings calls. And have $284 million remaining under our share repurchase authorization. With the first quarter behind us and an early view to the start of the 2024 season, we maintain our full year guide of flat to slightly positive growth in 2024. Based on historic prepandemic seasonal sales pattern, our first quarter sales as a proportion of full year sales suggests this is a reasonable expectation. As we move further into the second quarter and the beginning of the peak selling season, our visibility improves and we will have better insight into the full year after our second quarter. The 1% to 2% annual benefit we could have achieved from normalized weather in the first 2 quarters has not been observed to date. Therefore, it is so uncertain that we would see a significant weather recovery for the full year. Our expectations for inflation for the year remain unchanged as price benefits of approximately 3% on equipment has progressed as expected, slightly less on our remaining categories for an estimated 2% overall. Maintenance activity is tracking as expected and our volume expectations for renovation and remodel and new construction markets in the range of flat to down 10% remains reasonable at this point in the year. We still anticipate that Horizon in Europe could decline 5% for the full year. No significant contribution is expected from the additional selling days as they are late in the year. We still anticipate full year gross margin to approximate 30%. We look for the increased activity across the industry to moderate some of the preseason pricing activity combined with our supply chain and pricing strategic actions underway to realize the favorable seasonal benefits in the second quarter. Our expectation for operating expenses remains relatively unchanged. Volume-related expenses will continue to correlate with business activity, while certain inflation-affected expenses, such as rent, insurance and wages, will increase compared to last year. Performance-based incentive compensation will only increase based on operating income improvements achieved as it will reflect actual performance relative to performance plans. Strategic growth-oriented expenses, such as investments in sales center network expansion, tuck-in acquisitions and ongoing technology development will continue as we gain share and work to improve our service offering. With flat revenue for the full year, we believe operating margin of around 13% is attainable. Estimated interest expense in the range of $50 million to $53 million is unchanged from our previous guidance. And we would expect it to be highest in Q2 following our early buy payments to vendors. No changes to our expected annual tax rate of 25.3% excluding ASU benefit. Fully diluted weighted average shares outstanding is expected to be approximately 38.75 million shares, excluding any effect of additional share buyback. Guidance for 2024 diluted EPS of $13.19 to $14.19 now includes $0.19 of ASU benefit, up from $0.10 in our previously provided range. In summary, we are focused on continued discipline in managing our business through this time of economic uncertainty, while investing in areas of strategic long-term growth. We are in a position of strength as we have accessed the high levels of capital to fund our growth plans. At the same time, we continue to reward our existing shareholders with increasing cash dividends and an ongoing share buyback program. Our capital allocation approach allows us to continue to deliver increasing returns as we improve our operating results from a legacy of disciplined, consistent execution. We are now ready to move into the Q&A portion of our call.

I guess gross margin is going to be a major focus of this quarter. It's my understanding the reversal of import taxes was not contemplated in your prior margin discussion. So it wasn't in prior guidance either. I just wanted to check if that's correct. And then, Melanie, I think you said what the EPS benefit was, just for completion here, could you repeat that for me, please?

Sure. The EPS benefit was $0.24 in the quarter, and you are correct. So our review of the tariff classification issue has been open and ongoing since December of 2022, when we originally recognized and recorded the potential liability. As we mentioned back on our call, we accrued the additional expense based on uncertainty regarding the classification of certain products that we imported and related to their tariffs that would be assessed. We have completed a review and a determination with U.S. Customs. So we did learn that favorable determination earlier this month, which was after we gave our previous guidance for margins for the quarter.

Okay. And it's very one-time in nature, both the disbenefit and the benefit. But if you exclude both of those from the numbers, I mean, we kind of look at this, what is it, Slide 5, in the upper right-hand panel, clearly, there's seasonality there. But I think if you even normalize the fourth quarter of '22 and the first quarter of '24 and smooth out seasonality, it still looks like we're on a downward trajectory and it really continues somewhat unabated. I'm just wondering if you can give us some confidence in that 30% line in the sand, how you feel that this sort of decline that we're seeing here over the past several years moderates and maybe even reverses?

Yes. So the two things specifically related to the guidance that we gave on our year-end call, kind of excluding the impact from the import taxes that were different from our original expectations were; one, the mix on the building materials. So our guide contemplated that new construction would be down in that flat to down 10% range. So it was a little bit worse than that for the first quarter. We are seeing some positive trends in permits in a couple of our key states. As Pete mentioned, it typically takes around 60 days from permitting for that to turn into meaningful sales for us. So we are still expecting, as part of the full year that we would see those declines on the new construction side moderate. And so with that, once we get to that down 10%, we'll get some improvements in our product mix. And then the other item that we mentioned was related to some preseason pricing. So there were several of the markets more heavily impacted by weather, where we did see some customers looking for some more competitive pricing in order to start off their projects for the season. We see that as not recurring as we move into the core of the season, primarily because some of those projects won't continue once the maintenance portion of the business picks up in full swing.

I'll follow up on gross margin. You mentioned that you expect an improvement in the second quarter; should we anticipate a modest lift of around 20 to 30 basis points compared to the first quarter? Is the main factor behind this the competitive environment, or do you believe it will improve as we enter the season?

Yes. So second quarter, we are expecting it to be less than last year because we'll have a little bit of a tail of that lower cost inventory just kind of early in the second quarter. So we would expect it to be less than last year. But I would say that it would be pretty close to our kind of full year guide of around 30%. So we'll see. I think the biggest change is kind of from first to second quarter, which we receive in a typical year. A lot of that is going to be the mix of products. So as we start mixing up into the chemicals and the maintenance components that are more heavy in the second quarter as well as we get some benefits overall from a geographic mix and the higher sales that peak within the market.

Ryan, it's important to consider that a weaker first quarter influences our outlook. We believe that building permits were lower, leading to a slowdown in construction that may not reflect the overall year's performance. There are competitive pressures in the market as early buy payments become due from suppliers to distributors. Typically, we observe that in cycles like this, competition intensifies as companies try to move products and clear out inventory to generate cash for those early payments. However, as we transition into the second quarter, industry norms suggest increased activity. Products tend to sell quickly as people prepare for pool openings, so this temporary increase in competitive pressure usually diminishes rapidly.

Okay. That makes sense. And then I want to follow up on sales. You also mentioned you expect sales to improve in the second quarter. I'm just curious, what does a return to seasonal buying mean for the second quarter sales? And then have you seen April improve with better weather?

I would say that we are essentially out of the supply chain issues. While there is some lingering inventory, it's minimal. The need to purchase products in advance to ensure availability is a thing of the past. We've performed well with early buys, and those successes were largely due to gaining market share rather than a rush to procure products. Everyone seems to have stock now, allowing retailers to order just a few days in advance instead of overstocking for peak demand. This reflects our return to normal seasonality. The industry suppliers are in good shape, so we don't anticipate a need to pull ahead purchases. We expect demand to rise as products become available in both seasonal and year-round markets, especially as the swimming season gets underway. In terms of revenue, April is looking decent. With favorable weather, demand in April aligns closely with our expectations. Overall, we feel optimistic about the outlook.

Maybe just sticking on this gross margin point for a bit longer. You did mention, Pete, that you've identified some initiatives in order to drive that over time. Can you talk a bit more to those efforts? And I guess how you're thinking about them coming through and especially given the fact that we could see a tougher macro perhaps over the next couple of quarters? Just the ability to continue to execute on those?

Yes, one of the things I highlighted is our work on optimizing pricing. The teams are diligently focused on this area. When calculating gross margin, it's important to note that it's determined by the cost of goods. However, as the cost of goods varies and inventory is sold down, this can lead to misleading indications. Therefore, we've been examining gross margins and selling margins based on average costs. The team's efforts have shown us positive trends over the past few months, indicating improvement in gross margin through better pricing realization. The initiative really began in January, so there wasn't much impact then, but we were pleased with the results in February and even more so in March, which gives us confidence moving forward. Additionally, our supply chain team has effectively collaborated with supplier partners to ensure we remain well-stocked, which positively affects our overall gross margin. Furthermore, our private label programs are a top priority, especially in chemicals connected to the POOL360 ecosystem, leading to advancements in private label chemicals, which come with increased margins. Lastly, one aspect that often goes unrecognized is our execution capabilities. POOLCORP is known for its strong focus on execution, and it's crucial to avoid distractions that can result in lost progress. In this challenging economic environment, the team is extremely committed to executing our plans to ensure we retain every dollar and avoid any losses.

Okay. That's helpful. And then maybe turning to the new construction in the R&R side. You mentioned that permits in a lot of these key markets came in lower than where you had anticipated in the first quarter. I guess, what are you seeing or what gives you the confidence that we could see that moderation through the year? And I guess, how are you thinking about both of those R&R and new construction, if we do see rates continue to move higher?

We analyze permits as a market indicator, though they're not the final word on activity. There’s a noticeable delay with permits; builders typically report that the time to obtain a permit has extended from days to months. Over time, this should normalize, but the slowdown in permit processing is evident. Consequently, when families decide to build a pool, the permit approval will take longer than it used to. Looking at geographic permit data, Arizona saw positive movement in permits in March, which is optimistic. The same applies to Nevada and Florida. However, California and Texas have not yet shown similar trends, although Texas is somewhat better. We engage with builders frequently, and while there's no direct permit data for renovations, we discuss their backlog of renovation projects. Renovations are somewhat discretionary but ultimately necessary, so delays in completing them have a cumulative effect. Builders are now reporting an increase in renovation inquiries. The early signs of market activity indicate that while immediate demand for new pools isn’t robust, there are more calls for renovation projects. Interestingly, consumer behavior has changed; people are researching more extensively before committing to renovations. In the past, simply answering the phone could secure an order, but now consumers have various options. The positive aspect is that interest in renovations is picking up compared to new pool construction. However, consumers are also evaluating multiple builders to find the best fit and value for their projects. So the end of your question was, what happens if the macroeconomic environment gets worse? I don't know that the environment is going to get meaningfully worse but if it does, typically where we would see the offset would be in new pool construction. But the level of new pool construction today, especially coming off the big decline last year and the 15% to 20% decline in permits that we've seen in the first quarter, would indicate that we are nearing the bottom, plus we have some markets that have inflected and are starting to increase. Now hard for me to speculate what the Fed is going to do. I don't know that the Fed is going to raise rates because I believe that the embedded inflation is not a function of demand; it's a function of SG&A. So I don't know that the Fed reads the higher, more stubborn inflation as an indicator that they should raise rates. I see them more as paused at this point for the one rate cut perhaps that they've indicated later on in the year.

Pete, I'm interested in your thoughts on the second largest player in your industry, which was recently acquired by a larger company. How do you think this will affect the competitive landscape, particularly in terms of labor retention and other factors we might not be considering? Additionally, you mentioned that there may be some consolidation with the weaker players in the industry struggling during these challenging times. How does this influence your business?

Sure. We noticed the announcement earlier this month regarding The Home Depot's intention to acquire SRS. I don't believe much will change. Both SRS and Home Depot have stated they will operate the business separately. From my perspective, there may be some individuals affected by the sale who will reconsider their options, but overall, I don’t see it impacting us significantly. There isn't any new competition arising from this acquisition, and it doesn't introduce more distributors into the market. The channel to market remains unchanged, and we now have a long-term player taking over instead of private equity, which tends to focus on short-term gains. So, essentially, we're going to take Home Depot and SRS at their word and maintain that not much will change. Time will tell as the deal needs to be reviewed and finalized, but the announcement didn't lead us to feel the need to alter our strategies, as it doesn't significantly affect the competitive landscape. Regarding labor, one of our core principles has always been to be the employer of choice. We put a lot of effort into ensuring that we are the best place to work, and we focus on retaining talent. Our commitment to the swimming pool industry remains strong, and we believe that candidates looking for careers in this sector view POOLCORP very positively. As for consolidation among builders, this isn't surprising. In times like these, newer entrants attracted by high demand often struggle when demand declines. We see the stronger, established players typically outperforming newer, weaker ones during tough market conditions. As the demand for new pool construction and remodeling decreases, some companies may pivot to focus solely on service or cleaning, or even exit the business entirely. This shift will naturally allow remaining players in the market to absorb any lost demand. Overall, I don't think this will significantly reduce industry output, as there is still ample capacity to meet the needs. It may instead provide larger customers with some advantages as competition lessens.

Great. I appreciate that. And Melanie, just a quick question on SG&A. I'm curious about your target of a $20 million tech initiative this year, $15 million for performance-based compensation, and $12 million for new greenfield locations. Will these be spread evenly throughout the year? Did you achieve what you expected in the first quarter? Is there any change in the timing or mix compared to what you mentioned just a quarter ago?

Our original guidance indicated that the performance-based compensation would be recorded on a pro-rata basis throughout the year, corresponding to our actual operating results. We saw a slight decrease in performance-based compensation compared to what we would have recorded if our first-quarter results had been better. Regarding costs associated with the new sales centers, we have opened three so far and plan to open five more before the season starts, making a total of about eight open preseason, with a target of ten for the year. A considerable portion of these costs will be recognized in the first and early second quarters. Concerning the tech initiative, we have begun to ramp up spending and are on track with our expenditures so far this year. We will incur some expenses in the first quarter, followed by a slight increase for the remainder of the year as we continue to onboard the necessary resources for those projects.

So just a clarification question. The 1% to 2% benefit from normalized weather that I think you had in your prior guide, now you're saying you might not see that. I just wanted to be clear if that's what you're seeing?

Yes, that is what we're saying. So our original guide was for flat to kind of low single-digit sales growth. Embedded in that low single-digit sales growth did include some of that weather recovery. And so at this point, we'll really kind of look to see how quickly the season ramps and then more importantly, does the late start to the season cause it to either extend over into late into the third and fourth quarter. And so if we see any of that recovery, it would be later in the year at this point.

Got it. And then just on some of the share gains and the initiatives there and some of the opportunities that you had in the first quarter. Any way to size what that opportunity could be in just the stickiness of those share gains?

What I can tell you is that it varies by market. We have heavily focused on the aftermarket and maintenance business, and our POOL360 ecosystem is really driving our success in this area by making service providers more efficient. Our expanded footprint enhances convenience for customers. We always consider long-term growth and gaining market share as key components of our strategy, and we typically do not give it back. Of course, in any given market, there may be instances where we lose a customer here and there, but generally speaking, gaining market share is integral to our long-term growth strategy and will continue to be. Currently, we estimate our share gain to be around 1%. This can vary; it might be higher in some markets and lower in others. However, once customers switch to us, they tend to stay. We have validated this through supplier information and performance data for the same products, which shows that we have maintained, and even continued to gain, market share since the pandemic. While we may occasionally lose a customer, our focus is on bringing them back. Overall, we believe that maintaining market share is part of our long-term growth strategy and is around 1%.

I guess I just wanted to look at the balance sheet for a moment. You're at 1.4x debt-to-EBITDA. I think earlier to a question on consolidation amongst dealers, you offered some color. I guess I'm thinking about consolidation to be ultimately unfold amongst some of your competitors and some of the distributors. And I'm just wondering how far you'd be prepared to take the balance sheet in terms of leverage if something on a larger scale were to come along?

Yes, I want to emphasize that we always remain aware of our balance sheet and are responsible in our capital allocation. When considering acquisitions, we evaluate both the strategic and cultural fit, along with the economic rationale. The good news is that POOLCORP boasts a very strong balance sheet and an excellent leadership team, both of which are crucial for not just pursuing acquisitions but also for executing, integrating, and achieving savings from them. With our capable management and solid financial standing, we can assess potential deals and proceed if they are financially viable. Conversely, we also have the option to expand our capacity through greenfield projects if necessary. Our approach to capital allocation has always been disciplined, and we aim to pay fair prices for acquisitions. We have successfully acquired many businesses and will continue to do so, but we won’t pursue acquisitions at any cost, as that could harm the company. We carefully evaluate deals for strategic and cultural compatibility, and we have sufficient resources to pursue viable opportunities in our industry.

And I'm just going to add to that. So the 1.5 to 2x is really our conservative philosophy, but we have up to 3.25x under our debt arrangements. So we consider that we have substantial capacity.

Most of my questions have been answered. But Pete, I'm curious, are you hearing anything or drawing any conclusions around kind of the average cost of a pool build project or a pool remodel contract project? Do you think that's changed much?

It's an interesting question, Steve, because we've noticed that pool prices have reached unprecedented levels. This situation eventually impacts the market size, as the financing costs and elevated rates can deter some customers. Some of our builders continue to thrive because they have a solid portfolio and focus on high-end pools, which they are content to keep building. Others, however, are exploring ways to lower their average selling prices to attract more customers. Overall, I don't anticipate significant changes, but some dealers have mentioned that customers who initially envisioned extensive projects, like large decks and elaborate features, may need to reconsider their budgets. Dealers often work with these customers to segment their projects into manageable parts, deciding on essential features first, such as the pool size and foundational elements. Although clients may desire expansive decks, if it's not feasible at the moment, we can build a pool with a smaller deck and later add the decking or an outdoor kitchen when the budget allows. Price-sensitive builders are focusing on bringing costs down. It's important to note that the average price reflects both high-end and entry-level pools, leading to generally higher prices. Our dealers are attempting to be more innovative to include as many customers as possible in the market. On a positive note, features like automation and robotic cleaners are still performing well in sales, outpacing traditional pressure and suction systems, and customers are still choosing automation over older methods, albeit at more basic levels. This illustrates how our dealers are actively working within the current market conditions to accommodate a broad range of customers.

Got it. Okay. Interesting color. And then maybe just real quick for Melanie. If we're having this conversation in 3 months and we haven't seen some sense of recovery or reasonable volumes on new build and retrofit, how does that impact your gross margin for the second quarter?

Yes. So gross margin for the second quarter, if we continue to see lesser mix of building materials, that would be, I would say, an added component on top of the normalization in inventory that you would see as the decrease on year-over-year comparative margins.

First question I wanted to ask, just to make absolutely sure. The weather component that you said for the year, that you outlined as a negative. Was that a net negative from last year in isolation, i.e., I think last year was $60 million and forgive me but this year, I think, was a minus $2 million. So therefore, a net 2-year headwind of $80 million? Or was it just those select markets? And then with the guidance coming in, just to be clear, coming in lower at the top end of revenue guidance, that's not in expectations of weather favorability and it's the maintenance units coming down. Is that chemicals and equipment both or just one of those?

Yes. So the guide for the year, just kind of slightly positive, would not include the weather recovery as we had mentioned. And then for the first quarter, we did see the positive impacts in the quarter for the normalized weather in California. You'll note in Pete's comments that California outperformed kind of the rest of our big 4 markets. But where we saw weather for this year in the first quarter was primarily in Florida, which for the quarter, the proportion of those Florida sales is the highest of the big 4 states. So it had a larger impact as it relates to that.

I have one more question. Regarding the new branches and acquisitions, I understand that the base business was consistent with overall sales. However, over the past 15 months, which you seem to be excluding from the base business, you've added around 5.5% more branches. Is their contribution to revenue lower than your expectations? Perhaps this could relate to super cycle dynamics. During the Investor Day, you emphasized two points regarding the payback period and the target for bottom-line margins at 10%. Has there been any change in how the new branches are performing—are they now more of an expense in competing within the category rather than adding significantly to revenue?

When we open new branches, we always conduct a five-year pro forma analysis to ensure we are confident in the reasons and quality behind the decision. While branches in more challenging markets may see slower growth, many of the branches we open are related to maintenance rather than new construction and tend to perform well. Overall, I am satisfied with the performance of these new locations, particularly considering the number we have launched. This success reflects the experience of our management team. The team at new branches consists of seasoned professionals who are ready to take on their roles, enabling us to leverage their performance effectively. Overall, I feel positive about our progress.

Yes. Thank you all for joining us today. We look forward to our next call, which will be July 25, mark your calendars for July 25, when we release our second quarter 2024 results. Have a wonderful day. Thank you.