Pool Corporation — 2024 Q1

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 -- working 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.

Yes. So the 2 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 kind of that flat to down 10% range. So it was a little bit worse than that for 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 kind of down 10%, we'll get some improvements in our mix, our product mix.

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 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 [indiscernible] market.

Ryan, one of the things you have to consider too is when you have a softer first quarter -- and we mentioned that we think building permits were off, so construction was off more than we believe it will be for the total year. So you have just competitive forces in the market that you have early buy payments that are going to be due from the supplier -- due from the suppliers on all the distributors. And oftentimes, what we see and again, nothing new, this happens every time we happen to be in a cycle like this. There's more competitive pressures as people are trying to move our product to liquidate inventory so that they can generate enough cash to make those early buy payments. Now again, according to just normal industry or normal seasonality as we move into the second quarter, everybody is busier. The products are flying off the shelf as people are trying to open up pools. So that -- what I would call a seasonal blip in competitive pressure tends to wane pretty quickly.

So what I would say is with -- supply chains are essentially -- any COVID effects at this point are essentially out of the supply chain. There's some lingering inventory but really not much. So any idea that, "hey, I would have to go out and purchase product ahead of time to make sure I had product," is really in the rearview mirror. So what happens is that people are -- were -- I think we did pretty good on early buys, really. And I would tell you that I think the early buy wins, as I mentioned in my comments, really were a function of share gain/it wasn't people going out saying, "hey, I need to procure product because I won't be able to get it." So I think we did well on share gain.

Yes. One of the things that I mentioned is our pricing optimization work. So the teams are working very hard around pricing optimization. And when you calculate gross margin, you basically -- you calculate gross margin based on the -- obviously, on the cost of goods. But as the cost of goods fluctuates, as you're selling down inventory and it changes, it can create a false signal. So we've been looking at gross margins, selling margins from average cost. And the work that the team has done has given us a couple of months of positive signs that we're getting better from a gross margin -- getting better in gross margin from pricing realization as a result of the team's work.

Yes. We look at permits, which is an indicator, right? It's not the end of deal but it is an indicator of what's going on in the market because there's always a timing lag with permits. If you talk to any builder, what -- they'll tell you is that what used to take a week or a couple of days to get a permit now can take a couple of months. But you figure that over time, that normalizes and then still the change in permits is the change in permits. So I can't tell you that I think cycle times in the last year have gotten worse. I've just noted it takes longer to get a permit. So depending on when a family decides they want a pool, the time to which that permit would be realized and posted will be delayed over what it has been in the past.

Sure. We saw the -- obviously, we saw the announcement last month on or, I guess, maybe earlier this month, on The Home Depot intending to acquire SRS. I don't know that much really changes. They have -- they've made a point, both SRS and Home Depot have made a point to say that they're going to run the business separate. And when I think about the impact on our business, I think there's going to be a change. So there's going to be some folks perhaps that are in that business that are affected by the sale that may cause them to consider what they're doing. But as far as the impact on us, if I'm pragmatic about it and I step back, I say, well, there's no new competition. It's not like that this brings a lot more distributors into the market because there at this point, we don't see the channel to market changing. We'll see a long-term player owning it versus private equity, which tends to be shorter-term focused, which I think is a positive thing.

Yes. So our original guidance on that is that the performance-based compensation would be recorded basically pro rata over the year based on our actual operating results. So that's really the only one. We did record a slightly less performance-based compensation than we would have if we had better results in the first quarter. So that's really the only one that changed. As far as the costs related to the new sales centers and the opening sales centers, with the 3 that we've opened so far to date and the 5 that we're intending to get open before the season, cumulatively, we will have about 8 open preseason, with a target of 10 for the year. So we are seeing a significant amount of those costs in first and early second quarter. And then as it relates to the tech initiative, we have started to ramp that. So we're pretty much right on target with what we've spent so far in the year. That will go -- we'll have some spend in the first quarter and then we'll ramp up slightly through the rest of the year as we continue to onboard some of those resources that we need for those projects.

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 really 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.

What I would tell you is it really -- it kind of goes by market. So you've seen that we have -- we've leaned very heavily into the aftermarket and the maintenance business. And I think our POOL360 ecosystem is kind of leading the way there for us and the software that makes the service providers more efficient. And I think our expanded footprint makes us more convenient. So we always look at from a long-term growth perspective, share gain as part of our model. And we never really give it back. Now when I say that, the thing you have to remember is that in any given market, I'm certain, I mean, we're practical in that, I'm certain in any given market. We may lose a customer here and there. But by and large, share gain has been part of our long-term growth model. And it will remain as part of our long-term growth model.

Yes. I mean I would tell you, we're always very mindful of the balance sheet and making sure that we are responsible allocators of capital. We look at -- when we look at acquisitions, we look for a strategic fit and we also look for a cultural fit. And then we also look for an economic equation that makes sense. So the good news about POOLCORP is we have a tremendously strong balance sheet. And we also have a very strong leadership team, both of which are required, not only to execute an acquisition but to execute and integrate an acquisition and realize the savings. But with that very talented management team and a very strong balance sheet, it also gives us the ability to look at deals and say, if they make sense financially, then we would do them. But if not, we also have the ability and, frankly, a superior value proposition in almost all cases to say if we need additional capacity that we can do it from a greenfield perspective.

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.

You know, it's interesting, Steve. It's actually a very good question because we've seen the price of a pool escalate to all-time highs. And then at a certain point, that matriculates through to the size of market because at a certain point, just because of the monthly payment for those pools that are financed and the elevated rates, it can close out some customers. And what we've seen is that some of our builders have just, steady as they go, because they've got a good book of business and they build the high-end pools and they're very happy to continue to do that. We have other builders that are trying to figure out how they can lower their ASP by -- to make sure that they can perhaps bring more people into the market.

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.

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 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.

Andrew, what I would tell you is that when we open up new branches, as we mentioned during Investor Day, we always do a 5-year pro forma. And we have to be very comfortable with the reason and the rationale for us opening the branch and the quality of the pro forma. Certainly, if you look at the branches and their ramp, in a market that is more challenged from a new construction basis, they would be impacted and perhaps the slower growth but many of the branches that we open are really not for new construction, there could be much more maintenance tied to maintenance and those tend to perform well. So overall, when I look at the performance of the class, really, nothing is alarming. I'm actually pretty happy with the results on the greenfields, especially given the number of greenfields that we've done.

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.