Good morning and welcome to the Pool Corporation First Quarter 2023 Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to Melanie Hart, Vice President and Chief Financial Officer. Please go ahead.

Welcome everyone to our first quarter 2023 earnings conference call. Our discussion, comments and responses to questions today may include forward-looking statements, including management's outlook for 2023 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 is included in our press release and posted to our corporate website in the Investor Relations section. Peter Arvan, our President and CEO, will begin the call with his comments.

Thank you, Melanie, and good morning to everyone on the call. This morning we released our first quarter results which were adversely affected by challenging weather patterns across most of the North American market, and we were up against extremely difficult comparisons from 2022. Despite cooler and extraordinarily wet weather across many of our year-round markets, we posted revenue of $1.2 billion, down 15% for both total and base business revenue when compared to 2022. As a reminder, in the first quarter of 2021, our base business sales grew 51%. In the first quarter of 2022, we saw sales grow by an additional 26%, which makes a quarter-over-quarter comparison tough in and of itself, but especially when confronted with unprecedented weather in some of our major markets. What is encouraging, though, is that in the areas where the weather was normal, our business performed in line with expectations. Looking specifically at our year-round base business markets, we saw sales decline 9%. California, as you well know, saw historic amounts of rain and cooler temperatures in the quarter, which curtailed both construction and maintenance spending, leading to a sales decline of 24% in this very important market. This compares with the same quarter last year, where we saw sales increase by 31%. In Arizona, we saw sales decline 14% as they too experienced above-average rain and cooler temperatures compared to the normal seasonal patterns and what we saw in 2022. Again, by way of comparison, for the same quarter last year, Arizona saw sales increase by 31%. Texas, which experienced a more normal weather pattern, saw sales decline 6%, following a 7% gain for the same period last year, which is in line with expectations set earlier. Florida, which experienced favorable weather in the quarter, saw sales increase 7% on top of the 30% growth that we saw last year in the same quarter. Our seasonal markets, which include Canada, saw sales decrease 23%, but this compares with the 28% growth that we saw in the first quarter of 2022. As has always been true in our industry, the biggest external variable that can impact our business is the weather. Early in the quarter, we were encouraged by the weather conditions, but that quickly changed to a headwind and became more impactful as the quarter progressed and the sales effects became more meaningful. All in, we believe that the historic weather pattern that we have seen so far this year, particularly in the Western U.S., negatively impacted revenue by approximately $60 million to $70 million. Typically speaking, adverse weather delays pool and outdoor living construction, which may be made up on the shoulders of the season if the weather allows. Maintenance and repair spending are mostly lost as the pools go unused during inclement weather, limiting some equipment usage, which may lower or postpone repair spending, and definitely curtails chemical needs. After assessing initial permit data, demand for new pool construction is clearly down. The decline ranges from a high negative teens percent to over 50% in some markets. In total, we believe the overall pool permit number is down approximately 30% so far. This is worse than we had contemplated in our previous guidance, driven mostly by the weather and some additional economic headwinds. However, when comparing Q4 2022 levels to the first quarter of 2023, we see permits up 4%, which is encouraging. Weather, interest rates, consumer spending and the end of COVID tailwinds all contributed to lower pool construction activity on a year-over-year basis, but we are encouraged that the sequential quarterly permit level is up. We continue to see lower-end pools that are typically financed under the most pressure as consumers grapple with the higher cost of borrowing and higher pool construction costs. We estimate that our sales into the pool construction segment are down 25%, which implies that we continue to take share, consistent with our past performance. Our unmatched value proposition and commitment to an unparalleled customer experience continue to make us the supplier of choice for the industry. For context, new pool construction accounts for approximately 15% of our business. Approximately 60% of the business is driven by maintenance and repair with the remaining 25% being driven by renovation and remodel. As you can see, about 85% of our business is driven by pools that already exist. As we had anticipated, the renovation business appears to be holding up much better than new pool construction. This is based on our estimates that our new pool construction sales are off approximately 25%. However, sales of key construction products that are used only in construction and renovation are down only 3%, which implies that renovation activity is solid. Turning to end markets, the commercial swimming pool product sales, which tend to be less weather-dependent, are up 12%. Base business sales to the retail channel were off 16% for the quarter, reflecting a return to more normal buying patterns as supply chains have normalized. We believe normalized supply, cooler weather and a later spring across most of the country also delayed some shipments to the stores in line with a later start to the season and normal material availability. Pinch A Penny franchisee revenue is our indicator for retail sell-through. Here, we saw sales increase 10% in the quarter, which we believe is a good indication of the resilience of demand in markets where the weather is more typical for this time of year. Moving on to specific product categories, it should be no surprise to see that equipment sales were down 14% in the quarter, attributable to construction unit volume declines based on lower backlogs, unfavorable weather, and smaller, later customer early buys. As previously noted, we saw no change in pricing as all increases in this category are holding and are expected to hold as is normal. Chemical sales in the quarter were down 11%, which is also expected with cooler and wetter weather. Notably, Florida, which had favorable weather throughout the quarter, saw chemical sales increase 12%. Building material sales for the quarter were down 7%, reflecting lower new builds offset somewhat by higher renovation and remodel numbers. Let me now provide some context on Europe. We continue to see that demand in Europe remains soft. The general economic outlook, the effects of the war, and again, the weather have combined to create headwinds that resulted in a sales decline of 25%. For context, last year in the first quarter, sales were up 5% as the effects of the war had yet to begin, and the general economic outlook was more stable. For reference, the first quarter of 2021 saw sales increase 115%, so the two-year stack is quite difficult. Turning to Horizon-based business results, the first quarter sales decreased 7% with residential activities declining most prevalent in the Western states, offset somewhat by commercial project demand and stronger demand in Florida and Texas. Weather implications are being felt in this business as well, delaying some projects, but we are optimistic that some of this loss can be made up. Moving down the income statement, let me briefly cover gross margin. We are very pleased with the 30.6% that we posted reflecting the work that we have done in this area related to mix, pricing, and inventory investments. Melanie will provide additional color in her prepared remarks. Operating expenses came in at 18.6% of net sales. Although this is higher than we have seen in the previous two years, this is largely attributable to investments that we continue to make towards our long-term growth, inflation, and the effects of a softer, weather-driven revenue quarter. As we have previously discussed, our cost model is somewhat variable, but we do not want to take structural actions that would impede our ability to fulfill future demand. As you know, the first quarter is our seasonally least significant, especially given the unprecedented weather headwinds. It would be premature to read too much into the quarter. We, however, continue to invest in new sales centers and customer programs that we believe allow us to continue to provide best-in-class service and value for our customers and suppliers. For the quarter, we added seven new locations, two acquired, and five greenfields. For the balance of the year, we expect to add another five to seven. Additionally, Pinch A Penny welcomed five new franchise locations in the quarter. With respect to customer tools, POOL360 saw online order activity decrease by only 3%, indicating deeper penetration and increased usage within our customer base. Completing the income statement, we reported operating income of $146 million, which reflects strong execution in a weather-constrained environment. It is noteworthy that although this represents a 38% decline at the shoulders of the season, it is 13% higher than what we posted in the first quarter of 2021 and significantly higher than pre-pandemic levels. Before I turn the call over to Melanie for her financial commentary, let me address our guidance update. In any given year, we face challenges with the weather and uncertainties in the economy and how that can affect customer behavior, labor costs and availability, and operating expenses. Competitive pressures and, of late, geopolitical events can also impact our results. Some of these we can foresee and prepare for, while others we cannot but still have a significant short-term impact on financial results. In a typical year, it is not uncommon to be impacted by one or more of these conditions. The implications on short-term operating results vary with each, but experience tells us that the more prominent impacts are felt with significant changes in the weather, which can produce immediate impacts on operating results that will vary based on the weather event, market size, and timing. This is nothing new, and we have seen it frequently in the past. Changes in economic factors can be as significant, but generally, the effects are felt more slowly across the business. In 2023, we saw significant weather impacts in two of our largest year-round markets, Arizona and California, which were most prevalent later in the quarter, where the effects are more pronounced. At the same time, we saw and expected the expiration of COVID tailwinds, which favorably impacted 2020 through the 2022 season results and were contemplated in our previous guidance. Individually, each will cause notable variances in results on a year-over-year basis. But when they stack up in very large year-round markets and are combined with the return to normal buying patterns in the rest of the markets, it can meaningfully change our operating results in the short term. We want to remind our investors that the fundamentals of this business remain unchanged over the long term. Pools and outdoor living remain highly desirable. The southern migration will continue and the resilience of our industry, which is driven by the installed base of pools, is very much as true today as it was pre-COVID—just larger and more valuable. Flexible work-from-home arrangements remain in place for many pool and homeowners. The inflation that has made its way through the channel is here to stay, making the size of the industry larger. The installed base of products continues to grow and age, and the opportunity to upgrade and modernize existing pools and backyards continues, along with our ability to take share based on our unmatched competitive profile, which gets stronger every year. Taking a short-term view of the business and reacting to short-term issues like weather with structural changes or deviating from our proven strategic plan would be a disservice to our investors. We remain committed to being the best supplier in the industry. We see the value in investing in our capabilities to broaden our product and service offerings that will enable us to continue share gains, while remaining focused on discipline, execution, and capital allocation. The weather issues will pass, but their effects on the first quarter results will mostly stay. The economic pressures related to interest rates will affect new pool construction in the short term, but the desirability of pools and outdoor living will remain strong in the long term. Our installed base will continue to grow in size and value. Capacity creation continues. Our investment in our people and our focus on being the employer of choice is ongoing, and helping our customers grow and be more efficient is what we focus on each day and gives us the confidence that the short-term issues we see will have no bearing on the continued long-term success of our business. With this in mind, we have elected to lower our guidance and increase the size of our estimated range for 2023 to $14.62 to $16.12 to account for the recent challenges, but remain incredibly proud of what the team has done and very confident in the future. I will now turn the call over to Melanie for her financial commentary.

Thank you, Pete, and good morning everyone. We have exceeded $1 billion in sales in the first quarter for the third year in a row, as we continue to see the cumulative 30% to 35% inflation realized over the last several years remain a part of our base. Our first quarter revenue decrease of 15% compares to the first quarter of 2022, where we realized 33% top-line growth and 26% base business growth, and still represents a 14% increase over 2021. Inflation is in line with our expectations, and the pricing that took place at the beginning of the season on equipment remains intact. At this time, we are not aware of any additional price increases to come through during the season. Chemical inflation overall was around 4% for the quarter with trichlor pricing seeing some pressures offset by increases in other chemical product lines. Gross margin of 30.6% was 110 basis points less than the prior year and reflects a strong margin for the first quarter from a historical comparison standpoint. Prior year gross margin included benefits from multiple price changes amid higher levels of inflation. As expected, first quarter gross margin benefited from the sell-through of our lower-cost inventory investments made last year and reflects the higher base we would anticipate toward our full-year longer-term guidance of 30% gross margins, which includes the continuing benefits from acquisition-related accretion. Operating expenses increased $12.5 million or 6% over the prior year. Fixed costs impact our first and fourth quarters more significantly, as the higher sales quarters of second and third provide us more ability to leverage non-variable costs, and it is also where we would typically see higher correlations to sales for volume-related expenses. During the quarter, we continued to invest in strategic projects that we anticipate will drive long-term growth and profitability, specifically those around our customer experience offerings. Our overall costs related to facilities, freight, insurance, IT, advertising and marketing, and people have increased from a year ago, and we are focused on increasing productivity in the network to offset the inflationary increases we are seeing in these areas, therefore limiting the total year-over-year expense dollar increases. We have also added five new locations during the quarter, which will increase our overall capacity and ability to gain market share in expanded geographic areas. These new locations will be an initial drag on earnings and represent higher operating cost growth, but will generally be neutral to earnings in year two and generate normalized profitability by year four. For the full year, we still plan to open the anticipated 10 new locations, as our longer-term view has not been impacted by short-term market considerations. This is in addition to a similar number of franchise locations to be added as part of the Pinch A Penny network. We realized an operating margin for the first quarter of 12.1%, which was consistent with the 2021 first quarter margin and a meaningful step up over the prior five years as we have become larger and more efficient. The quarters in the shoulder of the season provide less of an opportunity for leverage, but the results achieved in the first quarter of 2023 are a good indication of the benefits we would expect to see longer-term as we continue to leverage our scale for increased profitability. Interest expense for the quarter increased $10.6 million over the prior year as we saw our average interest rates increase from 1.5% in the prior year to 4.8% for the current quarter. We have held our debt outstanding consistent with year-end while also making $44 million in open market share repurchases year-to-date. We continue to remain under our stated target leverage ratio and have more than adequate capacity to fund our capital priorities. Next, I'll discuss our balance sheet and cash flows. Days sales outstanding was 26.5 days compared to 26.4 days in 2022. Net receivables decreased consistently with overall sales changes, and we continue to utilize our credit function as a valuable resource for our customers as we work with them to support their sales activity. Inventory level increases have continued to improve from the third quarter of 2022 when we saw supply chains and lead times normalize. We have reduced our base business inventory growth from 43% year-over-year in the third quarter of 2022 to 18% in the fourth quarter of 2022, and again to 3% at the first quarter of 2023. Our focus on inventory is by sale center and by SKU, which ensures that we have optimal levels of inventory and can provide the highest level of service for our customers. We are making progress on moving through the safety stock inventory levels we had at this same time last year and are continuing to target the end of the season as a return to normal inventory levels. Our efforts on managing working capital are evident, and the improvement in cash flows from operations of $311 million over the first quarter last year. We are expecting higher payments in the second and third quarters on vendor early buy seasonal payment terms compared to last year where these programs were generally not offered. However, full-year cash flow from operations is expected to exceed $800 million. We completed $44 million of share buyback during the quarter and have $186 million remaining under our share repurchase program authorization. We typically review our capital allocation plan with our Board of Directors at the time of our upcoming annual meeting and will announce any changes shortly thereafter. We have updated our EPS guidance for the full year 2023. Our new range is $14.62 to $16.12, including the $0.12 ASU tax benefit realized to date. Our range considers the results to date and at the low end impacts from a mild recessionary environment. Continuing unfavorable weather throughout the remainder of the year or a worsening economic climate could impact our expected outlook. We are now expecting to see sales compared to 2022 to be down mid-single digits versus the flat to down 3% from our initial guidance. Based on current trends, it is possible that new pool construction could decline up to 30% in view of the number of permits issued year-to-date and fewer available buildable dates. Maintenance revenue is also expected to see a 1% lower increase than previously expected from the use of less consumable stemming from unfavorable weather in the first quarter. Our overall expectations related to renovation and remodel activity, our Horizon business in Europe remain relatively unchanged. We continue to pursue four to five tuck-in acquisitions for the year with a minimal impact on the current year results. We completed our first acquisition of 2023 by purchasing Pro-Water Irrigation & Landscape Supply, adding two locations to our Horizon network during the quarter. Looking at the trends in base business growth last year, we saw 26% growth in the first quarter, followed by 10% growth in Q2 and Q3 and modest growth in Q4. The largest year-over-year impact is expected to be seen in the first quarter and first half. We have one less selling day in the third quarter, and for the full year compared to 2022. We continue to forecast gross profit margins for the full year in line with our longer-term guidance of around 30%. The second quarter will be a difficult comparison as prior year gross margins increased 150 basis points from 2021. So we would expect the 2023 margin for the second quarter to be slightly higher than the full-year projection, as is normal for the second quarter. Inflationary pressures on operating costs will be partially offset by our continued efforts in capacity creation and our ability to manage variable costs. Growth of expenses will be significantly less than the inflationary cost input we are challenged with. Our management teams will make decisions to manage costs while continuing to invest in valuable programs and team members that will be necessary to support our long-term growth. Reduced volumes would allow for more field focus on our ongoing operational projects, such as the expansion of our priority pick express order programs, thin replenishment, velocity sliding, and delivery optimization. These initiatives will increase available capacities longer term across the network without more significant capital spend. There have not been any changes to our expectations on interest expense for the full year. We still anticipate interest expense will range from $50 million to $60 million. With exceptional cash flow generation, we expect debt balances to decrease throughout the year. We also plan to complete the transition from LIBOR to SOFR on our available rate debt agreements before the end of the second quarter. This change will not materially impact our results or financial position. Our overall borrowing rate continues to benefit from the portion of our debt currently tied to fixed-rate, interest rate swap agreements. Estimated weighted average shares outstanding that will be applied to net income will be approximately 39.5 million shares at each remaining quarter and 39.5 million for the full year. This number was 39.4 million shares at March 31st. We will update our forecast quarterly to reflect the impact of any future share repurchases. As we continue to focus on our four key operating priorities, our ability to integrate our ESG framework into those priorities has expanded. We expect the benefits to not only expand our efforts around sustainability and governance but also to assist in our capacity creation efforts as we utilize the same practices to grow our operating margins over the long term. Our second annual corporate responsibility report will be issued during the quarter and will provide more detail on what we have accomplished. Our first quarter 2023 reflects a transition period as we exit a time of uncharacteristic growth coupled with supply chain disruptions only to navigate challenging weather and macroeconomic conditions while generating strong current year operating results and focusing on the long-term stable growth nature of our business. We will now begin our Q&A session.

We will now begin the question-and-answer session. Our first question will come from Ryan Merkel with William Blair. You may now go ahead.

Hey, good morning everyone. Thanks for taking the question.

Morning.

Morning.

First off, can you comment on trends so far in April? And specifically, I'm wondering how California and Arizona are bouncing back at all.

Yeah. At the beginning of the month of April, Ryan, the weather wasn't all that much different. But as the month has progressed, California and Arizona have seen improvement. On the construction side, think of it this way: between construction and renovation in California, if the yards are still soaked and the builders can't build, that's simply going to forestall the construction-renovation. As long as there's a pool there, the renovation work can typically proceed regardless of temperature and rain. So we're seeing some improvement in that area. As it relates to the maintenance spend, the biggest component on maintenance, as you know, is chemicals. Chemicals are tied to water temperature. So we're encouraged that the sun is out, temperatures are heating up. And if you look this week and next week, Arizona is going to be in the mid to high nineties. So, we like the trend and we think things are turning in our favor.

Got it. That's helpful. And then you changed the guidance for the year to down mid-single digits. Is this what you're expecting in the second quarter? And really, what I'm getting at is can we be confident that the first quarter is mostly weather versus demand falling apart in a bigger way?

Yeah. I think we would be very confident that the first quarter was significantly driven by weather. And I say that because if I look at the results in Texas, which I mentioned in my prepared remarks, and I also brought up Florida, where we had good weather, in those areas the business did well and was very much in line with expectations. So we've never seen the water problem that we have in California, combined with very cold temperatures. The same thing in Arizona, where the Phoenix market has had more rain than I think they've seen in a 10-year period. So I would tell you that in those areas, we are very confident that it's weather-related. If I look at the seasonal markets, the quarter in total doesn't look terrible, but you really have to look at it in context of when the weather happened. So in the seasonal markets, the beginning of the quarter actually had good weather. The weather deteriorated later, which simply delayed the opening of pools and delayed construction projects. So I think that we're comfortable that the weather played a major role in how the season is opening up.

And then just on the second quarter, is mid-single digits kind of the right framework, or how should we think about the cadence of the year?

Yeah. So our expectations for revenue over the year have not changed significantly from where we talked about when we gave our original guidance. Although, obviously, we didn't have the impact of the weather on the first quarter. So from a comp standpoint, when comparing to last year's first quarter base business growth of 26%, we anticipate lower growth in the second quarter. So our original guidance was that we would see a larger decline in the first half of the year, and then that would move to modest growth for the second half. We expect that to play out similarly with the larger decline in the first half because of the weather impact on the first quarter.

Got it. Very helpful. Thank you.

Our next question will come from Susan Maklari with Goldman Sachs. You may now go ahead.

Thank you. Good morning everyone.

Good morning.

My first question is thinking a bit about the changes in the lending environment, especially as it relates to regional banks during the quarter. Do you think that that's had any implications on consumers' willingness or ability to take on new pools? And also with the projects that were delayed in the quarter because of weather, are you seeing that they're still in the backlog, or has the cancellation rate changed at all?

Very good questions. As it relates to consumer lending and the banks, certainly that's nothing we had contemplated when looking at how the year would play out. What I would tell you is that there are a couple of common themes. One is that we have always stated, or at least for the last 12 months, that we're seeing pressure at the lower-end pools. The rate of financing versus cash buyers goes up significantly for entry-level pools, while larger projects have a lower percentage of financing versus cash. In the current environment, the uncertainty in the lending landscape exacerbates an already pronounced issue with entry-level pools, but I don't think it's affecting much at the mid and upper-end markets.

That's helpful. And then, can you talk a bit about the maintenance part of the business? How are you thinking of the share gains you’ve seen there in the last couple of years? Has there been any change in that in the last couple of months?

I apologize, I didn't respond to the second part of your question about cancellations. Because of weather delays, we've not really seen that. The cancellation rate really hasn't changed significantly. So people that generally put down a deposit and were put off by the weather had already arranged their financing. It's still very early in the season. If your pool happens 30 days, 45 days, or 60 days later than anticipated, I think you're still going to have a fairly happy homeowner. Regarding the maintenance share gain, part of our value proposition is the unparalleled customer experience, which relies on our sales centers' locations, inventory profiles, speed of service, knowledge of our salespeople, and our B2B tool, POOL360. All these factors have allowed us to continue to gain share, and we believe that this will not change. POOLCORP has historically gained share, and we typically do not give that share back.

Okay. That's very helpful color, Pete. Thank you, and good luck with everything.

Thanks.

Our next question will come from David Manthey with Baird. You may now go ahead.

Good morning, everyone. First question is on the new 2023 top-line algebra. I believe you said new construction is down 30%, maintenance is down 1%, renovation is down 10% to 15%. And I didn't catch what you said on green. Could you just make sure I have those numbers right?

Yeah. So for the Horizon business, we didn't make any changes within our top-line assumptions to what we had put out at the beginning of the year. So that will stay at a decline of 5% to 10% on the green business.

Okay. And the other numbers were right?

On the maintenance side, that was the volume-related versus our expectation on inflation, which still remains around 4% for the full year.

Okay. 4% for the year? And on that 30% decline in new pools, is that revenues or volumes? It seems like you're implying that with the bottom end dropping out, that ASPs could actually be higher.

I think that as it stands today, the permit activity implies a 30% decline. Our internal measurement shows that our sales into that channel, based on specific products that are used only in new pool construction, our performance is better than the market. The market permit data today would show minus 30, and I think our performance would show minus 25. If you look at the number of pools on an average, the lower end pools are going to be affected much more dramatically, while the higher end would be more stable. It’s logical to think that the average selling price on a pool for 2023 would be higher than in 2022.

Okay. And then, second on SG&A, it seems like what you're saying is in a declining top-line environment, you hope to offset the investments that you're making with your capacity creation and efficiency efforts. Is that to say that you're budgeting SG&A dollars to be flat for the year?

The SG&A dollars will follow volumes. It could be negative two to positive two compared to last year, depending upon where the top line falls. The key is that you'll see larger increases in the second and third quarters due to staffing and variable expenses such as freight overtime. So we would expect that expense growth would be significantly less than the 6% growth seen in the first quarter.

Makes sense. Thank you.

Our next question will come from Joe Ahlersmeyer with Deutsche Bank. You may now go ahead.

Thank you for the question. I believe you mentioned a $60 million to $70 million impact from the weather this quarter. If we remove that from the base business decline, it seems to be down around 11%. Previously, you indicated that you expected a decline in the mid-singles to high singles range for the quarter. Is there a way to account for the remaining difference, or is my understanding incorrect?

So what you're starting with as a base will also be impacted by the new pool construction side as well. We also had early buys where last year the first quarter benefited about 2% from early buys.

Okay. And so then incorporating this mid-teens decline in the first quarter and your update to the full year, it looks like really only about a point of growth comes out of the remaining three quarters. Is that also sort of the right way to think about the update in light of what you did in the first quarter?

Within the top level of our range versus the bottom level, there is some variability based on which way you model to that can yield a point or a couple of points.

Okay. Great. Appreciate that. Thank you.

Our next question will come from Andrew Carter with Stifel. You may now go ahead.

Yeah. Hey, thank you. Good morning. I wanted to ask if you provided a product inflation number for the quarter. Are your expectations the same as before? I know you said equipment pricing was fine, but what about chemical pricing? What are you seeing there and how does the chemical price being down 11% in the quarter break out between price and volume?

For the quarter, inflation was a little bit higher than the 4% we expect for the year, around 4% to 5% total. Equipment pricing on the higher end. Inflation for chemicals was around 4%. So when you look at the negative 11%, it’s plus four for inflation and negative 15 for volumes due to weather. Our overall expectation for the year on inflation is still about four. We'll see a slightly higher rate early in the year, moderated in the fourth quarter.

Got it. And with some pressure on trichlor, I know the initial guidance did contemplate the packaging initiatives from Porpoise coming online. Is that still the case? Do you expect greater productivity from that, or do you have any worries about where chemical deflation could go on trichlor disrupting the product margin for the year?

The way we think about the Suncoast Chemical business and our ability to package is that the facility doesn't have capacity to do the entire business, right? So we are blending what Porpoise does for us with what we're purchasing in the open market. So as a blend, we are better off than if we were buying everything in the open market. The trichlor pricing part of it is a function of supply and demand, and a lot of trichlor came into the market towards the back half of last year. As that inventory sells through, we will see some deflation on the trichlor pricing. As Melanie said, this is being offset with CalHypo, bleach pricing, and other products. So I don't think our thinking is much different on chemicals, and it's in line with what we had considered at the beginning of the year. The industry had more product on the ground a quarter or two ago than there is today, so the oversupply is coming down, which will only help pricing stability going forward.

Thanks. I'll pass it on.

Yeah.

Our next question will come from Scott Schneeberger with Oppenheimer. You may now go ahead.

Thanks very much. Good morning. Peter, could you just comment on Florida and Texas as well? Just Florida seemingly better than what we would've expected on the good weather. How much do you read into that in your overall takeaway? I know it's early in the year. But do you extrapolate that at all to other markets for the rest of the year?

Yeah. I think it's a function of the install base continuing to grow. We're happy with that when the sun is out. The crazy thing is pools are in no less favor today than they were a year ago, but the weather conditions made the first quarter tough. Where the weather was good, such as Florida, and most of the Southeast was in good shape and in line with expectations. Texas was also in a better condition, although we cited a 6% decline after being up 7% last year. The market hasn't changed significantly, but what does change is people's ability to work on construction projects. The maintenance necessary is influenced by weather, as a significant amount of rain leads to chemical needs, but the market is behaving as we would expect. I don’t think that we’re reading into it as if there’s significant growth coming. Maintenance business will align with the installed base and be affected by weather. The renovation business has been good.

Great. Thank you. And Melanie, on inventory management, how are you starting the year there? It sounds like you are exactly where you want to be. Can you discuss how that's being managed, what was ordered early in the season? Is it where you want it to be? And will we continue to see inventory declines at the anticipated pace?

We were very pleased with our ability to right size inventory in the first quarter. It did increase from year-end, but that's typical from a seasonal standpoint, and we want to ensure that all sales centers are stocked up for the season. The dollar amount of our increase from year-end to the first quarter was significantly less than what we've normally needed to do due to last year's inventory on hand. Our corporate resources evaluate inventory levels, and local resources in the markets are responsible for overall inventory management. So we are pleased with the progress that we made. Our inventory growth this year from the first quarter compared to last year was by product line exactly as we wanted it. The two specific areas with more inventory this year versus last year are on controls and variable speed pumps, but we made good progress. As we move through the second quarter, we will continue to bring those levels down year-over-year, and we anticipate by the end of third quarter to be aligned with our historical levels.

Appreciate that color. Thanks.

Our next question will come from Trey Grooms with Stephens. You may now go ahead.

Hey, good morning.

Good morning.

I think you mentioned modest growth in the second half as in the expectations. If you could maybe provide some color around what you guys are seeing that gives you confidence in seeing that back half improve some versus the first half excluding weather. So kind of the puts and takes there for the second half top line.

Mostly, it will be focused on the comps. We expect that daily sales will continue at a good pace. We start to see new pool construction permits and activities slow down, beginning in the beginning of the fourth quarter and a little in the end of the third quarter. The comps will get easier on the new construction side. The remodel activity remained strong in the fourth quarter of last year, offsetting some of that on the new pool construction side. There will also be seasonal market impacts, where favorable weather conditions assist sales, but since the fourth quarter is similar to the first, it will be affected by weather too.

Got it. Okay. That makes sense. And then, it sounds like you guys are still gaining share in some of the harder-hit markets, you pointed out California. Are you seeing similar share gains in other markets like Arizona? And just to clarify, back to the guidance, I know your prior guide didn't have any market share gains baked in. Is that still the case with the updated guide given today?

Our share gains are really happening across the country, a result of the significant investment in people and an unparalleled service offering. I’m confident in our continued ability to gain market share across virtually every market. Although there may be specific branches where that may not be true, overall, we feel strongly about our ability to continue taking share.

And regarding the guide, any share gains in that down mid-singles?

Nothing significant at this point. We want to be cautious as we see what the weather looks like in the second quarter.

Okay. Thanks for taking the questions. Very helpful.

Welcome.

Thank you.

Our next question will come from Garik Shmois with Loop Capital. You may now go ahead.

Hi. Thanks for having me on. I wanted to ask first about operating expense in the first quarter. Just hoping you could provide how much of the increase was driven by some of the things you had previously called out, like rent and facility cost inflation versus the marketing expense in the first quarter versus the lower fixed cost leverage that you saw on the weaker volumes?

The rent increases we saw are not going away. So that is something that will continue through the rest of the year. We did see some incremental rent increases from the new locations we opened in the quarter, but the inflationary increases in rent will persist. The increase in expenses year-over-year is impacted more significantly in the first and fourth quarters. We did focus in the first quarter on activities with customers, costing a couple of million, and we invested in projects for expanding operational capacity.

Got it. Follow-up question on the maintenance revenue guidance going from flat to down one. Just not that big of a change, but just want to confirm it was primarily weather-related. Are you seeing any change in customer behavior on maintenance due to the choppy macro?

Yes, it is primarily weather-related. One of the best parts about our industry is maintenance is discretionary. You have to filter and treat the water. If weather is cooler and raining, people aren't using pools, which will curtail maintenance spending. So we are confident that it is based on the installed base size and the impacts of weather.

Got it. Thanks again.

Thanks.

You're welcome.

Our next question will come from Stephen Volkmann with Jefferies. You may now go ahead.

Great. Good morning guys. Still morning, I guess. Thanks for fitting me in here. Just a couple of cleanups from me, if I could. I know this is not going to be scientific, Peter, but I'm wondering if you have a view on where we are with backlogs, we’ve talked in some previous calls on backlogs on new and refurbishment projects.

Yeah. As you can imagine, we spend a lot of time talking to customers, and as you mentioned, it's not scientific. A year ago, I could comfortably tell you that builders were booked out through the end of the year. Currently, depending on the type of builder and location I've heard backlogs of two to six months. Two months is related to the lower-end pools, while high-quality builders for large projects have more demand and their backlogs remain unchanged. For reference, if you thought about backlogs from two to six months, you'd be accurate.

Okay. Great. And you teed me up perfectly because I wanted to ask how should we think about the mix between high-end and low-end? Because you've mentioned that difference a couple of times.

I would say it's a little more than 50/50 on the lower end. Probably around 60% to 65% would be at the lower end.

Got it. Okay. We'll hold you to it. I'm just trying to understand. Thank you. And then a quick question for Melanie, if I could. I think the cash flow from operations number you mentioned is greater than $800 million, which seems to align with our previous discussions. How should we interpret that? A slightly lower net income and a somewhat higher inventory liquidation?

Yeah. No, that's right on. That's the way I would think about it as well.

Okay. Thank you guys.

Thank you.

Our next question will come from Shaun Calnan with Bank of America. You may now go ahead.

Hi, guys. Just one question from me. So you mentioned that there was a 2% headwind from lower early buy activity. Do you have any feedback from the dealers on what drove that slowdown? Is that weather-related? Weaker expectations coming into the year, or anything to do with inventory levels at the dealers?

I think it's a combination of factors. Dealers realize that the supply chain has returned to normal for nearly all items. Whereas a year ago, they were saying, 'I need to get my order in because I need to have product for the season,' now they assured that they have inventory available. So they don’t need to take in product earlier. Also, there's a later start to the season in the previous week. Surveying dealers in the seasonal markets, they just started opening pools. If inventory is available and I don’t need product until the middle of April, I won’t place orders earlier. I think a portion of it is related to product availability and timing. As far as inventory concerns, while there may be some product left from last season, we don't view that as a significant issue. Early buy headwind is more about when the product is needed versus actual shadow inventory.

Okay. Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference over to Peter Arvan, President and CEO, for any closing remarks.

Yes. Thank you all for your continued support, and we look forward to discussing our second quarter 2023 results on July 20th. Have a great day. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.