Good day, and welcome to the Pool Corporation Second Quarter 2024 Conference Call. All participants will be in a listen-only mode. After today's remarks, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Melanie Hart, Vice President and Chief Financial Officer. Please go ahead.

Welcome to our second 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. As we introduced last quarter, we have included a brief presentation on our investor website to summarize key points for our press release and call comments. Unless otherwise stated within our prepared remarks, all comparisons refer to second quarter 2024 versus the second quarter of 2023. We are now ready to begin with comments from Pete Arvan, our President and CEO.

Thank you, Melanie and good morning, everyone. As we reported this morning, we generated $1.8 billion in net sales during the second quarter, reflecting a solid performance in the maintenance portion of our business during the busiest time of the year. This performance showcases our crisp execution, progress on strategic initiatives and our ability to continue gaining share by providing an unmatched value proposition. As we discussed in our June release, the trends we observed in discretionary spending for new pool construction and large renovation projects were impacted by continued economic headwinds, while nondiscretionary demand is solid and in line with our expectations. Our customers who primarily focus on new pool construction and renovation continue to report lower demand for low to mid-range pools, while demand remained solid at the higher end. The trend remains unchanged from recent quarters. A similar pattern is seen in renovations. High-end renovation project interest is reported to be solid; however, the summer, when people are using their pools, is the slow season for renovation. Similar to new construction, low-end pools and smaller renovation projects are being deferred frequently in this environment. Dealers are reporting more inbound calls; however, many consumers remain hesitant to proceed in the current economic cycle. We view this as a positive sign for the future. So far this year, we have made progress in several strategic areas of our business that excite us and drive our ability to capture future industry opportunities and extend our leadership position going forward. We remain deeply focused on our customers and areas of our business where we can position ourselves for sustainable future growth as we leverage the power of our widespread and highly integrated distribution network. We have strengthened our commitment to providing our customers with exceptional service and value-added tools to grow their business while advancing our digital ecosystem development. Adoption of our POOL360 tool continues to increase. We closed the second quarter with 14.5% of our sales completed on our POOL360 digital platform, which is our highest level to date, as our customers experience next-level service and convenience, which ultimately creates capacity not only for POOLCORP but for our customers as well. Our new digital marketing programs continue to gain traction as our dealers experience unmatched capabilities in driving demand for the brands that they carry and lead generation for their core business functions. We are also increasing utilization rates at our chemical packaging facility. Since we acquired the chemical packaging operation from Porpoise Pool & Patio, we have increased the production at the plant by almost 60%, which gives us unmatched capabilities and drives incremental profitability for our business. We continue to expand our sales center network, adding both convenience and needed capacity to support our growth as the industry's installed base continues to grow and we continue gaining share. So far this year, we have opened eight new sales centers in line with our strategic plan. Now moving to our second quarter results. Total sales in the second quarter declined 5%, which is an improved trend compared to the year-over-year changes that we have seen in recent quarters. As we mentioned in our press release, the last week of June showed a notable improvement in daily sales, which was sparked by favorable weather and strong execution from the team. Our maintenance business is strong. Our software platforms are gaining traction and our building material products performed better than new pool construction trends and external permit data would suggest. While we take some encouragement from this slightly improved trend, we are maintaining our top line guide along with our year-to-date results sales trend. Once we pass the midpoint of the third quarter and into the fourth quarter, the discretionary portion of our business can have a greater impact on our total sales based on the seasonality of the industry. We also considered this dynamic in our full-year guide. Our gross margin for the second quarter finished at 30%, down 60 basis points from the prior year. Remember that last year we were still selling through our strategic excess and lower-cost inventory in the second quarter. Lower levels of our higher-margin building material sales also inhibited the gross margin in the quarter. Our ability to deliver a 30% gross margin under these circumstances highlights some of the underlying structural improvements in supply chain value-added pricing and our strategic priorities. From a profitability standpoint, we produced an operating income of $271.5 million and an operating margin of 15.3%. Although down from the 17.6% operating margin from the same period last year, it reflects continued strategic investment in technology, a continuation of planned new sales center openings, acquisitions and further expansion of our Pinch A Penny network. Melanie will give you a more detailed commentary on expenses. While we are undoubtedly managing controllable expenses, we also continue to invest in the long-term success of our business recognizing that we are working through an economic cycle and that the business is getting stronger. We finished the quarter reporting diluted earnings per share, including the $0.01 tax benefit, at $4.99 per share. Looking at sales by geography, Florida saw the strongest performance with sales being down just 1%. In Texas, sales declined 6%, as we observed incredibly wet conditions through May making construction difficult and impeding maintenance spending. California and Arizona were down 5% and 8% respectively with a similar overall trend of solid maintenance and aftermarket sales dragged by lower new construction and remodel. In total, our year-round markets were off 5%, while the seasonal markets were down 6%. Europe was down 11% and remains challenged with tough consumer sentiment and was further impacted by cold and rainy weather and late pool openings this season. We continue to make operating improvements that will position us well in this area when sentiment improves. For Horizon, net sales declined 6% compared to the second quarter last year and at the same level of sales decline as we saw in the first quarter. Our irrigation business is more impacted by commodity pricing than the swimming pool business and has seen some irrigation project deferrals in both commercial and residential during the quarter. Moving to our product and end market details, the 1% increase in chemicals reflects a 3% growth in volume with a 2% deflationary impact on price, still primarily driven by trichlor. We see the positive effects of our efforts in this area, particularly noting that our private label chemical sales grew at double-digit rates and outpaced the growth of the rest of our chemical portfolio. On Building Materials, the 10% quarterly sales decline is better than what we are seeing in overall new pool builds and our remodel expectations. Equipment sales ended flat for the quarter and is an area that we have seen improvement, particularly around lights, pumps, heaters, and parts. Remember that our equipment results exclude cleaners, which is a discretionary area that remains challenged. The equipment performance is noteworthy considering the new pool construction trends and the maintenance of our aftermarket business. For example, we estimate that pumps used for maintenance versus new pool construction is 4:1. So we expect our maintenance and repair business on equipment to continue to hold up well. Price on equipment came in at up 2% to 3%. Related to price in other areas, we did see some pressure during the quarter on certain commodities like pipe and rebar, which show up in our building materials and irrigation business results and on chemicals as discussed. Commodity prices moved with the market and represent a relatively small portion of our overall business. Looking at our end markets and commercial business, sales increased 16%, rising after a flat first quarter and in line with another travel-rich summer and openings of community pools. Sales to independent retail pool customers declined close to 6%, which represents sell-in to those stores. We believe that this reflects consumers being more selective with some discretionary purchases and a later start to the season in some markets. Our Pinch A Penny franchisee sales to their end consumers collectively increased 4%, which reflects a high concentration of stores in year-round markets and a strong customer value proposition. Circling back to POOL360, we are pleased with our progress since launching our POOL360 service platform in February and the POOL360 water test application last summer. As we have discussed, these tools ultimately link into our enhanced B2B POOL360 platform, the foundation for our digital ecosystem. Our POOL360 water test tool provides optimal water chemistry recommendations to ensure safe water and an enhanced swimming environment directly tied to our private label products. To date, we are very pleased with the number of retail stores using the software, which we soft launched after the season began in 2023. Our retail solutions team has been fully engaged with the water test in the first half of this year and continues to onboard dealers. As peak season comes to a close and customers have more time to schedule onboarding, we will again be focused on driving our technology and offering in conjunction with our 2025 retail and service programs. POOL360 service allows our customers to expand their businesses by automating manual tasks like quotations, scheduling, routing, billing, and collections, all while providing direct purchase access to the POOL360 tool. Orders processed through the traditional B2B POOL360 platform increased to 14.5% of total sales this quarter, growing from 13% in the second quarter of last year and 11% in the first quarter of this year. Technology is a key source of differentiation and continues to be an effective tool to grow sales and create stronger partnerships with our customers. We continue to strategically expand our network, opening another three sales centers in the second quarter and acquiring one. Our second quarter acquisition offers us a premier presence in the Atlanta market with a central location combined with our established presence in the market, giving us the greater ability to serve the entire metro to fulfill demand in this major Sunbelt market. These additions bring our global sales center network to 445 locations. Our Pinch A Penny franchise network added three new stores in the strategic Texas market, ending the quarter with a total of 292 franchise stores. Continuing to build on our franchise network along with expanding support offerings provided to our independent retail dealers will allow us to expand our reach and continue to capture the do-it-yourself maintenance market. Taking all of this into consideration in view of the peak season activities and our current outlook, we are confirming our full year diluted EPS guidance range of $11.05 to $11.45, including an updated $0.20 estimated benefit from ASU. Even under somewhat challenging operating conditions, our strong cash flow allowed us to return a total of $173 million to our shareholders through dividends and share repurchase so far this year. During the quarter, our board increased our quarterly dividend to 9%, marking the 14th consecutive year of dividend rate increase and increased our repurchase authorization to $600 million, reflecting our commitment to generating returns for our shareholders. For the remainder of 2024, we plan to center our focus on execution and our strategic growth initiatives. From an industry perspective, pools and expanded outdoor living space remain highly attractive to homeowners. Pools remain one of the most frequently searched terms on online real estate sites. Home values remain strong. Demographic trends such as southern migration to the large millennial population are driving household formation and continued new home builds, all supporting the long-term industry dynamics even during the period of higher interest rates and suppressed existing home turnover. As we have seen for well over a year now, high-end consumers appear to be making up a large portion of the new pool builds again in 2024. It is unclear when the mix will shift based on the amount and timing of interest rate reductions and the economic indications needed for consumers to feel less pressured. We are best positioned to provide the widest product offering in the industry, support enhanced outdoor living features and aesthetics through our NPT branded products, and partner with our vendors to unveil the latest available automation offerings. We remain ready to serve our customers with everything they need to help them create the outdoor living oasis that people want while providing the tools and support to grow their business. Although we expect a lower number of new pools to be built this year at roughly 60,000 new units, this still represents a 1% increase in the installed base of pools that will need to be maintained going forward. We remain relentless in expanding our network to best serve the professional and do-it-yourself maintenance customer and improving the customer experience, enhancing our capacity creation and launching our industry-leading digital ecosystem. I will now turn the call over to Melanie Hart, our Vice President and Chief Financial Officer for her detailed commentary.

Thank you, Pete, and good morning again, everyone. We reported net sales of $1.8 billion in our seasonally largest second quarter, a decrease of 5% from the prior year. We experienced an approximate 1% inflation benefit during the quarter. From a product perspective, price increases on equipment sales continue to hold in the 2% to 3% range. While seeing positive volume trends on chemicals, there were negative effects on pricing of chemicals and other commodities impacting sales by 1%. Selling prices specifically for chemicals will likely remain lower than last year for the remainder of the year. From an end market and business line perspective, as we stated in our recent update, the trends regarding new pool construction and remodel activity are less than projected at the end of last quarter. As discussed in our June Pool Season Update Release, we now expect around 15% to 20% lower levels of new pool construction compared to the prior year, which impacted total sales by around 3% for the quarter. As discussed, we believe that remodel activity may be down as much as 15% for the full year and that lower levels of remodel activity adversely affected total sales by about 2% from the prior year during the quarter. Declines in sales at Horizon in Europe had an approximate 1% negative impact on total net sales for the quarter. Our gross margin for the quarter finished at 30%, down 60 basis points from the prior year. As we expected, gross margin in the current year is lower than last year when we were reducing our inventory levels and selling down lower cost inventory which for the most part has now been normalized. We do not expect any significant quarter-over-quarter changes from this effect in the second half of the year. Benefits realized over the last several years from growth of higher gross margin building material sales did not occur in the quarter. Although other factors such as acquisition contribution, pricing optimization and supply chain actions have benefited gross margin and should continue to support margins going forward. Operating expenses this quarter were $259 million, $18 million higher than the prior year, representing 14.6% as a percentage of net sales. The year-over-year increase in the quarter of 7.4% is higher than the 2.6% increase reported in the first quarter, as we had a higher level of spend in the quarter to accelerate our sales center network expansion and technology development. Specific to the quarter, through July, we have opened up eight new sales centers and have also rolled out several enhancements to our customer-facing technology platform, providing our customers with even better digital tools for use during the peak pool season. Additionally, we closed three Horizon locations, two in June and one in July, where performance did not meet our return criteria and we did not see appropriate near-term improvement opportunity. Expenses related to these locations were close to $1 million during the quarter and will not be continuing into the rest of the year. These locations were projects we used to evaluate different product or location offerings and have characteristics outside of our traditional Horizon business and thus do not reflect any changes to our expected results on the remaining part of the business. In light of the mid-season sales trends, we intensified our focus on controllable expenses during the second quarter, in an effort to improve cost leverage. We expect benefits from these incremental efforts to be seen as expenses in the second half of the year are expected to increase in the low single-digit range, with third quarter expenses expected to increase similar to first quarter and slightly higher growth expected in the fourth quarter. Operating income of $271 million was down $56 million or 17% compared to the prior year. We continue to operate with less debt outstanding and we were able to reduce interest expense by $2.8 million during the quarter, compared to the second quarter of last year. Overall, second quarter net income of $192 million compares to $232 million in the prior year. For the quarter, our results reflect a $0.01 benefit from ASU. Diluted earnings per share of $4.99 decreased 16% compared to $5.91 in the second quarter of 2023. Moving to our cash flows and balance sheet, second quarter cash flows remained strong, reflecting normalized contribution after early buy deferred payment terms which came due during the quarter. Cash flows from operating activities of $172 million year-to-date is on pace to meet or slightly exceed our target of approximately 100% of net income for the full year. On the working capital side, our accounts receivable days outstanding of 26.8 days remains consistent with the 26.9 days from last quarter. Inventory of $1.3 billion is $97 million less than the prior year. As of June 30th, 2023, we had completed $186 million of our stated inventory reduction goal of over $200 million during 2023. Thus the prior year second quarter number already reflected some destocking from the end of the prior year. Our inventory days on hand have reduced from 141 to 131, a similar improvement to what we reported in the first quarter. Our prior year inventory positions were normalized as we got to the end of the season at the end of the third quarter. Total debt of $1.1 billion is $68 million less than last year as strong cash flows provided funds for repayment. Debt leverage ratio of 1.4 as of the end of the quarter was just below our 1.5 to 2 times target, reflecting significant capacity for funding future growth opportunities. Moving to capital allocation, we continue to support the ongoing business and organic growth with $34.9 million of capital expenditures, including new sales center openings. We completed another acquisition during the quarter for a total of two additional sales centers added through acquisitions year-to-date. Also during the quarter, our Board of Directors increased our quarterly dividend by $0.10 or 9% to $1.20 per share, reflecting our confidence in the future earnings beyond the current economic cycle and expected ongoing strong cash flows. The Board also increased our share repurchase authorization back up to $600 million, adding $316 million in additional repurchase capacity. We made repurchases of $68 million during the quarter and an additional $10 million through today's earnings call. We currently have $572 million remaining under our share repurchase authorization. Looking ahead to the second half, our expectations for pricing for the remainder of the year are similar to actual results seen to date. The estimated lower number of new pool builds and reduced renovation activity are expected to continue to negatively impact sales around 4% to 5% collectively for the year. Horizon and Europe are expected to represent an additional 1% decrease. Seasonal gross margins held up well in the second quarter, although impacted by lower building material sales year-over-year. For the remainder of the year, we expect gross margin to be in a similar range to last year with internal strategic initiatives offsetting the drag from building materials. Full year gross margins we anticipate to be approximately 30%. Operating expenses for the full year, as mentioned above, are expected to see a low to mid-single-digit percentage increase year-over-year and will include continuing technology investments of approximately $20 million and costs associated with the newly opened greenfield locations estimated to be around $12 million and the acquisitions we've completed to date. Our rate of expense increase, after considering inflation and these incremental investments, reflects substantial efficiency improvement benefits from our capacity creation and operating initiatives. Full-year interest expense is expected to come in closer to $50 million from our previous estimated range of $50 million to $53 million. Our annual tax rate is expected to be approximately 25%, excluding the ASU benefit, with a lower rate to be reported in Q3 and a slightly higher rate similar to our second quarter rate in the fourth quarter. Excluding the effects of additional share buybacks, we anticipate that fully diluted weighted average shares outstanding would be approximately 38.5 million shares for the third and fourth quarter and 38.6 million shares for the full year, reflecting a reduction of approximately 140,000 shares from year-to-date share repurchase activity. Consistent with our June update, we expect that our 2024 diluted EPS will range from $11.05 to $11.45, including the $0.20 of ASU realized year-to-date. We completed our third annual corporate responsibility report last month. This year's report included expanded disclosures, in particular, around our Scope 1 and Scope 2 emissions and our workforce, and it is also aligned with the SASB framework, a leading framework that identifies important environmental, social and governance topics, typically most relevant to stakeholders. As we wrap up our comments today, we are reiterating our focus on managing the business through the current cycle while continuing to invest in strategic technology tools, sale center network expansion and selective acquisitions that will enable our long-term growth, superior operating performance and attractive shareholder return. We will now begin the Q&A portion of our call.

We will now begin the question-and-answer session. And our first question today will come from Susan Maklari with Goldman Sachs. Please go ahead.

Thank you. Good morning, everyone.

Good morning.

Good morning, Pete. My first question is maybe talking about pricing and the gross margin. You mentioned that you're seeing some success and some optimization initiatives there. Can you talk a bit about how we should think about that coming through over the next couple of quarters? And what it could mean for the gross margin over time?

Sure. As you know, Susan, there's a lot of components related to gross margin. If you look at the simple transaction count that we'll have between now and the end of the year, it's going to be several million transactions made up of a variety of products. So, of course, you have mix that plays into that. And as Melanie mentioned, and I think I mentioned in my comments, mix as it relates to construction material, which is typically a higher-margin product, is not particularly helping us this year with a decline in new pool construction and renovation and remodel. So that would be a headwind. But I don't think it gets any worse than what it is right now. I think that just kind of continues. And then we mentioned that there are things that we've done around our strategic pricing, and I think things that we have done related to our private label programs and our supply chain initiatives that help. So as I mentioned, the gross margin rate that we saw for the quarter of 30% I think is admirable. We're very pleased with the outcome for the quarter. So, between now and the end of the year, I mean, we would maintain that it is going to be approximately 30%. Might get a little stray up or down depending on mix. It could, but I think it's generally going to be in that range. I think that's supported by the activities that we've been working on as I mentioned.

Okay. That's helpful. And then it sounds like the POOL360 investments are gaining some nice traction as we think about the first half of this year. Can you give a bit more color there on how some of that is coming through and how you're thinking about that as we think of the back half of this year and then maybe even into 2025?

Sure. So, I'll talk about the three separate applications and they all basically, as I mentioned, are part of the POOL360 ecosystem. So if I start with the water test software that we have, that is tied to our private label program. So the dealers that are on that, they're full-line stocking distributors of our private label chem programs. They have kind of best-in-class water testing and prescription developing solutions that they can give the consumer when they come in. There's also a CRM function in there where they can capture the data about the pool and about the consumer, which helps them every time the consumer goes into the store. But as you can imagine, there is a selling season for that, right? So during the season right now, when typically the pool retail stores are very, very busy, is not the time that any of them are going to convert. This is the season where the people that signed up before are leaning into the software and they are using it. And frankly, they're helping us with feedback on features and functionality, which we're using to develop our software, because as you know, with software, you're never done. There will be a constant stream of enhancements that continue to improve the user's experience. So good progress on the water test. We still believe it or not there are still some dealers that are onboarding even this time of the year, but we expect that as the season winds down that we'll see a much larger number of dealers that onboard during the off-season. Similarly, if I refer to the POOL360 service, it's really the same cycle. So everybody in the pool industry right now is busy. So the service folks that would have to onboard on the software and load their data into the software, so that they could derive the benefits as I mentioned, which is scheduling, it's routing, it's onetime service, it's pricing. It's everything that they need to essentially run their business. This is again not the time of year when we expect to see a lot of people onboarding. But we are doing some selling this time of year. So we have a roadshow that's basically going around the country and going into several key markets where we are spending time with the customers. And frankly, the feedback we're getting on that is extremely positive because people see the benefit in the tool and that unlike the original version of POOL360, which didn't have nearly the same benefits for the customer as it did for us, that tool is in particular designed to provide most of the benefit for the pool service company, which again expands their capacity allows them to grow allows them to tap into our digital marketing program, and frankly, become stickier with us. And then of course, you have just our POOL360 platform, which we talked about earlier. We talked about on the last quarter call that we have updated significantly to improve the user experience. That's really kind of a year-round tool that allows people to put their order in, put an order in priority pick, avoid the lines at our sales center. And again, we're seeing more adoption on that as well. Overall, very pleased. We never expected that this was going to be an overnight success. We thought that it was going to take time to get the customers comfortable with. And then frankly, the more people are on it, then their voices are the best form of advertising that we can have. So overall very pleased.

Okay. That's great color. Thank you for everything Pete. Good luck with the quarter.

And our next question will come from David Manthey with Baird. Please go ahead.

Thank you. Good morning, everyone. Melanie, quick question for you on the gross margin. So I think you said in your monologue that the back half of this year would be similar to the back half of last year. And if we just run that through we're coming in a little bit below 30%, 29.7%, 29.8% range. Is that what you mean by approximately 30%?

I think that range is within 20 or 30 basis points. As Pete mentioned, there are many components that contribute to gross margin, making it challenging to pinpoint this early in the year. We know that full-year margins will be affected by a lower level of building materials, which we have already observed. Due to our higher purchasing from last year, we are experiencing slightly better vendor incentives, but this is somewhat offset by increased freight costs. We also expect chemical pricing to decrease year-over-year for the remainder of the year. Additionally, our larger customers continue to outperform smaller ones. Considering all these factors, your estimates seem to fall within a reasonable range.

Yes. Okay. And then I know it's too early to maybe talk about 2025. But when we're thinking about that 30% Mendoza line, if new pools and major renovation and the building materials are roughly in line with the maintenance as we go forward here again I think you picked up a bit of a benefit in the first quarter from a reversal of an accrual or something. But as you think about that 30% into 2025 maybe just qualitatively what are the factors that could improve gross margin from this year relative to next year assuming that the mix doesn't change all that much?

So assuming that the mix doesn't change, we certainly don't know when but we are hopeful and we know that it will change at some point and we'll get those benefits that we're missing out on in the current year related to the building materials. But outside of that, what we're really focused on right now are things that we manage and we control. So we're very much focused on our efforts around pricing. We're continuing to focus on our expansion of our private label chemicals as well as some additional actions that we're taking on the supply chain side.

I appreciate it. Thank you.

And our next question will come from Scott Schneeberger with Oppenheimer. Please go ahead.

Hi. Thanks very much. Good morning. Pete, one for you and then one for Melanie. Pete, a common question is just the confidence, and it's tough post-pandemic on anticipating these years what we're going to see with regard to new pool builds and renovation. And so the heart of the question is, how confident are you here with this reset guidance level for the remainder of the year? And maybe a little bit of discussion in the visibility you have into that? Thanks.

Yes, that's a good question and one we've spent considerable time discussing with our dealers. When I look at new construction activity, particularly permits, and compare it to our building material sales, it seems that we're performing better than the market would suggest for new pool construction. Our sales of building material products have not declined as much as the permit data indicates. Overall, permits are down about 17%, while our building material sales, although still down in double digits, are significantly better than that. The feedback from dealers indicates that while there aren't a lot of inquiries, there are more than earlier in the year and towards the end of last year. So, inquiries are positive. I believe people are waiting for clear signs that the Fed is serious about cutting interest rates, expecting some economic expansion, and hoping for improved consumer health. According to online real estate sites, the term "pool" remains highly searched, indicating ongoing interest. This year has been challenging and worse than we initially anticipated, which is why we updated our guidance in June. However, we are currently comfortable with our performance level, and dealers are not reporting any worsening conditions. It appears we are slightly outperforming the industry regarding the number of pools being built.

Thank you. I appreciate that. Melanie, regarding managing the operating margin, there are a few points I want to discuss related to today's call. I believe there were three locations closed on Horizon, which I heard had a $1 million impact. I'm not clear on the timing of that, so could you clarify? Additionally, you've mentioned supply chain efficiencies. I would like to hear more details on both aspects as you pursue efficiencies in the model, especially in a year where you're focusing on cost savings. Thank you.

Yes. The $1 million figure pertains to the quarter related to the three sales centers we closed. This expense will not recur for the rest of the year. Regarding the supply chain, we are concentrating on various issues, particularly product costs that will affect gross margin. However, the primary factor influencing operating margin is fleet and delivery expenses. We are heavily focused on this area. As we expand into new markets, we can take advantage of our vehicles, drivers, and delivery capabilities. Our competitors do not have the same model we possess. Specifically, as we broaden our MPT branded building material offerings, we can utilize one location within a market for those deliveries. The freight expense is a significant part of our overall costs, and we have been addressing it while also continuing to expand our CFL, which serves as our central shipping hub with four locations in the network. This setup enables us to source products at lower costs from our vendors and redistribute them effectively, improving inventory management, reducing costs, and enhancing product availability for our customers.

Thanks very much.

And our next question will come from David MacGregor with Longbow Research. Please go ahead.

Hello, David, perhaps your line is muted. Sorry about that. Thanks for taking my question, and good morning. I wanted to just start off by talking about some of the share growth and just the extent to which you're exceeding market growth right now. Can you talk about the composition of that difference and the extent to which some of that might be acquisitions versus other factors?

Yes. As you know, David, the essence of Pool is that we focus on organic growth. While the acquisitions we've made this year are important, they're relatively small in the broader context of the company. The growth you're witnessing is primarily driven by our market share, which is achieved organically. This is a result of our new sales centers that have opened in key locations where we needed to enhance our capacity and improve the value we offer to our customers. Our concentration of locations in the market, along with our commitment to customer experience, is unmatched by others. To illustrate my point, if I examine our chemical business, our chemical volumes have increased by 3% this year despite a late start to the season and challenging weather in several important markets. The fact that volumes are up while the installed base has not increased at the same rate indicates that we are successfully gaining market share because we are where customers need our products and we prioritize their experience above all. Furthermore, our private label capabilities in chemicals provide us with a significant competitive advantage. Regarding new pool construction, I would be delighted if more pools were built this year; maybe Melanie would agree. However, looking at the permit data, which reflects the slowdown in new pool construction, it’s clear that our building materials are also capturing a larger share of the market even without significant price increases. When it comes to equipment sales, we're generally satisfied, although equipment sales have remained flat. Heaters, in particular, were one of the first product categories to see growth during the pandemic, and they have also experienced a notable correction. We are now beginning to see growth in this category once again, which is promising, alongside increases in other products like pumps and lighting. Overall, there has been a strong focus on enhancing customer experience and ensuring that we offer unparalleled value-added services within the industry.

That's helpful. My second question, really with respect to operating margins, and just what is the opportunity to achieve operating margin improvement at the store level? And I know at the analyst meeting you talked about the focus of those centers and trying to improve four-walls profitability at that level. In a softer environment like we're in right now, do you think the expectations around that get pushed out a little bit? Or do you think you can still maintain the momentum?

I mean there's a few groups, right? So certainly, even in the focused locations, even in a down market, there is certainly an opportunity to continue to improve operating margins, and it's really a function of execution, right? It's a function of doing things right in the sales center and managing the inventory, managing the customer experience and managing our costs and ultimately growth. I mean the biggest lever you have for operating margin improvement is growth. And as you can imagine, I would imagine that our focus centers are the ones that are going to be trailing the rest of the business in terms of sales growth. Now, there are a couple of reasons for that. One is every new sales center that we open, by definition, goes on the focus list to make sure that it gets the appropriate attention, given the investment that we just made. Virtually every acquisition that we make operates well below the fleet average, so those two go on the focus list. If you look at our overall operating margin, if you look at a continuum, it's not like the mean and the median are the same number. There's a fairly wide distribution in operating margins. So we see even in a down market at the individual sales center level, there's still plenty of things we can do. Having said that, overall the biggest lever that there is is sales growth. And sales growth in a down market becomes much more difficult, but it is achievable and we have some locations that are up year-over-year. But getting back to the cadence of continuing to expand on a predictable basis the operating margins really comes with when the market turns and the market starts to grow and we get back to that long-term growth algorithm that we talked about, which is a 6% to 9%, which won't come really until we see the reversion in new pool construction. Do we think that's coming? Yes. Do I think it's going to happen between now and the end of the year? As we mentioned, we do not.

Very helpful. Thanks, Pete.

And our next question will come from Lauren Rivoli with William Blair. Please go ahead.

Lauren Rivoli on for Ryan Merkel. So first half sales were better given a stronger last week of June attributable to hotter weather regionally. Are you seeing these trends continuing into July with hot air weather? Is demand tracking better than expected?

Yes, I would say that the results in July so far are promising. They are strong, similar to the last week of June, and this is mainly because we are in peak season. It's hot, and we believe we have the best value proposition in the industry, which is what's driving the business.

Thank you. I'll take the rest offline and pass it on. Thanks.

And our next question will come from Steve Volkmann with Jefferies. Please go ahead.

Hi. Thank you, guys. I don't know if I missed this or maybe you didn't or don't want to say it, but if we have kind of the recurring revenue business sort of flat this year and the Building Products, I don't know, let's call it down 15% or something, is there any way to ballpark the impact that has on the gross margin, the dilutive impact?

So I would probably ballpark it in this manner. So when you look at the way that we have historically built up the bridge from the 29 to 30, we said that roughly half of that was acquisition benefit. The remaining half of that, the 50 basis points, was really made up of a combination of the benefit from the building materials, the pricing, the CSL expansion and the private label, with those kind of roughly distributed evenly within that mix.

Okay. I have a broader question for Pete regarding the long-term growth strategy you outlined before COVID. It seems that the approach included relatively stable gross margins while allowing for operational efficiency in SG&A over time. However, now it appears you are indicating more potential for gross margin improvement in the next 5 to 10 years. Am I correct in understanding that the updated strategy includes not only a positive outlook for gross margins but also continued SG&A efficiency?

I think longer term, Steve, the way to think about gross margins is, we do believe that there is upside in gross margin. But it's not going to come overnight. And frankly, there isn't a silver bullet that we do this and gross margin goes up. I mean we've talked about the areas that we're focused on that improved gross margin. We've talked about the work that we're doing around strategic pricing. We've talked about improving the mix business that we have. We've talked about leaning into our private label products in particular our chemicals. We've talked about improvements in supply chain and leveraging our CSL, which all contribute to in a positive way to the gross margin. That's going to be offset by competitive pressures which are in the market, really nothing new there, but there's certainly competitive pressures that we have to deal with every day. But if I were to give you a longer-term view that says can we continue to leverage SG&A? Yes, virtually every facility we have has the ability to leverage SG&A with sales growth. Now, as we have mentioned, when we look at our cost basis, certainly there's upward pressure on wages and there should be. Certainly, every time we renew a lease, it is certainly not on our side. The landlords have the advantage right now because there's a scarcity of facilities in particular in the areas that we want to grow in. So we're having to work hard on the SG&A leverage. And I think over time there is continued upside on gross margin. I don't think you're going to see it go 30, 31, 32, 33, 34 successfully over the next four years. But do I think that we have enough things in our deck that we are working on to continue to drive that number up? Yes, I do.

Okay. Thank you, guys.

And our next question will come from Trey Grooms with Stephens. Please go ahead.

Hi, good morning. Thanks for taking my questions. I think the first one that I have is kind of on cash flows and maybe the flow-through there. You pulled back inventory a bit in the quarter. As we look at the full year, should the year-over-year improvement in working capital should we continue to see an improvement there? Or is there anything on the working capital front that we should be aware of in the back half, Melanie?

Yeah. There's nothing unusual in the back half of the year. So as we would typically expect, the third and fourth quarters are a very good cash flow year for us. And we do think that for this year, we should be able to slightly exceed our target of 100% of net income from a cash flow standpoint. The biggest benefit, certainly the biggest driver, is that typically going to be inventory.

Perfect. Thanks for that. And I guess one last one for me is on the pricing side. You mentioned that you were seeing some lower pricing clearly on commodity. But is there any other area where you're seeing any kind of pricing pressure outside of like what we were saying on the commodity impacted front?

Yeah. I think what we said is that there's a few areas that we're seeing pressure on pricing. So commodities are going to fluctuate as you mentioned. There are certainly competitive pressures and we mentioned that on the last call, because we had folks that were essentially trying to generate cash to make their early buy payments. So we saw some pretty ridiculous pricing being delivered to the market, which we knew wasn't sustainable and it wasn't. And so that certainly has abated. And then I guess, overall, when I look at this competition, I would say larger customers on the construction side, as we mentioned, even though new builds are down, there are people that are getting the lion's share of what's being built is the larger customers, and certainly larger customers have a lower margin profile. So that's certainly a headwind perspective in the areas that we currently see. I guess, what's important to point out here is none of this is new, right? None of this is new. If you go back and look at our reports over the last 10 years, the comments I just made you will find in every one of them. There's nothing new in that.

Yes, that's very helpful, and I appreciate the insights, Pete. However, one question we still occasionally receive is whether there have been any changes in Heritage's behavior since Home Depot has taken them on for about a month now. It seems the answer to that is no.

Yeah. It really isn't. I mean, as you can imagine, I'm sure it’s way too soon to have any impact from their new ownership. So nothing has really changed in that. And frankly, as I said, if you go back and look at the market over the last 10 years, remember all Heritage did was turn around and buy the existing distribution that was out there. So much of what they have is the same competitors that we had before. So these same patterns from a competition perspective. And frankly, when you don't have the value add that we do, the best way to compete with us is on price. But again, and I have to point this out to our folks too, it's the same pattern that's happened for years and I expect it to continue, but it's nothing that we lose a lot of sleep over. I'm hopeful that with Home Depot helping run the show that they become a little more responsible.

Okay. Thanks, Pete. Makes sense to me. Good luck.

And our next question will come from Garik Shmois with Loop Capital. Please go ahead.

Hi. Thank you. Just on OpEx growth. I think if I heard you right, the growth rate is moderating in the third quarter, but then increasing somewhat in Q4. I'm just wondering as to the variance there for modeling purposes. And then it might be earlier, but do you think operating expense leverage could revert back to more normalized levels in 2025?

So as it relates to the differences between third and fourth quarter, the bigger difference there really is that the fourth quarter has less variable expenses that we will be able to take out from an efficiency standpoint. So the percentage increase is really just the fixed cost primarily on the rent side. That's going to be a bigger driver in the fourth quarter versus the third quarter. And as we look forward from an expense leverage standpoint, we have looked across the network and taken the opportunity, as we mentioned, some of those Horizon closure to really evaluate our cost structure from the ground up. I believe that the decision that we've made this year will allow us to be quicker on our feet in getting that expense leverage as we move forward with top line sales growth.

Got it. My follow-up question is short term. With the pickup in the last week of June continuing into July, is it mainly due to the non-discretionary products that you would have sold if it weren't for the weather delays earlier in the second quarter? Are you seeing any other positive signs that might suggest a broader-based recovery?

No. It's really the maintenance spend, right? So the more the equipment gets used, the more people that are in the pool then the larger the demand is for those products. And then we are enjoying a bigger share of that based on the differentiated value proposition that we have. But I'd love to tell you that I'm seeing green shoots on construction and renovation. But as I mentioned, this is really a renovation season so we don't really know. And on construction, I still think there's a lot of people that want a pool, as the dealers are saying, hey, the phones are ringing, people wanting quotes, they want to know, but I just think they're waiting for a little better economic environment to pull the trigger.

Understood. No. Thanks for that. I'll pass it on.

Thank you.

And our next question will come from Sam Reid with Wells Fargo. Please go ahead.

Awesome. Thank you so much. I know it's still too early to be thinking about 2025. But maybe just a quick thought from your vantage point on the top line algo next year. You're seeing kind of muted new pool construction and there obviously are some pools that exit the base due to scrappage and other dynamics like that. Maybe just talk through kind of the achievability of the algo next year if you don't get that, let's call it one to two-point contribution from new pools entering the base.

Yeah. So certainly, we would expect that looking at kind of what we've seen on the impact from the new build and the remodel activity this year, those are kind of collectively bringing down sales expectations kind of four to five. And so if that, let's say that flat next year then you would see no impact kind of positive or negative from that activity kind of year-over-year. And then you would see the positive impact coming through from the maintenance activity on the incremental 60,000 or so new pools that you have built this year.

Thanks. And then one final one, just thinking through your chemical packaging operations, it sounds like you've done a great job of scaling that. I think you mentioned up 60% since you purchased it. Maybe just talk through the margin benefit you've gotten from those chemical packaging operations and whether there's any kind of incremental margin beyond that we should be contemplating in our models? Thanks.

Yeah. I think it's a piece of the margin improvement that we have seen and the margin profile is really different by product. So there are certain products to that, have a much better margin profile. Others are going to be certainly better, but not as much. We really don't parse that out. And the one thing I would remind you is that our view on the chemical packaging operation is we need our chemical partners. We will never be sole sourced in that plant on our chemicals, because of surety of supply and redundancy. So even if I could supply the entire business out of that facility and have incremental basis points of gross margin by doing that, I wouldn't do it, because I wouldn't put all of the eggs of the company in one basket. So our chemical business is going to be a blend of our partner suppliers and the Suncoast facility. Certainly, the things that we run through the Suncoast facility are margin accretive to the business, and they vary by product. It would be at the high-end who's going to be your liquids and some of the balancers. And then when you get into trichlor, there's certainly an advantage but nowhere near the differentiation that we see on the other products.

That's super helpful. I'll pass it on.

Thank you.

And this will conclude our question-and-answer session for today. I would like to turn the conference back over to Peter Arvan, for any closing remarks.

Yes. Thank you all for joining us today. We look forward to our next call, which will be on October 24th, when we release our third quarter 2024 results. Thank you for your support. And enjoy the rest of your summer.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.