Pool Corporation (POOL) Earnings Call Transcript

Good day, and welcome to the Pool Corporation Second Quarter 2026 Conference Call. [Operator Instructions] Please also note, today's event is being recorded. I'd now like to turn the conference over to Kristin Byars, Director of Investor Relations. Please go ahead.

Welcome to our second quarter 2026 earnings conference call. During today's call, our discussion, comments and responses to questions may include forward-looking statements, including management's outlook for 2026 in 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 reconciliation of non-GAAP financial measures are included in our press release, or posted on our corporate website in the Investor Relations section. Additionally, we have provided a presentation summarizing key points from our press release and today's call, which can also be found on our Investor Relations website. I am now pleased to introduce John Watwood, our President and CEO, who will begin today's call.

Thanks, Kristin. Good morning, everyone, and thank you for joining our call. Before we cover the first -- the quarter, I first want to thank our employees for their tireless efforts and their dedication to our customers day in and day out, especially during these critical pool season months. I also want to take a moment as this is my first earnings call as POOLCORP's CEO, to share my perspective on our business and where we are headed. I came into POOLCORP with a deep appreciation for what makes distribution businesses successful. Branch-level execution, strong supplier partnerships, technical sales expertise, disciplined inventory and service level management and seamless coordination across local markets, these capabilities have supported POOLCORP's value proposition for more than 30 years and provide us a strong foundation for continued growth. Additionally, the structural drivers of POOLCORP's business model are powerful: a large installed base of pools that naturally grows each year and generates recurring revenues from ongoing maintenance and periodic remodel activities, a professional customer base that depends on our scale and service and a distribution network that is difficult to replicate. With our eye set on crisp execution, I believe we can continue to generate above-market growth and control how we respond to any type of industry backdrop. Our fundamental strategy is unchanged. We aim to be the best worldwide distributor of outdoor lifestyle products by growing our share with our customers, building density in our network and executing consistently across every market we serve. Our products must be on the shelves when the customer walks in the door. And when it comes down to service, supplier relationships and operational discipline. Every investment and initiative we make has to support the customer experience, strengthen supplier relationships, improve productivity and generate an appropriate return. If it doesn't, we don't do it and where it does, we will invest with discipline. Deliver on that strategy, we are focused on 4 priorities, each built to grow the business. First, sales excellence. Our growth starts with serving our customers better than anyone else. We are equipping our sales teams with the talent, training and tools to help our existing customers grow their business with us and to broaden our reach to new customers. Our digital platform, our proprietary products and the expertise in every call centers are how we deliver that value. When we make our customers more successful, we capture share and we grow. Second, pricing and supply chain discipline: pricing sharply and competitively, running strong chemical and building materials playbooks and growing our private label and proprietary brands, which deepen customer loyalty and strengthen our margins. Third, operational execution: running our sales centers with speed and consistency, holding a high service standard across all 455 locations and getting our recently opened greenfields to their full potential. And fourth, growth through disciplined M&A: adding density, new markets and capabilities where the operational and financial fit is clear. Together, these 4 priorities are how we drive profitable growth, widen our competitive advantages and create long-term value for our shareholders. None of this works without our people. At every level of the organization, our team should know what's expected of them, understand how their work matters and feel empowered to serve our customers. Over the last 6 months, I've spent significant time in the field with our operators, customers and suppliers, met with employees across various functions, levels and locations and more recently with our shareholders. Everything I've seen and heard confirms what excited me about joining POOLCORP. This is a great business, built by passionate employees, the best suppliers and hundreds of thousands of customers who trust us to service and partner with them. I am proud to lead POOLCORP's global team of employees as we work to deliver even higher levels of performance. Now I'll discuss how the business performed during the quarter, and Melanie will take you through the financial detail. Net sales grew 2% in the second quarter, a result that reflects the resilience of our model, as strength in our reoccurring maintenance business and continued share gains in building materials offset a soft new construction and discretionary environment. Where we serve our customers best, we win. Our large and growing installed base drove healthy recurring maintenance demand. Building materials grew 4%, and that outperformance reflects our national full trend showrooms, our product breadth and the way our teams help builders bring their projects to life. Our proprietary and private label offerings continue to gain traction and POOL360 reached 18% of sales, deepening how our customers engage with us and extending our reach. In Europe, sales grew 11% on strong demand and improving sentiment. The softness we saw was concentrated where the cycle is weakest. New pool construction stayed muted as U.S. pool permits are tracking down low single digits year-to-date, and discretionary demand remain measured, felt most in our year-round markets. Our overall sales in California, Texas and Arizona were down mid-single digits, and Florida declined 1%. Much of that drag was our Horizon irrigation and landscape business, which is concentrated in those markets and saw further pressure as residential projects slowed. Our [ seminal ] markets by contrast, grew 6%. Equipment grew 3% on price and repair-related demand, while chemicals declined 2% on pricing. Sales to retail customers were down 1%, and Pinch A Penny franchise sales were flat. On gross margin, higher inbound freight was the primary pressure, and it's an area we're actively working to offset. Melanie will cover the additional details behind our gross margin performance and implications to the full year. Consistent with our productivity first posture, we remain deliberate on network expansion, adding 1 location in a key U.S. pool market and closing 1 Horizon location. The greenfields we've opened over the past year continue to ramp, and their performance is improving. The class of 2022 and the remaining classes are trending in the right direction, but we still have room to grow as these locations mature. Across the rest of our network, ongoing process improvements and the continued adoption of our digital tools remain a focus for driving efficiency and productivity and getting more from the investments we've already made. Taken together, the quarter reinforces our strategy and our confidence, and we remain on track to achieve our adjusted earnings guidance range of $10.87 a share to $11.17 a share. In closing, I would like to emphasize how honored I am to lead the POOLCORP team and generate further value from the fundamentals of our business and the investments in place over the past several years. We compete in large markets with recurring repeat demand, and I don't take for granted the advantages we have built to serve them. A distribution network that's hard to replicate supplier relationships built over decades and 1 of the broadest product assortments in the industry. We are continually investing in tools and services that make it simpler for customers to grow their businesses with us, and we are doing that from a position of financial flexibility with ample capital available to reinvest, positioning us to emerge stronger as the cycle recovers. I'm grateful to our employees, suppliers and customers for the solid foundation they have built. I will now turn the call over to Melanie Hart, our Chief Financial Officer, to review our second quarter results in more detail.

Thank you, John, and good morning, everyone. We delivered a solid second quarter, growing sales to $1.8 billion, holding expenses tight and generating strong earnings. Net sales increased 2% over prior year, with a 3% contribution from pricing as we lap prior year mid-season vendor price increases. We were pleased to see that building materials volume grew again even with softer demand in other discretionary categories and noted a 2% decline in chemicals on lower pricing. Gross profit grew 1% to $541 million, with a gross margin of 29.7%, down 30 basis points year-over-year. Product mix overall was neutral. The decline was driven primarily by inbound freight costs which we were not able to fully recoup in selling price this quarter and by unfavorable customer mix as we saw a higher portion of our sales from larger customers. Supply chain gains partially offset these areas. We made strong progress on expense discipline this quarter, managing adjusted operating expense growth down to 1% from 5% in the first quarter. Our continued focus on capacity absorption, cap compensation and outbound freight costs well managed. As reported, operating expenses were $273 million, up 4%. The adjusted figure excludes a onetime $8.3 million charge, primarily the noncash acceleration of unvested equity grants tied to the CEO transition. Adjusted operating income increased 1% to $276 million, with an operating margin of 15.1%. Reported operating income was $268 million a decrease of 2% versus prior year. Interest and other expenses increased $2 million versus the second quarter of last year, driven by higher average debt outstanding. Adjusted net income increased 1% to $196 million. On a reported basis, net income was $188 million, down 3% from a year ago. Without the after-tax impact of CEO transition costs, earnings per diluted share increased 4% to $5.38 compared to $5.17 in the second quarter of last year. As reported, earnings per diluted share was $5.17 in both periods. Next, I will discuss our balance sheet and capital allocation. Inventory increased 4% to $1.4 billion at June 30, compared to $1.3 billion at the end of second quarter of prior year. Consistent with the seasonal early buy and opportunistic purchases we discussed last quarter and the normal seasonal [ dog ran ] we anticipated, we sold through our peak season stocking levels, moderating year-over-year inventory growth. We are comfortable with the quality and positioning of our inventory. Second quarter represents our peak debt levels as we stock up for seasons and pay vendor early by payments, ahead of cash collections on in-season sales. Total debt was $1.3 billion, an increase of $111 million over the past 12 months. Our weighted average effective interest rate improved to 4.3% from 4.7% last year as we continue to benefit from our swap agreements that are in place and expire in February of 2027. At $1.78 billion, we remain within our expected debt leverage ratio of 1.5 to 2x. On capital allocation, we are anticipating another strong cash flow year with cash from operations expected to come in around 100% of net income. We returned capital to shareholders through dividends and share repurchases, paying $93 million in dividends and completing approximately $86 million in share repurchases year-to-date. In April, our Board increased our share repurchase authorization to $600 million, of which $580 million remains available. As a reminder, the second half of the year as we exit the season is when we generate the bulk of our operating cash flow. With the first half behind us, here's how we see the balance of the year. We expect trends consistent with year-to-date. On pricing, that means higher inflation on equipment, modest inflation on all other products and continued chemical pricing drag. On the demand side, line growth in the maintenance portion of the business, some incremental remodel activity and still soft but stable pool builds. Together, we expect low single-digit top line growth for the full year with approximately 2% to 3% from pricing. The benefit from pricing is expected to be lower in the second half of the year. Second quarter margins reflected higher inbound freight and an unfavorable customer mix. We still expect pricing and supply chain benefits in the second half. However, on a comparable basis, these are tempered by last year's mid-season price increases. Given the second quarter's weight in the year, we now expect full year gross margin approximately 30 basis points below prior year versus in line previously. We are pleased with the expense progress we made in the second quarter. and we will continue to operate efficiently through the rest of the year. As a result, we expect adjusted operating expenses to be an increase of approximately 2% to 3% for the full year, including a modest amount of incentive compensation recovery over the prior year. This likely will be an expense increase on the higher end in the third quarter and lower end in the fourth quarter. This is because the fourth quarter prior year had incremental IT expenses that are not expected to reoccur in 2026. We have opened fewer new sales centers this year, so these additional investments have moderated as we continue to focus on expanding profitability at the greenfield locations opened over the last several years. Interest expense is still estimated to be between $49 million and $51 million. Our full year tax rate is forecasted to be approximately 25%, with a lower rate in the third quarter and no additional benefit from ASU for the remainder of the year. Our weighted average shares outstanding are expected to be approximately 36.4 million, reflecting the incremental share repurchases completed to date. Within our full year outlook, the puts and takes have shifted modestly. We now expect slightly better top line growth, offset by lower gross margin, largely reflecting the higher [ amount ] freight and customer mix we saw this quarter. On balance, these roughly offset. As a result, our underlying adjusted earnings guidance is unchanged at $10.87 to $11.17. In the current quarter, we recognized $0.21 related to onetime CEO transition expenses, have updated our diluted EPS range to $10.66 to $10.96. We see this playing out largely as we expected, and our team executed well through the peak months. We are focused on a clear set of strategic priorities across sales, pricing, supply chain and operations, aimed at unlocking profitability and extending our competitive advantage. While our gross margin reflects cyclical pressure from this environment, we view it as temporary rather than structural. We continue to expand our network in a way that strengthens our competitive position for the long term, and we're confident that the actions we're taking today will leave us better positioned as discretionary demand recovers. We will now move to our question-and-answer session.

[Operator Instructions] Today's first question comes from David Manthey at Baird.

John, relative to the 4 priorities here, just a couple of questions. One on M&A, if you could outline broad areas that might be attractive to you? And then two, on operational execution, could you talk about any fine-tuning actions around the sales force or branch economics that you've initiated so far?

Yes. David, thanks. So look, on the M&A piece, obviously, tuck-ins, anything that's called a business, we would be super interested in, and that's where our focus has been. And then as you break that down a little further, you get to more product category-specific opportunities. Outside that, everything's got to have the right strategic fit, cultural, financial fit as well. So I think that pretty much summarizes where our views are without giving too much detail or information. On the operational execution, when you think about sales in an operational execution, we've already made some investments in both of those areas and looking to refine what we're getting out of it and iterate as needed, right? So we're now in season where we're seeing kind of what's working and maybe what needs to be peaked a little bit. So without getting in too much detail there, I'm pleased with where we're at. I think, we'll get a little sharper focus in some areas around some of our product category specific initiatives. But overall, you can't really change too much in season. It's just all about execution right now. So any kind of big changes come after we get through the season as we prepare the next selling season going into 2027.

Makes sense. And then as a follow-up, we've discussed this before, but I was hoping you could talk about it in this forum. The market seems skeptical about your ability to gain market share. I mean the stock market and investors in general. Could you just outline some of the key areas where you think pool can gain incremental share within the business? .

Yes. Look, we have -- I think we've got a lot of right win when it comes to building materials and when it comes to chems and I think even in other areas, with some better connectivity down the organization throughout the industry as well. I believe we have a lot of opportunities now. I've obviously been out meeting with a lot of customers. And I think first step of that is listening to the customers and understanding where they're at, where they're going and how they view us right now and where we need to pivot. And secondarily, it's with our suppliers as well, how do we make sure we're the best partner, the best go-to-market channel for them. So I think when you take all that input, and you look at where we're at and where we're going, I believe we got a heck of a network to build off of for sure, right? So the foundation is there, and we've got a lot of capacity we can pull through that network. We let know what the market is telling us. We adjust. We execute on that. I think our ability to go gain share is substantial.

nd our next question today comes from Susan Maklari with Goldman Sachs.

My first question is, building off of your last answer, John, you mentioned listening to the customers. I guess when you've been out there, can you talk a bit about what you are hearing from customers about POOLCORP, what's working, what's not working and how that is shaping the strategy and the areas that you're focused on? .

Yes. So I'm going to give you somewhat direct quote that I've heard several times, is that POOLCORP is really good at doing the hard stuff. And I think when you want to break that down and say, "What's the hard stuff," I mean that's the operational execution day in, day out within and outside 4 walls. I believe that's a testament to just have in the decades of running a very large, very efficient network that we continue to improve and continue to iterate on. Do I feel like we can be more aggressive in commercial? Of course, I can. That's why I've been harping on that. And I believe just the connectivity throughout the organization is key. I think it's a key part of winning in this industry. And that's really what I've heard from feedback, is they want to learn more about where pool is going they want to hear more from the executive team, and we're going to make sure we're more, I would say, vocal and present with industry associations and -- with all of our customers as possible. So that's really the 2 main, I'd say, feedback components I've gotten, and it's been -- overall, it's been super positive.

Okay. Okay. That's great color. It's good to hear. And then when you think about the 4 initiatives that you outlined, are there some that perhaps need to come before others? Are you focused on all 4 sort of equally? Can you just give us any sense of how they sort of stack up? And then how you're thinking about the level of investment that's required as you pursue these initiatives?

Yes. Well, I mean it all starts when you sell something, right? So that's where our focus is at. And that's a broad statement, that's got a lot up under it, right? That's ground level execution, connectivity throughout the organization, the [indiscernible] operational execution that comes under it as well. So those would be the 2 primaries if we're going to rank anything here. And of course, pricing supply chain falls under that as well in its own category. M&A. M&A is opportunistic. So you got to have a willing buyer, you got to have a willing seller, and all the other stars have to align, so you take that as you can get it. As far as the level of investment, again, when you've got the network we have already, there's no significant major investments that really need to be made to execute on a lot of this. M&A stands on its own. It's whatever the price is. But when you think about, again, sales excellence, pricing, supply chain discipline, operational execution, we got a lot under our roof right now that we continue to refine. We continue to leverage. So I'm pretty excited about what the future holds for us.

And our next question today comes from David MacGregor at Longbow Research.

John, you talked about sort of leveraging some of the investments that have been made up to this point and sort of transitioning, I guess, from sort of investment mode to leveraging those investments mode. Can you just talk specifically about the technology investments and the opportunity that you see there? .

Yes. Yes, David. So there's been a lot of investment in technology, been a lot of conversation about it. Excited to say, as you saw in our release that POOL360 adoption is 18%. That's a record. So we're starting to see a lot more integrations in that area, I'd say a continued acceleration in integrations. We're having some conversations about other pieces and parts of the business, what those investments are giving us right now, I'd say, so far, very positive. When we look at water test, we've got some integrations going on with service as well. So I would say that the summary of that overall is we've made the right investments. We're going to continue to listen to the customer and continue to iterate in the right directions in the right areas, and that's really where our focus is right now, again, continue to benchmark where our right to win is. But I'm pleased with them, good to have them behind us, and then we just got to continue to increase our return out of those investments. But again, when you look at the 18% adoption in POOL360, continues to increase, that's a very positive sign.

As a follow-up, I guess a similar question around just the profitability of private label and Horizon in Europe and some of those businesses. How do you approach that? .

Yes. So when we discuss private label, that's more in chems and building materials, and obviously, it's a good margin profile for us. So that's why you hear us talk about it a good bit. And that doesn't come at the expense of any other product category. We just -- that's what's been driving the business for us and provide some continued growth there. So we'll continue to double down on that and see what we can get out of the market. When you think about Horizon, yes, it was a tough quarter for them, for sure. I mean we typically don't mention Horizon on its own. But as you've heard others that have come out and announced that are in that space, the market's not giving us a lot of tailwind right now. So happy to say though, we brought in a new leader for Horizon as well. And so we're investing in that business. We think there's a lot of potential there. It's a great group of people that are running it and that are out there executing every day. Really got some excitement through the rest of this year and see what we can do in 2027. And then Europe was a bright spot for us. It's been very hot over there, so double-digit growth out of those guys. Super excited about their execution and what they brought to the table. And outside the heat, there's a little bit of -- the comment I heard from various sources was, a little bit of a mini COVID going on, not from the sense of COVID, but from the sense of investment in the backyard right now, people are kind of staying around the home and not taking vacations. And I think we're realizing some benefits to some of those investments.

And our next question today comes from Ryan Merkel with William Blair.

First topic is just on revenue trends and cadence in the quarter. Just would love to hear how the quarter played out on a monthly basis. And then any comments on how July is starting?

Yes. On the revenue trends, there wasn't really anything significantly different when you look at the months across the quarter. For us, when you get into season, you don't see that same level of variability as you do in the first quarter or the fourth quarter. So no real major differences there. And I would say July is pretty much on point with -- as we look at kind of our forward-looking guidance. We talk about our expectations for second half would be a little bit less price because we're lapping those mid-season price increases that took effect really late April, May last year. And so that's coming through. But from the volume discretionary spend, no significant difference there in July.

Got it. Okay. And then just a question on Page 4. In terms of Horizon, do you think it gets any better in the second half? Or is it going to kind of stay down mid-single digits? And then the big 4 states there, all of those are negative. I'm curious, is that just chem deflation in the new pool market week? Just talk about why that was.

Yes. So on the Horizon side, that is -- Horizon has a little bit, when you think about the mix of products, they generally have more commercial and they're also more tried to residential, so that's really what's kind of creating that drag overall in the horizon market, is just the mix there and the timing of those commercial products -- projects. And then on the sales by state, kind of across the board, you would see that roughly 1 point in each of those markets, was the drag that was created by Horizon. But also, if you recall, when you looked at first quarter, we did talk out in the first quarter that we had higher early buy sales. And so some of those states that benefited from those extra early buy sales in first quarter, we had a slight shift on the blue side of the business with those sales between first and second quarter.

I see. So absent some of that first quarter, sort of, I guess, pull forward, if you will, or timing, nothing's really changed in those big states? Is that the right way?

That's right. That's right way to look at it.

And our next question today comes from Trey Grooms at Stephens.

This is Ethan on for Trey. First, John, I wanted to start off on the efficiencies and productivity piece mentioned within the new strategic priorities. You guys have been focused on capacity absorption here for the last couple of quarters. You've opened something in the range of 50 new sales centers over the past 5 years. Obviously, at different parts of the cycle. So can you just touch on the runway here in terms of improving the productivity of those recently opened locations?

Yes. So the good news is when we open a location, it's really not a new greenfield, right? We get to see that location with a lot of existing inventory because we're typically just following where the market is going in an individual space, right? So we start from a position of at least some pretty good revenue on through. But as with any new location, right, you want to continue to refine and grow and then obviously make up the revenue, it's [indiscernible] to trim to grow, right, or cut to grow. So as we look at those locations, those new locations we've done over the past, I'd say, few years, we're pretty pleased with the performance. But it's always going to be a 1- to 2- to 3-year runway, especially when you're in a market that's not really giving you a ton of tailwind here. So we just have to remain focused and diligent with these, what we call newer locations or focused stores to make sure that they become accretive or at least, I would say, in line with our broader network. So overall, I mean, as we look at future greenfields, I mean, we're going to be very selective with where we need to go. Again, very specific market driven, if we feel like the market is moving somewhere we're not in, obviously, we'll make those investments. But I would say there's not a tremendous amount of new greenfields moving forward that we'll need to invest in at least in the near future.

Right. Got it. Got it. Okay. That's super helpful. And then switching gears, perhaps, Melanie, on the revision to the gross margin guide, it sounds like that revision is primarily a function of the lower 2Q gross margin and then perhaps some continued realization of these higher freight costs. So one, is that the right way to think about it? And two, from a gross margin standpoint, at what point do you expect to potentially recover the higher freight costs? Is that more of a 2027 event? Just any more color there would be great.

Yes. So because Q2 is [ such ] a large portion of the year, that 30 basis points, when you're looking at the year in total, it will have that impact on the year-over-year comparison. When we look out kind of third and fourth quarter, at this point, we are projecting that we will have a similar 30 basis point differential when compared to the prior year. With that being said, we acknowledge the -- what was happening early on and saw the changes and track the rates -- the higher rates that were coming in from vendors. [indiscernible] And so we are actively working to improve it, but recognize that we may not be able to recoup all of it immediately. And so I do expect to see the full year impact.

And our next question today comes from Scott Schneeberger with Oppenheimer.

Just following up on that and the few. Melanie, how are you thinking about for the second half, flat at current levels, expecting it to increase or decrease? Just curious what's behind your assumptions in the guidance? And then just a quick follow-up on the supply chain. What -- is it mostly transportation costs that are impacting you? Are there any significant changes you're going to do on the front end, on the inbound side or on the outbound side as a reaction or an add to the initiatives?