Operator: Good day. And welcome to the Pool Corporation Second Quarter 26 Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. And to withdraw your question, please press star then 2. Please also note, today's event is being recorded. I would now like to turn the conference over to Kristen Byers, Director of Investor Relations. Please go ahead.
John Watwood: Welcome to our second quarter 26 earnings conference call. During today's call, our discussion, comments and responses to questions may include forward-looking statements. Including management's outlook for 26 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 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, Kristen. 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 the tireless effort 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 Pool Corp CEO to share my perspective on our business, where we are headed, I came into Pool Corp 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 Pool Corp's value proposition for more than 30 years and provide us a strong foundation for continued growth. Additionally, the structural drivers of Pool Corp'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 eyes 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 does not, we do not do it. And where it does, we will invest with discipline. To 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 sales 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 or 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 is expected of them understand how their work matters, and feel empowered to serve our customers. Over the last 6 months, I have 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 have seen and heard confirms what excited me about joining Pool Corp. 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 Pooled Corp's global team of employees as we work to deliver even higher levels of performance. Now I will 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 outperformed outperformance reflects our national pool 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 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 US 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 seasonal 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 is an area we are 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 have 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 have 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 Pool Corp team and generate further value from the fundamentals of our business and the investments put in place over the past several years. We compete in large markets, with recurring, repeat demand, and I do not take for granted the advantages we have built to serve them. A distribution network that is hard to replicate supplier relationships built over decades, 1 of the broadest product assortments in the industry. We are continually investing in the 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 am grateful to our employees, suppliers, and customers for the solid foundation they have built. I will now turn the call over to Melanie Housey Hart, our Chief Financial Officer, to review our second quarter results in more detail.
Melanie Housey Hart: Thank you, John Watwood, 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 kept compensation and outbound freight cost 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 cost, 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 draw down 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 season and pay vendor early buy 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 2027. At 1.78, we remain within our expected debt leverage ratio of 1.5 to 2.0 times. 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 return 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, slight growth in the maintenance portion of the business some incremental remodel activity, and still-soft but stable pool build. 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 inbound 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 and have updated our diluted EPS range to $10.66 to $10.96 The season is playing out largely as we expected. And our team executed well through the peak month. 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 are confident that the actions we are taking today will leave us better positioned as discretionary demand recovers. We will now move to our question and answer session.
Operator: Thank you. We will now begin the question and answer session. At any time your question has been addressed and you would like to withdraw your question, please press star then 2. And once again, we do ask that you please limit yourself to 1 question and a single follow-up. Todd's first question comes from David Manthey at Baird.
David Manthey: Thank you. Good morning, everyone. John Watwood, relative to the 4 priorities here, just a couple of questions. 1, on M&A, if you could outline broad areas that might be attractive to you. And then 2, on operational execution, could you talk about any fine tuning actions around the Salesforce or branch economics that you have initiated so far?
John Watwood: Yeah. Good morning, David. Thanks. So, look, on the M&A piece, obviously, tuck ins, anything that is core to the business, we would be super interested in, and that is where our focus has been. And then as you break that down a little further, you know, you get to more product category specific opportunities. You know, outside of 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, you know, when you think about sales excellence and operational executions, you know, we have already made some investments in both of those areas. And looking to refine what we are getting out of it and iterate as needed. Right? So we are to a point now in season where seeing kind of what is working and maybe what needs to be tweaked a little bit. So without getting into too much detail there, I am pleased with where we are at. I think we can get a little sharper focus in some areas around some of our product category specific initiatives. But overall, you cannot really change too much in season. it is just all about execution right now. So any kind of big changes come after we get through this season as we prepare for the next selling season going into 2027?
David Manthey: Makes sense. And then as a follow-up, we have 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. And 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?
John Watwood: Yeah. Look. We have I think we have got a lot of right to win when it comes to building materials and it comes to chems. And I think even in other areas, with some better connectivity up and down the organization throughout the industry as well, I believe we have a lot of opportunities. Now, I have obviously been out meeting with a lot of customers and I think the first step of that is listening to the customers and understanding where they are at, where they are going, and how they view us right now. And where we need to pivot. And secondarily, it is with our suppliers as well. How do we make sure we are the best partner, the best go-to-market channel for them? So I think when you take all that input, you look at where we are at, where we are going, I believe we got a heck of a network to build off of for sure. Right? So the foundation there, and we have got a lot of capacity we can pull through that network. We listen to what the market's telling us. We adjust. We execute on that. I think our ability to go gain share is substantial. Sounds good, John. Thank you. Thanks, David.
Operator: Thank you. And our next question today comes from Susan Maklari with Goldman Sachs. Please go ahead.
Susan Maklari: Thank you. Good morning, everyone. My first question is building off of your last answer, John. You mentioned listening to the customers. I guess, when you have been out there, can you talk a bit about what you are hearing from customers about Pool Corp, what is working, what is not working? And how that is shaping the strategy in the areas that you are focused on?
John Watwood: Yes. Good morning. So I am giving somewhat of a direct quote that I have heard several times is that Pool Corp is really good at doing the hard stuff. And I think when you wanna break that down and say, what is the hard stuff? I mean, that is the operational day-in, day-out within and outside the 4 walls. I believe that is a testament to just having the decades of running a very large, very efficient network. That we continue to improve on and continue to iterate on. Do I feel like we can be more aggressive in the commercial? Of course, I can. that is that is why I have been harping on that. And I believe just the connectivity throughout the organization is key. I think it is a key part of, you know, winning in this industry. And that is really what I have heard from feedback is, you know, they wanna learn more about where pool's going, They wanna hear more from the executive team, and we are gonna make sure we are more I would say, vocal and present with industry associations and with all of our customers as possible. So that is really the 2 main, say, feedback components I have gotten in gotten in. And-- but overall, it is been super positive.
Susan Maklari: Okay. Okay. that is great color. it is 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 are thinking about the level of investment that is required as you pursue these initiatives?
John Watwood: Yeah. Well, I mean, it all starts when you sell something. Right? So that is where our focus is at and that is a broad statement that has a lot up under it. Right? that is ground level execution, connected throughout the organization, then all operational execution that comes up under it as well. So those would be the 2 primaries if we are gonna rank anything here. And the course, pricing, supply chain falls under that as well in its own category. M&A. M&A is opportunistic, so you have got to have a willing buyer, you have 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 have got the network we have already, there is no significant major investments that really need to be made to execute on a lot of this. M and A stands on its own. it is it is whatever the price is. But when you think about, again, sales excellence, pricing, supply chain, operational execution, we have got a lot under our roof right now that we continue to refine. We continue to leverage So I am pretty excited about what the future holds for us.
Susan Maklari: Okay. Great. Thank you for the color, and good luck with the quarter.
John Watwood: Thank you.
Operator: And our next question today comes from David MacGregor at Longbow Research. Please go ahead.
David MacGregor: Yes. Good morning, everyone. John Watwood, you talked about sort of leveraging some of the investments that have been made up to this point and sort of transform trans 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?
John Watwood: Yeah. Yeah. Good morning, David. So you know, there is 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 is a record. So we are starting to see a lot more integrations in that area. I would say a continued acceleration in integrations. We are having some conversations about other pieces and parts of the business. You know, what those investments are giving us right now. And I would say, so far, very positive. You know, when we look at water test, we have got some integrations going on with service as well. So I would say that the summary of that overall is we have made the right investments. We gotta continue to listen to the customer. And continue to iterate in the right directions, in the right areas, and that is really where our focus is right now and continue to benchmark where our right to win is. But I am pleased with them. Good to have them behind us. And then we just have got to continue to increase our return out of those investments. But again, when you look at the 18% adoption, POOL360 continues to increase. that is a very positive sign.
David MacGregor: Good. And then 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?
John Watwood: Yeah. So, you know, when we discuss private label, that is more in chems and building materials and obviously, it is a good margin profile for us, so that is why you hear us talk about it a good bit. That and that does not come at the expense of any other product category. We just you know, that is that is what is been driving the business for us. And provide some continued growth there. So we will continue to double down on that and see what you know, we can get out of the market. When you think about Horizon, yeah, was a tough quarter for them for sure. I mean, we typically do not mention Horizon on its own, but as you have heard others that come out and announced that are in that space, you know, 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 are investing in that business. We think there is a lot of potential there. it is a great group of people that are running it and that are out there executing every day. They 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. You know? it is 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 is a little bit of, you know, 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 are realizing some benefits to some of those investments.
David MacGregor: Good. Very much, and good luck.
John Watwood: Thank you.
Operator: Thank you. And our next question today comes from Ryan Merkel with William Blair. Please go ahead.
Ryan Merkel: Hey, everyone. Thanks for the questions. 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?
Melanie Housey Hart: Yeah. On the revenue trends, there was not really anything, significant different when you look at the months across the quarter. You know, for us, when you get into season, you do not see that same level of variability as you do in the in the first quarter or the fourth quarter. So no real major differences there. And I would say, you know, July is pretty much on point with as we look at our forward looking guidance. You know, we talk about our expectations for second half would be a little bit less price because we are lapping those mid season price increases that took effect really, you know, late April, May of last year. And so that is coming through, but, you know, from the volume discretionary spends, no significant differences there in July.
Ryan Merkel: Got it. Okay. Thanks for that. And then just a question on page 4. You know, in terms of Horizon, you think it gets any better in the second half? Or is it going to stay down mid single digits? And then, you know, the big 4 states there, all of those are negative. I am curious, is that just chem deflation and the new pool market weak? Just talk about why that was.
Melanie Housey Hart: Yeah. So on the Horizon side, you know, that is Horizon has a little bit when you think about their mix of products, they generally have more commercial, and they are also more tied to residential. So, you know, that is really what is kind of creating that drag overall in the horizon market is just the mix there and some of the timing of those commercial products. Projects. And then on the sales by state, it, kind of across the board, you would see that roughly a 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 about in first quarter that we had higher early buy sales. And so, you know, 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.
Ryan Merkel: 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 read? that is the right way to look at it. Yep. Got it. Okay. Thanks. Pass it on.
Melanie Housey Hart: Thanks, Ryan.
Operator: And our next question today comes from Trey Grooms at Stephens. Please go ahead.
Ethan: Yeah. Hey. Good morning, John and Melanie. This is Ethan on for Trey. Thanks for taking the questions. First, John Watwood, 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 quarters. You have 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?
John Watwood: Yeah. You know, so the good news is when we open a location, it is really not a new greenfield. Right? We get to see that location with a lot of existing inventory because we are typically just following where the market is going in an individual, you know, space. Right? So you know, we start from a position of at least, some pretty good revenue up front. But as with any new location, right, you wanna continue to refine and grow and then obviously make up the revenue it is the old, you know, to trim to grow, right, or cut to grow. So as we look at those locations, those new locations we have done over the past I would say, few years, we are we are pretty pleased with the performance But it is always gonna be a, you know, a 1 to 2 to 3 year runway, especially when you are in a market that is, you know, 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 focus 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 are going to be very selective with where we need to go. Again, very specific market driven if we feel like, you know, the market's moving somewhere we are not in, obviously, we will make those investments. But I would say there is there is not, you know, a tremendous amount of new greenfields moving forward that we will need to invest at least in the near future.
Ethan: Right. Got it. Got it. Okay. that is 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 1, is that the right way to think about it? And 2, you know, 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. Thanks.
Melanie Housey Hart: Yeah. So, because Q2 is such a large portion of the year, that 30 basis points, when you are looking at the year in total, it will have that impact with on the year over year comparison. When we look out kind of third and fourth quarter, we at this point, we are projecting that we will have a similar 30 basis point you know, differential when compared to the prior year. With that being said, you know, we acknowledge what was happening early on. And saw the changes and track the higher rates that were coming in from our vendors, particularly in some of those heavier density items such as the building materials. And so we have actions underway that will be starting, you know, early third quarter to be able to start managing some of that. And so, you know, we are working to improve it, but recognize that we may not be able to recoup all of it immediately, and so do expect to see the full year impact.
Ethan: Got it. Okay. That all makes sense. Thanks so much.
Operator: Thank you. And our next question today comes from Scott Schneeberger with Oppenheimer. Please go ahead.
Scott Schneeberger: Thanks very much. Good morning. I am just following up on that in the fuel. Melanie, how are you thinking about it for the second half? Flat at current levels? Expecting it to increase or decrease? Just curious what is behind your assumptions in the guidance. And then and then just a quick follow-up on the supply chain. It mostly transportation costs that are impacting you? Are there any significant changes you are 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? Thanks.
Melanie Housey Hart: Yeah. So right now, we are not expecting any significant change in the cost environment as it relates to freight. So with that, you know, we have acknowledged that we need to look toward pricing and ensuring that we are having conversations with our customers to recoup the incremental cost that is coming through. And so that does not just flow straight to us. So that again, that process is what is underway because we do not see anything significant changing And that is looking at the inbound side, On the outbound side, we did earlier in the year put through some freight surcharges to help us to recoup the extra cost that we are seeing just on the delivery side.
Scott Schneeberger: Thanks. And then and then with regard to we have been talking about supply chain initiatives for a long time. Could you delve in a little bit to what is some of those initiatives are, John? Maybe your comments on things that may be added And is there opportunity, for to be more financial power with some of the things that you are doing over the back half and really more so into next year? Thanks.
John Watwood: Yeah. So I think when supply chains initiatives as a whole, you know, you got a network as big as ours. it is pretty efficient, but you can always look for efficiencies. And there was a lot of things already in play before I came to the company that we are working through the process now to see what that return's gonna be, and it could be how you shop you know, where you stock, how you ship, what the replenishment is, you know, what those gains are. I would say we are not quite ready to come out and say quite yet. We are still working through the math behind it. But the freight's a big piece. Right? So we have been super focused on that. As we started seeing it creep up, and then it jumped on us pretty hot and heavy. So that is really where our focus will remain for the remainder of this year. And I think there is some things we can do you know, not just to help with the here and now, but in the future as well. So I think that really sums up kind of where my thoughts are, you know, in the near term and then, again, the long term as we continue to look for the most efficient way to operate the network is the right way to look at it. And we will have more commentary on that, you know, going into next year.
Scott Schneeberger: Great. Thank you both.
Operator: Thank you. And our next question today comes from Andrew Carter at Stifel. Please go ahead.
Andrew Carter: Thank you. Good morning. I wanted to ask about the change in the gross margin assumptions because first off, this year updated guidance would imply a level of decline similar with the second half. And you are lapping kind of extraordinary pricing from last year. So that seems difficult. Second question I would ask is, given the Pentair update, what were your assumptions originally around the performance by customers? And is that impacting kind of the gross margin given opportunistic purchases? And also, different levels of vendor rebates? Thanks.
Melanie Housey Hart: Yeah. So there is no change in our guidance that is reflective of anything that Pentair has reported. When we look at our stocking levels and our opportunistic purchases, We talked about in first quarter that we were heavy because we had bought ahead. And that we would expect to bring that down to more normalized levels throughout the season. And so what we had intended is how things played out. The impact to the gross margin is specific to the 2 items. That I talked about, which is the higher inbound freight cost and then also a continued customer mix.
Andrew Carter: Okay. Second question. In the script, you said 2 to 3% pricing. The deck says 2. I wanted to square to square that away real quick, and I will pass it on.
Melanie Housey Hart: Yeah. So that will be it is 3 in the second half, so you will look at both first and second quarter pricing with 3. And then when we get into the back half, we are expecting that to moderate because of last year's mid season price increases. So it will be probably 2, maybe slightly less, so we will finish up the year at 2.
Andrew Carter: Thanks. Pass it on.
Operator: Thank you. And our next question today comes from Collin Verron with Deutsche Bank. Please go ahead.
Collin Verron: Good morning. Thank you for taking my questions. I just wanted to start on the commentaries, the commentary around pricing. I think you called out pricing sharply and competitively going forward. Just curious as to what this means exactly. Was pool price too high or too low? Kind of going into it, and just sort of how you anticipate this shaking out. And then around your initiative your priorities, I guess, any color as to sort of the long term sales growth algorithm? Are you reiterating the 6 to 9%, or would you make some adjustments based on the priorities that you outlined? Outlined?
John Watwood: Yeah for sure. So on the pricing piece, we say sharply and competitively. Right? it is it is not a matter of up and down you know, indexing to 1 side or the other. it is a matter of really understanding the market, suit the market conditions. And I am not saying that we do not do a good job of that now, but you know, when you when you have got this prolonged downturn, obviously, it is a super competitive market out there. And not that it was not competitive prior to this downturn, But when we look at also some of the variabilities that we have, particularly in chems, and with some of the freight coming through and things like that, all these factors coming at us We just need to make sure we are processing that information the right way. We are listening to our We are doing the right thing by our shareholders. Taking all that into account, understanding where we need to be on a local level. So it is just a function of running a large distributor. Right? A large decentralized distribution network is taking the local input understanding what that looks like, overlaying the macro conditions that you have, and figuring out what that price file is gonna look like. So we break that down by product category. I would say we are pretty good at it now. Can always get better. I think every distributor can get better, so I do not think we are in any different boat than anybody else. But I it is more of a matter of me acknowledging that too that in any particular industry that look, you have got to be right on certain things. You gotta be variable on certain things, and then there is other things you know, that, that give you a little more leeway on stuff. And that is all frankly, comes down to the to the customer. So really ties into when we think about sales excellence. Right? How are we arming ourselves with the right tools, technology, and training to capture as much market share as we can? And then I think your other question was on, yeah, the long term growth algorithm. So yeah, not really in a position to reiterate or change that, you know, obviously, the point I will say on that is you know, we are gonna need a little market help. I have been very clear about that if under current market conditions, I do not think the 6% to 9% is on the table. But, you know, in normal market conditions, we would we would go and we would talk about it, you know, at that point. So more commentary on that as we, get out of 2026 and we look into 2027.
Collin Verron: Great. that is helpful. And then just a question on the operating expenses in the back half of the year. I think you said that you are expecting operating expenses to increase 2% to 3% for the full year. Does that adjust out the CEO transition cost in that 2% to 3%? And how should we think about sort of the magnitude of the adjusted operating expense increases in 3Q and 4Q to get to the midpoint of the guide? Thank you.
Melanie Housey Hart: So, yeah, that is an adjusted number with that range there. And so we would expect that expenses will be a little bit higher in the third quarter. So I would mentioned that will be at the top end of the 2 to 3. And then lower in the fourth quarter. And I just wanna add 1 more thing. You know, I mentioned it in the script, but that does include some amount of incremental incentive based compensation that we are including in our assumptions there as well.
Collin Verron: Great. I appreciate all the color. Thank you.
Operator: Our next question today comes from Sam Reid at Wells Fargo. Please go ahead.
Sam Reed: Awesome. Thanks so much, everyone. I wanted to just see if you could quantify the magnitude of some of the gross margin drivers that you cite in your bridge in Slide 6. And then you talked to changing customer mix. It sounds like, you know, more large customers Any way to size what large customer actually means and what proportion of your mix are now large customers?
Melanie Housey Hart: Yeah. So from a sizing standpoint, you know, we typically do not come out with some detail, but when we look at it internally, the inbound freight is by far the most significant component. So if you are looking at just the overall magnitude, inbound freight was the biggest impact in the quarter. I would say customer mix was a follow after that. And then we continued on the supply chain to get benefits from the things that we have been working on there. As it relates to, you know, continued good progress on our private label, continued good progress on our exclusive products, Some of the areas as it relates to the building material, we saw some really nice pickup in some of the new products that we brought in there. So our expanded products that we brought in for the current season are helping us on supply chain.
Sam Reed: that is helpful. And then I understand you have brought in some more or, I guess, I should say, some newer equipment, specifically move pumps Just curious what the early uptake has been on that product? And then whether that has shifted in any way how you manage inventory for some of your other large OEM suppliers.
John Watwood: Yeah. So I will I will take the last question first. No, that is not changed how we look at our inventory with-- I will throw it out there, the big 3, which is 40% of our COGS. So no impact on that whatsoever. I would not say I would not say move is material to the to the overall picture right now. So to also give you a little insight on how we view our product portfolio, briefly is you know, look. We are tied in again. I mean, the big 3 or 40% of our revenue, so that is where our focus, and we just got through some really great meetings with all of strategic suppliers, those that rank at that strategic level. So, obviously, we are gonna go hand in hand with those guys out in the market and understand. And that is where the brand acceptance is at, and that is where the installed base is at. When we look at adding to our product portfolio in the case of your question here is, hey, is there something out there that might could bring more traffic in the door, not cannibalize? I think that is the key point here, bring traffic through the door that we were not getting or that maybe was going somewhere else. And that is where our focus will be. So I think that distinction probably needs to be made. But, ultimately, no. That it has not changed. it is it is been good for us. Do not get me wrong, but I would not say it is material at this point, and it has not made any impact on any decision we have made with, inventory decisions through our existing supplier base.
Sam Reed: Appreciate the color. Thanks so much. Thanks.
Operator: And our next question today comes from Steven Forbes at Guggenheim. Please go ahead.
Steven Forbes: Good morning, John Melanie. John Watwood, maybe just revisiting priority number 1, sales excellence. You mentioned commercial pricing I believe, earlier in the call here. So curious if you can just remind us what Pool's commercial pricing strategy was from a you know, regional perspective. And then and then with all your time in the field visiting the branch managers and talking to them, what are they asking for as it pertains to commercial Is it pricing flexibility? And sort of like what are you implementing at the field level to maybe give the branch managers more control you know, or tools, right, as you mentioned to sort of drive share dynamics?
John Watwood: Yeah. I mean, I think there is kind of 1 answer summarizes all that, and it is speed, agility, and flexibility. Right? With within reason. And it is not just pricing. it is terms. it is all those things. Things that, that we are dealing with and that all distributors are dealing with. So and that is really what our people are asking for. Right? You want to leverage your scale. You wanna leverage your size. And, obviously, we are we are the largest in the space. But you have got to be locally oriented, locally focused. And the balance I mean, I have said this a lot with my 1 on 1 meetings and other meetings. Distribution works best when there is balance. there is balance with the corporate initiatives, and there is balance with flexibility in the field. So I think to sum up, you know, what our what our pricing strategy is to take that local input and to look at the again, macro drivers and leverage our scale and just put the best plan together. So you know, the tools and the technology that we will put in for that, or that we already have for that in some cases is how do we do that quickly and effectively and also have a really good feedback loop to know what is working and what is not.
Steven Forbes: that is helpful. And then and then just a quick follow-up. Yeah. Obviously, the retail channel dynamics here given some industry news, it remains, I guess, complex. So curious, maybe if you could just help us, you know, think through what the expectation is for the retail channel over the coming quarters here. Are you expecting disruption? Are you seeing you know, sort of disruptive pricing dynamics transpiring? Is it an opportunity, right, for sort of your retail customers? How are you sort of thinking through what is happening in the in the retail customer base today?
John Watwood: Yeah. So, I mean, obviously, our business model is to support the independent retailer. And we are we are gonna do everything we can to make sure they are happy and healthy and growing. And to get into the individual situations, you know, of our competitors and stuff, I will leave that to them and whatever. Obviously, we are watching it. The competitive pricing on the retail side has been there. I mean, I think anything's significantly shifted You know, broadly, I would say market to market, you always get some noise for different reasons. Right? Some somebody runs a sale, somebody gets some import product, whatever it may be, and we know how to attack those things. And more importantly, help our help our partners, our customers attack those things. So as we look, you know, obviously, the early buy season was really good on the retail side. I think that was a little bit of the impact the numbers you see in Q2, as Melanie mentioned earlier. As we look to the rest of the year, we will wait and see. I mean, I do not see anything right now. I realize what is out there on the news front, but cannot really speculate on how that is gonna impact anything until it plays out, if anything plays out. Thank you.
Steven Forbes: Thanks.
Operator: Thank you. And our final question today comes from Shaun Calnan with Bank of America. Please go ahead.
Sean Connen: Hi, guys. Thank you for taking my questions. Just a couple on the gross margin. To the large customer mix headwind, that is been a headwind for a long time now. Is there something temporary in the market that is driving that? Or should we expect that to continue to be a headwind as some of your dealers consolidate over time?
John Watwood: Yeah. So I will take a piece of that, and, Melanie, if you want to add in a little bit. You know, look, there is there is roll ups going on and that is fine. We are we are well positioned. To service the large customer. I mean, probably better than anybody else. So you know, is it temporary? I would not say it is it is temporary necessarily, but, you know, I think we there is ways we can offset some of the margin pressures and things like that in other areas as we have talked about with product categories. And as those get more implemented and that gets more accepted or we do a better job of selling those product categories, You know, there is, again, ways we can offset margin pressures from customer mix. But as it is right now, I think the roll-ups are relatively new to the industry. And, you know, yeah, there is competitive pressures there, obviously, or I would say scale pressures there that we are working through you know, and we will continue to. So probably I have not done a great job with that answer. Melanie, you wanna add any color to it?
Melanie Housey Hart: Yeah. I think I think the only thing I would add is when we start seeing the volume in increase. We will start seeing some of the smaller customers that maybe have exited the market come back when particularly on the new build side. And so, you know, we generally have higher margins with some of those smaller customers, and so that is part of the customer mix. So I do think there will be some improvement longer term when we start seeing some of that discretionary spend improve.
John Watwood: Yeah. So to add on to that, think it is a great point too. I mean, we gotta think about where the market's at right now. Then what happens later on once we start getting some tailwinds. We all we all believe we are we are probably bouncing off the bottom right now. there is some stability, some good signs. That show stability. So, I think long term, this will play out just fine. And, again, we get some headwinds excuse me, some tailwinds from some market growth, maybe, you know, seeing what happens in the in the upcoming years. This will be less and less of a conversation.
Sean Connen: Okay. Great. Thank you. And then just going back to the higher transportation cost So you guys are including that as a headwind for the full year in your guidance. And saying that you are working to try and offset those Are you including any, of those actions to offset it for example, like pricing in your price guidance? Or is that not assuming any surcharges that you are passing along?
Melanie Housey Hart: Yeah. So we have we have had some freight surcharges to date on outbound freight. So that is included in our pricing. When you look out for the balance of the year, we are still working through any impact of what the future pricing might look like for some of that inbound. So we do not have anything material included in the guidance at this time. So we will know more on that as we get through as we get through third quarter.
Sean Connen: Okay. Great. Thank you.
Operator: Thank you. And that concludes our question and answer session for today. I would like to turn the conference back over to the company for any closing remarks.
John Watwood: Yes. So thanks again, everybody participating in the call. You know, we have been working hard to deliver a strong summer season and are proud of our performance in this quarter. However, as you can see, you know, there is a lot more work to be done. We are moving with urgency on focused initiatives to strengthen our execution and further enhance our performance. We look forward to providing an update on October 22 when we announce our third quarter 26 results. Have a great rest of your day.
Operator: Thank you, sir. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
