Pool Corporation Aktie

Good day, and welcome to the Pool Corp. First Quarter 2026 Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Melanie Hart, Senior Vice President and Chief Financial Officer. Please go ahead.

Welcome to our first 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 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 any non-GAAP financial measures included in our press release will be posted to 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. We will begin today's call with comments from Peter Arvan, our President and CEO. Pete?

Good morning, everyone, and thank you for joining us. As we begin the 2026 season, the industry continues to work through a period of stabilization. Consumer discretionary demand remains measured while the installed base continues to drive steady maintenance activity. Q1 is our smallest and most weather-sensitive quarter and our focus entering it was on executing cleanly through the shoulder period to position us for the core season ahead. Our team delivered a solid start with sales growth of 6%, operating income growth of 7% and a 10 basis point of operating margin expansion exceeding our expectations for the quarter. Execution was steady across our geographic footprint with strong maintenance volumes and improving trends in several discretionary categories. A solid start like this reinforces rather than changes our full year view, we are confirming our full year diluted earnings per share range of $10.87 to $10.17, which includes the $0.02 of ASU benefit realized in the first quarter.

Reviewing sales by geography, California grew 10% and Texas 7%, supported by constructive weather and strong maintenance demand. Arizona grew 1% and Florida declined 1%, reflecting steady maintenance activities, offset by weather and some softness on the irrigation side in Florida. Across the markets, our teams adapt quickly to local conditions and our differentiated product portfolio, proprietary brands, technology platforms and supplier partnerships built and refined over many years, continued to widen the structural advantage that define our position in this industry. These are not advantages that can simply be replicated by adding locations.

In our other key businesses, Horizon net sales declined 2%, consistent with the broader discretionary environment we've seen persist. In Europe, sales grew 5% in local currency, building on the improved trends which we exited in 2025. By product category, we saw broad-based growth. Chemicals grew 8% on strong volume with standout contributions from our proprietary and private label lines, which carry structurally higher margins and are gaining traction across the enterprise. Building Materials grew 5%, continuing to build on our national pool trend offering. This, we believe, builds upon our growing share in this category given the backdrop of muted new construction market.

Equipment grew 7% on price and solid volume and commercial was flat for the quarter, largely due to project timing, but exited the quarter with slight growth.

Turning to our 2 strategic aftermarket channels, independent retail and the Pinch A Penny franchise network. Sales to independent retail customers grew 3%, a solid setup as they prepare for the core season. And Pinch A Penny franchisee sales to their end customers grew 4% and our franchisees opened 7 new independently owned franchise locations in the quarter. On the digital side, POOL360 increased to 13% of net sales in the first quarter, up from 12.5% a year ago. Our teams continue to make steady progress engaging customers through enhanced offerings and most recently -- or most recently POOL360 unlocked. Between our digital investments, and our distribution network, we are well positioned to continue deepening customer engagement across both professional and DIY end markets.

Consistent with what we have discussed last quarter, we remain disciplined on our sales center expansion -- capacity expansion and are focusing on driving more value from our existing footprint. We consolidated one sales center into its existing market in the quarter, bringing our total to 455 sales centers. We still expect to open 5 new sales centers for the full year. This is a measured productivity first posture, the right stance given the current environment. We have made several investments in our network, our technology and our people over the past several years, and our focus now is on leveraging those investments rather than adding to them. You should expect our expense growth rate to moderate as we grow into the capacity that we have already built.

As we look at the rest of the year, the macro backdrop has not changed materially from what we described entering 2026. New pool units for 2025 came in at 58,000. While we expect 2026 will be close to that level, it is important to remember that the center of gravity of our business is the 5.5 million in-ground pools already installed. We serve that installed base with a combination of product innovation, customer experience and go-to-market capabilities that no 1 else in the industry can match. Our growth thesis does not require a recovery in new pool units. It is anchored in maintenance, remodel and share capture across product categories for the existing installed base.

Our teams remain focused on executing the plan we have set out entering the year, maximizing share across product categories and investing deliberately in technology, private label and partnerships that extend our reach. Over nearly 4 decades, we've built something that goes well beyond distribution, an integrated platform of supplier relationships, proprietary products, technology, franchise networks and field expertise that no one can replicate. We have deliberately invested in that platform so that we perform in the environment we are in today. And so that we are in a fundamentally stronger position whenever the cycle turns. The depth, the reach and the relationships that we have built are unmatched, and we are getting stronger and not standing still.

We look forward to sharing more about our strategic priorities and capital allocation discipline at our Investor Day on May 12. I want to thank our team, our vendor partners and our customers for the work and the trust that underpins what we do. Our people are the reason we start each season ready to win and their efforts in Q1 set us up for the season ahead.

I will now turn the call over to Melanie Hart, our Senior Vice President and Chief Financial Officer for her commentary. Melanie?

Thank you, Pete, and good morning, everyone. We are happy to share a solid first quarter with net sales increasing 6% compared to the prior year period. The 6% increase reflects approximately 3% from pricing, 3% from volume in our maintenance and discretionary categories and 1% from customer early buys and foreign currency translation. Pricing contributed approximately 3% to sales growth in the first quarter. This reflects an estimated 1% to 2% full year price realization from current year increases supplemented by an approximately 1% incremental benefit from mid-season pricing actions that were implemented at the end of April of the prior year. We expect this pricing contribution to normalize in subsequent quarters when fully reflected in our year-over-year comparison.

Within our chemical product lines, we have observed some moderation in pricing from levels seen at the beginning of the quarter. But at this time, we are not realizing a significant impact on consolidated net sales. We will continue to monitor market conditions. Volume growth was a meaningful contributor to our top line performance with our maintenance and discretionary product categories, delivering a combined 2% increase driven by improved demand across equipment, parts and chemical volumes. The positive momentum we experienced in building materials during the back half of 2025 carried into the first quarter, providing support to overall sales growth.

Build and material sales for the quarter increased 5%, and we are encouraged that our results continue to track ahead of permit data. Permit data remains lower than prior year levels through the end of the first quarter. Finally, the benefits we saw from early buys and foreign currency translation provided an approximately 1% tailwind to reported sales in the first quarter. We do not anticipate currency to be a material contributor to full year results as the favorable translation impact is expected to diminish in the seasonally stronger second and third quarters as the sales base increases.

Gross margin for the quarter was 29%, a decrease of approximately 20 basis points compared to the prior year period. Primary drivers of the year-over-year change during the quarter were product mix, inbound freight associated with stocking levels through the season and increased early buy activity. Product mix was the most significant driver of the year-over-year variance. Equipment sales grew 7% in the quarter and given the lower relative margins of this category, the strong volume performance diluted consolidated gross margin. We view this growth as strategically positive.

Customer early buy activity also increased in the quarter. As is typical with early buy programs, these sales reflect modest discounts from regular season pricing and therefore, carry somewhat lower margins than our in-season business. The increase in early buy volume is consistent with our go-to-market strategy and positions us well for the selling season ahead. Customer mix and chemical margins were also modestly below prior year levels, though neither represented a material individual driver of the variance.

Partially offsetting these headwinds, we continue to realize benefits from our pricing initiatives and ongoing supply chain actions. First quarter gross margins are in line with our historical seasonal patterns and should not be viewed as sequential from fourth quarter levels. Operating expenses for the first quarter were $247 million or a 5% increase over the same quarter in prior year. The increase was driven by the addition of 6 greenfields opened after March of last year, technology cost and overall inflationary increases.

As discussed on our year-end call, our 2026 operating plan is focused on unlocking efficiency across the 50-plus greenfield locations opened over the past 5 years, combined with process improvements resulting from our ongoing investments in POOL360 and its expanded capabilities. First quarter results are tracking in line with that plan.

Operating income of $83 million increased $5 million or 7% compared to the prior year. We realized a 10 basis point operating margin improvement. Interest expense of $12 million reflects the incremental borrowings associated with share repurchase activity during the quarter. Diluted earnings per share of $1.45 increased $0.03 compared to the prior year. Prior year included a $0.10 ASU benefit versus $0.02 in the current quarter. Excluding the impact of ASU in both periods, diluted EPS increased $0.11 or 8% for the first quarter, reflecting our ability to generate earnings growth with top line expansion.

Moving to our balance sheet and capital allocation. Consistent with our normal seasonal pattern, we executed our vendor early buy programs to ensure appropriate inventory coverage heading into the season. Inventory at March quarter end was $1.7 billion, 14% higher than first quarter last year and an increase of approximately $200 million from year-end as product was received and positioned across our network. Our current inventory includes stocking for new locations and acquisitions added to the network, new product introductions resulting in a broader product range and cost inflation relative to the same period last year, with some opportunistic purchases made ahead of currencies season price increases.

Inventory investment is concentrated in our fastest-moving product lines, and we would expect a normal seasonal reduction in inventory levels as we move through the peak selling season. We ended the first quarter with total debt of approximately $1.2 billion and a leverage ratio of 1.7x, which is within our stated range. As is typical, debt levels will increase through the first half of the year as seasonal inventory builds and early buy payments come due before declining in the back half of the year as receivables are collected.

Net cash provided by operations was $25.7 million for the first quarter compared to $27.2 million in the prior year period, with the year-over-year change primarily driven by higher inventory purchases in support of the upcoming selling season. During the quarter, we repurchased approximately $64 million in shares, an increase of $8 million over the prior year period, with $271 million remaining under our current repurchase authorization. We will continue to execute share repurchases in an opportunistic and disciplined manner, consistent with our capital allocation framework.

Even with our first quarter trends tracking ahead of our expectations, full year guidance remains unchanged. We continue to expect a 1% to 2% pricing benefit for the full year of 2026 from vendor cost increases and related price pass-throughs. Combined with growth from the installed base of pools and the absence of any meaningful recovery in discretionary spending, we expect top line performance to be a low single-digit growth on a same selling day basis. Gross margin for 2026 is expected to remain consistent with 2025, supported by continued supply chain efficiencies, pricing strategies and higher private label sales offsetting the prior year margin benefit from mid-season price increases.

As indicated at year-end, first quarter reflected the highest year-over-year expense comparisons. We expect expense growth to moderate on a quarter-over-quarter basis throughout 2026 as we focus on capacity absorption and a prior year new sales center opening. Incremental incentive-based compensation, if earned, will be recorded in proportion to estimated operating income growth and the costs associated with new sales center openings in 2026 are expected to be weighted towards the back half of the year.

With the share repurchases during the quarter, our projected interest expense is now a range of $49 million to $51 million. We would expect second quarter to have the highest interest expense of the year following the payment of early buys. Our estimated full year tax rate remains approximately 25% with the second quarter rate to be approximately 25.5%. Our guidance does not include ASU benefits beyond the $0.02 recognized year-to-date as we continue to expect the full year impact to be less than prior year.

We are expecting approximately 36.6 million weighted average shares outstanding for the rest of the quarter and the full year, updated for our first quarter share repurchase activity. Guidance remains unchanged with a diluted EPS range of $10.87 to $11.17 including the $0.02 ASU tax benefit recognized in the first quarter. The midpoint reflects a 2% to 3% growth over prior year.

Pool Corp's first quarter results demonstrate the earnings power of our model. even in a market that has not yet seen a full recovery in discretionary activity. Pricing discipline, supply chain execution and the growing contributions of POOL360 are working as intended and our network continues to expand in a way that strengthens our competitive position for the long term. We entered the peak season with confidence in our team, our inventory position and our ability to deliver.

I will now turn the call over to the operator to begin our question-and-answer session.

[Operator Instructions] The first question comes from Susan Maklari with Goldman Sachs. .

My first question is on your ability to realize the return on investments that you talked about coming into this year. As the pool season start come together. Can you talk about your competitive positioning? What you're hearing from the sales centers and your customers in there? And just how you're thinking about that overall positioning as we move into the spring summer?

Sure. When we think about getting ready for the season, we think about making sure that we have all of the sales centers ready for the surge of business that happens during the second and third quarter. That means that having the right inventory in the right location, having a staff that is fully trained and frankly, excited about the season having all of our new products ready to be introduced to customers working really hard on early buys to make sure that we have the product out in the field at our customers' locations ready to sell, making sure that we have explained all of the new product offerings that are available to our customers so that they can help grow their business and that our marketing programs are finally tuned to kick off the demand creation efforts that we do, they are very unique in the industry.

And then it's a matter of making sure that in the sales centers that our teams are ready for the surge of business and that we've taken advantage of the investments that we've made in capacity creation so that we get better every year. We have a performance-based culture and every year, there is a drive to make sure that whatever we did last year, that we do better this year, whether it is our productivity levels in the sales centers. whether it is our efficiency in serving customers and how quickly we get them in and out the door. All of those things are part of the overall customer experience that we focus on.

And especially with the newer locations that we opened up in the last couple of years, the newer ones are the ones that we pay the most attention to, to make sure that they're ready to start without missing a beat.

Okay. That's helpful. And then, I guess, given the geopolitical environment and the moves that we're hearing in consumer sentiment. What are you hearing from your customers on the ground? Has there been any change in how they're thinking about their backlogs or consumers' willingness? And what are you seeing on those discretionary side of the business?

I think that we continue to watch the health of the consumer. We watch housing turnover, frankly, the age of the installed base all matter. What -- it's early in the year to look at permit data and try and draw any conclusion for where we will end up because the first quarter is just so small relative to that. So there's a lot of -- first quarter is really kind of selling season and now the builders are trying to lock down contracts. So I can tell you that I've heard everything from very optimistic, and I'm sold out to other areas where they're still trying to pursue contracts to make sure that they can lock up the season. So on balance, I would say, relatively unchanged with some green shoots, I would say.

Okay. All right. That's encouraging. Good luck with the quarter.

The next question comes from David Manthey with Baird.

Pete, as you mentioned, I realized the first quarter is seasonally volatile, but we saw a couple of decent-sized changes in some of the supplementary information you provided. So chemicals staged quite a turnaround here. Florida, I guess it had been growing a little bit. Now it's down 1% and California and Texas are booming. I'm just wondering if you can talk about those to the extent there's any signal there versus noise in the first quarter.

Yes. I'd be careful about drawing huge conclusions on first quarter, but I'll give you just a couple of things to think through. In terms of Chemicals, first quarter is actually one of the quarters that -- so when you're trying to sell a program to a dealer, dealers typically don't convert during the season, they convert after the season and then they would load their inventory into the stores for the upcoming season.

So as you know, with our private label chemicals, our legal and easy floor lines, which we believe are best-in-class, especially when paired with the technology tools and the water testing apps that we have and water testing strips, everything for the integrated systems, I think we saw good traction from the dealers and specifically on the retail side, that has helped our traction that we're seeing on the chemical side. And frankly, the teams are out hunting that business because I think we've got a great value proposition.

When I look at California and Texas, California, I think, benefited a little bit from weather. California was pretty hot in -- earlier in the first quarter, which is atypical. So that weather pattern helped. And I think the same was true for a bit of Texas. But again, it's so small and relative to the grand scheme of things that I don't know that I would draw a whole lot of conclusions from that. But I can tell you, the team did a very good job of explaining the value proposition and winning share at the dealers in the first quarter. And I think that's just a result of conveying a very strong message or the best value proposition in the industry.

Yes. And second, you've talked about growth in OpEx expected to slow through the remainder of the year. And Melanie mentioned that. Could you tell us, does that still kind of anticipate that full year OpEx will be in that 60% to 80% range relative to gross margin or sales dollar growth. Is that -- I know that's a target. But based on your guidance ranges and how you're looking at the business, is that still the target for 2026?

That is the long-term target, but you should remember for 2026, we do also have that incentive comp reload, so -- where we do expect to get some leverage for the year, some of that natural leverage will be offset by that rebuild on the compensation side. So it will be a little bit lower than our normal long-term algorithm.

And that comp reset was -- I think you talked about $15 million. Is that still the case?

Yes, at the low single-digit growth.

Got it.

What we're counting on, Dave, though, is the absorption as the new sales centers that we've opened last year and the year before, as they continue to gain traction and the absorption rate on that cost improves. And when you couple that with slowing of adding new investments to the business, because I think we're adequately invested in most areas right now. I think the results for the back half of the year are encouraging.

The next question comes from Ryan Merkel with William Blair.

I wanted to start with gross margin. Peter, Melanie, can you quantify the impact to gross margin from the customer prebuy and then also the higher equipment mix -- and the reason I asked is I think last quarter, you guided gross margin slightly up year-over-year in the first quarter. So curious what was different versus what you thought?

Yes. So we're not going to provide a kind of detailed quantification of that. But if you think about what we have talked in kind of relative margins, so we generally will talk about kind of building materials, having the best margin and then after that would be chemicals and then after that would be equipment. So with the equipment being the higher portion of the first quarter sales and really kind of outgrowing our expectation that's really where we saw some dilution of the consolidated margins.

Got it. So in my own words, it sounds like the equipment growth surprised you in 1Q versus what you thought?

It was a very pleasant surprise.

Okay. Got it. All right. That's good to hear. And then second question is, can you just comment on what you're seeing so far in April? And how does that compare to March. And I'm just curious if March had a weather boost and trying to figure out if that's continuing into the second quarter.

Yes. I think we're -- I don't know, most of the way through April, and I would -- I guess I would characterize April as expected. So it's -- for what we have contemplated within our guidance and with the plan, I mean, April is going as expected.

The next question comes from David MacGregor with Longbow Research.

I guess I wanted to just ask about pricing and inflation and demand elasticity. And I guess in the past, where within the mix have you seen this sort of first appear? And do you feel your private label offering is sufficient breadth to maybe offset by capturing the down market shift? And would that downshift be margin accretive?

Yes, I'll take that, David. Just the way, I wouldn't want anybody to position our private label as a down price offering. We look at our private label and have intentionally focused on making sure that it is a very high-quality product. So we're not actually selling it saying, "Hey, we're trying to make -- we're trying to have a cheaper offering, we're trying to have an offering that has tremendous value and is very high quality.

I think when it comes to the inflation, where we have seen it, and I've commented on this before, obviously, inflation drives the -- it's most prevalent in discretionary when you get into the cost of a new pool. And then when you get into on the maintenance side, there are some parts of maintenance that are -- that we would call semi-discretionary. A pump and a filter nondiscretionary, if those need to be replaced or repaired, they have to be replaced or repaired. But you get into heaters and/or lights, something like that. If somebody doesn't want to fix that, if there is one that is -- that needs to be replaced, you don't actually have to have that to continue to safely operate the pool.

So in some areas, that's where we have seen some decline in demand. But I would tell you that that's already in and baked in. So we're not seeing that either change materially from what we've seen over the last couple of years.

Okay. Got it. And thanks for the clarification on the private label. I guess second question is just on equipment sales, which obviously look encouraging, I guess, at this point, which you saw this quarter. Any sense of how much deferred investments may be in the market there? And just, I guess, given the rate of catch-up following prior downturns, what could that contribute to growth over the next year or 2?

Can you clarify your question. I just want to make sure I answer the right question. On your comment on deferred.

Well, I'm just -- I'm getting the sense of the equipment sales, there's been some deferral with the downturn. And so now it looks like we're starting to see people spending money on equipment again. And so I'm just trying to get a deferred pending may have occurred there.

Yes. I think there is -- as a couple of pieces of equipment transition to longer life items. So like when the industry moved from single speed pumps to variable speed pumps, by their very nature, variable speed pumps last longer -- sometimes up to 2x longer than a single-speed pump. So if you go back to 2018 when that regulation went into effect, then you just do the -- you extend out the life of a variable speed versus single speed, those variable speed pumps that were installed very early on in the transition that would have gone well past the normal life of a single-speed pump. Those will now start coming into the replacement cycle, we believe that. And the same thing as it relates to like incandescent lights, which were much shorter life than the LEDs that we replace them. And those 2 -- as we work through that cycle, you'll start to see more replacement for that. So that's all encouraging for us for the future.

The next question comes from Scott Schneeberger with Oppenheimer.

I'm going to focus a bit on pricing. I guess, Melanie, for you, you discussed that we're going to be lapping the tariff pricing that started in April last year. I'm just curious how we should think about that. Did that ramp much in the second quarter? Will we see that as a comp in the second quarter not really until we get to the back half. Just curious how we should think about the cadence and the impact of that since it's a full point in the guidance calculation.

Yes. So when you look at full year pricing, we are at the 1% to 2%, which is based on the current year increases. And so in the first quarter, we had that incremental 1% that was really the tariff price increases that we saw last year. In second quarter of last year, we did have some benefit from those price increases, so we will be lapping that. So at this point, for the remainder of the year, we would expect pricing to be more in that 1% to 2%, just reflecting the current year cost increases. .

And then with this really solid move in the first quarter in Chemical, and I think 1 of you mentioned that there was some good private label, which is higher margin activity there. Could we see upside this year just a little bit behind the strength there and the possibility for persistence in it and also the margin element of the private label with the chemical impact?

Yes. We're very encouraged by chemicals in the first quarter because that's the nondiscretionary part of the business. and it really goes in 2 channels, right? It goes to the pro channel, which is -- that's your day in, day out, foot traffic into the branches, which is very encouraging. And that's driven by the value proposition that we have. That's the 40-year relationships, that's the expertise in the branch, that's the footprint. That's the customer experience they get there, the tech platform and frankly, the quality of the private label product that we're selling.

And then the other side of that is going to be the independent retail taking that product on and putting it on their shelves and that being their go-to brand for the season. So we're encouraged by the results in the first quarter. And we think that as the season progresses, that will be just a good tailwind for us.

The next question comes from Garik Shmois with Loop Capital.

Just on the expectation that you have for operating expense growth to moderate -- you mentioned improved operating leverage on recent greenfields. I'm wondering if there's anything else besides that in the calculation? Are you expecting certain cost actions in addition to better operating leverage?

Yes. So we are focused on ensuring that the greenfields that we put into place that we're continuing to get those up to fleet average. So there's our concentrated effort on that, which does drive operating leverage at those locations. And then along with that, we are constantly kind of evaluating from both a seasonal standpoint and a market standpoint, ensuring that we're operating effectively within our capacity creation efforts. So we've talked about utilizing the benefits of POOL360. So looking at -- as we continue to increase our sales through POOL360 at each location, that gives us the opportunity to evaluate our operating model in those locations.

Okay. A follow-up question is just on chemical prices. There's a comment I think in the prepared remarks, they moderated in the quarter, but you're not seeing an impact to sales. Just wondering if you can assess if there's going to be a risk that it becomes a bigger headwind in future quarters at all?

Yes. I don't know. From where we sit right now, our view is that prices are fairly stable. So I don't -- I mean, that could change, but from where we sit right now, I don't see it in any meaningful way. I mean, it could happen market to market. Somebody, a competitor could do something in a market, but I don't see anything structural that -- where there's a setup for that to change.

The next question comes from Sam Reid with Wells Fargo.

Just wanted to quickly dive into the inventory comment around new product introductions. Specific examples, but also, are you doing any more, say, around like white label China import product? I just want to better understand some of the nuances there on the inventory line.

Yes. Our job as the distributors to make sure that we have the best product offering for our customers, no matter where it comes from. So I wouldn't say that there is a -- if you look at our private label products, the -- much of that product is domestically produced, and there is some of it that comes in from import and that's frankly always been the case. But our view on new products is not new products, lower cost for the sake of lower cost what we look for is new products that have new technology that help us expand the market. So we look for highest quality features and benefits that our customers and their customers would want would want to drive demand.

So I mean in no way, shape or form, do we go out and look for, hey, I just want to find the cheapest pump, the cheapest filter if that was our goal, our product mix would be very different than it is today. We focus on having the best product, highest quality professional grade products that will help our customers grow their business.

All helpful, Pete. And maybe just a quick one on the prebuy activity during the quarter. I mean, you did break out the prebuy contribution in your bridge. I'm just curious though roughly what is the gross margin for a customer that prebuys a product versus, say, a non prebought product. Would just love maybe that split on your gross margin line, just so we could better understand the impact to gross margins in that first quarter from prebuys.

Yes. We typically don't break that out. I mean because there is no one answer, it varies, right? It varies by customer, it varies by the products that varies by the products that they buy, and so the overall mix. So unfortunately, I can't give you an answer that says, "Hey, it's, this many bps for that type of customer versus a customer that buys normally because it depends on when they buy, how much they buy and what they buy and how large of a customer they are for us.

The next question comes from Collin Verron with Deutsche Bank.

I just wanted to follow up on the equipment and the replacement cycle. Can you just put some numbers around what the useful life of the equipment is now -- and just given that useful life, do you see a replacement cycle in the next couple of years just because we're coming up to 5 or 6 years post COVID when there was a lot of demand.

Yes. Let me characterize it like this. The life of -- expected life of equipment varies tremendously, based on what the product is and the operating conditions that it's used, whether it's in a seasonal market or whether it's in a year-round market and whether the product is properly maintained or not and with weather events. In general, part of the value proposition of a variable speed pump is that it runs instead of that full rate under full load all the time. It runs at a lower load which extends the life. It could extend the life by 30%, 40%, 50%, it really depends on many, many other factors. But in general, it has extended the life span of pumps, doesn't really have much of an impact on filters or anything like that.

Heaters, it's really a function of water quality, more than anything else. If you maintain great water chemistry that can extend the life. You could have a brand-new product with lousy water chemistry and destroy it very quickly. So -- but in general, we look at 2 categories for life expectancy changes that were a bit design, if you will. One is the variable speed pump certainly last longer than the single-speed pump in the range of what I just discussed. And then if you look at LED light bulbs for the pool, those certainly on an apples-to-apples basis are going to outlast an incondici. So since the time that both of those products were introduced we see that there should be opportunity for that replacement market coming up.

The next question comes from Jeff Hammond with KeyBanc Capital Markets.

Just want to come back on inventories, 14% growth. I think you mentioned that the broader product range and service levels, but just maybe how would you characterize inventories where you want them to be? And then just back on that broadening the product range. Can you talk -- give us some examples about the new tech or expanding the market type products that you mentioned in the prior comments?

Yes. So in terms of the inventory, if I look at the -- certainly, the level of inventory is up. If I look at the profile, the profile is what I would characterize as extremely healthy. actually very astute buyers when it comes to buying inventory. So if I look at the dollars and where those are, if they're not sitting in a significant amount and a bunch of new products that don't have any sales history. They're sitting in very high moving very high moving items. So I really -- from an inventory perspective, I spend very little time worrying about the inventory levels because I think the team has -- does an amazing job controlling inventory, and we generally do what we say every time.

When I think about new products, I'll give you an example. So on our private label line, we have a regular chlorine tablet, which has been around forever in the pool industry. And now we also have a proprietary product, which is an extreme tab. The Extreme tab has additives in the tablet that distinguish it from a standard tablet. It has more additives in it that produce a better quality pool that has inhibitors that has as algecides and then it has clarifiers and other products that distinctly differentiate that product. And our customers and their customers see a big benefit from that. So that tab -- or that product is growing nicely.

Another example would be our -- something in our filter cartridges. So we have a proprietary [indiscernible] antimicrobial cartridge filter, which is much faster to service and has a very low micron filtration rate, which again helps produce a clearer pool, and that's especially important when you think about LED lights, which are getting brighter and brighter. So anytime somebody upgrades their lights, if the water quality isn't really good, you'll start to see those suspended particles. So great filtration to complement lights matters a lot, and we're right there for the customers to provide those products.

Okay. Those are great examples. Just on pricing, I think you mentioned you expect it to moderate. I'm just wondering if you're hearing of any potential follow-on price increases, whether it's freight inflation from higher gas or oil-based products. I think we heard about some pricing actions in [indiscernible] coordinators, Section 232 kind of tariff update. Any chatter of any follow-ons coming?

Yes, there has been some chatter. I would tell you when we look across our product category from where we kind of stood this time last year. Last year, when we talked about the impact from the tariffs, we did have an incremental 1% that we added to pricing for the forecast for the year. At this point, some of it's noise. We've gotten some notices from vendors, but I would say it's not as widespread as we were at about 30% of our cost of product this time last year where we had announced price increases per se, and we're just not at that level at this point. So we don't have as much of an impact expected. So we're still kind of waiting to hear from if other vendors have reactions to what's going on in the market.

The next question comes from Steve Forbes with Guggenheim.

This is Jake Nivasch on for Steve. Just 1 for me. I wanted to dig into POOL360 a little bit. So it's nice to see that penetration levels continue to increase as seen from this quarter from the prior year period. And just curious what the expectation is for the year for this platform, I guess, from a penetration standpoint. And I guess, as a follow-up, curious about what the customer retention looks like utilizing this platform. Where are you seeing when perhaps some of the newer branches, perhaps they're utilizing that a little bit more than some of the older vintages? Or is it the dynamic not really related to that? Just any sort of update there would be great.

Yes. We're actually very encouraged by POOL360. We think it is a structural differentiator for POOLCORP, both in customer experience and certainly from a cost-to-serve perspective, which is why we've had so much focus on it. What's interesting is, is that there are some regional differences in the adoption rate. There are some -- we have some [indiscernible] very high utilization, some well over 30% in the tool, and we have some that are lower. So some of that is just some -- which seem to be regional differences and some of it is just opportunity on our part.

So we continue to focus on improving the quality of the tool every day people wake up and say, "How do we make it better, how do we make it better, how do we make it better, what new features that we have to add, how do we communicate those, how do we train the customers and our branch teams on those features. So there's a range. So I don't think we're anywhere near as a company near entitlement of our penetration. As last year, we ended for the total year at 17%. And as I mentioned, we have some branches that are well over 30.

So for me, I don't see any reason why the company couldn't ultimately exceed 25% target and maybe higher in the future, it all depends. So it's important that we remain flexible with our customers though, would not try and force them into using it. We do business with our customers the way they want to do business with us. Some of them embrace the digital tools, some people like the face-to-face.

The next question comes from Shaun Calnan with Bank of America.

Just first, can you talk about what you think growth be better early by this year? Do you think customers are more worried about potential price increases? Or do you think this is like a view that they're more optimistic on 2026?

Yes. I don't know that it was a fear of price increase. I think it's a couple of things. I think that early on in the year, there is always a fair amount of optimism because customers don't know what they don't know. And by nature, our customers tend to be fairly optimistic. So that's a portion of it. I think to scale it, when you look at some of these early buys, I don't know that there's any risk for any of the customers with an early buy. It's not like they're buying a year's worth of inventory. So they're buying some inventory to start the season. So I don't know that anybody is betting the farm on what they buy. So I would say it's a function of our sales efforts, the quality of our products and how well we serve the customer more than anything.

Okay. Got it. And just as a follow-up, you had mentioned being able to get some discounted equipment last quarter, did you pass that discount along to your customers? And was there any change in the structure of your early buy discounts?

I assume you're referring to early buys. And early buys are just as part of the normal course of business. And I think we had a question earlier about pricing on early buys. And again, the answer is it just depends on the customer or the product mix they're buying, how much they're buying, and things like that, there is no formula that says, this means that as it relates to the price increases. .

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

Yes. Thank you all for attending today's call. We look forward to you joining us -- joining our Investor Day webcast on May 12, when our executive leadership team covers strategic initiatives and our long-term financial outlook in more detail and on July 23, when we announce our second quarter 2026 results. Have a wonderful day.

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

Good day, and welcome to the Pool Corporation Fourth Quarter 2025 Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Melanie Hart, Senior Vice President and CFO. Please go ahead.

Welcome, everyone, to our fourth quarter and year-end 2025 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 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 any non-GAAP financial measures included in our press release will be posted to 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. Peter Arvan, our President and CEO, will begin our call today. Pete?

Good morning, everyone, and thank you for joining us. Let me begin with a look back at 2025. This was a year of continued industry developments, shifting demand patterns, persistent customer uncertainty, and evolving customer expectations. We stay true to our long-term strategy, investing in new capabilities, expanding our exclusive brands and advancing our digital and distribution platforms. These efforts allowed us to address current market pressures while maintaining a strong foundation for future growth.

One important industry theme this year was the ongoing decline in general construction activity, including new pool construction. It's important to note that this trend is not unique to our business, but is felt across the broader construction sector. In 2025, we estimate that just under 60,000 new pools were built in the U.S., a mid-single-digit decline from last year. This is about half of what we saw at the height of the pandemic and 40% lower than in 2022.

Even in this environment, we maintained our position and gained share in several important areas, driven by our differentiated offering and commitment to service. While new pool construction remains down, maintenance spending proved resilient. Also see the likelihood of pent-up demand in the pool industry, although it's difficult to predict the timing, we do believe that as consumer confidence returns, deferred pool projects and upgrades will come back to the market. This opportunity encourages us even though it remains difficult to put a time line on it.

Operationally, we took a disciplined approach to 2025. While the broader industry continued to add capacity, we slowed our own facility expansion and focused instead on driving more value from our existing network. While early, we are seeing measurable benefits from our strategic investments, including increased efficiency from our technology upgrades, improved customer experiences through digital platforms and enhanced profitability from our supply chain initiatives. The progress underscores the effectiveness of our approach, and we expect these gains to become even more significant in 2026 as our initiatives continue to scale and evolve.

Moving to financial performance. Our annual revenue was $5.3 billion, holding steady year-over-year. This stability was supported by steady maintenance demand with early indications of improvements in some discretionary categories, even with lower new pool starts.

In the fourth quarter, our sales totaled $982 million, just 1% below last year's level, a period that, as a reminder, benefited from significant hurricane-related repairs in Florida and thus was a particularly tough comparison. We delivered strong gross margin performance in 2025, reaching 29.7% for the year, up 20 basis points from the prior year when adjusted for onetime items. This reflects the strength of our market leadership, disciplined pricing strategies and operational excellence through our supply chain. In the fourth quarter, gross margins rose to 30.1%, an improvement of 70 basis points year-over-year.

We delivered our commitment to shareholder returns, distributing $530 million in cash this year, a 10% increase over last year. This includes $341 million in share repurchases and a 4% increase in our quarterly dividend, underscoring our confidence in the business and our disciplined capital allocation. Inventory, as we have done successfully in the past, we acted opportunistically to secure pre-price increase purchases. This proactive investment positions us to protect and expand our gross margins, and we expect to sell through this inventory in the normal course of business.

When we look at our performance by region, Florida sales declined 2% for the year and 9% in the fourth quarter, reflecting last year's post storm activity. However, on a 2-year basis, fourth quarter sales in Florida were still up 2%. Texas showed early signs of recovery late in the year. Sales grew 1% in the fourth quarter, which helped offset a 3% decline for the full year. California declined 3% for the full year and 4% for the fourth quarter. Arizona was flat for the full year and down slightly in the fourth quarter. Elsewhere, Horizon sales declined 2% for the year. In Europe, we posted local currency growth for the first time in 3 years, including a 4% increase in the fourth quarter.

If we look at our results by product category, chemicals were down 1% for the year, mostly due to price and 3% in the fourth quarter driven by tough comps with post-hurricane cleanup. Building materials finished flat for the year and were up 4% in the fourth quarter, driven by demand for our national pool trend products and our differentiated customer experience. Equipment sales, excluding cleaners, were flat year-over-year and down 3% in the fourth quarter, cycling against prior year hurricane recovery comps. Commercial pool products rose 3% for the year.

Now let me highlight performance in 2 important channels: independent retail and Pinch A Penny franchise network. Sales to our independent retail customers decreased 3% for the year and 4% in the fourth quarter. This reflects softer retail demand compared to hurricane-driven surge we saw in -- late in 2024, which created a high benchmark for year-over-year comparisons. Additionally, we did see pressure on chemical pricing, which is why the team is focused on proprietary product differentiation.

For Pinch A Penny, sales from franchisees to their end customers declined 2% for the full year and 9% in the fourth quarter. It's important to remember most Pinch A Penny stores are in Florida, and last year's fourth quarter saw a 15% jump in franchise sales due to the hurricane activity. At year-end, our Pinch A Penny network grew to just over 300 locations after adding 10 new stores during the year, including 5 in Texas and 1 each in Arizona and North Carolina. Our franchisees continue to provide essential services to customers and remain a key growth driver for our business.

Turning to the digital side, we continue to make investments in technology, the launch of POOL360 unlocked new artificial intelligence features, expanded customer access to our products and improved their experience across our network. Digital sales reached 13.5% of total revenue in the fourth quarter, up from 12.5% last year and peaked at a record 17% during the pool season. For the full year, we finished at 15% of sales, which is an all-time high, and we believe this will continue to grow.

We also expanded our physical footprint, opening 8 new locations and acquiring 3, bringing our total to 456 sales centers at the end of the year. Between these investments in digital and our distribution network, we remain well positioned to support both the professional and the DIY end markets moving forward.

Looking ahead to 2026, we anticipate net sales will grow in the low single-digit range. This outlook assumes new pool construction will stay close to the 60,000 units we saw in 2025. Maintenance revenues should remain resilient, and we expect to continue to capture share through exclusive brands, enhanced technology and differentiated services.

We expect our work to drive greater efficiency, especially the network optimization and operational improvements launched at the end of 2025 will produce more meaningful gains in 2026 as those initiatives scale. We will continue our disciplined approach to capital allocation, focusing on investment -- focusing investments on opportunities with the highest returns. With all these factors in mind, our diluted EPS range for 2026 is $10.85 to $11.15. Melanie will provide further details on our financial outlook in just a moment.

To summarize, our focus in 2026, we'll have 3 priorities that guide us as we move forward. First, delivering an unmatched customer experience through exceptional service, tailored solutions and the reliability our customers count on. By raising the bar on customer engagement and satisfaction, we reinforce our position as the partner of choice in the industry. Second, expanding our exclusive brands and deepening our OEM relationships to offer innovative, differentiated products that set us apart in the market. And third, fully leveraging our technology and network investments from POOL360 to our distribution platform, driving greater efficiency, reach and agility across our business.

We will continue to exercise strict discipline in execution and investment, ensuring we generate strong returns and stay nimble as the market conditions evolve. Feedback on our new products and digital tools have been very encouraging. We look forward to providing more detail on our strategic road map and innovation plans at our upcoming Investor Day.

Investing in our people remains fundamental to our long-term strategy and culture of excellence. We are relentless in attracting, developing and retaining top talent, empowering our team members to lead, innovate and drive meaningful results. Their expertise and commitment not only fuel our current success, but also ensure we are well positioned to seize future opportunities and shape the next phase of our growth.

Before I conclude, I would like to thank our employees, our vendor partners and our customers for their ongoing commitment and trust. Through another demanding year, we delivered solid results and laid the groundwork for further progress. I am confident that together, we are well positioned to drive continued leadership and value creation in the years ahead. I will now turn the call over to Melanie Hart, our Senior Vice President and Chief Financial Officer for her commentary.

Thank you, Pete, and thanks to everyone for joining us on today's call. I'll begin with a summary of our fourth quarter results, discuss our full year 2025 achievements and then look ahead to 2026 expectations.

For the fourth quarter, sales decreased by 1% compared to the prior year. The prior year's fourth quarter included a 2% benefit from increased maintenance activity and weather from hurricane recovery efforts, primarily in the Florida market. We continue to see an effect from lower discretionary spending which had a drag on sales of 2% this quarter, including the results from Horizon. However, the impact has continued to moderate throughout the year as we have seen permit declines across most of our markets begin to improve.

Net pricing benefit for the quarter was approximately 2%. Fourth quarter gross margin was 30.1% and reflects a 70 basis point improvement over the prior year's margin of 29.4%. The improvements to gross margin were a result of pricing, supply chain benefits, expanded private label sales activity and a favorable product mix. The favorable product mix includes the fact that the prior year's weather impact led to increased equipment sales, which generally have lower margins than our overall product mix.

Operating expenses in the fourth quarter increased by $14 million or 6% compared to the prior year. This year-over-year expense increase is higher than the trend to date, primarily due to incremental technology investments made in the fourth quarter to ensure that POOL360 unlocked, as Pete outlined, was ready and available for use across the network. In addition, we have our new sales center openings and sales transformation expenses. We also saw self-insured medical costs continue to rise significantly outpacing general inflation rate.

We reported operating income for the quarter of $52 million compared to $61 million in the prior year and diluted earnings per share of $0.85 as compared to $0.98 in the fourth quarter of 2024. For the full year of 2025, we maintained sales of $5.3 billion, consistent with the prior year despite having 1 less selling day. Discretionary activity related to remodels continue to make progress with the new pool construction remaining a challenge, resulting in approximately 2% to 3% lower sales for the full year. We have successfully implemented both pool season and mid-season price increases while effectively managing evolving market pricing for chemicals, resulting in a 2% net pricing benefit. Maintenance activity overall for the year was positive.

In 2025, we estimate that maintenance items accounted for roughly 64% of our pool product sales, while renovation and remodel projects made up 22% and new pool construction contributed 14%. These are consistent with our 2024 estimate. Our sales of products primarily used in new pool construction and remodel finished the year flat, which was better than the overall new build market, we have estimated to be down 3% to 5%.

Gross margin for 2025 was 29.7%, up 20 basis points compared to the prior year reported margin, which was also 29.7%, but included a 20 basis point benefit from import taxes. This improvement reflects effective supply chain management and disciplined pricing practices. These results were achieved through a consistent focus on operational execution and proactive engagement with customers. Regarding product mix, building materials accounted for 12% of sales in 2025 and 2024.

Operating expenses increased $34 million, bringing the total to $992 million. Key investments this year included in the 3.5% expense increase are approximately 1% for incremental costs related to the 8 new greenfield locations and 1% in incremental technology spend. These increases were partially offset by ongoing improvement from our capacity creation efforts, which helped mitigate the impact of broader cost inflation.

For the year, operating income reached $580 million compared to the $617 million in the previous year. Interest expense decreased by $3 million year-over-year benefiting from lower overall rates, including benefits from refinancings during the year. We have continued to benefit from our treasury management efforts and mix of fixed and variable rate debt. The effective tax rate was 23.8%, slightly higher than last year's 23.4% with ASU benefit. On a full year basis and excluding the impact of ASU, the tax rate was 24.7%.

Diluted earnings per share of $10.85 compares to $11.30 in the previous year and includes an ASU benefit of $0.12 per diluted share for the full year versus $0.23 in 2024. Adjusted diluted EPS was $10.73 compared to $11.07 last year, representing a 3% decrease. The $11.07 includes the $0.25 import tax benefit.

Moving to our balance sheet and cash flow. Inventory at year-end was $1.45 billion, an increase of $165 million or 13% from last year's balance of $1.29 billion. In anticipation of estimated cost increases for certain products for the 2026 season, we evaluated early buy opportunities and made strategic purchases. We expect normal inventory seasonality for 2026 with a peak in March ahead of the season and lower inventory levels by the end of the third quarter. This is an area where our team has proven to excel, and we are comfortable with the lift in the inventory that is focused on our faster-moving product line.

Total debt increased $249 million to $1.2 billion at year-end. Debt balances were primarily used to fund incremental working capital and share repurchases. Our year-end leverage ratio was 1.67, consistent with our target range of 1.5 to 2x. As expected, our cash flow from operating activities was $366 million representing 90% of net income of $406 million.

Cash flow in 2025 was reduced by the $69 million in deferred tax payments made in the first quarter of 2025 related to those impacted by the hurricanes in 2024. Cash flow from operating activities in 2025 would have been 107% of net income without the deferred tax payment.

We finished 2025 with solid earnings performance. We continue to invest forward into the business with 8 new greenfield locations, 3 acquired sales centers, 10 new Pinch A Penny franchise stores, including 2 new states and enhanced capabilities within our POOL360 ecosystem. We have invested capital in inventory, dividends and increased share repurchases to benefit the business and the shareholders.

Next, we'll move on to our discussion of 2026. Heading into 2025, we faced a challenging macro environment, including higher than historical interest rates, increased cost, continued inflation, impacts from tariffs and uncertainty around when consumers will return to more typical discretionary spending in the pool and irrigation market. While we saw some improvements in the comparative trends, we are still awaiting more positive consumer spending. Our focus has been on improving the business outside of the macro trend, and we accomplished that in 2025 as we were able to realize benefits from pricing and maintenance activity that offset the decline in discretionary spending.

In 2026, we expect our maintenance business to remain resilient, supported by the addition of approximately 60,000 new pools built in 2025. We also anticipate vendor cost increases and corresponding pricing pass-throughs to result in a 1% to 2% pricing benefit.

Given that we have not yet observed a positive inflection in discretionary spending trends, we will continue to monitor these dynamics before projecting the timing of any significant recovery. Overall, we expect 2026 to continue to be a challenging market. However, we anticipate our market position and execution will allow us to achieve low single-digit sales growth.

In 2026, we will have the same number of selling days each quarter and for the full year compared to 2025. Our gross margin for 2026 is projected to be consistent with 2025. We expect ongoing positive contributions from the effective supply chain, pricing strategies and increased private label sales offsetting continued shift to larger customers. At this time, we do not anticipate a significant increase in new pool construction or remodel activity, so product mix is not expected to have a material positive impact on 2026 gross margin.

For 2026, we estimate we will incur approximately $5 million in additional costs to open 5 to 8 new sales centers. As part of our commitment to being an employer of choice, we also plan to increase employee rewards in line with higher earnings. This means that assuming we achieve low single-digit growth revenue, incentive-based compensation expenses are projected to rise by $10 million to $15 million.

As we have proven over the last several years, this incentive compensation reload only occurs in line with improved results and has not yet been normalized through 2025. The management team remains confident in our ability to generate returns from recent investments in technology and infrastructure. These investments have positioned us to proactively manage staffing and facility needs more efficiently across our network.

With low single-digit sales growth, we expect operating margin to improve in 2026, although this improvement will be partially offset by the onetime increase in incentive compensation. We are also seeing positive momentum at the more than 50 new greenfield locations we've opened since 2021. The operating costs associated with new locations added in 2025 will result in higher year-over-year expenses in the first quarter. However, we expect expense growth to moderate as these sites reach scale and efficiency gains are realized throughout the year.

Our continued focus on operational excellence and process optimization provides us with confidence that we can leverage our growing platform, drive productivity and achieve further cost efficiencies as the year progresses. We expect interest expense to approximate $50 million in 2026 based on current rate. Interest expense is typically higher in the first and second quarters due to inventory buildup for the swimming pool season.

For depreciation and amortization, we have included estimates of $55 million to $57 million. In 2026, we do not anticipate any significant changes to our capital allocation. It would include reinvesting roughly 1% to 1.5% of net sales back into the business, and we plan to allocate between $25 million and $50 million toward acquisitions. Subject to approval, dividend payments are expected to use around $200 million in cash and we intend to continue repurchasing shares on an opportunistic basis.

We project that cash flow for 2026 will be aligned with our goal of achieving 100% of net income. Annual tax rate is estimated to be approximately 25% excluding the impacts of ASU. This rate typically runs closer to 25.5% in the first, second and fourth quarters and lower in the third quarter. We do not expect to see a significant benefit from ASU in the first quarter when restricted shares, vest and stock options expire and, therefore, have no projected ASU benefit in our 2026 guidance. We estimate approximately 36.8 million weighted average shares outstanding at the end of the first quarter and 36.9 million for the remainder of the year.

Our guidance for 2026 is a diluted EPS range of $10.85 to $11.15 with no ASU tax benefit. The improvement in earnings at the midpoint would be approximately 2% to 3%. Looking ahead, we remain confident in our strategy to drive performance through steady maintenance activity, disciplined pricing and ongoing operational improvements. While we continue to monitor broader macroeconomic conditions for signs of sustained recovery in discretionary markets, our strong balance sheet positions us well to capitalize on future opportunities. We remain committed to delivering exceptional cash returns to shareholders through a balanced and disciplined approach.

We will now begin the Q&A portion of our call.

[Operator Instructions]. Our first question comes from David Manthey with Baird.

First question on SG&A. Melanie, you pointed out that the low single-digit growth rate that you're guiding to is enough to trigger the incentive comp reset. So I assume that, that -- whatever that is, 25 or 30 basis points of a drag is factored into your earnings guidance. The question is if revenue were to come in flat, let's say, unexpectedly what -- would that imply that you would not trigger the incentive comp reset? I'm trying to get an idea, is this a sliding scale? Is it binary? How should we think about how that layers in or doesn't layer in given various ranges of revenues?

It's definitely a sliding scale. So within kind of that range of low single digits, we would expect different points of recovery. With flat sales, the way that our incentive programs are structured, we would not see any change to the overall incentive compensation from '25 to '26.

And what I would say is that additionally, if sales -- aftermarket lags even more and sales do come in flat, then, frankly, from a cost perspective, we would do other things to be in line with the market.

Okay. Yes. And then on gross margin, you're guiding that flat. I'm just -- as you're going through scenario planning and setting your budgets, what are some factors that you think about where that could come in above or below flat with 2025 some of the key things that you're considering?

That's a good question. It's a broad topic, as you know. So when I think about the drivers of gross margin, certainly, customer mix and product mix are part of that. Our work in pricing optimization, which continues to improve factors into that. I was particularly encouraged with the fourth quarter gross margin expansion. And I think that was driven by a couple of things. It was driven by a great effort by our supply chain teams. I think it was partially driven by the pricing work that the field is doing. I look at product mix. Now on one hand, I would say if renovation and remodel, which continues to outpace new pool construction, frankly. If that continues on the same path that it's on, that will create some lift for us from a product mix perspective.

And then I look at the proprietary or exclusive brands that we have been building over the years and our continued work in those areas as, I would say, tailwinds that would help drive the number. The other side of that is that in a market like we are in, there's always, I would say, competitive pressures, which, again, I don't really get too concerned about because we have them -- I don't expect the competitive pressures to be, frankly, any different in 2026 as they were in 2025. And as you can see by the numbers, I think, the business did a very good job of more than offsetting that.

So yes, they're there, but does it really drive our behavior? No. I mean we did see some deflation on chemicals. But again, in my comment, I mentioned, that's why we're kind of focused on the chemical side that we have some products that are exclusive and proprietary where we don't see that type of headwind that we are also leaning into. So overall, when I look at gross margin, I think the team did a very good job in '25. And I also think we have the same levers plus more to pull in 2026, which will help us out in that area.

Our next question comes from Ryan Merkel with William Blair.

Thanks for all the thoughts on '26. I also wanted to ask on SG&A. When I plug in some of the parameters that you gave, I'm coming up with like 1.5% SG&A growth for '26. Just given some of the things you talked about with the employee rewards and new sales centers. Is that -- am I in the right ballpark there?

Yes. So I would say, if you're thinking about sales growth and expense growth and trying to match those, we would expect that the expense growth would come in slightly less than the sales growth to give us a similar operating income margin, maybe slight leverage for next year.

So we're going to be looking to offset the -- some of that incentive comp recovery overall by looking at utilizing the capacity that we have put into the market. So the term that you made here for 2026 will be capacity absorption. As we've talked about the investments that we've made in technology and the investments that we've made in building out our footprint on the greenfield side, we feel very well positioned with what we've done to date. And so our actions in 2026 will primarily be focused on starting to further enhance the generation of returns that we have on those investments.

Ryan, I'll give you a couple of thoughts in this area. So I think we are particularly focused on the SG&A of the business because I think in the last couple of years, rightfully so, we invested in order to make sure that we maintained our market leadership position in terms of capabilities and customer experience. At the same time, we also have opportunities from -- as Melanie mentioned, now from a capacity absorption perspective, we made some investments.

We're starting to see positive traction on those investments. And I believe that the new facilities as they continue to mature with a great degree of focus from the management team that our operating leverage on those facilities will continue to improve. I mean if you look at our operating margins across the fleet, if you will, we have some -- most of our facilities, frankly, are in fantastic shape. They're doing well. We added new which mixes us down.

But it's the same formula that propelled the fleet to a high average is now being applied to the 50-some-odd new facilities that we've added over the years, and a focus on our lower-performing locations, which you've been covering us for a long time, implies our focus list. They're getting a particularly high level of attention right now. So when I look at SG&A, and I say, will we be in line with the market from a top line perspective, if the market improves, then SG&A will be easier to deal with from a percentage basis. If the market doesn't improve, then we're going to have to do other things to make sure that we stay in line. But we're okay with that because we believe that the investments that we've made over the last couple of years don't need to be repeated and we should start to harvest the benefit.

Got it. Okay. That's very helpful. My second question is just on 1Q. Are you assuming the first quarter is also up low single digits like the full year? Just want to just see if there's any cadence things we should be thinking of and there is a bit of weather in 1Q, I'm not sure if that had an impact or not. And then could you also comment on chemical prices, will those be down in the first quarter?

So I'll take the first one on how 1Q is performing. I think -- so as you know, 1Q is our least significant quarter. That's not to diminish that the contribution to the business. I mean when I look at first quarter, we're not -- we're basically halfway through it. But March is bigger than January, obviously.

So at this point, I would tell you that I am encouraged with what we've seen. Too soon for me to tell you that hey, we're going to blow the doors off of first quarter. But what I will say is that if we have a normal weather pattern for March and the rest of this month, then I think our expectations for the first quarter will be in line.

And then your second question about chemicals. A little too soon to tell because remember, in the first quarter, this is when there's some noise in the system with chemical pricing. I can tell you, I'm not particularly concerned about deflation at this point on chemicals. I think things are fairly steady. So I don't -- I'm not at this point spending a lot of time thinking that chem prices are going to get worse. But what we are focused on is getting customers introduced to and using the proprietary chemicals where we have a differentiated value proposition, which makes us less susceptible to swings in the market on anything but pure commodities.

Our next question comes from David MacGregor with Longbow Research.

Yes. I guess just a question on store ops. And what's the opportunity? You made passing reference a moment ago to the focus list, but just what is the opportunity to improve the profitability of the bottom performing quintile stores? And what are some of the actions that you're taking there? Maybe you could talk about that? And I guess related to that, just given the near-term market outlook, does it make sense to begin consolidating some of these locations and just achieve better 4-wall economics?

Yes. I'll take that, and then Melanie can chime in. So part of our work at the focus list level, which is our bottom-performing branches, and this is nothing new for POOLCORP, but the branches that fall into the focus list, which I would argue what is a focus list branch for us would be considered by most others to be a very well-performing branch, because our standard is pretty high on what we consider a focus branch.

I mean the leverage that you have there are a couple. One, obviously, the biggest lever that you have is sales growth. Are you growing -- are we growing sales? Are we becoming more important, more relevant to the customers. And that's done with creating a best-in-class customer experience and frankly, customer engagement. So from a lever perspective, the biggest one we have for the focus branches is just that.

Then there's the operational execution side of that. So the teams are focused on exactly what we do, how we do it, how efficient we are in doing that and making sure that we're utilizing all of the competitive advantages that we have to give us the most efficient cost to serve those customers.

Your last comment as it relates to is there some opportunity for consolidation? And the answer is maybe. So when we look at each individual market, we look at our footprint, and there are a couple of markets where I would say, as we have expanded our capabilities in some areas, we may have opportunities to consolidate some of those, if we don't see the market, an individual particular market continuing to grow and expand, those would be ones where we look at how else can we most efficiently serve the market without letting down our customers and ceding any share.

So I mean, you've known us for a while, so this is nothing new. This is what we do. We've been focused the last couple of years on continuing to build out the network and making sure we were where the pools were going to be built and where our customers needed us to be. We've added capabilities as it relates to technology and supply chain, which allow us to be, frankly, more efficient. And now we're starting to see the gains from that. To put an opportunity to size it, if you will.

I mean, when I look at the -- our focus list branches, I would just say that when I look at the overall operating margin improvement, I think, there's plenty of opportunity to work there to achieve our goals, really kind of independent of the market improving. So when I look at our operating margin improvement and expansion, yes, would the industry growing make that easier, yes, but it still wouldn't mean that we wouldn't do what we're doing on focus list branches to make them more profitable and contribute more to the business.

Got it. My second question, really just with respect to kind of the longer-term growth algorithm, and you've included within that growth of 2% to 3% above the market, mostly through store openings and private label, I guess, a little bit of acquisitions. I guess how are you thinking about your ability to achieve that above market growth in 2026?

Yes. I think part of it is there is still plenty of opportunity. When I look at our market share across the fleet, we have plenty of markets that are still below the median. So I think just improving our customer engagement, frankly, our customer experience and our operational efficiency helps.

I also think that there is an opportunity from a demand creation perspective because, pragmatically, when I look at the market overall and the products that are still being sold into the market, there is still a more than significant opportunity to expand the TAM, if you will, by selling the more technologically advanced products, which are ultimately very, very good for the homeowner. And I think our job is to help expand the adoption of those.

So you're going to see at the Investor Day presentation, something we call the [ Prozone ], which is designed to do just that. To teach the builders and the service professionals when they come into the branch to be able to see the full range of products, to be able to see the benefits from the more innovative and technologically advanced products that have more full-feature automation and are, frankly, more efficient for the homeowner.

So rather than take a more passive approach on that, we're going to take a much more active approach on that in the showrooms to make sure our customers understand all of those new products and what benefits they provide either them as a servicer or for hopefully -- so that they can explain to the homeowner, I should say.

Our next question comes from Susan Maklari with Goldman Sachs.

My first question is on the gross margin. Just thinking about the path for that as we look over the year. Can you talk about what that inventory build that you made in the fourth quarter will mean for profitability? And how we should be thinking about that relative to the guide for the pricing to be up 1 to 2 points this year?

Yes. So one thing, so we do expect that we will see some continued pricing benefits from the investments that we've made in inventory. We would expect that, certainly, we would see that in first quarter. As a reminder, when you look back from a comparable standpoint for 2025, we did have that mid-season price increase in 2025.

So starting kind of May 4, there were some benefits from that mid-season price increase, which at this point in time, we wouldn't anticipate would occur again in 2026. So I would say that we would see slightly better margins in first quarter. The remaining of the quarters would be relatively comparable with fourth quarter because it's so -- is a smaller portion of the year, we may not see as many benefits.

The only thing that we've seen to date is we have seen a second wave of price increases on certain products for salt cells. But when we look at it kind of consolidated wise, we don't think that will have a significant impact on margins overall.

Susan, this is Pete. Let me add just a little bit to that, if I could. I think the team did a very good job of exercising good financial judgment with the investment in inventory. And I think they were very surgical about it. So when we allocate capital to something, one of the things that is a hallmark of the company is that we have been very judicious allocators of capital, whether that is investment in long term or whether that is investment in working capital.

So I think the team did a very good job and was very surgical about making investments in areas that will help us through the 2026 season. Now obviously, given the amount of inventory that we have and what our COGS are on a full year basis, that we will burn through most of that benefit by mid-season, and then, of course, we will be reordering. But I think we feel very good about realizing benefits, but they'll be more weighted to the beginning of the year than the end of the year, subject to what happens in the industry from a pricing perspective.

Yes. Okay. And then I wanted to go back to thinking about the growth for the business over time. Can you talk about how you're thinking of organic growth, given the investments that you've made in the last several years relative to the inorganic growth opportunity that's out there. Are we really sort of shifting now to this period where it's going to be driven by your initiative, a lot of these efforts that you've implemented in the business, whereas the inorganic piece will just inherently become just a smaller and smaller part of that algorithm. Just any thoughts around that and what that would mean for capital allocation?

Sure. I would tell you that from an organic growth perspective and what gives us confidence in the long-term growth algorithm for the business is that -- we believe that the product that -- the industry that we serve and the product that we primarily sell either through new pool construction or remodel and renovation is still highly desirable. And we've been talking about -- we're kind of bumping along the bottom.

There was a slight drop in new pool construction in 2025. I can't tell you that I think that, that was driven by any wild change in consumer sentiment. I think it's more a function of certain geographies and the housing market per se. So when I look at our opportunity to grow and I look at our market share, and I look at that on a market-by-market basis, I would tell you that we have opportunity to continue to grow even if the market continues to stay towards the bottom.

I would also tell you that there's a couple of things that are going to -- we're going to start to see benefit from as it relates to equipment. So when the industry switched to -- from single-speed motors to variable speed motors, they inherently lasted longer. But now we're starting to get close to the period where when we started selling a lot of single-speed motors or single speed pumps to variable speed pumps that they will start coming into their replacement cycle, number one.

Number two, I still believe that there is a significant opportunity to modernize the pad. If I looked across the -- we talked to many, many customers. We talk about what they're seeing in the backyard when they go into these backyards and they look, what we were seeing over and over again was ultramodern pads, fully adopted, everything that is available to the consumer, I would say, okay, so now we're more in a replacement cycle.

But today, what I would say is there is still an outsized opportunity to modernize the pads with the new equipment. Now part of this demand creation is incumbent upon us, I believe, in order to teach the servicers, right, and get word out, so to speak, through marketing programs and demand creation in conjunction with our OEMs that says, "Hey, you can improve your customer experience in the backyard if you adopt and use these new products versus just replacing what's there."

So I think there is still an opportunity. The installed base is going to continue to grow. I think that there is pent-up demand on renovation and remodel, and we're starting to see some of that realized as evidenced by the building material sales increasing and the fact that we have -- I believe we've taken share in the new construction area for those as well.

And then lastly, your question on inorganic growth, I think that there are still opportunities for inorganic growth out there. And I think the team is very focused in that area as well as just one of our long-term growth levers. And I don't know that anybody in the industry is any better positioned to do that than POOLCORP.

Our next question comes from Scott Schneeberger with Oppenheimer.

It's Daniel on for Scott. Could you please discuss the key factors that would put you at the low end versus the high end of the EPS guidance range?

Yes, the range is primarily going to vary depending upon overall market conditions and the resulting sales growth from that standpoint.

Got it. And as far as the assumptions on new pool to be flat year-on-year as well as renovation and remodel flat to slightly up. Could you speak to the -- what you're hearing from your customers regarding backlog and how confident you are in those projections?

Yes. I'll take that. So we've just come out of our show season. So January, there's a lot of shows. We spent a lot of time with dealers in January and frankly early February even as recent as this week. So I will tell you that the level of optimism from the customers right now is pretty good. I don't know that -- I've talked to many customers that say we're going to build just as many pools as we built last year and the phones are ringing. So we feel comfortable in that assessment. Is that as many pools as they built during the peak? Absolutely not.

But I would tell you that the general sentiment on new pool construction is that based on the dealers we have spoken to, which is a sample size of the total, is actually pretty good. So it's not a doom and gloom. The phone is not ringing. It's basically, yes, I think we'll build at least as many pools as we built last year with many dealers saying that, hey, you know what, we're actually optimistic.

But saying that they're optimistic in February and actually having those contracts come to realization, during the season are two different things. But I will tell you, it feels much better to me that the dealers are saying, "Hey, I'm going to build at least as many pools that I built last year," and there's many of them that are optimistic. And then like every sample, right, you have opposite ends of the spectrum.

You have people at the high end that they would tell you, "Hey, business is great. I'm turning customers away. I have -- I'm going to build as many pools as I can this year, and I'm taking orders into next year." And at the low end, you have people that would be struggling. But by and large, I would say, the industry confidence level is more encouraging than not.

Our next question comes from Trey Grooms with Stephens.

Melanie, this is Ethan on for Trey. I wanted to dive deeper, maybe digging into more of a market-by-market look. So directionally, what are you seeing on the new pool or broader discretionary side? From a market-by-market standpoint, some of these more challenged markets on the new residential construction side like Florida and Texas, maybe starting to show signs of a potential trend improvement? I know you called out in the prepared remarks, improving trends in Texas in the back half of 2025. Obviously, these are important markets on the new pool side. So any more color on market specifics would be really helpful.

Sure. The information coming out of Florida right now is still encouraging. As I mentioned, even with the storm issues that we had in Florida, and housing prices and insurance and costs and everything else in Florida. If you do a 2-year stack on Florida, in the fourth quarter, they were still up 2%. So again, very encouraging for me. Builders in Florida, I really think it depends on where you are.

So for instance, if you're in -- there's a lot of people moving into South Florida, into Miami. Miami is -- that market is very good. But it runs the spectrum, if you will. But overall, Florida is a cornerstone market for us. I think very soon, will be the largest market that we have in terms of the installed base, and it's still a destination for homeowners. So I'm encouraged with that.

Texas is the one that was, I think, surprising for a lot of people. The slowdown that we saw in Texas, but it's also a bit bifurcated too, because it didn't -- it wasn't universal in let's call it, DFW in Austin, San Antonio and Houston. They all move kind of at different rates. We're starting to see the Dallas market improve, the Austin market improved. Houston lags a little bit, but the near-term commentary on Houston is that there is some optimism on the new build side.

Arizona and California, Arizona is -- was encouraging. And if you remember during the -- when the [ pools ] really started to die out, Arizona was one of the first ones to drop. They have -- they seem to have firmed up. And California it's okay. I don't look for a big change in California. In my mind, California is much more of a renovation market than it is going to be a new pool construction market.

Got it. That's super helpful color. And second question, just putting a finer point on an earlier question on the top line cadence. It sounds like 1Q trending pretty well, but it's still early. But just wanted to clarify, was hurricane repair activity still a major contributor to the 1Q '25, perhaps to a lesser degree, than the 4Q, but perhaps still enough to call out because if 1Q is trending well in spite of this comp dynamic, obviously, that would be a positive.

And then maybe any thoughts on first half versus second half weighted top line profile relative to broader new res expectations, which at this point, appear to be skewed more towards a modest second half uptick.

Yes. We -- you're correct in your assumption that fourth quarter was a bigger lift, fourth quarter of '24 storm related. They were still working into first quarter. So there was still some work that most of which is repeat has been finished. The only exception to that would be the areas where the houses were completely destroyed and they had to get permitted and built to do house and the pools come last. So there's still some of that.

But by and large, I would say, the storm work or anything, but complete destruction is certainly done by now. Most of it was done in the fourth quarter and some lagging. So when I look at first quarter, it's not like we had a huge comp to overcome. There are some. But again, that makes our results even more encouraging from a firmness of the market perspective.

And then your comment on second half -- first half, second half, it's really -- frankly, it's just too early to say. There's so many factors in there that can affect the discretionary, so I'm talking about new pool construction and renovation and remodel. But rest assured that the majority of our business is driven from the maintenance and repair and I think that there is more than ample opportunity. And quite frankly, I think the business performs well in that area, and we've also added capabilities, which should allow us to continue to take share.

Our next question comes from Garik Shmois with Loop Capital.

I'm wondering if you could update us on what you're assuming for new sales center openings in 2026. And just given the more muted demand environment, have your expectations on the ROI on the new sales centers changed at all versus more normalized demand periods?

Yes. So when I look at the number of locations, I mean, Melanie gave a range of 5 to 8. I would tell you, I don't know that it will be more than 8. I mean, it could be a scenario, I guess, where it could be, but it's highly unlikely at this point based on the capacity investments that we have already made and the footprint that we have.

I think our focus is more about execution this year and driving growth in the facilities that we have. As you know, we have a very disciplined process that goes with every new facility open. There is a pro forma. There's a budget. That pro forma and budget are carried forward. So the facility that we've opened in the last couple of years, the operating expectations and budgets associated with them were not adjusted.

I looked at some of the facilities that we would have opened in 2022 when things were -- when there was a lot more new pool construction. If I look at some of those, we had to go back and say, well, maybe our expectation on new pool construction growth was a little bit too aggressive. But basically anything in the last couple of years, the number is the number.

So I think the team is really focused on execution and realizing what the commitments were in the pro formas that were submitted to fund those. And when I look at new ones, so I look at the anything that we may do this year. I mean we -- as I mentioned in my comments, I think we've kind of sharpened our expectations on return on investment and making sure that when we go out and do a branch, I mean we're going to open new branches again in 2026 without a doubt.

Are we going to open as many? No, we're not going to open as many. Will there be a lot of attention paid to the ones that we opened for the last couple of years to make sure that we're realizing benefit on those? Absolutely. So the amount of attention and scrutiny on new locations right now is and should be pretty high.

Okay. That makes sense. Thanks for helping with that. And follow-up question is just on Horizon. It's a smaller part of your business now, but just curious as to the deceleration in growth or the negative 5 in Q4? And also, what are you assuming for 2026?

Yes. I mean the Horizon business is tied mostly to new construction. The biggest product line that we have in the Horizon business is irrigation, which, as you know, most of that goes in when the housing business or when the house is constructed. There's some that happens around big, large renovation and there's also a commercial portion of the business.

When I look at the overall results for the full year, I would tell you that they're not terrible. I look at -- they didn't have the same benefit of price that we had in other parts of the business. I think we have a limited footprint. I think that we have an opportunity to continue to improve from an execution perspective with Horizon. We have a focus list for Horizon just like we do the rest of the business.

So do I think that we're going to see outsized growth for Horizon? I do not, but my expectations were there, execution and return on capital for them, they don't get any break as compared to from an expectation perspective, and are under the same scrutiny as the rest of the business as it relates to performance.

I mean the irrigation market is -- I would tell you, it's not booming. The maintenance business is good, similar to what you see -- what we see in the pool side. And I think the business has been over the last couple of years trying to focus more attention and gain a better foothold in the maintenance and less focus on just the new construction piece.

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

Just like to thank you all for your interest in POOLCORP, and we look forward to updating you on April 23 when we will announce our first quarter 2026 results. Have a fantastic day.

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

Good day, and welcome to the POOLCORP Third Quarter 2025 Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Melanie Hart, Senior Vice President and Chief Financial Officer. Please go ahead.

Welcome, everyone, to our third quarter 2025 earnings conference call. During today's call, our discussion, comments and responses to questions may include forward-looking statements. including management's outlook for 2025 and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and thereabouts 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 any non-GAAP financial measures included in our press release will be posted to 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.

We will begin today's call with comments from Peter Arvan, our President and CEO.

Thank you, Melanie, and good morning, everyone. I am excited to share that our teams have maintained the momentum we established in the second quarter, delivering another solid performance in Q3. Thanks to their hard work and dedication. We continue to drive growth with top line sales up 1% and gross margin expansion of 50 basis points. This was fueled by consistent maintenance activity and encouraging signs of stabilization in both new pool construction and remodel. I'm also pleased to see that we achieved year-over-year growth in building materials for the first time since Q3 of 2022 driven by improvements in remodel activity and share gain.

As you know, we have continued innovating and investing in our POOL360 applications. And I'm pleased to say that our adoption rate of these industry-leading tools continues to grow as our customers realize their full potential. Building on these successes, we recently shared our strategic road map for the next year and beyond with the entire management team at our international sales conference, and their excitement was palpable. The innovative products and ambitious growth plans we unveiled are already gathering a buzz and our teams are ready to hit the ground running as new initiatives start rolling out immediately.

We're focused on key areas of our business where we know we can win. This forward-looking approach not only positions us to close 2025 with momentum, but also lays a strong foundation for an even more dynamic 2026. Looking at the macroeconomic environment, uncertainty around tariffs and elevated borrowing rates continue to weigh on consumer sentiment and limit discretionary demand, particularly for pool projects that require financing. While we observed overall permit data down mid-single digits year-over-year through August with considerable variability across the country, recent easing of interest rate policy offers a promising path forward towards relief.

For clarity here, we believe it will take further reductions to bring borrowing rates to a level that will motivate potential entry-level pool owners to build. Despite these challenges, however, our new pool construction sales have outperformed industry permit data indicating continuous share expansion. On the remodel side, consumers remain focused on essential repairs and targeted improvements rather than large-scale upgrades. In response, our teams are leveraging our robust product portfolio, our strong private label offerings and enhanced technology while partnering with vendors to deliver innovative solutions and drive future growth. Overall, I am more than confident in our team's ability to adapt, execute and position us for long-term success.

Now I will walk through our third quarter results. We reported $1.5 billion in net sales, up 1%, building on the growth we generated during peak season. Maintenance product sales performed well, particularly parts and private label chemical volumes. As mentioned, we saw growth in building materials used in new construction and remodel projects. mid-season price increases created a slight lift on top line, but were diluted some by chemical deflation. Related to our geographic markets, Florida produced 1% growth with Texas flat and California and Arizona each down 3%.

Florida remained steady across our product categories and leads the country with new pools being built in 2025. And while flat, Texas showed sequential improvement compared to recent quarters. New pool builds in Texas remain pressured, but continued to improve throughout the year and maintenance-related product sales showed resilience. In California, we see continued pressure on new pool build, particularly in areas affected by recent wildfires. Arizona showed some deceleration in permits compared to earlier this year, but we believe this may be related to timing versus reversion, while maintenance held up for both California and Arizona during the quarter.

In Europe, net sales decreased 1% for the quarter in local currency and increased 6% in U.S. dollar. Similar to last quarter, we saw growth in the southern countries while impacts from political strain and related consumer uncertainty pressured sales in France. For Horizon, net sales increased 3% in the quarter, supported by solid maintenance growth and improvement in sales for outdoor living products like landscape lighting, hardscapes and synthetic turf.

Shifting to product categories. Total chemical sales declined 4% this quarter, reflecting some additional deflation. Overall, I consider the demand for chemicals and our performance to be stable. Our private label offerings generated volume growth during the quarter, showing that our teams are being successful in showing the power of our brands and the innovative products that we offer. With our new product showroom displays and marketing support, our customers continue to see strength of our value proposition, and this bodes well for the upcoming selling season.

Building Materials sales increased 4%, again driven by our expansive private label offering and elevated customer experience. We recently rebranded NPT, formerly National Pool Tile to National Pool trends to align our brand name and marketing efforts to highlight our many offerings. The new name brings greater clarity to our value proposition, showing NPT as our customers' partner for complete backyard transformations using our tile pool finish decking to name a few. Our premier product offering, product sales specialists and consumer showrooms offer a one-of-a-kind customer experience, and it is shown in our results. Equipment sales, which excludes cleaners increased 4% during the quarter, mostly reflecting benefit from price and steady replacement volume for critical components.

Turning to end markets. Our commercial sales increased 2% in the third quarter, showing steady momentum from a strategic focus area. We continue to make investments in our team during the quarter and created greater connections to key designers and builders to better support commercial aquatic projects. Sales to our independent retail customers declined 3% and chemical deflation created mild headwinds here, while DIY consumers continue to be hesitant with discretionary purchases like cleaners and above-ground pools, spas and some equipment.

For our PinchoPenney franchise group, represented -- sales represented our franchisee sales to their end customers declined 1% during the quarter. Also of note, we have not seen any meaningful shift between do-it-for-me and do-it-yourself customers. For covering progress on our initiatives, I want to briefly highlight gross margin ahead of Melanie's prepared remarks. I'm extremely pleased with the team's effort to expand gross margin by 50 basis points this quarter. Although the operating environment remains challenging, our teams continue to deliver by making strategic and efficient supply chain choices refining our network and applying disciplined buying and sales strategies, all while providing an unparalleled customer experience.

A key investment area and differential year for POOLCORP is our technology suite. POOL360 is the largest and most comprehensive set of customer-facing tools in the industry and our adoption rate continues to grow. For the quarter, sales through the tool represented an all-time high of 17% of our total sales for the third quarter, which demonstrates the customers' desire for technology that creates value. While still in the early stages, this growth shows the output of our technology investment over the past few years. Our targeted spend in our digital ecosystem is driving technology adoption and fueling not only growth in private label chemicals but also service and traditional B2B offerings.

Our deliberate investments in innovation and enhancements of our tools have been key drivers of Pool 360's impressive sales results. These advancements empower us to support higher sales efficiently while creating capacity for future growth. Increased POOL360 transaction adoption delivers significant benefits, not only strengthening our margins, but also elevating the customer experience, accelerating private label and exclusive product growth and enhancing our long-term competitive advantage. We completed 1 acquisition during the quarter, adding 2 locations in key markets. Additionally, we opened 1 greenfield bringing our year-to-date opening to 6 sales centers we remain on track for additional openings in the fourth quarter to reach 8 to 10 new sales centers for the quarter, adding to our Arizona presence and bringing the pinch of Penney locations to 303 franchise stores.

Touching on guidance. As we exit the cool season and enter the fourth quarter, we expect full year sales performance to be relatively flat to up slightly. We are confirming our diluted EPS guidance for the year to a range of $10.81 to $11.31 updated to reflect the $0.11 in realized ASU benefits year-to-date. At POOLCORP, our relentless pursuit of continuous improvement is driving us to lead the way on innovation across products and processes. Recognizing the industry's need for fresh ideas and solutions, we are making a new and intentional push to discover, shape and bring new innovation to market for our customers and as the strongest channel to market for our supplier partners by identifying emerging opportunities and thoughtfully [Audio Gap] industry while growing sales, expand margins and generate strong cash flows and delivering exceptional returns for our shareholders.

I will now turn the call over to Melanie Hart, our Senior Vice President and Chief Financial Officer for her detailed commentary. Melanie?

Thank you, Pete. For the third quarter, we saw year-over-year improvement in sales. driven by increased maintenance on the installed base, favorable pricing and market share gains, while noting that the impact from lower discretionary spend levels was less of a drag on a comparable basis, compared to the third quarter of prior year.

During the quarter, we realized a 3% benefit from pricing, reflecting the full quarter impact of price realization on the mid-season vendor price increases implemented in April and May. Trichlor selling prices continue to be impacted by the lower level of spend in the industry and somewhat offset our positive price realization in the quarter. Throughout the quarter, in certain markets, we saw some positive months where there were permit increases year-over-year from the prior period. However, in total, year-to-date permits remained below last year's level.

Our estimate of new pool construction remained flat to slightly down, consistent with our expectations included in last quarter. Overall, the lower level of discretionary spend had a 2% impact on our sales for the quarter. similar to the impact we saw in the second quarter, with both Horizon and Europe having positive sales growth in the quarter. As Pete mentioned, we added 2 new sales centers through acquisition during the quarter, as well as on newly acquired location in October. These additions did not have a significant impact on our base business results, so we have not reported base business performance separately for the quarter.

Our gross margin in third quarter was 29.6%, representing a 50 basis point improvement over prior year. This improvement was driven by favorable pricing, successful supply chain initiatives and an increase in sales of our expanded private label offering. All areas that we continue to focus on and excel in despite the persistent impact of the macro environment and lower levels of consumer discretionary spend. The sequential change from the second quarter margin is consistent with our typical seasonal trends.

Operating expenses increased 5%, slightly ahead of the quarter-over-quarter changes we reported during the first half of the year. This increase includes the impact for our cumulative new greenfield locations that were not open in both periods. Also, as Steve described, the positive results we have seen with our expanded POOL360 initiatives we accelerated some incremental technology costs during the quarter because we believe that this further differentiates us from our competition and will yield better sales and operating leverage in the future.

Operating income improved $2 million over prior year and was $178 million for the quarter. Interest expense of $12 million continues to compare favorably to prior year. Our effective tax rate was 23.5% for the quarter compared to 23.4% in prior year. ASU benefits contributed $0.01 in both periods presented. We generated diluted earnings per share of $3.40, up 4% from the $3.27 we realized in the third quarter of last year.

Next, I'll discuss our balance sheet, cash flows and capital allocation. We finished September with inventory balances of $1.2 billion, up 4%, our lowest level of inventory we expect during the year as we exit the season. The increase includes product inflation and also includes stocking for our 9 new locations, including Beta greenfields and the acquisition completed during the quarter. Total debt of $1.1 billion resulted in a leverage of [ 1.58 ] remaining at the low end of our stated target range of 1.5 to 2x. We generated $286 million in cash flow from operations year-to-date, compared to $487 million in the prior year. The decrease was primarily due to higher tax payments and investments in working capital. We expect to achieve our current year target of converting 90% to 100% of net income into cash flow from operations, which includes a deferred tax payment from prior year.

We continue to execute on our share repurchases opportunistically under the authorization provided by the Board. We have completed $164 million of share repurchases through the third quarter with an additional $20 million through our earnings call ahead of $159 million through third quarter of last year. We have $493 million remaining under our share repurchase authorization. -- in out the year, we continue to expect full year sales to be relatively flat compared to the prior year, with 1 less selling day. This outlook reflects a modest decline in discretionary spending compared to last year. offset by positive impact from maintenance growth and pricing realization. In the prior year, we've ended 1% in the fourth quarter from weather-related hurricane activity, which at this time is not expected to reoccur in the fourth quarter.

Our full year gross margin rate is forecasted to be similar to the prior year, which, on an ongoing basis reflects improvement as the prior year rate included a nonrecurring import tax benefit recorded in first quarter of prior year. This would include some improvement on a year-over-year basis in gross margins in the fourth quarter. While customer mix remains less favorable, these impacts are being offset by growth in private label sales ongoing supply chain improvements and pricing benefits. Our estimate for full year operating expenses remain in line with last quarter, with an expected annual increase over prior year of approximately 3%.

This reflects productivity improvements, offsetting inflationary cost pressures with increases attributable to our investments in greenfield locations and our focus on technology initiatives. Forecast for interest expense estimated tax rate and share count for the full year are included in our quarterly earnings presentation posted on our website. There have been no significant changes to these estimates since last quarter, with interest expense updated to include share repurchase activity. As we typically see, our third quarter tax rate is lower than the annual rate due to discrete timing differences, and we expect our fourth quarter rate to be in line with the first and second quarter rate.

We are confirming our diluted EPS range of $10.81 to $11.31 including $0.11 in ASU tax benefits realized year-to-date, of which we reported an additional $0.01 in third quarter that is now included in the range. I am pleased with our team's ability to perform and remain focused on our internal strategic initiatives, which have delivered tangible results year-to-date. This highlights the strength of our team and the significant value that industry-specific talent contributes across the outdoor living value chain. While we continue to manage the business effectively, we are also investing in our key strategic growth areas to create long-term value for our shareholders.

I will now turn the call over to the operator to begin our Q&A session.

[Operator Instructions] The first question comes from Susan Maklari with Goldman Sachs.

Thank you. Good morning, everyone. My first question is diving in a bit on the comments you made around seeing some early signs of stabilization which is encouraging, given what we've seen in housing in the consumer as we think about this summer and into the fall. Can you talk a bit more about what is driving that and how you're thinking about the trends that you're seeing on the ground as we exit this year and maybe even into early 2026.

Yes. As I mentioned, the permit data, when you look at that, which again only represents a portion of the market, is very sporadic. And so there isn't a consistent theme. But when you look at them from geography to geography, but I guess when we look at them in totality and then combine that with our comments that we're getting from our builder customers and remodel customers, I would tell you that the activity level is -- seems to have firmed up, and we are encouraged as evidenced by our growth in Building material sales in the quarter, which it's been a long time since we've seen that.

So I would say that overall, the comments tend to be more positive now I think it's going to take further interest rate cuts to really drive the entry-level pool buyer to jump in. But I think that overall, the consumer sentiment on new construction and large renovation projects seems to be fairly consistent and more optimistic than it was.

Okay. That's good to hear. And then my second question is on innovation side, you mentioned that you accelerated some spend in the summer. It sounds like you've got some really good initiatives that are coming through the business. Can you talk about how you're thinking of the investments and the trends that we should expect into the fall and year-end? And then what that can mean for your ability to outgrow the market, even if things do stay relatively more challenging for next year or the next several years?

Sure. So I'm going to break this down into a couple of areas. I'll talk about technology as it relates to POOLCORP's technology, and then I'll talk about technology related to the market. all of our investments in technology from a POOLCORP perspective are really designed to enhance the customer experience, to give them greater access, greater convenience and allow them to be more productive.

I look at our suite of tools, whether it's the POOL360 service, which allows our service customers to essentially operate their business, invoice, market, schedule, do everything with the tool which allows them to be more productive. It allows them access to their catalog of products in POOL360 allows them to schedule pickups for products, have them delivered and frankly, have access to the entire network or whether you're talking about our industry-leading water test technology that we provide for our independent retailers that are selling our proprietary pool chemicals.

Again, great product very good reviews for the homeowners and we've also extended that into an at-home app. So you can either bring the water test -- or bring your water to the store for testing or you can buy our proprietary Regal and easy chlortestrips take them home and then use our -- again, our proprietary app test the water and get the same recipe, if you will, for correcting any water chemistry in balances. So we look at our standard B2B tool, which is the -- where the preponderance of our traffic is and said, what can we do in order to enhance the customer experience to make that tool easier to use and the team has been relentless on that, which again provides more convenience, more information, more access for our dealers.

And then the last thing that we have recently started launching is the -- an app that our counter people can use in our branches outside in the yard so that our customers don't even have to come inside. So if they're just getting product that is outside, they'll be met outside with a tablet and they can tap to pay. If they don't have an act they can tap to pay or swipe a credit card out in the yard, which again gets them back to work. So feel really, really good about the technology suite that we're rolling out for our customers. And I think that allows us to provide more convenience to our customers, a better experience and allows them to grow their business faster.

And those all feed into our marketing tools, too, which our consumer-facing marketing tools are designed to help our customers grow. So a plethora of tools available and the adoption rate continues to grow. So very, very pleased with that. The other side of the technology that I mentioned has to do with product technology for the industry. I think our industry needs innovation and new product technology in order to grow I think customers are craving technology, convenience and value as it relates to those new products, which will give them reasons to invest in their backyard, in their swimming pool to make the ownership of a pool, whether you're talking about managing the water chemistry or managing your equipment pad, easier, more convenient and at a price point that is available for everybody. So we're very excited about the -- how technology will continue to impact this business and POOLCORP's role in driving that.

The next question comes from David McGregor with Longbow Research.

I wanted to start by just I just wanted to start by going back to the graphic in your deck where you referenced customer risk or customer mix, I guess. And just -- I presume we're talking about larger consolidated contractors and the kind of growing presence in the remodel work. But just thinking about longer-term margin implications here, and what are the levers that you have available to offset against that impact?

I think what we -- what it means is that we continue to see consolidation at the customer level. And when you have consolidation at the customer level, they're looking for more tools and more convenience in order to help them be more effective. So for us, I actually think it's a big opportunity because nobody has the technology suite that we have today in order to integrate with them. So our systems are very flexible. It allows us to integrate with them. It allows some of the customers are choosing to use our software to operate their businesses. and some of them are just choosing to integrate with us. So I actually think that it creates a competitive advantage for us, on 1 hand, it actually it makes them easier to deal with because we get more advanced notice, which allows us to be more productive when we're handling their orders, and it also gives them access to information on a self-service basis versus having to call and make inquiries, which again is -- just drives our cost to serve. So very comfortable with our ability to leverage our technology suite in order to help the larger companies be more efficient and grow their business.

That makes sense. And just as a follow-up, I want to go back to the 4% growth on equipment and how much of that would have been just kind of parts going into maintenance and repair versus equipment sales in the remodel segment?

I think most of it right now is -- I mean, of course, every new pool gets a set of equipment a portion of the renovation and remodel we'll get new equipment. But the vast majority of the products that we sell are related to 1 of the critical components on the pool failed and had to be replaced, whether it was a pump or whether it was a heater or filter like the vast majority of our equipment sales, and it's -- frankly, it's always been this way, are for the replacement business for failed components.

The next question comes from David Manthey with Baird.

First question on Chemicals. I was surprised that the weakness there, I think it's been recently flat to moderate growth. And could you talk about inflation, deflation broken down by chemicals, building materials equipment. And I'm just wondering, is that chemicals? Is that something that happened recently? It seems like a slight change in trend versus what we've been seeing lately.

Yes. I'll take that. Dave, I think the way -- here's the way I think about chemicals. I don't know that there's been any trend. I think we've mentioned on the last couple of calls that there's been some deflation on trichlor. Now remember, we break chemicals down into 3 buckets, right? There's the sanitizer, then there's balancers and then their specialty. So the most deflation that we have seen, and again, I wouldn't put it in the category of significant, I would just say that there has been some deflation is really in the santiser category. I don't think it should be -- I don't look at that in alarm.

In fact, in my comments, I looked at our overall chemical business, and I said, you know what, our sales out the door on chemicals I would consider a fairly normal because you have to remember that it's -- our sales of chemicals goes into our service professionals and into our retail stores. So when you're within a few percent of the total I don't really look at that as an alarming trend one way or the other because that could be absorbed in just inventory on people's trucks when they actually bought an inventory in the stores. So overall, I would say there's been slight pressure in sanitizers, right, and sanitizers in shock. But I would say that the rest of the business, balancers and the rest of the specialty products are actually holding up holding up just fine. So nothing really alarming or noteworthy there. the rest of the inflation that you mentioned, building materials, I would say, not a tremendous amount of inflation there. I would call that slight -- and then on the equipment side, the equipment guys are all out with their pricing for the upcoming season. And I would say that, that's fairly consistent to what we have seen over the last couple of years.

Okay. That's helpful. On looking out to next year, I'm not asking for guidance. I'm just thinking about how the model works here. And I think typically, you talk about if you're growing normal kind of [ 6% to 9% ] in that growth algorithm, you often have talked about keeping SG&A growth to 60% to 80% of the top line growth rate -- and I know there's also some costs that creep back in when you start reinstating bonuses incentive comp and that sort of thing. So I just want to how the model works mathematically, when we think about year 1 of mid-single-digit growth, let's say, do we see that kind of normal 60% to 80% growth rate in SG&A leverage? Or is it slightly higher than that in year 1 and then we start to hit that leverage as we go forward.

Yes. So the model stays intact. We will see some upfront kind of recovery of expenses. So incentive compensation, as you mentioned, would be the 1 area. But of course, that would only track as far as our growth track. And then outside of that, what we've talked about from an expense-based standpoint, is we've managed variable expenses. And so when you think about kind of volume increases coming back, we will have some add backs as it relates to drivers and warehouse personnel, but that will be kind of limited from that standpoint because we've maintained all of our professional staffing, our sales center managers and -- so initially, there will be those volume-related expenses as well as the incentive compensation that would come back in with the sales growth.

So Dave, this is Pete. Really nothing new to report in that area. It's the same as we always have done. I guess what is noteworthy though is we continue to invest in the business for the long term. So we continue to increase the number of sales centers that we have in the markets that we believe are either at capacity now. or poised for additional growth and opportunity. And we also continue to invest in technology because we are convinced that it's something that customers really want and value, -- it is an area that allows us to differentiate POOLCORP in an area that customers have been very happy with the investments that we've made. Now again, those investments are -- none of those are short term. Those are all long-term investments that we believe we make. They become foundational and become part of our operating system, become part of the customer's operating system. And the leverage on those will continue to climb in the out years.

The next question comes from Ryan Merkel with William Blair.

I wanted to start with the commodity pricing down 1 in the chart. How much is Tricor down year-over-year? And then are you also seeing deflation in PVC? Just what else is in there?

Yes. So we still are not seeing PVC stabilize. So it's getting better. when you look at the quarter-over-quarter rates on the PVC, but it is still within the quarter a decline. And then when you look at trichlor, the overall impact of the pricing is, one, but the chemical pricing is down more than that since it's just a portion of about 12% of the sales overall. So it varies. Right now, it's somewhere kind of in the mid- to high single digits down from a pricing standpoint of where it was last quarter.

Yes. It's pretty interesting to see this persistent chemical deflation. I mean, usually, that commodity is kind of up 1 to 2 points pretty consistently every year just because more of an insight like what is different today about trichlor? Why do we continue to see this persistent deflation?

Yes. I think, Ryan, that trichlor, as you know, went up dramatically during COVID. It went from for -- when I look at the price of trichlor today compared to what it was pre coved it is significantly higher than it was. It was a crazy high number, it has come down from what I thought was an unsustainable number at the time. but it is still up significantly over what it was during the COVID era. So again, what's changed? Really, nothing has changed from a demand perspective. I think -- and any given year, you're going to see ebbs and flows in demand that's tied to overall demand, which is whether when the pool is open, how hot the weather is, how wet the weather is -- but honestly, when I look at it, it's not a number that I think is moving -- what would concern me is if it was moving sharply 1 way or the other.

I think the movement is muted -- and I don't know that it is affecting anybody's long-term trend. I think that import regulation can have an impact on that depending on what the administration -- the size on that because some of the chemical is domestically produced. Some of it is sourced from imports. But overall, I don't get too excited about that number because, again, it's not moving sharply. During Cubed,when it's skyrocketed and like a lot of things that was moving sharply, that was much more of a concern. But I look at the movement today and say, yes, it's down slightly. But in 6 months, it could be back where it was, too. And I don't know that I could explain why it would be up 4% or down 4% 1 way or the other. Overall, though, it's a portion of our chemical mix. And I think trichlor just happens to be the product that everybody pays very close attention to. But when we look at it in total, it's a much smaller part of the total.

The next question comes from Trey Grooms with Stephens.

So just from 1 comment earlier, I want to make sure I have this right. So sales still expected to be kind of flat. And I think Pete, you said flat to slightly down for the year. But we're still thinking 4Q overall should be up year-over-year. Is that still the right way to think about it? And then I guess, with the EPS range, you reiterated clearly. But given where we are this kind of late stage in the -- with the pull season pretty well behind this. I guess what would maybe get us to the higher end versus the lower end of the guide range here, given the expectation for sales? And then I think you mentioned gross margin to be roughly flat year-over-year for the year. So any color on that would be great.

Sure. So for sales, fourth quarter, we would expect that to be kind of flat to slightly up. And what we're seeing there is we'll see incremental benefit from a pricing standpoint in fourth quarter, that's really offsetting the weather-related hurricane benefits that we got in the fourth quarter of last year. And then from a margin standpoint for fourth quarter, we are also expecting margin there to be up. So we would expect to continue to see all of the benefits of the things that we've been working on all year long. And we'll see that it should be kind of up slightly from where we are in third quarter with some benefits from product mix.

The other thing I would to mention, which is always the case, our fourth quarter a portion of what happens in the fourth quarter is construction and remodel. And again, that is going to be dictated largely by weather in the seasonal markets is what I'm referring to. So right now, weather up north is still pretty good, pretty warm. And the folks that have contracts to build are still building, which is encouraging. So the longer the weather stays warm, that bodes well for the fourth quarter for us.

And in order to get to the higher end of the range, that would really be weather dependent. So at this point, basically, we don't have any -- we don't have a near-term hurricane or weather impact -- significant weather impacts that we're seeing. But that would -- that benefit from last year would -- we saw that similar benefit, that would be where it would fall in the range.

The next question comes from Scott Schneeberger with Oppenheimer.

I guess, Melanie, I'll start with you, but Pete, if you have anything to add, I'd love to hear it. In the third quarter gross margin improvement, it looks like pricing and supply chain were about equal. It's a 2-part question. In pricing, could you just delve into a little bit now that we have the full impact of the tariff increase in the third quarter level or to deeper, Menon what you're seeing, how have competitors reacted, how we should think about that going forward? There's some uncertainty, obviously, on November 1 as well. But just how we should think about the sustainability of that trickling forward? And then the second half of the question is on the supply chain piece, could you just take us into what -- how structural is that, how permanent are the fix is maybe some anecdotes of the improvements you're conducting there?

Okay. Yes. So sure. On the pricing front, we are seeing that the -- we did have a full quarter of the price increases that went into effect kind of mid-season. And those are at this point I would say, fully flushed through the cycle. And so when we're looking at the acceptance of that pricing overall within the market, we -- that is through the pricing channel, and we're not seeing any impact on what we're doing versus our competitors doing as it relates to pricing.

And I'll take the second part of the question as it relates to supply chain activity. We have become more and more sophisticated with supply chain over the last couple of years. Very happy with the team's effort in that regard. I think we have better technology. They have embraced the AI tools that we have available to us. So I look at the actions that the supply chain team, which has to do with what we buy, when we buy, whom we buy, how we buy and making sure that we are partnering with our vendors to maximize our opportunities and benefits and say that we are as good in that area, if not better than we've ever been. So I would look for the gains that we see in that area to be sustaining.

The next question comes from Garik Shmois with Loop Capital.

You spoke to equipment price increases that have been announced for the next season. I'm just curious you can speak to the early buy programs and if your approach for the coming season is taking any different shape than usual.

Yes. Really, nothing new to report there. The vendors have -- there was only, I think, 1 year during the peak of COVID when the vendors modified their traditional early buy program. So the early buy programs are very, very similar to what they've always been. And we are certainly participating in those in a very strategic way as we always have. So there's really not much new to report on there. .

Okay. And then just a follow-up question, just on SG&A and the guide for the year, a little bit of a nitpicky question, but I think, Melanie, you mentioned remarks and outlook for 3% SG&A growth this year. I think last quarter, it was maybe 2% to 3%. I just want to confirm that. Is that different? Or -- and if so, is it just related to the expenses that you saw primarily in the third quarter.

Yes. We had the 5% increase for the third quarter. So that increased slightly because we did accelerate some of these technology investments. When we look forward to fourth quarter, we'll expect to see that rate higher than what we saw earlier in the year. I would say in the range of a 3% to 4% increase for the fourth quarter.

The next question comes from Jeff Hammond with KeyBanc Capital Markets.

Just on pricing in the next year, I guess, we've gotten the price list or from some of the equipment guys ahead of the early buy seems like they're putting kind of normal plus 2 to 3 points with tariffs. And I'm just wondering, one, what are you hearing from kind of the rest of like your other categories around pricing into next year? And just kind of the level of fatigue as we -- it looks like we're seeing kind of another year of above-average price increases?

Yes. I think as it relates to the rest of the suppliers, I would say fairly normal cadence. I think the equipment guys are above where most of the rest of our suppliers are. Your comment on that level of fatigue from our customers that is -- that is certainly something that we hear. Quite frankly, all of that is solved with innovation, right? So new products, new innovation, make those price increases far more palatable for the customers because it gives them something new to go sell and grow their business and to help address the concerns of the homeowners and pool owners.

Okay. Great. And then just on POOL360, continue to see good adoption there. I'm just wondering if you have a target or the way to think about what you think that percentage of adoption is a couple of years out. And what the pushback or feedback is on people that are may be more reticent to adopt?

That's actually a really good question. I would tell you that -- when I look at the rain, gives me good comfort on this number as well as many others as I look across the expanse of our quantitative metrics at POOLCORP is the range. So whenever I see a very tight range on something, I look at it and say, okay, if the range is very tight, it tells me that, okay, this is really kind of what process capability is for the particular thing that we're talking about. In the case of POOL360, I can tell you that our range is pretty broad, which, again, I have people that are well above. I mentioned that we were at 17% for the quarter. which is an all-time high for us. We have people that are nearly doubled that. In fact, there's a few that are actually above that.

So I look at that and say that there is still significant room to improve the adoption of the tool. What we hear consistently from customers, it's an education thing, right? So first of all, we have to have something that is worth using. And I think we have that. I think the teams work very, very hard to make sure that we have a relevant set of tools that is best-in-class that exists primarily for the benefit of the customer. So this is not, hey, how can I operate POOLCORP cheaper. It's about how can we help our customers be more productive and improve the overall customer experience.

And I think the teams have worked very hard to do that. So I look at the adoption rate in some areas, it is significantly higher than what it is for the total. So what's my target I guess my target is still significantly higher than where we are. Do I think we could be as a company, 25%, 30%, yes, I think we absolutely could do that. Could it be higher? And the answer to that is probably yes. but we don't have quite enough experience with it, and we need to spend more time with our customers to say, okay, what would it take in order to have this be your go-to every time?

The next question comes from Steve Forbes with Guggenheim.

Yes. Maybe to the follow-up on Jeff's there around POOL360 60, is there a way to help frame to us sort of how a customer spend or wallet share evolves sort of 6 months, 12 months after initial adoption as we sort of build support right around that achievement of target that you just laid out?

Yes. I think the way I think about it is this, customers that have a very strong digital connection with their supplier tend to be -- we tend to grow faster with those companies. In particular, when you look at our digital tools related to water test, obviously, the water test was developed to support our private label chemicals, whether that's our Regal or easy brand.

So every dealer that uses the software, every homeowner that buys the test strips and test their water using either the test strips or the store in-store experience, they're going to get a recipe, if you will, or a prescription of chemicals to add to their water, which are all private label products. So the more -- the faster we drive adoption in that area, the faster we'll be able to grow our chemical business. And it becomes less about, well, I could buy this bottle of [indiscernible] for $1 cheaper from someplace else that becomes, well, wait a minute, this is part of the recipe and the program that I'm using to manage my pool water that produces these great results in crystal clear.

So whether it's that or whether it's the service tech that is using POOL360 service because every time that person needs something, he's drawing the quote from POOL360 account rather than shopping around. So we see much greater stickiness for customers that use that. And frankly, every time we integrate with our customer software, again, that drives stickiness. So we love the potential of growing the business through closer technological connections with our customers. And as those businesses or as those connections grow, we believe our sales will grow faster than the average, if you will.

Helpful. And then as we think about sort of future innovation and technological advances. When you talk to the builder community today, what's sort of in the pipeline as you think about opportunities to sort of continue to create a digital advantage and sort of drive further share capture? Like is there -- are there certain specific things that the builder community is asking you to innovate beyond or behind?

Yes. I don't know that I'd focus specifically on the builders, right? Because the builder in our mind is the certainly, it's foundational because that's how the installed base grows. But the percentage of our business that is driven from builders as compared to the installed base of pools, which is maintenance from repair, the latter is far larger. So that's initially where we are focused. Now a lot of those tools can be used for the builders too. So we're investing for the builders with our -- a lot of the builders, in particular, the smaller builders, if you will, are very much in tune with and use our design centers and our digital catalogs for our building materials.

But our focus right now is more with the maintenance and repair operations. Certainly, builders can use the same tools to get -- to prepare their quotes and order materials and order equipment sets for construction projects. That is something -- and then -- and don't forget about our retailers, too, because the retailers, many of them are using their systems integrated with ours to do essentially replenishment to the stores to manage their inventory. So it is -- I wouldn't focus just on builders, I would just say we are looking to improve our customer experience on all facets of the business.

The next question comes from Sam Reid with Wells Fargo.

Awesome. I wanted to touch on the relationship you've historically seen between home equity line of credit rates or locks and the demand for remodel and new pool, anecdotally, kind of what's the lag typically between lower HELOC rates and spend for some of those more discretionary categories?

Yes. I don't know that I could quantify a strong link that says, okay, at this -- at this HELOC number, the project is a go at 50 basis points higher in a no go. I mean, I would just tell you, instinctually, the that homeowners today have a higher level of home equity than they've ever had before. And I think cools and new pools and renovation remodel certainly are still highly desirable. It stands to reason that as those rates come down, HELOC is one of the sources of financing that homeowners use to finance those projects.

There's also other ways that they are doing it. But we just look for kind of overall more liquidity and lower rates is going to bode well for large renovation projects and allowing more customers that are -- have been waiting on the sidelines to get a pool to go ahead and pull the trigger and start construction.

That helps, Pete. And second question here. I know it's early, but I think you're going to be hosting an Analyst Day next year. You're going to follow your consistent kind of biannual schedule. So just along those lines, any high-level thoughts at this point around things that you think you might share or not share -- just looking to get a sense for, are we going to potentially get an update to your algorithm or something along those lines?

I can't give you all of my secrets now. It's way too early. It's not even Christmas, I would tell you, we put a lot of time and effort into our Analyst Day to make them Investor Days in order to make them worthwhile and show the best parts of the company and our focus areas and what gives us confidence in the future and what differentiates our value proposition. So at this point, that's all I'm going to give you is that I believe you're going to -- hopefully, you attend, and I believe that you'll leave there convinced more than ever that nobody is better positioned than POOLCORP to capitalize on this industry.

Since we run out of our time, our last question comes from Collin Verron with Deutsche Bank.

The technology sounds really exciting, and sounds like you've already done quite a bit of investment behind it already. So I was hoping you can just help us think about the magnitude of the spend that you're doing there and how much more SG&A investment is there left to drive these initiatives or -- are those pretty much behind you just reap the benefits as we move out to '26 and '27.

Yes. I think when you start with technology, I look at the spend that we have on -- I don't -- it's not an alarming number. It's not a huge amount for a company of our size at all. And when I compare it against the benefits that we are seeing and will potentially and should see going forward. I think that in order to have anything relevant in the technology world, it's nothing -- it's not like, hey, I spent a little bit of money and it's done. Technology changes at a very, very rapid pace. And we have to make sure that we change with it. AI is certainly going to have an impact on our business, the way we develop technology and the way we deploy technology -- and I think it's going to be helpful on both ends. But I don't look at the spend and say, wow, okay, we are spending hundreds of millions of dollars on an ERP system, we're not.

We're spending as part of our normal course of business to make sure that we have the best, most relevant set of technologically up-to-date tools that create value for our customers, which again drives them to adopt the tools which makes for a stickier transaction because of the value that it creates for the customer. So I guess that's a long way of saying that I don't think we're spending a lot of money today, but I -- we're certainly not done spending. But like everything we do we try and squeeze the nickel just as hard as we can. And I think AI is helping us in that regard.

Great. That's really helpful color. And then maybe a more near-term question here. Melanie, you mentioned a few times the weather benefit that you guys saw last quarter. Any way you can help quantify just the magnitude of what you don't expect to repeat this year?

It was a 1% benefit in fourth quarter of last year. That was the top line sales number.

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

I just want to thank you all for joining us today. We look forward to hosting our year-end call on February 19, when we will release our fourth quarter 2025 results and full year results. Thank you for your interest and support in POOLCORP, and I hope you all have a happy and safe holiday season and new year.

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

Good day, and welcome to the Pool Corporation Second Quarter 2025 Conference Call. [Operator Instructions] Note this event is being recorded.

I would now like to turn the conference over to Melanie Hart, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, and welcome to our second quarter 2025 earnings conference call.

Our discussion, comments and responses to questions today may include forward-looking statements, including management's outlook for 2025 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. We have included a presentation on our investor website to summarize key points from our press release and call comments.

Peter Arvan, our President and CEO, will begin today's call with his comments.

Thank you, Melanie, and good morning, everyone.

We were very pleased to see positive sales growth in the second quarter, along with stable gross margins and steady operating margins versus the prior year. Given all the challenges affecting the broader economy and industry dynamics, I consider these results to be very solid. They are a testament to the team and reflect our ability to deliver outstanding value and exceptional service to our customers, further reinforcing POOLCORP's leadership position in the industry.

The second quarter started off similar to how we exited the first quarter. We saw encouraging trends in most areas of the business through April and early May, unfavorable weather conditions in certain markets through mid-June, tempered demand but turned more favorable towards the end of the quarter, helping us post a modest sales gain.

The macro uncertainty and constantly developing policy decisions, combined with no signs of interest rate easing continue to pressure new pool construction and larger renovation projects. Despite this, our construction-related sales fared better than the permit data would have suggested. As you all know, permit data indicates that new pool construction is down high single digit, but it's still too early to call the year. It is worth noting that the second quarter trends improved from the first quarter, but still represent a headwind on a year-over-year basis. The remodel activity we expect will be modestly better than the new construction activity for the balance of the year. The aging installed base necessitates certain remodel and renovation projects each year, creating ongoing demand. We believe that larger renovation projects in the most recent quarters have been split into phases, allowing consumers to reduce their spend per project or spread out the spend over a longer time frame.

The second quarter results, we reported $1.8 billion in net sales, up 1%, reflecting our team's effort in executing on strategic areas of our business. Maintenance products performed well, including strong growth in our private label chemical products. On sales related to new construction and renovation activities, we saw improving trends during the quarter, creating less of a drag on sales than in recent quarters. Tariff-driven price increases had a modest impact on the quarter due to timing and was somewhat offset by the [ inflation ] in our commodity categories.

Regionally, we saw distinct trends across our 4 major U.S. markets. Florida and Arizona each delivered solid 2% sales growth for the quarter, outperforming national averages. In both states, ongoing population growth in migration and favorable weather patterns fueled continued demand across the maintenance, renovation and new construction categories. Our strong local presence, robust distribution network and targeted marketing initiatives have kept us top of mind with cool professionals allowing us to expand our customer base and capture additional market share. Additionally, franchise growth and emerging builder partnerships in these states further strengthens our position for long-term success.

Texas and California continue to experience this challenge in new pool construction with sales down 2% and 3%, respectively, reflecting macroeconomic headwinds and tempered consumer confidence. However, maintenance and aftermarket sales in these markets remained resilient, highlighting the value of our established installed base and trusted service partnerships. Our teams in Texas and California are focused on supporting remodel activity and enhancing customer support to ensure we are well positioned for recovery as local economies and construction activities rebound in the future. We remain confident that our disciplined investment and regionally tailored strategies will enable us to continue outperforming the broader market across all our core geographies. Additionally, we were encouraged by the sequential improvement in permit data for Texas as the quarter developed, although it is still negative.

In Europe, net sales increased 2% for the quarter in local currency and 7% in U.S. dollar. We saw sales growth in most European economies, particularly in the southern counties while France dealt with colder temperatures but showed some improvement in June. We are encouraged that this trend for Europe continued into July. For Horizon, net sales declined 2% in the quarter. Maintenance product sales were solid. However, weakness in larger development areas -- I'm sorry, larger development-related construction projects muted those gains. Pricing, for the most part, has stabilized in the market, and we are encouraged with the month of day July sales trends.

Looking to our product sales mix, chemical sales grew 1% despite price deflation and weather headwinds in certain markets, highlighting the power of our brands and expanding offerings for our customers. When combined with our POOL360 water test platform, it is a very strong chemical offering that will continue to take share as our brands grow. Customer feedback is excellent, and our confidence in this area and our entire retail support offering is strong.

Building Materials sales declined 1%, a sequential improvement from what we saw in the first quarter and much of last year and better than the underlying trends would suggest. The results highlight the value of our NPT branded offering, improving trend -- including improved trends in our proprietary pool finish and the effectiveness of our consumer-facing showrooms and refreshed dealer showrooms that support our customers and enhance the pool owners design experience.

Equipment sales, which include cleaners increased 1% during the quarter -- which exclude cleaners increased 1% during the quarter, reflecting modest price realization and stable replacement volumes mitigating the year-over-year decrease in new construction units. For context, the most recent price increase went into effect late in the quarter.

Looking at our end markets. Our commercial sales increased 5% in the second quarter, supported by the investments we have made in developing our commercial team, designating commercial warehouses and expanding start-to-finish project capabilities.

Sales to our independent retail customers declined 3% in the quarter, showing a similar cadence during the quarter on what we saw in overall sales, but with greater headwinds -- weather headwinds on our DIY maintenance in May and early June, considering our retailers heavy concentration in northern markets. We saw much improved retail sales in these markets in the latter half of June. For our Pinch A Penny franchise group, representing our franchisees' sales to their end customers, sales increased 1% for the quarter, reflecting their best-in-class offering and customer experience while also noting their Sunbelt concentration with less weather headwinds this quarter.

Now let me comment on gross margin results. As you saw, the business posted a solid 30% gross margin for the quarter, consistent with the same period last year. I'm pleased with our team's collective effort and focus in this critical area. We have seen historically downward cycles place additional pressure on winning business. And through collaborating with our supply chain teams and [ pricing ] specialists and making smart decisions on the ground, we've been able to maintain gross margins in line with prior year in a very challenging and dynamic environment. Melanie will cover this in more detail in her prepared remarks.

Our continued investment in digital innovation are paying off with POOL360 platform transactions now represent 17% of net sales, up from 14.5% last year, reflecting enthusiast customer adoption and creating durable competitive advantages that are hard to replicate. We celebrated the opening of our 450th branch during the quarter, strategic openings in the market with higher pool densities continue to be the driver in further building out our footprint and positioning ourselves for further share expansion. We opened 2 new locations during the quarter and 4 year-to-date. Our Pinch A Penny franchise network added 5 new stores in the quarter, including the first new store in North Carolina and increasing the Pinch A Penny locations to 302 franchised stores.

As we move through the peak season, we expect sales in the back half of the year to be modestly up with the full year performance anticipated to be relatively flat. In the absence of an interest rate cut or external catalyst, we are updating our diluted earnings per share guidance for the year to a range of $10.80 to $11.30, which includes a $0.10 realized benefit from ASU year-to-date. We remain highly confident in the long-term fundamentals of our industry with the demographic trends, desirability of at-home leisure and continued need for maintenance and renovation supporting ongoing demand, we believe that when the macro backdrop improves and the housing turnover resumes, new pool construction and renovation activity will accelerate and [ footwork ] will be uniquely positioned to capitalize on that growth.

Finally, I want to thank the entire POOLCORP team for your dedication and adaptability. Your commitment enables us to deliver exceptional value and reliability to our customers and partners and importantly, drive success for our shareholders, we look forward to the opportunities ahead.

I will now turn the call over to Melanie Hart, our Senior Vice President and Chief Financial Officer for her detailed commentary.

Thank you, Pete, and good morning again, everyone.

We continue to see robust maintenance activity, benefiting from both volume and industry pricing. While new construction permits are improving in several key markets, we have not yet seen a consistently positive trends across all regions. We are closely monitoring these variations and remain prepared to capitalize on opportunities as they arise. Both the traditional pool season price increases implemented earlier in the year and the subsequent late April, early May price increases enacted by certain vendors to react to higher expected tariffs have passed through and have been accepted into the marketplace. Although initially up for discussion, there was not a third wave of June price increase that impacted our cost to date. Pricing for the quarter benefited sales 2% to 3% but continues to be offset by 1% related to chemical and commodity selling prices. Chemicals, specifically trichlor, are seeing selling prices less than what we saw in the second quarter of prior year. This pricing, although lower than last year, still represents a significant premium over 2020. We saw volume increases, in particular, in our private label chemical sales activity. Negative comparisons from discretionary spend leveled out with just a 2% impact overall on the sales for the quarter.

As Pete highlighted, our investments at our MPT showroom continue to pay dividends and showcasing for our builder customers and homeowners, the many options where our unique MPT branded tile decking and pull finished products are available to customize their backyards. Our resulting building material sales decrease of 1% is outpacing the market activity compared to permit trends.

I'm very pleased to be reporting a positive comp sales quarter. We continue to showcase our ability to get pricing in the market as a result of both our service levels and our focus on the aftermarket, resulting in a 1% sales benefit. Impacts of discretionary spend in remodel and new pool construction were a 2% headwind, but again improving from a 3% impact in the first quarter. We were encouraged to see the positive results in Europe and better horizon trends. Gross margins of 30% for the quarter remained strong. We continue to see our internal initiatives related to supply chain improvements, private label growth and effective pricing enabling us to maintain margins even with lower building material product sales and impact from customer mix. We saw normalized second quarter seasonal margin benefit. We reported a 1% increase in operating expenses for the second quarter. Through our earnings release date, we have now opened 8 new locations since the same time last year, contributing around 1% to the expense increase with our disciplined operations offsetting other cost increase drivers. Our volume-related expenses for both compensation and freight remained very well managed. During the quarter, we were able to maintain expenses as a percentage of revenue of 14.7%. We realized operating income of $273 million, an improvement compared to $271 million in prior year. Interest expense of $12.2 million represented a reduction of $1.8 million, altogether generated diluted earnings per share of $5.17 compared to $4.99, which is up 4% from second quarter of last year.

Summarizing our second quarter results, we are pleased with the positive signs related to discretionary spend in the pool and outdoor living space and our ability to utilize our technology tools to grow our private label chemical sales while leveraging our network to generate positive income over prior year.

Moving on to our balance sheet. We finished the quarter with inventory balances of $1.3 billion, which is up 3% from the prior year. This increase includes new product offerings and supply chain actions to stock our network location for the season. We expect that our inventory patterns for the rest of the year would follow a typical seasonal pattern with balances drawn down through the third quarter, which will position us to evaluate our needs for the 2026 season during the fall and winter early by offering. Inventory days on hand improved 1.5 days from prior year second quarter. Our 1.47 leverage ratio remains at the lower end of our targeted leverage range. In early July, we amended and extended our term loan facility to increase capacity, lengthen the maturity and obtain more favorable borrowing terms. Cash flow for the quarter remains in line with our annual expectation of achieving 90% to 100% of net income and cash flow from operations, weighted more heavily to the second half of the year from a cash generation standpoint.

Consistent with first quarter 2025, we increased the pace at which we have completed share repurchases, purchasing $104 million during the quarter, an increase of $36 million in the prior year second quarter. Year-to-date, we have exceeded prior year repurchases by $76 million and have [ $560 million ] remaining under our share repurchase authorization.

As we look out over the second half of the year, on our first quarter call, we referenced an expected future data during equipment cost increase. With the changing tariff landscape, we do not actually see an increase in cost with a June effective date. However, there were some additional vendors over the initial group of 20 that did push through May effective price increases.

Sales for the full year now are expected to be relatively flat with last year, reflecting some pricing benefit from the April-May price increases, but no significant change in discretionary spending from current levels for the rest of the year. Although trends have improved throughout the year, based on the activity to date, we do not anticipate a pace that would provide a significant benefit to 2025. Gross margin rate is also expected to be in line with the prior year full year, which would represent an improvement after considering the nonrecurring positive import tax included in 2024. Execution on realization of tariff-driven price increases and supply chain improvements are net positive that are offsetting any impact from product and customer mix. As you have come to expect from us, SG&A expenses will continue to reflect productivity to offset inflationary increases and be adjusted real time based on actual volumes at each sale center location. The year-over-year increases in the back half are expected to be higher than the current quarter, likely ranging from a 2% to 3% increase for the full year an improvement from the 3% previously estimated and will include the cost spent on the new sales centers we will open this year.

We do not have any significant changes to our expectations regarding interest expense and our estimated tax rate. We have included those ranges along with our forecasted share count as part of our quarterly earnings presentation posted to the website. The update on our interest expense range to be $46 million to $47 million, includes the incremental share repurchases we have done year-to-date. Having completed our largest quarter of the year, we have updated our expected diluted EPS range to $10.80 to $11.30, including the $0.10 ASU tax benefit recognized year-to-date. We continue to focus on running a strong business through this period of higher interest rates and reduced consumer spending. Our actions on sales that support market share gains and on our gross margins holding up in a slower demand environment, suggest strong fundamentals that will support the business in discretionary growth returns. Our capital allocation, expense management and strategic actions remain focused on long-term profitability.

Thanks, everyone, for listening in on today's call. We will now begin our Q&A session.

[Operator Instructions] Our first question comes from Susan Maklari with Goldman Sachs.

My first question is, I wanted to get a better sense of how you're thinking about the full year. Appreciating Melanie's comments around some of the dynamics with tariffs and pricing and the implications that, that will have. But when you think about some of the momentum that you're seeing around some of the company-specific initiatives, how should we think about what that will add to the year, especially given strength you saw in the second quarter relative to some of those incremental headwinds that may come through as you consider some of the moves in the operating environment and tariffs?

Yes. Good question, Susan. I think the business is performing well with a lot of uncertainty in the market. I think 1 of the of the shining stars is the fact that the maintenance and repair business of the growing installed base is still very resilient. So that's good. People still love their pools. People have to repair their pools, that is continuing as we talked about. I would say that the the renovation business is different than it was a few years ago. As I mentioned in my comments, we feel like many of the larger renovation projects are being broken up in the phases to make them more digestible. And I think that trend is going to continue for the balance of the year as long as there's no interest rate relief. Believe that in the -- on the construction side, the larger builders are the ones that are winning in this environment. And more specifically, it's larger builders in the highly desirable areas, right? So the the southern cities that are still doing well. So from where we are spending our time and effort, we've invested in the NPT centers in the areas where we do see new pool construction growing. We have refreshed our product offering there. We have invested, as you know, with developing our private label chemical brands and are -- we're seeing great traction in those areas. And again, that just ties into the maintenance business. and making sure that we are the preferred brand. Our technology is getting good reviews, and we're seeing a nice increase in adoption. And for context, remember, we never said that it was going to rocket straight up. We are looking for consistent progressive growth in our -- the adoption of our tools, and we are certainly seeing that. The feedback on the tools has been good. We continue to invest in those tools to improve the overall customer experience. And I think that's what's driving further adoption. And I guess lastly, we continue to open locations in areas that we see continued growth, both short term and long term. We look at markets like Texas, for instance. And in our commentary, we said that construction in Texas has been under pressure, is down, but our view on that is that that's really tied to the greater Texas housing market, which appears to be a little bit overbuilt. Existing inventory continues decline, so I think this is a short-term problem for Texas. But long term, we believe Texas is a great pool market for us now and in the future, it will be too, so we continue to invest in those markets. So some of our investments are paying off short term. Certainly, our focus on capacity expansion or capacity creation and our focus on customer experience, which is allowing us to win at the dealer level I think making sure that our value proposition for the customer is unmatched is helping us win at the dealer level. I think our demand creation activities from a marketing perspective, again, are helping us win at the dealer level. So I think the company is in given the current environment and where we have -- we already placed our investments as those that I've mentioned and perhaps the investments that we've made in improving our supply chain team and investments in our commercial team, those are all highlighted in our results and are helping drive POOLCORP.

Okay. That's great color. And then maybe following up, when you do think about the pricing that has been passed through to the market this year relative to some of those headwinds that you mentioned around consumers breaking down renovation projects and those types of things. I mean how are you thinking about the elasticity of demand in the industry. Do you think that some of your suppliers are thinking more about price versus volume of late consider the outlook for the macro, and how maybe they'll be approaching that going forward?

I think it falls into 2 categories, Susan. I think that a portion of our sales of all products are discretionary and a portion of them are nondiscretionary. So I think as it relates to price, and price going up on equipment, I would tell you that if it's a -- if your pump has failed, whether your pump is 10% more or 5% more or 2% more than it was last year, I really think it's irrelevant. You have to replace the pump. I would tell you that we do see our dealers are reporting that some consumers are opting to fix pumps and repair pumps. So if we look at our parts sales, for instance, our parts sales are outpacing total sales growth in almost every market. So I think that there are some trade-offs being made with, well, can I fix it versus replace it. So I think in nondiscretionary areas, I don't really think the pricing is having an impact on whether it gets repaired or replaced, although sometimes people are opting to have it replaced if the repair cost is too high. I also think that there's some things on a pool pad, for instance, whether you're talking about if the heater is bad, and it's June, something like that can be deferred to later in the year when you need the heater. So again, that would fall into the discretionary area and certainly, new construction is discretionary. But when I look at the price of material as it relates to new pool construction, so even if the pad is up 5%, 6%, 10%, depending on what you have given that you're talking about a $15,000, $16,000 line item in a project, average pools now are $85,000 to $90,000. If the pool pad was $1,000 more or $1,000 less, I don't know that, that causes the consumer to opt in or opt out as a result of that. So I think it's a long answer to your question, but I think it it really depends on the circumstance, and how the consumers are navigating that.

Our next question comes from Ryan Merkel with William Blair.

Pete, just a first question on the outlook. What's the bottom line on why you lowered EPS guidance for the year? Is it that the first half was just a little bit below what you thought, or is it something else?

No. It's really -- I think the first half, we had anticipated that there would be some interest rate cuts which didn't happen in the first half. And at this point, I have my doubts whether they happen in the second half at all. And if they do, whether in time to really kind of impact demand in the second half. So we just -- the adjustment was relatively minor that we made. I think that the maintenance business is good. The installed base is in great shape, whether at this part of the season, you could see the weather maps just like I have, it's very hot, and that's good for our business. But I think it's really looking at the outlook on new pool construction and saying without an interest rate cut, that will address the greater housing market I think it would be tough to say that we believe that new pool construction is going to rebound this year. And if without new pool construction rebounding, even with a little bit of price working its way into the industry, those 2 things are going to offset.

Yes. I agree with that. Okay. That's helpful. And then my second question on gross margin. I was happy to see the 2Q and even the first half results, pretty good in a tough market. I guess my question is on the first quarter call, you talked about more price competition. Has this abated as you've gotten to the need of the season?

Yes. If you remember, we talked about it, we said it's always more pronounced in the first quarter because of the timing of early by payments, and it's a smaller quarter. So from our perspective at this point, I don't really see anything new going on in that area. So I mean, we still -- we called out in our commentary, we still have seen some deflation on some of the chemicals. But by and large, I would say, I would classify competitive activity as nothing out of the norm.

Next question comes from David Manthey with Baird.

Pete, just to follow on your comment on rates. I'm just wondering, are you referring to a cut in the Fed funds rate somehow impacting mortgage rates in the housing market in general. And then second, as it relates to that -- the monthly payment buyer down here in Tampa, Florida, the minimum you pay for a pool of $60,000, which is higher than the industry average was back in 2021. So I'm wondering, given the pool content and general inflation we're seeing, is there even an interest rate that pulls that monthly payment buyer back in? So 2-part question on rates.

I think there's a couple of things, Dave. I think the interest rate is -- has to do with housing turnover, right? Not so there's people that are in their home. I'm not moving, but I need to borrow money to buy the home. But at the elevated rate -- good news is my home equity is high. Bad news is the access at home equity is very expensive. I think if the Fed cuts rates and that works its way through the lending community all the way through mortgages for the family that isn't moving, it will have some impact on them, although I don't know that it would be a tremendous amount, as you mentioned. I do think the bigger impact is housing turnover because we see a lot of activity as it relates to housing turnover, and I think there's people sitting on a lot of equity in their homes that if they could access that as part of a house transaction, if you will, to move to that bigger forever house where they want to build a house, I think that's where we'll see it.

Got it. Okay. And then to follow on to Ryan's question as it relates to the outlook. In the past, I know you've said that once you sort of get past the midpoint of the third quarter and into the fourth quarter, the discretionary portion of your sales can have a greater impact on the overall. But as we look at the report here, you said that you saw an upturn at the end of June, you were encouraged by July trends and yet the guidance went lower. I'm just -- is it the expectation for second half growth in new and R&R, what's lower today versus 90 days ago, or was there something else in there?

Yes. I think it's -- I think that's exactly right, Dave. It's the expectation on new. I don't really see any improvement -- material improvement, if you will, in permit data that would suggest the back half of the year that new construction and large rental projects are going to increase. So I think we're looking at, okay, here's the trends we had for the first 6 months of the year and those don't really look like they're changing all that much on a month-over-month basis. But the rest of the business, the maintenance portion of the business is doing quite well. So I just don't see enough I don't see enough in the near term to suggest that new pool construction is going to improve materially. So that's why we made the small adjustment.

Our next question comes from Trey Grooms with Stephens.

Pete, could you talk about any inventory benefits to the margin in the second quarter you have supply chain as a benefit in the bridge there, but any more color around that? And then also, as you kind of think about the puts and takes on the gross margin for the balance of the year, either Pete or Melanie, sorry.

Yes. So as it relates to the current quarter, the supply chain benefits are made up of a combination of multiple things that we're working on from a process standpoint and initiatives that we're doing. So we're continuing the throughput that we're getting from our CSOs that helped to lower our overall product cost. We're actually continuing some improvement as well on our freight activity there. So those are helping our product cost. When we look at the incremental margins that we're getting on our private label products, those are also helping us. And then we did get some minor benefit, which would be a little bit more pronounced as we move forward for the rest of the year. from the price increases that went into effect late in the quarter. So as we look out for the balance of the year, we'll see a little bit of margin benefit from some of those incremental prices in the third and fourth quarter. And then we'll also see a little bit of improvement from the year-over-year change in the building materials as that started to moderate when you compare it to prior years.

Got it. Okay. All right. That's helpful. And just to kind of circle back on the discretionary piece. It sounded like in the press release that there was some improving trends in discretionary. There was some mention of maybe some year-over-year increase there, but is it? And I think from some of the slides, it implies that volume, I believe, is the way to think about it is volume is still down there, but you're getting some benefit from pricing that's maybe slightly more than offsetting that. Is that the right way to kind of bridge that commentary around discretionary?

Yes. So the improving trend was -- is really more sequential versus we're not seeing any net positive on the trends on Building Materials. But even when you look at permits, they're moderating from a decline year-over-year. So they are improving throughout the year. And then our actual building materials sales activity is showing much better results than that. So when you looked at Building Materials specifically, we were down about 5% quarter-over-quarter in the first quarter, and that improved to 1% in the second quarter. The pricing impact on building materials is not significant. So they just saw kind of more normalized 1% to 2% as it relates to inflationary pricing benefits.

Our next question comes from Andrew Carter with Stifel.

What I wanted to ask is just stepping back on the questions around new construction. You've talked about the rates on 1 side and the hope of kind of lower rates to get existing home sales moving. But I guess, with where we are now with dealer capacity and obviously the dealer profit pool, I would argue is likely meaningfully expanded from 2019. Do you think they will actually turn their attention to try to grow volumes that's kind of supportive of the -- of kind of the mid- to high single digit for your algorithm? Or better said, I guess just step back from all of it, do you think mid-single digit to high single-digit construction is still possible with where pool costs are and where dealer capacity is today?

Very interesting question. And I would say the answer is, I think it really depends on the dealer. I think we have some dealers that are trying to find a way to make the price of a pool more affordable. At the same time, if you survey the dealers, they would tell you that their SG&A, their operating costs, their labor costs, insurance, taxes fuel, everything is also up. So I think there is a -- I think there's -- there are some folks that are looking at it differently. There are some folks that say, like some of our dealers, Andrew, are actually doing quite well. So like the folks, again, that concentrate at the high end, that business, as we've said, it sounds like we repeated every call, but that business is good, was good and the outlook is still strong. It's really at the lower end. And I don't know that you'll see a material drop in the basic cost of a pool. What I will say is, keep in mind that the average price of a pool has come up is much from mix as anything else. I mean as Dave mentioned, the basic price for a small pool is in Florida is still around $60,000. In other parts of the country, you can get an entry-level pool for that or a little bit less. The average is pulled up because of the current mix. And the reason for that is more about financing the associated financing costs at the lower end where they're much more highly leveraged versus the cash buyer at the upper end.

Second question I would ask, with all the kind of tariffs kind of impact on supply chains and second order effect, have you seen anywhere out there where there's any tightness on products? I know you're domestic maybe tightness that would hit the lowering guys and [indiscernible] while I'm on the topic, anything on the labor front that you've seen out there, obviously, from your contractors, customers, but anything you would obviously -- that would be second order to you guys?

Yes. I -- we talk to our dealers, we don't get the sense that there's a labor problem. I think everybody has enough labor to do the work that there is today. As far as your other question on second order effect on tariffs, I'm not quite sure I understand that. Maybe you could expand a little bit, so I make sure I answer the right question.

Yes, I apologize. I meant more on the -- any kind of product shortage you're seeing. I know that you source domestically, but just the supply chain whips and [ sales, ] if that's -- if that hits you.

Yes, nothing out of the ordinary. In any given year, there will be an issue with something, but there's nothing that we can point to that says that, hey, there's a shortage of this material or that material that's affecting everybody. I would say supply chains are generally in very good shape.

Our next question comes from Scott Schneeberger with Oppenheimer.

I'm curious, you guys mentioned in the -- in inventory. It's a little bit higher year-over-year. You mentioned ensuring customers have good access. But the first list was expanding product offering. I'm just curious if there's anything we should read into there, if you could elaborate on what that is? And then I have a follow-up.

Yes. There's nothing to read into that. Every year, manufacturers introduce new products into the market, and we have to make sure that we have those products available for sale as the sales development efforts are underway. So nothing really to read into that. And what I would also say is not -- we have really no concern on our end as to the inventory balances. We're actually very, very good at managing inventory. So we'll be exactly where we need to be at year-end.

All right. And then as a follow-up, I guess, Melanie, probably more for you. Recent passage of the 1 big beautiful bill. Is it -- might that have a favorable impact on your cash flow? Have you assessed where that might impact you is the primary question. And then, I guess, maybe either 1 of you, do you think it could have a derivative impact on your consumers? And could you possibly see it as soon as this year, potentially perception of tax benefit individually assisting in discretionary spending.

Yes. So from the company standpoint, our tax team has done a very detailed analysis, and now you're prepping me from my answer to the Board next week. But we see it as some slight benefit. There's a couple of things on the international side, that really won't have a material impact on our tax rate overall. But the biggest thing that we expect to see as a benefit is the change in the accelerated depreciation. So that will, for us, be a positive as it relates to -- at the cash flows on the tax side. On the homeowners, I don't know that we'll be able to see any type of quick reaction on that. Most people, I would suspect, are still kind of digesting the impacts, and we really haven't seen any significant changes in consumer confidence or spending of discretionary income at this point.

The next question comes from Sam Reid with Wells Fargo.

I wanted to touch on chemicals and dig deeper on pricing. So it sounds like the price backdrop in chems, it's still negative just based on the commentary, but it also sounds like you're not seeing a change or a deterioration, I should say, in the competitive backdrop. So if things are not getting more competitive. I guess the question is kind of why is pricing still negative here?

Sam, that's a really good question. As we look at the market, there isn't a macro backdrop that says that there should be -- that we should see deflation on chems. We're in the heat of the season. Demand is good. I think -- what I would tell you -- here's the way I would characterize it is, there was pressure earlier in the year. Now there is -- things really haven't changed. So I don't think things are getting any worse. I think from a chemical perspective, prices are not much different than we saw earlier in the year. But I can't give you a scenario that says, hey, I think there's a backdrop that's going to lead to a decline further decline in chemical pricing.

No, that's helpful, Pete. I appreciate it. And then maybe just touching on Q2 sales in the context of some of the tariff noise during the quarter. And just want to maybe put a finer point. Did any of your customers as best you can tell, pull forward demand ahead of tariffs. If there was any demand pull forward, what would be the implications on Q3 in that scenario? Just any help on that would be appreciated.

Yes. No, I can't tell you that we really saw any material pull forward. Remember, so much of our business is pickup business every day. 70% of our business takes place at the calendar, our transactions, if you will, to take place to the calender and pick up. So I don't know that anybody -- we didn't see any material change in buying patterns. So I don't expect there to be a whipsaw into third or fourth quarter as a result of that. We would characterize buying patterns as normal for in-season.

Our next question comes from Garik Shmois with Loop Capital.

First, just hoping you can review the gross margin bridge in a little bit more detail for the back half of the year, just as far as the puts and takes go with respect to the supply chain, the pricing, the mix that you outlined in the slide deck. I'm just wondering which of these categories are getting more favorable to get to gross margin growth in the second half?

Yes. So as we look at the second half, we'll see pricing will be a little bit more favorable. And we would expect that product mix, although it would still be a negative year-over-year when you're looking at individual quarters, it's trending more positive. So it will be a little bit less negative on the product mix side.

Okay. That's helpful. And a smaller part of your business, but the improvement in Europe was notable. Wondering how much of that is improvement in the underlying market? Or I know the continent have a bit of a heat wave, especially in June. I was wondering if maybe that was a big driver of the growth there.

Yes. I think that, as I mentioned, it's really -- if I look at Europe, obviously, our largest market in Europe is France. France had -- France didn't help a lot. So France was down slightly for the quarter, even though Europe, the more southern countries in Europe are the ones that we're leading the charge. I would tell you that I think the weather is good, and it appears that there's a little more stability over there. So I was over there last quarter, and I came away more encouraged at the outlook for Europe, which has been a -- they've been in a tough spot for a few years. But the team appears to be more optimistic, and we're seeing it on the sales line, so we're encouraged.

Our next question comes from Collin Verron with Deutsche Bank.

In your prepared remarks, you provided some high-level commentary, but can you just provide any more color or put some numbers around how demand trended by month, and how things are tracking thus far in July? Just trying to understand if underlying demand, excluding some of those weather impacts accelerated throughout the quarter and as we exited June and if volumes could inflect positively at some point in '25 just with the discretionary end market decline shrinking.

Yes. I think we attempted to kind of frame that up as follows. Early in the quarter, the markets, April and May were stronger than the beginning of June. June is the biggest month of the year, is always going to be, May or June. So in the beginning of June, we saw a bit of a -- I wouldn't characterize it as a huge slowdown, but it wasn't as positive as it was earlier in the quarter for a couple of weeks. And then on the back half of June, things picked up again. And I would say that those trends have carried out into July. So we are encouraged at the near-term outlook.

Okay. Understood. And then just on the pricing dynamics, I understand that 1 of the manufacturers walked back some of a second price increase here, but I think another large manufacturers out publicly saying that they might be looking to take further price in the market later this year. So can you just talk about what you're seeing and hearing maybe about second half price increase as term suppliers, and what's baked into your guidance currently?

Yes. I don't think we're going to see any increases aside from the normal increase that the manufacturers are going to put in at the end of the year. There was some contemplation about another in-season increase prior to the prebuy or early by and pricing for next year. That seemed to have abated, but now we're looking at -- we're starting to receive increases -- increased letters for the upcoming season. They'll take effect depending on the manufacturer sometime either in September or October, and those are contemplated in our guidance, what we know of now.

Our next question comes from Shaun Calnan with Bank of America.

Just first, on the to net price you realized outside of commodities. It looks like the manufacturers were realizing like more mid-single digits. So can you just break out what's included in commodities versus that other 2% to 3% bucket? Is that just equipment and you guys are kind of getting squeezed a little on price there, or are there other things we should be thinking about that are included?

Yes. No, the main difference between what we're realizing from a price increase versus the equipment is that only 30% of our product mix overall is equipment. So when you're looking at the higher price realization that the equipment manufacturers are getting, that's only on a portion of our business. So things such as the building materials, those are seeing much more normal increases, 1% to 2%. And so really, the difference there is going to be product mix overall. As it relates to the commodities, what we have grouped in there is generally going to be chemicals, plumbing and rebar. And to some extent, there is a little bit of decking material as well, some of our decking building materials.

Okay. Great. And then the private label chemicals continue to show good results despite what kind of seemed like a tough backdrop for chemicals for the industry? Can you talk about what's driving that growth? And then where private label sales are as a percentage of total chemical sales today versus the last couple of years?

Yes. I would say what's driving the growth is we have a great portfolio of brands for the chemical space. So we, last year, refreshed all of the brands. We completed the lines. We added the POOL360 water test software and decisions to change brands on chemicals are not short cycle decisions that the large retailers and our -- some of our other dealers make. So they -- it takes time for them to decide whether they go in to change and to gain confidence. So we know we have a good product. We know that we have really kind of best-in-class, a complete value proposition for chemicals, whether it's the POOL360 water test, the consumer apps for the water test and the -- and how those all work together. So we think that we have a good product. We think we have a great value proposition for the customer, and we think in time -- or as times go on, that will continue to grow, especially when you couple that with the rest of the things that we do for our dealers.

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

I just want to thank you all for joining us today. We look forward to our next call, which is on October 23rd, when we will review our third quarter 2025 results. Enjoy the remainder of your summer, and have a great day.

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