Good day, and welcome to the PoolCorp Q3 2022 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star, then one on a touch-tone phone. To withdraw your question, please press Star, then two. Please note this event is being recorded. I would now like to turn the conference over to Melanie Hart, Chief Financial Officer. Please go ahead. Welcome to our Q3 2022 earnings conference call. Our discussion, comments, and responses to questions today may include forward-looking statements, including management's outlook for 2022 and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and variables that could cause actual results to differ from projected results are discussed in our 10-K. In addition, we may make references to non-GAAP financial measures in our comments. A description and reconciliation of our non-GAAP financial measures is included in our press release and posted to our corporate website in our investor relations section. I will now turn the call over to our President and CEO, Peter Arvan. Thank you, Melanie, and good morning to everyone on the call. This morning, we were pleased to report another solid quarter for the business. Net sales, including acquisitions, came in at $1.6 billion, a 14% improvement, with base business posting a 10% improvement over the same period in 2021. Our results were fueled by solid demand for non-discretionary maintenance and repair products, continued new pool construction activity, strong renovation and remodel activity, and inflation in the 9%-10% range. Now that we have closed the Q3, we are fairly certain that new pool construction activity in 2022 will be down when compared to 2021. We would estimate that new pool construction units this year will be 10%-15% less than the previous season. As expected, remodel activity has tapped into the free capacity of our builders to keep them busy. From a macro perspective, inflation, adoption of smart pool products, consistent demand for non-discretionary maintenance on the install base of pools, and the leveraging of our operating network are all enabling continued share gain and growth. Now let me provide some specifics on what we have seen in our four largest base business year-round markets. As expected, Florida continues to be very strong with base business revenue up 20% for the quarter. Arizona also posted strong results, with revenue up 18%, while Texas and California finished the quarter with solid results, up 10% and 16% respectively. Our year-round markets grew 15% for the quarter, and seasonal markets grew 5% as less favorable weather impacted the buildable days and pool usage in the northern seasonal markets. Looking at end markets, I'm pleased to report that commercial pool product demand remains strong, with sales up 28% for the quarter. This is in line with total year-to-date growth rate of 27%. Retail sales, excluding Pinch A Penny, were up slightly at +4%, which reflects some inventory correction in the channel and less favorable weather in the seasonal markets. Looking at Pinch A Penny as a standalone, we continue to be very pleased with the results. Retail sales through the franchise stores are up 16% over prior year Q3. From a product perspective, equipment sales growth is solid, posting gains of 9% for the period. This category includes pumps, heaters, lights, filters, and automation. Chemical sales were up 32% for the quarter as the Trichlor shortage and inventory issues have abated. At this point, the only chemicals that remain in short supply are liquid bleach and Cal Hypo, which are used to shock the swimming pool. Lastly, building material through 14% in the quarter, reflecting solid demand in a still labor-constrained market. Let me now add some commentary on our European operations that, as a reminder, make up about 4% of our total revenue. After a tremendous year last year, the teams in Europe have been impacted by less than favorable weather, a very tough economy, spiraling energy costs, and the war in Ukraine. This has combined to create a significant headwind for our team as we saw sales decline 24% in the quarter, 11% on a constant currency basis. This follows two solid years of growth in the quarter, where combined sales grew approximately 44% in the same quarter. The Horizon team continued to perform well as we posted base business revenue growth of 12% in the quarter, bringing the year-to-date sales growth to 17%. We continue to expand this platform and remain confident in our ability to grow. Turning to gross margins for the quarter. Our overall gross margin was 31.2%, which is a decline of 10 basis points when compared to last year. Generally, we are pleased with the stability of our gross margins with the year-to-date results being a very solid 31.8%, which is a 140 basis point improvement over prior year. From an expense perspective, the team again delivered incredible results. Our operating expenses for the quarter were up 17%, which slightly exceeds our revenue growth, but is in line with expectations given the acquisitions, new location, and investments in growth. From a base business perspective, operating expenses were up 8%, with revenue up 10% in the period. You can see clearly that our capacity creation activities continue to deliver value for our customers, team, and supplier partners alike. Pool360 and our other digital platforms continue to grow. In the Q3, Pool360 sales increased 14%. As previously mentioned, we released a new version of Pool360 this year and are in the rollout phases. As a percentage of our revenue, sales through Pool360 are at 12%. This is an area that we expect to expand as more and more customers experience the benefits of using this improved app and other B2B tools in our arsenal. Wrapping up the income statement, you will note that our operating income came in at a solid $264 million, which is an 11% increase over the previous year's same period. Operating margins came in at 16.3% for the quarter, with our year-to-date operating margin at a strong 18.1%. Finally, with three full quarters behind us and a favorable outlook for the balance of the year, we are updating our earnings guidance for the full year 2022 to $18.50 per share-$19.05 per share. Excluding the ASU adjustment, the range is $18.26-$18.81 per share. This represents an incredible 22% improvement at the midpoint on top of a tremendous year in 2021. As you can see, the PoolCorp team continues to raise the bar within the industry and deliver very strong results in a dynamic economic environment. The last two and a half years have been both challenging and at the same time transformative for the industry. No single company was or is better positioned to capitalize on these challenges and opportunities than PoolCorp. The depth of our team, our expansive footprint, our strong balance sheet, and sheer grit and determination have allowed us to not only gain share but gain efficiencies at the same time. The industry has transformed as well and is now larger, driven by, one, a higher install base, which is approximately 6% larger when compared to the 2019 installed base of in-ground swimming pools. Two, structural inflation that has increased the size of the industry by approximately 30%. Pool owners continue to upgrade their equipment pads with new technology as normal repairs are needed and replacements are made. This too increases the size of the market as people invest in technologies that make their lives easier and may not have been available when their pools were built. Consider the average age of a pool in North America is around 25 years old, with about half of those pools operating with little to no automation or modern features. Clearly, the jump in new pool construction activity in 2020 and 2021 helped drive our growth. At the same time, however, the non-discretionary maintenance and increasing spend on the replacement items as well as the structural inflation on the growing installed base have allowed us to grow this year despite the fact that new pool construction activity may be down from the previous year by as much as 15%. With announced inflation from the major equipment manufacturers in the 4%-5% range for 2023, we expect this to mitigate potential declines in new pool construction and a less robust renovation market should those market conditions occur. Additionally, we are confident that the strategic investments that we made with the acquisition of Corpus Pool & Patio to improve our value proposition for the retail and DIY segment that we serve through our thousands of independent retailer customers will drive continued growth. We also continue to expand the number of Pinch A Penny franchise locations in the Sun Belt markets, gaining an even stronger foothold in key year-round markets as we added 7 franchised locations this year with more in development for next year. This acquisition also brought us strategic capabilities in chemical packaging, making us more vertically integrated and improving our margins and capabilities. We further gained incredible customer technology platforms and applications that we intend to leverage across our entire business to grow our independent retailers' customers' businesses. We have remained disciplined in our capital allocation, maintaining a leverage ratio well below the 1.5-2x target that we have historically observed. We have returned $572 million to our shareholders this past year in the form of share buybacks and increased dividends. Our industry is somewhat unique given the high recurring revenue nature of the business. We also enjoy a market-leading position, expanding capabilities, and an unmatched track record. While no one is certain about what challenges we will face in the future, we can be certain that we will rise to the occasion. Our mix of business is most heavily weighted on non-discretionary spending, and we provide best-in-class service and value for our customers. Additionally, we do not believe that inflation across most of our product categories will revert to previous levels as this would be unprecedented and not sustainable given the historic cost increases that our manufacturer partners have absorbed. Thank you, and I will now turn the call over to Melanie Hart, our Vice President and Chief Financial Officer, for her commentary. Thank you, Peter, and good morning, everyone. Q3 finished with a record $1.6 billion in sales, representing 14% growth over the 24% growth realized in 2021 for a two-year cumulative increase of 42%. In comparing the quarterly growth of 14% to the full year expectations of 17%-19%, we saw Q3 growth of approximately 10% on pricing, 4% on acquisitions, and net overall domestic volume growth. This was offset by unfavorable impacts of 1% each for Europe operations, foreign currency, and one less selling day in the quarter. We also had some sales center closures during Hurricane Ian over the last few days of the quarter. Historically, big weather events have resulted in short-term disruptions with a slight positive impact in the subsequent quarters. Gross margins of 31.2% came in slightly below prior year margins of 31.3%. Base business margin decreased 80 basis points over prior year where we saw a 250 basis point increase in the Q3 2021 over 2020 levels. Focused pricing efforts, supply chain initiatives, and product mix all contributed to sustaining higher margin levels during the quarter as prior year benefited from our strong ability to pass through price as we saw multiple in-season price increases from our vendors. Base business operating expenses as a percentage of net sales decreased from 14.5% in prior year to 14.2% as our capacity creation efforts continue delivering operating margin leverage as we manage through the inflationary cost impacts of our business. Acquisitions added $20 million in expenses during the Q3 compared to last year. Overall, our quarterly operating margins remain strong at 16.3%. We continue to invest in growth strategies while being focused on our disciplined expense management. Interest expense for the quarter increased $9.4 million as we have higher debt levels compared to the same time last year, reflecting our investments in acquisitions, share buybacks and working capital. Our average interest rate increased from 2.8% to 3.2%, reflecting higher borrowing costs. We continue to maintain a conservative trailing four quarter leverage ratio of 1.25, still well below our target leverage range of 1.5-2 times. For the quarter, we recorded an ASU benefit of $0.6 million or $0.02 per diluted share. The same quarter last year had a higher level of activity, resulting in a $4.2 million or $0.10 per diluted share benefit. With our current stock price, we estimate that we would recognize approximately $0.04 in additional benefits in either the Q4 2022 or the Q1 2023 for remaining options that expire in Q1 2023. The effective tax rate excluding ASU for the quarter was 24.9% compared to 23.2% for the prior year period, consistent with our historically slightly lower rates in Q3 than for the full year. Net income for the quarter represents an improvement of $5.4 million. Excluding the ASU, it reflects an improvement of $9 million or 5%, driven by revenue growth, healthy growth margins and continued strong execution. This resulted in a 7% earnings per share growth excluding the ASU in both periods. Moving into our balance sheet and cash flow discussion. Accounts receivable increased consistent with sales growth compared to last year. Day sales outstanding finished the quarter at 27 days, a slight improvement when compared to more historical levels that were in the 28-30-day range. Inventory increased to $1.5 billion, compared to slightly over $1 billion in Q3 2021. We have seen the incremental growth in inventory year-over-year decrease from 77% at second quarter to 48% or 43% base business as we wrapped up Q3. Approximately $140 million of the year-over-year increase relates to inflation, $52 million was added to support acquisitions and $13 million for the 5 new U.S. locations that were not open in Q3 of last year. We have realized strong returns from our investments in inventory and supply chain initiatives, and the value of the inventory on hand will continue to provide incremental growth margin benefits as we have seen additional vendor cost increases in the 4%-5% range heading into next season. During Q4 2022 and Q1 2023, we expect to begin receiving inventory placed on early buy terms consistent with 2019 and prior years to prepare for the upcoming season. Our resulting inventory balances at year-end will vary depending upon the timing of shipments of those orders by the vendors. However, any orders placed on early buys have all been strategically evaluated. We have reduced the dollar value of open POs by approximately 60% from peak levels as lead times have improved from vendors. Year to date cash flow from operations was $307 million compared to $359 million in 2021. The increase in net income of $134 million was offset by increases in working capital. Recall that 2022 cash flow also reflects $80 million of income tax payments that we deferred from 2021 as a result of Hurricane Ida. In the Q4 2021, we continued to add to base business inventory, and so this year in the Q4, we would expect to generate more cash as a number of our inventory receipts expected in Q4 will include extended early buy payment terms. We anticipate finishing the year with solid adjusted cash flows around 80% of net income, excluding the Hurricane Ida tax payment, while positioned to benefit from inventory investments going into 2023. Our inventory balance at year-end could range from +10% to +25%, depending on the timing of vendor early buy shipments. This is slightly ahead of the +5% we were expecting earlier in the year before we had the opportunity to evaluate the early buys. We have paid $112 million to date in dividends to shareholders, a 27.5% increase over last year through Q3. Additionally, we have purchased $192 million worth of shares on the open market during the quarter for a total of $461 million year to date and have $230 million available under our current authorization. Leverage at the end of Q3 was 1.25 times and is well managed within our stated capital allocation model while investing first in the working capital of the business and providing strong returns to our shareholders. We expect to be at or below our target range at the end of the year. As we look out for the balance of the year with just the Q4 remaining, we still expect our sales growth to range from 17%-19%, reflecting a 5% contribution from acquisitions and 10% from inflation. We are not expecting Europe to recover during the remainder of the year, so project that to be a 1% drag on the full year with an additional 1% from foreign currency. Weather and the extent of repair activity that takes place in the Florida area may impact how we close out the year. Inflation impacts for Q4 are expected to be approximately 8% compared to the 10% for the full year. Selling days for Q4 and the full year will be the same as last year. As we lap the 260 basis point gross margin improvements realized in Q4 2021, we would expect gross margins in the Q4 to decline sequentially due to seasonal timing and also be negatively impacted by lower inflation from vendor price increases this year in Q4 compared to last year and lower incentives earned under volume-based vendor programs, resulting in a 150-200 basis points decline in Q4 gross margins compared to last year. We focus mainly on full year gross margins and will finish the year up from prior year. Considering future expected rate increases during the balance of the year and our higher borrowing levels, interest expense for the Q4 is expected to be significantly higher than last year, resulting in interest expense for the year of $43 million-$44 million, up from our previously estimated $40 million. Consistent with our overall capital allocation, we have a conservative position on debt management and currently have in place $300 million or 20% of our outstanding debt covered under interest rate swap agreements that convert our line of credit debt to fixed rates that are currently below market rates, mitigating the full impact of our debt exposure to rising interest rates. The share repurchase activity during the year reduced overall shares outstanding, and we expect full year weighted average diluted shares to be approximately 40.1 million, including participating securities. Any further share repurchase activity in the Q4 is not expected to have an impact on our share forecast for the year based on the time remaining in the year. We have narrowed our earnings guidance range and reflected the additional ASU benefits recorded during Q3. This brings our guidance range for the year to $18.50-$19.05, including the 2-cent ASU tax benefit it added in the quarter for 24 cents year to date. This represents expected earnings per share growth of 20%-24%, excluding the impact of ASU benefits. As mentioned above, the impact from expiring options in Q1 will be expected to provide a 4-cent benefit. However, timing is uncertain and thus not considered in the guidance range for Q4, but will be included in the 2023 guidance for any unexercised amounts as of year-end. As we wrap up another successful pool season, we are extremely proud of the hard work the team has done to continue to grow the industry, and we look forward to finishing the year strong. We will now begin our Q&A session. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. We ask that you limit yourself to one question and one follow-up at this time. You may always rejoin the queue if need be. At this time, we will pause momentarily to assemble our roster. Thank you. Our first question is coming from David Manthey from Baird. David, please go ahead. Yeah, thank you. Good morning, everyone. Morning. First off, Melanie, I think you just said that the Q4 gross margin would be somewhere in the 20s%, and you did say that you're focused on the annual amount. I just wanted to gauge your current confidence in that prior view about holding the line on a 30% annual gross margin in 2023 and beyond. Yeah. Certainly our long-term guidance, we still hold to that, and we will reiterate that when we give our 2023 guidance in February. If you look back at just our quarterly, the impacts of the margin quarter- over- quarter, you know, Q4 certainly is historically less than some of the quarters within season, because we have the ability within season, our customers are typically not as price sensitive. You know, the decline in margin going from Q3 to Q4, you know, is consistent with what we historically would have expected. Right. Okay. Then, as a follow-up, how should we think about earnings leverage in the model? I mean, you've had years of successful capacity creation and this recent inflation taking things to a higher price level, and now your operating margins, at least this year, will probably shake out in the 17% range. Will contribution margins in the future be higher than the mid- to upper-teens level you've typically seen in the past? Just trying to understand earnings leverage from this point, given contribution margins versus reported margins. Yeah. As we take a look at, you know, just kind of our operating model and our expense leverage, you know, as we have seen over the last two years, we have certainly seen higher levels of sales growth. With that, we hve seen, you know, lower than those, the sales growth on expenses, but certainly growth. As we continue to look forward from a long-term standpoint, you know, we would always expect that we would grow expenses less than the overall sales growth. Do believe that within our model, we have, you know, many types of expenses that are variable and flexible based on volumes. We do still believe that we have some ability to maintain our current operating margins and to continue to grow those long-term with sales growth. Got it. Thank you so much. Our next question is coming from Ryan Merkel from William Blair. Ryan, please go ahead. Hey, good morning, everyone, and thanks for taking the question. Morning. First off, can you just talk about volume growth through the quarter and into October? Really what I'm driving at is, are you seeing any signs of weakness anywhere in your business? Yeah. Good question, Ryan. As we said, you know, we are forecasting at this point that new pool construction is gonna be down, as I said, in the 10%-15% range. You know, a little bit, the shoulders of the year, as you know, are the times that are most affected by weather, that, you know, it may be at the higher end of the decline if weather closes up sooner and maybe a little bit better if the seasonal weather stays buildable. I guess what I would say is that when I look at volumes, considering the decline in new pool construction, when you look at what we posted for the quarter, I'm actually pretty happy with the fact that volumes are holding up. They're, remember, they're holding up off of an elevated level, you know, compared to where we have historically grown, and that's partially because the install base is growing, partially because, you know, we believe that there was some pent-up demand in renovation. It's offsetting a decline in new pool construction. On balance, you know, to say that, you know, new pool construction is gonna be off, you know, likely at least double digits, the fact that volumes are still, you know, flattish, is actually a pretty good position, we think. Yeah. I agree. Can I follow up on that new pool comment? Is that down 10-15? Is that in units or dollars? Another question is, I thought there were backlogs out there, so I'm a little surprised, right, that we're seeing this kind of dip here. What I would say is that to your first question, it is in units. Dollars will be higher, of course, because of the structural inflation. And I think the backlogs really are, you really have to kinda take that apart. First of all, we had a slow start to the season, especially in the northern climates where builders got a late start, right? They got less pools in the ground. As you know, when you lose those days early on, you typically don't get those back. I think that the builders would tell you that they are seeing more pressure in the seasonal markets and the year-round markets are in better shape. I think higher-end pools tend to be in better shape than the lower-end pools. I think that any pullback will be skewed in my mind to the lower-end pools. The higher-end pools, I think are in good shape. If you look, you know, across our customer base, I think there is an adequate backlog. Is it as high as it was last year? No. But I think, given the state of the economy, I think that there is plenty of work out there. Exactly how many, again, you know, we still have almost a quarter to go, so we're estimating -10% to -15%. I think most builders would tell you that the frenzy has died off, but there's still plenty of work out there. Okay. That's helpful. Just lastly, I wanted to ask a high-level question that is on everyone's mind. We have got a situation. We have got rising rates. We have got a swelling housing market. Really, Peter, I just want your high-level views on how to think about each segment of your business, you know, over the next couple quarters. Maintenance, upgrade, reno, and new pools. How do you see that trending in this environment? Yeah. Good question. You know, let's start with the maintenance and repair of the install base of pools. Historically, that segment has grown with the install base plus inflation. Because as you know, and we have said it many times, once you have a pool, you have to move the water, filter the water, and treat the water. Whether you're using it seven days a week or whether you're using it two days a week, those activities have to happen. We would consider that portion of the business, which is historically been the norm, that part of the business is going to continue to grow as the install base of pools grows. You know, new pool construction, we think is gonna be down this year, as we said, and I think we started the year saying we felt, based on input from our dealers, that there was a backlog in renovation and remodel projects that people were waiting to have done as the builders focused on new pool construction. I think that portion of the business has held up well, and I think has benefited from the available labor as evidenced by the fact that, you know, even with new pool construction down, you know, volumes are still flattish. We like that. I would tell you that the new pool construction, you know, is down this year. Could it be down next year? I suppose it could. I mean, we're certainly not forecasting that, Ryan. I guess when we think about it from a macro perspective, new pool construction makes up roughly 20% of our business. Renovation and remodel make up roughly 20% of the business, and the balance is the maintenance and repair, the 60% that continues to grow. Really, you know, we're certainly not forecasting to this, but let's say new pool construction fell another 20% next year. If new pool construction falls 20%, that's 20% of 20%, so that's 4% of revenue. If you said, wow, that same pain would be felt broadly across the renovation market, you know, 20% on another 20% is an additional four. If you take the inflation, which from the major equipment guys is already been announced in the 4%-5% range, and I think if you look across our portfolio in total, that's probably a good number to look at. If you look at +4%-5% on the 60% of the business, that gives you a minus one or a plus one there, right? Or plus one net, right? 'Cause you're up 5 minus 4. You know, even with a 20%, I mean, to be conservative, if those two markets are down 20%, I think you're still looking at a flattish sales number. Our next question comes from Susan Maklari from Goldman Sachs. Susan, please go ahead. Thank you, and good morning, everyone. Morning. My first question is, I wanna follow up a little bit about the inflation point. You know, you made the comment that you see the 4%-5% for next year. Can you talk about the sources of those inflationary items, how we should think about them going forward? How we should think about that relative to perhaps some commodities or some other areas that may deflate on a relative basis next year? Sure. Good question. The 4%-5%, that's really, you know, that's kind of a composite number that we see assembling from the, from the major equipment folks, right? Which is a very big, the biggest part of our business, in total. You know, pure commodity things like, you know, rebar and, PVC pipe to some degree. You know, do I think that there could be, more deflation on those items? There could be. I mean, there's so many factors that go into that. When I look at those items in total, you know, our exposure in terms of dollars to those items is relatively small because in the grand scheme of things, there's not a whole lot of dollars associated with that. If you move into another category that some would consider more commodity-like, would be chemicals. You know, you've got really, you know, three different parts of the chemical business, right? You've got the three-inch tab portion of the business, right? So the two biggest parts of chemicals are gonna be the Trichlor tablets. And I would say that given the inflation that we saw this year, the tariffs that are in place, the additional supply that's coming on next year. I mean, at this point, we've not put a forecast together, you know, for chemicals for next year. Is it conceivable that we could see some decline on that portion of the business, which makes up, let's call it a, you know, a third-ish of our chemical spend? Could there be some decline there? Yes. You're talking about, you know, 2%, 2%-2.5% of our overall business. Even if that were to decline, you know, 10%, 15%, you are still talking, you know, a very small impact overall. The next biggest part of chemicals is gonna be, you know, your shock, right? So chlorine and Cal Hypo, and frankly, both of those are still net short. I don't really see prices in that area doing anything but probably going up. Then there's the specialty chemicals which would make up the balance. I think, you know, that pricing will be fairly solid in those areas. That's, you know, from a very high level, that's kinda how we think about it. Okay. That's very helpful color. I also wanted to dig into the balance sheet a little bit. Can you talk about inventory, how you are thinking of the ability to work through that as we get to the end of this year and then into next year? Perhaps with that too, just in general, as we move to the sort of, you know, newer macro environment that we may be in over the next couple quarters, how you're thinking about the balance sheet and leverage and the relative opportunities there. Yeah. As I mentioned, you know, when we took a look at all of the early buy opportunities, you know, we evaluated them, you know, on an individual location standpoint and by SKU. You know, we knew what we were buying when we placed those purchase orders. We are very comfortable with the POs that we have executed on the early buys and that we have done so to position ourselves as we go into 2023 to ensure that we have some margin benefits. Very comfortable with that. As we move into kind of the Q4 and Q1, you know, when you look at the inventory that we have on hand, you know, we probably have about three weeks more than we normally would have in kind of ordinary supply environments. When you roll forward to kind of the end of Q1, typically that would be our peak inventory period as we prepare for, you know, the second quarter and the increases in sales for the second quarter. Based on our projected purchases between now and then, you know, we would expect that our inventory would normalize over the next couple of quarters, as we come out of second quarter next year. Okay. Thank you. That's very helpful, and good luck. Thank you. Our next question is coming from Andrew Carter from Stifel. Andrew, please go ahead. Hey, thanks. Good morning. I appreciate the commentary, Pete, you walked us through on the different business lines and almost a worst case scenario down 1. In that kind of scenario, what would be your flex at the SG&A level? I mean, would the gross margin be higher than your 30%? Could you kinda help us what the takes across the P&L are that would help you mitigate some of that kind of sales decline? Yeah. Gross margins, you know, we'll be better positioned to be able to provide a little bit more color on that, when we talk again in February. As we look at the expense line items, you know, we've already talked about, specifically, you know, we have called out incentive compensation, as one of the areas over the last two years with our, higher than, historical growth where we've seen some increases in there. We talked about that moderating on a normal growth year from 6%-8%. If, you know, sales expectations are lower than that, we would have, some additional ability to flex that. Really, you know, outside of just the incentive compensation, you know, there are several areas when you look at the overall contributions to our expense line. The biggest expense is really in the people area. You know, where we are from a staffing standpoint with the 17%-19% growth that we have this year, we have certainly added some temporary and incurred some overtime expenses that, you know, in a time where sales would not be growing as they are this year, we would have the ability to flex that as well. Then really kind of after those two components, there's just, you know, many of the natural items as it relates to delivery expenses and even discretionary expenses when you start getting into travel and entertainment. Yeah, I think that when we looked at kind of our expectations and the expense flex that we did in 2020, to me is just kind of a good model to show that we do have the ability to take some of those discretionary expenses out of the business. Thanks. Second question that I would ask there, kind of going on to thinking about kind of your branch network and kind of your managers, what they can do in terms of I mean, you just said it, Melanie. You went through everything. How quickly are they able to adjust? How quickly are they able to say, "Hey, I don't wanna miss sales in this environment," and weigh the trade-off between that and, you know, ordering too much, staffing too much, whatever, and then having worse sales, worse profits. How quickly can you make that transition, and how are they incentivized at the local level to make the correct decision there? Yeah, Andrew, here's what I would say. We're very fortunate to have very experienced operators that have been through many cycles. If you look at our management team, you know, really all the way down to the branch level, it's a very experienced, years of experience. You know, when you look at the depth of experience at our general manager level and our regional manager level, some degree at the sales center manager level, you know, we have been developing the team for many years. This is not a new thing for them. They've been through the cycles, so they understand the trade-offs on expenses. You know, they don't typically wait and say, "Well, I'll wait if things look like they're going to cool." They have the experience and frankly, every incentive, because, you know, with basically the PoolCorp system, the operating system's a total bottom up. You know, the way that the whole company, like frankly, the way Melanie and I are measured, it really is that same way all the way down to the individual P&L level. There is no incentive for them to be late. You know, there is no incentive for them not to capitalize on a sales opportunity. The flip side is, there is no incentive for them to wait and say, "Wow, if things are going to cool off, you know, I'll just carry this incremental expense that I don't know that I need." I mean, the operating model is time tested and well thought out, and it is executed by a very experienced team. You know, if, again we're not suggesting that the environment next year is going to be bad. Frankly, we don't know at this point, but are we prepared for, you know, any occurrence? As I said, you know, I kinda gave you a worst case model, you know, from a revenue perspective, if new construction were to really drop off again, which basically would take you back to 2019 levels. You know, if that were to happen, and the renovations followed the top line sales. As Melanie mentioned, you know, there are numerous areas that we would see immediate benefits from an SG&A perspective, whether it's people, whether it's incentive comp, whether it is transportation, trucks, fuel, you name it, the model will flex almost immediately with those. Thanks. I'll pass it on. We have now a question from David MacGregor from Longbow Research. Please go ahead, David. Yes. Good morning, everyone, and thanks for taking the question. I guess just again, thinking about 2023, how much of a drag could Horizon or SCP Europe be? I think if you look at Europe, you know, we said that it is 4% of the business overall, right? Right. It's having a very tough year this year. I mean, if things get, you know, sequentially worse again and they're off another 25%, you know, you're talking about about 1%, right? When I think about Horizon, in terms of their size, their footprint and where they are, they'll be slightly bigger than that. I also think that given the areas that we are building in Horizon. Because again, when I think about the economy in general and housing specifically, which obviously is more important, the housing market is more important to the Horizon folks than it would be to Blue. A couple things to consider. Number one is over time, we have been working to expand the maintenance and repair portion of our business in Horizon so that it is not so fully dependent on on new construction. Now, clearly, in that business, new construction is important. When I look at it in terms of the impact in total, I mean, you're talking about a business that is, you know, less than 10% of our total. I think we've been moving more and more of that business focus to the maintenance and repair piece, which should mitigate a cooling off in new construction, number one. Number two, we have invested in the markets that even if there is a cooling, those markets are still going to be good. Florida is still going to be good. We have invested in growth in Florida and the Carolinas that, you know, the housing markets there, you know, are still good. I mean, I look at it and say, you know, could there be a drag if there's a catastrophic drop in those areas? Yes, but given their relatively small percentage of our total, I don't think it's going to be a terribly meaningful impact. Okay. Thanks for addressing that. My follow-up question is really around Porpoise Pool & Patio, the acquisition, and just how you're thinking about accretion next year. I guess I'm wondering it kind of at a higher level, if there are pool owners that are feeling kinda economic pressure, do they switch from having a pro maintain their pool to going DIY? If so, does that create maybe a stronger sense of optimism around what that accretion might look like next year? I think that is something that could very well happen. Now, obviously, we are not providing guidance on next year at this point, but if I just think thematically about it. Yes, conceivably, if the economy slows and you have homeowners that are making a decision that says, "Well, you know what? I'd rather just take on the maintenance and repair of the pool myself." And frankly, that was part of the reason for the strategic reason for the acquisition of Pinch A Penny or Porpoise Pool & Patio, is that, you know, they have a great retail network that the franchisees operate. And embedded in that are some great tools and capabilities that we can now leverage for the independents. I think, you know, looking forward, if there is a switch from professionally maintained to DIY, I don't think anybody is better positioned to capitalize on that. Quite frankly, you know, the way we look at it is the customer is the pool, right? What we're focused on is we know where every pool is in the country, and what we are focused on is, you know, from a market share perspective and from a service perspective is, all right, if the pool is the homeowner wants to do a DIY, great, then we wanna make sure that we are working with a retailer or a franchise, a franchisee that is catering to that part of the geography where that pool is, so that we're best positioned to continue to gain, to grow and share and provide the equipment, and chemicals and supplies needed to maintain that pool. Great. Thanks, Pete. Yep. Our next question is coming from Trey Grooms from Stephens Inc. Trey, you may proceed. Thanks. This is actually Noah Merkousko on for Trey. So my first question, I wanted to touch on commercial demand. I know that's a small part of your business, but it sounds like that's still an area for growth. As you look out over the next few quarters, do you think that's an end market that continues to show growth? And can you just remind us how much of the business that is? Yeah, it's about. I think in total it's in the 4%-5% range. You know, that business is, remember, went through a really tough spot during COVID, right? When people stopped traveling. You know, people are back to traveling, they're back to vacation. There is a considerable amount of money being spent in those areas as evidenced by our sales growth, right? We are up 28% for the year. The project deck that we get to look at, 'cause remember, there's 2 parts to that business, right? There is the project, right? New construction, major renovation. Those are, you know, that's typically a bid and spec. They're larger, many times municipal projects, so there's a lot of visibility to those. We, you know, get a pretty good look at the pipeline of that, and I can tell you that the pipeline is very healthy in that area. Then there's just the maintenance and repair that's tied to, you know, using of those pools. Given the fact that, you know, the travel season this year was very good, don't really see that letting up all that much anytime soon. The fact that it's a relatively small part of the business. When I look at it, I think that there's upside there. You know, is it tremendously gonna reshape our future? No, but I'm encouraged by our ability to continue to grow and take share in that market as well. Thanks. That's helpful. Just for my follow-up, you know, if we think about that, you know, pretty conservative case you made for demand next year for new pool construction and renovation. If that were to take place, you know, does that change your appetite at all for M&A? No, not at all, really. I think we are a very strategic acquirer. You know, if you look historically back on the acquisitions that we made, we have been very prudent and judicious and also strategic. Am I willing to overpay for an asset? The answer is absolutely not. The reason is because in most cases, you know, those acquisitions, we're not in a position where we have to overpay for anything because frankly, in most markets, we're already there. It is, you know, perhaps some additional capacity that we would be picking up, and some additional business and then a synergy opportunity on the backside. You know, when asset prices become inflated, you know, we get the choice to sit back and say, "Am I willing to pay an inflated price for an asset that I probably don't really need to acquire?" Because if I need additional capacity, we have the, you know, muscle memory, if you will, and the capabilities to greenfield very quickly. This year, we're gonna open up, you know, approximately 10 new greenfields. Next year, we are looking at a similar number of greenfields. You know, if I made an acquisition in some markets that I had teed up for a greenfield, might that change my appetite to greenfield if there was something that made sense strategically, from a business perspective and from a cultural perspective, because that was one of the other things that we look at when we do acquisitions is. What is the culture that we're acquiring? Because we have a very good culture in the company and, you know, there has to be a fit there. I think we have an appetite, and we certainly have the balance sheet to do it. We have a strategic plan that is really done at an individual MSA area. If good assets become available and from a value perspective it makes sense, then absolutely we would move forward. The flip side is that if we needed additional capacity in an area, there was no asset that made sense to acquire, then we would simply do what we have always done, and that is greenfield, and we can do that relatively quickly. If you look at our success rate with greenfields, it is just tremendous. Thanks. That makes sense. I'll leave it there. Thank you. We have a question now from Joe Ahlersmeyer from Deutsche Bank. Please go ahead, Joe. Joe? Go ahead, Joe. Yes. Can you hear me? Yes, sir. Okay. Sorry about that. Yeah. I'd like to go back to the growth margin guide for 4Q if I could. I think it might be helpful. I hear you on the. I'm sorry. You're breaking up a little bit, so I can't hear your question. Okay. I'll take it offline. Okay. Sorry about that. Okay. We'll move on with Stephen Volkmann from Jefferies. Please go ahead, Stephen. Great. Hi, guys. I'm here. Most of my questions have been answered actually, but I was just hoping you could maybe explain to me a little bit how sort of the vendor rebates work. I guess I'm trying to figure out. I assume they're probably volume related rather than price related. So if we had maybe a base case of sort of flat volumes next year, how should we think about the headwind from vendor rebates? Yeah. The majority, the vast majority of all of our programs are volume related, and they also do reset every year and with typically having targets in there for growth targets. In the years where we've had, you know, kind of higher than normal purchases and sales growth, we typically will benefit from that on the vendor rebate portion of our growth margins. Right. I guess that's where I'm going because I'm assuming you benefited from that over the past couple of years, and maybe as we normalize, you won't going forward. I'm just trying to figure out what kind of headwind that might be. Yeah, we can take a look at that and maybe provide some more commentary in February as we look at, because it's really it is going to be tied to our sales expectations as to what we think that impact might be going into next year. Yeah. The programs are negotiated on an individual basis, and we're just in that process right now. Hard for us to quantify that because, again, we haven't guided from a revenue and volume perspective, and the programs are still in flux. I mean, rest assured, this is part of a normal business practice for us. There are some years, obviously, that vendor rebates are better, and it's even than others. It really depends on the individual vendor and how the programs are constructed. We'll have more color for that when we provide our full-year guidance for next year. I can tell you that it's contemplated in our long-term guidance, which is really the way that we would ask you to think about it. Understood. Okay, thanks. Maybe a quick follow-up, Pete. I think you mentioned in your comments that retail was up, like, 4%, but Pinch A Penny was up 16%. It's a pretty big difference. What's driving the Pinch A Penny growth? Yeah, I think as we mentioned, we certainly have some great retailers in our traditional independent retail business. I think if you look at our retail business from a geographic perspective, it would be very similar, right? Pinch A Penny is a great operator, and we certainly have great operators that perform equally as well. I would also tell you, look at the footprint where Pinch A Penny operates. It's primarily Florida, Texas, some Louisiana, and a location in Georgia, as compared to our entire retail basket, which goes all the way up into the seasonal markets, which, as you know, had a much tougher year given the late start to the season, the large early buys that they made, hence my comment on inventory correction. We have a question from Ken Zener from KeyBanc. Please go ahead. Just good morning to you guys. How are you? Good. How are you? Well, Melanie, the interest expense, I believe you said $17 million in 4Q implied. I'm sorry, go ahead. Finish up your question. No. The interest expense, you said $43 million for the year if my model is correct. That implies roughly $17 million in the Q4. Is that correct? Yes, that's correct. Should we annualize that so we're $68 million next year? You know, again, we'll provide a little bit more color on that. You know, two things on that. You know, as we are at higher inventory levels, and so we would not expect for the full year of next year that we would be carrying a debt at the same level that we have currently. Okay. Obviously, even sequentially, it's a pickup. In terms of, Peter, you talked about valuations and your ability to do greenfields, et cetera, et cetera. Could you maybe give us some parameters, you know, how you think about valuation in the space, EBITDA, EV to sales, if you would, within the context of deals you guys have done? Yeah. I mean, valuations of late have been high, right? Traditionally, I would tell you that valuations in industrial distribution for a good business, you're talking about multiples that would traditionally have been in the 5%-7% range or 5-7 times range. What we have seen in the last year with the frenzy of capital coming into the space is we have seen some what we would consider just crazy numbers being paid. Again, the luxury of not having to participate in what we would consider crazy valuations. Traditionally for us, you know, 5-7 times is what we have seen. From a greenfield perspective, you know, it varies really on a case-by-case basis, but we can typically greenfield for at least a couple of turns or more below that. Yeah. You know, I was just kinda, you know, just taking a look back. Obviously, the stocks had a large decline, of which, by our estimates, you know, a good chunk of that, you know, 60%-70% valuation, right? Which you are kind of referring to in the broader market. You know, the revenue ladder, if you will, 60% maintenance, discretionary, new, whether it's down 10-25, it doesn't seem to be that's the issue, you know, in terms of what is in investors' mind so much, as much as perhaps the. I know you guys went over this at your Analyst Day. Melanie, you know, you talked about the gross margins just recently at 30%, perhaps. I mean, it seems to be that margin is really the big mover for this valuation's cut quite a bit lower for the group. At the analyst day, I think you guys did a very good job outlining why you think the dramatic margin expansion is sustainable. Could you maybe talk to your understanding of how, you know, you've obviously gained a lot of share. Fluidra, other companies have talked about down volumes. Can you talk about perhaps how the competitive landscape might, you know, if we do get these, and I don't know if it's worst case scenario, but what you kind of laid out. What's your experience with how smaller operators respond to, you know, kind of a draconian demand world in terms of the margins versus you guys? Just so we can understand how the competitive landscape might shift if demand does decline significantly. Yeah. Certainly when in very tough operating conditions, when cash is a big issue, then the ability for the smaller guys to be able to maintain inventory and maintain the service that the customers have become accustomed to becomes a challenge. Typically in those markets, the bigger players tend to get stronger because we have far more resources to bring to bear to continue to provide the exceptional customer service that I think has allowed us to take share. Again, you know, I certainly don't wanna overplay the, you know, the draconian what could happen, but it seems that there's a lot of concern in the market that says, "Wow, you know, new pool construction went way up, and it's going to go down." The numbers that we picked, you know, basically, would take you back to a new pool construction number similar to, you know, where we were, you know, pre-pandemic. I think the part that is worth mentioning again is the fact that the industry is structurally larger now. It's not like we're depending on and hoping that, well, you know, new pool construction is gonna continue at this elevated level. Look, if new pool construction is flat next year or up a couple or up 10% or -10% or minus 15%, again, we kind of or even -20%, we kinda outline, you know, what that means for the business. At the same time, you have to consider that the industry is structurally bigger because of the inflation. Now, when your expenses are going up and business is slowing down, certainly you have the smaller players are the first ones, you know, to feel the pinch. They're the ones that have the least capital reserves in order to, you know, continue to provide the level of service that they have been providing. Our expectation would be, if history were to repeat, that in a market like that your larger players like us would do better. Right. You wouldn't see discounting similar to your old roofing industry, perhaps, where they would go for cash flow and create extra pressure as they liquidate their inventory. Yeah. Your gross margins were fairly stable in 2007. I mean, you did 27.5% down from 28.3%. You know, it's kind of in that. Didn't compress so much back then, your gross margins. Right. Very, you know, very good point. Look, we have to compete in individual markets, right? We certainly don't have a national price on everything. We compete in individual markets. If there was an independent that decided that they needed cash and had a lot of a particular product that they wanted to drop the price on to try and grab some immediate revenue to generate some cash flow, could that happen? Absolutely. But the way we would look at that is there's a finite amount of product out there. They can't do that for very long because none of these players are very large. Might they discount, you know, some excess inventory if they have it in order to raise cash? Yes. You are talking about, you know, a de minimis amount of product in the grand scheme of things. You know, frankly, we compete with that, you know, all day, every day anyway. If you look at the operating margins of our competitors, and obviously through all the years of acquisitions, we've seen a lot of the P&Ls of these guys. There isn't a whole lot of room there to do anything on a sustained basis. It's not like, you know, they were operating at, you know, high double-digit margins, and they could say, "Well, let's discount." Frankly, it doesn't really change the demand curve, right? Right. Right. Given the cost on inventory is high, there frankly isn't an opportunity over the long term to do anything in regards to that. I apologize. Their operating margins are tight enough that they simply don't have the checkbook to say, "Well, I'll just, you know, I'll take it on the chin. Right. They can't weather it. I apologize about pursuing this line of questioning with you. I mean, your margins in 2005, 2006 were about 9%. They fell to about 6%. Would you say those margin ranges are consistent with the comments you made about competitors in the environment today? Tough question to answer. I can tell you I have seen much worse than that. Thank you very much. We have a question from Garik Shmois from Loop Capital. Garik, go ahead. Oh, hi. Thanks. Thanks for squeezing me in. I'll try to be brief here. Just on the comment that you made, the contractors are switching more to renovation work as some of the new construction has slowed. You know, should we read into this that backlogs on the renovation side are still strong and, you know, the outlook there is still quite good into next year. I'm just trying to, you know, maybe kind of bridge that with maybe an earlier comment, Pete, when you were trying to provide some sensitivities on the renovation work relative to new construction in 2023. Yeah. I mean, information that we're getting from dealers right now is that, you know, they still have plenty of work, right? So I can tell you know, we believe, as I said, new construction is gonna be down. So you can see that our volumes are flattish. Frankly, if you look at the seasonal markets, as I mentioned, versus the year-round markets, you see a pretty big difference. So the year-round markets, Sun Belt markets, you know, where we saw growth in population and where people are moving, you know, those markets are still very strong. As we mentioned, you know, Florida was up 20%, which is obviously way more than inflation, you know, for the year. You know, Texas is up, California, Arizona, the big year-round markets are up. You know, our conclusion is that, you know, where pools are being built, still strong in those areas, although permits are down. Still, pools being built in those areas and renovations in those markets, that the demand there is still strong as evidenced by what we're seeing from a revenue perspective. Okay. Thanks for that. Follow-up question is just if you could speak a little bit to mix and if there's been any recent evidence at all to any trade down or if it's you know that you haven't seen that just yet. Yeah. I don't think we have seen that. In fact, we don't know for sure because the year still is not complete, and once the year gets wrapped up and we have some more, you know, forensics on the construction count and such. You know, what I think is happening is you're not really seeing trade down at the component level because at the component level, it really is a de minimis for something that is a longer term investment, right? If I'm buying a pump and it's gonna last seven to 10 years, I don't know that you see people saying, "I'm gonna trade down," because over the course of ownership, not that, you know, not that big a deal. The same thing when it comes to, you know, a high efficiency heater, if you will. People, I think, are still making longer term decisions on larger purchases. Where I think we would see contraction is really at the entry level, right? I think at the entry level, that's where you're likely to see more pain before you see trade downs at the component level. It's the decision of, you know, do I build the pool or not? If I was, you know, on the edge of whether it made financial sense for me to build a pool, those are the ones that I think probably maybe tap the brakes and see what happens in the broader economy. I think at the upper end of the scale, I think those projects still continue. Hence, the value that we're talking about, not just pool counts, but value being still being healthy. Understood. Thank you. This concludes our question and answer session. I would like now to turn the conference back over to Peter Arvan for any closing remarks. Thank you. Yes. Thank you all for your support and for joining us today. We hope you all have a safe and happy holiday season. We look forward to reviewing our Q4 and full year results for 2022 on February sixteenth, at which time we will also provide preliminary guidance for the 2023 year. Thank you very much. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your phone.