Good day, and welcome to the Pool Corporation Third Quarter 2023 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 your touchtone 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, Vice President and Chief Financial Officer. Please go ahead. Thank you, and welcome everyone to our Third Quarter 2023 Earnings Conference Call. Our discussion, comments, and responses to questions today may include forward-looking statements, including management's outlook for 2023 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 the Investor Relations section. We will begin today's call with comments from Peter Arvan, our President and CEO. Peter? Thank you, Melanie, and good morning to everyone on the call. Our third quarter results came in largely as expected. As the 2023 swimming pool season winds down, we consider our results to be solid on a standalone basis, particularly when considering the dynamic conditions we have been operating in. The third quarter carried on with typical summer weather conditions overall, allowing us to evaluate our performance and in the industry environment on a mostly weather-neutral basis. Our third quarter 2023 sales of $1.5 billion is a 9% decline compared to 2022, with one less selling day, but exceeded 2021 third quarter sales by $63 million or 4%. As expected, sales declines continued to moderate in the third quarter, showing sequential improvement versus the 10% and 15% declines we saw in the second and first quarter of 2023. In view of the neutral weather conditions during the third quarter, our sales trends across our major markets were relatively consistent. Starting with year-round markets, sales declined 5% for the quarter in Florida compared to the third quarter last year, with Arizona finishing down 8%, California down 10%, and Texas down 11%. For context, last year in the same quarter, Florida sales were up 20%, Arizona was up 18%, California was up 16%, and Texas was up 10%, respectively, versus the third quarter of 2021. This simply highlights the difficult comps that we were up against this year. Year-round base business declined 8%, while seasonal-based business markets declined 10%, a slight sequential improvement from the 9% and 11% declines in the second quarter of 2023. Again, for comparison, last year in the same period, we saw growth in our year-round base business markets of 15% and 5% in our seasonal-based business markets. Moving on to product category results. Chemical sales increased 5% in the third quarter, mostly driven by increased volume as chemical pricing came in relatively flat for our collective offering. Our strong footprint, leading proprietary products, and enhanced technology tools gives us an unmatched value proposition and contributed to our share growth. Building material sales for the quarter were down 13%. This category includes products necessary for both new pool construction and renovation and remodel projects. The building material trend continues to suggest that renovation and remodel demand is stable and outperforming new pool construction, and our NPT footprint and product offering enables us to outperform the industry in this category. Equipment sales declined 9% in the quarter. As you can see, this implies solid demand for maintenance and repair, despite the softer demand for new pool construction and renovation and remodel. Looking at end markets, commercial pool product demand remained strong in the third quarter, with sales up 10%. Sales to our independent retail customers were down 8% for the third quarter, an improvement from the 11% decline and 16% decline we saw in the second and first quarters of this year. Pinch A Penny franchisees collectively reported sales growth of 1% for the quarter. The franchisees generated solid sales for their maintenance products, but weaker sales of discretionary items in line with what we are seeing across our distribution business. Europe's third quarter sales showed a 2% decline in local currency, a notable improvement from the 7% and 22% decline in the second and first quarters of 2023. Europe has been challenging for the past 15 to 18 months, and we are encouraged by this more favorable trend. For Horizon, sales declined 7% during the quarter. Consistent with prior quarters, sales activities for commercial projects remained stronger than residential. Moving on to gross margins, where we ended the third quarter at 29.1%. Consistent with our past thinking, we believe gross margins for the full year will be approximately our long-term guidance of the 30% range. As is typical, Melanie will provide more details on what to expect in the fourth quarter gross margins in her comments. Even while continuing to invest in new locations, acquisitions, and technology during the quarter, we reduced operating expenses by 2% compared to last year. The team did a good job managing expenses that typically ramp up during the season in light of the softer demand environment. Thankfully, the team has been focused on capacity creation for many years, and that helps us offset inflationary headwinds and leverages our fixed expenses, leading to a 15.9% operating expense percentage. POOL360, our B2B tool, saw sales increase 5% over the prior year, a higher growth rate than our overall sales activity. The line volume growth for the same period was 3% and demonstrates the tool's contribution to our capacity creation effort, while also improving the customer experience and productivity, and adding value to our business and our customers. We view this tool as best in class, providing multiple benefits for both our customers and the local operating teams. Operating income for the third quarter of 2023 was $194 million, down $69 million compared to last year. This, however, represents an 85% improvement over 2019. Our reported third quarter operating margin of 13.2% is a 160 basis point expansion from 2019 and a 20 basis point expansion from 2020, showing the sustainability of our fixed cost leverage initiatives. During the third quarter, we added two new greenfield locations. This puts us at 10 new greenfield locations for the 2023 season, a further testament to our strong brand and refined expansion process. In addition to our organic openings, we added four new locations through acquisitions this year. Additionally, we expanded our Pinch A Penny franchise network by adding two new franchise customers in the quarter, bringing the new franchise store count to 11 for this year. We continue to prioritize organic growth investment as the future of the business, which not only expands our customer reach, but also creates capacity for additional products and service offerings at our existing locations. Melanie will be commenting on most of the balance sheet items, but I would like to highlight one significant accomplishment. That is the work that the team did on right-sizing our inventory. Because of the tremendous effort of our team in conjunction with our vendor partners, the team surpassed our inventory reduction goal and delivered a reduction of over $260 million year to date. This was done while expanding our footprint, integrating acquisitions, and maintaining best-in-class inventory availability. This achievement helped us generate $750 million in operating cash flow through September 30th, a company record, and nearly 2.5 times that of this time last year. As we move into the final quarter of the year, we have proven that even in the most difficult operating conditions, our experienced team delivers an unmatched value proposition, which enables us to outperform the industry and expand our share. We have built the largest, fully integrated network of sales centers in the industry, and we are adding new locations faster than anyone with a proven process that delivers a solid ROI. We have a vertically integrated chemical packaging operation and the broadest selection of proprietary building material products, from pool tile to finish, over 135 NPT showrooms and design centers, four centralized shipping locations for import and consolidation, industry-leading technology solutions for our customers and our own use, and best-in-class retail franchise development and support operations. Perhaps most importantly, we have over 6,000 employees that operate in a performance-based culture that know how to compete and win. While new pool construction is likely to finish down with units down 30% in 2023, we still expect about 70,000 additional pools will be expanding the ever-growing installed base of pools, where we derive over 80% of our revenue. No doubt, the current macroeconomic environment is tough, but the desirability of swimming pools and outdoor living has never been stronger, and we do not see that changing. We firmly believe that even with fewer pools being built, our share and the value of our products on a per-pool basis has grown. We know that renovation activity will continue as homeowners upgrade both services and pool technology to enhance their backyard oasis. We believe that our relentless focus on delivering a second-to-none customer experience positions us better than anyone in the industry to serve the pool professional and support the specialty retailers that cater to the DIY owner. In short, we believe in the long-term growth characteristics of the industry, the strength of our company, and we believe in our team. As I look back on the pool season, I'm very proud of our team that has remained focused on innovation, execution, and collaborative partnerships to deliver a customer experience that, as I said, is second to none. Lastly, with over three-quarters of the year behind us, we have narrowed our annual earnings guidance and now expect diluted earnings per share in the range of $13.15-$13.65, including the impact of year-to-date tax benefits of $0.15. Melanie will now provide additional details in her financial commentary. Melanie? Thank you, Peter. Net sales for the quarter finished at $1.5 billion, a 9% decrease from prior year record sales in the third quarter. We estimate a year-over-year quarterly sales decline in the range of 5%, related to new pool construction, which is trending as expected, with units likely to show a 30% decline for the year. Remodel activity, with a roughly 3% year-over-year comparative decrease effect on our top line, is outperforming new pool construction, but still at lower levels from prior year and in the range of our previously estimated down 10%-15%. We also saw several other areas which each represented an approximately 1% decline in net sales. First, we had one less selling day in the quarter compared to last year. Secondly, selling prices on commodities, including trichlor. Pricing on trichlor is showing recent signs of stabilizing, but during the quarter, selling prices were approximately 20% lower than third quarter of last year. Third, volumes on certain discretionary products, such as above ground pools, heaters, and cleaners, reflected weakness, suggesting consumer hesitation on these more discretionary items. Outside of these products, maintenance spend remains relatively stable. Inflation continued to provide an overall advantage, resulting in a benefit of approximately 2%-3% for the quarter. Net sales from acquisitions or new market openings contributed less than 1% in the quarter, and therefore, we have not broken out these activities from base business separately in the press release, as they had an insignificant impact on the financial information for the quarter. Gross margin was 29.1% in the third quarter, reflecting a typical sequential decrease from second quarter. Gross margin was 210 basis points less than prior year, resulting from the expected decrease in inventory gains realized in 2022, that benefit from investments in inventory ahead of the multiple inflationary price increases. Other items impacting margins in the quarter are product mix, including the lower selling prices on trichlor and new construction and remodel activity, which resulted in building materials seeing a higher year-over-year decrease than other products. Customer mix, such as a higher proportion of sales to larger customers, also had a negative impact on margins when comparing to 2022. Weaker industry demand and wrapping up of channel inventory rationalization contributed to a more competitive pricing environment, causing some modest additional pressure on gross margins during the quarter. We also saw lower purchasing incentives than a normal year in conjunction with our inventory reduction plan. SG&A expenses continued to be very well managed, reflecting a 2% decrease year-over-year, after seeing a 3% decrease in the second quarter, as these two seasonally larger quarters have the most ability to benefit from reductions of volume-related expenses. Operating expenses compared to prior year also includes the impact of four locations added from acquisitions and 14 new sales center openings since third quarter of last year. Additionally, expenses for the third quarter include a $550,000 goodwill impairment. Operating margin of 13.2% was 300 basis points less than prior year, reflecting the 210 basis points impact from gross margin and effects of lower top-line revenue. We reported 11.6% operating margin in third quarter 2019, so we have been able to maintain benefits in our operating margin. Interest expense on a comparative basis for the third quarter resulted in a $1.9 million increase in expense as a result of higher rates offsetting a significant reduction in debt outstanding. As is consistent with prior years, our third quarter tax rate is generally the lowest quarterly rate, with all other quarters being slightly higher and averaging to our full year rate. Third quarter EPS, excluding ASU, of $3.50, compares to $4.78 in third quarter of 2022. Despite the decline from our record 2022 results, these earnings highlight our ability to retain the majority of the significant growth seen throughout the 2020 to 2022 period, as Q3 2023 results are higher, 90% higher than the third quarter of 2019. Our credit and collections process and management of trade receivables remains a business advantage, with DSO of 26.3 days at the end of the quarter, comparable to prior year. I was confident in our ability to execute when I stated our inventory reduction goal at the beginning of the year to bring down inventory by $260 million. In fact, we were able to reduce inventory $332 million from December 2022, even with acquisitions, new locations, and current year inflation, exceeding our goal. In the fourth quarter, we plan to selectively participate in vendor early buys that we determine make strategic sense for us. As we look ahead to the 2024 season, we are expecting to see a range of price increases for next season of around 3%-4%, based on some equipment vendor pricing announcements to date. This will result in dollar growth in inventory from third to fourth quarter as we would normally build inventory to be ready for next season. There will be no cash flow impact in 2023 from early buy shipments we received before year-end, as these purchases will be done on deferred payment terms. We generated $750 million in cash flow from operating activities year to date. We have also completed $137 million of open market share repurchases during the quarter, leaving $463 million available under our authorization. We have also reduced debt by $479 million from the same time last year and $353 million from year-end 2022. Our debt leverage ratio remains conservative at 1.48 and at the low end of our stated target expectations of 1.5-2 times. As we finish out the year, we are confirming that our sales expectations for 2023 is to be down in the range of -10%. For the fourth quarter, we would expect to see sales down mid- to high-single digits, mostly dependent on the weather and how the level of new pool construction finishes out the year. The one less selling day that we reported in the third quarter will not be made up in the fourth quarter, and so we will have one less selling day for the full year. Gross margin for the full year will approximate our long-term guidance of 30%. The fourth quarter is seasonally expected to be less than the full year rate. Our range for margins for fourth quarter is expected to be around 29%, but could vary in either direction. Margins in the fourth quarter will be reduced by the year-over-year increase in average costs we have seen to date as we compare against last year's fourth quarter that benefited from lower cost inventory. From a comparative view, this will primarily offset the 120 basis points negative impact recorded in fourth quarter 2022 for the additional import tax expense. Additionally, we would expect to see some continued pressures on margins from product mix, similar to what we saw in the third quarter. The other structural benefits we have discussed on gross margin all remain. Our target for full-year operating expense growth is still to limit base business expense growth to 1%. Fourth quarter will not see the year-over-year decrease in operating expenses we saw in second and third quarter due to the lower volume-related expenses in the smaller quarter. But the year-over-year increase will not be as high as we saw in first quarter. Full-year interest expense is expected to be approximately $61 million. Our fourth quarter tax rate will be consistent with our rate in first and second quarter to result in our full year expected rate of between 25%-25.2%. The expected annual rate is similar to our prior year rate, excluding ASU. Our guidance on uses for capital allocation are the same as those discussed at the end of the second quarter, with a use of cash of approximately $25 million on acquisitions, $60 million on capital expenditures, and $170 million on cash dividends, reflecting the 10% quarterly increase approved in the second quarter. We will continue to retire debt and repurchase stock opportunistically throughout the balance of the year with the remaining excess cash flow. We have completed $180 million of share buybacks to date, leaving our expected share count for fourth quarter to be 39.3 million shares, and weighted average diluted shares outstanding for the full year will also be 39.3 million, down 700,000 from last year. We have narrowed our range for our EPS guidance for the full year 2023 to $13.15-$13.65, including the $0.15 ASU tax benefit realized to date. Providing a narrower range in the third quarter after completion of the pool season is consistent with our historical practice. Quarter came in very much in alignment with our latest expectations. Our focus on operational improvements and customer experience will allow us to continue to support our customers and provide them the broadest product selection with continued opportunities to grow their business. We will now begin our Q&A session. Thank you. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please limit yourself to one question and one follow-up question. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ryan Merkel with William Blair. Please go ahead. Thanks. Good morning. Thanks for taking the questions. Good morning. I wanted to start off with a big picture question. Peter, it seems that perhaps the worst might be over for the pool declines. Can you just walk us through the puts and takes as you think about 2024? I'm not looking for specific guidance, just the positives and negatives that you see heading into next year. Yeah, sure. So, 2023 was no doubt a kind of a crazy year, which followed a couple of years of crazy, but for different reasons. So it was, we had bad weather in the beginning of the year. We had interest rates that continued to rise, and that, we think, put a crimp on new pool construction, which was actually is turning out to be lower than what we thought it was, when I was talking to you a year ago, and frankly, when we initiated guidance at the beginning of the year. You know, I think new pool construction this year, as I mentioned, is gonna be down 30. I think it's it depends on the t hat's on average, right? So I think if you look at entry-level pools in some markets, it's actually down more, and in some cases, you know, significantly more. The flip side is that the higher-end pools remain solid. The builders that build the higher-end pools for the more affluent people that have less financing connected or no financing connected to them, that business is good. So when I look at the step back and look at the macroeconomic environment based on what we see today, I would tell you that I don't think new pool construction is going to drop much more. Could it drop a 1,000, couple of thousand? It could. Way too soon to tell because the builders are, frankly, you know, just putting together their plans and pricing and starting their selling season for next year. But I've talked to many builders in the last couple of months, and everybody is fairly optimistic that, you know, this year the new pool count is down. They don't really expect it to fall much more than where it is today. The other comment I would make on the market is on renovation. Renovation is, again, it plays a little bit of that same pattern, right? The renovations that would require financing are going to be under the most pressure because of interest rates. Now, I read the same things that you guys do on interest rates. If there is moderation in interest rates next year, then that will bode well for both new pool construction and for large renovations. Smaller renovations, most of those are paid for in cash, and it really doesn't have a big impact on whether the jobs, you know, get done or not. You know, from a maintenance perspective, maintenance is maintenance. It has to happen. You know, the overall desirability of the pool, outdoor living, is still very high. People still want pools. There would be more pools being built if they were, frankly, more affordable. So those that have a pool, like them, use them when the weather is good, then they, they're in them. You know, if I look back at the beginning of the year, a couple of the headwinds we had was, you know, very tough weather in the beginning of the year, and we also had some of the inventory hangover from the previous year that was in the channel. So as I look forward, and again, too early to give you a guidance, but, you know, I'm more optimistic about next year than this year, but I also wanna be clear with the setting expectations. I'm not looking for, you know, a material, you know it's new pool construction is not gonna take off. It's not gonna grow, but I, I look at the, the headwinds that we faced, and the stability of the market, and I remain confident that I think next year, next year will not be another year of down, down, down. Got it. That's helpful. Appreciate that. And then it was good to hear that the inventory is right-sized. Can you just talk about the early buy? Would you call that normal? Are you being aggressive? And, you know, how does that impact gross margins the first half of next year? I would say that our early buys, Ryan, we're gonna participate in early buys as is normal, because now we've, you know, we've created the headroom in the inventory where we can participate. So that certainly helps, and as does the price increases that will be rolling out effectively next month. So for the first half of the year I mean, remember, our gross margin, as Melanie said, our gross margins are not consistent quarter to quarter. They vary from quarter to quarter, so they're generally higher. They peak towards the middle of the season, and then they come down. What I would also say is I would draw your attention to the comment Melanie made about gross margins and the inventory drawdown. When you draw down inventory like we did, and you're buying less product like we are, that's also going to impact volume related incentives. So we don't anticipate inventories dropping significantly from where we are. Therefore, we would expect volume incentives to be more in line with what we would see traditionally. But again, very early. I can tell you from a macro perspective, we'll be participating in early buys, but we'll give you guidance on how that should flow through the P&L when we initiate guidance next year. Got it. Thanks, Peter. I'll pass it on. Our next question comes from Susan Maklari with Goldman Sachs. Please go ahead. Thank you. Good morning, everyone. My first question is Morning. Morning. Good morning. Can you talk a bit about the competitive landscape now that we're sort of through the bulk of the pool season? How you're thinking about the different dynamics on the ground, your ability to react to those, and any thoughts on the setup as we think about next year? Yeah. Thanks, Susan. Good, good question. You know, the competitive environment today is really no different than it would have been in a similar year in the past. Meaning that volumes are down this year. We have competitors, and we believe that we've taken share this year, so we have competitors that are probably in rougher shape than we are, but that's nothing new. We've taken share virtually every year that we have been in existence. We'll continue to do that going forward. Now, what does that mean for competitive actions? There's times when we have competitors that do some things that are pretty desperate, and when that happens, you know, we have to react. The good news is that none of those things have really any staying power, so might we have to react to a certain inventory position that somebody has, that they're trying to liquidate? Yes. Is there any material amount that makes that sustainable? No. So, you know, the competitive dynamics today really are, in terms of what competitors do in this environment, no different than they have been. I would tell you that we are stronger today than we have ever been. We've more locations. We're opening up more locations. And we have more locations already. We're opening more locations than anybody else is, too. And our, really, it comes down to our relentless focus on the customer experience that I think allows us to win. Okay. That, that's helpful. And then, any thoughts on capital allocation? Perhaps, you know, your willingness to step up on the buybacks, just given the improvement you made in the inventories and the cash flows that we saw during the quarter and as we think about the full year here, and any other sort of thoughts around some of the strategic initiatives and investments there? Yeah. So overall, for capital allocation, you know, as we mentioned, for the bulk of the year, you know, we would really be looking at share repurchases opportunistically. Certainly, historically, you know, we would expect that this year, fourth quarter, would continue to be a positive cash flow quarter. And so we would, you know, have even more cash to spend than we currently have. And when you look at just our total capacity on all of our debt arrangements, we have a significant amount of capacity. So really, we are very fortunate from a positioning standpoint, you know, that we have the ability to make decisions throughout the quarter to invest in what makes sense, whether it be anything related to acquisitions, new sales center openings, or continued share buybacks. Okay. Thank you for all the color, and good luck. Thank you. Our next question comes from David Manthey with Baird. Please go ahead. Hi. Thank you. Good morning. Good morning. Is it safe to say that you've now lapped any strangeness or variability in the minor repair and maintenance volume situation? I think we had shortages. We had COVID pull forward. Just trying to gauge if there's any puts or takes remaining that would lead you to believe that MR minor repair and maintenance business wouldn't return to a typical kind of low single-digit growth rate next year. I'm not asking for guidance. I'm just saying, is there anything in the past that would lead to variability as we look forward? Yeah. No, I think that's a fair question, Dave. I think the maintenance business should be normal. The only thing that I would tell you impacted it, we started to see an impact in the fourth quarter that carried a little over into first quarter from a maintenance perspective, is the storm in Southwest Florida, but you know, relatively minor from a the total company perspective. But when I look at normal demand patterns for everything, I would tell you the maintenance and repair business has the highest you know, predictability and stability. Where it gets you know, where it gets a little bit subjective is when it comes down to you know, a repair versus an upgrade. So, and again, it really kind of depends on the market that you're talking about. In some cases, repairs may be choice number one. In other cases, you know, repair and replace or replace would be choice number one. But by and large, I don't really see much different. In fact, I look at it and say that as I mentioned in my comments, there's 70,000 new pools that are in the ground that have to be maintained next year, that didn't exist this year. There was likely some things that were put off this year that next year are going to have to be done. So the good news about a swimming pool and the market is, you know, there are certain things that I have to do, you know, every week, as you know, as a pool owner, and there are some things that I could defer, but you can only defer things for so long when they turn into a, you know, a, "I'd like to," to a must-have. So, you know, that, that part of the market, we remain confident in. Right. Okay. Yeah, don't I know it? And then second, Melanie, does the inventory reduction effort in the back half of this year have any implications at all for the pre-buy and therefore your gross margin in next year? Yeah, well, it certainly was able to allow us to clear out physical space for pre-buys and make the determination really on a vendor-by-vendor basis, depending upon what their individual incentives were of what we wanted to participate in. And so, you know, I would say, if you had to characterize it, compared to 2019, we would say that early buy season was relatively normal. And so when you look at you know, what that benefit that might bring for margin for next year, you know, certainly we'll have better color on that once we take a look at what we've received kind of first quarter. We typically will receive early buys either in fourth quarter or first quarter. So we'll have a better sense for that when we talk again in February. So the one thing that, you know, we did mention that will be slightly ahead of where it has been historically is, you know, typically we would be looking at those kind of one to two price increases, you know, in the pre-2019 period. And so for next year, we are looking at those being, you know, look slightly higher at kind of the two to three range. Got it. Thank you very much. Our next question comes from Scott Schneeberger with Oppenheimer. Please go ahead. Thanks very much. Peter, you've spoken in the past about, about, you know, maybe a handoff from new pool construction, where there was a backlog and then folks moving to remodel. And we've heard your guidance on it, but I'm curious just to get an updated commentary from you of, do you see that trend occurring and likely persisting? Could there be upside as you enter 2020 in the remodel category? And in that question, just what you're seeing with higher tech offerings and discretionary purchases there and propensity to pursue those items. Thanks. Sure. You know, as I mentioned, we believe that the renovation and remodel business is holding up better than, new pool construction, and that's for, a couple of reasons. People with pools tend to be more affluent in general, than people that are deciding whether they want a pool or not, certainly at the entry level. So, you know, our survey of the builder community would say, build a remodel community because most people do both, right? Most of our customers that are builders are also doing remodel. And I think there's, with, with probably very few exceptions, our builders would tell you that their remodel business is better than the new construction business. I think there was a bigger backlog in renovation and remodel, you know, a year ago, 18 months ago, because of people that were focused on building new. I think with new pool construction being down 30%, I think the backlog of renovation and remodel has been worked down. But also remember, you know, the industry kind of views renovation and remodel as about 10% of the industry, right? So if you have, you know, 5.4 million in-ground pools, there might have been a little more than 10% in pent-up demand and backlog that today may be back down in the 10% range. So that business is good. It was probably a little bit ahead of itself, you know, addressing the backlog. Now, I would tell you that it's probably back down to more normal. I think that's good and that's healthy for the industry. Your question on, you know, the technology adoption, again, it comes down to, I guess, during the height of COVID, when people were home and they said, "Hey, I'm spending a lot of time, I'm staring at a swimming pool with no technology on it. I want, I want, I want." We saw a big, you know, request for, "I want technology. I want technology." We see with new pool construction, the trend towards, you know, higher ticket items and technology is still continuing, right? The pools that are being built today still have the new features and the new technology on it. Oftentimes, when there's a replacement necessary, again, it is an opportunity for an upgrade. So maybe during COVID, some of the upgrades were pulled forward, meaning the time clock still works, but I'd actually like to do this from my phone versus going out to the pad. So now, you know, when there's failures of equipment, we still see adoption of the higher tech product, because, frankly, it's just, it's a better experience for the consumer. You know, when pumps fail and they're putting in a variable speed pump, there's still a lot of single speed pumps in the industry that were working and people weren't going to change them, but when they do change them, because of the DOE regulations, they're going to variable speed, and they're recognizing a significant benefit in their energy cost. The same opportunity exists when it comes to heaters, you know, high efficiency heaters versus standard efficiency heaters. And cleaners, there's, you know, types of cleaners that are for far more efficient. And again, the consumer trends for those products continue. They are. When people are spending money, those that are replacing most often are replacing for the, for the, newer product versus looking at old technology. Great. Thanks for that. And Melanie, really nice SG&A efficiencies in second and third quarter. Heard the guidance on fourth quarter that, you know, less leverage and then less seasonal activity. But looking ahead to next year, how are you feeling about margin? I know it's very dependent on what you see on revenue, but, you know, how are you feeling on margin on some of these efficiencies you've gained? How sustainable will they be into next year? Thanks. Yeah, you know, we are very proud of what we've been able to do on the expense side, and it's a really good indicator of, you know, the quality of management, and, you know, their ability at each individual sales center level to adjust expenses according to the volumes at each location. So, you know, as we look forward for next year, you know, we would certainly continue to do that, you know, regardless of whether or not, it's a, you know, significant upswing, or just kind of a continued moderating of where we are from a sales standpoint. And so, you know, we continue to have worked throughout the season, and one of the things that we said earlier on, you know, that we weren't cutting the base of our expenses, because we wanted to take the opportunity from a volume standpoint and reinvest in our employees, in operational initiatives, in our training, and we have been very successful in those things that we wanted to do for this year. And so our expectation would be that that would be a benefit for us as we move forward. Thanks. Our next question comes from Noah Merkousko with Stephens. Please go ahead. Good morning, and thanks for taking my questions. Morning. So first, morning. I know there's been a lot of discussion about gross margins already, but hopefully I can squeeze one more in here. I think longer term, you've talked about 30% gross margins, and so I guess as we sit here today, is that still the right way to think about it? And you're now, you know, as we look at the medium term, you're benefiting from early buy from manufacturers, plus higher than normal inflation for next year. So could that potentially influence gross margins a little bit higher than that 30% target in the medium term? Yeah. So, so thank you for acknowledging that. You know, we are still consistently stating that our long-term margins will be, will approximate 30%. When we look at kind of the structural things that made up those margins, you know, we are continuing to benefit from the acquisition-related margins that we did from the Pinch A Penny and Porpoise acquisition. And as Peter mentioned in his comments, they are trending overall very well, as it relates to kind of compared to the traditional retail market within our industry. We've also seen some benefits from our private label products. That is an area where we would expect to continue to expand, as we move forward. We're continuing to add capacity there to serve more of our locations. We've made great strides in what we've done on our procurement and our logistics end, so that continues to provide benefits, as well as pricing. We would say that, you know, we're definitely not done from the pricing area. We have some new things that we'll talk about when we talk again in February on what we're doing as it relates to pricing. And so really, the only thing this year that will be a little bit out of what we've seen historically is kind of that product mix, particularly as it relates to the building materials. So we are seeing a little bit more of a drag on the new construction on the sale through of some of those products, which we did talk about. You know, that has been a significant growth opportunity for us. So as that normalizes, we would see that that normalizes as part of our overall longer-term margins. And then again, we did also mention the the vendor incentives for this year will be less than what they would be in a normalized year. No doubt, margin is a very important focus area for us. It can be hard to predict when you have a dynamic market that you're playing in, right? With mix, you know, customer mix, new pool construction, weather, all of those things factor into the overall product mix and the overall customer mix. But rest assured that the drivers behind that, which is a very effective supply chain, a customer product offering that is very desirable, focus on our private label and exclusive brands, a dynamic pricing environment, you know, leaning very heavily into our vertically integrated chemical packaging facility. All of those things help, and they're all factored into our long-term plan and our long-term guide. You know, certainly, as we mentioned, the vendor incentives this year is a it's different this year and a year where you're drawing down inventory than a year when you are increasing inventory. So, a lot of factors go into Gross Margin. I can tell you that it is a big focus area for the entire business, and we believe that it will continue to pay dividends for us. Got it. That's helpful. And then for my follow-on, just a clarifying question. The language in the press release noted the low end of the revised EPS guidance range at $13.15 would be a solid result. Should we read into that to mean that you're pointing to the low end of the guidance? Yeah. No, that really wasn't intended to, to guide one way or the other. I think it was more of just, you know, taking a big step back and acknowledging, you know, where we're ending up for this year. So, you know, again, as we sit here today, you know, we don't wanna be telling you that sales are down 10%, but, it's really just putting it in context of, you know, taking out the last two years of, you know, extraordinary growth, and seeing that from a, you know, incremental standpoint, we have certainly accomplished a lot from, from where we were when we reported 2019 results. And so, you know, we are proud of the results that we will be, presenting to you for this year. Yeah, the fourth quarter is our season Got it. That makes Yeah, fourth quarter is our seasonally least significant quarter. It also is the quarter that is affected the most in terms of a percentage of the quarter by things like weather. So if the season shuts down early and construction drops off sooner because it gets cold, it magnifies itself because of the size of the quarter. So I think all we were pointing to is the potential variability. Yep. Yep. Okay, that all makes sense. And if I can just squeeze in one other quick one. What was the expected inflation next year from price increases? Was it three to four or two to three? So, so we have three to four from a equipment vendor standpoint. You know, we are expecting on the based on the current run rate on Trichlor, we still will have a first and second quarter that will be lapping some, you know, year-over-year prices. So you know, it could blend kind of within that. We're also still waiting to get kind of final pricing on Horizon. So current look is that that'll probably be something less than what we're seeing on the blue side on the equipment. So, you know, we'll have a better definitive answer for that when we talk again in February. Got it. That makes sense. Well, thanks for taking my questions, and good luck going forward. Thank you. Our next question comes from Andrew Carter with Stifel. Please go ahead. Yeah. Hey, hey, thanks. Good morning. I think you said this was more of a weather neutral quarter, but I kind of wanted to understand the jump in chemicals, 'cause that, I would assume, had to be volume related because I think the pricing was steady. So was there any weather impact in that? And then regarding, I know that you called out product mix as a headwind, but it would chemicals be accretive or dilutive to gross margin overall? So I'll stop there. Yeah. So the chemical sales growth that we saw, Andrew, as I mentioned, is a result of a couple things. So it was a weather neutral quarter, which it's been a long time since we've been able to say that it's a weather neutral quarter, and we weren't saying that it was extraordinary. Now, was it hot in Texas? Yes, it was hot in Texas, but frankly, I've lived in Texas, and in Texas, it's hot every summer. So you know, from a weather perspective, we would say neutral. I would tell you that we have been focused on our chemical business, and we've been focused on providing our customers with a product offering that is second to none, and with technology tools that allows them to be to frankly sell more chemicals. And I think that bodes well for us, and we are participating. And so I think our ability to take share on the chemical basis is evident within the quarter. And that, as you know, is a focus area for us. So from a margin perspective, you know, when you're talking about our private label and exclusive brands, remember, on the chemical side, there's three different parts of chemicals, right? You have the trichlor part of the business. Remember, we've always said it's about a third, a third, a third. You have specialty, you have balancers, and then you have Trichlor. On the Trichlor, as Melanie mentioned, we did see some deflation on Trichlor, but that was offset by some inflation on the other two areas. So in general, it is margin accretive for us, but it really depends on the chemical trail that you're talking about. Got it. Thank you. Switching gears a little bit, I know you kind of talked, talked a little bit in sales and not, not kind of putting a firm line in the sand, but as far as, like, EPS goes next year. Do you have other drivers to grow EPS in a, in a more, you know, tepid environment? I know this year's been a story about maintaining SG&A investment. Do you see a world where you could get more flex on SG&A? Do you see perhaps more meaningful gross, gross margin increases? Anything, anything along those lines? Thank you. Yeah. Again, too early to put together a, an outlook for next year, but if you, if you think back about the themes that we've consistently discussed, that are gonna have an impact on our EPS, right? One is we have a relentless focus on growth. Sometimes the market helps you in that area with, from a demand perspective, but this year, for instance, with new pool construction, it certainly was of no help. In times like that, we lean into other areas like our capacity creation, which is something, again, we didn't just start this year, we didn't start it last year. Frankly, you know, it was something that was started pre-COVID, and it's a good thing we did because that allowed us to ramp up very quickly and handle the, the surge in business and, and the increase in activity without adding, you know, significant amounts of cost. So from a EPS leverage perspective, obviously in a business like ours, your biggest leverage points are gonna be volume. So we have you know, if, if we grow more, then that certainly helps. Margin is an area, too. You know, as we mentioned, you know, gross margin is something that is a focus area for us. It's an area that we still see opportunity in, and of course, as I mentioned, you know, capacity creation and, and SG&A leverage is something that, we always work on. But at the same time, too, in order for us to provide a best-in-class customer experience, in order to provide the best technology tools, that requires some investment, too. So we tend to be very long-term focused on our investments, and deliberate with where we're investing capital, on recognizing that sometimes you spend money this year to reap rewards next year or the year after or the year after. But I think if you look back historically on the investments that PoolCorp has made, that's one of the things that has allowed us to continue to grow and to continue to expand the operating leverage. Finally, just real quickly, you said something about increased competitive activity during the script. Was that isolated to chemicals, or were there any other significant pockets out there beyond just normal course of business that you kind of talked about? Yeah, Andrew, I think it's really in a lot of areas, right? When you have a demand environment that is markedly different year-over-year, you have competitors that are going to do things. They're going to react because they need cash, and they need to liquidate inventory. So, you know, I can't tell you that it was the only place we saw competitive pressure was in chemicals. We saw it in chemicals, we saw it in equipment, we've seen it in building materials. And again, the good news is that none of those are sustainable. Do they cause us to react? Yes. Is there a short-term impact when we have to react on that? Yes. Is anybody better positioned to withstand that? Yes. And frankly, what we really focus most of our attention on is providing the best customer experience so that it doesn't come down to having to match a desperate price in the market. That's all I got. Thank you, guys. I'll pass it on. Thank you. Your next question comes from Joe Ahlersmeyer with Deutsche Bank. Please go ahead. Hey, everybody. Good morning. Hey, Joe. Hope you're well. Morning. Yeah, forgive me. I just I'll need to follow up a little bit on the prior question about the competitive environment. Maybe first, if I'm looking at the comment from earlier around the typical sequential decline in Gross Margin, I think it's a little larger than the typical sequential decline. And of course, you listed out some unique items. I'm just wondering if, ex those items, you were down sequentially, maybe in the, like, 50-70 basis points range, and the rest of it would be sort of the implied quantification of all that, all those other things. So are you looking at kind of a typical change from second to third quarter and then suggesting that the individual items that we listed out accounted for about 70 basis points? Is that what your question is? That's right. Yep, because 150 basis points sequentially, I think the last time you did that was in 2007, and the average had kind of been around the, you know, 50-70 basis points. Yeah, I would say that, you know, we don't quantify each of the individual items, specifically. You know, once we get to the end of the year, we'll be better able to quantify kind of the full impact of, you know, specifically as it relates to the building materials, on the margins. The customer mix, you know, that does vary quarter-over-quarter because you will see, from, you know, depending upon the first or second quarter, some of those early buy purchases and the shifts, from a timing, from that. So I think that that definitely impacts the comparison, quarter-over-quarter. So, you know, those types of things are, you know, very hard to individually, at that detail level, assess. You know, when, when we actually. You know, when we go through the list of things that we talked about today, you know, when we look at margins internally, there's probably 20 things that we're seeing that fluctuate quarter-to-quarter, year-over-year. So we're really just trying to kind of narrow it down to the things that are more impactful, to be able to give you a better picture of what's going on with, with the business. Yep, that makes sense. I guess I just am curious, the call out of it being typical. Maybe that was a directional comment and not so much on the magnitude, but we can take that one offline as well. The other question I had was related to the first answer. There was a particularly poignant comment there that new pools, more would be built if frankly, they were more affordable, I think is to paraphrase. Interest rates seem to be what you're calling out as the main bad guy there.] But if I'm thinking about the other side, certainly there's just the price and cost of the pool. And I'm just wondering, you know, what is sort of the probability you would assess to the chance that we just have gone too far on pricing? You know, 10 years from now, when we say that the pool industry typically gets 1%-2% pricing, except for, you know, 2024, when the industry did have to experience a reset, is there a probability you would assess to that? Yeah, I would tell you the probability of that is really low. Let me expand a little upon my comment about the affordability. As I mentioned, I believe on the second quarter call, what we where we are seeing the biggest headwind on swimming pool construction in terms of units, is in the entry-level pools, right? The smaller pools, the cheaper pools, which the builders will tell you that the conversation takes place at the kitchen table to close that deal. Prior to the run-up in interest rates, so for the previous couple of years when interest rates were very low, a pool could be had for, you know, $750-$800 a month, and homeowners were signing deals based on that as their monthly payment. But with a significant increase in interest rates and frankly, less lending in that area in the last 12-18 months, it has driven up the cost of borrowing costs and availability of that, of those funds to build a swimming pool. So that has really taken a chunk out of the lower-end pools. As it relates to the higher-end pools, which are paid for, as we have mentioned, many times in cash, those, the demand for those pools is good now. It was good before, and the builders are telling me that the outlook for that is still strong. So that really is the comment as it relates to affordability of new pools. Now, remember, you know, the inflation that we're seeing, so Melanie is talking about, you know, she'd mentioned that prices could be up 3%-4% this year. So 3%-4% on the rest of the industry on something that is nondiscretionary in nature, doesn't really change the demand curve. So if, if, and, and frankly, if the price of a swimming pool, if you said that an equipment set for a swimming pool is in the $15,000 range now, if the equipment set came down 5%, which we are not suggesting, and I don't think that is. I don't think that's going to happen at all. In fact, I think there's virtually zero chance of that, in my opinion. But if it were, that really isn't going to change the homeowner's decision on whether they should start installing a pool, because in the grand scheme of things, material makes up 25% of the project, so it just isn't enough to move the needle. It's really everything else that factors in. On nondiscretionary items, it doesn't really If there was a decline from the manufacturers, which we've had zero indication of, if there were, it wouldn't change the demand curve for the nondiscretionary purchases because nobody buys any of those items until such time as they need them. Understood. If I could just squeeze in one more follow-up, if there are- Yeah, I think. I'm sorry. I think that we're over our time for the call. Do you want to just follow back up with me? Sure. Sounds good. Okay. Thank you. Peter, did you want to close this up? Yep. I want to thank you all for joining us today. We look forward to discussing our fourth quarter and full year results on 22 February 2024. If we don't talk to you before then, have a very happy and safe holiday season. Thank you. Thanks, everyone. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.