管理層發言
Good day. And welcome to the Pool Corporation Second Quarter 26 Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. To withdraw your question, please press star then 2. Please also note, today's event is being recorded. I would now like to turn the conference over to Kristen Byers, Director of Investor Relations. Please go ahead.
Welcome to our second quarter 26 earnings conference call. During today's call, our discussion, comments and responses to questions may include forward-looking statements, including management's outlook for 26 and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and variables that could cause actual results to differ from projected results are discussed in our 10-K. In addition, we may make references to non-GAAP financial measures in our comments. A description and reconciliation of non-GAAP financial measures are included in our press release or posted on our corporate website in the Investor Relations section. Additionally, we have provided a presentation summarizing key points from our press release and today's call, which can also be found on our Investor Relations website. I am now pleased to introduce John Watwood, our President and CEO, who will begin today's call. Thanks, Kristen.
Thanks, Kristen. Good morning, everyone. And thank you for joining our call. Before we cover the quarter, I first want to thank our employees for their tireless effort and their dedication to our customers day in and day out, especially during these critical pool season months. I also want to take a moment, as this is my first earnings call as Pool Corp CEO, to share my perspective on our business and where we are headed. I came into Pool Corp with a deep appreciation for what makes distribution businesses successful: branch-level execution, strong supplier partnerships, technical sales expertise, disciplined inventory and service level management, and seamless coordination across local markets. These capabilities have supported Pool Corp's value proposition for more than 30 years and provide us a strong foundation for continued growth. Additionally, the structural drivers of Pool Corp's business model are powerful: a large installed base of pools that naturally grows each year and generates recurring revenues from ongoing maintenance and periodic remodel activities; a professional customer base that depends on our scale and service; and a distribution network that is difficult to replicate. With our eyes set on crisp execution, I believe we can continue to generate above market growth and control how we respond to any type of industry backdrop. Our fundamental strategy is unchanged. We aim to be the best worldwide distributor of outdoor lifestyle products by growing our share with our customers, building density in our network, and executing consistently across every market we serve. Our products must be on the shelves when the customer walks in the door. And when it comes down to service, supplier relationships, and operational discipline, every investment and initiative we make has to support the customer experience, strengthen supplier relationships, improve productivity, and generate an appropriate return. If it does not, we do not do it. And where it does, we will invest with discipline. To deliver on that strategy, we are focused on four priorities, each built to grow the business. First, sales excellence. Our growth starts with serving our customers better than anyone else. We are equipping our sales teams with the talent, training, and tools to help our existing customers grow their business with us and to broaden our reach to new customers. Our digital platform, our proprietary products, and the expertise in every sales center are how we deliver that value. When we make our customers more successful, we capture share, and we grow. Second, pricing and supply chain discipline: pricing sharply and competitively, running strong chemical and building materials playbooks, and growing our private label or proprietary brands, which deepen customer loyalty and strengthen our margins. Third, operational execution: running our sales centers with speed and consistency, holding a high service standard across all 455 locations, and getting our recently opened greenfield locations to their full potential. And fourth, growth through disciplined M&A: adding density, new markets, and capabilities where the operational and financial fit is clear. Together, these four priorities are how we drive profitable growth, widen our competitive advantages, and create long-term value for our shareholders. None of this works without our people. At every level of the organization, our team should know what is expected of them, understand how their work matters, and feel empowered to serve our customers. Over the last six months, I have spent significant time in the field with our operators, customers, and suppliers, met with employees across various functions, levels, and locations, and more recently with our shareholders. Everything I have seen and heard confirms what excited me about joining Pool Corp. This is a great business built by passionate employees, excellent suppliers, and hundreds of thousands of customers who trust us to service and partner with them. I am proud to lead Pool Corp's global team of employees as we work to deliver even higher levels of performance. Now I will discuss how the business performed during the quarter and Melanie will take you through the financial detail. Net sales grew 2% in the second quarter. A result that reflects the resilience of our model as strength in our recurring maintenance business and continued share gains in building materials offset a soft new construction and discretionary environment. Where we serve our customers best, we win. Our large and growing installed base drove healthy recurring maintenance demand. Building materials grew 4% and that outperformance reflects our national pool trend showrooms, our product breadth, and the way our teams help builders bring their projects to life. Our proprietary and private label offerings continue to gain traction and POOL360 reached 18% of sales, extending our reach. In Europe, sales grew 11% on strong demand and improving sentiment. The softness we saw was concentrated where the cycle is weakest. New pool construction stayed muted, as U.S. pool permits are tracking down low single digits year to date, and discretionary demand remained measured, felt most in our year-round markets. Our overall sales in California, Texas, and Arizona were down mid single digits and Florida declined 1%. Much of that drag was our Horizon Irrigation and Landscape business, which is concentrated in those markets and saw further pressure as residential projects slowed. Our seasonal markets by contrast grew 6%. Equipment grew 3% on price and repair-related demand while chemicals declined 2% on pricing. Sales to retail customers were down 1%, and Pinch A Penny franchise sales were flat. On gross margin, higher inbound freight was the primary pressure, and it is an area we are actively working to offset. Melanie will cover the additional details behind our gross margin performance and implications to the full year. Consistent with our productivity-first posture, we remain deliberate on network expansion, adding one location in a key U.S. pool market and closing one Horizon location. The greenfield locations we have opened over the past year continue to ramp, and their performance is improving. The class of 2022 and the remaining classes are trending in the right direction but we still have room to grow as these locations mature. Across the rest of our network, ongoing process improvements and the continued adoption of our digital tools remain a focus for driving efficiency and productivity and getting more from the investments we have already made. Taken together, the quarter reinforces our strategy and our confidence, and we remain on track to achieve our adjusted earnings guidance range of $10.87 per share to $11.17 per share. In closing, I would like to emphasize how honored I am to lead the Pool Corp team and generate further value from the fundamentals of our business and the investments put in place over the past several years. We compete in large markets, with recurring, repeat demand, and I do not take for granted the advantages we have built to serve them: a distribution network that is hard to replicate; supplier relationships built over decades; and one of the broadest product assortments in the industry. We are continually investing in the tools and services that make it simpler for customers to grow their businesses with us and we are doing that from a position of financial flexibility with ample capital available to reinvest, positioning us to emerge stronger as the cycle recovers. I am grateful to our employees, suppliers, and customers for the solid foundation they have built. I will now turn the call over to Melanie Housey Hart, our Chief Financial Officer, to review our second quarter results in more detail.
Thank you, John Watwood, and good morning, everyone. We delivered a solid second quarter, growing sales to $1.8 billion, holding expenses tight, and generating strong earnings. Net sales increased 2% over prior year, with a 3% contribution from pricing as we lap prior year mid-season vendor price increases. We were pleased to see that building materials volume grew again even with softer demand in other discretionary categories and noted a 2% decline in chemicals on lower pricing. Gross profit grew 1% to $541 million with a gross margin of 29.7%, down 30 basis points year over year. Product mix overall was neutral. The decline was driven primarily by inbound freight costs, which we were not able to fully recoup in selling price this quarter, and by unfavorable customer mix as we saw a higher portion of our sales from larger customers. Supply chain gains partially offset these areas. We made strong progress on expense discipline this quarter, managing adjusted operating expense growth down to 1% from 5% in the first quarter. Our continued focus on capacity absorption kept compensation and outbound freight cost well managed. As reported, operating expenses were $273 million, up 4%. The adjusted figure excludes a one-time $8.3 million charge, primarily the noncash acceleration of unvested equity grants tied to the CEO transition. Adjusted operating income increased 1% to $276 million with an operating margin of 15.1%. Reported operating income was $268 million, a decrease of 2% versus prior year. Interest and other expenses increased $2 million versus the second quarter of last year, driven by higher average debt outstanding. Adjusted net income increased 1% to $196 million. On a reported basis, net income was $188 million, down 3% from a year ago. Without the after-tax impact of CEO transition cost, earnings per diluted share increased 4% to $5.38 compared to $5.17 in the second quarter of last year. As reported, earnings per diluted share was $5.17 in both periods. Next, I will discuss our balance sheet and capital allocation. Inventory increased 4% to $1.4 billion at June 30, compared to $1.3 billion at the end of the second quarter of the prior year. Consistent with the seasonal early buy and opportunistic purchases we discussed last quarter, and the normal seasonal draw down we anticipated, we sold through our peak season stocking levels, moderating year-over-year inventory growth. We are comfortable with the quality and positioning of our inventory. Second quarter represents our peak debt levels as we stock up for season and pay vendor early buy payments ahead of cash collections on in-season sales. Total debt was $1.3 billion, an increase of $111 million over the past 12 months. Our weighted average effective interest rate improved to 4.3% from 4.7% last year as we continue to benefit from our swap agreements that are in place and expire in February 2027. At 1.78, we remain within our expected debt leverage ratio of 1.5 to 2.0 times. On capital allocation, we are anticipating another strong cash flow year with cash from operations expected to come in around 100% of net income. We return capital to shareholders through dividends and share repurchases, paying $93 million in dividends and completing approximately $86 million in share repurchases year to date. In April, our board increased our share repurchase authorization to $600 million, of which $580 million remains available. As a reminder, the second half of the year, as we exit the season, is when we generate the bulk of our operating cash flow. With the first half behind us, here's how we see the balance of the year. We expect trends consistent with year to date. On pricing, that means higher inflation on equipment, modest inflation on all other products, and continued chemical pricing drag. On the demand side, slight growth in the maintenance portion of the business, some incremental remodel activity, and still-soft but stable pool build. Together, we expect low single digit top line growth for the full year with approximately 2% to 3% from pricing. The benefit from pricing is expected to be lower in the second half of the year. Second quarter margins reflected higher inbound freight and an unfavorable customer mix. We still expect pricing and supply chain benefits in the second half; however, on a comparable basis, these are tempered by last year's mid-season price increases. Given the second quarter's weight in the year, we now expect full year gross margin approximately 30 basis points below prior year versus in line previously. We are pleased with the expense progress we made in the second quarter and we will continue to operate efficiently through the rest of the year. As a result, we expect adjusted operating expenses to be an increase of approximately 2% to 3% for the full year, including a modest amount of incentive compensation recovery over the prior year. This likely will be an expense increase on the higher end in the third quarter and lower end in the fourth quarter. This is because the fourth quarter prior year had incremental IT expenses that are not expected to reoccur in 2026. We have opened fewer new sales centers this year, so these additional investments have moderated as we continue to focus on expanding profitability at the greenfield locations opened over the last several years. Interest expense is still estimated to be between $49 million and $51 million. Our full year tax rate is forecasted to be approximately 25%, with a lower rate in the third quarter and no additional benefit from ASU for the remainder of the year. Our weighted average shares outstanding are expected to be approximately 36.4 million, reflecting the incremental share repurchases completed to date. Within our full year outlook, the puts and takes have shifted modestly. We now expect slightly better top line growth offset by lower gross margin, largely reflecting the higher inbound freight and customer mix we saw this quarter. On balance, these roughly offset. As a result, our underlying adjusted earnings guidance is unchanged at $10.87 to $11.17. In the current quarter, we recognized $0.21 related to one-time CEO transition expenses and have updated our diluted EPS range to $10.66 to $10.96. The season is playing out largely as we expected, and our team executed well through the peak month. We are focused on a clear set of strategic priorities across sales, pricing, supply chain, and operations aimed at unlocking profitability and extending our competitive advantage. While our gross margin reflects cyclical pressure from this environment, we view it as temporary rather than structural. We continue to expand our network in a way that strengthens our competitive position for the long term, and we are confident that the actions we are taking today will leave us better positioned as discretionary demand recovers. We will now move to our question and answer session.
分析師問答
Thank you. We will now begin the question and answer session. At any time your question has been addressed and you would like to withdraw your question, please press star then 2. And once again, we do ask that you please limit yourself to one question and a single follow-up. Todd's first question comes from David Manthey at Baird.
Thank you. Good morning, everyone. John Watwood, relative to the four priorities here, just a couple of questions. One, on M&A, if you could outline broad areas that might be attractive to you. And then two, on operational execution, could you talk about any fine tuning actions around the salesforce or branch economics that you have initiated so far?
Yeah. Good morning, David. Thanks. So, on the M&A piece, obviously tuck-ins—anything that is core to the business—we would be very interested in, and that is where our focus has been. When you break that down a little further, you get to more product category-specific opportunities. Outside of that, everything's got to have the right strategic fit and financial and cultural fit as well. So I think that pretty much summarizes where our views are without giving too much detail. On operational execution, when you think about sales excellence and operational execution, we have already made investments in both of those areas and are looking to refine what we are getting out of them and iterate as needed. We are at a point now in season where we are seeing what is working and what might need to be tweaked. So we are pleased with where we are at. I think we can get a bit sharper focus in some areas around product category-specific initiatives. Overall, you cannot really change too much in season; it's all about execution right now. Any big changes will come after we get through this season as we prepare for the next selling season going into 2027.
Makes sense. And then as a follow-up, we have discussed this before, but I was hoping you could talk about it in this forum. The market seems skeptical about your ability to gain market share—I'm referring to the stock market and investors in general—could you just outline some of the key areas where you think Pool can gain incremental share within the business?
Yeah. I think we have a lot of right to win in building materials and in chemicals, and I think even in other areas with better connectivity up and down the organization and throughout the industry we have a lot of opportunities. I've been out meeting with a lot of customers and the first step is listening to customers—understanding where they are, where they are going, and how they view us. Second, it's with our suppliers: how do we ensure we are the best partner and go-to-market channel for them? When you take all that input and look at where we are and where we're going, I believe we have a strong network to build off and a lot of capacity we can pull through that network. We listen to what the market is telling us, adjust, and execute on that. I think our ability to gain share is substantial.
Thank you. And our next question today comes from Susan Maklari with Goldman Sachs. Please go ahead.
Thank you. Good morning, everyone. My first question builds off your last answer, John. You mentioned listening to customers. When you have been out there, can you talk a bit about what you are hearing from customers about Pool Corp: what is working, what is not working, and how that is shaping the strategy and the areas you are focused on?
Good morning. One direct quote I've heard several times is that Pool Corp is really good at doing the hard stuff. By that, they mean the operational day-in and day-out both inside and outside the four walls. That speaks to decades of running a large, efficient network that we continue to improve and iterate on. Do I feel we can be more aggressive commercially? Of course. That's why I've been focused on that. Connectivity throughout the organization is key to winning in this industry. The feedback is that customers want to learn more about where Pool is going and hear more from the executive team. We'll make sure we are more vocal and present with industry associations and with our customers as much as possible. Overall, the feedback has been very positive.
Okay, great. That is good color. When you think about the four initiatives you outlined, are some of them prioritized over others? Are you focused on all four equally? Any sense of how they stack up and the level of investment required as you pursue these initiatives?
Well, it all starts when you sell something. So that's where our primary focus is: ground-level execution connected throughout the organization. Operational execution falls under that as well. Pricing and supply chain are also critical. M&A is opportunistic—you need a willing buyer and seller and the stars to align. As for investment levels, with the network we already have, there are no significant major investments required to execute on much of this. M&A stands on its own financially, but for sales excellence, pricing, supply chain, and operational execution we already have a lot under our roof to refine and leverage. I'm excited about the future.
And our next question today comes from David MacGregor at Longbow Research. Please go ahead.
Yes. Good morning, everyone. John Watwood, you talked about leveraging investments and transitioning from investment mode to leveraging mode. Can you talk specifically about the technology investments and the opportunity you see there?
Good morning, David. There has been a lot of investment in technology, and I'm pleased to say that POOL360 adoption is 18%—that's a record. We're seeing more integrations and continued acceleration in that area. We have integrations with water test and service, and overall the investments are giving us positive results. The focus now is to continue to listen to the customer and iterate in the right directions, increasing the return on those investments. Seeing 18% adoption is a very positive sign.
Good. And then a follow-up around profitability of private label and Horizon in Europe and some of those businesses—how do you approach that?
For private label, particularly in chemicals and building materials, the margin profile is attractive, which is why we emphasize it. It doesn't come at the expense of other categories; it supports continued growth. Horizon had a tough quarter; the market isn't providing tailwinds right now in that space. We brought in a new leader for Horizon and are investing in that business because we see potential. Europe was a bright spot—double-digit growth driven by very hot weather and strong execution. Outside the heat, there has been increased investment in backyards as people stay closer to home, which has also benefited us.
And our next question today comes from Ryan Merkel with William Blair. Please go ahead.
Hey, everyone. Thanks. First topic is revenue trends and cadence in the quarter. Would love to hear how the quarter played out on a monthly basis and any comments on how July is starting.
On the revenue trends, there was not anything significantly different month to month across the quarter. During season you do not see the same variability as in the first or fourth quarter. No major differences there. July is pretty much on point with our forward-looking guidance. We expect the second half to have a bit less price benefit because we are lapping last year's mid-season price increases that took effect in late April and May. From a volume and discretionary spend perspective, no significant differences in July.
Got it. Thanks. And then on Horizon, do you think it gets any better in the second half or will it stay down mid single digits? Also, regarding those big four states that were negative, is that primarily chemical deflation and a weak new pool market? Why were those down?
Horizon has more commercial exposure and is more tied to residential, which is creating the drag overall—mix and timing of commercial projects. For the sales by state, roughly each had about a point of drag from Horizon. Also, recall in the first quarter we had higher early buy sales, so some states benefited in Q1 and that shifted between Q1 and Q2.
So absent that first quarter pull-forward, nothing materially changed in those big states? Is that the right read?
Yes, that's a fair read.
And our next question today comes from Trey Grooms at Stephens. Please go ahead.
Hey. Good morning, John and Melanie. I wanted to start on efficiencies and productivity mentioned within the new strategic priorities. You have been focused on capacity absorption. You opened about 50 new sales centers over the past five years. Can you touch on the runway for improving productivity of those recently opened locations?
When we open a location, it's typically not a pure new greenfield in the sense that we often follow where the market is going and start with some revenue up front. As with any new location, you want to refine and grow; it's typically a one-to-three-year runway, especially in markets without a strong tailwind. We're pleased with the performance of new locations over the past few years, but they need continued focus to become accretive or in line with the broader network. Going forward we'll be selective about future greenfields—very market-driven—and there isn't a tremendous amount of new greenfields planned in the near term.
Okay. And then switching to gross margin—your revision to the gross margin guide seems primarily a function of the lower Q2 gross margin and continued realization of higher freight costs. One, is that the right way to think about it? And two, when do you expect to potentially recover the higher freight costs—more of a 2027 event? Any color is helpful.
Because Q2 is such a large portion of the year, the 30 basis point decline impacts the full year comparison. Looking into third and fourth quarter, we project a similar 30 basis point differential versus prior year. We saw higher rates coming in from vendors, particularly on heavier density items such as building materials. We have actions underway starting early third quarter to manage that, but we may not be able to recoup all of it immediately, so we expect to see the full-year impact.
And our next question today comes from Scott Schneeberger with Oppenheimer. Please go ahead.
Thanks. Good morning. I'm following up on fuel and freight. Melanie, how are you thinking about fuel for the second half—flat at current levels, or expecting it to increase or decrease? And what is behind your assumptions in the guidance? Also, regarding supply chain, is it mostly transportation costs impacting you or are there significant changes on inbound or outbound you are implementing?
Right now we are not expecting any significant change in the cost environment as it relates to freight. We have acknowledged the need to have conversations with customers to recoup incremental costs; that process is underway. On the outbound side, earlier in the year we implemented freight surcharges to help recoup delivery costs. We are looking at inbound and outbound dynamics, but currently don't see a material change in freight costs for the guidance.
Thanks. On supply chain initiatives you've discussed for a long time, can you delve into what some of those initiatives are, John? Anything added for the back half and into next year that could provide financial leverage?
With a network as large as ours, it's pretty efficient, but there are always opportunities for gains. There's been a lot in play before I joined and we're working through the process to quantify returns: how you shop, where you stock, how you ship, replenishment—those are the areas. Freight has been a large focus as it started rising, and it jumped on us significantly. We'll remain focused on that for the rest of the year and look for things that help both near-term and long-term. We're still working through the math and will have more commentary going into next year.
And our next question today comes from Andrew Carter at Stifel. Please go ahead.
Thank you. Good morning. I wanted to ask about the change in the gross margin assumptions because the updated guidance implies a level of decline similar in the second half, and you are lapping extraordinary pricing from last year. Also, given recent industry updates, what were your assumptions originally around customer performance and is that impacting gross margin given opportunistic purchases or different levels of vendor rebates?
There is no change in our guidance reflective of anything from other companies' reports. For our opportunistic purchases, we had talked in Q1 about being heavy due to buying ahead and expected to bring that down to normalized levels during the season, which is how things played out. The impact to gross margin this quarter was mainly the higher inbound freight cost and an unfavorable customer mix.
Okay. Second question: in the script you mentioned 2% to 3% pricing. The deck says 2%. Can you square that away?
We had about 3% pricing in the first half. For the back half, we expect it to moderate because we are lapping last year's mid-season price increases, so the full year finish is about 2%.
And our next question today comes from Collin Verron with Deutsche Bank. Please go ahead.
Good morning. Thank you for taking my questions. Starting on pricing: you called out pricing sharply and competitively going forward—what does that mean exactly? Was Pool priced too high or too low? How do you anticipate this shaking out? And regarding your priorities, any color on the long-term sales growth algorithm—are you reiterating 6% to 9% or would you adjust?
On pricing, 'sharply and competitively' means understanding the market and tailoring pricing to market conditions. It's not simply up or down—it's about processing local input and macro drivers and determining the right price profiles by product category and market. We are good at this today but can always improve. Regarding the long-term growth algorithm, we can't reiterate a specific long-term target under current market conditions. When the market normalizes, we'll provide more clarity, but under the current prolonged downturn the 6% to 9% is not on the table. We'll comment more as we approach 2027.
Thanks. And related to operating expenses, you're expecting adjusted operating expenses up 2% to 3% for the year—does that adjust out the CEO transition cost? How should we think about the magnitude in 3Q and 4Q to reach the midpoint?
Yes. That is an adjusted number excluding the CEO transition cost. We expect expenses to be a bit higher in the third quarter—so the top end of that 2% to 3%—and lower in the fourth quarter. That range includes some incremental incentive-based compensation in our assumptions.
Our next question today comes from Sam Reid at Wells Fargo. Please go ahead.
Thanks. I wanted to see if you could quantify the magnitude of some of the gross margin drivers you cite on the bridge in Slide 6, and about changing customer mix—more large customers. Any way to size what 'large customer' actually means and what proportion of your mix is now large customers?
We typically don't break out that level of detail externally, but inbound freight was by far the most significant component of the margin change this quarter. Customer mix was the next material contributor. We continue to see benefits from private label and exclusive products and some nice pickup in building materials from expanded products we brought in for the season.
Helpful. You mentioned adding some newer equipment, specifically Move pumps—what has the early uptake been? Has that shifted how you manage inventory with large OEM suppliers?
No, that hasn't changed how we look at inventory for our major suppliers. The big three suppliers represent about 40% of our cost of goods sold, and there's no impact on that decision. Move isn't material to the overall picture today. When we add products, the goal is to bring traffic to the door, not cannibalize existing sales. Move has been good for us but not material at this point and hasn't changed inventory decisions with our strategic supplier base.
And our next question today comes from Steven Forbes at Guggenheim. Please go ahead.
Good morning, John and Melanie. John, revisiting priority number one, sales excellence: you mentioned commercial pricing earlier. Can you remind us what Pool's commercial pricing strategy is from a regional perspective, and with your time in the field what are branch managers asking for in commercial—pricing flexibility, tools, etc.? What are you implementing at the field level to give branch managers more control or better tools?
It comes down to speed, agility, and flexibility—within reason. It's not just pricing; it's terms and other factors. Our people want to leverage scale while remaining locally oriented and focused. Distribution works best with balance: corporate initiatives and field flexibility. Our pricing strategy is to take local input, overlay macro drivers, leverage scale, and put the best plan together. The tools and technology we are implementing are intended to do that quickly and effectively and provide a good feedback loop to understand what is working and what is not.
Helpful. Quick follow-up: retail channel dynamics given some industry news remain complex. How are you thinking about expectations for the retail channel over the coming quarters—disruption, disruptive pricing dynamics, or opportunity for your retail customers?
We support the independent retailer and will do everything to help them be healthy and grow. We are watching the competitive dynamics, but broadly there's market-to-market variability. The early buy season was strong for retail, which affected Q2 timing. We don't see anything at the moment that would cause broad disruption; we'll monitor developments closely and respond as appropriate to help our customers.
And our final question today comes from Shaun Calnan with Bank of America. Please go ahead.
Hi, thanks. A couple questions on gross margin: the large customer mix headwind has been ongoing—anything temporary driving that or should we expect it to continue as dealers consolidate over time?
There are roll-ups happening in the industry, and that's fine—we're well positioned to service large customers. We can offset margin pressures through product category initiatives and private label growth. Roll-ups are relatively new to the industry, and we'll continue to work through scale and competitive dynamics. Longer term, with market tailwinds, this will be less of a headwind.
To add, when volume increases we expect some smaller customers who exited the market to return, particularly on the new-build side. Smaller customers generally deliver higher margins, so customer mix should improve longer term when discretionary spend recovers.
Okay, thanks. And on higher transportation costs: you included that as a headwind for the full year in guidance and are working to offset it. Are you including any of those offset actions—like pricing—in your price guidance, or is that not assuming any surcharges you are passing along?
We have implemented some outbound freight surcharges and those are included in our pricing. For the balance of the year, we are still working through the impact of future inbound pricing and do not have anything material included in guidance at this time. We'll know more as we get through the third quarter.
Thank you. And that concludes our question and answer session for today. I would like to turn the conference back over to the company for any closing remarks.
Yes. Thanks again to everyone participating in the call. We have been working hard to deliver a strong summer season and are proud of our performance this quarter. However, as you can see, there is a lot more work to be done. We are moving with urgency on focused initiatives to strengthen our execution and further enhance our performance. We look forward to providing an update on October 22 when we announce our third quarter 26 results. Have a great rest of your day.
Thank you, sir. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.