Q1 2020 Earnings Call

Welcome to an operator will be with you shortly.

Down construction and we see that uh, changing almost almost daily as more areas are being permitted to work.

Okay. Got it. Okay, and then Mark you mentioned that you lowered your capex outlook. So how should we think about capex now for twenty twenty, you know roughly half of what it was last year in the $12,000 range.

Got it. Okay, and last question for me as far as the write down of a long-term note for two and a half million dollars could can you give us a little bit more color on that, please, But thanks for asking it. Okay. Thank you. All right. The next question is from Blake horstmann with Stevens. Oh, go ahead.

Thursday

welcome to course, please. Hold an operator will be with you shortly.

Home phone call which conference would you like?

Yeah, good morning guys. Good morning. Good morning. I think you you said something about your expectation for pricing being a little bit less. Um, I think it had to do with you know, just expectation that the competition might get a little bit more aggressive, you know, as activity slows. Can this still be a normal pricing year or I mean should we be thinking like a step-change like hundreds of basis points in the Delta versus you know, what you guys were thinking a few months back.

Thank you.

Your name, please.

And the company you're with.

When you in the phone calls being recorded.

And the Midwest implemented stay-at-home orders that limited our customers ability to operate.

Yeah, like Mark and I what I what I mentioned was that really two scenarios top of our range scenario and bottom of the range scenario and in bottom of the range area. We tried to anticipate that you know, this year is is very unusual even compared to the last recession. We're seeing a very sudden slowdown and in the in the economy and that could have an impact on some of our competitors as I mentioned, you know cash constrained generally speaking. And if for some reason the economy softens more than what we anticipate in the you know, top of our range guidance, they could be some some of them that are looking to monetize inventory and in terms of the impact, you know, it's it's relatively modest in the scheme of things and certainly nothing like, yep.

Looking at our year-round markets. We saw Revenue growth of 11% driven by very strong performances in both California and Arizona with Fourteen and fifteen percent growth respectively Florida post office solid gains with Revenue up 8% while Texas felt the effects of a colder and wetter spring and saw 6% sales growth.

From an End Market perspective a commercial sales were modestly better with sales up 5% This follows the 8% growth that we saw in 2019 commercial projects can be somewhat cyclical represent about 30% of our total Commercial Business did inspect activity has been healthy, but we have seen slower demand through the latter part of March and into April for maintenance and repair of these poems as many have been closed due to the pandemic. Keep in mind at the commercial business only represents 5% of our total revenues turning to residential demand retail sales were strong and the third quarter and we're up 14% in line with the overall business again, the earlier opening of pools and the shift and growth in early by deliveries. No doubt helped Drive the increase like other partner a business current activities vary from very strong to somewhat soft in areas where retail store traffic has been Limited.

Points and and pricing and really just a a temporary phenomenon. That's not going to be an ongoing issue.

Okay, got it. Perfect. And do you have any rough guess as to how much of like your contractor?

Customer base is still up and running or just any color you can give on to what degree they've kept their people versus, you know, I'm kind of cutting the staff or cutting their hours or anything along those lines cuz I know labor capacity can be an issue for you guys just in trying to meet the level of underlying and so I'm trying to get a better feel for that for the season. Thanks.

From a product perspective chemical sales were up 16% for the quarter while equipment sales Rose 18% in the same. Both a good sign that demand for maintenance repair and replace them products or strong sales building materials were also strong for the first quarter growing 14% which is encouraging as it shows that there is solid demand in the construction and remodeling markets off. It is worth pointing out again that we also saw slow and construction and remodel activities starting in late March in several markets that were affected by state and local orders halting the corporate office pool renovation construction and opening spending on maintenance and repair is continuing at normal levels across most of our markets based on April activity.

Yeah, good question.

I would tell you in my conversations with Builders and across the country and our team, you know the vast I guess the way to characterize this is a vast majority of the of the dealers still working. Right? I mean they break their work down into maintenance or repair and construction. So certainly in the areas that where there's been a very hard. To pool construction. That would be a that would be a very small percentage of our business in total. And if I look at the geographies, you know that I had mentioned some parts of Northern California. For instance very very tough New York. Pennsylvania have been very tough. But again, we just for instance in in Pennsylvania, New Jersey and Connecticut, um, were we found out this morning that they have now released pool construction, so that will start to open up. So as I think about it across the country, it's not been dead.

our internet

So operations experienced more significant effects during the end of the quarter as Europe felt the effects of the pandemic earlier than North America and response to government orders. We closed or curtailed operations took several weeks and France Spain Italy and throughout the continent resulting in revenues being down 8% for the quarter after being up double-digit through the end of February.

Horizon sales ended the first quarter flat with the previous year again driven by the effects of various stay-at-home orders and delays and projects as contractors and municipalities navigate the current situation month. We also welcome Jeff clay as our new president of horizon. He brings a solid background and his skill set to this important platform and his focus is to continue improving and expanding our green business office. I want to thank Dave Cook for his leadership of horizon over the last two-plus years, they'd implemented numerous improvements during his Horizon tenure and is returning his full-time Focus to Leading our Western a swimming pool operations and our sourcing team.

A huge step function of people that were unemployed. I think a lot of them slowed down. I don't shifted some of their activities, but I did not see a whole bunch of folks being put on the street as a result of that. Okay. Got it. That makes sense. I'll hop back into. Thanks. Thank you.

Also in the quarter we closed on the acquisition of Master tile Network seven location distributor of swimming pool tile and Hardscape. This will continue to strengthen our portfolio in this strategic. Yep. Operating income for the first quarter excluding non-cash impairment was 42.5 million, which is an 11% increase over the first quarter of 2019, excluding impairments and tax benefits recognizing the quarter diluted earnings per share were seventy-one cents up 20% over last year. As we enter the second quarter. We are confronted with a far different environment than we enjoyed coming into the first quarter. The remainder of my prepared comments will focus on how we are altering our operations and adapting to this new and uncertain environment. And now we are preparing for What play lie ahead

The next question is from Paul Dierks with William Blair, please go ahead.

Hey, good morning. Everyone. Good morning morning. It's just a few quick ones for me. If I may first of all, I appreciate all the extra transparency and color on how you thinking about the year, you know concentrating both the high and low end of the range for sales and gross margin performance. Maybe you could put a little bit of a finer point on how you thinking about your commercial business and European business, which month while each of them is relatively small as a percentage of your sales and earnings could at least have a bit of a disproportionate effect here in the near-term. If you could talk a little bit about those two parts of the business, so so for perspective as I as I Quantified the commercial business remember it's uh, it is about 5% of our total revenues and 30% of it is bidden spec activity wage. Um, you know that uh is the business back activity is still going on how many of those projects actually get built? It's still very early to tell where we have seen that curtailment wage.

First and foremost the safety of our employees and customers is the highest priority. We have implemented rigorous sanitation and hygiene protocols in all facilities providing sanitization supplies, personal protective equipment and establishing physical distancing procedures for safely serving our customers. I'm happy to report that while one is too many we have only had 10 reported cases amongst our world when a team of over forty five hundred people. We will continue to observe and reinforce these protocols in line with public health officials direction as we survey our customers. We are finding that month plenty of work to do and are continuing to provide their services to their customers within the local restrictions. Anecdotally. We have heard many reports of homeowners accelerating projects while Sheltering in place at home. However, we have also heard in some markets construction projects are slowing down being deferred or in some cases canceled altogether for at least the short-term.

Is on the consumables if you will, so for instance, if you have you know, the big the big competition pools and and Resort pools. Um, it's not you really can't drain them for a very long period of time so they basically could be drained for maintenance. But for the most part the same three things that you always have to do with water which is moved the water filter the water and treat the water have to happen with the difference is is that the amount of chemicals that the pools will use is really a function of of the bather load. They called the number of people in the pool. So we think that Iraq will see a compression in that depending on what they decide with pools. What's interesting is the problem is actually really not the pool itself the pool is there really, you know as the CDC I mentioned my properly maintained pool doesn't represent the risk. It's really the surrounding areas that have the municipalities and and hotels and motels concerned about the pool. But in terms of quantifying it again given that wage

Per meeting office closures subcontractor availability and retail store closings are all currently contributing to a more challenging business environment despite this We are continuing to find innovative ways to serve customers and assisting them in rethinking their customer service processes to deal with these new circumstances.

5% of our revenue and wouldn't be in our highest margin category.

as we

Continue to feel our way through these unprecedented times. We are anticipating a variety of different scenarios of how the rest of 2020 will play out here is what to expect at this point. I think consumer spending swimming pool maintenance products will be close to normal levels with a potential upside from increased pool use as families stay at home in lieu of vacation travel and other leisure activities, we expect that discretionary spending could be somewhat suppressed a new pool construction and remodeling activities during the second and third quarters. It is likely that as restrictions are gradually lifted. We will see an improvement in market conditions as we move into May and June.

You don't know that there is a uh-uh number in there. That's worth you quantifying. You know when I think about Europe on the other hand.

Europe is we saw the slow down earlier. It's coming back. I was on the phone with our European folks yesterday and there is quite a bit of pent-up demand. The weather is good and Europe is starting to open up. But again in terms of a revenue perspective, it's about 4% of our Revenue in total. So again, in terms of the percentages of our profit wage is relatively low. So again, I don't know as far as modeling that I would I would take the time to go out that far in decimal places.

There is the potential for increased pricing pressure as competitors sites maintained cash flow, which could result in gross margin headwinds during 2020. We will as we always have intelligently manage our costs down to these market conditions in summary. We have a very strong business led by a seasoned management team know one in our industry is better positioned to weather the economic uncertainty than Palm. We believe that as the economy begins to reopen families may choose to invest in a backyard pool and Outdoor Living opting For The Safety and Security it can provide versus the uncertainty of crazy is Global Travel and Resorts. We have taken the necessary steps to whether the short-term uncertainties by trimming our operating costs and have the benefit of a robust balance sheet with more than ample liquidity wage. Additionally. We have reduced and refocused our capex spending prioritizing those items with the quickest payback while delaying other expenditures until we have more clarity around when the economy fully reopens. Yep.

Got it. Now the very helpful color appreciate that, you know on the technology side, obviously you guys continue to invest in those initiatives. Maybe you could talk about how your online ordering full 360 off in the quarter. And are you able to ramp the Blue Streak mobile order processing technology to more and more service centers in this environment? Yep. So, let me talk about 364. So cool 360 again is, you know has been a hot-button for me and a focus area for the whole business really for very intently for the last fifteen months, and we have seen progressively more usage on the tool. In fact, and for the first quarter sales through the tool were up 32% I believe so we seen continued adoption of the tool and our team is is getting better at uh-huh frankly getting customers comfortable with the tools. So that continues to role what we didn't see and if you if you go back to home

Some markets have seen the negative effects of the stay-at-home orders others are faring much better this uncertainty brought on by the covid-19 pandemic has prompted us to update our guidance to reflect the impact. It may have bought our 2020 results. We are revising our 2020 earnings per share guidance to $5.30 to $5.90 including the impact of the tax benefits of $0.19 and the $0.15 non-cash impairment that we recorded in the first quarter of 2020.

Earlier comments on previous calls the growth rate, you know, we'd been in that 20 to 30% growth range. So what we did see this last quarter and again the the as far as compact on the third quarter or first quarter was still relatively late, but we didn't see a huge Spike and I look at it weekly so it it's update continues to be up but it's not like there was a step-function change. And the reason for that is the nature of our business and the it's one of the beauties of our business and that 70% of our transactions still take place, you know at the counter. So, there is a lot of value that our teams provide the the customers certainly adoption to the tool is growing but most of our customers still prefer to go into the sales team to to make their purchases Blue Streak on the other hand enables and speeds the the customer experience at the sales Center because we use it in two ways one is dead.

Excluding the impact of non-cash impairment adjusted 2020 diluted earnings per share would be 5:45 to 6:05 before I turned to call over to Mark. I just like to thank and women of pool cord for their dedication and passion to be the best distributor for our customers and the best channel to market for our valued suppliers. Our team has once again shown why they are simply the issue now, I will turn the call over to mark for his commentary. I'm going to discuss four Topics in my prepared remarks this morning. I'll start with comments on a balance sheet followed by a few highlights of our first quarter performance, then I'll discuss short-term the actions. We are taking now to rain in expenses and finish with our expectations for the future as we speak today.

Use it for our we're we're selling, you know bulk chemicals of bleach an acid outside. The customers don't even have to come in. They they scan a card signed the name of their finger and they're on their way. We are scaling up in that by the end of the year. We hope to have about half of our centres live with with Blue Streak and we are dead are ramping up obviously in these in these times because we view it as something that is um beneficial for our for our safety program and also beneficial for the customers.

Begin by reiterating statements made in our press release related to our balance sheet.

We are in the fortunate position of having entered 2020 with a very strong balance sheet. We have secure low-cost access to Capital with substantial untapped availability at our disposal. We began a year with low leverage that has been trending lower which at one point four nine at the end of March was just below the bottom of our targeted leverage range of one and half to two times add to this that we have substantial inventory positions as we enter the annual Peak pool season with supply chain dynamics, that should meet our customer needs into and through the season also important to keep in mind as with most wholesale distribution businesses are cash flow is countercyclical to sales and to do well in a downturn

Helpful color lastly Mark, you know on the buyback activity. How should we think about that in terms of fact that I certainly appreciate the reduced catbacks here and EM discussions can be a little bit harder to complete in the near-term given so much uncertainty. Should we expect to see any pause or perhaps if we see a little bit more of a meaningful ramp than that over the course of the Year depending on how long the sales and earnings trends go

Yeah about a good question and and certainly that is not an area where we are going to be withholding Capital. We will continue to buy opportunistically as we have done in the past and have substantial capacity to do that. So we'll we'll be you'll be seeing more activity there as well.

Our balance sheet provides us with a lot of opportunity and flexibility as well as a significant competitive Advantage compared to are substantially smaller competitors through in many cases will be cash constrained we are doing but we need to do to protect our position and direct continuing Investments where returns are shorter term and clear. We've reworked our 2020 Capital plan to reduce pain by about 50% or Twenty million dollars wage continuing to pursue investment and growth opportunities with near-term Benefits such as those that provide safer and more efficient interactions with our customers will continue to pay a dividend as communicated a press release this morning and we will buy back shares opportunistically as we did in the first quarter in summary, we believe our balance sheet position gives us a distinct advantage that will be able to utilize throughout the economic cycle. However, it progresses

Very good. I'll pass it on thanks guys. Thanks. The next question is from Steve involvement with Jeffrey's please go ahead. Hi. I had actually had a double cash flow questions. But can I just follow up quickly on the Blue Streak thing Peter, you know in the stores where you have that running. Well, does it result in you know, quit throughput or higher margins? I don't know. What what kind of early returns are you seeing there? Yeah. It doesn't it doesn't change that margin profile that business because it doesn't have an impact gross margins I should say but what it does is it adds capacity for us. So it's certainly speeds of through put in the branches. So what we've done if you remember last year we talked about, you know speed at the counter and it simply eliminates the folks having to go get in line at the counter for things that they pull up load their trucks. I'm with their finger and leave. So basically it adds capacity and lowers our op-ex to serve that same.

Now just a few comments on our first quarter results. Let me remind you that on our year-end call to very long months ago. I stated that our q1 sales margins would be impacted by a power forward from Q2 a lower margin customer early by sales that I activated to be ten to Fifteen dollars and the margins would be further impacted by a 90 basis points headwinds from margin gains in q1 2019. The early by sales increase was larger than expected at twenty-eight million and along with the tough, from 2019 off the primary cause for our 120 basis point margin decline in q1 as noted in our release. We benefited from an extra selling day in the quarter, which is the only quarter this year with a difference in selling price is compared to 2019.

Okay, great. Thanks and and Mark. What should we be thinking about, you know relative to your new guidance range in terms of working capital.

In terms of our investment in working capital. Well, first of all, you know cash flow overall, it seemed to have like a trend my comments like some of what I meant to say ended up on The Cutting Room floor related to operations are big when I looked at our two thousand a 2007 to 2019 cash flow from operations. It was 190% cumulatively over that time. So, you know if there is a downturn significant downturn we expect cash flow to be back from a working capital standpoint. We started the years you said pretty well inventoried if you will and expect to trim that as long as we get into the end of the season and and and really from a receivable standpoint is a mention if you're good about about our customers and their ability to maintain Panthers.

Our operating expenses increased 8% of our last year, excluding the asset impairment charges of six point nine million, given our sales growth. This was a very good result as a percent of sales. Our operating expenses were 21.7% down 110 basis points from 2019 note that our interests another line was down 1.8 million years as we benefited from lower death, which was down 16% from last year as well as the lower interest rates on a tax line. If you exclude the ASU benefit wage and the tax impact of the impairment charge. Our tax rate for the quarter was in line with our projected twenty five and half percent for the year.

Sheet on our balance sheet growth and net receivables of 10% reflects our sales growth and the quarter while our inventory is grew at a more modest 5% on our cash flow statement that I'm not receivable as was the main reason the cash flow from operations fell short of last year by nine million.

so I think we're going to have a very strong Year from

I'm a cash flow perspective. Okay, and then just the final one for me. It sounds like you're expecting some of your competitors to have some off-roading issues and it gets it strikes me that that could free up some acquisition targets and I don't know if maybe if you want to talk about sort of previous recessions and if that is an opportunity there or if it's smarter to just kind of wait it out and and see if you can maybe take the share organically or something. Yeah, and I I would say a couple of things I I do think that in general are our competitors are cash constrained. In fact, I know they are and what that means more than anything is we found the ability to invest in products and services and and staff, uh, you know, we should as we did in the last recession be able to take off.

Now I'll give you a view into some of the actions we've taken to improve our cost position given the current state of our business as we've described it as well as the uncertainty about future conditions. We've taken immediate actions to reduce our operating expenses in the short-term and retain options for further reductions in the future as warranted. I'm not going to quantify the impact of most of these here as the net sales tax is included in our guidance range, but I wanted to give you an idea of some of the short-term accident we were taking

Employee-related costs where 15% of our sg&a spend in 2019 and certainly one area we're looking at for cost reductions.

One self-regulating part of this spend is incentive based compensation base pay at pool Corp is generally modest with more paid tied to Performance as positions increase in responsibility in total. We see a potential cost reduction in the range of 10 million dollars in this area and $29 in 2020 compared to 2019 for our senior management team included. The fix component of our compensation is about 15% of our total compensation and we expect our total cash compensation to be about 50% of our targeted cash compensation this year based on the company's expected performance.

More share than we would during normal times. And so I think it's a very good share gain opportunity for us in terms of acquisition targets. Um, um companies don't like to sell necessarily at the bottom of the price range and and so for you know, earnings dips, that's that makes it tough. Sometimes a harder for them to justify that we didn't see a lot of of businesses come up for sale and and 2008 2009. But at the same time I do think they'll be some opportunities and and we will be, you know looking at at those opportunities that make sense for us particularly in areas where we had our opportunities that we want to capitalize on.

In addition to this one of the first steps. We took was to put a hiring freeze in place excluding new hires for our management development program that we will continue to invest in in our domestic business. We had forty-one hundred employees at the end of March with our salaried employee count down 3% and hourly employee count up to eighty percent from last year. This includes the impact of nine new location openings since last March and fournette locations purchased as part of our Master tile acquisition and February largely through attrition and targeted action where warranted we expect our labor cost savings to grow over the course of the Year depending on conditions.

Great, that's helpful. And actually I just thought of one more if I can sneak it in Peter, you talked about social distancing and extra cleaning and all that kind of stuff. Does that drive any type of a productivity in terms of margin that at the existing stores know we really haven't seen that. I mean we've equipped the the folks with the proper PPE and that doesn't really have an impact on life and you know how they conduct their job. They spend a little more time cleaning, you know between customers wiping down counters and and doors and things like that, you know, for sure some of our locations where the showrooms are in fact closed it made actually speed things up because in those cases the orders are being phoned in and they are uh-huh get put in priority pick and they basically pull their truck up we load their truck and they leave so I I would say there's not there's not a huge gain or a huge drag because there are things that benefit dead.

Other areas where expect to see cost savings include overtime pay and outside labor travel and entertainment expenses and advertising to name a few of the many discretionary cost areas. We are cutting back in addition lower Capital spending will have a positive impact on depreciation costs as will lower fuel costs for delivery and administrative Vehicles one area that we that will be a challenge for us to impact his facility costs as the industrial East Market remains fairly stable and we work through existing leases signed in the past with locked-in rate increases

Just as much as there are a little more time spent on housekeeping.

I understood thank you so much. The next question is from David MacGregor with Longbow. Research, please go ahead. Yes. Good morning, everyone. I hope you're all keeping. Well, I wanted to just a few questions. First of all, thanks for all the granularity around the operating expenses. That was really helpful. But maybe just coming out from a slightly different direction. Is there any way you can characterize fixed versus variable for us off? Well, yeah. So let me first of all just give you a little more color and to how our cost breakdown I mentioned something in the comments. So if you look at our sg&a cost ugh, 57% of those are employee-related 13% our service facility related and 9% our freight with the remaining 21% being, you know, everything else on the employee.

Looking forward to the rest of the year. We provided guidance for the year that is wider than normal and Compass a range of economic outcomes impacting the discretionary parts of our business office times of our guidance range anticipate to to sales that are down approximately 5% from 2019 with social distancing restrictions using gradually beginning in May the second half of the year the top of our range anticipate sales growth sales growth of two and a half percent as we believe softening of demand for discretionary products would have an impact previously expected sales growth.

While the bottom end of our range anticipate second-half sales that are down 7% as the economic toll on homeowners has the potential to rain in discretionary spending more significantly off this results in sales growth of 2% for the year in the top of our range and two and half percent down for our bottom of the range case.

beside the 57% the biggest

That is you've got I mentioned the incentive comp and there is certainly a a lot of our labor. That is somewhat flexible given the volume of business. So of that 57% I would say less than 20% of that. I would say is is more variable in the short range and certainly very ability exists more in the in the longer-term right the facility cost 13% very inflexible and short-range until leases come up for Renewal. We have our leases generally or five year terms. So each year about 20% of our leases are coming up for Renewal and that's the opportunity to make changes there and then Freight is is very variable, of course and then the 21% everything else the mixed dog.

In both cases gross margin would be impacted by the Tough Cop and cute to wear 2019 gross margin was up Thirty basis points from 2018 and by slightly lower purchase volt to send is for the remainder of the year.

In the downside case we have also factored in more aggressive price competition as capital constrained competitors May seek to convert inventories to cash as mentioned action taken to reduce operating expenses should help mitigate the softening sales and margin environment with the expectation that we would have a modest expense growth for the year in our top-of-the-range case off and modestly lower expenses for the remainder of the year and our bottom of the range case.

Now for those of you looking to model the impact of the coming recession to the last one, let me leave you with a couple of thoughts. The first is that the origin and not sure of the two recessions are very different. The Great Recession was brought on by a collapse and the housing market which triggered avoidance of housing-related Investments. The current economic decline that has you know has been brought on by social distancing and is characterized by Family staying at home. In fact of life that in some fashion will remain for some time.

I would say maybe 20% of that has more variability to it than the rest of it. Okay, that's great. That's very helpful. Thanks very much with respect to a previous question with regard to the online sales. And you had talked about the fact that the gross margins, um, aren't that much different but obviously lower off exes lower-cost serve. Is there any way you can help us understand? Just how bout me differ a store sale versus non line dollar sale at the at the deadline?

As opposed to avoid this this recession has the potential to Spur housing investment for those who can afford it.

The other significance iteration significant consideration, which I covered at our investor day meeting last fall is that our business today is larger, but similar in many respects to our business office 2016 with a primary difference being this mix of our sales. We have a greater mix of non-discretionary sales and lower mix of fully discretionary sales today than they did preceding the last recession. This is best exemplified by looking at the most discretionary parts of our business which are construction of New Pools and irrigation system installation in 2006. There were approximately 215,000 New Pools constructed in the US that fell by more than 80% to about 40,000 pulls 2009 and it since recovered to about 80,000 new pools built in 2019 still down 60% from Peak.

Let me think about that for a moment. So it really if I think about the amount of time that is spent by the customer service folks entering the order versus the customer touring it online at the end of the day there is there's certainly some productivity but it comes really in the form of we're continuing to grow so it wrong is a capacity ad for the business. Right? So it's not as much as hey as more as more business shifts to you know online. We're not getting we're not releasing people as a result of that it frankly it's just freeing up capacity for us to grow so it basically slows the rate at which we have to add costs because you know when you add labor and when you add cost in the facilities, you know, it goes in Step function. You can't add it on a percentage by percentage basis, but over time we get better because we add less cost in order to serve the incremental sales dollars, but that makes sense birth.

similarly irrigation

System installations have not recovered to pre-recession Peaks as new home construction a leading indicator of irrigation system installations is about half of what it was in 2006 month. This is the primary reason that our Horizon business sales and 2019 were 9% of total company sales down from 13% and 2006.

It again in response to a previous question. You had noted that there was a tremendous organic growth opportunity right now. Just giving you a competitors that are you know, feeling feeling duress Thursday thing that you can do in terms of tweaking your internal incentives that would help you accelerate on that organic growth opportunity. Yeah, I think the way our our incentive plans are laid out today, but they're they're fine. There's nothing that we would need to do is say hey go out and grow because we're a we're in organic growth based company. That's what all of our our plans are are driven around and it's a complete Adam up from the sales Center level all the way up to Mark and myself. So it it's not like, you know, the folks aren't rewarded for growth. They're rewarded for profitable growth today and the situation that we may be in right now as it relates to potential upside. I don't think warrant any change in our comp plan. I think we're very fortunate that we are a dog

It's on this discussion up. We think that our business today is a better position than it was before the Great Recession and less likely to have as as adverse an outcome, assuming similar economic conditions with that. I'll turn the call back to our operator to begin our question-and-answer session.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

We're in organic Growth Company. That's really.

In our fiber and DNA and that's what that's what drives everybody every day. And the incentive plans overtime have evolved around that same thing. Last question for me on that point is just your plans with respect new store openings over the next year or two and how you think about first-year productivity. Yeah. So, um for this year we have one location that is off on the on the books that will open up in the next 60 days ish. Assuming we can get the proper inspections that we need to open up after that. That's when we talked about, you know deferral of capex and tapping the brakes do we see how how things shake out from an economic perspective, you know, we'd planned on opening more last year we opened up and I thought it was nine facilities and we said there'd be a similar number this year on balance were actually very pleased with the ones that we opened up the class of nineteen and the class of eighteen are all doing very well actually ahead of time.

Our first question comes from David with bared, please. Go ahead.

Hey, good morning guys. This is Quinn Frederickson on for days morning.

so you guys mentioned, you know, the builders have pulled Builders have started to see some instances of cancellations for New Pools going in and I think you had mentioned previously that the backlog entering this year was pretty strong and and had been strong, you know nearly part of the Year prior to obviously the

Yeah, good question. The the answer. The question is varies by region overall. I would tell you that there is still there's still plenty of work in the system Builders entered the season with with very good very solid backlogs fact. I was talking to one in the Southeast this morning who was already out till August 4th new pool construction. So I think it depends on what part of the country that you're in but overall I would say that the backlogs are good the cancellations at this point have been relatively minor and I've not heard of any cases where cancellations have Builders and subcontractors standing around with no work to do. So part of the part of the Slowdown think is simply a function of as I said the availability of subcontractors and then some reticence on some homeowners parts to have people in the south.

Expectations, um, but given the uncertainty and the economic future right now. We said we got one that was ready to go. We kept going with that and we have several others approved geographies. And if we see that there is there's still the need and to add that capacity then we'll move forward with those we're certainly in a position from from a cap strength and balance sheet to forge ahead. But we've decided that this point let's just tap the brakes and see what happens over the next uh quarter and then decide how fast we wrap that back up to make sure thank you very much true.

The next question is from Ken zener with KeyBank, please go ahead.

Morning, everybody. Good morning again.

You still like this industry first year old one, don't you?

At working but overall I would tell you that the backlogs are still good still solid and our Builders at this point are still optimistic about the amount of work that is out there. And what is likely to come out of the back half of this?

I appreciate the range. It's a wide range. I think that's you know, that's wise if you could just kind of go through this high and low, you know, we we we are currently at the lower end of the estimates and part of that issue is from assumptions. What is your assumption on that high low for new construction? And if. Doesn't pick up in May social distancing, how how I mean? Is that how how much Social distancing? I mean, I'm just trying to get some activity around each of these inputs. Um, cuz you guys have obviously a lot of insight and the industry structure is good, but it's nobody really knows so how can you kind of a firm your confidence in this high low range as relates to the new and discretionary categories?

Okay, thank you. And then just any any thoughts right now on the quality of receivables pasties. Yeah, this is Mark and and not really uh, first of all at the end of the first quarter we were in great shape actually improved on past dues from where we were a year ago, you know in some cases where our customers are not working in the short-term There's issues that we're working through but we feel very good about the state of our customers a health of our customers and our ability to work with them through through the season on collections. So not not a concern for me at this point.

Okay. Thank you very much.

Yeah, I can you know, first of all the terms of the the second quarter. We don't see a big impact on the discretionary part-time business given that there's a lot of pent-up demand entering the season their jobs that are in process that have been halted in some, you know area by government order. I want the government restrictions lift than those jobs will certainly continue. So the the variability really is more in the second half of the year and uh, you know, we believe it's likely that that construction and and home and remodeling will have have some softening demand associated with it and just really varied our expectations between birth.

The next question is from Anthony levinsky with sidoti & Company, please go ahead.

Yes, good morning. And thank you for taking the questions. So just first on the q1 would you guys be available? Will you be able to perhaps quantify the impact of the mild weather and q1 and and also I know you mentioned that sales of discretionary products were up in q1 and just just wondering if you think that there was any potential pull forward them.

Anthony in terms of the weather impacts, I mean 13% you know compared to a a modest growth in the first quarter of last year how much of that 13% was weather-related if I had to throw a number out there as a guess maybe 3% something like that. So it wasn't I wasn't insignificant in terms of pull forward and mentioned that twenty eight million or so in early by sales increase which is off to some extent due to the warmer weather a little bit earlier Easter this year and just a good solid start to the season which had our customer busy earlier than last year.

base case and

Downside case around that part of the business by the way, the discretionary. Yeah the discretionary the maintenance business page right Greg recession actually went up in the range of 5% a year mm. Right something to 9. Okay. So if I could the discretionary so about 15% of sales was New Pools in FY nineteen because there's a backlog you actually have more confidence on that kind of let's say flat-earthers Market versus the discretionary which has less visibility backlog and you know, there's less discussion in terms of how much physical work needs to be done. Is that accurate

I think it's it's accurate that yeah, we have backlog coming in and and actually, you know, we're getting a lot of anecdotal input about dealers that are getting more calls from homeowners who are looking to add pools as they have more time at home and it's just a little unclear as to what will happen with those as the season progresses into the back half of the year. So we'd been cautious in our in our guidance in the back half of the month. Okay. Just housekeeping that what would the interest expense be and then could you just comment the lag effect? You said I think obviously cool homeowners School owners specifically tend to be more affluent terms of the composition than the and job stability than the headline job claim

We've been seeing what your devastating so could you kind of talk about your comments around you know what, you know or quantify homeowners to loaners, you know medium income home values that type of thing as well as the interest expense for the thank you very much. Yeah, well interest expense as I mentioned rates are down our debt is down. So, you know, I'll let you model out what you think our debt will be but we're paying around 2% all in on interest at this point in time, which is down from what it was last year. I certainly the year-over-year interest cost will be lower going forward than what it was a year ago in terms of you know, the typical pool owner and uh, let's say, uh potential pool owner there should be dead.

Less impact generally speaking on on those individuals certainly homeowners in general are less impacted than I would say renters in general look at you know Industries and the employees in those industries that are are not working right now and where you know, there's going to be more of a drag going forward. Um, and so we feel like, you know, the economic sensitivity is less in our customer base than in the economy overall and you should be good for our industry as it will be for us.

Thank you.

All right. Thank you Jen. Thanks Kim. The next question is from Capitol, please go ahead. Thanks for squeezing me in. I'm just wanted to ask on a discretionary part of the business. You know, it seems like it's holding up pretty good right now. But are you seeing any signs of residential owners, you know deferring it all on discretionary money. Maybe, you know, if you could talk a little bit about it, but you know, how did this hold up your prior recessions?

I'm sorry. Can you repeat that again? What was your question about did not discretionary. Peace. Are you seeing people, you know defer or or extend out how often they need to, you know, use the the chemicals and in in the cleaners and there pools right now. Uh, yep now I got it now. No, that's again. That's the beauty of our business. There's three things that have to happen. When you have a pool you have to move the water filter the water and treat the water and the amount of treatment that goes into the pool really is a function of how much the pool gets used the more you use to pull the more chemical that will take to maintain the balance of water given the cost to do that versus the damage that can be done to the pool and the investment then you know, the nobody wants a green swamp in their backyard. So I mean that's again one of the beauties of the business is that as the install base grows every time a pool goes in the ground. We gained a potential customer for life. So we've seen no birth.

Reduction and even if you look at you know, it's Mark said look at when you contrast the economic conditions of the Great Recession and today and how very different they were even in that which I would argue was far worse from economic, uh condition. That would be far more long-lasting than I think the one we're in now, they non-discretionary part of our business continued to grow and we expect that same thing happened today well and and and you have people staying at home. Right? Right, and of course, they're using the full more because you've got a bunch of it's funny. I got a note from a friend of mine this morning and said, hey life and helping you out because my grandkids are in the pool every day because they're all stuck here and can't go to school. So he says my pool spend is going up. You're welcome.

That's helpful. When is it just pull back around and gross margins. Maybe I missed it. But you know, if you just talk about the gross margin expectations within your guidance range, you know, you're looking for you know, generally that's a gross margins coming into the year down in the first half off in the second half, you know, it seems like mixed could be positive for you. But then you talked about, you know, pricing being a little bit uncertain so, you know, how should we think that's gross margins as we move through the rest of the year. Sure. Yeah, and and let me just kind of recap what I said previously second quarter. We have a headwind as I think I mentioned coming into the year. We had Thirty basis points of gross margin Improvement in the second quarter of 2019 is largely driven by wage continuing pre-owned inventory purchases pre price increase purchases and in 2018 that we were still selling in 2019. So that is a headwind and it was in the first quarter wage.

and we expect uh

Continue to expect as we did coming into the season that that would be difficult and it was just assumed that we're down 30 basis points in the second quarter and then really the back half of the year instead of breaking up. I would say more flattish. I mentioned purchase volumes being down that affects our purchase price and that's in both cases. But really the downside case that's the one that gets closer to the bottom of our range anticipates that there could be some competitive pricing pressures as as our competitors link to convert Direct Cash. So that's relatively modest but factored into the lower end of our range, so I know that's helpful very much. So thanks last question for my life, you know, you helped us out with your view on April and you talked about, you know, some of the more restricted markets versus I guess hold less restricted market. So I was wondering if there's any yep.

You could remind us extenders our sales in the restricted versus non restriction market. So you'll say California the north east and the Midwest so they're a little bit, you know kind of shut down a few will often is the the the southeast and you know other regions that are operating a little bit more smoothly. Yeah, so so consider that the four are four main markets, which would be Page Arizona, Texas, Florida that makes up about 50% of our Revenue, right? And as I mentioned Florida is Florida is very good, but I would also extend Florida. Yep. Yep extended the good times if you will all the way up through the Carolinas and and frankly coming West through the through the Panhandle and Louisiana and into Texas is actually has been has been very strong. Now, there's some parts of Texas really so I can't even talk about it at the state level because there are some parts of Texas that are dead.

Very good and very busy and don't have a lot of restrictions and there's other parts of Texas. For instance Austin and San Antonio where amongst the most restricted parts in Texas that we have is that we had to deal with and as I as I mentioned in the north east and the Midwest, you know, we have seen just this morning. We got released our dealers. I should say got released mm build earlier in the week New York added pool openings as a essential business. So the dealers were allowed to go back and start opening pools. Again, they had release it for construction. But on the other hand, Connecticut, New Jersey and Pennsylvania that had it locked down have now released them for construction, you know, California is again a little bit different depending on where you are. You know, if you're in the Bay Area very restrictive if you move into the Central Valley, it's a little bit uh a little bit easier to operate and the further south you go into California wage.

Can get a little more.

But I can't really do it at the state level because the local municipalities have quite a bit of variation, but we're encouraged by the trends that we have seen in April as we mentioned, you know, we took in the press release that we thought we could be down 5 to 10% We've been encouraged about what we have seen in the last week and we think that will be um will be at the better end of that range. If the trends that we have seen continued and I expect given the releases that we've gotten in the last couple of days that that only gets stronger. Yeah just to clarify, you know, we talked about shutdown. We're not talking about our facilities and we're not talking about the majority of our customers at any of our facilities. It's really just a small part of the customer base in summer is diction, which is really the the part that serving construction had been in in in a couple of locations pool openings. Those are now cleared now, so it's really a yep.

Very limited part of our overall customer base. Yeah consider, you know that it's the it's the discretionary part of our business that we referring to because the non-discretionary part, you know, the maintenance and repairs in almost all scenarios. They were allowed to continue to work.

Helpful. Thanks again.

The next question is from Alex with berenberg, please go ahead.

Hey, good morning. And thanks for taking my questions. The first question involves the industry and its recessionary inventory pricing. And I know that it's a bit different now that can you explain what you generally saw in 2008/2009 in regards to inventory price increases or decreases and how you're thinking about it looking into next year. Yeah. I mean, this is Mark in and really you talking about Thursday industry-wide. We did not see as you would expect a lot of price increases during the recession those were harder to justify Thursday. We didn't see deflation either. So pricing was relatively stable and you look at our margins over that period in time they were relatively stable. So not a lot of lack of of change up or down in that 2007 to 2009 tax.

Okay, and then similarly do you think there's going to be any impact your vendor programs due to this?

I think the the vendor programs as Mark mentioned earlier. It's a function of Revenue right in terms of the more we buy than the better the the better the discounts are so in fact that's again is factored into our guidance.

Okay, it makes sense. And then secondly you touched on how the new poll construction Market is much lower today than it was in the last recession. Do you have any numbers around the foot of new pool consistent for new homes versus older homes? Yeah, typically a pool is not something that's added at that new construction. That's something that's added after the fact there. There's a few markets that we have like Florida where it can be more commonplace to have the pool transfer with title of the of the new home sale. But for the most part Builders don't want to wait for or the complication of having pool infringe upon them being able to close and move on because it's sub generally subbed out to somebody else. So what we've seen by and large across the country is that you know, it really is a function of 141. It's something that's added after the homeowners take possession and then they put their their own spin on it and customize the backyard. I mean pools are very often.

a very personal if you look at you know, there's not a lot of pools that are

Exactly the same everybody wants a little bit different a little bit different feature. So the Builder is pretty much have said Look by the home. Then you call your pool builder and have them build whatever you want. So it's not something that we see being attached early on Thursday or at at the transfer of title for the initial new home.

Okay, that's great and very helpful. Thanks guys. Sure. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Peter or van for any closing remarks.

Yes, thank you. All for joining us today will next speak with you on July 23rd when we will review the second quarter results stay safe and have a great day. Thank you.

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

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