Q2 2020 Pool Corp Earnings Call
Good morning, and welcome to the Pool Corporation second quarter 2020 conference call.
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I would now like to turn the conference over to Mark Joslin, Senior Vice President and Chief Financial Officer. Please go ahead.
Thank you good morning, everyone and welcome to our second quarter 2020 earnings call I'd like to remind our listeners that our discussion comments and responses to questions. Today may include forward looking statements, including management's outlook for 2020 and future periods.
Actual results may differ materially from those disgusted <unk> information regarding the factors of variables that could cause actual results to differ materially from projected results just discussed in our 10-K.
Mission, we may make references to non-GAAP financial measures in our comments it description and reconciliation of our non-GAAP financial measures is included in our press release and posted to our corporate web site in our Investor Relations section.
I'll turn the call now over to our President and CEO, Peter Arment <unk>.
Thank you Mark and good morning, everyone on the call.
[noise], where outdoor living comes to life. That's one of our registered trademarks, which happens to characterize the work product aspirations of our nearly 4500 employees worldwide.
And frankly, I can think of no better description for what has taken place in the first happened this year.
We managed to navigate through an unprecedented combination of events in our business this year, which I'll briefly summarize for you.
As you know despite the effects of the Cobiz 19, pandemic, which began to impact our business in mid March we started off the year very strong with 13% growth in revenue for the first quarter and adjusted EPS growth of 20% I.
Our first quarter call. We explained in our April sales were trending down 5% to 10% year over year due to the cobot related restrictions put in place.
And that we were pulling back on discretionary in capital spending in anticipation on a more normal more cautious consumer spending environment in the months ahead.
Then as we moved into May government restrictions in many jurisdictions began to ease and we saw new trends emerging above and beyond our normal seasonal trends. These were driven by the new stay at home and social just think restrictions further complemented by favorable weather.
First seasonal markets pool owners, who typically the lakers openings until warmer weather or rights wanted to use their pools sooner rather than later, which drove a significant increase in demand for repairs and equipment purchases like heaters and cleaners. Most of our dealers quickly became inundated with repair enough.
Great requests from pool owners, who wanted to enjoy the safety and fun up their own backyard earlier in the season.
It should be noted that due to this we believe many dealers shifted resources to maintenance and repair and away from construction.
Which was delayed by the closing of permitting and inspection offices in many parts of the country.
Second as consumers sheltered in place interest and demand for new pools picked up significantly but as consumers see found out many people had the same idea, which quickly soaked up build their capacity in this labor constrained industry. This was further exacerbated by the already compressed building.
Resulting from the Kobe related delays.
At the same time homeowners, we're turning to other ways to turned their backyard into a recreational oasis seeking out above ground pools and spots early on these products were readily available, but with the on predicted surge in demand. They quickly became scarce as the supply chain most stretch beyond its capacity.
[noise] all combined these trends caused accelerated growth for our business throughout May and June which continues now he said the third quarter and we believe the renewed interest in swimming pools and outdoor living is not only great news for our industry, but also for homeowners, who will benefit from a safe happy environment.
Where their families now and for years to comp.
[noise]. This story would not be complete without commenting on just how exceptional our employees are performing in these challenging and uncertain times considering the initial confusion surrounding government restrictions and their impact on our sales centers and customers.
The ensuing work life balance issues that our teams it countered the new procedures put in place to safeguard our employees and our customers together with the environment, not accelerating demand, which stretched our customers employees and our supply chain.
The obstacles our employees faced over the last several months in their determination to rise above them is truly remarkable I.
I'm very proud of our team and their ability to stay focused on delivering outstanding customer service.
Safe and effective manner throughout this challenging an unprecedented period their dedication and resiliency is second to none.
The outcome of all of this is one of the best quarterly operating results in the history of our business. The rare combination of significant sales rose and intense expense management drove substantial growth in income and cash generation.
From where we started the quarter and how our business environment has progressed I believe our results are truly exceptional.
Even more encouraging is the fact that our builders remodelers and retailers are all recording continued strong demand with many builders reporting that their backlogs, we'll take them out into next year.
I mentioned earlier that the unprecedented demand has strained our supply chain, but the strength of our balance sheet and our scale has allowed us to keep back orders and stock up to a minimum which has also helped drive our results.
For the quarter. Our total revenue was a record $1.28 billion, an increase of 14%, which is truly amazing considering how the quarter sorted out.
In our year round Blue markets revenue was up 11%, while the seasonal markets grew an impressive 18% as schools opened sooner than normal.
Florida was up 9% for the quarter and on a year to date basis as well.
Arizona, So I, 21% increase in revenue for the quarter to bring the year to date number to 20%.
Texas was up 14% in the quarter, bringing the year to date number to 12%, California saw 6% growth in the quarter as they were impacted by wed start for the quarter, coupled with the lingering effects of the covance shutdown on a year to date basis, California is up 9%.
From an end market perspective, retail sales were up 22% for the quarter and 20% year to date strong demand for swimming pool maintenance supplies above ground pools spies, an automatic cool cleaners drove most of this increase.
The resilience of our retailers allowed them to successfully navigate the pandemic and its associated challenges as many adapted to the restrictions and concerns by device, They touchless service and curbside pickup.
Commercial revenue, which account for about 4% of our U.S. Blue business was down 21% for the quarter and down 10% year to date, driven by the cobot related closures and the decline in both business and leisure travel and the continuing health direct is limiting commercial pool operation.
[noise] chemical demand has weighed and new projects that slowed we are anticipating continued softness for this market for the foreseeable future.
From a product perspective equipment sales were up 22% quarter to date and 20% year to date again, driven by people opening cool sooner and using them more frequently.
Heaters pumps lights and filters are all see strong demand.
Very encouraging signs, where you're seeing is that more and more homeowners are opting for some level of automation during construction and remodel and repair which is providing added sales opportunities and convenience for the pool owner.
Chemical demand was up 5% for the quarter, an 8% for the year with results being impacted by stronger than normal residential and service size chemical demand being somewhat offset by softer commercial chemical demand.
Building materials in the quarter were up 7%, reflecting the pause in construction we saw in the first half of the quarter driven by the restrictions and shutdowns in permit offices in many markets as mentioned this caused many cool contractors to divert resources to serve the surge and maintenance and repair request.
Demand for building materials accelerated as a quarter progressed, reflecting the resumption in construction and strong demand for new pools.
Switching to Europe, we saw a remarkable come back in the latter half a quarter as sales rebounded from the drag created by numerous mandated closures throughout most of the E U for the quarter Europe posted a 21% gain in revenue, bringing the year to date revenue growth to 11%.
France, Spain, and Germany were off strong as where most of the other markets. We believe that demand across Europe is being increased by similar covisint related changes in consumer behavior.
Horizon side second quarter based business revenue growth of 5%, bringing the year to date growth to 5% as well demanded the sunbelt has come back strong, while northern California, and the Pacific Northwest have seen only modest recovery in demand.
Turning to gross margins overall gross margins for the quarter was 29.2% 30 basis points lower than the same period last year, where we'd be recorded 30 basis points of margin improvement.
Mix certainly contributed slightly to the decline, but overall, we are happy with the stability here.
Operating expenses were favorable in the quarter up a modest 6% clearly the actions we put into place early in the quarter together with the benefits of our capacity creation activities contributed to these strong results.
Our team's focus on execution has allowed us to create significant operating leverage while still providing unparalleled service to our customers.
Cool three six the RV to be tool along with Blue Street, our remote sales counter application both experienced significant growth during the quarter cool Threesixty sales have increased 32% year to date, while the number of transactions processed on Blue Street has surpassed 30000.
Our other digital applications like the NPT backyard, App and swimming pool Dot Com also gained significant traffic and traction in the quarter Mark will provide more details in his commentary on operating expenses.
Moving on to operating income I'm very pleased to report that for the quarter operating income was a record to $205.9 million, representing a 19% increase operating margin was 16.1%, which was a 70 basis point improvement over the previous year.
As you can see the second quarter was extraordinary and I'm extremely proud of what our team has accomplished current demand trends remain strong and contractors are reporting significant backlog.
We are optimistic about the outlook for the remainder of the year remain cautious regarding the potential impacts of the pandemic on business conditions.
With this in mine and assuming similar conditions for the remainder of the year. We're updating our full year 2020, adjusted diluted earnings per share guidance to $6, a 90 cents to $7 in 30 cents per share for $7 85 to $7.45 excluding impairment charges.
Our previous 2020 earnings guidance range disclosed in our April 20, Threerd 2020 call was $5.30 to $5, a 90 cents per diluted share or 545 to six up but excluding the impact of non [laughter] impairments.
Thank you and I will now turn to call over to Mark Joslin, Senior Vice President and Chief Financial Officer for his commentary.
Thanks Pete.
I will Mark my 16th year, a phone Corp. In a couple of weeks, which makes this my 64 thorniest call and without a doubt this quarter's bend the most remarkable and not just for the stellar results, but also for how we got here.
One we announced our first quarter results in the middle in April we were facing significant uncertainty around the pandemic around how the pandemic would impact our upcoming critical pool season, and the rest of year. So we took a cautious approach by locking down both capital and operating expenses as we discussed on our first quarter call.
Within the next few weeks as our markets rebounded and then accelerated and we are and we ran the risk of falling short of resources needed to meet customer demand, while also adapting to a challenging new operating environment.
While we had been stretched for any saddened by the confluence of these forces as Pete and as Pete also stated and I wanted to reiterate here our field supporting teams did a truly remarkable job of keeping their focus and rising trial challenges delivering outstanding financial results in the process.
I had a few specific comments on that on those results as well as what we expect to come for the balance of the year.
Pizza already.
Discuss sales and margin highlights so I'll start my commentary with expenses.
I went into some detail on our first quarter call about the specific actions, we're taking to tighten up our purse strings amid the pandemic uncertainty, but in summary back in March in early April we drill down on all discretionary spending and locked into a lower spending trajectory as we entered the peak of our season.
The impact from our expense control efforts is visible under the covers and our Q2 results.
Given the change in our outlook both for the quarter in the year, we recorded a substantial 13 million dollar increase and our performance based compensation in the quarter without this our operating expenses would have then down 2% from last year as a percent of sales and would have done a down 190.
<unk> basis points.
As reported including additional incentive compensation, we still brought expenses down 100 basis points as a percent of sales providing us with substantial 70 basis points of operating leverage in the quarter.
<unk>.
The expense savings realized we're in a number of areas.
Some of the bigger bucket items included labor related costs with headcount down about 1% at the ended the quarter compared to last year energy related expenditures traveling meeting costs advertising and bad debt expenses, where we where we recorded.
Or where we experienced strong collections and good management of age receivables.
Given the change in the level of our business activity from where we started the quarter. We've listened up the string somewhat so why a while I still expect our expense management to be good for the remainder of the year I wouldn't expect it to be as good as reported in the second quarter and will include a continuing impact from higher performance based compensation costs.
Yes.
These costs are very broad based as we tie some portion of pay to performance for virtually everyone in the company.
For example, in a second quarter alone our hourly employees in the field, including drivers warehouse associates and customer sales associates were paid incentive pay up $2.2 million, which was on average over $1000 per employee for the three month period.
Moving down the PNM always picked up 3.8 million compared to last year on the interest line with benefit coming from lower debt and lower interest rates.
Our average debt for the quarter was 493 million down 24% from last year, while our average interest expense on debt was 1.82% down 174 basis points from last year.
Back to see continued travel a favorable comparisons on this line for the remainder of the year.
Moving to taxes, our effective tax rate, excluding Matthew tax benefit remained stable at 25.5%.
Given the growth given the growth in our share price over the quarter, we had some pull forward of option exercises, resulting in the $6.2 million or 15 cents per share.
A few tax benefit which was less than the 7.8 million benefited reported last year.
With this our effective tax rate was up 160 basis points to 22.5% for the quarter this year compared to 20.9% last year.
As most of you note given the unpredictability of the ask your tax benefit. We don't include further gains further ask you gains in our guidance for the remainder of the year I should note. However, we estimate will have $5 million a tax benefit for options that will expire in the first quarter of next year, which I would expect.
To recognize sometime between now and then.
Moving over to the balance sheet and cash flow growth in our total net receivables at 9% reflects our sales growth during the quarter as well as improved collections from last year.
Our dsos at the end in the quarter was 28 and a half days down at full day from last year.
Looking at inventory, we fortuitously entered the season fully stocked and sold down 10% compared to last year was higher than normal stockouts, notably a heat related products and above ground pools.
Our inventory turns calculated on a trailing four quarter basis were 3.5 times this year, which was a 13% improvement over a year ago.
One other notable item was the impact of deferred tax payments as a part of the federal and state relief and stimulus measures and resulted an $18 million and tax payments that were deferred from Q2, most of vegetables and paid in the third quarter instead.
Driven by our inventory performance, a net income growth for the year and aided by the tax deferral, our cash flow from operations was an exceptional 221 million year to date and improvement of 124 million over last year and 18% greater in the net income.
We will give some of this back over the next few months as we rebuild inventory and pay taxes, but I expect a very good year for cash generation for us in 2020, which is always a key focus area for us.
One other thing to point out as our capital spending, which I noted on our first quarter call I had expected to be down 15%, 50% for the year as we reprioritized spending for short term payback items and preserve capital and other areas. We made good progress towards that objective was 13 million in Spain.
And year to date down 32% from last year again, what they markedly improved business outlook, we're retooling, our spending plans and now expect capex to be down roughly 35% from last year to a range of 20 to 25 million for the full year.
With our cash generation in the quarter largely applied to debt reduction our leverage as measured by trailing 12 months debt to EBITDA came down to 1.26 at the end of the quarter, which is a multi site a multi year low.
Looking ahead, our revised guidance make it makes a couple of assumptions I wanted to point out.
First the growing spread out of the crowd of virus in the U.S. brings with it the threat of Reimposition a business lockdowns, particularly in key southern markets that are more significant share of our business as we move through a out of the summer months.
Further lockdowns could threaten our construction and renovation business if imposed and have not been factored into our guidance second as always whether it plays a significant role in our results, particularly when looking at year over year changes and temperature and precipitation.
Benefited us by comparison in the first half of this year as poor weather in last year's first half resulted in 3% base business growth and much better second half 2019 weather when we posted 8% base business growth.
Our guidance assumes normal seasonal weather overall with our range, reflecting a little better than normal weather at the top and a little bit worse weather at the bottom end of the range.
With these caveats our guidance range today assumes will total full year revenue growth of 11% to 13% and modest decline in gross margin on the first half of the year.
And expense growth for the year of 6% to 8%.
Doing this would generate mid teens op income growth for the year 30 to 50 basis points of operating margin expansion.
And excluding they ask you benefits in both years and the first quarter impairment charge. This year, we expect EPS growth of 15% to 22% for the full year.
With that I'll turn the call back over to our operator began our question and answer session.
We will now begin the question and answer session.
You asked a question you May press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
And our first question comes from Anthony.
The bid Zinski of Sidoti and company. Please go ahead.
Hi, good morning, everyone on the Mark Congratulations on your six anniversary.
[laughter]. Thank you Anthony good morning.
Good morning, Okay. So that's so obviously the quarter came in significantly better than expected just just wondering.
If you guys could talk about your updated outlook for new pool construction and may be.
Perhaps or you just discuss the growth rate for above ground pools versus in ground pools.
Sure.
The outlook that we see.
As of now which is based upon obviously numerous conversations with our builders across the country is is very positive everybody has very large backlogs phones are still ringing off the hook.
And everybody has plenty of work, we believe to take them through the end of the year and into next year.
On your question on a above ground versus in ground for perspective, So we mentioned above ground pool being up significantly but above ground pools is slightly over 1% of our revenue in total so it's been around pools were up about 50%, but it's still a relatively small.
Well number in the whole Grand scheme of things.
When I look at Nukhul construction for the balance of the year or for the full year I expect it to be somewhere in the 8% to 10% range, maybe a little better if weather stays.
Good and the season is a season is longer and maybe at the lower end of that if it gets very cold and rainy freezes up sooner.
Got it thanks for that and then.
There's a way for you to distinguish but as far as the impact of the government stimulus checks do you think that that had much of an impact on your business or do you think you're and consumers are not really impacted by what they spend on.
Related equipment there.
[music] pools.
No.
Very hard to tell Anthony what I believe is that if it impacted anything.
Significantly it might have been the above ground in spot business.
Just in terms of one dollar amount of what went above ground pool with cost.
And a spot maybe it impacted that I don't think it really has a big influence on.
The in ground market.
Got it Okay and my last question. So as you mentioned the Mark that your leverage ratio was only a 1.26 times so with that in mine up what's your.
Patients for that Oh.
How should we think about.
How youre thinking about leverage ratio.
That's about.
By the end of the era.
Yes. Good question I mean, we have our capital allocation priorities, which are investing everything in the business.
We that we need to for for a maintenance and growth.
We have a dividend which we.
We will grow over time with earnings and then we is share repurchases.
And to keep leverage in our target range was which is one and a half to two times now as you mentioned were a little bit below that right now.
And then between now and the end of year I'm not sure that that's going to change much.
And that May come down more leverage may come down more but overtime, we're going to get our share repurchases and and we'll get back to that target leverage at some point if not a this year.
Got it right well, thank you and best of luck.
Thank you Anthony Thank you.
Our next question comes from David Macgregor of Longbow Research. Please go ahead.
Yes, good morning, everyone. Congratulations on a really strong quarter.
Great to see that.
Sort of the performance there I guess I'd like to better understand gross margins and you mentioned down 30 basis points of just wondered if we can unpack that sort of talk about some of the puts and takes I mean I'm guessing. It was less promotional activity you had talked last quarter. It thinking that there could be little more price competition from some of the smaller players I'm guessing that didnt play out.
Private label was probably pretty strong maybe just theres more big ticket, obviously that was a factor, but maybe just to understand I understand some of the puts and takes behind that took three basis points.
Yeah, well in the 30 basis points, a few on back to our first quarter call.
What we highlighted was that we expected gross margins to be down in the second quarter, primarily because of.
30 basis points of improvement that we add and 2019, which was related to selling out lower priced inventory that we purchase at the end of 2018 right. So the 30 basis points that we ended up was actually a little better than our expectations in our and our.
ER market update that we did at the end of May mention that we're selling a lot of these higher ticket items, which have a very nice gross profit, but gross margins a little bit lower.
And that was going to add to the.
You know, we thought that would add to the decline slightly a 30 basis point that we're expecting so.
Again that 30 basis points. This reflects the.
The tough comp from last year, but very stable margins beyond that adds and similar to what we had in 2018.
Private label I'm guessing with strong how much of a contribution would you say private label contributed.
Yeah private label.
Has over time continued to take more share of our total business were up to now more than 25% of our revenue and even higher.
For side of our margins from private label business. So.
Gains there.
Continue they inch forward I would say, it's not dramatic but they certainly helped contribute to the results in a small way okay.
Just a follow up question can you quantify lead generation growth.
Looking forward to the second half.
Yeah, It's again very tough right because it has to do with what the B what the builders are telling us across the country. So I guess very hard to put a number on it but virtually in every market across the country. The builders would tell you that their backlogs are very high the number of leads that they have.
I think I heard was talking to a builder just yesterday that told me. They have so many leads and now that before he actually puts a sales person on the lead people call them back to qualify the lead just to make sure that it wouldn't be a waste of those sales resource time. It's it is significant it's just hard to put a number on because it's the.
It's a summation of.
Of.
Thousands of small businesses. Okay last question for me just on the stock out so how much of a headwind should we think about for third quarter from.
Just from stock of topline.
I, it's it's in our it's in our guidance between now and the ended the year. So I Didnt I don't anticipate a huge uptick.
In stock out there higher than they would normally be with this level of activity as you could imagine.
It's also something that we spend a lot of time on with working at the very highest levels with our key suppliers to make sure we understand.
Production schedules and that we are.
Getting product to the right locations. The other thing to consider is again, just because of our scale in our size.
We may if we may not habit in one location. We may have an another location in the same market so with a with a few exceptions.
[music] key products that we've been able to keep those at a minimum so I wouldn't anticipate I wouldn't bake anything in as far as a big increase in that area.
Thank you very much yes. Thank you.
Our next question is from Stephen Volkmann of Jefferies. Please go ahead.
Hi, good morning, guys.
Pete maybe just a quick one you said about crown pools with less than 1% slower than I guess I would've thought I didn't think it was huge but does that include everything chemicals pumps whatever else people made for those things.
No. That's just that's just the above ground category.
The water vessel itself.
Hi, guys. So maybe a few more per cent and total that.
Yeah, I mean, it would be it would be a little higher but remember that the pumps and filters for an above ground pool are much much much cheaper than what you look at when you compare this to the in ground equipment.
And right level.
They typically don't have heaters. They don't have light. So so most of the cost is in the pool itself.
Got it okay. Thank you and then I'm wondering if I can just ask for your sort of opinion or maybe mark can chime in giving has longevity here, but as as we think out to next year. We're obviously going to have some sort of tough comps, but it looks like there's still a lot of backlog for the builder channel.
I don't know how to think about where are we going to have a situation where like most of the remodeling and trying to be equipment upgrades is kind of done and we won't have that and so we'll have a big mix shift to kind of more new build or.
Do you think this is sustainable and sort of as we layer that on.
To the operating expenses kind of bounce back because you've obviously made a lot of headway on this year, but in a more normal environment, maybe you'd be spending more I'm just trying to think about kind of the big picture.
Broad brush strokes for next year.
Yeah. That's a that's a good question that's a big question, there's a lot in there so let me see bike sorry.
Piece that together so when we look at overall demand and how the year.
Shook out for the quarter to quarter in particular.
As we said that the there was a lot of call for maintenance and repair because construction was stymied.
Certainly in the beginning of the quarter.
So what happened is a lot of resources got diverted to the to the maintenance and repair. So the people that bought heaters for instance, this year, they're probably not going to go by here again next year, but thats really the dealers were.
Spending on maintenance and repair.
Diverted away from as we said construction now demand for construction is very strong lot of people believe that swimming pool is the best way for a safe family recreation activity that will be long lasting so there's been a lot of in a lot of.
Interest in swimming pool, so the dealers are getting a lot of calls.
Along with that is the people that have the pools and remember the installed base is the is the real Jim in this industry. The installed base, which is somewhere in neighborhood of five and a half million pools with people spending more and more time in their pools.
Now are looking at upgrades and remodel so in the beginning I think what we saw his pools opening sooner in the northeast remember when I gave you the growth rates on seasonal versus zero markets. The the seasonal markets at a higher growth rate because pools open sooner, but at the same time I think there's been and what the dealer.
As a reporting as a greater interest in.
The back yard whether it's building a pool, if you don't have one or its remodeling, adding features and upgrading what they have so the builders are reporting a significant amount of activity on new pools as well as.
Remodel now you have to wrap all of that with the labor constraints that hasn't gotten any better in the industry. There's only so much labor so as I've mentioned before.
The system is somewhat pressurized that there is more late there's more demand and there is labor and that certainly hasnt changed in fact, what has happened now is there is even greater demand, which I think further pressurizes and the Elongates. This season, and we will take us into next year. So we'll have a tough comp certainly for next year, but I'm I'm.
Very confident that the demand will sustain and that the builders are going to remain busy right through next season. So one of the biggest impact you have to put on that as Mark put in his comments as weather right. So the number one building days can will affect remodel and construction, but assuming normal weather.
I would think that next year should be another another strong year.
Now you're in the last part of your question was Opex and we certainly had have realized some gains this year in opex.
But remember this is not a new phenomenon that we just started we started our capacity creation initiatives last year.
To try and create capacity to slow the rated inflation that we.
I would see by increasing the throughput in our sales centers.
And that has paid great dividends for us so I would expect that the.
The tremendous performance on Opex that we had this year.
And I looked at going well look at going forward I think that the same ratio of incremental opex. The GP dollars back in that 60% ranges what I would expect in terms of incrementals going going into next year.
Great. Okay. That's very comprehensive you've got every part of it I'm impressed thank you so much I.
Our next question comes from Quinn Fredrickson of Baird. Please go ahead.
Hey, good morning, guys good morning.
So I think you mentioned, 5% base business growth for Green in the quarter did I hear that correct and then also in your outlook for.
The second half the year would your expectation be that glue continues to outpace.
Green base business growth or would you expect that green see some catch up and starts to benefit from those same.
Stay at home and backyard living trends that that blue has been benefiting from.
Yeah, I think that.
Green will pick up in the back half of the year I don't know that it will be as.
As big as what we're seeing on blue because we simply have a different footprint in the green business as we do in the Blue business when I look on a market by market basis as I mentioned, the Sunbelt was a was good with the green business, but we were impacted by the.
Kobin.
Related slowdown in California, particularly in northern California market up into the Pacific Northwest, but when I look at the Sunbelt markets you know when I look at Arizona, and when I look at Texas. The Green business is actually in the in good shape and strong. So we have a new leader in the Green business that we brought any started right at the end of the first quarter and he is getting his arms around it.
Okay.
We like the outlook for the Green business, we think that there is ample opportunity to grow but I don't think for the balance of this year that the growth rate will match in total what we're seeing in blue simply because of the of the footprint than the lack of the installed base that we see with the blue business.
Okay. Thank you that's helpful.
And then last quarter, you had mentioned potential for increased competitive crap out pressures, obviously, given how strong things have rebounded I'm guessing that's not something you're seeing but can you give us a stand for what expectations around pricing contribution might be in the back half of this year with demand being as strong as as it is and so.
Okay, So you're saying.
Yes, let me grab that one client so what I've said on the last call, which seems a different people I've heard differently I've had a number questions about it was that.
Our expectations for discretionary purchases by consumers might be softer given the economic conditions and that that could be a end of season issue with competitors getting stuck with more inventory than they wanted to.
I have and lowering prices to sell out that inventory convert that to cash at the end of the season and they ended the season being kind of the August September timeframe. So that was a potential that we had factored into our guidance.
Bottom end of our guidance when we set it back and April.
That obviously first of all we're not at the end of the season second of all that conditions are are.
Much different than what we thought they could be and so that pricing competition and need to sell off inventory for having too much.
Certainly not an issue I'm in terms of margins expectations for the back half of the year I'd I did give a bit of guidance in my remarks prepared remarks that we expected margins overall for the year to be down a little bit, but that's all first half related so second half and looking for stable margins with a with prior year.
Hi, Thank you very much.
Sure.
Our next question comes from Paul Dircks of William Blair. Please go ahead.
Hey, good morning, everyone and congrats on a good quarter.
Thank you good morning to Martin.
Just a few for me I know, it's covered a lot of ground.
Mark or peak could you remind us in a typical third quarter what percentage of sales you would see on a by month basis July August September.
Yeah Man you know, it's a downhill trend.
July is the biggest month of the quarter I would say, it's in the range of 40% to 45% of the corridor August or maybe in that 30.
35% range and and September being the lowest month of the quarter, 20% to 25% something in that range.
Okay I appreciate that thank you.
Oh on capital allocation, obviously, you guys generated very strong cash flow.
Maybe could you talk about how you're thinking about allocating over the back half the year and specifically when do you anticipate some of your discussions with M&A targets resuming.
Into that a little bit has the appetite for investment abroad increased given the strength of your U.S. business and what you're also seeing in Europe, how while you've seen those markets recover.
Yeah, let me.
Let me address Adnan Pete as additional comments he can jump and so in terms of our capital allocation no change to what we've done historically, there certainly we invest everything that we need to for business growth, which primarily as organic inorganic as a part of that equation.
[music].
We did take a brief pause in terms of a really what.
We were.
Trying to get a handle on where the industry was going back in the March April time period, and that was a brief pause.
Since then.
Kind of gotten back into gear and as always.
We are active and the M&A.
Part of our business looking to grow share, particularly in markets, where we have lower share and that is domestically in the blue and green business and internationally and the Blue business. As you know Europe is part of the equation feed mentioned very strong results. There we have a great team that is really execute.
Meanwhile, and we are underpenetrated and certain markets in Europe, France, where the number one share in Europe.
But outside of France, we have lots of opportunities to grow span German a big markets, where we have.
Lower share and there's others as well so that's all part of the equation.
And lots of opportunities for us talk question of timing and and.
Meeting expectations of sellers, and and us coming to agreement so.
Back to normal.
Pete if there's anything on that.
No I think you I think you covered it it's part of our strategic plan. So it's we don't sit back and wait so theres areas as Mark said, we're interested in those are the ones that we pursue and as far as our appetite for those that we as he said it's business as usual right now.
No it's encouraging to hear lastly on you guys touched upon earlier on.
Growth in pull through 60 and in Blue streak.
Over the last few months have you seen the competitive gap between you and some of your local competitors widen or how would you characterize their performance in the current market.
Well I don't think our competitors have the tools and the resources that we have so whether it's the whether it's the pool threesixty, whether it's the density of sales centers that we have across our markets, whether it's you know the deep inventory.
In a wide inventory breadth that we have in all of our locations I think our value proposition is second to none and in an environment that has.
Very big uptick in growth.
And a very compressed period of time, you have to be in that position, where you can capitalize on that and service that and I think that our resources and our capabilities are simply unmatched.
Indeed, thanks, so much.
Thank you.
Our next question comes from Garish family of Loop capital. Please go ahead.
Okay, great. Thanks.
Congratulations on a quarter does it sounds like it but just.
Just wanted to be clear are you seeing screen and supply chain and any extended lead times getting products. The big surge in demand and that was just a follow up to that can you provide just a few on inflation going into next year. If any pricing you think you'll need to get in front of.
Yes, let me, let me address that so as I mentioned that supply chain in certain areas has certainly been put to the test.
And we have.
Things like above ground pools in spas, we sold out of in the second quarter in many areas.
And the suppliers are at a Max capacity for what they're going to be able to ship for the balance of the year, So but again those categories for us although represent nice growth. They are relatively small when I look broadly across our our categories.
We have.
Our stock outs are up but.
It's something that I look at on a weekly basis and when I look at it in total what is what is outstanding if you will.
It's still a relatively small number I think the team our supply chain team has done just an outstanding job of working with the suppliers now if the supplier simply doesn't have it. The good news is as with many of these products. If one manufacturer doesn't have if youre waiting for.
Heater for instance, which there's obviously been a huge run on demand for heater. If you don't have a one heater in stock. We a may have that heater in another location that we can we can draw from or we may have a know their brand of heater and or the conversion kits are that we can keep the.
Keep the customer working so I think the team is very creative very resourceful and the strength of our of our entire organization has certainly helped us from a growth perspective and helped the customer.
As it relates to inflation inflation for this industry typical year is 1% to 2% I would think that next year and then the reason they qualify that with I would think it's because all the manufacturers are not out with their with their numbers for next year, but I would think it next year, it's probably going to be a little bit.
Higher maybe two to three instead of one to two but I don't think anything crazy.
Okay. Thanks, and then just one follow up is on gross margins are you talked about.
Sound, but pretty stable gross margin somewhere in the second half year, but just kind of given the.
And maybe the variance and.
The protocol I figure so through any mix considerations that we should should be cognizant of as we move to the next two quarters.
Yes, not from a gross margin.
Perspective so.
Stable gross margins.
Even with mix, maybe putting a little bit of pressure on we have other things that are offsetting that.
And believe that overall will have a good stable gross margin performance in the back half of the year.
Got it thanks guys.
Okay.
Again, if you would like to ask your question. Please press Star then one.
And our next question will come from Alex Morris Young of Baron Burke. Please go ahead.
Hi, Good morning, guys, starting more like one on inventory what level of inventory would you be comfortable with that we ended the year considering your days inventory were down two days in Q2.
Well.
That's a good question I think.
Different ways of measuring that were a little bit light right now as we said, we fad shortage and in certain areas and really want to.
Beat those up we're also looking at growth as we move into next year. So.
Inventory just just one reminder, inventory is a little bit variable at the end of the year because it's based on when our vendors shipped to us and the pool industry. We have lets called early by where we place orders in the late September.
Early October time period.
Big orders with our major vendors and then they ship those orders at their convenience. So it keeps them working and fully engaged throughout the off part of the season. The latter part of the season and then as they produced product they ship it out.
To the based on the orders they have into all their customers and so it varies quite a bit in terms of when we receive that product that can come in November December January February. So really we look at trying to get inventory to a level at the start of the season February March of next year.
We want to be fully stocked as we were this year and prepared for strong season. Our service is certainly one of the most important aspects of our culture and that has helped us overtime take share and so we're planning on a gross.
During our business and growing our inventory levels by the time, we get to the startup next season.
Got it all makes sense. Thank you and just a second on that if I heard correctly. During the prepared remarks, Pete noted that chemicals demand waned in Q2, what do you think wouldn't driving that and as a reversal possible given the fact that the number of installed pools might be higher next year than was previously forecast.
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Yeah, No what I said was the chemical demand for the commercial segment.
Eight residential chemical demand was up what we were we saw the decrease was it commercial as the municipal pools and public schools.
Many of them remain closed because of the cobot restrictions residential pool residential chemical demand is actually on the retail side, our chemicals sales are up about 9%.
Yes in terms of growing installed base is certainly something that we see happening as Pete mentioned, we're looking for growth in the installed base this year with new pool construction construction going up.
Possibly 10% in that range and expect that to grow next year as well so that adds the installed base, which is a building maintenance business for us chemicals as a major maintenance product and so that's good for growth in that category for us over the long term.
Okay, great. Thanks to the clarification and good luck and after the quarter, yes. Thank you. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Peter Arvind for any closing remarks.
Yes, I want to thank everybody for joining us on the call today, we look forward to reporting our third quarter results on October 22nd have a great day. Thank you.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.