Q3 2020 Pool Corp Earnings Call
Good morning, and welcome.
Welcome to the Pool Corporation third quarter 2020 conference call.
All participants will be in listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
Please note. This event is being recorded I would now.
Now, let's turn the conference over to Mark Joslin, Senior Vice President and Chief Financial Officer. Please go ahead.
Thank you Gary.
Good morning, everyone and welcome to our third quarter 2020 earnings call I would like to remind our listeners that our discussion comments and responses to questions. Today may include forward looking statements, including managements outlook for the remainder of 2020 and future periods.
Actual results may differ materially from those discussed today it for me.
Information regarding the factors and variables that could cause actual results to differ materially from projected results is discussed in our 10-K.
In addition, we may make references to non-GAAP financial measures our comments a description and reconciliation of our non-GAAP financial measures is included in our press release and posted to our corporate website in our Investor Relations section.
I'll turn the call over now to our President and CEO, Peter Urban Big [noise].
Thanks, Mark and good morning to everyone on the call.
This morning, we released our third quarter results and they were truly incredible I could not.
I could not be crowd or the extraordinary accomplishments of our team. It was the first time in our history, we delivered back to back quarters with over a $1 billion in revenue it did.
Additionally earlier this month, we marked our twentyth anniversary as a public company over that period, we had an amazing 28% compounded growth in total shareholder return also.
Also in the quarter, we were very proud to be added to the S&P 500 index. None of this would have been possible without the talent and dedication of the 4500 plus people.
On a full core team and we are so thankful for everything that they do.
For the third quarter.
I'm very excited to report that total revenues were 1.14 billion, which is a 27% increase over the third quarter of last year with substantially all of this growth coming organically our diluted earnings per share was $2 or 92 cents, which is a 50% increase over the same period last year.
As noted in our earnings release demand for swimming pool, and outdoor living products has been strong throughout North America and Europe.
Work from home school from home, the lack of vacation travel and a d. urbanization trends have resulted in many families willing to invest in their own outdoor living retreat.
We have also experienced favorable weather across our markets, which drives higher demand for maintenance and repair items and allows new pool construction in backyard renovations the pace nicely our bill.
Our builders and remodel or customers are reporting deep backlogs, which should carry them into the first half of next year in many markets.
Looking at our four largest markets, Florida, and Arizona were up 23%, respectively, while Texas getting 26% in California grew 12.
Well, California lagged the other large markets delays and renovation and construction cost by permitting at inspection restrictions appear to be easing as we saw stronger growth as the quarter progressed.
Collectively these year round markets grew 20% in the quarter, while seasonal markets saw revenues grow 33%.
We believe that the pent up demand from permitting delays earlier in the year combined with favorable weather and the extended season, all contributed to the seasonal versus year round market variants.
Looking at end markets commercial demand remains soft with sales down 10% in the quarter and down 10% year to date as you can imagine this market is heavily affected by the lack of travel and public school usage right.
Retail sales on the other hand are extremely strong as pool owners seek the expertise and convenience at the independent pool retailers as we saw retail sales increased 28% in the quarter.
From a product perspective heaters comps filters and lighting continued to be in high demand sales for these products in aggregate increased an impressive 36% in the quarter, while there have been product shortages as demand surged back orders are on the decline as seasonal demand receipts. Our teams did a great job.
Using our broad network to minimize disruption as manufacturers struggled to keep up.
Chemical sales for the quarter were up 9% like last quarter strong residential demand is being somewhat offset by lower commercial demand as public schools and lodging related facilities, either remain closed or operating on reduced hours, which curtailed chemical usage bill.
Building materials sales were up 29%, reflecting a very healthy construction and remodel market as the quarter progressed, we saw demand of these products increased significantly as our customers were able to get permits more easily and they shifted resources to construction and remodel as I mentioned earlier, our builders are reporting significant backlog.
Which is very encouraging.
Turning to Europe. The same strong demand that we noted in the ended the second quarter continued throughout the third quarter as we said new sales records in most of our European locations Europe posted sales growth of 45%.
Which is indicative of a very healthy market and tremendous execution by our team Europe is benefiting from the same trends that are driving increased demand across North America.
Turning to our green business.
We were quite happy with a 14% increase that we saw and horizons base business for the quarter almost all markets saw double digit growth with irrigation landscape and power equipment product sales, leading the way, we see strong demand in residential and multifamily construction, but office and retail projects continue to lag for the time being.
Moving on to gross margins, we reported a healthy 28.9% gross margin for the quarter, which is a 20 basis point improvement increase over the third quarter of 2019, we are.
We are benefiting from volume related purchase incentives this quarter with some of that gain being offset by the heavier mix of lower margin equipment and an unfavorable customer mix.
Operating expenses increased 18% in the quarter with most of the increase being driven by incremental incentive compensation. As you know we have a relentless focus around execution and capacity creation, which is helping drive significant operating leverage across our entire business. One of our most important tools is poolthree hundred 60.
B to B platform, which for the third quarter saw sales growth a 43%, bringing the overall percentage of our sales process in Poolthree hundred 62, 11.4% I would also like to mention that as you would expect our other digital tools like blue streak, the backyard app and swimming pool Dot com have all seen.
Nipigon increases in activity.
Turning to operating income I'm very pleased to report that we delivered a record $148.2 million, which is a 42% improvement over the same period last year.
Operating margin was 13%, which is a 138 basis point improvement over the previous year.
As you can see the momentum that we started to build in the back half of the second quarter has continued right through the third quarter.
Our team has done a tremendous job dealing with many unforeseen circumstances, both personally and professionally but managed to provide unparalleled service to our customers, allowing them to serve the increase in demand for our products.
We executed as part of our strategic growth plan by closing on two acquisitions jetliner distributors with nine locations in New York, New Jersey, Florida, and Texas, and North Eastern swimming pool distributors with three locations in Eastern Canada The news.
The new locations and talented teams will allow us to provide even better service to our valued customers going forward, both acquisitions were well known for strong relationships and great customer service and we are happy to have them as part of the pool 14.
We continue to be optimistic about the future both near term and within our five year outlook as we progressed through the seasonally less significant fourth quarter and head into 2021, let me provide you with a few thoughts.
First we believe that some of the Kobin inspired trends will continue to favor home improvement spending with the pool industry being an ongoing beneficiaries.
We believe that inflation will be a bit higher in 2021.
Around 2% to 3% compared to the 1% to 2% for 2020.
Strong builder backlogs and an easier comp in the first half of next year should help us get off to a strong start as we see nice contributions from our newly acquired locations and newly opened Greenfields.
While we have some expense headwinds to make up for coming out of 2020. The tailwinds provided by this years higher than normal incentive compensation costs should help ease the transition.
Longer term, we expect that our.
We expect that our historic organic revenue growth rate of 6% to 9% driven by new construction.
Renovation and repair combined with inflation, the expanding installed base market share gains and new products will prevail.
Of course this is predicated upon a stable economy normal weather patterns and adequate labor supply and other external forces.
With three very successful worst behind us in 2020, I'm happy to update and narrow our full year guidance. Our new range is $8.05 to 835 per diluted share for 822 850, excluding the noncash impairment charges our previous guidance was.
690 to 734, seven no five to 745, excluding impairments.
Thank you very much I will now turn the call over to Mark Joslin, Senior Vice President and Chief Financial Officer for his commentary.
Our Q3 results are a continuation of our really remarkable year. So let me start off with a few of the financial highlights before walking through some of the details.
Starting with sales for the quarter, we had a $241 million or 27% increase in sales over last year, almost all of which was organic.
In dollar terms this was greater than the sales growth we've had in any single year over the last decade, and it was about 20% more than our growth in all of 2019, which at 7% for the year it wasn't too bad.
Our Q3 operating income of 148 million was up 42% or $44 million from Q3 last year.
Operating margin in the quarter or 13% was 140 basis points better than a year ago 300 basis points better excluding the 160 basis point drag from incentive compensation.
The contribution margin from our Q3 sales increase which is the incremental operating margin contributed by our incremental sales was 18.2%.
Year to date, our operating income was 390 million, which was 14% more than our operating income for the full year of 2019.
These are truly outstanding achievements for our business and I can't say enough about our field team and a remarkable job they have done.
To meet our customers challenging needs, while maintaining great operating discipline and delivering these stellar results.
Now for some of the details looking at our operating expenses for the quarter. The Big story here is performance based compensation as report.
As reported last quarter and as reflected in our press release for this quarter. Our results have warranted, a sharp increase inventories and for pharma space employee compensation.
This expense was up $20 million in the quarter and $32 million year to date.
Well, we believe this variability in our employee compensation is good for both employees and investors providing appropriate rewards are strong performance, while cushioning downside results when conditions are less favorable.
Our elevated compensation expense as well above historical levels, given our exceptional performance this year and should provide a tailwind for our expense management plans next year as we expect these costs return closer to historic norms for the year that should be roughly to fit that should be roughly $15 million to $20 million lower than that.
This year's level.
Excluding the increase in incentive compensation, our operating expenses would have been up a very modest 5% in both the quarter and year to date periods, considering the substantial sales growth. We experienced this reflects greater expense management by our entire team with the year over year savings realized in a number of.
Areas that are detailed on our last call.
In addition to our operating expense results, we reduced interest and other expenses by $3.6 million in the quarter and to a $9.2 million year to date.
As weve used our cash generation to pay down debt, which was 208 million lower than this time last year. We've also benefited from lower rates as our average interest rate for the quarter was 1.6% down from 3.2% in Q3 last year.
Moving down the pin out of tax line, we recorded 22.6 million of EPS, you tax benefit without which our tax rate would have been 24.5% for the quarter. This was in line with our lower.
Due to a lower Q3 tax rate.
Excluding a few benefits we are on track for the 25.5% rate that we would expect for the year as I mentioned in our first call back in February.
With the few benefit utilize so far this year, we now estimate we'll have $1 million of ask your tax benefit for options that will expire in Q1 of next year, which I would expect to recognize between now and then long with any pull forward of option exercises option expenses that may otherwise expire in future years.
Moving over to the balance sheet and cash flow growth in our total net receivables at 19% reflects our sales growth in the quarter somewhat offset by improved collections from last year. Our dsos at the end of the quarter was 27.6 days down from 29 days last year has extended season has helped.
Our customers cash flow.
Looking at inventory, we ended Q3 with inventory levels that were essentially flat with last year continuing to reflect the strong pace of sales and some stress on our vendors to keep up with demand.
Our inventory turns calculated on a trailing four quarter basis were 3.7 times this year and improvement from 3.2 times a year ago.
Our inventory and receivables management combined with our earnings growth has led to great cash generation and ROI see.
As for cash we've generated $389 million in cash flow from operations year to date, which is 127% of net income and and an improvement of $146 million over last year as.
As mentioned much of this cash was used to pay down debt, which resulted in leverage.
Just above one times at quarter end our.
Return on invested capital jumped to an all time high of 36.4% from 29.5% last year, while our return on equity was 71%.
I should point out that we did a small share repurchase in the quarter by 20000 shares at an average price of $299 per share, which is 6 million in cash.
Also just a couple of comments on our recently recently completed acquisitions northeastern a jetliner added a substantial 12 net new locations.
To our network and were bigger than many of the acquisitions, we made over the last decade, but.
But also are more seasonal given the predominantly northern market exposures of their businesses.
Expect them to add roughly 4% toward revenue growth over the next 12 months at lower operating margins than our existing business and with appropriate seasonal weighting of their sales and profitability, including a seasonal operating loss in Q4 this year.
With that I will turn the call back over to our operator to begin our question and answer session Gary.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question is from David Manthey with Baird. Please go ahead.
Yeah, Hi, good morning can you hear me, yes, good morning Myday.
Hey, guys.
So historically fourth and first quarter been dependent on when the when the weather turns in the seasonal markets and when you're thinking about the length of this season overall is it different this year I mean, do you think the stronger than normal.
Pool construction trends that you might see in your year round markets could could make it a little different in the fourth quarter and first quarter a that we're looking at.
Yeah. If you if you think about the way a typical year plays out as you mentioned it would Wayne Wayne quickly because builders would have for the most part worked through the majority of their backlog.
This year with with the backlog being what it is and permits I mean through September building permits pulled through September exceeded the entire number for 2019. So I think it's fair to suggest that the season. This year will have will be stronger in the fourth quarter.
And first quarter than we would normally see as builders have plenty of work to do now seasonal markets are going to be affected by weather, but the year round markets, there's still plenty of work that needs to be done.
HM Okay.
Okay and on that that note Pete.
With the strong trends, we're seeing right now in these these solid backlogs are pretty by the full builders do you think that industry. We're building capacity can increase by more than Weve seen say since the great financial recession.
It's probably averaged about 5000, new pools incremental per year or do you think we could see a little bit more than that if the builders themselves are.
Our feeling more confident based on the backdrop today.
Yeah, I think a couple of things to consider there. One is that you know whether it really is the biggest factor in terms of capacity and we've been very fortunate with great weather. So you know building capacity is up if for no. Other reason just that but your comment about are there additional capacity coming online what I.
I would say is anecdotally we've heard from several large homebuilders that are starting to build their own pools simply because they can't wait for the who builders to catch up so it's hard for us to say how much capacity additional capacity that will represent but it's also the first time that.
We've heard that in many many years.
Mm.
Okay. Thanks, very much thank you.
The next question is from Ryan Merkel with William Blair. Please go ahead.
Hi, guys congrats on another stellar quarter Martin.
So first off can you discuss the cadence of organic growth through the quarter and into October I'm, just trying to tease out how we should think about sales growth in the fourth quarter, which I know can be weather dependent to some degree.
Yeah, I guess I'll talk about it in two parts. So as I mentioned in my comments, California.
Started slower as they were again slower coming out of the permitting and inspection restrictions that they had and they exited the quarter and have begun to fourth quarter had a very strong rate I would say that the rest of the country was was strong and is strong from an organic perspective.
Okay, and then any help on the fourth quarter in terms of what we should expect for pay sales growth year over year.
I would say that we are we're still we're still very busy and a lot of it is going to be dependent on the weather. So you know I can tell you that there is substantial demand that can result in a very very strong quarter.
There are a lot of that is going to have to do with how much work can get done I mean, the same thing same trends of you know as I mentioned stay at home school from home. So pools are going to be open longer where they can now be used more but hard for me to give you a number because as you know the fourth quarter, the biggest predict or we have.
There is weather so if it you know if that snow that's in the upper Midwest were to move into the northeast than it were to get cold that would curtail things quickly, but as I mentioned before year round markets are very strong.
Okay Fair enough second question.
27% base business growth is just well beyond what I thought was possible pool maintenance is generally a stable business and so my question is I'm trying to understand why would people using their pools, more and maybe upgrading and remodeling a little bit more of that because they're stuck at home.
Why is that driving such strong growth retail up 20%. That's one of the strongest growth rates that I can remember I know you mentioned that why that was great and a bit of pent up demand, but a 27% growth is just really really strong and any other color you can add.
Yeah, I I think I mentioned, a lot of it really isn't there really isn't a silver bullet there that says Oh. This is this is it I mean, there was a lot of pent up demand in the seasonal markets and because of the restrictions that were early on normally those guys would have been closing down you know on the.
We end up there on the end of their season and that most of the pools that they had to build we're already you know well well underway. This year there was a significant backlog. So they kept working we had we had great weather it was.
It was very warm and dry you know if you look at if you look at southern California huge market they've had they've had great weather has been very hot out there. So a lot of a lot of usage and there was no backlog you know for for equipment upgrades that people were waiting on and as people started using their pools earlier in the year and said, Hey, I want to I want to really.
Oh, well they had to get in line with their builders to start those so what we saw was you know the maintenance business has been has been strong but the construction business.
Came back very strong in the third quarter as as builders and our customer switched from you know just trying to keep up and get a pool operational. So now we can start working on on remodel and renovation as well.
Okay. That's helpful. Yeah, I guess I didnt appreciate the pent up demand aspect that really kicked in there. So that's helpful. I'll pass it on thank you.
The next question is from Anthony Lebiedzinski with Sidoti and company. Please go ahead.
Yes, good morning, and thank you for taking the question. So I may have missed it did you guys get sales growth number for chemical sales for the quarter.
Yeah, I think other chemical growth for the quarter was 9%.
Got it okay. Thank you for that okay. So so so as far as the sales trends, obviously has pointed out that by previous people on the call obviously the strongest so.
As far as how should we think about the sustainability of these trends I mean do you think there was anything to think of as far as any pull forward of future demand or how should we think about that.
[noise] I guess, here's what I would say it really when I when I look at what's you know.
What's in the future for us when I consider the fact that the number of permits is up so significantly and the fact that the labor really hasn't changed all that much yet.
There is still significant demand and backlogs and people that want to get pools built I mean, again anecdotally, but I know several builders that are essentially sold out for the 2021 season.
I think about the trends that are driving our growth, which you call to stay at home in a stay at home school from home Cocooning, whatever you want to call. It I don't see travel and you know I would call normal life returning any time soon so the same things that drove our business in 2012.
Any I think are going to drive 2021, because I don't see that the overall market dynamics are going to shift. So labor is still constrained. So its not like Theres unlimited labor that can just put a bunch of pools and having said that with an elevated demand for new pool, the new pool construction being up.
You know remember for us it's not over when the pool is built that just happens to be another pool, a customer for life that has to be maintained so I mean, we're very encouraged by what we see coming down the road.
Got it okay. So as far as new pool construction do you have an estimate as to where that will be for the full year and any early thoughts for for for next year, obviously taken into account some of the labor constraints.
The I can tell you the latest number I've heard is up to 100000, new pools and that I was coming off of 75000 last year I would tell you. My number is probably between 90 and 100000, new pools, depending again on how long the weather hold so that they can continue.
To work in the a and the seasonal markets I mean, I was speaking to dealers and the seasonal markets in the last few weeks and their backlogs are huge and they're hoping to get as many of those pools as they can in the ground before the snow flies and whatever they don't get in the ground they'll start as soon as they can in the first half of next year and again then the whole the number of pools is real.
They're going to be a function of weather because demand I think will remain pretty consistent.
Got it okay. Thank you for that and I guess last question as far as the.
Margin impact for the increased volume incentives.
Mark can you quantify how much that was.
Yes, Thanks, Anthony for asking me a question [laughter] that burn.
30 of the increase so if you look at the 20 basis points was actually a little bit more than that and then as Pete said offset a little bit less on mix on both product and customer so yes not.
Not a huge amount, but that's certainly helpful.
Okay got it all right well, thank you and best of luck. Thanks.
Thanks. Thanks.
The next question is from Stephen Volkmann with Jefferies. Please go ahead.
Hey, Good morning, Mark I had a question for you if that's all right.
[laughter], so I'm actually for anybody who is interested but so it sounds like you guys are fairly optimistic at least for the first half of next year based on backlogs et cetera, and then Mark I think you said, you're going to have a little bit higher price.
Trees than normal and I wonder if that means there's an opportunity to perhaps front end load some inventory and you know.
I have some impact on gross margins and 2021.
Yeah, what were expecting as you mentioned price has really inflation, so inflation looks to be a little bit higher next year.
2% to 3% versus a one to two normal and you know, we typically try to buy a little bit more when that happens that vendors are struggling.
Struggling a bit to stay up with demand. So it's not clear that we'll have as much opportunity as we might otherwise like to benefit from that.
Okay, all right good point.
And then maybe back to Pete.
Is it possible maybe you guys, it's even hard to get visibility, but what do you think new build versus retrofit and upgrade breakdown looks like.
In terms of growth.
Very hard to tell I don't know that we have that we have good visibility on how much of it is new build and and remodel.
I don't think its going to be much different than the historic norms, given the installed base and the aging of the remodel I just think the more time people are spending in pools, if you have a pool and its old.
Our aging and now you're using a lot more those folks are out calling the builders and wanting one remodel and then there's obviously a bunch of new people trying to get into a pool. So.
It's an interesting question, but I don't know that we have a way to tease apart how much of that business is remodel versus versus new construction.
Okay, all right Great and then maybe my final one I'll pass it on.
Just again, I guess, everybody sort of stunned at the growth numbers here, but how much do you think a share gains have played into this or maybe another way of asking it are there certain niches, where you've done really well on share I mean, Europe was Europe up 45% overall or.
Just anything to call out on share I guess.
Yeah, I think clearly it would be fair to say that we picked up some share in in certain markets I wouldn't be so bold as to say we gained a lot of share in every market, but I think we certainly gained share its still little bit too soon to tell the years not over it you know at the end of the year I think we'll have a better idea.
Based on what actually gets built but I think we're very comfortable saying that we picked up some share this year.
Okay, great. Thank you that's a function of the of the service that we provided that we had product.
Thank you guys yet.
The next question is from Ken Zener with Keybanc. Please go ahead.
Mark Peter be bold, but I would suggest to you.
So I am getting my poor you Don said, Fortunately, you're not hearing the concrete demo as we speak.
But this was delayed from March on out in California. So there's a couple different angles that I want to ask you I apologize in advance that it's going to be a little ranging but.
I clearly think you're getting share because for instance, yesterday, we are just getting hardscapes because youre MPT has a very good supply chain compared to one of your largest competitors I meant sorry, which goes through distribution that here could you talk to peak given your distribution background, what share gains and perhaps opera.
Entities you are saying.
As your competitors supply chains aren't as perhaps well managed as yours and specifically at Hearts gets cut that must be a take away from your.
Data that you're talking about internally Thats My first question.
Okay, Let me try and answer that.
The when I think about share gains specifically in building materials and Hardscape I mean, not many of our competitors our full line in terms of having everything that the pool builder remodeled their needs. So.
So we are unique in that in that fashion and that we have such a broad range number one number two we have a very broad network and deep inventories, which allows us to keep up with demand much better than others, having said that all of them.
Manufacturers are stretched at this point in terms of capacity. So you can have even have a great supply chain, but if the ultimate demand outpaces, what the collective output is of the plants, then you're going to have you're going to you're going to struggle. So I would tell you in certain parts of the country, we did great.
In other parts of the country, we had builders that wanted a wanted product sooner than we can get it but by and large better than most.
Okay.
<unk>.
Mark.
[laughter] outlined to you.
You details that I'm, just trying to do my math on here regard.
Regarding EPS, why 21, which had no explicit guidance. However, you are giving us the begin.
Beginning of that growth bladder, so inflation, 2% to 3% you said.
I heard you say M&A right.
Roughly.
4% that's on a 12 month basis. So its more northern I believe is what you said so the bulk of that.
4% 12 month growth will occur and that's why 21 is that accurate.
Yes, yes.
And those acquisitions are bright, but at the end of the third quarter. So we won't get right fourth quarter next year, So expect a 4% growth from.
From Q4 to largely two and three yes, definitely so greater growth and.
Kind of April through September.
September time period.
Now it's an acquisition. So you said, it's not flowing at the same EBIT margins, but you know if you have an 11% margin I mean, it's 7% reasonable tough trying to think about an EPS contribution.
Is it yeah, and the five to seven range.
Okay. Now you talked you explicitly called out comp.
Hi, Jason well done this year being lower next year, a 15 to 20 million comma all else equal is that accurate because that's about 20 cents. There I mean is that [noise].
Well fair.
Basically what I'm, saying 10 watts.
Was this year, our operating costs have been extraordinarily extraordinarily low given the revenue growth.
And we probably will have a little bit to catch up on that next year.
Because.
Base operating costs.
So a little bit higher growth than normal, which will be offset largely by the higher incentive comp that we've had this year. So the 15 to 20 million our reference that I gave was just on incentive costs.
That is the amount of let's call it higher than average over the last several years and incentive costs. This year, so that will offset a what I would expect to be kind of a higher operating costs otherwise given that we have some.
Some makeup to do in our in our branches for delayed hirings and other things that they've done this year.
Right. So your 2% to 3% inflation, 4% M&A is that separate I mean, your base case, but you're kind of guiding to next year as you know, it's a high single digit.
If we assume conservative core demand given what we're seeing on your M&A at inflation, that's clearly the.
You know what I'm hearing from you or would you disagree with that.
I wouldn't disagree, but I'd also say this is October we.
We typically don't get specific on our guidance until we get no I understand but just generally speaking because it's it's very robust.
Right go to those factors you isolated figure so.
Okay.
Very well thank you very much for your time.
Alright, thanks, guys.
The next question is from Garik soil with loop capital. Please go ahead.
Yeah. Thanks, Congrats on the quarter just on the early buys and it sounds like there won't be as many incentives as usual, but do you think you'll be able to get everything you need all the product in stock and set for the next season I mean, it sounds like some of the product on Backorder Backorders bigger.
Backorders beginning to normalize so just want to make sure that you're you're feeling comfortable going into next year as far as kind of inventory position is concerned.
Yeah, I think for the most part will be fine next year I know there is absolutely going to be a an early buy typically their manufacturers are already working on the early buy but because the strengths of the 2020 season. Many of them are still shipping product that as soon as we get it will turn around and ship it out the door, but obviously there is a there is a nash.
Sales seasonal Wayne in demand.
Which will allow the manufacturers to to catch back up and they will basically start shipping early buys. So you know for the most part I don't think there will be a problem with material availability next year I expect to start the season.
With the a foot warehouse so to speak.
Okay. Thanks, I had a question just.
A question just on the follow up on some of the markets your questions.
Tim earlier do you think you're seeing any change in behavior by pool owners. If there are maybe previously somebody who had performed a lot of the maintenance work themselves are they starting to outsource.
The work to cool professionals, whether it's a function of corporate restrictions or you know maybe just.
A way to go about their their time elsewhere.
That's a change at all or or.
Or are we thinking about perhaps.
Yeah, I think you think might be over thinking that a little bit I think in general the amount of folks that are taking care of their pool versus.
Versus having it done professionally don't think Thats change are we I don't think weve picked up on any significant change in that regard.
Okay and then the last question just on the comments around builders looking to do more of the pool construction themselves.
Is this something that you've seen in prior up cycles that they normally pick a task of poor construction now.
Now that we're approaching 100000 pools I mean historically that.
Historically that will balance the average if not a little bit below the long term average so as we move more towards a historical normal level.
I have to be you know should we expect the builders to take on some of the construction activity you know more so than they've had to do over the last 10 years.
I think its supplemental capacity for certain builders right I think the trades are essentially the same right. It was plumbing, there's electrician and there's Mason masons involved in building a pool on so I think that historically some of the homebuilders, we're doing their own and then they outsource that when.
There was essentially capacity to do that and they focused on the home itself now with a limited capacity to get pools built they want a complete the home and turn it over for the homeowner. So some of them and said we've done it before and we'll do it again.
Great helpful. Thank you.
You bet.
The next question is from Alex Meraux Chill with their Berg. Please go ahead.
Hey, guys. Good morning, first a question for Mark on margins I'm last quarter, we saw lower gross margin due to the product mix being heavier towards higher ticket item, but you also mentioned that we would see stable gross margins in the back half of the year. Obviously, we had that tick up this quarter, but we had similar strength in some of those.
Lower margin products. So how should we think about the mix impact and 2021, if new construction and remodel remain strong, but you get a positive offset from read it.
Yeah well.
By the way I consider 20 basis points to be pretty stable. That's a minor change we're going to have some not.
Some natural fluctuations in our business.
Every year quarter over quarter. So that's 2030 basis points ups are up or down either way relatively flat for the year or is kind of our expectations over time and I think that will be the same for next year.
There, we're coming off of high volumes. This year, we're looking for good growth of the business next year, maybe not as significant but Ah, but continuing to see sales of these bigger ticket lower margin products.
Which which provide a little bit of product mix down so.
Expectation again relatively flat next year could be some ups and downs by quarter, but not not a big change from this year.
All right. That's helpful. And then secondly, you know recently, we've had some of these hurricanes hit your Gulf markets and hope your employees are doing well, but in in late Q3, and early Q4 are you able to.
Give us a sense of what that impact was on sales in the bottom line and then how it'll flow through in the coming quarters.
Yeah, I would say its tariff.
Terrible situation for those impacted but you know these these weren't major populate.
Population centers so.
From our standpoint really no impact on the business of significance.
Okay understood I appreciate everything.
Yes, Thank you Mike.
Again, if you have a question. Please press Star then one.
The next question is a follow up from Stephen Volkmann with Jefferies. Please go ahead.
Mr vote. When your line is open on our end.
Yes helps if I'm not muted sorry about that thanks for taking the follow up just curious the discussions around some homebuilders starting to maybe do some of their own pool work would you still be a supplier to that project or would this they're doing multiples do they have other options.
No I mean, that's a that that business is still going to flow through us I mean.
Inventory that we have is specific to the pool industry thats not things that the rest of their trades are typically going to have I mean can they buy rebar and PVC pipe from somebody else, yes can they get the specialty fittings and everything else that's required and equipment to build a pool no.
Got it and my actual follow up was really more around logistics. So we're seeing quite a bit of inflation in logistics markets, but I know you guys have had some.
Focus on managing that just any thoughts about that going forward into 21.
Yeah, I mean remember from a transaction perspective, 70% of our transactions take place over the counter.
So you know we benefit in situations like this we are seeing the same inflation that others are seeing as it relates to transportation costs, but you also know that we've been working on as part of our capacity creation initiatives.
Stretching the capacity, we have and getting more out of our existing fleet by better routing market based transportation and such that Weve been able to you know all things considered bring to bear to help control those costs.
So net net kind of stable going forward or do you get some benefit.
I mean, if I think we saw a slight improvement in terms of a percentage of sales. This year and I would think that that would consider that would continue into next year unless there is a step function increase in transportation rates external transportation rates, because remember a lot of.
Our deliveries happened on our own trucks as well that's the vast majority of <unk> expenses.
Got it thank you yep.
This concludes our question and answer session I would like to turn the conference back over to Peter our van for any closing remarks.
Great. Thank you.
I want to thank all of you for joining the call joining us on the call today, we look forward to reporting our fourth quarter and full year 2020 results on February 11th of 2021 have a great day.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
No.
[music].