Q2 2021 Pool Corp Earnings Call
Good day, and all kinds of the pool Corp, second quarter conference call.
All participants will be in a listen only mode should the need assistance. Please signal of the content. That's makes farfetch the Dod NGL off.
After todays presentation, there will be an opportunity to ask questions to ask the question. You May Press Star then 1 on the touched on the phone to withdraw your question. Please press Star then 2 please note. This event is being recorded.
I'd now like to turn the conference or at the Mark Joslin Senior Vice President and Chief Financial Officer. Please go ahead.
Thank you operator, and good morning, everyone and welcome to our second quarter 2021 earnings call I'd 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 the year in future periods actual results may differ materially from those discussed today informing.
Regarding the factors of 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 in our kind of a description of 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'm joined here today by our President and CEO, Peter Arvin, and I'm very happy to say by our next CFO Melanie art will start as usual today with opening remarks by Keith.
Yeah.
Thank you Mark and good morning to everyone on the call. The beginning in May of last year as the country came to grips with the pandemic and its effects on everyday life across North America, and Europe, homeowners interest and swimming pools and anything to do with outdoor living searched.
The steady growth that we had seen over the years kicked into overdrive as people realize that investing in their own backyard. They could enjoy a family friendly safe healthy outdoor living experience right at home demand for in ground pools above ground pools luxury patios and outdoor kitchens spiked, creating demand that quickly soaked up any.
Available buildup of capacity the surge in demand has not let up and continues through today as our builders and remodelers are telling us for the most part they are booked through year end and in many cases into 2022 or.
Our retailers are also reporting robust store traffic as well.
This morning, following an exceptional first quarter, we reported that our second quarter total earnings or total sales came in at a record $1.8 billion, which is a 40% increase over the second quarter of 2020, which was up 14% over 2019. This is our largest quarter ever and our seasonally low.
Significant quarter of the year.
Thanks to the tremendous efforts and hard work of our team that is executing at an incredible level the support from our supplier partners and the perseverance of our customers together, we helped more people enjoy the healthy safe outdoor living experience than ever before.
From a base business perspective sales increased 32% with acquisitions accounting for 8% of our quarterly growth.
Inflation as we have previously mentioned has been above average this year and is trending to 5% to 6% for the year. In total this has had no meaningful impact on demand and has passed through the channel as is typically the case overall of the unprecedented demand for our products has strained the manufacturing capacity and supply chains in the.
The industry in times like this we use our strong balance sheet, the robust network of sales centers and tremendous execution to help our customers keep projects moving forward. So of families can enjoy their backyard escape.
By and large of the manufacturers are finding ways to increase production, which when combined with the industry seasonality should ease some of the shortages that have plagued the industry. This year, allowing supply change the function where normally as the year progresses.
Looking at base business in our 4 largest markets, California saw sales increase of 33%, Florida sales increased 35%, Texas saw sales climbed by 30% in Arizona sales increased 24% for the quarter.
Overall, our year round of base business markets increased by 31%, while the seasonal markets increased by 33%. This growth is a testament to the strong demand throughout the entire business.
Now, let me provide some product sales details for our base business, even with the strained supply change of equipment sales, which include heaters pumps filters lighting and automation all using the construction remodel and maintenance of swimming pool has posted record sales up 35% in the quarter following a 62%.
Again in the first quarter again, what is most significant about this result is that it occurred in our seasonally biggest quarter when industry capacity is most challenged in our comps the most difficult from an industry perspective.
Chemicals, which have been a challenge to supply this year with the widely known industry shortages saw sales increased by 28% in the quarter pricing represented 19% of the increase while volume accounted for 9 persistent shortages in tricolore andi floor have driven the.
The increased demand for alternatives, such as liquid chlorine and calcium hypochlorite.
Which most recently have seen supply interaction interruptions of their own in.
Elevated stock outs across our network as the teams grapple with industry shortages in most cases this results in the intermittent stock outs across some of our network that can last a day or 2 as seasonal demand for chemicals is peaking soon we expect the situation to ease in the coming months.
Building material demand remained strong as construction and remodel activity is brisk our sales in this product category grew by 33% in the quarter. Following a similar growth number in the first quarter retail products posted a 20% gain driven by a larger installed base and elevated usage levels, although here to the shortage.
In chemicals and other products is limiting growth.
Commercial pool products continue to rebound as leisure travel has resumed and resort hotel and municipal pools reopen for the quarter sales in this product group increased 45% coming off of weak second quarter, and 2021, where sales fell by 21% due to the Covid lockdowns.
Currently sales in this category of being dominated by maintenance from repair products as large commercial construction projects are just beginning to get traction again.
Last year, we completed 4 acquisitions, 3 blue and 1 green and to date, we have completed 2 more blue acquisition, all are performing well and being integrated into our network, which will make them even better.
Our deal pipeline and expansion plans are robust and remain a focus area for the business year to date 2021, we have opened 9 new locations 7 out of the blue side and 2 on the Green side.
Let me now take you across the Atlantic and provide some commentary on our European business sales remains brisk and growth strong.
For the second quarter, we saw sales grow by 42%, bringing the year to date growth to an incredible 62%. Our team is executing at the highest level and benefiting from a similarly strong market that we're seeing in North America being a multiline distributor versus a distributor manufacturer allows us to be more flexible and provide customers.
More options in a supply constrained environment. This has allowed us to take significant share.
Turning to our horizon business. We are very pleased to report that sales growth continues to be strong as the business posted another terrific quarter with sales up 31 per cent for the same period base business sales increased 24% versus last year.
As mentioned above year to date, we have opened 2 new locations, 1 in California, and the other in Florida, while continuing to execute our strategic plan of organic growth Greenfield expansion and acquisitions as we develop our pipeline in targeted areas.
Let me now switch my commentary to gross margin expenses and operating income first on gross margins. We are very pleased to of reported a gain of 170 basis points for the quarter and the 200 basis point gain from our base business. This improvement was driven by supply chain execution inflation benefits and Prada.
Mix Meli, who will provide more color on this topic.
Operating expense performance was spectacular given the volume growth our opex as a percentage of sales improved by 117 basis points for the quarter is being driven by the team's execution and our relentless focus on capacity creation activity.
360 sales grew by 56% and accounted for 12% of our sales for the quarter. The importance of this tool continues to increase as it enables both our customers and pool corp to be more efficient in how we operate.
Wrapping up the income statement I could not be prouder of what our team delivered an operating income the record $339 million in operating income for the quarter was a 64% increase over the same period last year.
Our team's skill dedication dedication and commitment to the customer experience is second to none of this along with the benefits of our business model continue to set us apart from the competition and enable us to continue to take share in this challenging environment, our ability to consistently drive organic growth and manage our cost structure.
Through execution and capacity creation is a testament to the team here at pool Corp.
With this in mind and the half of the year behind US, we are raising and narrowing our EPS guidance for the year from previously of $11.85 to $12.60.
2014, 75 to 14.25 per diluted share, including the 29.
Year to date tax benefit that we have received.
Looking forward there are several factors and trends that give us confidence for continued growth beyond 2021.
First single family the single family housing market remains strong driven by millennials entering the housing market for the first time day urbanization and the southern migration all of which are very positive factors from both the blue and the green business as people move to the Sun belt states with longer outdoor living season, they see the value of investing in a pool.
Patio outdoor kitchen of remodel project, which is driving demand for our products.
Second the work from home change that has swept across North America is also creating more time to enjoy a luxury backyard retreat. This trend it looks like it will continue longer term.
Third new products, such as automation and the connected pool simply increase our sales opportunity on every project as people become familiar with this new user friendly technology.
Force New in ground pool installations were 96000 pools last year and are forecasted to grow to more than 110000 pool. This year as our business is that builders are reporting stronger backlogs that continue into 2022.
Each new pool adds to the maintenance and repair market, which going forward, which by far is the largest part of our industry.
Fifth inflation, which is higher than normal this year will likely continue at elevated levels into 2022.
6 of the new variable speed pump legislation that goes into effect. This month will add $30 million to $40 million of incremental revenue opportunity going forward.
Seventh.
Our relentless focus on the customer experience and our expansion plans are allowing us to take significant share and we see that continuing going forward.
Finally.
Acquisitions will continue to play a role in our growth as we continued to build and execute our deal pipeline as part of our strategic plan.
As you can see we have many reasons to be optimistic about the future and we expect to continue the track record of success that we have demonstrated over the years I will now turn the call over to Melanie Hartford financial commentary.
I am very pleased to be joining you all of this morning, I will cover some of the details of our second quarter financial results as Ted has provided an overview of our sales activity in the quarter I will begin my commentary with some additional discussions on gross margins gross margins increased 170 basis points during the quarter with base business gross.
Margin of 200 basis points. These increases exceeded the expectations expressed on our first quarter call first we saw benefits from our supply chain initiatives, which included a focus on accelerating purchases ahead of vendor price increases to limit stock at where possible in today's tight supply conditions.
Next with our increased parts of volume. We also expect improvement in the rate earned under our vendor programs. Additionally, we realized from improvements in gross margin during the 2021 second quarter from product mix changes as a larger portion of our sales was comprised of lower margin bigger ticket items.
In prior year.
Lastly, customer mix changes also had a positive impact on margins for the quarter.
Yes.
Moving down the P&L to the expenses, our consolidated quarter to date operating expenses were up 27% with base business operating expenses, increasing 18% over prior year on base business sales growth of 32 per cent base business operating expenses were down 140 basis points as a percentage of.
Sales variable expenses, such as those related to personnel and freight costs that are necessary to serve our increased business activity were very well managed by the team during the quarter included in these expenses as our performance based compensation, we recorded an additional $7 million over prior year during the quarter and.
19 million more year to date, given our exceptionally strong performance.
Operating margin grew 280 basis points to 18, 9% for the quarter the <unk>.
Acquisitions added since the second quarter of last year have performed well contributing 11 million or 11% operating margin.
The operating margin contribution from these acquisitions was below our base business operating of Martin and like underperforming sales centers and new locations of which we opened 9 new locations in the past 12 months represent additional opportunity for operating income from it over time.
Interest expense declined from the same time last year as lower debt levels resulted in lower overall borrowing costs. Our average debt for second quarter 2021, with $376.8 million compared to the same period last year of $493.4 million.
Our recurring tax rate continues to be around 25% on pretax earnings.
Excuse me, we realized an additional ASU tax benefit of $7.7 million or <unk> 19 per share from stock option exercises that occurred during the quarter, bringing the reported rates of 22, 9% for the quarter.
I'll now move to our balance sheet and cash flows our growth in current assets over the last year reflects the increase in total net receivables of 29%, including the effect of acquisitions made after the second quarter of last year. This is driven by sales growth in the quarter offset by strong collection of activity we realize every.
The action in DSO or day style of that standing to $25.8 days down from $28.5 days during the same quarter last year.
Inventories were up in total of 42% or 36% not considering the inventories we added for acquisition, we continue to leverage our capital strength and sourcing scale to add inventory to support the demand increases and maintain customer service levels.
Inventory turns on a trailing 4 quarter basis increased to 4.1 from the 3.5 in second quarter of 2020.
Cash provided by operations through the end of June was 187.2 million. This is down $33.9 million from the same quarter last year, primarily due to increased inventory investments.
Prior year also benefited from deferred tax payments that shifted from June to July in 2020, as part of the Covid relief package cash flow for the year are expected to remain strong, but we may continue to prioritize investments of inventory of our cash generation as we believe our strong inventory position has allowed us to gain share.
Sure.
For the year. We've also been focused on returning excess cash to shareholders in May the board increased the authorization of share buyback by $450 million during the quarter. We spent $19 million. In addition to the 66 million repurchased in first quarter, returning a total of $85 million to shareholders year to date the.
These repurchases resulted in total share of the acquired of almost 243000 for an average price paid of $348, leaving 542 million on our repurchase authority. We also increased the quarterly dividend rate during the quarter by 38% our debt levels remained lower than our targeted range, where the tray.
Ailing taught by the ratio of 0.5 at quarter end, giving us substantial capacity and flexibility to support our business needs and execute on capital investment opportunities.
Now I'll turn the call over to Mark to provide comments on our expectations for the remainder of the year.
Thank you Melanie.
During my comments today with some perspective on our second quarter financial results.
For each of the last 2 quarters I've alluded to our results looking like the work of some sort of modern day Renaissance Master.
In hindsight I think I should of save my superlatives for the Q.
Q2 results, which are the real work of the master.
At the peak of the season when demand is greatest our customers' needs of our most urgent and our supply chain is the most stretched delivering the kind of results. We achieved this quarter is the embodiment of the team effort that is truly exceptional and demonstrates the incredibly high level of execution.
Our second quarter was the culmination of a frenetic year in the pool of industry.
All of showcase the talent of our team as well as the value of our business model.
Looking back over the last year, our trailing 12 months of financial highlights included 40% revenue growth and cumulative sales of $4.8 billion.
84 basis points of gross margin expansion and 350 basis points of operating margin expansion, while delivering a return on invested capital of 50% of.
All of our remarkable results.
In addition, we had a balanced deployment of capital over the 12 month period with $125 million of capital used to acquire 5 companies and nearly $200 million returned to shareholders evenly split between dividends and share repurchases and we invested $26 million of PP&E, primarily to support investments in technology and new.
<unk>.
We also invested just over 200 million in working capital in 2021 ahead of our seasonal business peak to be in the best position of possible to serve our customers throughout our supply constraint environment.
As a matter of note our sales growth of over the last year of $1.4 billion was just a bit more than our total sales when I joined the company back in 2004.
Clearly our marketplace has evolved the rapid pace over the course of the last year and has our performance and our outlook for the future which continues to be very positive.
At this point I will share some insights into the factors included in our guidance range.
Yeah.
Using the midpoint of our new guidance range as a measuring stick and comparing the new range to the old you can see that we raised our expectations by 15% per the year. This is the result of 3 factors.
Better overall Q2 performance unexpected with higher sales growth and a day a bigger gross margin gains and we had factored into our previous range.
Expectations for somewhat higher sales growth and better gross margin performance for the remainder of the year and.
And lastly, the $7.7 million of 19 <unk>.
Share of benefit from our ASU tax gain in the second quarter of that was not in our previous range.
Our previous range had anticipated sales growth for the year.
In excess of 20%.
Our new range, which of course has Q2 baked into it anticipate sales growth in excess of 25% for the year with greater growth in Q3 than in Q4 as cost become increasingly difficult.
As a reminder, our Q3.2020 sales growth was 27% while Q4.2020 sales growth was 44%, which was aided by very favorable weather conditions and include acquisitions, which will be lack of this year.
While we assume normal weather for the rest of the year and our guidance range favorable fourth quarter of weather. This year could see us reach the milestone of $5 billion in revenue for the full year.
As I noted our gross margin expectations for the remainder of the year have also improved with year over year gross margin gains now anticipated in both the third and fourth quarters, though much less improvement in the fourth quarter, given the 70 basis points of margin pick up we recorded in Q4 of 2020.
Despite inflationary pressures on our operating costs and growth in certain discretionary business expenses that had been pair it back during the pandemic, we expect to continue to manage expenses well and could achieve as much as 250 to 300 basis points operating margin improvement of 2021 over 2020 with the majority of additional gains.
Excuse me the majority of additional games for the back half of the year coming in Q3.
With that I'll turn the call back over to our operator to begin our question and answer session.
Yes.
We will now begin the question and 1 quick question to ask a question in April then the 1 on more touchtone phone if youre using a speakerphone. Please pick up the Shannon the cold.
Question the key.
Is that any part of your question is I would like to withdraw your question. Please.
Alright.
Of course.
Momentary from Oakland.
Oh sure.
The first question comes from David non core with the please go ahead.
Alright. Thank you good morning, everyone.
Good morning.
Sure.
Yeah, and Mark Congratulations what a run.
Fantastic Good luck thank.
Thank you Dave.
Yeah, so as far as the quarter goes.
I think the gross margin is a good place to start.
This quarter, you clearly jumped outside of the typical band for a second quarter.
And you sort of implied that the back half of continued to be higher year on year, but I guess, if I look at the the 160 basis points.
Better than the 5 year average.
Assuming no major falloff in business when you look at that sort of the overage how much of that do you think is structural versus transitory assuming the same level of business activity.
Okay.
I'll take that Dave I guess struck.
The structural versus transitory that's the.
Interestingly I guess of phrasing it I think.
First of all when you look at the at the margin gains in the second quarter.
Melanie.
Went through them, we got some benefit from last year, a little bit of margin pressure from the bigger ticket lower.
The lower margin sales that we had that we didn't have.
In the second quarter this year and frankly, we don't expect going forward.
That's really not transitory the.
The.
1 of 1 benefit.
Mentioned customer mix part of that relates to Internet sales. So we do sell to the internet retailers of store base retailers.
And.
Given the lower margin on the Internet.
And the supply outages.
Didn't have as much growth there as we add in our store based retail.
Is that going to come back in the future its possible, but I see that you know.
Being longer term, perhaps not necessarily over the next.
Year or more given the higher pace of revenue growth of the industry and the need to continue to prioritize.
Net.
The store base sales for us.
We have those kind of supply chain initiatives that we discussed which also involve the inflate.
Inflation that we've seen and as Pete mentioned in his comments, we expect continued inflation as we move through the rest of the this year and into next year. So that may not well certainly won't be a long term issue I don't see that being an issue over the next 12 to 18 months.
And then you know vendor incentives Melanie mentioned as well and that's.
That's something that we'll be working through with our vendors.
In terms of what that looks like going forward and I don't want to try to predict that at this point. So I think there's a combination there.
But I feel pretty positive about the.
Margin gains are certainly continuing through the rest of this year and into next year and then we'll see what happens after that so long answer to your question a good question and hopefully I gave you a little bit of insight.
Yeah. The that's helpful for sure.
And second if we could talk about the.
Kind of deconstructing the growth.
Pete I think you mentioned the chemicals unit volumes were up like 9%, which if you think about that 60% of your business, which is the maintenance of minor repair that yeah.
Probably correlates fairly well.
So the outsized growth you're seeing has to be coming from the refurb of the new pools and I think you've talked about new pool is being up like from 96000 last year to $1.10, this year, which is kind of teens growth so that leaves us with the the.
Refurbishment as well as the content in those pools can you can you just touch on kind of when you see this outsized growth and we sort of and other pieces that aren't growing at 40% sort of.
What pieces do you see driving those and how sustainable are of those factors.
Yeah.
Good question, Dave I think.
When you try and deconstruct the growth we commented on the chemical volume.
The U zeroed in on a couple of things in the new construction going from 96, So last year, new construction was up 26%. So this year, we think the new number is going to be 110. So when you have new pool construction that you're bringing into play a lot of different product groups right. So you are bringing in the building.
Cereals, which from a from a year over year comp perspective.
Remember the second quarter of last year, we had essentially little to no construction in many markets across the country because of restrictions.
Due to Covid. So that has that has certainly.
Rebounded so we see the building materials of construction materials product sales.
The driving growth and that's a function that's going into 2 places right its going into remodel which by far is the bigger portion of the market I mean, a lot of folks zero in on the new construction is new construction that would be 110, 112.515, whatever to me that is.
It's all good but the lion's share of the market and where we're seeing a lot of activity as well as in remodel.
So when I look at the growth and 1 of the major drivers of our growth is a the pools are being used more right. So just general maintenance of equipment is a piece of that as technology, we're seeing more homeowners adopter opt for technology or more high tech products smarter.
Alex which is again driving the value of the ticket.
And for Us.
And then when you do of remodel project those can go from.
A few thousand dollars for a new piece of equipment to all the way of 2 resurfacing, the pool and adding decks and per.
Patios around it changing tiles and changing structural features in the pool all of which are very good and again the opportunity for that given the age of the installed base is very very good.
That's very helpful. Thanks, very much guys all the best Yep. Thank you.
The next question comes from Ryan Merkel with William Blair. Please go ahead.
Hey, everyone.
Good morning, I wanted to.
Grants and some incredible numbers yet again.
Thank you.
So I guess first off Pete it sounds like you have enough evidence now to say the pool of industry has entered a new normal with work from home migration of the suburbs migration South is that a fair statement.
Yes, we are.
Let's say as I said in the.
Towards the end of my comments when I was sitting back reflecting upon what is driving the numbers and whether it is of short term thing or a longer term trend. When I started listing goes out which is why I purposely did it there are several factors as you mentioned that the change the outlook for our industry and give us great.
Confidence that the growth will continue that it wasn't just it wasn't just the COVID-19 driven bubble.
Right.
Okay. Just wanted to make sure that was the message and then on gross margins I just wanted to get a better view of the cadence during the second half.
Not to put you on the spot here, but.
Maybe up 100 basis points.
Year over year in <unk> and it may be up something like 40 basis points year over year in <unk> is that in the ballpark.
You want to send me your model and I can just fill it out for you [laughter].
You know I would say.
Maybe a little bit better.
And then what Youre thinking.
Certainly in the third quarter fourth quarter of little bit tougher.
But.
See more benefits and and.
And as I said, you now expect the some of that to continue in the next year or so feel good about the the gross margin opportunity for us as we exit the second quarter here and are in the third.
Okay.
Sounds good and then just lastly inventory levels still up massively year over year, obviously demand is the big part of that but are you also using your scale to buy inventory just given the shortages and then are you also are buying ahead of price increases still.
Yeah, I think Theres 3 factors right. So inventory dollars are up but when you look at it in terms of days of inventory were actually down.
We this is where in this environment is where a company like pool Corporately excels, because we use the strength of the balance sheet to kind of lean in to make sure that we have product available for our builders. So part of it is that you know.
Theres still periodic shortages of of product and.
But that's that's a widely known fact, but what happens is.
It could be 1 product right. So if I look at the inventory balance in total it could be a couple of products that are missing for 2 ship of job complete so when that comes in it will go but by and large it's a couple of factors 1 the business is up so our days of our days of inventory.
<unk> are down because of the the shortages. We are buying ahead certainly to make sure that we have as much product as we can and then we're still dealing with intermittent shortages of specific items that may be holding up the shipment of a.
Of the complete job.
Sounds good thanks for the comments and Mark all of the best.
Yes, Thank you Ron.
The next question comes from Macquarie.
No.
Ahead.
Thank you good morning, everyone and congrats on a great quarter.
Martin Thank you.
My first question is going back to the gross margin I know that you mentioned that you definitely saw some lift from an improved the mix shift I guess, when we think about what's going on on the ground. You know you mentioned the fact that you are still seeing a lot of refurbishment of lot of new pool construction going on how does that mix today compared to where you were in kind of of more.
Normalized period 2019, 2018 whenever it was and is there more to go in terms of that normalization over time.
Yes in terms of the.
You're saying that the increased construction activity.
Yeah. So what are the health of debt yeah. Okay.
The mix question is kind of a complicated 1.
But if you focus just on construction so.
With pool builds going from let's call. It 75.
80000 to 90 to 100.110, those are typically larger customers that are doing the construction and thats a little bit lower margin customers, just because they're buying more and have more of a little more purchasing power generally speaking.
But that's just 1 part of the overall story in margins, there's a lot of a lot of other things going on there we're selling more of building materials.
Which are a higher margin category for us.
That's growing and we have other product categories that are higher margin and growing as well so.
I wouldn't focus just on the construction and in that piece of it because.
Because if you look back over time, our margins have been very stable, even with growth from 2010 really up through 2020 of the construction.
We've managed a very stable gross margin story so.
Answer to your question.
Yeah, no it definitely does.
I know its tough because theres a lot of moving pieces, there, but like I said I was just trying to think about the fact that that new construction piece has really risen pretty significantly in the last call it year and a half 2 years now and how to think about you know what that means relative to you know where we were before.
Greg Yes.
And my second question is around you know, you've obviously gained quite a bit of market share.
It seems like Thats continuing to come through is there any of that you can talk to whether it's in terms of I don't know, maybe historical retention rates or other initiatives around.
Sticky that business is and your ability to really kind of keep these customers engaged going forward.
Sure.
If you look at over time, or we have consistently gained share over time, so I think our.
We have a tremendous focus on the customer experience and we every time, we get a new customer we treat that as a golden opportunity to make sure that we maintain that and if you look back historically on our on our market share it's been weak.
Been consistently growing that now in the last in the last year, we certainly have grown faster given the circumstances.
Debt are that have that have played out but if you look back over time those tend to be very sticky relationships with the customers. So it's not like they come to us they jumped back over time, we've been able to demonstrate that as people come to us we engage them. We work with them, we covered that business take care of their service.
As best we can and focus on execution that that business generally stays with us.
Okay. That's helpful. Thank you good luck. Thank you.
The next question comes from Anthony all of your debt.
<unk> with Gabelli <unk> company. Please go ahead.
Okay.
Good morning, and thank you for taking the questions on the marker congrats again on your pending retirement.
So I.
I guess first the.
Of capacity creation.
Okay.
Anthony you broke up all we heard was in terms of capacity creation and you broke up.
Oh, sorry, so let me repeat that so in terms of capacity creation, how should we expect that to evolve over the next few years for you.
I mean, it's a as you know it's been a focus area for us for the last several years. It's 1 of my 1 of my personal focus areas and I think it's paid great dividends going forward.
I think you.
There are various parts of it right there is capacity creation within the facility within our within our truck fleet and within within labor productivity.
I think we've gotten we've gotten better.
We're still not as consistent across the network as I would like meaning that there is still opportunity in this area. We see pool $3.60 for instance in our blue streak application, we see those continuing to grow and add value for not only us but for our customers as well. So I think it's a very very important.
Area for US and has paid great dividends and I don't think we are anywhere close to the end of of what we can extract out of out of that focus.
Got it and then in terms of of your customers whether its pool remodelers are true.
So it's been much increased the capacity for them or is it the over the last of few months or so can you just comment on that I know there have been labor constraints for a while but just wanted to see if there has been any changes that you've seen from your customers.
Yeah, that's of Great question.
And I was talking to several of our field folks over the last couple of weeks about that and I'm encouraged by I heard several times from our folks that the.
Our customers are adding labor.
And expanding their crews in many cases, which I think is going to expand capacity for the industry and as you know.
Labor has been the single biggest limiting factor on the industry growth over time, but I think given the.
How desirable this the spaces outdoor living and pools and patios and such I think builders are growing more comfortable and more confident in the opportunity and they are starting to add labor.
To their to their teams now there hasn't been a step function increase in that yet, but I can tell you having been here for almost 5 years. The that's that's not been a common thread that we see cruise expanding but I think what we've seen year to date. This year are some very positive.
Signs in that area.
Got it Okay and then the last question from me in terms of the higher costs. I know you mentioned freight I think of it in your release.
The thing there is other than the data just wanted to get a better of sense basically as to where you're seeing the greatest pressure points in terms of costs the increases.
Sure Sir.
Freight is an area of freight fuel as a component of that.
Typically that from an inbound freight perspective is is captured in our cost of product line from an outbound perspective, we actually have an advantage in this area and again as part of our capacity creation and net most of our freight happens on our own fleet. So by working on the things that we've done over the last couple of years with the truck utilization smarter routing.
Better loading and such we have been able to.
To minimize some of the effects that have.
That have happened.
It happened in the industry.
The other areas you know real estate is a is an issue that we all face and that the.
The demand for warehouse space is going up so every time, we renew a lease the that's an area that is we're seeing inflation in as well and there's always been or there has been of late.
Some of.
Inflation on labor as well.
Got it okay, well, thank you and best of luck. Thank you. Thank you Anthony.
The next question comes from Stephen Volkmann with Jefferies. Please go ahead.
Hi, Good morning, guys still morning here. Thanks for taking my question and Mark If you wanted to do my model too I appreciate it.
Yeah.
You can send it to me in the future.
Good day for you.
[laughter].
Instead, I would never send you my model.
But seriously.
I think of a lot of this has been asked but I guess, what I'm trying to just think of it as longer term I don't know maybe this is the peak question, but you guys have this pool financial model Slide you include in lots of your presentations.
Sort of lays out what you think the model is and I guess, what I'm wrestling with is how.
As of this change is the 6% to 8% revenue growth the stable gross margin kind of over the long term have you kind of have accelerated this to another level at this point or where do you think we are in that process.
Yes.
Yeah.
Yeah.
As you party of question.
Many of our I'd be happy to.
First of all of I think.
You know, we'll be giving an update in September.
The investor.
The.
And shareholders.
We will kind of go through.
Our longer term expectations and initiatives that we see as Pete mentioned in his comments you know 1 of the earlier questions. There's definitely been a step up in the industry volume and activity.
And as we look forward I think there's more growth opportunity.
You know over the next several years from an industry perspective than perhaps.
We've seen certainly you look at pool construction and the acceleration there.
And then the aging of the installed base and some of the factors Ive mentioned about the long term.
Activities that should continue to drive demand in the pool of industries I see us being a fairly optimistic about the growth opportunity in our in our model will reflect that.
<unk>, but.
The sum of some modest uptick there.
And just to push you on the next level down.
Gross margin has been ridiculously stable for such a long time is it now stepping up a little bit going forward or.
Is this more temporary.
Well I think that that sounds like the question I addressed earlier.
But.
Certainly in the short term it's picked up.
We've done a good job over time of maintaining stability some of what we see in the short term may not.
It may not continue long term, but I think there's some opportunity to bring the margin level up from what it has been over the last couple of years. So.
That certainly will be an effort that will be focused on.
Alright, so it will call the medium term that maybe and the final 1 from me.
I'm just curious maybe this is more of a Pete question, but.
I wasn't expecting a lot of inflation next year, because it felt like the chemical situation normalizes.
And some of the supply constraints through the industry normalize it just felt like the less inflationary outlook to me, but you seem pretty confident that this will continue so just curious about that.
Yeah.
A little early to tell you exactly what I think the number is going to be next year. Because this is the time of year. When our manufacturers are trying to read the tea leaves as to what their what their inflation is and what they're going to pass along.
I think if I the construct which you said for a moment on the chemical side.
I don't think the chemical situation will return to normal in my opinion until probably the third quarter into the third quarter fourth quarter of next year, because our information on when the plant.
Come back online puts it out into the end of second quarter 4 of startup. So the by the time it has a meaningful impact on the industry. It will be later in the year. So from from of chemicals perspective, I I don't see a whole lot of change in that area.
From from an equipment perspective, again, it's a little bit early but if you ask.
Asked me to call. It right now I would say that it's going to be above the normal which for US remember has been in the 1% range and I'm pretty confident kind of comfortable that it's going to be above that above that number for next year, but again as the year goes on as we normally do we'll give you a much better read on that.
In future calls.
Super Thank you guys.
The next question comes from David Macgregor with Longbow Research. Please go ahead.
Yes, good morning, the great quarter, Mark kind of congratulations on your retirement.
I had a question I had a question on the new construction and I just I guess the question is just you know.
To what extent is your forward visibility of new construction improving through the change in technology.
The use of pool of $3.60 gives you a little more forward visibility I don't know maybe online engagement with your customers, but I'm just trying to get a sense of if youre getting a little better forward look on new construction now is the consequence of some of the changes that have occurred.
Yeah.
We actually have I think we get better visibility now than we ever have and it's the result of a couple of things.
Obviously, we have always had access to <unk>.
Permit data just like you just like you all do so it's 1 of the things that we track, but given the.
The tightness of supply of the major components in pool construction, whereas in the past there was plenty of inventory in the pipeline builders didn't put a lot of orders in advance, saying, hey, I'm going to need this product on this day. So we have in order to make sure that we can accommodate their needs and that we have the equipment.
<unk>.
On the day that they needed in the future.
Remember that we have the plaster there to deliver on the day that they're going to deliver the builders are sharing more information with US now about hey, these of the jobs that have in the pipeline. So oftentimes when they go sell of job get of contract they are coming into us, saying, okay. Here's the job that I sold I'm going to need equipment I'm going to need the plumbing kit here.
The.
The steel Kidd here and I'm going to need the equipment and finished kit on these dates so.
1 of the benefits of the situation that we're in as we do have better visibility to what the what the what the backlog is in the industry.
Great.
I guess what are the reasons I ask is just thinking about new construction.
There's always the question of there with respect to.
And to what extent his stay at home pulled forward into 'twenty, and 2020 'twenty, 1 and therefore, maybe create some risk around new pool sales in 2022.
I realize you've walked through some factories has been very helpful in that sense, but I'm just trying to get a sense of what the downside scenario might look like and is it would it be of returned back to the 90, 596000 pools or maybe a little bit better than the Adam how are you thinking about kind of the risk around that that's sort of.
I think you got to consider like what could cause what could cause that I mean, the builders have had significant backlog in place as we mentioned and from a macro trend you know people moving to the south of the.
The work from home those things those things are going to continue millennials entering the housing market a strong housing market in terms of value and frankly people value wing, having the backyard escape so.
Frankly, I don't but for a major economic issue.
I don't think that there is anything in the in the near term debt would say Wow. The 110000 is going to drop back down to 95000 net that's really not.
How we read the tea leaves today.
The other 1 potential exception as weather of course sure having favorite <unk> days available day, particularly in the shoulders of the season that allows a more more construction date until the eyes.
Great great. Okay. Thanks for that and then just a follow up question I guess.
Just regarding Texas, Florida, the toward the extent of the quarter benefit from kind of 1 time spending on the repair and replacement of equipment damaged in the freeze earlier in the year.
Are you able to size that.
The the.
It didn't affect Florida right. It was really a it was really of Texas issue in terms of the Texas.
And we we said that there was a lot of repair that was done in the in the first quarter.
And then due to equipment shortages I think it's I think it's still going on.
I think it's going to go on between now and the year end, although at a much smaller pace than what we saw.
In the first quarter. So I think it's it's something that we'll see continued tailwind zone, albeit at a much smaller level than we saw in the first quarter.
Okay. Thank you very much.
The next question comes from day small with loop capital. Please go ahead.
Great. Thanks for taking my questions squeezing me in just wanted to follow up on the inflation comments. You mentioned you haven't seen any impact from inflation of on demand, but if we're going to be in a modest inflationary environment again next year I mean, it sort of point in the which inflation is going to start to impact volumes.
I guess do you worry at all about price elasticity at all or guarantee of lessons from this experience. This year that makes me feel even more confident about the I guess the pool owners of bill.
All of you to withstand much higher pricing.
Yeah, I think you had the you got to break down the inflation and where we're at a weird and how it impacts of the business. So in terms of you know.
Maintenance and repair if you need of filter you need of filter and if you need of pump you need of pump and if it cost 5% more than it did last year, a that's not typically for a pool of under an insurmountable amount. So it's nothing you'd say wow I'm not going to change the filter because of cost 5% more I have to do it in order to keep the pool operating so in terms of <unk>.
<unk> from repair, we see very little very little impact your question on inflation as it relates to construction is a little bit is a little bit different because depending on the type of pool construction.
It can have a.
Hey, excuse me of bigger impact on the total project, but 1 of the things that we have.
You have to consider when you think that through is that most of the cost of a backyard project, whether it's a renovation or whether it's the new construction projects most of that cost in most cases is labor right. So in terms of a material cost increase and if there is if inflation next year.
Is again, what we think above normal I don't think it will have a material impact on demand and somebody deciding that I am going to do the project or I'm not given how the cost of lease into the project.
That's helpful.
Yes, My follow up question is I know.
It's relatively minor considering the revenue base of about $5 billion now, but how quickly do you expect the $30 billion to $40 billion in revenues from the variable speed pump of legislation that's going to affect.
How quickly do you think that might of start showing up.
As we've mentioned before the way the the way the rule as written it says that.
If they can't make the pumps anymore right. So they have now had the switched the only variable speed pumps, but the product that is in the pipeline.
Can be sold.
I guess Fortunately for us in this case, there isn't a lot of inventory left in the pipeline. So we think that will start to see the benefits.
This year and then we should essentially see the full benefit next year of in terms of what the opportunity is.
So it's a gift given the shortages in this case it basically it pulls that in but you also have to consider the seasonality too and the impact.
On us is earlier in the year rates during the peak season. So most of the effect that you would see I wouldnt look for a meaningful bump in 2021, I think youre going to see it in 2022.
Okay. Thanks, again, a great quarter and Mark Russell book of your term.
Yes, Thank you Dan.
Well. The reminder, if you have a question. Please press Star then 1 can be joined the computer.
The next question comes from Ken the narrow with Keybanc. Please go ahead.
Okay Hello, everybody.
Good morning, good morning, Ken.
Look forward to seeing you guys.
In New York on September 15th.
I'm sure you're going to give us a lot more insight.
However.
Hi quite of few things now.
How do you guys measure of stock outs.
How much which is the way to think about how disrupted the supply channel because I was at <unk>.
Hotel over the fourth of July and they're hot tub wasn't working because they didn't have parts I mean, how do you measure.
Doc adds relative to a stress level in the supply chain.
Yeah, So derik.
Our goal of on stock outs is to be at less than 5% Alright. That's been that's been the goal that we've been chasing.
Excuse me for many years.
And the and we in terms of our attention to it and weighting of it as a business, we actually put much more emphasis on it during the peak season than we do on the shoulders of the season. So.
We do kind of a weighted average in our in our measurement. So the goal is 5%.
On some products. It is a it is higher than that and I would say overall, obviously because of the the shortages the number.
The number has come up and it really it really varies by location and it varies by product.
But youre not suggesting it's actually something meaningful I guess.
In terms of backlog and.
Meaningful so it is we take we treat every 1 of the stock out situations is a really bad situation. So to us they are all very meaningful because anytime debt okay.
And says Hey, do you have something and I have to say no, but now we look at the system and we can tell the customer hey, here's when it is here's 1 of the scheduled to arrive so that we can coordinate.
With the customer on what and provided an expectation.
Some areas thats been very challenging in the chemical side, because we certainly don't have the same the same visibility as we do on the equipment side. So it is a it is elevated.
And I would tell you in some cases it could be a ton of crazy products that can be approaching 10% in and but by and large I would say the increase is the is slightly above the 5% target that we have established.
The established okay.
You talked about gross margins a little bit Mark I think you've talked about positive gross margins as we're moving into the second half.
Could.
And you talked about product mix and stuff, but it seems as though if youre moving into positive mix.
In the second half a that would have a positive carry into the first half of 'twenty 2 given those variables.
But related to that.
S G&A has come down quite a bit.
Is my assumption here.
Well, we see it and it certainly versus the prior years. So can you and I tend to think about your company, whether you get any gross your SG&A.
Not such a concern to me, but I mean, where we are.
We're getting questions on that gross margin. So can you talk to if that SG&A has kind of.
Something's changed in that relative to where you were a few years ago or.
Is that to another COVID-19 metric.
Would it be sets of normalized.
Kind of a 2 part question there really as it relates to eat it but could you expand on that a little bit well, yeah, a little bit I guess.
Your question or your comment about gross or.
SG&A coming down Youre, referring to SG&A as a percentage of sales SG&A is obviously correct of business is growth.
The people and you know the sentence.
Of the support added the locations facilities vehicles out so our S and obviously gone up.
It's come down as a percent of sales the last couple of years and part of I think I've mentioned this before at some point of you know.
The leverage is easier when sales growth is higher so we've had obviously a great sales growth out of the last the last year and this year and that makes getting that SG&A leverage a little bit easier.
But at the same time, we've talked a lot about capacity creation initiatives and those are things that we do throughout the organization to focus on getting more out of existing investments.
And and that is a big part of our operational initiatives and we've made good progress there we have more of a ton.
We also pared back.
Expenses during the pandemic initially we talked about that last year, we're seeing some growth in those costs and gross and other cost areas as Pete mentioned, the things like leases of labor.
Insurance is another area.
And then you know the.
The.
The incentives we talked about incentive costs were up substantially last year, we thought they'd be down this year of every year, we talked about that earlier in the year and in fact are there going to be up.
So those are a big component of the cost structure and should be coming down.
The next year.
The most likely there'll be a tailwind for us so a lot of different components, there I think that.
As I look at our long term model I feel good about the opportunity to continue to provide operating leverage and a and that is going to continue to be a big focus for us which is in that kind of mid teens plus area in terms of operating leverage we expect so.
I don't know if that covered both parts of your question, but that's kind of how we.
Yes, it's interesting right because I mean, the fact is you're running.
200, plus basis points below I'm not sure if your gross margins hold true.
Rising a little bit of this year. Your SG&A is basically going to be down about 200 basis points and maybe you guys. What the dresses at the analyst day of more so.
But operating leverage needs to come through your gross margin or of your SG&A, but it seems like it fell off lot. So theres nothing structurally different but I look forward debt.
Exploring that a little more in time of shift topics here for you.
You came from obviously.
Roofing, which.
It's a different category of before that you are doing other things in distribution, but.
In roofing and O 8.
Had this you know as it relates to the manufacturers they had high oil input costs of the distributors were always going after price pre buying creating.
Creating these swings in demand which affected pricing.
Religion came to that cat.
Category of the AR.
Needing to get price and then they just realized margins can be better is there anything.
That you see relative to your competitors and you all and the manufacturers.
Given how high demand is and how there is input cost.
Perhaps.
Creating a.
Structural shift in the industry given how much demand, we have had and given all the volatility.
Yeah.
Let me see I'm going to answer that.
We have a lot in there because your competitors I mean, it's just they kept the they don't have as good of supply chain as you do and especially things like hardscape much less the core parts of the business.
It seems like this has been a very structural benefit to you all.
Yeah. So we have a we have taken share as I mentioned, we think we think we've taken in the 3 to 4 points of share of this year and that's based on the fact that.
In a particular market we have.
And most most markets we have multiple locations. So if I don't have it in 1 location I may have it in another I mean, the irony of of the world.
The situation that we're in now is that we use debt to benefit our customers, but it is creating a lot more work for our teams I mean, I can't I can't Express how hard our teams are working to do what we do in a in a tight constrained environment because they are they.
They are having to move product from 1 location to another and coordinate deliveries and to really look very specifically at what day as people need things, so that we get product to them.
This is where we separate ourselves, though because in most markets. We're the only ones that have multiple locations and nobody has as many locations as we do and nobody has the buying power to place the orders as big as we do in the beginning anyway.
So we're doing that we're working very hard to make sure that we can we can take care of the customers and certainly is creating a benefit for us and I think the benefit from the customers as well.
Yeah.
Thank you very much see you guys here.
Thank you thanks, Ken.
Yeah.
Okay.
This concludes our question and answer the question.
From the conference back over to Peter.
The closing remark.
Thank you.
Before we disconnect I would just like to take a moment to thank mark for his 17 years of dedicated service to pool Corp.
His leadership technical knowledge and passion for the business have contributed greatly to our success over the years since I joined the company 5 years ago, Mark has been a valued partner and I've often benefited from his experience and advice. He also has done well to trend to ensure a smooth transition from Melanie as she has seamlessly prepared to step into the CFO role for pool.
Corp, we wish Mark well as he transitions into his next phase of life. He will certainly be missed here at pool Corp.
Finally, as a reminder, we look forward to sharing our third quarter results.
On October 21st of 2021. So please mark your calendars have a great rest of your day. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
[music].