Q3 2021 Pool Corp Earnings Call
Good day and welcome to the Pool Corporation third quarter 2021 conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero after todays presentation.
Patient and there will be an opportunity to ask questions.
I asked a question you May press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Melanie Hart, Vice President and Chief Financial Officer.
Welcome to our third quarter 2000.
'twenty one 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 the year in future periods actual results may differ materially from those discussed today 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 in 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.
Will we will begin our call today with opening comments from our president and CEO Peter Argon Pete.
Thank you Melanie and good morning to everyone on the call.
This morning, following exceptional first half results and up against a very difficult comparison from the third quarter of 2020 the pool.
<unk> once again raise the bar to record Heights, we.
We proudly posted net sales for the third quarter of 2021 of $1 4 billion, which is a 24% increase.
The increase over the prior year quarter, our base business grew 19% in the quarter with acquisitions contributing 5%.
Our diluted earnings per share for the quarter were $4.54, which is a 55% increase over the very strong third quarter of 2020. The earnings per share were $4 44, a 64% improvement when excluding the ASU benefit from both periods or from the period.
In both 2020 one.
People's desire to spend more time outside in the comfort and safety of their backyard pool or outdoor living space remains strong our builders and Remodelers are reporting very solid backlogs going into 2022 and in some cases through the 2000.
Two season, our retailers are reporting elevated demand and our service professionals are working long hours just to keep up with service requests.
From a supply perspective lead times, where our products are still above normal and in some cases, well above normal component shortages, a tight labor market and the global logistics crisis.
20% make keeping up with the elevated demand of the industry a challenge for most of our vendors our talented teams had leverage the unmatched scale of our network and the powerful balance sheet to mitigate supply interruptions by providing more products and options for our customers than is typically about available everywhere else.
Our teams have worked tirelessly in the most challenging environment of our times to make sure. We can provide unparalleled service to our customers. Our network is strong our people are skilled and creative with a tenacious work ethic and this combination has allowed us to once again prove we are the best in the business as we continue to take share from our competitors.
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In accordance with our strategic plan, we have opened 10, new locations and completed two strategic acquisitions during the year as we relentlessly pursue service excellence and capacity creation.
Now, let me share the specific results from our four largest markets, Florida and Texas continue.
To benefit from favorable demographic trends with base business growth of 26% and 25%, respectively, California grew 17%, while Arizona grew 18% further proof that the industry is seeing strength in all major markets in total year round markets had base business growth of 20.
And in the quarter, which was slightly better than the 20% growth that we reported for the third quarter of 2020.
Seasonal base business markets grew 16%, but this compares to a very strong third quarter of the previous year, where we reported 33% growth for the same quarter for context here weather conditions were generally favorable.
In most markets for the quarter.
Looking at end markets and excluding the impact of acquisitions I am happy to report that commercial pool product demand has come back to a greater than pre pandemic levels for the quarter commercial product sales increased 25%, bringing the total year to date growth rate to 24%.
To provide more pools reopened with elevated usage driving maintenance and repair spend and construction projects are starting to flow again.
This is a very encouraging sign as this market was impacted the most during the COVID-19 travel and public gathering restrictions.
Retail product sales were encouraging with demand up 16%, which.
Compares to the 28% growth that we reported in this end market for the same quarter of 2020, Ken.
Chemical shortages have impacted this part of the business more severely than others as it is a key product for a retail focused customer.
From a product perspective equipment sales growth was.
We've posting gains of 23% for the period. This category includes pumps heaters lights filters and automation chemical sales were up 10% for the quarter as the industry graph grappled with shortages in managed rolling stock outs on key products as mentioned previously the reduction in industry capacity.
Strong after a major fire.
Biolab plant last year left the industry and a net short position on Tricolore and drove significant inflation on available product. Fortunately there are several ways to sanitize the pool and the industry is to add adapted and improvise to keep pools clean and safe.
<unk> tightness in chemical supply is likely to continue into next season as biolab rebuild its plant in the meantime capacity expansion from the remaining players product substitution and imports should mitigate the effects, albeit at elevated price levels.
Lastly building material demand remains strong.
This markets sales for this product line grew 24% in the quarter and this is on top of the 29% growth that we posted in the third quarter of 2020.
On a year to date basis, we were up 30%, which is driven by a very robust construction and remodel market.
Turning to Europe sales grew.
Two 5% in the quarter, but bear in mind, we had a very difficult comp here as last year for the same period, our European sales grew 45% like North America demand remains strong, but cooler and wetter weather and supply shortages had a significant impact on the team in the third quarter.
Horizon continues to accelerate posting overall revenue growth of 25% in the quarter, bringing the year to date sales growth to 28%.
Base business sales growth was 20% and 22% respectively for the quarter to date and year to date results.
We are very pleased with how this business is performing and we.
To invest in this platform like the blue business supply shortages and extended lead times continue to be a challenge for our team, but their grit determination and focus on the customer have driven solid share gains in the industry.
Now, let me turn to gross margins for.
For the quarter, our overall gross margin was 30.
Continued 3%, which is a 240 basis point improvement over 2020.
On a year to date basis, we are up 170 basis points like last year and last quarter. This improvement is driven by supply chain execution certain volume related incentives inflation benefit in product mix. In addition.
We have been focused on more strategic and disciplined pricing, which is helping us in the current environment and will continue to help us going forward.
Our ability to strategically leverage our balance sheet has been a key factor in our success in both the 2020 in 'twenty 'twenty. One season. This is a key differentiator for <unk> and it has allowed us to.
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The industry, leading customer service, while capturing greater value and positioning us for a great start to the 2022 season.
From an expense perspective, the team again delivered incredible results our operating expenses for the quarter were up 13%, which is outstanding given our 24% revenue growth for the quarter.
Provide yet again, the team's focus on execution hard work and capacity creation initiatives allowed us to achieve record levels of operating leverage.
Pool 360 continues to be a cornerstone of our business comprising 12% of our revenue and growing 47% in the quarter. We are excited to announce that beginning.
In the fourth quarter, we will be rolling out. The next generation of this strategic platform that we think will further drive adoption and help our customers be more efficient.
Wrapping up the income statement I could not be more pleased to report that our operating income increased 60% in the quarter to $237 $3 million.
Beginning in by any measure a masterful performance and a true reflection of the incredible team and unmatched capabilities that cohort.
Finally, with three full quarters behind us and a very favorable outlook for the balance of the year. We are updating our earnings guidance for the full year of 2021 to 14.
$1 85 per share to $15 35 per share excluding the ASU benefit the range is $14 46 to <unk> 96 per share.
Before turning the call over to Melanie let me offer some closing thoughts.
Beginning with the onset of the pandemic in two.
We saw a change in consumer behavior that created a significant increase in demand for our products as people with pools use them more than those without a pool or outdoor living area began looking for someone to build them their own backyard retreat. We believe that this trend will endure as the flexible work from home arrangements continue and.
People recognize the many benefits of an enjoyable outdoor living lifestyle.
When you add this to a healthy housing market, where equity levels have increased nicely in the last couple of years and with pools now regarded as highly desirable a highly desirable feature according to the National Association of Realtors is simply furthers our confidence.
And our long term growth prospects for the industry. We believe people will continue to move away from urban and higher cost of living areas to more affordable suburban housing in pool friendly markets furthering their desire to invest in the outdoor living lifestyle.
We feel that the southern migration will continue for the foreseeable.
Foreseeable future.
Giving those people a year round environment to enjoy pools, patios hot tubs and outdoor kitchens.
Further we have been encouraged to see industry capacity start to expand as our customers seek to expand their businesses, albeit in a very challenging labor environment.
From a supply perspective.
Manufacturers are also adding capacity, which should allow them to capture more of the elevated industry demand inflation. This year will likely be in the 6% to 7% range up from our previous estimate of five to six and it looks like that will repeat again for next year, given the global supply chain issues to date. This has done.
I want to temper demand and in time this inflation passes through the supply chain.
All in all we are positioned incredibly well to continue our tremendous performance demand is strong the team is focused and by working very closely with our vendors and customers, we bring outdoor living to life.
Thank you.
<unk> will now turn the call over to Melanie Heart, our Vice President and Chief Financial Officer for her commentary.
Thank you Pete and good morning, everyone I'm thrilled to provide some additional commentary on our exceptional third quarter financial results. We have continued to see positive growth trends in the third quarter related to both our net sales growth and grew.
I will now turn net sales benefited approximately 7% from inflation and 5% from acquisitions in the quarter, we once again realized higher than normal increases in gross margin.
Gross margins saw an increase of 240 basis points during the quarter with base business gross margins up 250 basis points.
Consistent with our discussion on our second quarter earnings call to address the anticipated supply chain constraints. We took the opportunity to purchase ahead in product areas, where we forecasted continued high demand our strong inventory position has allowed us to gain share and to continue to provide exceptional service.
High demand and tight supply chain environment.
As we have seen product cost increases come more frequently than in the past we have established systematic pricing updates to ensure we quickly adjust to the more rapidly changing environment.
Additionally, we have an ongoing process in place to focus.
On a judicious evaluation of all customer pricing taking into consideration the cost to serve each specific customer.
Having the capital strength to be able to confidently move forward with increasing the amount of materials in the supply chain is a stressful pool corp that sets us apart from many of our competitors.
Our higher purchasing levels resulted in higher volume driven vendor incentives, which also benefited gross margins for the quarter.
Given the better than expected third quarter results. We now anticipate gross margin improvement of more than 170 basis points for the full year 2021 compared to 2020.
Versus the 100 basis point improvement, we were expecting at the end of the second quarter.
Record sales growth and improving gross margins only tell a portion of the story of our results for the quarter. We have also reduced our quarter to date consolidated operating expenses as a percentage of net sales by 130 basis points.
These expenses, excluding the net recoveries were up 14%, while consolidated net sales grew 24% in the quarter base.
Base business operating expenses were down 160 basis points at 14, 2% of net sales for the quarter on sales growth of 19%.
We have seen inflationary.
Cost increases in the areas of compensation healthcare freight and rent our continued efforts on capacity creation and our existing locations has generated strong operating expense leverage.
Our gross margin expansion and strong operating expense management has allowed our operating margin to grow.
Generics by 380 basis points coming in at 16, 8% of net sales for the third quarter compared to 13% in third quarter of prior year.
Interest expense of $2 3 million is up slightly compared to $1 9 million in prior year.
Third quarter 2021 average debt.
Debt was $354 3 million compared to $331 5 million for 2020.
Our trailing 12 months leverage ratio was right around 0.5 at quarter end.
During the third quarter, we amended our revolving credit agreement to increase the total borrowing capacity from 700.
Third and $50 million to 1 billion. The renewal allows for lower available interest rates and favorable terms and covenants and also provides us substantial capacity and liquidity to maintain our strong balance sheet and efficiently manage our capital structure going forward.
Our annual tax rate, excluding the ASU benefit.
<unk> is expected to be around 25% on pretax earnings for the full year coming in slightly lower for the third quarter at 23, 2%.
Our ASU tax benefit in the third quarter was $4 2 million or 10 cents per share.
This was less than the $8 5 million or 21 cents realized in the same quarter.
<unk> last year.
As these benefits result from employee stock option exercises that occurred during the quarter. The timing is difficult to forecast and therefore not included in our guidance range until realized we.
We do have an additional $1.4 million of ASU benefit related to stock options that should be recognized.
Eyes between fourth quarter of 2021, and first quarter of 2022 based on exploration date and calculated at the current stock price.
Next I'll discuss our balance sheet and cash flows increases and our total net receivables of 30% reflects our sales growth in the quarter.
Our days sales outstanding.
At the end of the quarter was $25 seven down from 27 six days in 2020.
Looking at inventory compared to 2020 reflects an increase of 70% or 63% on a base business comparison as we invested in inventory to efficiently serve our customers.
And better manage supply chain disruptions. We have also added inventory to support our 10, new locations opened since last year.
Inventory levels at September of 2020 were less than we would have liked and virtually flat with 2019 coming off of a strong selling season.
Our third quarter two.
Two year sales growth was 57%.
Our deliberate purchasing actions have us well positioned to support ongoing sales growth in 2022.
We saw our inventory turn days improved from 97.5 in 2020 to $94 seven in 2021.
Cash from.
<unk> activities is $359 million on a year to date basis, driven by strong earnings contribution and also reflecting the investments made into inventory.
Our return on invested capital of 59% is up from the prior year of 36, 4% and highlight our found deployment of capital.
Operating operating cash flows for the quarter benefited from deferred income tax payments as we took advantage of the IRS relief for those impacted by Hurricane Ida we are able to defer payments that we'd typically be made in third and fourth quarters of 2021 until January of 2022 in the ordinary course, we would.
Our third quarter estimated federal tax payment of $56 million.
I want to pause to thank all of our teams that were in the areas impacted by Ida certain of our sales centers were operating on generator power to get products to our customers. So they can begin repairs as quickly as possible many of our support teams relocated.
Would've made out of the area to continue to serve our field overall, our disaster recovery plans operated flawlessly and without major disruptions to our customers in.
In support of our employer of choice initiatives, we have established during the quarter. The pool Corp employees first fund to support any employees that are impacted by natural disasters.
Kato far in 2020, one we have executed on $132 million of our authorized share buybacks, leaving $495 million available under our repurchase authorization.
Share buyback, so far in 2020, one exceed the amounts repurchase in 2019, and 2020 combined and continued to be.
After a value add to the shareholders as part of our overall strategic plan.
We have repurchased 343000 shares year to date at an average price of $386 per share.
Acquisitions added 5% to our sales growth for the third quarter and 7% for the year to date results. However.
An area as we move into the fourth quarter, we begin to lap several of the larger acquisitions completed in 2020, so the impact of acquisitions on the results for the remainder of the year will not have as significant of an impact we would expect acquisitions to add only about 1% to our sales growth in the fourth quarter.
As we look at how we think.
We expect to close out the year sales growth momentum from the third quarter has shown that demand continues to be strong for 2021, we have one less selling day than we did in the fourth quarter of 2020, we exactly expect sales growth of over 30% for the full year. This considers our projected fourth quarter sales growth.
Right to moderate with one less selling day nor.
Normal weather assumptions for the fourth fourth quarter this year compared to the favorable weather last year and that result from our Debtline acquisition are included in both comparable periods.
Fourth quarter prior year sales growth was 39% for base business.
Gross margins should remain with a positive.
As a result of our inventory investments with improvements in the range of what we were able to achieve in both second quarter and third quarter of this year.
Purposeful expense management will allow for a full year operating margin improvement of 350 basis points.
This improvement is well in excess of our historic.
Outlook and while it may have been bolstered by exceptional topline and gross margin growth the principles underlying our ability to improve over time remains strong.
We have increased the range for the full year 2021 to consider earnings results for the third quarter, including an additional 10 cents from ASU.
Expected.
<unk> a positive demand trends and have provided updated guidance of $14 85.
The $15.35 per diluted share.
I will now turn the call back over to our operator for our question and answer session.
Yeah.
We will now begin the question and answer session to ask a question you made for.
<unk> was all are then one on your Touchtone phone.
You're using a speakerphone, please pick up the handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Okay.
First our first question will come from Brian Merkel from William Blair. Please go ahead.
Hey, everyone. Good morning, good morning.
So first off peak gross margins really jumped off the page how should we think about sustainability of roughly 30% margins, you'll put up for the full year as we think.
Oh 2022.
Yeah. It's.
Obviously.
Little early to provide guidance for 2022.
I can tell you is as I said in my comments.
Demand is demand is strong.
We're in a very good position from a.
Think about the supply chain, we've made investments in inventory.
Two things really one is make sure and most importantly make sure that we.
We can continue to serve customers and fill orders as they need them.
And certainly to keep pace with inflation.
And secondly, as I think we've put a lot more.
Rigor around our pricing processes and discipline and we've added some analytical horsepower too that will help us so again, a little bit early to give you guidance on what we think about gross margins for <unk> for 2022, but I.
I can tell you that.
The things that we outlined in my comments should should sustain.
Okay Yeah.
That's fair.
You mentioned that price inflation was going to be up nicely again next year. So that certainly helps but with that in mind are you planning to do a bigger than normal winter pre buy.
So you can enjoy a little margin lift in the first half of 'twenty two that dynamic in play.
Yeah. So we have we have a considerable amount of product on order and have had really throughout the year just trying to keep pace.
Demand. So I would tell you that the amount of product that we have on order today would be more than we would we would typically.
You don't get an order.
Sure.
Got it Okay, and then last one I know you made some good comments about 'twenty, two with the backlog and everything you're seeing but if I could get a little more granular.
As we think about 'twenty two should we think about going back to normal industry growth, let's say four to six percentage just off the higher base or.
Or is there reason to believe that it remains a little bit elevated relative to history.
Yeah, I think that's an interesting question right.
Yes, I would I would unpack that a little bit and look at.
The elements right. So you have inflation, which again a little bit early to tell you what the total inflationary effects.
Typically be for 2022, but inflation is certainly going to be elevated.
We think new pool construction.
This year will be between 110, 115000 units, which puts new pool construction up 20%.
So the installed base has grown nicely over the last couple of years.
Demand is still strong the commercial business has come back and and backlogs are good. So I would say for you know again, we're not ready to call. It 2022 number but I would just go back and look at the elements that we think are driving demand I think the work.
And dynamic is going to stay in place I think southern migration will stay in place you know the housing market is in good shape. So we're encouraged by.
The results and if you break down you know what drives our growth.
I think we said we opened 10 locations. This year, we should have a similar number for next year.
Here a couple of acquisitions this year.
Have a good M&A pipeline going so.
It's.
The elements are in place for another good year.
Yeah.
Alright, well said Keith Thanks, I'll pass it on.
Thank you.
Our.
Work from home question will come from David Manthey from Baird. Please go ahead.
Okay.
Thank you and good morning, everyone. Yeah, Pete Mike. My first question is on gross margin as well clearly you've had some nice tail winds here.
But you also mentioned some of the enhancements and things that you.
As it relates to pricing and so forth.
Is it too optimistic to think that 30% is the new 29%.
Or do you think about a day and we can recapture or maintain half of the gross margin improvement. We've seen how are you thinking about the step function that we have here today.
<unk> relative to what we should expect not not just next year, but five years from now.
I think theres a lot of things in play right. When you look at what drives gross margin mix is a is a is a huge factor the inflationary effect is a factor of pricing execution and discipline.
Is a factor of that is volume related incentive programs are a factor.
Our Roe.
I can tell you, we're paying very close attention to it but for me to tell you that Hey, I think this is the this is the new floor I just think it's way too soon to call anything like that certainly out four out for five years, but you know what the way. We think about it is is really kind of on an element by element basis.
And make sure that we're executing on all of those certainly the robust demand environment as a as a very positive thing.
Right Okay.
And then.
As conditions change going forward, whether thats price or the economy or weather or what have you.
<unk>.
Beyond the variable costs that naturally flex lower can you just give us an idea of what levers you have to pull if its sales or gross profit dollars are down.
Moderately at some point in the future what is what are the key factors that you would look to lean into.
Okay, well first of all you mentioned our performance based incentive compensation and so coming out of 2020, we had mentioned that we expected that number to be down around 30 million going into 2021.
And in fact, our projections for this year now we're thinking that we're actually going to be $10 million to $15 million.
You are than where we were in in 2020, so that gives us quite a range of flexibility and on the incentive compensation side, but really outside of that there you know more direct factors that I would want you to take into account. So you know I know that we've talked a lot about capacity creation.
Hi, until we've covered those historically, but the other thing that's really not evident in these numbers because of the hard work that the team has put through is.
Is the fact that you know within this environment a lot of the the market share that we've gotten in a lot of the share gains have come from our ability to serve our customers but doing.
That is not without additional cost so we have had the.
Opportunity, where we've had to move product around in order to serve our customers and do other things that have from an out the door operating expense side has cost us more in the current year and so those costs. We also expect to come out of the the next year base when the.
The supply chain is more in line.
Alright, congratulations and thank you. Thank.
Thank you. Thank you.
Our next question comes from Susan Marc Lore from Goldman Sachs. Please go ahead.
Thank you good morning, and congrats on a great quarter.
Thank.
My first question is as we think to 'twenty, two and and obviously all the tightness that is in the labor markets and the supply chain can you talk about your suppliers' ability to support incremental growth next year how.
Are you having to further expand that supply base, and perhaps rely a little bit more on imports and what that might mean.
And as we think about some of those global logistics.
Yep.
Very good question Susan.
And the way I would think about it is you really have to think you have to consider what products. We're talking about so if you look at the major equipment suppliers in in North America.
I think theyre going to be in.
For next year, certainly they they would you'll have them the same questions I'm sure, but based on what we are seeing you know they won't have the COVID-19 hangover that they started the year with so I think production rates or at least the amount of inventory that we're getting.
Is is much better than it was so we feel.
And better about their ability to and I think I mentioned that in my comments there'll be able to pace better with us going into the 2022 season and number one and number two our inventory position starting in 2022 season is going to be better, which again creates a little breathing room for them.
One exception notable exception would be on.
Chemicals as I said.
In that situation.
With the Biolab fire that was a huge chunk of the industry's capacity you have to try and cooler product.
So that whole as being made up a couple of different ways. So in that case. There is some import product that is coming in.
And as you know.
With the snarled supply change, it's taking longer and its more expensive when it gets here.
But I think the domestic the remaining domestic producers are also going to be in a better position from a capacity perspective to provide more product and then there's also there's also alternatives.
For standardization.
Nation, which would primarily be either salt system or liquids chlorine shock, which will again I think being a better position. So all in all I think the industry is.
Is ramping up and it has ramped up and worked very very hard I, we mentioned our folks working very hard this year our.
Suppliers have worked.
Equally as hard trying to keep pace with the industry, but I think we'll be we'll be in a better position.
Going forward I don't really see major changes in the supplier landscape.
Okay. That's very helpful color and then my next question is you know obviously the weather has been very favorable.
Ball, especially in the seasonal markets heading into the fourth quarter can you talk about the level of new construction that youre seeing and any comment on the backlogs as we think about you know coming into the end of this year and into.
2022.
Certainly.
Again, I think I mentioned it in the comments we have.
We've spoken obviously to all of our dealers to see where they are positioned in.
In virtually all of the geographies. The dealers are have very robust backlogs and I mentioned in one of the things. That's also very encouraging is that many of our dealers are now looking to expand their own capacity.
They're having to contend with the tight labor market that that the entire world is is having to manage through right now so from a new construction basis, we think that new pools are going to be up as I mentioned about 20%.
It could be a little bit more plus or minus depending on what happens in the shoulder in the.
And the remaining months of the fourth quarter, but activity is very strong so.
It's going to leave them with a a very good backlog to start the season. So.
I think from new construction.
There's plenty of work and we.
We feel good about that continue.
<unk>.
Remodel is another area, which is also a big portion of our business and with the strong housing market and strong home equity values the remodel.
And renovation market is good and our many of our dealers are also booked out for many months with the pending remodel and renovation.
So again just gives us further confidence in the long term outlook for the industry.
Great. Okay. Thank you for all that color and good luck. Thank you.
Our next question comes from Noah Mark Cuzco from Stephens incorporated go ahead.
Thank you and good morning.
Tony.
So you know you mentioned a little bit about the share gains that you're continuing to see is you're able your size has allowed you to secure product when others, maybe haven't it sounds like these supply chain issues are going to continue at least into 'twenty, two but any sense of you know how sustainable these share gains might be.
Morning.
If capacity doesn't really improve maybe later next year do you think you'll you'll start to maybe give up some of the share gains you got or just trying to understand how sticky you think some of that might be.
I can tell you.
First of all it's a very insightful question. So thank you for asking it what I will.
We are very focused on the customer experience. So we recognize that we are busy we recognize that demand is elevated and people need product, but we also don't take that for granted so our team works tirelessly to make sure that we provide the best value for.
Tell your customers. So it's not just about having the product it's about having the product.
And it's competitively priced and it's available when they need it and other tools that allow the dealers to be more productive.
Tools that allows the dealers to expand and grow their business, whether it's our marketing.
<unk> programs or whether it's our.
Digital marketing tools or whether it's the pool $3 60, which allows remote access they can look up schematics. They can order parts. They can put things in priority pick.
So I can tell you that we measure things like speed at the counter and and.
Our.
Our dealers time as one of their most critical resources. So it's not just we don't just look at sales dollars, even as busy as we have been we still measure.
Michael time to serve a customer at the calendar because in a business like ours, approximately 70% of our transactions take place at the counter so.
Nobody knows for sure how much.
<unk>.
The share gains will remain with us, but I can tell you that my entire team all.
All the way down right through every employee in pool Corp is very focused on providing the very best customer experience.
And we think that in the.
None that wins out so if you have the right product we have the right locations Thats why were expanding our footprint. So that we have capacity in that were convenient located for our dealers and that we have a robust inventory management programs.
In place so that we have more product than anybody else available.
Along with the technical expertise that we have the marketing programs that we appreciate the time.
Them at our sale centers and don't ever take that for granted and we try and get them in as quickly.
In and out as quickly as possible, we think that in the end that's going to serve us best and that that gives us the best chance of retaining.
That we are the <unk>.
Share gains that we have.
That we have received.
Okay. That's certainly helpful.
And then as a follow up here you know it sounds like when you're looking across the different channels that you guys operate in it sounds like demand is strong across all of them and then looking into 'twenty two but.
Where do you where are you most cautious or where do you see possibly signs of any demand cooling off of as you look into next year.
Yes.
As we.
We survey dealers really coast to coast right and we are in we talk to the customers, we talk to them each and every day.
I guess and I can tell you right now the amount of leads that they have.
And the amount of work that they have booked would suggest that for the for the time being.
They are in very good shape, but then I fall back to the kind of the macroeconomic conditions that we think are driving the result.
I would tell you that as I mentioned this work from home dynamic has has certainly.
Enhanced people's desire for a pool or a patio and outdoor living because frankly, they are spending more time at home and less time in the car commuting or at an office.
We think that people moving out of high cost of living areas.
And when they're when they're exiting those areas. They are exiting with very nice of you.
<unk> on home equity so they're armed with.
Very good down payments that they can use for renovations and remodels on the new home that they purchase and a lower cost of living area and in many cases that happens to be in more year round year round.
<unk> kits.
So.
Quite frankly, we're very encouraged by the outlook, we don't look at it as a as a short term gain when you look at the underlying fundamentals and say that.
Things are things are good now that a lot of that is tied to the housing market. So if the housing market as long as the housing market.
Round, Marty strong people feel that their financial condition is good and improving then we think that the desire to spend money on.
Outdoor the outdoor living experience, whether it's a pool of patio, a hot tub or an outdoor kitchen. We think has a has a lot of legs and will continue.
Alright. Thanks.
For taking my questions I'll leave it there.
Okay.
Our next question comes from Stephen Volkmann from Jefferies. Please go ahead.
Hi, good morning, guys good.
Morning.
I'm working from home today, just to help prove your point so thanks for taking my question.
Okay.
Couple of quick end market questions. If I may it seems like the building materials I guess, that's been growing a little bit faster than the rest of the business I am curious how would you describe sort of new build and remodel as a percent of total these days.
Yeah, I think historically, we've said.
You know newbuild is in the kind of 15% to 18% and renovation remodel would be in the.
23% to 25% range I.
I would tell you it's Steve.
Steven it's probably still it's still in that range last year I think we saw more focus on new construction.
Said, and then then remodel, but I think as a as the builders have have added some capacity and frankly gotten caught up in some markets I think theres been a bigger desire for renovation and remodel which is where I think theres a lot of a lot of pent up demand independent of the <unk> of the backlog.
Strike higher for new pools, so I would say that I don't think that the percentages have shifted all that much but I can tell you that there are both are they.
They both have significant backlogs.
Okay.
I think you mentioned in your prepared comments that you thought that the industry was adding capacity as well so.
And do you think.
Pool builds could be in 'twenty, two what do you think the industry could do.
A little too soon for me to tell you what 2022 will be I can tell you that it's been a long time since I've spoken to dealers that told me that they are adding crews and we've heard that we've heard that several times. So it's not it's more than.
What is it then I'll comment on now but.
It's very challenging labor environment. So I think we can give you a better a better estimate on that.
When we give our a wrap on 2021 and provide guidance for 2022, but I can tell you. That's really one of the most encouraging things that I've heard of late.
Is that the dealers are adding capacity to their crews.
Great. Okay makes sense and then the final one maybe I'll take just a different whack at this margin question if I may.
I think long term sort of your algorithm.
We thought it was sort of a mid teens incremental margin over a.
An area do you think Thats changed just given some of the dynamics we're seeing.
Yeah. So from a from an operating margin standpoint, you know, we've certainly seen accelerated growth in 2020 in 2021, but from a long term standpoint, we're still reiterating kind of our 20 to 40 basis points.
Back to the improvements.
On the the new higher base as I've numbers that you see going into 2022.
Super Thank you guys.
Yeah.
Our next question comes from David Macgregor from Longbow Research. Please.
Go ahead.
Hi, This is Joe Nolan on for David Macgregor.
Hi, Joe.
Hi.
I was just hoping for a capital allocation update just at current share prices the share repurchasing continue to be your best use of cash or is there.
Are there areas, where you might want to allocate that.
At this point.
Yeah. So from a capital allocation standpoint, you know, we do first look to support the current business.
Which you know from a from an overall turnover standpoint, we've done that very well, we also look to invest and expand them and so we've added 10 new locations. This past year, we have also.
Cash did four acquisitions in 2020.
And you know quite a bit more we spent about $125 million, which is higher than our traditional level. This year. So far we have completed two additional acquisitions.
And so yeah from a long term perspective, we certainly see the benefit and I'm, adding.
Complete work and including those acquisitions.
And then after that we are you know we.
Did also increased our dividend policy earlier in the year to increase the dividend rate that we're giving back to our shareholders and then once we've kind of taken a look at all of the various opportunities. We do continue to believe that share buybacks.
To the very accretive benefit to the company and so as I mentioned, we did increase actually the total dollars.
We've spent on share buybacks in the current year and we will continue to have to look at that as it makes sense going forward.
Yeah.
Very helpful. Thank you.
And then just as a.
Is a well you mentioned the world leading out of the next generation of the pool of 360 platform. I believe you said that was in the fourth quarter just any details.
Details you can provide on that any features that are going to be added.
Yeah, where it will start to rollout in the fourth quarter of we've already should we expect that we are already starting to have customers.
Following right now and that will be rolled out in full force really after the after the first of the year.
It's a very robust upgrade over the cool tool that we have traditionally used it is much more user friendly for the customers the search function.
And the available functionality on there we have captured really.
Voice of customer concerns and suggestions and ideas and kind of wrap them into the tool. So any kind of goes hand in hand, with our blue streak.
Kind of a kiosk or counter application that we're using and we're also arming our <unk> to be able to use the blue Street tool when they are actually out with the.
So where we are investing nicely in.
You know kind of the whole customer experience as it relates to technology. So I think customers will be very pleased and very happy with the improved functionality and that we listened to them with things that they suggested would make the tool more user friendly for.
And it certainly makes it more inclined to use it.
But all of them.
Our next question comes from Derek <unk> Moise from loop capital. Please go ahead.
Alright, Thanks, and thanks for taking my question.
And then just wanted to ask first of all on freight inflation and I think if I recall correctly you own your own fleet and it seems like you've managed that really well, particularly on the outbound freight side, but just curious if you are impacted at all whether it's with respect to drivers or how your fleet capacity is set up moving forward.
To handle the stronger.
Okay.
Yeah, certainly we are we are not immune from the increased costs as it relates to two fleet. We've seen inflation on these on the driver side certainly fuel is up considerably over where it was where it was a year ago.
And even the cost of vehicles is up but if you remember.
Robert in a few years ago, we started our capacity creation initiative in earnest in one of the things one of the key elements of that was truck utilization. So the key for us is actually getting higher and higher utilization rates on the truck, which allow us to absorb the.
The increase in operating costs.
But still create operating leverage with the trucks. So in a type of environment that we're in given that most of our products that are delivered or deliver on our own trucks that actually has has worked in our favor. So it's.
The team works very very hard on execution as it relates to the truck utilization.
And the overall transportation rates, because we know what's coming down the pipe with with fuel and in driver cost and other associated maintenance and repair.
Okay, and then I guess my next question just around operating leverage into next year that clearly theres a lot of focus today on gross margin.
Margin.
But just curious how we should start thinking about the drop through.
On incremental margin for.
Opex into next year should it be consistent with the normal algorithm or is there going to be any change just given how strong.
Managed care this year.
Yeah, so in a year, where we return to our normal growth as we've talked about the 6% to 8% we would expect to see kind of a normal drop through.
Would expect in any event are in the year that we finally do return to that normal growth that we would have a benefit from some of the incentive compensation and.
Also we do continue to work on our capacity creation that will allow us to.
To continue to reduce our operating expenses as a percentage of overall sales.
But the operating margin leverage on that would be similar to what we've seen historically within the 20 to 40 basis point improvement.
Got it and just.
Just lastly on the M&A environment. It seems like the pipeline is full but I'm. Just wondering if you are you seeing maybe incrementally more activity maybe on what some sellers are looking to capitalize on the market strength or maybe even smaller players just sort of party themselves unable to compete with your scale. So I'm just curious.
The pipeline stepped up.
A bit in activity or is it just for batesville throughout the year.
We certainly have seen the pipeline step out.
From a salary perspective, a lot of them have gotten much more interested because of some of the pending tax changes that are coming and.
And so we do continue to evaluate those opportunities as they come through and we do.
Barry focus look on them and ensure that from a strategic standpoint, we believe that any of those acquisitions would add value to the overall consolidated financial statements going forward. So we do have some specific criteria that we look at as we evaluate those acquisitions.
Okay makes sense. Thanks again best of luck. Thank you.
Again, if you have a question. Please press Star then one.
Our next question comes from Ken Zenner from Keybanc. Please go ahead.
Good morning, everybody.
Good morning.
So.
Interesting time to be a distributor.
Since last quarter.
But could you kind of talk about stock outs.
Yes.
You have a lot of products to move products around and just let me give you a little context, so but like Sherwin Williams right they couldn't get chemicals to put it into their pain.
Sales you know the high single digits, that's very.
Our material constraints, so I'm trying to kind of.
Parlay that into your business for two reasons one.
The very strong sales you had delivered.
Was there any lost business and their owing to stock outs.
And I think the nuance of the question.
You can't really you might've had the material. So you got market share, but does that mean the market couldn't grow as much as it could have and I'm just trying to think about right now how that's working from your business versus what you think the market grew.
Okay interesting question, it's a.
Knockouts are stock outs really.
Barry byproduct, so I would tell you it's a different answer so if we talk chemicals for instance, which are Treichler. There is certainly a different answer as it relates to stock outs as I mentioned in my comments, we had rolling stock outs as it relates to try color there just.
So it wasn't the right he had I couldnt moving around from one facility to the other we took whatever product we had.
We tried to be fair with customers and didn't allow people to stockpile and take care of as many customers as we had but we were net short in that situation.
<unk> has a couple of choices a they can go to someplace else and so.
They have the product, which in the case of Tricolore in most cases the answer was if we didn't have it and nobody else has it.
Got it and then they move but it's different.
Or in pumps or filters it could be very different like yes, I just had to explain in my neighborhood that is.
Paul.
If they as pump was broken missing a boring because were so loud.
So he could go to you or to someone else, but if someone else didn't have it because they always get it basically from you like where you're out on equipment for example.
Anywhere or is that really just not an issue for you guys.
Yeah, what I would say Ken is that we had.
We had certain items that were in short supply from the manufacturers and in those cases the value one of the biggest values that we provide our customers is that we may not have it in one location, but I may have it in another.
It's just generally net short in the industry and it doesn't exist like some.
Some key products. We're early on in the season, then there is another alternative or another vendor. So if you need a pump you may have wanted vendor a and.
And that comp wasn't available, but it's not like we said hey, I don't have anything to offer you. We said you wanted you asked for pump a but we have BC indeed.
We can offer you, which will get you up and running and get your water.
Use your pool and Thats frankly, the area that we excel because it was a the chances of us having it in the multitude of facilities that we have in a market where better than than virtually anybody we compete with in general but in those cases that we still didn't have the particular.
Particular item because it was sold out and backed up with.
And the vendors unable to produce that we had another product. So it wasn't like we said I don't have anything to offer you in most cases I'm sure. There were some cases, where a specific product. We may not have had an alternative but given the fact that.
<unk> sales were up so nicely and at the same time, our inventory was growing kind of shows you the flexibility that we have and the power that we have in the market to offer a better solution to customers.
Right, Yes, that's a very enviable position to be in.
As he said that.
It occurred to me are you getting stronger I mean part of your guidance, obviously your collection costs and costs, partly reflect how much so but also rebates and cleaning is there any large rebate dynamics that we should.
Or you'd like to call out that are moving through your <unk>.
Your margins given given the volume.
Yeah.
I think.
Certainly part of the part of the gross margin calculation for the business or a certain volume related programs.
So we're having a we're having a very good year. So it stands to reason that that part of the of the gross margin.
Is is enhanced.
You have now the year starts again next year. There is a new program again next year and we have to work through that.
Right.
I wonder.
Going down to the human level here.
Yeah.
Your facilities.
Facilities are operating at a very high.
How are you handling.
Your employees not burning out because they're probably one of the busier.
Yes.
Elements of the supply chain right now and the pool market. How are you kind of handling that given all the demands on them.
Yeah.
If.
Hi, Ray when we first met I told you that there is four things my four operating principles are safety growth profitability and employer of choice and what makes employer of choice. So important is that there is really nothing that you can buy for me that you can't buy from anybody else. It simply is the team and the value proposition that they create.
Around those things those products that.
If you remember that from other folks that make the difference we are very fortunate very blessed to have an extremely dedicated team and I couldnt be prouder of the results and more appreciative of the results and the hard work that they have put in in order for us to accomplish into frankly to facilitate our dealers.
<unk> customers ability to accomplish what they've done so we strive to take very good care of our employees. We have I think Melanie mentioned that our incentive compensation, which a year ago, we were telling you well could be.
The source of some.
Cost savings are operating I'm sorry.
And our bonus program this year incentive compensation whenever you want to call it.
Is up significantly and will be up so we're basically taking the.
The bounty that of the terrific results, we have and we are sharing it with the folks, but it's not just about money it's about depreciation in recognition.
<unk> of their efforts and I think we we've done more of that this year than we ever have done.
And it's something that has has allowed us to keep the workforce together behind us and engaged.
Last question. Thank you for that.
With Manny.
Sure <unk>.
Capacity not meeting your 100% target rate.
That's the way you're appealing smaller distributors.
From our poll survey that we just conducted you know we're seeing that.
Distributor here, perhaps over ordering rate to 130.
I really want to get a 100 units.
Can you give a little context for.
Why do you think.
That dynamic you also express.
Not be sending the wrong signal.
Through the channel through the manufacturers I E.
Everybody's over ordering a little bit right backlog for everybody look a little stronger.
When they're not there.
Thank you very much.
Yeah.
Think what you have to keep in context is that is that.
Mentally pointed out in her comments that the inventory is up.
In dollars quite a bit but if you look at it in days our days of inventory.
We are actually down so it really is about getting your head wrapped around what the true demand.
The true demand signal is and making sure that we have we have products in place now.
The demand signal from the market is very strong right. So the backlog the amount of work that they have today and.
At work that they have.
For going into 2022, and as I mentioned, sometimes all the way through to 2022 season. If you simply just look at the amount of product that is on order.
And you turn the crank on how much product, we're going to need through the balance of the 2022 season it.
It doesn't really give me much concern at all in terms of why we have we have too much product frankly at this point I'd really rather err on the high side because it allows flexibility on our customer side to keep them keep them moving forward. Because every time one of our dealers has to go back to a job to complete it because they maybe they.
You have the whole goods that they needed or the part that they needed that simply the huge productivity drain on them. So we've worked very hard to make sure that we have.
As much of that product on a first time.
Fill rates.
To allow them to keep going so again, given the dollars given the season.
Analogy that this is the time of year, then we should be ramping up from inventory.
To start and be prepared for the 2022 season, so I'm not really concerned with the with the amount of product. That's on order because we will certainly go through it.
Thank you very much.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Peter Armen for any closing remarks.
Okay.
Thank you everyone and thank you for your support and for joining us today.
We hope you all have a safe and happy holiday season, because the next time that we.
We will talk together will be on February 17th of 2022, where we will be reviewing the fourth quarter and full year results for 2021, and providing guidance on our outlook for 2022. Thank you and we hope you all have a wonderful day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.