Q4 2021 Pool Corp Earnings Call
Yes.
Good morning, and welcome to the Pool Corporation fourth quarter 2021 conference call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your 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. Please go ahead.
Welcome everyone to our year end 2021 earnings conference call, our discussion comments and responses to questions. Today may include forward looking statements, including management's outlook for 2022 and future periods actual results may differ materially from those discussed today information in regard.
The factors and variables that could cause actual results to differ from predicted results are 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 web site and our inverse.
The relations section I'll now turn the call over to our President and CEO , Peter our van Pete.
Thanks, Melanie and good morning to everyone on the call and thank you for joining us.
As you all saw in this morning's release, our fourth quarter results capped off an extraordinary year favorable weather combined with strong demand and tremendous execution by our team helped us post yet another record quarter. This amazing performance helped propel our full year 2021, net sales to $5 $3 billion, which.
Presents an increase of one 4 billion over an improved over an impressive 2020.
Certainly acquisitions helped drive growth throughout the year, adding $257 million in revenue to our net sales, but the real star of the show and a testament to our people and strong operating model is that our base business grew 29% or $1 1 billion and a very in very difficult operating environment.
By focusing on execution, we were able to leverage this growth to achieve incredible earnings for the full year, our diluted earnings per share sorry to $15 97, a 78% improvement over 2020, yet another masterpiece.
Our unmatched operating model and capabilities, coupled with the best most dedicated team and the industry allowed us to help more people enjoy a backyard oasis than ever before we could not be prouder or more thankful for our team's efforts our customers real resilience and the support from our manufacturing partners who work diligently.
In a challenging business environment.
In this busy year. We also completed four acquisitions, we added pool source in the Nashville market backpack builder supply in the Jacksonville market to our full distribution network. Additionally, we added Wingate are wingate supply to horizon in the Tampa market.
And we also completed the very strategic acquisition of Porpoise pool and patio in December .
This business based out of Clearwater, Florida is a distributor of swimming pool products, a chemical packaging operation and a franchise or a best in class a swimming pool retail stores throughout the state of Florida with additional franchise locations in Alabama, Georgia, Louisiana, and Texas I'll cover this in more detail in a minute.
In addition to the four acquisitions, we opened 10 new locations. This past year four locations as part of our horizon business and six locations on the pool side.
Before getting into our view of the upcoming season, let me add some color around our amazing fourth quarter in the last quarter. We posted net sales of one point O 4 billion, which is a 23% increase over.
The previous year's very strong fourth quarter and helped us achieve another milestone marking four consecutive quarters with net sales above the $1 billion Mark.
Base business revenues in the fourth quarter rose, 22% with acquisitions contributing 1% to the growth during the quarter.
From a geographic perspective, our four largest markets ended the year strong, California grew by 16% in the quarter and 24% for the year, Arizona was up 24% in the quarter and 23% for the year, Texas posted 22% growth in the quarter and 34% for the year, Florida continues to be.
A strong area for us with 26% growth in the quarter and 30% for the year combined our year round markets grew 22% for the fourth quarter and 28% for the year seasonal markets had similarly strong results with 23% growth for the quarter and 30% for the year.
Although it is still a preliminary number we believe that new pool construction numbers in 2021 will come in around 120000 units, which implies a growth rate of approximately 25% over the 96000 pools that were built in 2020.
Moving on to end markets commercial had a very strong fourth quarter with sales up 26% and 24% for the year. After a tough 2020. This market has rebounded nicely and continues to drive growth with a strong maintenance and repair market and new construction picking up once again.
Retail sales climbed 18% for the quarter and 20% for the year.
Let me provide a couple of comments on inflation in the quarter, most manufacturers announced increases in the fourth quarter as we discussed on our last call, but many came back again and announced additional increases subsequent to those previously declared we expect these increases to pass through the channel as is normal for this business with no impact on.
Demand in the fourth quarter, we saw increase announcements of approximately 7%. So far this year, we have seen additional increases which I will quantify for you later in my comments.
Turning to product sales performance beginning with equipment, we saw sales increased 21% for the quarter, bringing the total year to 35%.
<unk> automation products and variable speed pumps led this categories growth chemical sales driven largely by inflation grew 26% in the quarter and 20% for the year as supply problems continue to plague us and the industry.
Lastly building material sales, which is a key indicator of the health of the construction remodel business saw sales climbed by 20% in the quarter and 28% for the year as a reminder, the fourth quarter of 2020 was incredibly strong in this category as we saw sales for that period grow by 42%, making the 20% growth this quarter.
Order even more impressive.
Now, let me turn your attention to Europe once again, a tremendous performance.
For the fourth quarter net sales increased by 18% and this was on top of a 48% increase for the same period last year for the full year Europe grew by 39% another incredible performance by our dedicated and talented European team.
Moving onto our horizon business, we are incredibly proud of the performance of this strategic business and very fortunate to have such a talented team as mentioned previously we opened four new branches and completed one acquisition late in December that when combined with our existing locations helped horizon grow by 28% in the <unk>.
<unk> and 29% for the full year looking only at the base business growth horizon posted 20% growth in the quarter and 22% growth for the full year proof that our focus on the customer experience is helping us gain share there as well.
Turning to gross margin overall gross margin for the quarter ended at an impressive 31, 1% up 260 basis points over the same quarter last year.
For the full year, we ended at 35% a 180 basis point improvement over 2020 volume related incentive programs, along with supply chain initiatives pricing management and products mix. All played a part in this improvement.
Operating expenses as a percent of sales came in at 18, 8% for the quarter, which is an 80 basis point improvement over the same period last year for the full year operating expenses as a percent of sales ended at 14, 8%, which is a 210 basis point improvement over full year 2020.
The team continues its relentless focus on capacity creation and when combined with strong growth. The results are very impressive.
<unk> hundred 60 continues to be one of our biggest productivity tools for our team and the customer revenue growth through the tool was 46% in the quarter and makeup and makes up about 10% of our order line volume.
We expect continued gains in this area as we are now rolling out our next generation of <unk> 360, with many enhancements that will continue to drive adoption and customer engagement and provide additional value to our customers.
Wrapping up the income statement, we are exceptionally proud to report operating income of $128 million for the quarter, which is 72% higher than the same period in 2020 operating margin came in at 12, 3%, which is a 340 basis point improvement when compared to the fourth.
Order of 2020 for the full year operating income totaled $883 million, which is up 79%.
Operating margins for the year ended at 15, 7%, which is 390 basis points better than 2020.
Again, this would not be possible without a strong market dedicated and talented dealers excellent manufacturing partners in the world class team here at Pool Corp.
Before moving on to the outlook for next year I thought it might be helpful. If I provided some insight into the strategic acquisition of porpoise pool in patio and Suncoast chemical packaging.
We paid $789 million and we funded this transaction through our existing credit facilities and remained well below our targeted leverage range of one and a half to two times trailing 12 months EBITDA. This unique acquisition is essentially three businesses. One is a pool products distribution business that provide supplies to 200.
62 individually owned and operated franchise pool, and outdoor living retail stores and three company owned stores.
The second part of this business is a world class chemical packaging operation that packages themselves chemicals to these franchise stores and other distributors and retailers in the industry.
The third part of this business as a franchise or pinch a penny and award winning best in class franchise or with a stellar reputation in the franchising world and in the swimming pool retail market.
They're retailing and customer support expertise developed over our 45 year history include a cutting edge technology platform will provide new capabilities to pool Corp that can be leveraged to benefit all our current customer base segments, when combined with our tremendous buying power our international distribution network and proven execution.
Focused operating model. This is an extremely powerful and unmatched combination.
As I mentioned the business includes a world class chemical packaging operation that produces and packages tricolore tablets.
And other proprietary specialty chemicals, including a variety of proprietary liquid chemical blends under several well known brands for use in swimming pool maintenance the operation enhances our cost position improves supply consistency and reliability and is scalable for future growth.
Today, our products our warehouse in one state of the art distribution center located in Clearwater, Florida and delivered to the retail stores by a fleet of dedicated delivery vehicles.
As previously mentioned the business has 262 stores 232 of the stores are located in Florida with the remaining 30 located in Alabama, Southern Georgia, Louisiana, and Texas supplying to now 21, Texas stores from South Florida is a challenge. So you can see that our existing distribution network creates tremendous synergies.
It is our intent to leverage these capabilities over time and established franchise locations throughout the sunbelt to enhance our service to the significant number of homeowners maintaining their own pools.
One of the most strategic capabilities and key motivation for the acquisition of Corpus pool, and patio was the technology platforms and tools they.
They have developed that can that we can leverage across all of our customer segments best in class tools, such as a point of sale system, a water chemistry chemical application guide and customer apps demand creation tools service management software and valuable local pool market databases that will help fuel our business growth.
Product sales for many years to come.
Jim is a 28 year veteran and key architect of this amazing business has joined the <unk> team and will help us.
We integrate and grow this business going forward, Jim will report to me and has already become a key contributor and confident to our team.
We plan to expand the pension Fannie franchise store network at an initial rate of eight to 12 locations per year, focusing on maintaining and enhancing the brand while providing the high level of support that the franchisees have come to expect to date, we have opened one new store in 2020 to.
The acquired for pistol and patio operations are expected to contribute approximately 5% to full force total revenue in 2022, we are confident that over time. This operation will accelerate our penetration into the important DIY pool maintenance customer sector comprised of highly desirable recurring revenue.
<unk> products for the growing installed base of swimming pools.
Finally, and before I turn this over to Melanie for her commentary, let me provide some thoughts for 2022 and our initial guidance range for full year.
EPS.
The pool and outdoor living industry, driven by consumers desire to spend more time outdoors in the comfort of their own backyard is strong.
Whether it's an afternoon in a pool or spa with family and friends or grilling dinner on the patio and an amazing outdoor kitchen or simply enjoying a quiet evening and a manicured backyard that is accented with beautiful hardscape and outdoor lighting. We are an integral part of the equation and demand is growing dealers are reporting.
Strong backlogs real leaders are reporting that homeowners seek properties with a backyard retreat, including a pool are in very high demand.
Covid has accelerated the movement to the suburbs fueled the southern migration and changed the way people work, allowing millions of people to work from home it created an environment that supercharged our industry.
Demand remains very strong across all our geographies and we see some encouraging signs as the supply chain is improving as well inflationary pressures continue but have yet to curtail demand. So we remain optimistic that the underlying about the underlying strength of the industry. We see labor constraints is continuing to be one of the biggest limiting.
<unk> on pool, construction and remodeling growth, but again are encouraged by signs of our contractor customers wanting to expand the size of their crews in many areas.
Labor will continue to be a limiting factor on how fast the industry can grow whether we're talking about new construction or remodel their service skilled labor is required and there is a war for talent. This war also affects our suppliers and their suppliers, which is continuing to impact the product availability for the coming season.
Chemicals will continue to be tight and the products that contain computer chips, such as automation and some variable speed pumps will remain challenged inflation increased more than we previously expected. We ended the year with with a benefit from inflation of 7% to 8%, including eight to nine 2% in the fourth quarter.
<unk> inflation now looks to be in the 9% to 10% range as we move into 2022.
Acquisitions, and new locations will add 5% to 6% to our revenue growth taking all of this into account, we expect top line growth to be in the 17% to 19% on top of an amazing 2021.
Earnings per share are projected to reach $17 19 to $17 94 per share.
In closing I would like to thank the pool Corp team, our amazing customers and incredible supply partners for helping us bring outdoor living to life for so many people I will now turn the call over to Melanie Hart, Vice President and Chief Financial Officer for her comments.
Thank you Pete and good morning, everyone. We are very pleased to announce our outstanding fourth quarter and full year 2021 financial results and begin our discussion on 2020 as Steve mentioned, our fourth quarter results were very notable.
A record $1 billion in net sales in southern momentum continue from our third quarter reported results.
Profit increased 35% to $322 million and we said that gross margins increased 260 basis points to 31, 1%. This is a record high and was aided by continued strong realization on purchasing incentive programs and actions, we took to proactively manage our inventory needs in times of longer.
Lead times and rising cost pressures from higher.
Fourth quarter operating expenses were well controlled increasing only 18% over fourth quarter 2020 expense levels.
Adding additional incentive compensation expense incurred during the quarter offset by higher bad debt recovery.
We saw an increase in operating margin for the quarter as we realized 12, 3% operating income from net sale.
From the prior year fourth quarter operating margin of eight 9%.
That demand driven growth in our top line and expanded gross margin provided the opportunity to increase operating income performance for both the fourth quarter and full year in 2021.
Interest and other expense for the quarter with lower than expected primarily due to interest income received.
Say hopeful recovery moving.
Moving on to the full year 2021, eclipsing 5 billion in sales for the year is a remarkable accomplishment even more sand when considering the growth rate card here, where sales were up 23% in 2020 over 2019, resulting in a two year sales growth stack a 66%.
Revenue growth was primarily the result of generally favorable weather throughout the year strong new pool construction activity higher inflation and revenues added from recent acquisitions.
Other contributors to sales growth included the winter weather anomalies affecting Texas and parts of the southwest in February resulting in additional sales in the first quarter of approximately $20 million and an additional $10 million and the remainder of the year. There was also a new department of energy regulation that took effect in July requiring that the majority of new pumps.
So the variable speed pump.
We saw an increase in the percentage of higher ticket variable speed pump sales in the second half of the year, realizing approximately 20 million in incremental sales in 2021.
Base business sales increase of 29% included market share gains and an estimated 25% increase in the number as neutral as constructed during the year as we look at the expected contribution for 2021, we estimate that the maintenance portion of our business. We will continue to be around 60% of our total business with us.
The increase in the proportion of new pool construction related product sales and with limited labor our customers prioritize new pool construction project and where we.
Remodel and renovation activity.
Gross profit reported with $1 6 million, a 43% increase over 2020 gross margin increased 180 basis points over the prior year to 35% bolstered by supply chain management pricing changes in vendor incentives from increased purchasing volumes.
Overall for the year, we had an increase in operating expenses of 117 million, which included increased performance based compensation of approximately $20 million. A reward program are directly tied to increased financial results, which allows us to leverage our overall compensation.
Effectively executing on our capacity creation initiatives allowed us to keep expense growth at 18% compared to 35% sales growth during the year, even after considering the increased performance based compensation paid to employees to reward them for their efforts in delivering these results to shareholders, where we have sell centers that capacity, we will look.
To invest in 2022 to enable it did show continued growth in those markets.
Our expenses for the year benefited from a onetime net recovery of $2 5 million that was previously written off in March 2020, there are no additional benefits expected on this note as it is fully recovered.
As a result of substantial revenue growth enhance gross margin and focused expense management, we realized significant operating income leverage throughout 2021, increasing our operating margin to 15, 7% of net sales up from 11, 8% of net sales in 2020 total reported operating income of $833 million.
Represents a 79% increase over 2020 operating income of $464 million.
Included in income tax expense, we received the ASU benefit of $14 2 million or 35 per diluted share in the fourth quarter, which added to the 39 cents that was previously recognized and included in our guidance for a total of 74 for the year, our failure tax rate, excluding ASU with 24, 7%.
2022, we anticipate that our tax rate will be closer to our 25, 5% historical rate.
Turning to our balance sheet and cash flows we reported increase in net receivables of 30% consistent with our higher sales price DSO improved from $26 five days in 2020 to $25 six days in 2021.
Inventory levels increased 71% compared to prior year and 65% excluding 2021 acquisition by comparison, our 2020 year inventory levels were lower than our sales increases due to product shortages in the absence of typical early by purchasing program.
During 2021, the increased level of industry demand put continued pressure on our supply chain partners, resulting in us electing to build inventory.
Ahead of anticipated sales growth over the course of the third and fourth quarters, we made significant improvements to our in stock inventory positions, while continuing to meet high demand.
We also increased inventory to support the 10 new locations, we opened during the year and our completed acquisition. These increased investments in working capital resulted in a lower than normal reported cash flow from operations.
We are confident that our current inventory position will provide us a tailwind to better serve our customers in 2022.
Executing on our capital priorities, we spent $38 million and purchases of property and equipment to support our ongoing business operations, we invested $812 million on key strategic acquisitions, including 789 million on our December 2021 acquisition, a purposeful and patio. This also includes amounts paid in the current year for.
Prior to your acquisition or a portion of the purchase price is deferred.
2021 acquisition activity was funded by our long term debt agreements, which we amended and expanded in September 2021, providing plenty of capacity to fund our future business growth. We ended the year with a trailing 12 months leverage ratio of <unk> 77, and expect to continue to remain under our target leverage ratio of one and a half to two two.
Right.
We purchased 138 million shares and increase our dividends per share by 38% during the year, providing $120 million in dividend payments, bringing our total cash returned to shareholders 258 million for 2021.
Moving to our guidance for 2022, we expect to realize earnings growth of 12% to 17%, resulting in a 2022 diluted EPS guidance range of $17 19.
$17 94.
Including an estimated 19 ASU tax benefit which is expected to be realized in the first quarter.
In developing our guidance range, we are expecting high teens sales growth, including approximately 5% from acquisition completed late in 2021 inflation will continue to be a component of our sales expectations for the year with already announced vendor price increases, we expect that inflation will add 9% to 10% to our top line for next year.
Selling days for 2022 compared to 2021 will be up one day in the first quarter and down one in third quarter with the same number of selling days year over year.
Currency impacts for 2022 are likely to be an overall drag on net sales growth and overall operating profit.
Gross profit margin in 2022 is expected to be relatively flat with 2021, and we are well positioned with inventory, which will allow us to see modest improvements in the first half. We expect these improvements to level off as they reach the third and fourth quarter, which will have difficult comparisons because of the inflation realized in 2020 one are.
But for a patio acquisition will be slightly accretive to gross margin the distribution business, which is the larger revenue piece has lower margins than our historical rates. However, the franchise revenue will have a positive impact.
If inflation levels in the industry returned to more normal growth rates and we see improved lead times from vendors, we would expect that our inventory levels will increase at a much lower rates and sales increases returning our expected cash flow from operations to be more in line with our net income.
On the operating expense side, we are anticipating that expense growth will come in higher than our historical levels are.
Our sales growth has come in ahead of our strategic plan for the last two years and we see 2022 is a year, where we need to further increase our investment in technology and automation to drive our long term growth and enable us to operate even more efficiently. We have initiated a multiyear project to transform our legacy enterprise systems and capabilities.
To improve customer and team member experiences. We are also expanding our proficiencies and investing in our digital marketing initiative.
We will also continue investing in new sale centers, serving growing markets and expect to see some cost increases as we though that these new locations and expand our market reach for both greenfield and existing lease renewals, we have seen sharp increases in industrial lease rates as a result of the strong demand on warehouse space we are.
We're also seeing external factors impacting our labor costs, causing wage inflation in today's current competitive labor market and these are our more significant components of operating expenses higher increases in these areas contribute to higher expense rates.
Capital expenditures, including our investment in ongoing <unk> project will approximate 1% of net sales in 2022, our technology investments are trending towards cloud based systems and applications and will be reflected directly in operating expenses as they are amortized versus capital expenditure with associated depreciation expense.
We completed the acquisition of purposeful and patio in December 2021. This strategic addition to our business is expected to add approximately 5% to net sales growth and 5% to our EBIT growth.
Although the added debt used to fund the acquisition will result in increased interest expense and we will incur higher intangible amortization expenses in the current years.
So I'm heading out performance will be accretive in 2022.
Accounting for around 3% of our projected net income growth and provide significant long term growth possibilities. The intangible amortization expense is included in the increases, we expect and our selling and administrative expenses.
Even with higher sales growth in 2022, our operating margin target is expected to return to our historical contribution levels, where we realized approximately 20 to 40 basis point improvement. This improvement is off of a significantly higher base by 15, 7%, which was a 390 basis point improvement over prior year.
Interest expense at a higher outstanding debt balances is anticipated to come in between $26 million to $28 million considering the expected interest rate increases that had been announced for later. This year. This is subject to change based on the extent and timing of the proposed increases.
Excluding any potential share repurchases, we anticipate that our weighted average shares outstanding that will be applied to the net income attributable to common shareholders will be approximately 47 5 million shares.
I'm also pleased to announce that later this year, we will be publishing our inaugural report on our ESG efforts. We are delighted to provide more details on the many things we had been working on in those areas.
We are excited to continue to collectively grow the outdoor living industry.
With that we will repeatedly offer strong and steady returns for our shareholder looking forward to sharing 2022 with all of you.
I'll now turn the call back over to the operator to begin our Q&A session.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
We asked today, but you limit yourself to two questions. At this time, we will pause momentarily to assemble our roster.
Our first question today comes from Susan the Macquarie with Goldman Sachs. Please go ahead.
Good morning, everyone. This is actually Charles running for Susan. Thank you for taking my questions and congrats on the great results and a great year.
My first question is on your inventory.
I think you've talked that you were able to really take advantage of the environment to scale up and load up on products. How comfortable are you with your inventory position today.
Much of the growth that we saw in 2021 was inflation mode to volume growth and any need to FERC further increase those levels in Q1 may be for certain category and as a result, how should we think about the impact of the fully pre buys.
Benefiting through your margin and gross margin in 2022.
Yeah. So yeah, we are very pleased with where we ended the year from an inventory standpoint.
There were additional vendor increases that took place in the fourth quarter, which is typical for us and much of that product was received prior to that latest price increase and some of the vendors have also announced additional first quarter increases.
And so obviously the inventory on hand would not be subject to out to those increases as well.
So with that you know we are expecting.
Both of those two of them contribute to our margin and from a benefit standpoint for the first half of the year.
From an overall if you look at the components of it that inflation related.
Say that it's somewhat similar to the overall inflation that we experienced for the year. If you look at the growth standpoint.
And then as we look at we certainly do continue to see shortages in certain products, but overall, we're very pleased with the way we've been able to manage and balance the inventory throughout all of the various locations and divert it to where the product is a is needed and sell them in a very comfortable that we will sell through that product.
You know very quickly based on our expectations for 2022.
Great. Thank you for the color there and then in your prepared remarks.
Remarks, you commented about your heart your intention to increase your presence in the DIY market servicing. This market can you talk about maybe the dynamics in that market the growth rates and how it is different versus your your pre distributions segment in terms of the competitive dynamics in the margin profile.
Yeah sure I'll take that one so the the growth of the DIY market is really just a function of what percentage of people are taking care of their own pools versus having it done professionally and I think that varies greatly by geography right in the year round markets Theres more pools professionally serviced than there are in the seasonal markets, which are.
Which can be more DIY, but if blended it's probably in the neighborhood of 50 50, and when you throw spas and things like that in there too.
That just further as the furthers the DIY.
Segment. So we like we like the fact that this gives us additional reach it gives us additional tools to.
To help our existing retailers as well and we think that as the installed base of pools grows I think you could look at the market available growing really it will index to the installed base of pools.
Okay.
Okay. Thank you for your time guys.
Thank you.
Our next question comes from Trey Grooms with Stephens. Please go ahead.
Hi, This is actually know them or counts go on for Trey. Good morning, Thanks for taking my questions and congrats to a strong into the year.
Great. So.
So first I kind of wanted to talk about how youre thinking about the sales cadence for this year you know <unk> has the toughest comp, but you know it sounds like you're off to a strong start of the year. So maybe help us unpack that I know there was also some unfavorable weather earlier this year plus youre comping against I think you called out a 20 million topline benefit from.
The abnormal Texas last year, so just again any color on the cadence.
Yeah.
Businesses are we ended the year as you saw very strong and and I would tell you that at this point. We've continued on that on that trend. So we've seen the market is generally strong it started.
Really eating up as you can imagine as you remember back right. After the onset of Covid and has continued to build continue to continue to be strong I mean weather is certainly the biggest external factor that we have so it at this point whether in the year has been has been okay and.
Business remained strong at the back I guess more importantly, the backlog of work with the dealers is a is really unchanged from where we exited the year, which is very strong.
Great. Thanks, that's helpful. And then on my follow up I think you said earlier you believe new pool construction was about 120 K units in 'twenty. One what are your thoughts on what that will look like in 'twenty, two and how much of that is baked into the guidance.
Yeah.
So the new pool number for 2020 as as I mentioned, it's for 2021 is still preliminary so we'll get a we'll get a better beat on that in the coming months, what I would say is that our demand is still strong labor is still going to constrain the.
The growth.
Meaning that there's more people that are wanting pools that are going to get they're going to get a pool I think the industry has added capacity, but at this point, it's very it's very early to tell because even if there is demand and there's people ready and willing to work it really depends on the weather window and what happens to <unk>.
Those are available days to work I mean it wasn't.
You remember back in 2019, and the beginning of the year it turned out to be a particularly the second quarter of a total washout for weather. So we lost a lot of buildable days. So it really is kind of early for us to comment on what we think new pool construction is going to be in 2022 simply because the one one of the factors that we can't control as well.
<unk>.
Is there just.
There's a lot there's a lot of quarters in front of US right now that weather could curtail.
Or sustain the build rate that we have but overall, we feel very good about demand.
Very good that the.
Many of the dealers have had been able to add some labor to their crews, but it's really going to come down to.
What weather is going to allow them to do so it really is just a little too early to answer that question.
Thanks that makes sense and that's helpful I'll pass it on.
Our next question will come from Stephen Volkmann with Jefferies. Please go ahead.
Hi, Good morning, guys first thing just a couple of modeling things if I could I think my only if I heard you right that we were thinking gross margins sort of flattish in the first half and down in the second half and any order of magnitude as to sort of the full year impact there.
And maybe kind of the same question on the Opex side, because you talked about higher spending is higher on a dollar basis or percentage basis, just any additional color. There. Thanks, okay sure. So for the margins. We're looking at essentially flat margins for the full year. So we would expect that those would be higher than last year in the first half of the year.
Here, and then lower than the current year or 2021 in the second half primarily because we saw some of the increases in 'twenty one in the second half of the year. When we started to see some of the benefit from inflation. So that the the flat expectation is really for the full year with them higher in the first half and then lower in the second.
Yeah.
As it relates to expenses you know the overall expense growth and he hasn't mentioned because of the various different really kind of cost inflation pressures that we have that are impacting the business. You know we are expecting that to be higher than what we normally would see them, but that should be relatively consistent throughout the year.
We start to sell some physician that you know we weren't able to get people hired as quickly as we would've liked last year in order to sustain kind of the additional volumes.
As well as some market increases on the wage side.
Great. That's Super helpful. And then maybe just going back to this question about.
How about new new spending and Refurbishments and I guess I'm curious it feels like you know an 80000 dollar budget for a pool doesn't go quite as far as it would have a couple of years ago. So I guess are.
Are we seeing sort of less content because of all this inflation or you know any any concerns around the wobbling of demand because the markets haven't been great lately or.
Any any of interest rates going up those types of things.
Good question, what I would say is that I.
Ironically, we've not seen any.
Retreating in what people want in terms of pool, rather it continues to build and if you remember we started talking about this a couple of years ago of the the amount of pools that essentially have no technology on them.
And as many of these pools are being taken over by new homeowners. That's one of the first things that they were wanting to do is increase install some technology. So that it becomes more of a smart pool and as it relates to you know.
<unk> pool construction there is a there's some great designs out there is some great new features whether its a zero entry or sun or Sun pad, where there's spillover spot that it was still a response, it's been around for a long time, but and other water features we've really not seen any decline in rather pools are getting.
Pools are getting fancier, not theyre not theyre not into value engineering. So we're encouraged by the fact that.
People see a beautiful backyard with a really decked out pools and those tend to be the pools at the builders want to build obviously, because they make more money at and doing those as well.
So with the backlogs that they have they can be a little picky around what there are what they are building, but you are right and $80000 pool doesn't buy you as much as it did a few years ago, but it really is you have to curtail demand.
Alright, I appreciate it I have one of those simple clothes with no tax or you make me jealous every time you talk about that stuff.
Okay.
Yeah.
Yeah.
Yeah.
Our next question will come from David Macgregor with Longbow Research. Please go ahead.
Good morning, everyone and Pete Congratulations on just a phenomenal year.
It's impressive that we're looking at 15, 7% operating margins for the year.
And I guess a year ago, we were kind of all thinking kind of 10 to 12, and then looking to grow kind of 20 to 50 basis points per year of annual progression.
In your prepared remarks you.
Talking about this you kind of said look we have strong market, where we had just great execution by the team and I guess I'm, hoping you can kind of help us understand how much of this.
Proven and.
And margins right now would you attribute to just the strength of the market versus.
Kind of sustainable margin growth through execution improvement of systems.
Yes on the cost structure and everything else.
Yeah I think.
I think about it this way.
In order for it to have great productivity numbers, you need to have a certainly elevated elevated volume helps right. So.
Assesses ease of motherhood of invention. So the busier that we have gotten into sales centers and if you remember we started talking about capacity creation, probably three years ago now.
As a way to improve our customer service and also to drive our productivity and try and stay ahead of the of the operating cost increases whether it was rent or wages or transportation. So we've been working at this for three years.
We get a little better at it every year, we have a deck of projects that we work through every every year that we think continues to make us better I mean, you certainly get facility's leverage right with the rent as long as I'm not moving the rent doesn't change and to the extent that you are having a great growth year than your operating margin at the facility level.
Improves along with that so we're encouraged by the fact that we've seen good results on capacity creation. It's ingrained in the pool Corp culture, right now and the fact that we have a list of things that are on deck that we will continue to work on to improve I mean, Melanie mentioned that we're spending money on technology too.
Which you know the money, we're spending today will reap benefits on and in years to come. So it is really it is just you know it's ingrained in our culture pool Corp has always been very very tight on execution and again part of the culture and I think in a year, where you have great demand like we had this year and frankly.
Last year we've.
We've been able to to get some tremendous results from that.
No it really has been remarkable.
Just shifting gears to the acquisition program.
There's a lot of consolidation going on in this space and so.
Yes.
Love to get your comments in terms of how Youre thinking about your acquisition program from a from a.
The objective standpoint, what does it what does it make sense or are you looking to put more.
Penetration into existing markets are you looking to expand geographically.
And just maybe talk as well about the discipline of your acquisition program, because obviously the quality products quality properties get bought first and then.
There's kind of a marginal diminishing of quality I would surmise in the market.
Just interested in hearing how you approached it from a discipline standpoint, yeah, I mean part of our the our operating model as we have a very a very well thought out.
The strategic plan for the business and acquisitions are a part of that so and acquisitions, we view as extremely strategic so we're if you look at the geography in North America for instance, where essentially in most major markets today. So there arent many acquisitions that we have to make certain.
Any business that are that transact I should say for the for the most part every business that transaction, we get to look at.
I'm sure there's been some exception to that rule, but I can't think of one so we get a look at we know what their worse we're.
We're happy to pay a fair market price, but we also we're in most markets. So we can we can afford to be strategic about it if there's markets that we want to improve our presence in and we wanted to improve our penetration and we think that the acquisition is both a strategic.
Fit for us and a cultural fit for US then we certainly have the firepower to.
To go out and execute on that but what we don't do is is pay you know ridiculous prices for acquisitions, we know what they're worth we're in most markets. We already have a footprint in most markets. So if it makes sense from a from a capabilities for consolidation perspective, we're happy to we're happy.
To jump on.
And and make the acquisition, but if it's a if we think that it's not a good cultural fit then we have a footprint we have a very good Greenfield model. We opened 10 branches last year, we'll open a similar number this year, which is all part of our share growth.
Initiatives so.
Growing share as execution with your existing facilities, it's adding facilities and it is acquisitions and acquisitions for us.
Tend to be the smaller of those levers.
I appreciate the thoughts thank you.
Again, if you'd like to ask a question today. That's Star then one star then one to ask a question.
Our next question will come from Garik <unk> with loop capital. Please go ahead.
Alright. Thank you. Thanks for having me on I wanted to unpack a little bit more just a comment around consumers.
<unk> more.
Some recently built pools versus why the refurbishment side.
Curious if there is a gross margin mix impact here just considering.
Cool.
<unk> is generally higher dollars, but lower margin.
Refurbishment.
Has it been about kind of a bright spot situations. So.
Any any margin consideration you should be thinking about just given the mix shift.
Sounds like that's occurring this year.
Sure I mean.
When people talk about refurbishing their pool. It really there is a couple of there's really this think about it in three parts right.
<unk>.
One part is is the is the pool pad and.
That is the equipment, which will from a margin perspective has lower margin component.
Then the shell of the pool.
Yeah.
Sorry about the noise. So the shell is is part of our.
As part of the remodel that is a pool finish in pool tile, which tends to be very margin accretive more so than the equipment pad and then when you get into the third part of our of the pool, which is really kind of the decking.
And water features and fire features and fireplaces and outdoor kitchens that tends to be even more even more margin accretive. So it's just equipment and somebody says hey, I want a remodel basically and change my heater and go to a variable speed pump that's good business, but that's not us that's not as margin accretive to us as if theyre going to refinished a whole pool.
With new titles, new coping and add some decking around it does that makes sense.
Yes, it does.
Thanks for that.
Wanted to follow up just on the corporate acquisition and the announcement to expand the number of retail branches I think if I heard correctly, you seem to 20 per year.
Could you speak to just the opportunity set to grow in retail.
This also signify perhaps fewer opportunities to grow in the traditional distribution model and I guess just.
The last you know.
Part of this multi part question.
Are you seeing any change in pool owner behavior or is there a shift maybe just with some inflationary concerns towards DIY versus harder and got a pool professional ought to come in service of the pool.
Yeah, we didn't say that the expansion was going to be.
18 to 20 I think the number was eight to eight to 10 is what we talked about.
And the opportunity is pretty big because if you look at the market today and what was again very attractive about this is pinch a penny is a very well run retailer has very good market share in the markets that they compete they have very good density in the state of Florida.
And we're just starting to gain a foothold in Texas and if you remember what I mentioned in my prepared comments that said when you run a truck from Clearwater to Houston.
Which is how they are delivering and supporting those stores today. That's that's a 19 hour drive and when you look at our footprint and where our warehousing is throughout the state of Texas and the number of facilities that we have there's tremendous synergies between the two and then so if you consider that.
There is a certain number of people in every market. They are going to take care of their own pool. There are choices to go to the mass you know a specialty retailer, whether that's a somebody like pinch or.
Uh huh.
To have their pool professionally professionally maintained.
But the ones that are going to do the pool themselves they need to place where they can get product and more importantly get the expertise.
That they seek so think about a pool store, whether its an independent pool store, whether its one of a whether it's a pinch a penny for instance, part of the reason. They go there is for the knowledge of the person behind the counter and pool and.
Uh huh.
The folks at Pinchpenny are very very good at that so we like the fact that the footprint.
<unk>.
As yet to expand really much past, there's as I mentioned 21 locations in Texas.
I don't think that that has really any impact on opportunities to grow the rest of our business, which I think was the other part of your question because remember theres still a number of people that are going to have somebody maintain their pool for them. So with the installed base growing.
Right with the installed base growing I think that there is ample opportunity for us to grow.
On both the professionally serve side and for the DIY and that was part of the rationale for the for the acquisition that and the the technology and the tools that are inside of pinch if any that we can help our current independent retailers.
Improve their business as well.
Got it thanks for that and fixing the core condition.
Our next question will come from David Manthey with Baird. Please go ahead.
Pete Melanie good morning, good morning.
I guess I'll stay on porpoise here, you've given us roughly the revenues of $250 million or so.
I think you said operating margins are close to your corporate average is there any variance on the gross margin of that business relative to your core business.
Yeah.
Your description was was related to the gross margin.
So the operating margins were yeah, probably right.
To what we've seen and what we're seeing currently but it will be burdened if you will by the intangible amortization expense. So you want me to take that into consideration so that lowers that for the projection going forward.
And I'm, sorry, I got dropped from the call, but did you give interest expense depreciation and amortization for 'twenty two.
I did not give it in total but the addition, there is going to be its about $10 million in it.
The increased expense for.
For DNA.
Yeah, just for the amortization expense on the intangibles, it's about 10 to 12 million in total which will be the add that will be coming in from corpus.
Got it okay.
And then as you talked about the components of the business.
Pete I think you outlined distribution chemicals packaging and then the pinch a penny business itself.
Could you discuss the breakdown of revenues between those and are there.
Intercompany revenues, we need to worry about here.
Certainly on the on the franchise side right. The way franchises works you know there is a there is a franchise fee, which is on a total retail revenue and then there is the.
I am sorry, then theres just the cost of goods going into the store, which would be at traditional wholesale value and then there's the chemical piece, which either is at this point as we said some of that product is sold externally most of it by and large it goes to the stores and then we will we will consume a large pool.
<unk> of what else can be produced by by that plant.
So the the intercompany piece would be us acquiring chemicals from from suncoast to sell through the sell through the branches.
Okay, but the distribution and chemical packaging.
Business is that effectively from a revenue standpoint, the same thing and then the if you're selling that to pinch a penny if you're selling in that pool corp that would be the intercompany situation.
Well so the any chemicals that are sold from the chemical packaging to any of our existing operating locations would be in our company and so that would not be reflected in the consolidated financial statements.
And does he chemical Patrick packaging per Se. It was primarily third party. So outside of the franchise network historically, and so that would be where we would be taking on the additional capacity.
Any of the distribution activity that goes to the franchisees is not considered intercompany because it's going to the franchisee, which is not a related party.
Okay, alright, so everything going through the stores, David as a as an external sale because they are all independently owned and operated.
Got it okay.
Alright, thanks, very much look forward to seeing you in a few weeks down here yes.
Our next question comes from Susan Macquarie with Goldman Sachs. Please go ahead.
Hey, everyone. This is Charles again, thanks for my follow up just a quick question can you talk about your expectations for supply chains in 2022 and is your guidance selecting an improvement from here and I would assume that any incremental supply chain pressure is a relative advantage for you given your relatively relative size and scale compared to.
Your competitors considering does can you also talk about some of the initiatives to protect your recent market share gains from mom and pop when supply chain eventually improve I'm, assuming either through goes through 60 or others.
Sure Alright, let me unpack that because there's a lot in there so from a supply chain perspective in our prepared remarks, we said that supply chains are improving we're seeing greater productivity and greater stability in productivity from the manufacturing sites. So we are we're encouraged by that.
Couple that with the fact that our inventories are significantly better starting to season. This year than they were last year. You know that is a that is another positive sign two so from an overall supply chain perspective, as I mentioned theres still going to be a couple of areas of concern one is gonna be in chemicals, and two is going to be in some of the equipment that contains a.
<unk> chip that you've all read about and we will provide some some pressure.
Right so.
As it relates as it relates to you know the customers that we were a market share that we gained.
We are very focused on the customer experience right. So we take every one of those new customers as an opportunity to grow our business, we don't take any of them for granted.
And we tried to make sure that the customers that.
That have switched over and they've come to us.
Continue to stay with us and we continue to provide them with a with tremendous value. So there would be no reason for them to switch back certainly I think when supply chains.
Returned completely to normal which appears to be in the distant future at this point, but when that does happen you know there may be some customers that go back but by and large I think most of the business that we are we have secured we hope that the customers can see the value in our focus on on helping them in the tools that we've.
Provide that will encourage them to stay with us so not really a big concern that we're going to lose the business that we've gained.
Okay. Thank you so much for the tango.
Ladies and gentlemen, this will conclude our question and answer session.
I'd like to turn the conference back over to Pete <unk>, President and CEO for any closing remarks.
Yes. Thank you all for joining US today, we look forward to our next call, which will be on April 21st when we will be releasing the first quarter 2022 results. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.