Q4 2022 Pool Corp Earnings Call
Good day and welcome to the Pool Corporation fourth quarter 2022 conference call all participants will be in listen only mode.
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Like to turn the conference over to Melanie.
President and Chief Financial Officer. Please go ahead.
Welcome to our fourth quarter and year end 2022 earnings conference call, our discussion comments and responses to questions. Today may include forward looking statements, including management's outlook for 2023 and future periods actual results may differ materially from those discussed today.
Regarding the factors and variables that could cause actual results to differ from our projected 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 website.
After relations section.
I'll now turn the call over to our President and CEO Peter are there Pete.
Thank you Melanie and good morning to everyone on the call and thank you for joining us.
2022 was another extraordinary year for <unk>, we achieved record results in revenue and earnings we grew our market share our focus on the customer experience and execution has never been stronger and we continue to enhance our capabilities as we integrated purposeful and patio.
For the first time ever we exceeded $6 billion in net revenue ending the year at $6 2 billion and generated just over $1 billion of operating income when compared to 2019, the last pre pandemic year. Our revenue has almost doubled and our operating income is travel.
We now operate over 420 sales centers, and we are continuing to expand our footprint and capabilities.
In 2022, we opened 10, new locations and pinch if any added seven new stores to the franchise network. The industry has grown substantially and pool Corp has significantly outpaced the industry by providing best in class service to our customers and helping them grow their business and being the best channel to market for our suppliers.
Now recap the full year and quarterly results as.
As I previously mentioned total sales for the year came in at $6 2 billion, which represents a 17% increase over 2021, where we saw sales grow an incredible 35%.
In the fourth quarter of 2022, we grew revenue, 6% and this is on top of the 23% growth that we saw in 2021.
From a base business perspective fourth quarter revenue grew by 7% and our year round markets and fell by 6% in the seasonal markets.
Certainly the less favorable weather impacted the business in both markets contributing to fewer pools being built and lower usage in the quarter as compared to last year.
For the full year, our base business grew by 15% in our year round markets and 8% in the seasonal markets. Our growth was driven by the resilience of the industry and a larger installed base inflation greater adoption of higher end features and technology share gains and expansion of our powerful self fund our network both organically and by.
<unk>.
Oh Corp has built a tremendous team at a footprint that is not only focused on execution, but also providing an unmatched customer experience, which enables us to be the preferred supplier to the swimming pool industry trade.
Our execution focused and unmatched capabilities have allowed us and will continue to enable us to outperform the industry, our culture and people are performance, driven our investments and capabilities and new facilities drive revenue growth and incremental profitability in our track record is unmatched simply put we could not be prouder of our team.
Now let me provide some details on our base business sales in our four largest markets for.
For the total year, California grew by 14%, Florida grew by 24% in Arizona, We saw 18% growth in our Texas business grew by 8% it is worth noting that.
Texas in 2021 had the benefit of the freeze, which made the comps much more difficult for 2022.
For the fourth quarter, California grew by 5%, Florida continued to show significant growth with sales up 22%, Arizona sales were largely flat for the quarter and Texas saw sales decline 5%.
Turning to end markets, our commercial business continues to gain momentum with the fourth quarter and full year growth coming in at 27%. This is on top of 26% growth in the fourth quarter of 2021, and 24% growth for the full year, we continue to gain share and capture the demand in growing municipal and leisure and <unk>.
Travel related spending.
Shipments to our base business retail customers in the fourth quarter were up 1%.
Before the full year up 9%.
This is on top of the 18% fourth quarter 2021 growth and a 20% increase that we posted for the full year of 2021, we believe that weather and some change in buying habits as the supply chain returns to normal affected the fourth quarter, we feel that with the supply chain issues in 2021, many dealers placed long.
Orders in the fourth quarter of 2021 to make sure. They had product available when the 2022 season began with product availability almost back to normal level, most dealers reverted to more normal ordering patterns by the end of 2022, Pinchpenny retail sales, unlike our shipments to dealers and contractor customers.
Presents the sales through to the end customer saw sales increased 17% for the quarter and year keep in mind that the footprint, where the pinch if any franchise store network is highly concentrated in Florida with an expanding presence in Texas and a small number of stores in Gulf States, we continue to gain synergies.
Where significant value is being derived for both the franchise and wholesale business with one year of ownership now under our belt, we remain confident and on track with our initial expectations.
Now, let me add some commentary on specific product sales in the quarter and year equipment, which represents about a third of our sales increase of 9% for the year and 2% for the quarter with lead times and availability of equipment, mostly back to historic levels, our dealers changed their buying habits back to a more normal.
<unk> on purchasing equipment as needed during the construction and repair process.
It's most availability concerns have abated demanded units, where equipment, which surged last year and early this year has retracted some but remains higher than pre pandemic levels.
<unk> has held with no weakness so the overall impact on our revenue was positive for the quarter and for the year.
Base business chemical sales for the quarter were up 19% and 32% for the year, reflecting share gains installed base growth and inflation.
<unk> availability has improved dramatically over the previous year and we are now well stocked for the upcoming season, we have refreshed our brands and will begin launching our pool 360 water solution software in 2023 for our independent retail dealers, which we believe will be a best in class growth tool for our retailers. This will allow us to continue.
To take share in the very important maintenance and repair market.
This is our next generation offering in our software solutions for the training pool $3 60 usage continues to grow and now makes up about 11% of our total lines.
Okay.
Building materials, which are used in both new construction and renovations were flat in the quarter as compared to the 20% growth of this category in the same quarter of 2021 and 42% in the fourth quarter of 2020 for the full year building materials sales were up 18% on top of the 28% growth that we saw for the full year in this.
Category in 2021, and 23% growth in 2020.
Clearly the reduction in new pool construction in 2022.
These results illustrate that a solid remodel market and our share gain are fueling our growth. It is particularly obviously in the fourth quarter. When we believe that new construction was the slowest in 2022 and compares to a much stronger build level in the fourth quarter of 2021.
Now I'd like to provide some insight on Europe .
As we have seen all year the market in Europe has been affected not only by less favorable weather, but the Russia, Ukraine War elevated energy cost inflation and a slower economy Europe's fourth quarter 2022, net sales were down 22, 5% for reference the same quarter in 2021 was up 18% and 40.
8% in 2020 for the full year, we saw sales declined 15% in U S dollars.
Net sales in Europe for the full year of 2021 were up 39%.
Looking across the continent, the eastern and northern countries were affected much more by the factors that I listed above we believe in the longer term growth opportunities in Europe , and our team's ability to manage the business, while providing best in class service and a very dynamic environment.
Let me now provide some comments on horizon's performance for the quarter and for the full year in the fourth quarter net sales increased 5% and for the full year net sales increased 15% in 2022, we opened five new locations one in the first quarter and four in the fourth quarter. Our strategy for this business remains unchanged we are investing.
In areas, where we need additional capacity and expanding our footprint further into the sunbelt, primarily through new sales center development activities. Our operating model is solid the team continues to execute at a high level and we are encouraged by the long term growth opportunities of this business. Although this business is more tied to residential construction and the blue business.
We also have a large commercial business that is holding up quite well and it is also benefiting from inflation.
As you saw in this mornings release for the full year, our gross margins increased 80 basis points to 31, 3%. This follows the 180 basis point increase that we realized in 2021 over 2020.
For the fourth quarter and in line with our previous guidance. Our gross margin declined 230 basis points ending at 28, 8% given the seasonality of our business with margins fluctuating quarter over quarter. We believe that the full year number is far more indicative of where we are from this for this metric.
Melanie we'll provide some more detail on our gross margins in her comments.
Moving on to operating expenses, we continue to show that we can improve our operating leverage through our relentless focus on capacity creation and execution base business operating expenses decreased by 1% for the quarter and increased by 6% for the full year in both cases, we continue to show that our expense growth is it.
Half of our revenue growth contributing to our improved operating leverage.
Wrapping up the income statement, we were very proud to post operating income of just over $1 billion. This compares with 833 million that we recorded in 2021 and $464 million that we recorded in 2020 for the quarter, we recorded $107 million in operating income a 16% <expletive>.
Klein most of which is driven by the seasonality of our business and magnified by the relative size of the quarter here again I would point you to full year results is a better indicator of performance on which Melanie will provide additional comments operating margin for the full year of 2022 was 16, 6%, which is 90 basis points better than our previous record high.
That was posted in 2021.
Looking ahead I'd like to provide some color and context on how we expect to see 2023, taking shape. There is no doubt that our industry and pool Corp had benefited from several factors over the last few years that will have a lasting impact on our industry desire for swimming pool and outdoor living has increased with both viewed more favorably than does.
<unk> for homeowners today versus the past this is especially true as more people are migrating to the sunbelt in search of a comfortable year round climate and a healthy outdoor living lifestyle.
New connected product adoption rates are increasing the value of the goods and services related to the maintenance renovation and construction is swimming pools and outdoor living as increase propelled by unprecedented inflation that is now embedded in the industry.
We are continuing to expand our footprint and leverage our capacity creation activities to anticipate and improve the customer experience and we remain closely aligned and partnered with our key suppliers working together to improve the industry and homeowners ability to enjoy their pool and outdoor living spaces at the same time and underpinning our results.
Is a growing and aging installed base that will need to be maintained and remodeled as new construction levels will likely decline in 2023, the wholesale value of the pools built should in fact be at least 4% higher on a per unit basis, driven by inflation alone add to this the specific competitive advantages unique.
Pool Corp, and it gives us the confidence that 2023 will be a solid year.
Are people and network are second to none our balance sheet is strong, giving us flexibility to take advantage of dynamic market conditions and investing in the future. Our csl's vertically integrated chemical facility flex programs technology applications for the customer and our proven team will enable us to get the most out of whatever market.
Conditions present themselves.
Our seasoned leadership team has been has seen many cycles and is quite skilled at managing the business in line with volume realities as of right now we expect that new pool construction in units could be down approximately 15% to 20%. Although this number will likely vary broadly by market and geography.
Our end markets will be stronger, while lower end and entry level pools will continue to see headwinds.
The renovation and remodel should be solid in most markets as we believe renovation activities.
Only a modest decline in 2023. These considerations are baked into our guidance inflation at this point looks to be in the 4% to 5% range for the year, we see little to no risk of deflation, except for Tricolore, but movement in that chemical will likely be offset by others.
Overall, we expect the chemical sales in line with the installed base growth and of course weather, which is the largest driver of chemical needs, particularly in the seasonal markets.
With supply chain returning to normal we expect the customers' buying habits, largely have and will continue to return to normal.
All of this in mind, we would expect that our EPS range for 2023 will be 16, <unk> to $17 <unk> on a per share basis, including an estimated <unk> <unk> benefit from ASU.
Again for context, I'd like to remind our listeners that the bottom of our range is in fact over two five times, our full year 2019 results.
From a cash generation perspective, we would expect that free cash flow will exceed net income as inventories returned to a more normal level and our capital allocation model remains unchanged as is typical we will use our cash flow to invest in our operations growth and expansion.
With the approval of our board continues to pay dividends in accordance with our policy fund acquisitions and continue to buyback our shares to provide returns to our shareholders in closing I would like to thank the <unk> team our incredible customers and are invaluable supplier partners for their unyielding support I will now turn the call over to Melanie <unk>.
Our vice President and Chief Financial Officer for a detailed commentary.
<unk>.
Thank you Pete and good morning, everyone.
Sort of highlighting a few items for the quarter recapping the year and then move into our expectations for 2023 at.
As we finished out the year fourth quarter sales exceeded $1 billion, marking the second year in a row, where we have hit the billion dollar mark in our seasonally slowest quarter.
Our gross profit percentage was 28, 8% in the quarter or 230 basis points less than the fourth quarter of 2021.
It was still 30 basis points higher than the 2024th quarter margin.
During the quarter, we recorded an additional $13 million and cost of sales, resulting in 120 basis point decrease in gross margin for fourth quarter, and 20 basis points for the full year.
This amount relates primarily to import duties and taxes on purchases throughout 2022.
Imported chemical products without the impact of the increase in <unk> gross margin would have been 30%, which is a 110 basis points less than prior year and slightly better than the decrease of 150 basis points. We were expecting at the end of second quarter as benefits from inventory investments remained strong as well.
And in the press release, we have seen the supply chain in this area to stabilize and thus we are not expecting to import a significant portion of our chemical supply in 2023.
Operating expenses grew 7% to $208 million and as a percentage of sales were roughly comparable with prior year fourth quarter.
Operating income declined by $21 million, primarily due to lower gross profit generated in the fourth quarter.
During the quarter interest and other expense came in at $15 million, which was lower than our projected $18 million at third quarter, as we began reducing inventory purchases earlier during the quarter.
2022 finished off another dynamic year Infocorp history. They all reached 6 billion representing growth over the prior year of 17% topline and 21% EPS growth excluding the ASU.
Revenue growth has expanded since 2019 by 93% driven by approximately 30% to 35% from inflation <unk>.
Percent from acquisitions, 9% from new pool construction, 7% from the growth in the installed base of Poles, and 25% to 30% from market share and new product right.
Market share growth include 23, new Greenfields opened since the beginning of 2020 and an increase in consumer interest and automating their fold higher price point product spending and expanded featured in the backyard.
2022 demonstrated the resilience of the pool Corp, operating model with the new pool construction expected to be approximately 98000, new pools down 16% from prior year, we estimate that our 2022 domestic pool distribution revenue was comprised of slightly more than 60% from maintenance.
This includes increases in the portion of our business related to specialty retail customers, whose business primarily serves the maintenance portion of the industry added with our 2021 acquisition, a purposeful and patio.
Sales of retail products in 2022 represented approximately 14% up from 12% in 2021 as we added these new customers in this channel.
We also saw a decrease in the portion of our business related to new pool construction to more historical levels of 17% to 18% and for remodel. We estimate this comprised 21% to 23% of our 2022 sales.
Gross profit increased 20% and reached $1 9 billion. The gross margin improvement of 80 basis points reflects benefit from acquired sales, representing approximately 50 basis points and inventory related gains from multiple vendor price increases throughout the year.
The related benefit from our inventory investments in response to supply chain disruptions as well as benefits from product mix. These.
These benefits were offset by lower amounts earned under vendor incentive programs and higher costs related to the import duties and taxes.
Operating expenses increased 123 million to $908 million, a 16% increase over 2021.
$77 million was attributable to acquisition.
This business expenses rose only 6% compared to the 12% increase in gross profit. These.
These increases were related to volume.
Sales occupancy cost employer of choice initiatives marketing costs and continued investments in digital transformation and technology.
Partially offset by lower incentive based compensation of $13 million.
We achieved operating income of $1 billion and increase the operating margin to a record 16, 6% of net sales operating margin benefited from higher sales and gross margin and <unk>.
And by the capacity creation effort, we began several years ago, enabling increased operating efficiencies and productivity producing a significant step up in our operating margin.
Our full year tax rate, excluding <unk> was 25, 2%.
We received an ASU benefit of $10 8 million or 27 cents per diluted share for the full year of which $1 2 million or three was added in the fourth quarter and not included in our prior guidance.
Earnings per share increased 17% to a record $18 70.
And without the impact of the ACO in both periods, our EPS increased 21%, we estimate that purposeful and patio accounted for approximately 30% of the increase right in line with our expectations at the time of acquisition.
Despite our higher working capital investment throughout the year, and an $80 million deferred tax payment in 2022 cash flow from operating activities increased to a record 485 million an increase of $171 million over 2020 one.
Moving next to highlight a few key items from our balance sheet.
The wells continue to represent excellent credit management, finishing at a DSO of $26 nine days in 2022.
As discussed on our third quarter call, we expected inventory growth to moderate in the fourth quarter as lead times have come down on those products. We finished the third quarter with year every year base business inventory growth of 43% and reduce that to 19% at year end. The 19% increase includes approximately 10% from inflation.
And approximately $30 million of inventory added for the new locations opened during the year.
Looking at days of inventory, we have 136 days on hand, compared to 2019 year end of 113 days on hand.
Different from historical normal levels represent additional inventory value of around $260 million.
The seasonal nature of the business our days in inventory fluctuate quarter over quarter, and we would expect some natural growth in first quarter in anticipation of peak selling season requirements are.
Our expectation is that by the end of second and third quarters, we would see our days of inventory on hand were starting to levels consistent with historical turnover rates of approximately three five times on a trailing four quarter basis, while still providing the high in stock performance and broad product selections that our customers have come to expect.
Our key competitive advantages.
Forecast is not considering any additional strategic M&A or new product investments.
Total debt finished the year at $1 4 billion up $204 million from prior year.
That balances remain below our targeted leverage ratio of one five to two times with a conservative leverage ratio of 137 at year end.
During 2022, we repurchased one 2 million shares for a total of $461 million and increased our quarterly dividend per share by 25%, returning $611 million or almost 82% of net income to shareholders.
Our return on invested capital was 28, 8% continuing our leadership position in ROIC achievement, among our distribution industry peers.
Looking ahead into 2023, we have developed our guidance range based on flattish organic net sales to a decrease of 3% compared to 2022.
We have lapped our larger acquisition.
With a more uncertain economic climate, we approach 2023 cautiously.
For the roughly 60% of our business that serves the maintenance of the existing base of fault, we expect to see growth in line with manufacturer inflationary increases of around 4%.
We continue to expect a 1% benefit from installed base growth from 2022.
Renovation and remodeling activity, which grew in 2022 and labor began shifting from new pool construction may experienced deferrals or reduce spending in view of economic uncertainties and could be down 10% to 15% from 2022.
Hey, Paul construction could be down, 15%, 20%, resulting in approximately 80000 pull things out roughly equivalent to the 2019 levels.
Rising sales more affected by new home construction, maybe 5% to 10% lower than in 2022.
Europe , Florida concentration of aftermarket versus maintenance could result in a 10% to 20% decrease from 2022 level.
Comparing expected 2023 sales cadence to 2022, we will have tougher comps at the beginning of the year due to the higher base business growth in 2022.
We're likely to see low to mid single digit decreases in the first half with greater declines in Q1 and somewhat less in Q2, and then modest growth in the second half of the year.
For 2023, there'll be one less selling day in the third quarter and for the full year compared to 2022.
Gross profit margin in 2023 is expected to be in line with our longer term guidance of around 30% compared to the 31, 3% gross margin we reported in 2022.
We will realize some benefit on the existing inventory we carry into 2023 during the first half of the year.
As we have stated previously this represents an increase compared to more historical levels of approximately 29% with the improvement comprised of around 50 basis points from acquisitions and additional benefits from the combination of supply chain enhancement product mix changes increases in private label and customer pricing.
In particular on the product mix building materials is growing faster than the rest of our business and carries a higher gross margin percentage.
Operating expenses will continue to be challenged by inflation affecting wages transportation and real estate, we will continue to invest in our industry, leading talent within the organization with this market level and performance based compensation inflationary wage increases will be partially offset by aggressive management of <unk>.
<unk> and temporary labor costs supplemented by our continued capacity creation investment.
Looking at our SG&A, we have around 50% that is partially variable which includes our incentive compensation, we have significant variability with the portions of our business. We start with third party freight other variable costs include warehouse supplies and facilities and vehicle fleet maintenance.
Without a doubt our experienced management team, we will actively evaluate expenses at every level to ensure that we offset inflationary expense increases with appropriate capacity benefit and managed in line with sales activity.
Even with expected weaknesses in economic conditions, we anticipate exceptionally strong cash flows from operating activities in 2023 as normalization of inventory investment.
I am a solid earnings will likely produce operating cash flows exceeding $800 million for the year.
Our capital allocation priorities remain unchanged and we will continue to focus on funding the ongoing business expanding our sales center network and investing in enabling technology projects.
We continue to look for accretive appropriately priced acquisition opportunities to further grow and complement our businesses both domestically and internationally.
Dividends subject to board approval will increase an opportunistic share buyback, we will provide additional return opportunities increasing shareholder value. We currently have $230 million available under our existing share repurchase authorization.
In view of the potential for flat to slightly lower sales gross margin compression and inflationary pressures on expenses, we would anticipate operating margin to decline as much as 100 to 150 basis points compared to 2022 full year results.
We believe we can achieve a 15% operating margin even under these reduced sales expectations by continuing an intense focus on expense management and the French operating execution, we have demonstrated consistently over time.
Interest expense for the year it may vary depending upon our capital allocation opportunities. However, assuming outstanding debt balances remained relatively consistent with our current leverage ratio and higher borrowing costs.
Interest expense could range from $50 million to $60 million with strong cash flows and 20% of our debt at fixed rate, we are well positioned to manage these costs during times of rising rates.
Our annual tax rate is expected to be between $25, three and 25, 5% excluding the ASU.
Currently we are estimating a three cent benefit from a issue in the first quarter for stock options expiring in 2023, and the expected impact of restricted share vesting.
In 2022, we reduced shares outstanding by $1 1 million, primarily as a result of our robust share buyback activity.
Our estimated weighted average shares outstanding that will be applied to the net income attributable to common shareholders will be approximately 39 6 million shares without giving effect to share repurchase activity that may occur in 2023.
As we deal with ASU, if we complete significant buybacks during the year. We will include the expected impact in our updated guidance quarterly.
Our 2022 diluted EPS guidance range of $16 three.
The $17 three.
Includes the estimated three ASU tax benefit.
I'm sure. We will all agree that 2023 is poised to bring on many new challenges. However, I believe that this experienced proven management team operating in a growing industry supported by significant non discretionary recurring revenue will produce strong financial results for many years into the future.
I'll now turn the call back over to the operator to begin our Q&A session.
Thank you well.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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Please limit yourself to one question and one follow up.
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Our first question comes from Ryan Merkel with William Blair. Please go ahead.
Hey, good morning, everyone. Thanks for taking the questions.
So my first question is just you you ran through a lot of the guidance stuff and I was trying to write it down as fast as I could could you just talk about what the volume assumption is I think it was down 5% to down 8% and then just walk through the rationale just from a high level can just so we all understand it.
Yeah, so topline value volume is going to be flat sales to negative three.
And it's comprised of you know when we look at the maintenance business, we would expect volume to be.
Relatively flat.
Yeah, we are with the benefits coming there from the inflationary price increases from vendors. So we would expect about a 4% pickup.
Pick up at the maintenance side of the business primarily from inflation.
And then for the for the new construction side of the business we would.
We're expecting that to be down 15% to 20% and so that could range.
Down to about negative three on the top line.
And for the the remodel activity that is 10 to 15, so we would expect that that could be.
Around it.
Probably less one of three if you will on the top line.
Yeah, we are expecting.
Horizon and the international operations to be a drag so for them. The horizon, we would expect that to be possibly up to a 1% drag and then Europe could also be a 1% as well.
Okay. That's helpful. And then I think you said gross margins, 30% in 2023, correct me if I'm wrong on that whats. The reason for the decline about 100 basis points is that all just the price cost gets back or is there any thought anything else in there.
I know the bulk of that is going to be that price cost get back. So you'll see that historically our margins have been you know we picked up more than 100 basis points.
So the portion that were related to and the things that we've been doing internally as it relates to supply chain.
Pricing, we would expect that those will continue into 2023, but as 100 basis point get back is primarily due to the the inflation benefits we got on pricing.
Got it and just one last one quickly.
In the first quarter did you say that you expected low to mid single digit organic decline on that very tough compare did I hear that right.
Yeah, that's correct comp coming off of a 26% base business increase for 2022.
We would expect that tough comp to kind of in line with our overall guidance for the year that we could see some negative to a tough comparable.
Okay, Great I'll pass it on.
Our next question comes from David Manthey with Baird. Please go ahead.
Hi, good morning, everyone.
Would you say that the level of pre buy that you had this year was higher or lower than normal not that we've seen in the past couple of years, but relative to let's say the past decade.
Yes, David what I would say as I mentioned in my comments at the end of 2022 people, where people were still buying in anticipation of supply chain disruptions. So that kind of return back to normal at the end of the fourth quarter. So I guess, we were expecting in the first quarter early.
Nice to be at a more normal level.
Okay.
And then.
Just to baseline US do you have updated data on new pool installs and average price per pool in 2022 and related to that when you say that.
The new pool construction could be down 15% to 20% for you.
Is that units or do you have an assumption for the average value of a pool, but that's incorporated in that.
Yeah. So the initial number that the industry.
Tracks is that 2022 will turn out at plus or minus 98000 pools. So it'll be firmed up in the next couple of months and that's the that's the initial look and that would compare with the $1 17 from.
From 2021, so that represents about a 16% decline.
Our new pool construction numbers, because we track it for what we are selling in terms of.
Concrete pools fiberglass pools and kits so while the industry was down about 16% give or take it will be as I mentioned the final number is not final yet while the industry was down about 16%, we believe that our new pool construction in units was down somewhere between 12 and <unk>.
13%. So we think we actually picked up share from from that perspective.
And that's supported by the growth numbers that we have the other part I would tell you to think about in an answer to your question is in terms of the value per pool because of the inflation that went through the system, which we've talked about many times.
It is the value of a pool, depending on where you are.
<unk> has also increased now.
Do an average really is not not gonna do anybody any service because it really depends on where you are where you build that cool I can tell you that.
On average pool now is probably in the $70000 range, but if you pick a different geography, I'll, probably give you a different number and then based on the number of pool builds as are we.
Mentioned the business in the seasonal markets.
Was much slower than it was in the sunbelt to sunbelt markets held up much better so the new pool construction numbers in the sunbelt are not nearly off as much as they are in.
In the in the seasonal markets.
Okay, but the the 15 to 20 for you that includes both units and value of new pools correct yeah.
Yeah, and that's a that's a that's a conservative.
Range right.
Right, that's a revenue number okay alright.
Alright, thanks very much thank you.
Our next question comes from Susan Mcclary with Goldman Sachs. Please go ahead.
Thank you good morning, everyone.
First question is around the competitive dynamics as you think about supply chain sort of normalized in order rates that also seem to be following that path.
Youre thinking about the ability to gain share in this kind of an environment and how does it perhaps compared to the levels that we've seen in the last few years.
Yeah as you know thank you for the question as you know we are a we are very focused on the customer experience and providing best in class service and investing in things that enhance our customers'.
Business and allow them to grow you know when I look at the market in 2022, I would say that certainly in the back half of the year supply chains had returned.
Back to almost normal I mean in any given year, there's going to be a shortage on something but you know most of the manufacturers would say that for most products availability was not an issue.
For the back half of the year.
Got better as the year progressed so we.
And even.
I would say a relatively normal supply chain, we continue to take share.
We take share because it's not just an availability. It's the service we provide it's the location. It's the tools that we offer.
Our our dealers and our builders and we think those are the things that separate us and <unk>.
And are the reasons that we are being.
Oh afforded an awarded the incremental share those things don't stop in 2023, we have more things coming our focus on the customer has never been sharper.
And we would continue that even in sort of nuclear construction is off.
For the for the industry, we would expect that we think we would outperform that simply based on the services that we provide to our customers.
Okay. That's very helpful. And then as a follow up can you talk about.
What are your suppliers are telling you as it relates to their inflation what are the key sources of that pricing that you're expecting for this year and how are you thinking about how that may trend through the year and then I guess similarly, what are you hearing from your customers on the ability to continue to get that price through in and how that may work itself through the supply chain.
<unk>.
We obviously spend a lot of time with both sides of that question and so I'll start with I'll start with the manufacturers.
Traditionally in our industry the manufacturers raised price once a year. It was done in early by time.
Beginning of the fourth quarter and that price would hold throughout the whole next year and be adjusted again at the end of.
Or at the beginning of the fourth quarter of the following year for the next season.
Over the last couple of years, we had to deal with multiple price increases as our manufacturers prices were increasing at a very rapid rate and they have to pass those prices on.
Those costs are embedded in the product essentially most of that cost is embedded in their operating cost. So we don't really see any risk that those prices are going to are going to retreat. The.
The increase that we got this year and I remember for our industry for years on this call we talked about inflation for the year and in their market assumptions was 1% to 2% for the last couple of years, obviously much higher than that for this upcoming season or the season that we're about to begin right now beginning depending on where you are.
We said the number is going to be it's going to be four to five based on my conversations with.
The manufacturers there are certainly some outliers on products, which are more commodity base, which could see more.
A more rapid movement.
But by and large I think the industry doesn't expect to see wild pricing fluctuations this year and at this point I have no visibility to any additional.
Significant price increases for the 2023 season.
As it relates to our to our dealers.
And we've now had three shows.
Since the beginning of the year, where we spent considerable amount of time with a cross section of our dealers from across the country actually theres been for.
And I can tell you that the dealers remain very optimistic.
<unk>.
I wasn't sure what I was going to.
See when I when I spent time with the dealers and the dealers are actually very optimistic for the upcoming season. The price seems to have been accepted by the end market.
It isn't causing big pushback on most projects as we mentioned the headwind that we see in the industry on new construction is mostly at the lower end right. It's the kind of the entry level pool, it's the one where there may be a significant <unk>.
Personal loan or a HELOC that is theres going to finance that and with the elevated rates those are the ones the.
Families that may that may have to tap the brakes, and say I'm going to defer but for.
Average pool.
Average pool homeowner is usually in a more fluid place.
And if they want a pool they are going to have a pool, our conversations with the dealers about all right. So you're what are the customers asking for are they trying to reduce the cost of the pool are they saying hey, let's take features out.
And I can tell you that our conversations with dealers wouldn't suggest that that's the case, but it's fairly consistent the adoption of the new technology products.
Hasnt slowed additional features really hasnt slowed so.
We did hear a couple of comments that people would say well maybe I'll do the pool now, but given that these.
These additional features when you put them in a pool the only time to do it is during construction or else it becomes very expensive for reconstruction to.
To add these features so there the structure itself is being outfitted with those same high end features that the market has taken a greater adoption rates do but perhaps some of the other features like a pergola.
Or an outdoor kitchen those are the things that that maybe people could be more cautious on.
Okay. That's very helpful color Pete Thank you and good luck.
Our next question comes from Andrew Carter with Stifel. Please go ahead.
Hey, Thank you good morning, I wanted to ask about the the.
Terrorists 13 million because I'm confused about that about that being such a big headwind in the quarter was that first off was that included in kind of the more pronounced pressure for the fourth quarter gross margin guidance, you kind of outlined last quarter.
Good thing I would ask about that is why is it all hitting in one quarter and are you pricing to that or is that I know you said that supply chains are normalizing you don't expect that as much next year, but are you price of that or is that something that you don't feel like you can price for this incremental kind of source of product inflation. Thanks.
Okay. So on the first part of the question that was not considered in the guidance that we gave for third quarter, so kind of excluding the $13 million.
We did actually achieve better gross margin for the fourth quarter because of some additional values that we were able to get from the our inventory investments.
Overall pricing.
The $13 million it did the 25% impact from that did actually relate to purchases that were brought in throughout the entire year.
So if we would have.
Assessed that and pay the higher rate throughout the year, you know would have impacted some of the other quarter, it's kind of five to 10 cents throughout each of the other quarters.
But as it stands right now we did achieve market pricing.
And you know very very high levels of margins on those chemicals from a sell through standpoint.
When we look forward to 2023, we do not expect to have any further impacts as the products that we'll be selling in 2023 will be a source domestic.
Thank you second question I would ask is kind of looking at your guidance and apologize if my math wrong here, but I'm getting your SG&A absolute dollars down 15 $18 billion year over year, I think you've said incentive comp just from progression is $30 million of course. Your initial cut here is also below long term.
So help us understand kind of the flex there. If there is additional room, if kind of if you consider your network you can if managers are able to quickly adjust and Portland.
Actually required to just and I guess, one more piece piece in there you do mentioned wage inflation, we see that our warehouse employees are you seeing any any any increased competition or increased turnover for managers out there as you kind of consider other platforms and is that kind of an extra source of investment you have to consider thanks.
Yeah, so as it relates to the incentive compensation.
Did see a $13 million decrease in 2022 results.
And that was primarily driven when we looked at kind of our earlier guidance throughout the year, we were expecting a 17% to 19% topline growth and so we did come in at the 17%.
That did do some decreases as it relates to that incentive compensation in 2022, as we look at our plans for 2023.
Would suggest that the incentive compensation flux, there would be ranging from $10 million to $15 million with $15 million kind of at the bottom and so if you take the 15, plus the 13 and that kind of gets you roughly in line with the 30 that we've talked about previously.
It's a little bit less than that because you know as we look forward to 2023, we've put in some new incentive guideline for the field management, we want to make sure that we are kind of retaining that motivation for them to perform.
They go into next year kind of considering the overall market conditions, but still feel like that you know slightly less decline in overall incentive compensation will be in the best interest of the shareholders.
Oh, Thanks, I'll pass it on.
Our next question comes from Joe Munda with Deutsche Bank. Please go ahead.
Yeah, Thanks, guys and congrats on the quarter and the outlook.
Thank you.
I just wanted to make sure I'm really clear on the.
Sales and gross margins for <unk>, if I'm using a normal type seasonality number even on a flattish outlook.
It seems like sales in the first quarter to be down in the range of mid teens for the base business first of all is that right.
Yeah, I don't see a mid teens, you know I do think that we'll have them sharper declines in first quarter, but I would say more of it.
Mid to high single digits, when Youre looking at the comp year over year, because we will have that benefit from the inflation on the maintenance portion of the business.
Okay got it and then just remind us about.
About the seasonality of gross margin in the first quarter, if we adjust that fourth quarter again to the 30% should.
Should we see.
Sequentially down in the first quarter, and then I have one more follow up.
So first quarter I would expect that we'd probably see about 100 basis points off of where we reported first quarter of last year I'm just kind of in line with what the estimate would be for the full year.
Okay, Great and then just my final one here bigger picture, what's your level of confidence.
This outlook if you execute upon it represents a reasonable baseline to return to the growth formula you've detailed it in the past I guess in other words does 2023, largely reflect a return to trend line growth in demand stable share normalized cost structure, although up all those things.
Yes, I think that that I think 2023 is going to be a solid year certainly as we mentioned there'll be it look it looks like it looks like there'll be a decline in new pool construction.
Obviously, many factors will drive that and it's very early in the year, but at this point, we have to be very conservative with the guide renovations, we think are going to hold up better than the new.
New pool construction, and we saw renovations holding up better in particular in the fourth quarter of last year, because if you remember from my comments I said that given the fourth quarter. Our building material sales were actually flat so in a quarter where.
Nuclear construction it was the slowest quarter of the year for new pool construction for building materials sales to be flat in the quarter implies that the renovation market, which is the one of the only two places that building materials are used.
Implies that the renovation market is actually holding up.
Pretty well so again, we're conservative at this point of the year in terms of what we believe.
As the year will shape up as but I think the renovation market.
<unk> a <unk>.
Very important part of our business going forward. So to answer your question in a roundabout a long winded way I think 23 is a.
Uh huh.
A year that as we transition into 'twenty four we turned back to our normal model.
1% installed base growth.
The rent maintenance and renovation business will be should be solid remember the average age of the swimming pool isn't getting any younger so the average age of the swimming pool was approaching 25 years. The installed base is continuing to grow inflation is in is in the industry. So there's a lot of other factors weather economy, but.
Yes, we remain we remain.
Our confidence in the long term outlook for the business.
Very encouraging thanks a lot.
Our next question comes from Trey Grooms with Stephens Inc. Please go ahead.
Good morning, this is actually <unk> on for Trey and thanks for taking my questions. Good morning.
So first I wanted to touch on the maintenance piece of your business I know, it's the largest part and historically, it's been highly non discretionary nobody wants a green pool, but.
In this more uncertain backdrop have you begun to see any pool owners potentially delay or push off any maintenance spending and could that kind of show up later in the year and then along the same line of thinking you know I know there was a lot of tough weather.
And the <unk> kind of specialty cold in Texas should we expect that to be a benefit to maintenance sales later in the year.
Yeah. So one of the ways that we look at the maintenance spend and when you look at.
Deferred maintenance and such and are people fixing versus replacing we track our parts sales if you will along with whole good sales.
And what we have not seen as a major shift in the parts and the parts business is related to whole goods. So.
That's encouraging so it's not like people are saying well I can you just fix it versus.
Replace it so that the upgrade normal replacement upgrade behavior.
Is it still going on so we feel good about that.
When I look at.
Your comment about Texas I don't think there was any weather in Texas was cold, but it was nothing like what happened in Texas in the previous year was cold and power failure. So if it gets cold in Texas.
It just means that there.
There's people that may not go out and work because it's really cool, but as long as there is electricity the pool is running and it's designed.
Our pools are designed with some level of freeze protection. So as long as the equipment is running nothing is going to free. So we didn't get word of any significant damage as a result of that but the maintenance business really is a function of <unk>.
Usage and the installed base the aging of the installed base right. So if if and.
In particular as I mentioned in the comments.
It's hot.
Season opens up earlier in the seasonal markets open up earlier than people will have to treat those pool sooner in the operating season on that pool will be longer than the maintenance spend will be higher if it's very it's a very cool spring and it doesn't get warm until.
Late April early May then certainly thats going to take a few weeks off of.
Perhaps a month off the season, depending on weather, but we haven't really seen any trends in my conversations with our dealers is has confirmed that we haven't really seen any trends where people are saying well I can I can I differ.
And can I repair versus replace the replacement market is behaving as it normally has.
Got it thank you that all makes sense.
And then for my follow up.
All the color on the guide and the moving pieces between the end markets, but just a point of clarification when when Youre looking and I think total sales you are looking to be flat to maybe slightly down for 23, when youre walking through that math does that include any new branches that you might add or continued market share gains.
Yeah, not anything significant so we do intend to open up.
A minimum of 10, new branches as we get into next year, but the impact on the the first year.
It'll be somewhat accretive, but it probably wouldn't get to the 1% level just because the lower dollar value of the sales in the first year.
Got it that makes sense. Thanks for taking my questions and good luck with the rest of the year. Thank you.
Our next question comes from David Macgregor with Longbow Research. Please go ahead.
Hey, Good morning. This is Joe Nolan on for David.
Morning, Good morning.
Good morning.
I just had.
I apologize if this was already addressed on the call, but I had a little choppy connection earlier, but what are you guys assuming for free cash flow conversion in Europe 23 guidance.
So our guidance is that we would have at least $800 million.
So our typical realization of cash flows from net income of between 90% to 100% and then we would expect some additional amounts from the turn on the additional inventory that we had at the end of the year.
Great Okay. Thanks.
And then just as a follow up.
Demand ends up being a little bit weaker than you guys. Initially expected where do you guys have the ability to flex your model in 2023, if you see that occur.
Yeah, it's primarily going to be in our SG&A expenses at that point.
So you know, we're well equipped because of the seasonal nature of our business too.
Do you actually staff up based on the detailed activity in each individual market. So there is flexibility in deferred hiring and certainly in our overtime and temporary labor as well as just kind of a natural expenses that we talked about as it relates to third party delivery freight and maintenance on our vehicles.
And you know warehouse maintenance and those types of things that really do get accelerated at higher volume levels.
Great. Thank you.
Thanks.
Yes.
Okay.
Your next question comes from Sean <unk> with Bank of America. Please go ahead.
Hi, guys. Thank you for taking my questions.
Just going back to market share gains. So it's been a significant driver of growth since 2019, and some of our recent channel checks indicate that over the last two years or so dealers were unable to purchase equipment directly from manufacturers. So they turned to distribution to make these purchases. So I'm just.
Curious do you have an estimate of the impact of those purchases and are you assuming any market share reversals, there or do you expect to hold those gains.
I think your question about weather.
Dealers were buying direct and distribution most dealers buy a blend.
They are very very few dealers buy and own and frankly, I don't know any dealers to buy exclusively from manufacturing.
Most of them buy by a blend.
Our ability to provide product to the dealers when they needed without them having to store it without them having to have capital tied up in inventory as part of the reason that we continue.
Continue to grow our business and to gain share I would say that most of the share gain that I believe that we are.
<unk> had over the last couple of years was <unk>.
<unk> by service was driven by unique capabilities that that cohort has that our competitors simply don't have.
And I think that we have been rewarded by the market for those.
With that share gain and for that service and at this point, we haven't seen any of the quote unquote share gain reversing in fact, we think that will continue.
Got it thanks, and then just.
Spending for more discretionary products like heaters.
Hot tubs above ground pools lighting, just things in that category, but what are you forecasting for those products, which bucket does that fall under the part of the maintenance or renovation or remodeling up there just adding a heater or buying a hot tub.
Our heater heaters go and basically it's all it's all parts of the business. So for instance.
When you're building a pool, almost all pools or adding a heater at the time of construction during renovation and remodel and if they are upgrading the equipment set and there is an older heat around there and they are upgrading everything then during the renovation and remodel that too will get a heater and then there is the normal break fix that says you know I have a heater is 10 years old it's been repaired five time.
<unk> and now.
It's about time to change it it really would function very much like the HVAC system in your house you can fix it for so long and then youre going to replace it Hot tub is really if you're talking about a discrete unit hot tub like that is not.
Attached to the swimming pool that is a that's a discrete purchase.
Not part of usually any renovation model or anything like that so those are those are just on automation is done at the time of the renovation and remodel.
And also a repair so if the time clock that is running the pool fails then there's a very high likelihood that the dealer is going to tell the homeowner would you like to replace the time clock or who is now the time to upgrade to two automation so from a from a unit perspective.
Part of that is going to attract new pool construction, but if I look at the number of units in almost every product out there the number of units, we sell as compared to new pool construction the number of units.
Which we sell which include maintenance and renovation remodel far exceeds the number of units that we would sell for new pool construction.
Okay. Thank you.
Okay. Thank Ike we're about out of time, we have time for one more question.
And our next question comes from Garik.
Loop capital. Please go ahead.
Hey, This is Jeff Stevenson on for Gary Thanks for squeezing me in here.
And then you mentioned Tricolore supply it has improved and there could be some downside risk to pricing have you seen any change in tri core pricing, yet and that's not when would you expect to have more visibility on the stability of our current price levels.
Yes.
It's a very good question I would tell you. The answer lies in it depends right. So that we have seen and we will always see markets Act individually. So.
In a particular market.
A distributor or a dealer or a retailer or whatever wants to run a special.
They can do it when I look at the overall price of Tricor. There's I would say they are largely steady my belief is that it will probably it will probably come down some.
In sum im talking slight and meaning that that I think the way I look at chemicals on the overall basis, because remember sanitizers are going to be.
Hypo or liquid shock and the tablet who can use a tablet.
Use of tablets for daily Standardization IQ you can also use.
Chlorine or Cal hypo with a stabilizer to essentially do the same thing the trade I think moved back and forth. So I think what is the price of a treichler moved up last for the last couple of years, we saw more people move over to Cal Hypo and liquid shock the price of those products has come up and continues to rise. So I think if if there.
There is a if there is movement.
On the <unk> side down slightly I think it's going to be offset by prices on the other side by and large I think chemical pricing is going to be fairly stable, maybe some downside, but at this point I wouldn't say anything.
We think significant.
Okay. That's very helpful. And then just one quick follow up Peter you talked about new corporate clients will likely vary by geography.
Any more color about you would talk about as far as kind of the regional skew.
Where new pool construction declines are expected this year.
I think what we saw this year or for the 2022 year and I don't know any reason that it would be any different but for weather. So I think the beginning of the 2022 season started off cooler so the builders.
We're quite as active early on in the seasonal markets.
I would also tell you that.
<unk>.
The sunbelt markets.
Have the southern Theyre being fueled by the southern migration and year round. So if I had to place a bet on the markets that we're going to fare better in this next coming year I think the economies are generally stronger in the sunbelt in year round markets than they are in the seasonal markets in many cases, so I would expect that the sun.
The markets are going to fare better than the seasonal markets for the upcoming season as well.
Great. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Peter <unk> for any closing.
Mark.
Thank you all for joining US today, we look forward to our next call, which will be on April 20th when we will be releasing our first quarter results of 2023. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.