Pool Corp (POOL) 2011 Q1 法說會逐字稿

Greetings, and welcome to the Pool Corporation first-quarter 2011 earnings call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Mark Joslin, Vice President, Chief Financial Officer for Pool Corporation. Thank you, Mr. Joslin.

Thank you, Claudia. Good morning, everyone, and welcome to our Q1 2011 conference call. I'd like to once again remind our listeners that our discussion, comments, and responses to questions today may include forward-looking statements, including management's outlook for 2011 and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and variables that could cause actual results to differ materially from projected results is discussed in our 10-K. Now I'll turn to the call over to our President and CEO, Manny Perez de la Mesa. Manny?

Thank you, Mark, and thank you all for joining us on our first-quarter 2011 results conference call. As evidenced by our first-quarter results, the industry downturn that began in 2006 by every measurable indication is now behind us. As has been the case throughout our history, we continue to generate above-market results, given our ongoing investment in talent, resources, and tools to enable us to provide value for our customers and our suppliers.

But, we should not get carried away with our first-quarter results as this year's favorable weather compared to last year's adverse first-quarter weather and industry dynamics provided us an easy comparison. For those of you who live in Snow Belt markets that have suffered through a brutal winter, there is very little sales activity in the winter for our business, with the lion's share of our sales in these months being in Sun Belt.

In reviewing our first-quarter sales results by major market, please keep in mind that we had unusually cold and wet weather last year from Texas, Oklahoma, east through the Carolinas and south to Florida. In the quarter, our overall blue business sales increased 15%, with our green business increasing 12%. Our first positive year-on-year quarter in the green business since the industry downturn began, as that customer segment generally lagged the blue customer segment by roughly one year. Within the blue business' largest markets, Texas was the headline, with 27% growth; with Florida at 14%, and other markets, primarily in the southeast United States, up 17%. Clearly a reflection of the easy weather comparison in these markets.

In contrast, in California, which had pretty normal weather in last year's first quarter, we realized 4.4% sales growth. This reference is important, as weather in the balance of 2010 was, on average, pretty normal overall. So mid-single-digit year-on-year sales growth for the balance of the year, we believe, is a reasonable expectation.

This is further demonstrated by our heavy dependence on the more stable maintenance and repair source revenue segments that are driven by the install base pools. The aging of the install base is providing some opportunities in remodel replacement revenue growth, but the more discretionary new pool construction segment is still very depressed, with very marginal increases in pool permit activity. As usual, we continue to grow profitable share organically, as we've done consistently for many years.

Moving to gross margin, the easy comparison from last year's first quarter accounts for most of the change this quarter, with ongoing improvement expected for the balance of the year, albeit at a more modest rate. One recent question is the impact of raw material cost increases in our business. To date, that impact is muted, although we do expect some increases as the year progresses, which we'll pass in the normal course.

Fuel cost increases of 30% plus are an example outside product cost that we'll also seek recovery of in the form of new or higher freight surcharges on deliveries in this case. On the expense side, no surprises other than higher fuel cost impacted us by approximately $0.01 a share, which cost increase we'll seek to recover as indicated before. Bottom line is that we still generated a 20% contribution margin in a sales increase as is our guidance for the next several years as we grow into existing infrastructure.

On working capital, I would like to highlight that our inventory and accounts payable increased somewhat more than normal as recent sales trends drove higher replenishment rates. But as sales growth moderates, so will the increase in inventory and accounts payable. To that end, our free cash flow should approximate net income for the year. Overall, I believe we had a strong quarter and are on our way to another year of solid earnings-per-share growth.

As many of you know, we believe that with a reasonable recovery in the macroeconomic environment, we have the opportunity to grow earnings per share at over a 20% rate per year for the next five years. That we have a good shot at doing that in 2011, as we did in 2010, without a notable increase in new construction and with still depressed consumer confidence, is evidence of the underlying resiliency of the industry and our team's ability to execute in a still challenging macroenvironment. Now I will turn the call over to Mark for his financial commentary.

Thank you, Manny. I'll start with a few comments on our SG&A before moving on to balance sheet and cash flow. As was the case for 2010, our goals for expense management in 2011 are to leverage infrastructure and capacity that we have in place to grow our expense base at a slower rate than sales. Doing this well, combined with modest gross margin expansion over time, will allow us to contribute $0.20 or so to operating income for every $1 of sales growth.

Our start to 2011 has put us right on track with that objective. We increased Q1 operating earnings by $8.5 million over Q1 2010, which was right at 20% of our $43 million in sales growth. This certainly won't be the case every quarter, but we do expect to achieve this over time. We also had greater than normal gross margin growth and higher expense growth this quarter, both of which have normalize over time.

Specific to our percent expense growth for the quarter, there were two primary reasons this was a bit higher this quarter than what we expect going forward. One reason is the impact of acquisitions, which added $1.2 million, or 1.4%, to expense growth for the quarter. Our Metrinox acquisition, which lapsed in Q2, was the biggest component of this.

Incentive accruals was the other area which added to our expenses for the quarter. For the full year of 2011, we expect at this point that our incentive expense will be higher than 2010 by $5.5 million. We booked $2.1 million of that increase in Q1, given the results for the quarter, which accounted for 2.5% of the 8% expense growth.

Moving down the P&L to interest expense, you can see that we picked up $700,000 here compared to last year, which was due to a combination of lower average debt and a lower interest cost. I would not expect that benefit to continue beyond the first quarter, as debt levels increase to support the greater level of business activity, as well as share repurchases, and as interest rates flatten out.

In fact, even though our average debt was lower, our quarter-end debt was up slightly at $280 million, compared to $278 million last year. $100 million of this debt has moved to current on our balance sheet, which is our note that is due in February 2012. We expect to refinance this capacity in 2011. Our leverage at the end of the quarter is measured by a trailing 12-month average debt-to-EBITDA of 1.81, which was down from 1.99 at year-end.

Moving on to receivables, we had a lot of success over the last couple of years managing the flow of credit to our credit-worthy customers while tightening up on collections where needed. This has continued into Q1, with our days sales outstanding having declined to 31.0 days from 34.2 days at Q1 2010, and 31.6 days at year-end 2010. This improvement in collections allowed us to grow receivables just 10% year-over-year compared to our 16% growth in sales for the quarter.

Inventory of $439 million was up 15% from a year ago, with the highest-velocity items in our domestic blue business growing 22% year-over-year, while the value of our slowest-moving inventory dropped from last year. From a cash flow perspective, you can see that our accounts payable was up 21% year-over-year, nearly offsetting the increase in inventory, as much of the inventory receiving Q1 was purchased on extended payment terms. Overall, considering the increase in business activity, as well as the seasonal nature of our working-capital needs, the $37 million use of cash in operations was a good result, with the increase over Q1 2010 due mainly to cash used to fund the growth in our accounts receivable.

To give you an update on our share repurchase activity, we repurchased 1.3 million shares during the quarter at an average price of $24.19. We also repurchased an additional 173,000 shares since the end of the quarter at an average price of $24.48. This leaves us with 4.2 million available for repurchase under our existing $100 million board authorization. On our last call, I gave you a forecasted share count by quarter for the year, which had anticipated our share repurchase activity under the current authorization. At this point, I believe that forecast is still accurate, and I would suggest referring to it for modeling purposes.

I want to take a minute now to reiterate a point I made on the last call related to our quarterly performance in 2011, which was that our Q1 comps are by far the easiest of the year. To put that in perspective, let me remind you that our sales in Q1 of 2010 declined from Q1 2009 by 2.5%, which compares to sales growth of 6.4% for the rest of 2010. And our gross margins in Q1 2010 declined by 108 basis points, which compares to gross margin gains of 21 basis points over the balance of 2010.

The point I'm making here, and I may be starting to sound a bit redundant, is that sales and margin growth rates reported for Q1 need to be tempered by the tougher comps for the remainder of 2011. That concludes my prepared remarks, so I'll turn the call back over to our operator to begin our question-and-answer period. Claudia?

Thank you. Ladies and gentlemen, we'll now be conducting a question-and-answer session.

(Operator Instructions)

Tom Hayes, Piper Jaffray.

Nice quarter.

Thank you.

Manny, I was just wondering -- a couple questions -- I was wondering if you can talk about some new products that you are seeing coming out of the quarter with some higher growth rates than maybe you expected, or maybe finish the year out?

Sure. First of all, it was pretty much across the board. There was no particular product category that declined or had significantly less growth than our overall numbers. I would like to highlight the fact that we continue to grow share and one part of category that did grow a little more than the norm, although it's hard to do that, given the number of reported, was in the area of building materials. And that would be primarily related to share gains.

Okay. One more. I was wondering if you can talk about -- I know you talked about this last year -- the growth where you are seeing in the private label product as far as where that is and roughly what percentage of sales that is?

That continues to grow at a rate a bit faster than our overall growth. And turning to building materials as an example, a lot of the aggregates that we sell that blend in with our plaster to have a higher-end finish on the pools, the tile, a lot of those products are private label, as well as our chemicals. Overall, I believe we probably very close and if not this year, next year should be in the mid-20s in terms of what percentage of our overall sales are related to our own products.

Okay, lastly if I could, you guys had a press announcement on March 21 with your relationships with Lending Club. I was just wondering if you could provide a little bit more color in your expectations of what that could do to business this year and next year.

Sure, Tom. First of all, I should point out that we have been active in looking at various ways for consumers to finance pools, and we have a number of financial institutions that we've recommended to our folks and to our customers that they connect with. Most of those are regional in nature. Lending Club was a little bit unique in that they have a more broad across-the-US platform, although there is a few states that are excluded.

We see this as a very good financial tool for consumers at this point in the let's call it the banking and housing market recovery. And that it is unsecured product. It's relatively easy to sign up. The approval rates that we are seeing for people who apply for these loans is fairly high at around 50%. Volume has been picking up, and we think it will have a really relatively modest impact.

But from a customer standpoint, it's very helpful for our customers when they have homeowners coming in and of looking at the kind of products that they can buy from that customer, whether it's a new pool or above-ground pool or a spa, the bigger ticket items. Pool refurbishments is a very good use for this kind of loan product. It really helps our customer in having that tool available to offer to the consumer. So it's just one more of the types of things that we try to do as a Company to help our customers be successful and we think, again, the timing is good for us to be able to promote that a bit to our customers and to homeowners this year.

Okay. I know it's not a big dollar amount, but it says you're going to invest up to $2 million. Is that an investment, or are you kind of -- ? We can take it

Yes, just to comment on that. It is an investment from our standpoint. We really don't expect to lose that. Lending Club has a pretty good track record of returning a positive investment to people who invest in the loans that they underwrite.

We don't take a majority. We take a small portion of the loans that are done in the pool area. So we will spread that $2 million across a large number of borrowers. So the more pertinent issue there is that we want to send a message to our customers that we support them, we support the industry. And by taking investment in their customers, we think that's a positive message that we want to send to our customer base.

Great. Good luck for the year.

Thank you.

Mark Rupe, Longbow Research.

This is actually Andy in for Mark. The first question is on the inventory side. How much would you say of the increase in inventory was related to acquisitions versus related to anticipation of higher purchase levels for 2011?

Approximately $10 million was related to acquisitions, and the balance was base business.

Okay, got you. That's helpful. Thanks. Similarly, on the SG&A front, how much would you say -- if you break that out for us a little bit -- how much was related to I think you mentioned incremental freight costs versus the incremental payroll. Can you break that down for us?

Sure. If you take out the year-on-year SG&A increase, and Mark touched on some of the elements in his comments, but essentially, you take out acquisition, you take out incentive, and you take out freight, and at the end of the day, you're talking about something in the neighborhood of closer to 3%.

Okay, got you. Okay, that's helpful. On the pricing site, have you been notified by any vendors, or have you -- do you expect any further price increases on the equipment side in 2011? Or has that not been an issue at this point?

First of all, in terms of price increases, commodities items like pipe, rebar, that are used typically in new construction, those have been going up during the course of the year and pretty much as we expected to take place. But the impact there is negligible because a -- new construction is still very small segment of our total business. And therefore that dilutes the number. In terms of the equipment sector, there is one major -- of the top three vendors in the category that has announced the price increase that's effective June 1. And therefore that'll have some impact this year. Again, diluted by the fact that it is only one of the top three vendors.

And on the chemical side, which is the largest product category by far, on average, prices there are a tad lower than last year. So there's a little bit of deflation there. So net net, I think overall, the 1% to 2% that we estimated for the year is still reasonable net net. And again, probably the run rate will be a little bit higher in the latter part of the -- in the third and fourth quarter, but overall for the year, 1% to 2% seems still to be a reasonable number.

Okay, got you. And on the equipment side, that vendor, I assume you just intend to pass along that price --

Yes, yes.

Okay, got you. And finally for me, on the competition front, I know you had mentioned in the past that you maybe expect to see some share gains related to some of your competitors not really being able to keep up with inventory requirements when you see an uptick. Has that been a positive benefit for you at all at this point? Or do expect to see that as you get into Q2, or is that really not an issue at this point?

That's not so much a factor in the fourth and first quarter. That's more of a factor in the heat of the season. So therefore, that benefit that we begin to see a bit last year, we expect to see a little bit more of that this year as well. That's basically service levels in the middle of the season.

Okay. Great, thanks a lot guys. Good luck.

Appreciate it.

Ryan Merkel, William Blair.

Very nice quarter.

Thank you.

My first question, it sounds like the year is playing out like you thought, with growth mostly coming from maintenance and repair, but I'm wondering if 2012 is still the year where new pool builds kick in or maybe major refurbishments.

We believe that other that the aging of the install base of polls, which is certainly helping some degree on the remodel and replace side, but the real change in behavior on the consumer, be it refurbishment replacement or new construction, we begin -- we expect will begin in '12. And that impact, if any, will be very, very modest this year.

And then what does the recovery in refurbishments and new pools look like? Is there pent-up demand? Do you have any historical precedent to tell us how that might look?

Unfortunately, there is no historical precedent. We have in this industry enjoyed over 40 years of growth independent of what was happening in the rest of the world through 2006. And then it kind of -- it changed. So there's no history or reference we can point to. From our own internal calculations, is that the -- it will take about five years before replacement remodeling activity from a consumer standpoint through our customer to us reverts to normalized behavior.

And there is certainly some pent-up demand there, and that will come in, we believe, over the course of the next five years. We're not smart enough to figure out what year that'll be, or over which year it will be concentrated. And then in the case of new pool construction, we believe it could very well take 10 years, up to 10 years, before that reverts to normal behavior. And that's what we baked into our five- and 10-year models.

Yes, the point is there's a sizable recovery opportunity ahead. The timing is just pretty tough to call.

Yes, but you know, the interesting thing, Ryan, is that without using those kind of expectations, which some have challenged me as being too conservative, we can still get to 20% plus earnings-per-share growth. And as evidenced last year, and I think we have a good shot at doing this year, we can still realize 20% earnings-per-share growth without that tailwind at our back.

Right. Okay, and then just one more for me, what do trends look like on swimmingpool.com in terms of inquiries and contractor leads and that sort of thing? Any lead there, or is it just too early in the season?

Well, the read is misleading. And it's misleading because over the course of the past two years, we've made a fairly significant investment in some of the ways that the site works, as well as our other websites, as well as the way that we use to reach consumers using social media and other investments that we've made that are more efficient. So our actual activity is up significantly.

Significantly, both in terms of unique visitors, as well as how long they stay on the site and how many page views they have. So in context, I would say that I believe, and certainly our director of social media will tell you, that that's primarily driven by how we re-oriented our resources to leverage that, as opposed to inherit demand. But I believe that I think both factor in, but I would tend to agree with him that most of it is driven by the efforts we've made and investments we've made in that area.

Sounds very positive. Thank you very much.

Thank you.

Anthony Lebiedzinski, Sidoti & Company.

I was wondering if you guys could quantify the base business sales improvement by product category, maintenance, repair, remodels, construction type of products?

We don't have it captured that way. We have it by individual product-line category, and in the case of equipment, for example, while it's primarily driven by replacement activity, there is some factor or some element, obviously, that goes into construction.

But if you bear with me, Anthony, what I would estimate is that of the 15% base business sales growth, I would say probably something in the 12% to 15% range would be maintenance and repair, as well as replacement remodeling. And then it would be a little higher than that, call it more 20% plus, tied to new construction. And that new construction we know is driven heavily by market-share gains with a building materials product category.

Okay. That's helpful. And also, looking at your floating rate senior notes that you have upcoming next February at $100 million piece. Any ideas as what type of interest rate will be able to refinance at? Would it be similar to the current terms or any different? I don't know if you could provide any outlook for that, that would be helpful.

Sure. Unfortunately, the market isn't quite as robust for borrowers as it was when we did that back in 2007. So the terms will be a little higher, but having said that, and given the order of the increase of the $100 million and everything else, it will probably be contained to impact us by know more than $0.01 for 2012.

Okay. All right. That's helpful Thank you.

Thank you.

David Mann, Johnson Rice.

Yes, thank you. Great start to the season, guys.

Thank you, sir.

First question was on the performance of the Green business. Can you just elaborate on how much of the 12% gain in revenues there was perhaps related to the weather pulling some business forward versus the sustainability of that kind of gain? And also, Mark, could you update your loss projection of perhaps this division get to break-even this year?

Sure. Two parts. Given the weighting of the Green business in terms of geography, the weather impact there was not as significant on the positive side as it was in the Blue business. And just to make the point, the Green business is heavily weighted towards the west, with the actual network spanning from Texas west to California and up through the Pacific northwest into state of Washington. So therefore, when you look at the weather impact there, it was not as big a factor as it was in the Blue business.

And therefore, we believe that, well certainly there was some benefit certainly in Texas, from the weather, it will probably be outperformed from a year-on-year standpoint the Blue business in terms of sales growth. With that sales growth, plus some of the actions we've taken in the business from an SG&A and other elements, we feel that for that business to have a positive contribution this year, albeit modest, it is very reasonable at this juncture.

So that would be an improvement versus what you thought on the last conference call?

That would be yes, a little bit of an improvement, but again, not in the order of magnitude, it's not a huge improvement. Maybe $0.01 or $0.02.

Okay, great. In terms of the gross margin guidance you gave on the last call, you still believe that we should be looking for about 10 to 30 basis-point improvement for this year?

I would say given what happened in the first quarter it would probably be more about 20 to 30 as opposed to --. I'd take the 10 out and think more 20 to 30 is reasonable.

And what's driving that?

Our ability to manage our business both on the buy and sell side, execution a little better. The gradual but ongoing migration to private-label products and exclusive products. That's -- those are the major drivers that drive that change.

Okay. And then one last question. Going back to the comments you made about the spending on higher-ticket items, that you saw somewhat higher consumer discretionary spending this quarter. Can you help to quantify what you mean by that? And I guess you're not including that in your full-year guidance. Can you give us a sense on what the impact might be if that spending level in the first quarter continues for the rest of the year?

Well, part of that is the comparison with the first quarter of 2010 and again, when it's cold and bleak outside, whether it be in Texas or Georgia or Florida, people don't tend to focus so much on their pools. And this year, when the weather was a little better, they did. And they ended up replacing some of the equipment that may have otherwise been repaired or replaced one or two or three months later.

So I think that's -- they may have used the pool a little more. So those are the considerations that play into the behavioral change we saw in the first quarter. Again, part of it is the easy comparison both weather-wise as well as from a macroeconomic standpoint. We continue to move along. Overall, there's still no headlines in terms of genuine change, but certainly, if nothing else, consumers are feeling more comfortable in the status quo.

Great. Thank you, Manny. Good luck.

Thank you, David. Appreciate it.

(Operator instructions)

Luke Junk, Robert W. Baird.

First, on the updated EPS guidance. I know you pre-suit you disclosed you had a low- to mid- single-digit growth rate embedded in that guidance. We see good trends that we saw in the first quarter and raising the range above what you had previously. Fair to say we're probably looking at more of a mid-single-digit growth right now?

Yes, for the balance of year we're looking at mid-single digits. 4% to 6% for the balance of the year.

Okay. And then as it relates to early trends in April, I'm not sure if you want to comment on that, but --

Consistent with our expectations for the balance of the year.

Okay. And then second, as it relates to improvement in the market, and actually last year we had the beginning recovery looks like things have maybe accelerated a little bit here, and the beginning of 2011 as it relates to your acquisition pipeline, do you feel -- are more people interested and coming to the table at this point, or is that still depressed somewhat?

Well, we have ongoing dialogue with a number of people all the time. The -- primarily weighted on the international and Green side of our business, so therefore that dialogue continues. It's a matter in some cases of the emotional thought process to sell. In some cases, it's more an issue of valuation, and in some cases, when we look under the covers, we may not be as interested. In any case, but that dialogue continues and certainly, when we have something of significance, we'll report it.

Thank you.

It appears we have no further questions. I will now turn the floor back over to Mr. Perez de la Mesa for closing comments.

Thank you, Claudia and thank you all again for listening to our first-quarter results conference call. Our next call is scheduled for July 21, mark your calendars, July 21, same time, 11.00 Eastern, 10.00 Central, 8.00 Pacific, when we will discuss our seasonally most important second-quarter 2011 results. Thank you again.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.