Pool Corp (POOL) 2013 Q1 法說會逐字稿

Good morning and welcome to the Pool Corporation first-quarter 2013 results conference call. All participants will begin in a listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Mark Joslin, Vice President and Chief Financial Officer. Please go ahead.

Thank you, Emily. Good morning, and welcome, everyone. Before I get started -- before we get started this morning, I would like to remind our listeners that our discussions, comments and responses to questions today may include forward-looking statements including management's outlook for 2013 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 are discussed in our most recent Form 10-K as filed with the SEC.

And at this point as usual, I will turn the call over to our President and CEO, Manny Perez de la Mesa.

Thank you, Mark, and good morning to everyone on the call. The more normal weather this year contrasted sharply with the very mild winter of 2012. This weather resulted in delayed pool openings by roughly one month, directly affecting sales in most seasonal markets.

As highlighted in the press release, base business sales in the year-round markets of California, Florida, Texas and Arizona, were up a collective 9.8% in the quarter. This sales result is more reflective of our performance than the collective sales decrease experienced in the other swimming pool markets.

It is also positive to see the continued recovery of our green business with 13.5% base business sales growth.

Adverse weather, fewer selling days and then a specially challenging market environment all contributed to a 15% sales decrease in Europe. Our sales projections for 2013 remain constant with the annual guidance provided in February of 5% to 7% sales growth overall.

In our focused customer segment retail, sales declined 7.4% compared to 2010's 10% growth, while our strategic priority product segment, building materials, increased by 12.8% on top of 2012's 25% growth. Both the retail customer segment and the building materials product segment provide us the opportunity to increase sales and gross profits at an accelerated rate.

Moving to gross margins, a combination of adverse geographic market, product and customer mix coupled with the usual competitive market pressures resulted in the first quarter margin decline. By way of comparison, the greater [weighing] of construction business in Horizon resulted in a 13.5% sales increase converting to an 8.4% gross profits increase. More influenced by product mix, the 9.8% sales increase in the above referenced year-round blue markets converted to an 8.1% gross profits increase.

Meanwhile, the 9.8% sales decline in the rest of the blue markets converted to a 10.1% gross profits decrease. Simply the geographic mix impacted margins by approximately 20 bps. These factors should be diluted over the balance of the year such that our base business gross profits should increase commensurate with sales at a 5% to 7% rate for the year.

Expenses were under control and very similar to last year's first quarter as expected. We project modest inflationary expense growth for the year with the usual seasonally higher expenses driven by sales activity, all together a roughly 20% flow-through margin from base business sales growth is a reasonable expectation.

The result is our earnings guidance of $2.13 to $2.23 per diluted share, growth of 15% to 20% over adjusted EPS for 2012.

The balance sheet was also as expected with accounts receivables and inventories both under good control. Overall, our realizing cash flow from operations that is equal to or greater than net income is a reasonable expectation for the year.

We made very modest share repurchases in the quarter but anticipate that we will increase repurchases during the balance of the year. At this juncture our team is poised to provide our customers and suppliers exceptional value as the industry's leading value-added distributor. Just a little old warm weather and the season will take off.

Now I'll open the call for questions.

(Operator Instructions). Ken Zener, KeyBanc Capital.

Good morning. When you look at the Horizon business growing 14% -- roughly 14% in 1Q, can you frame out just cyclically how much sales have declined from the peak, A? And what that would translate into EPS? I assume at kind of that 15% corporate incremental rate.

And then if you could give us a little flavor because I know it is not just new construction that drives it, but obviously housing starts are up a lot. Is it -- are you seeing a real pickup in terms of baby boomers writing checks to put a pool in their backyard or can you describe that growth a little bit?

Sure. First let me talk about Horizon. From the peak of that sector or that business to the trough it was roughly a 60% to 65% decline in industry volumes. That has begun to recover and last year there were real headways made in that regard. And this year it is continuing in that vein.

But as I think reflect in our investor presentation, there is a strong correlation overall in terms of our sales in that business and overall single-family home construction. So to that end as that has recovered a bit from its trough, the Horizon business has also recovered in kind.

It is still significantly below what we believe to be normalized levels of single-family home construction. So that still has a long tail to get back to normal, especially understanding that irrigation systems are put in at the tail end just before delivery of a home. So again, that still has a ways to go from a full recovery standpoint.

The contribution margins there are close to our flow-through of 20%. So to that end as that recovers, that will very directly go to the bottom line. Last year, for example, we had about a nickel's worth of benefit in our earnings per share growth from 2011 to 2012 from the improved performance in the green side of our business.

On the second question, Ken, that you asked which was more related to pools, was whether there was a change in consumer behavior and people springing forth and shelling out $30,000, $40,000 for a new inground pool. That has not been happening to any significant degree in terms of change in behavior. There has been a modest improvement from 2009 to 2010, 2010 to 2011, 2011 to 2012 and we expect a little bit more like that in 2013.

But if you look at new pool construction levels in 2013, they are still going to be down roughly 70% from peak levels and down about 60% from what we believe to be normal levels. So there is still a long, long ways to go in that regard as well.

So coming back here if you make an analogy to a baseball game in terms of recovery, I think the new construction segment of our blue business and our green business are perhaps in the bottom of the second inning in terms of that recovery.

Thank you for that thorough explanation. One more on the building product and strategic initiatives that you are doing, very good sales on a very difficult comp. Can you highlight how much of that your business that is today and if you do view that as a gross contributor to the gross margins? Or is that really more just of a top-line factor to help you outgrow the market? Thank you.

In terms of building materials, last year it represented overall roughly 7% of our total sales. Our margins, gross margins there are very similar overall to our overall company gross margins.

And the way -- what we see there is two things. One is it is an element or an area of the market where we have significant opportunities to grow our market share. And secondly, we also anticipate that as the building sector recovers we will be participating in that as well. So there is a double leverage component there that will take place over the next five to seven years.

The success that we've had, not just in first quarter this year but over the course of the past several years, has been largely driven by market share gains. And we continue to realize market share gains and I also make a note that a lot of that growth is not so much driven by new construction, but the remodeling activity that is taking place. And that remodeling activity, much like equipment replacement, is based on the installed base of pools and the aging of that installed base of pools.

Thank you.

David Mandell, William Blair.

Good morning, everyone. Can you talk a little more about the price competition you are seeing and has there been any changes?

With respect to price competition, as most of you know, we compete primarily against local and regional distributors. We also compete indirectly against mass and some manufacturers that sell direct to some of their products. And that really given the nature of our business is very local.

So some years the competitive frenzy is more intense in one geography or one or two markets in a particular state, and then the next year it's somewhere else. And there is constant in a competitive free enterprise type of structure, there is always competitive activity that takes place. I think here from a pricing standpoint, while certainly there is intense competition as there is every year, what the main factors driving the year-on-year margin decline are more geographic mix as well as customer mix.

For example, as it is, Horizon, my references that I make to Horizon with more construction business obviously that is -- not obviously, but that is more at lower margins. As well as product mix with technology products, which, as I've mentioned in previous calls, we may be selling same size box at a higher dollar price but receiving less margin percent compensation in the transaction.

So those are the overriding biggest factors I think the competitive market dynamics are like they are most years which is again local, very local but with nuances by market, by product.

Okay, and then regarding that sales number you gave for the retail channel, is that reflective of the tough comparisons or is that reflective of just how difficult it is for that channel right now? Difficulty regarding (multiple speakers)

Sure. The decline in sales in the retail segment, the decline in sales is primarily driven by the tough comparison whereas last year we had an exceptionally mild winter and this year we did not.

The principal product category sold into that segment is chemicals and that's -- in terms of chemicals, you basically the outlets there are the maintenance customers that pick those up themselves on a daily basis, the (inaudible), the independent retailers that we sell to and as well as the mass and some of the regional and national chains that will buy chemicals direct and handle it internally.

So overall the overriding primary factor is simply the tough comparison because of the differences in weather from year to year.

We also had one less selling day.

And one less selling day.

Thank you.

Luke Junk, Robert W. Baird.

Good morning, Manny and Mark. So just first question, could you maybe talk about the overall acquisition landscape here including your appetite for green acquisitions going forward? And related to that is could you [send] any details on the March acquisition of swimming pool supply center?

Sure. In terms of acquisitions, we are always open, and that is especially the case in markets where we have no presence. So as a matter of course for the past several years, the green side of the business has been proportionally -- you had to have greater focus because about half the markets in the green business domestically we are not in.

The second consideration would be markets where we have a very small share and we would look to augment that by buying another local distributor in that market. Those are the two primary drivers overall, very open obviously from a balance sheet standpoint. We have plenty of capacity. Our banks are constantly asking us to borrow more money.

Debt to EBITDA, we are at 1.3, which is extremely conservative. Our cash flow generation, we bought $150 million worth of shares in the past two years. And, frankly, if the right acquisitions are available and out there, we certainly have the wherewithal to do them, but they have to make sense.

In markets where we already have a very good share, generally speaking have an established organization and team, generally speaking we get a better return on capital by just leveraging and building upon what we have. But when you look at the investments we've made as a company over the course of time and providing -- and tools to provide value, resources that provide value for both our customers and our suppliers that we execute the right way as we generally do, we gain share organically and that has been the greatest source of profits and profit growth for us historically.

That's helpful. And then second question from me just and maybe it is better to look at this through the lens of your year-round markets that did well this quarter. But just do you have any color on maintenance and minor repair trends versus some of the more discretionary, major renovation and new pool construction?

Sure. Maintenance and repair is driven by the installed base. The installed base has grown by about 1% per year for the last several years. So in terms of unit growth, that would drive the industry unit growth, that 1% plus perhaps 1% to 2% inflation. So you've got that sector from an industry standpoint is growing in a 2% to 3% rate.

We typically grow somewhat faster than that given market share gains as I talked about earlier, and that should continue over time. I anticipate that with the industry at a 2% and 3% growth rate as it has been for the last several years in terms of both units and adding a little bit of inflation, if you factor that in that 2% to 3% for us becomes probably 4% to 6%. And that is as you probably know or I know you know is a majority of our sales coming from that segment.

So when you look at our business, it is reasonable that we will grow that sector by about a 4% to 6% rate.

And then that relative to some of the more discretionary spending, Manny, just maybe (multiple speakers)

The more discretionary spend will grow at a faster rate than that and based on very low numbers, whether it be the installed base of pools, the aging of the installed base of pools coupled with a gradual revert to normal from a consumer behavior standpoint, as well as the gradual recovery of new construction when you look at those two components that those two components should grow at a more like a 10% rate for us.

So when you weigh that call it 10% on top of the 4% to 6% for the maintenance and repair type products, that is how we get to the 5% to 7% rate overall for the year.

Okay, helpful. Just two quick modeling hits if I could. One, on the blue sales on the base business, would that be up 2% roughly in line with the overall?

It actually rounds to 1%.

1%? Okay, perfect. And then second, just view on pricing in 2013? Are you still seeing that as a 1% to 2% tailwind?

Yes, pricing for 2013 I would say 1% to 2% and probably closer to 1% than 2%.

Perfect. Thank you.

David MacGregor, Longbow Research.

Good morning, everyone. Manny, can you just talk about your private label business and what is happening with respect to topline growth and any margin improvement?

Sure. Our private label and exclusive products represented approximately 25% of our GP dollars domestically in 2012. And that is an area that we continue to focus on. What it serves to do is it helps not only provide us with greater margins, but more importantly, it provides our customers with greater margins. And that is the key, key consideration for us because by virtue of the fact that we can control how those products are marketed in terms of which customers, what channels, things of that nature, what it serves to do is it insulates our customers from what I'll refer to as irrational competitors. And we can be very deliberate in that process. And again, that helps our customers' margins and as a consequence to a degree also helps our margins.

And that is obviously important for us. We will continue to grow that part of our business; we will continue to invest resources to build that segment of our product mix and offering. So it is something that is very important for us strategically.

How should we think about the growth rate in that business going forward?

I think it is reasonable to assume that as a percentage of our total mix it will increase by 1% in a typical year; in a one-off year, it could grow by 2%. And the sensitivity there is from a -- as a distributor, we are hypersensitive to our service levels to our customers and we have to have good evidence and high level of comfort that not only are our private label or exclusive products providing our customers real value in terms of the opportunity to generate new sales and/or higher margins, but we also have to make sure that from a quality standpoint, supply chain dynamics standpoint, everything works just right.

So we typically take three to four years before we go from trials to having a national rollout.

Is the thought process to just continue adding private label presence to additional categories within your assortment, or what is kind of the strategy there over the next two to three years?

As it has been, it would be to add and then potentially not necessarily in the next two or three years, but over time as those products prove themselves to be better for our customers and for us, we may also at that juncture at some point in time decrease the offering of generally available products.

Got it. Thanks very much.

David Mann, Johnson Rice.

Thank you. Good morning, gentlemen. Manny, when you look back over seasons that are similar to the way this one is starting with the weather, at what point do you start losing business in some of these non-year-round markets because of the weather? And perhaps what is your read on pent-up demand in some of those markets?

Sure. In the seasonal markets last year we got the benefit of another month's worth of maintenance activity. The fact that those pools were opened that additional month or so not only did it move forward some activity, but it also added a month's worth of maintenance. So that is lost. And this year it is a more normal expectation from a seasonal standpoint.

So at this juncture everything looks like it is a normal season although the weather was certainly cooler in the first quarter in the seasonal markets. Typically again pools don't open that early in those seasonal markets, so therefore they are beginning to open now, and we are seeing the increase in terms of daily sales rate as we have and started seeing in this latter part of March and certainly through April to date.

Has there been a material change in the trend in April?

From a daily sales rate standpoint versus March? Sure, but not materially different than it would be in a normal season.

Okay.

If you go by 2010 or 2011, it is similar to those trends.

Okay, and then in some of these markets where things may be starting later, does that add a potential for more competitive pressure from some of those smaller competitors you have out there?

Sure. The fact that customers aren't as busy gives them the opportunity to shop around more, and once the season starts and things get busy, then what is most important is who has it and can provide it, the complete needs of that customer best, and that is where we really shine.

When a customer calls and says I need 28 items at 2 o'clock in the afternoon delivered to 123 Main Street and we have the 28 items and we deliver it, that goes a long ways. If we only have 26 of the 28 items and they have to make a second call to 123 Main Street a day or two later to finish the job, that is very inefficient for our customers and in fact a 5%, 10% difference in the price of the materials is blown away by the labor inefficiencies that result.

So again, when a season starts what is most important is the ability to serve, and that is where we shine.

Great. Thank you very much.

Anthony Lebiedzinski, Sidoti & Co.

Good morning, everyone. First the comment, Manny, that you had about the 9.8% base business sales improvement in the year-round markets, what is the comparison versus the first quarter a year ago for that specific item?

That's a great question. I don't have that in front of me, but I would venture to say that it is probably in the high single digits. The markets that had the biggest benefit in the first quarter of last year with growth rates well into the teens, in fact in some cases over 20% were in the seasonal markets.

Okay. That's helpful. And as far as the gross margin, obviously first quarter we already know. Can you give us a sense as to what your expectation is for the gross margin for the balance of the year and also for the next two to three years?

Sure. In terms of this year what I see playing out is that the year-on-year margins, the delta will decline in the second quarter and probably the back half of the year be very similar, if not a little better than last year.

So what basically you will have is a --when it is all said and done are margins, gross margins for the year will be very similar to last year, which is why when I talk about our guidance for 2013, I am looking at 5% to 7% growth in both sales and gross profits.

In terms of 2014, 2015, 2016, I would anticipate that margins will be very similar to 2013 overall. There are some pluses and minuses playing out here. Certainly our continued evolution with private label and exclusive products will help margins as well as our improved sales, sourcing, purchasing, and service execution.

On the other hand, the headwinds that we have there is mixed, particularly on the construction side. Some of the higher value products carry with them a lower gross margin percent. That's one of the things that when you step back and you look at it and you look at profitability by customer and profitability by product segment, have to be cognizant of the fact that when you're moving a box that is say sold for $1000, that transaction is going to naturally come with a lower percentage margin versus the transaction when you are moving a box that goes for $50. Will have a higher-margin percent, but obviously from a transaction cost standpoint, they are more similar than not.

So therefore you would expect that lower transaction dollar items will have higher margins and higher transaction dollar items will have lower margins. That is, again as there is ongoing recovery of new construction, whether it be on the green or blue side of the business as well as more remodeling and equipment replacement activity entering the mix, that is the headwind that we have overall.

From competitive market standpoint, very, very competitive and my perception is that a good many of our customers aren't making very much of any money in today's environment. So don't have any sense that they will be going any lower than they are from a margin standpoint because that would just accelerate their demise.

That's helpful. And as far as new locations, you opened five in the first quarter. First, are these mostly in existing markets? And second, what is your outlook for new locations for the balance of the year?

In terms of the openings, yes, they are all in existing markets. These are what we refer to as satellite centers, markets that we were serving remotely from an existing location with regular delivery. And now we've added physical presence to enhance our service level to the customers in that immediate area.

In terms of I think there is a couple left for this pool season or for this season overall, and then we will be opening several more at the tail end of the season which will have a little loss but that is -- we do that every year. We will have several at the back end of the year that will open either in the fourth quarter or first quarter that will be for the 2014 season.

Just curious as you open these satellite locations, is there any risk for cannibalization effect for the other sales centers?

Yes, we factor that in. When we look at these openings, we look at it from an incremental standpoint in terms of what incremental sales are we going to realize that we otherwise would not be able to realize incremental GP and play that against what the incremental costs are. And we look for the same 30% pretax return by year four as our hurdle rate.

Okay. Thank you very much.

Keith Hughes, SunTrust.

My question has been answered. Thank you.

(Operator Instructions). Joan Storms, Wedbush Securities.

Good morning, everyone. I had a question just wanted maybe a little bit more detail on the question related to the maintenance versus more discretionary spend. Is it -- I got the growth rate, but are the trends that you are seeing from those customers that have the existing pools that are three years old, five years old, 10 years old, are those people spending the necessary amount that they need to maintain those pools or is there still some postponement going on? What are the trends looking like there?

Well, just for clarification, the maintenance part of the business has remained constant. So those pools have been maintained even in the worst of times and the best evidence of that is the fact that through the downturn from 2005, 2006 down to 2009, our chemical sales, our parts sales, our accessory sales continued to grow through that downturn. So the pools were always maintained.

Are there one-off paces that somebody abandoned the house or whatever? Yes, but in overall, pools were maintained.

Part two is really I think what you are asking for is the remodeling and replacement activity, is that coming back? And there is a two-part answer to that. One part is you've got the consideration of the fact that most of that remodeling and replacement activity begins with pools that are seven plus years old. So to the extent that the build rate through 2005, 2006 was healthy, the installed base greater than seven years old has continued to increase at a rate of about 4% per year for the past four or five years.

The second factor playing into it is that yes, consumers, pool owners specifically, are slowly -- and I caution the word slowly -- reverting to more normal behavior with that normal behavior leading to them not deferring, replacement and remodeling. Again, I distinguish that from maintenance. But not deferring replacement remodeling to the same degree that they were two, three years ago. So that is also a second factor.

And overall when you weigh those two factors, first, the fact that the installed base of pools more than seven years old has been increasing at about a 4% to 5% rate in the last several years and also the fact that you have a gradual returning of consumer behavior to the normal, especially since 2011. When you have those two factors weighing into it, we are looking at replacement and remodeling activity increasing by from our standpoint by about 10% per year. Now the industry probably is more like at 7% for that -- in that vein, but for us it will be about 10% per year.

Okay.

Does that answer your question?

Yes, it does. But what are the types of things that people are replacing like the pool liner and the tile and the concrete? Those are projects that range in dollar size from X to X.

Right. In fact, it sounds like you know a pool pretty well. Typically most of those items range from, depending on whether you do them one at a time or do a whole big job in one time, generally speaking they run as low as $1000 to $2000 to as much as $10,000, $12,000 depending on how much you do at one time and what it is exactly that you're doing.

Thank you very much.

Brent Rakers, Wunderlich Securities.

This is Anjali in for Brent this morning. My first question is on the new construction side. I know it hasn't been a material impact on your sales, but do you have any -- could you some insight from your builder categories on where we are and where you think it is going?

Sure. Let me give you context. By our estimates in 1999, the industry built approximately 170,000 inground pools in the United States. That increased as it had over the course of the past previous 40 years to approximately a peak of 215,000 units in 2005. Between 2005 and 2009 for the first time ever in the industry, unit volumes declined in a significant way to a trough of 45,000 units in 2009.

We estimate that last year, 2012, industry volumes for inground pools increased to something close to 60, 000, probably 58,000 to 60,000, and that this year they will be approximately 63,000 to 65,000.

Thank you. Excellent clarity. My next question is on the 5% to 7% guidance. Could you readdress some of the underlying components in there? And given the strength in the underlying business, the nonseasonal business in the quarter, is there any reason to have more confidence as you move through the year on the top line?

That's a great question. And the essence of the subtlety there is that we've already got the first quarter behind us, so that 5% to 7% includes our first-quarter results. So therefore when I go to the components, just to refresh everyone, maintenance and repair from our standpoint, we will be up 4% to 6% based on the industry being up 2% to 3%.

And then on the remodel replace as well as new construction, our expectation is that our sales growth will be more approximating 10% in those segments with the industry being up about 7%. Those are our expectations at this juncture, and that factors in the fact that we have 2% base business sales growth in the first quarter.

Thank you, and lastly, could you remind us what the gross margin differential between the northern and southern markets is? Is it something like 40, 50 basis points?

No, no, no. Just the impact of mix, the fact that the four biggest states for example represented 60% of our first-quarter sales in the blue business in the first quarter versus last year's 55%, that 60% to 55% difference, just that difference was 20 bps.

Okay, well thank you so much.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Perez de la Mesa for any closing remarks.

Thank you, Emily, and thank you all for listening to our first-quarter results conference call. Our next call will be on Thursday, July 18 when we will discuss our second-quarter results. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.