Pool Corp (POOL) 2013 Q4 法說會逐字稿

Good morning, and welcome to the Pool Corporation 2013 year-end conference call. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. 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, Gary. Good morning, everyone, and welcome to our 2013 year-end earnings call. I would like to remind our listeners that our discussion, comments and responses to questions today may include forward-looking statements, including management's outlook for 2014 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 the call over to our President and CEO, Manny Perez de la Mesa.

Manny?

Thank you Mark, good morning to everyone on the call. 2013 marked another year of solid performance, despite the challenging external environment. Given the impact of the late start in seasonal markets, we estimate that overall industry sales increased by a very small amount, as solid increases in discretionary products were largely offset by decreases in typically non-discretionary products. The bottom line is that we again increased market share organically, given our progressively more effective execution, and ongoing investments in the value-added tools and resources.

The best illustration of our performance was our results in the four largest year-round markets -- California, Florida, Texas, and Arizona -- where we increased base business sales by 10.7%, and base business gross profits by 9.6%. In contrast, sales in seasonal markets, including Europe, were up only 1.5%, and gross profits were essentially flat.

While every market is unique, the distinction and results between year-round and seasonal markets is primarily attributable to weather, not performance. Given the context of 2013 results following the gradual recovery in consumer discretionary spend since 2010, we believe that mid- to upper-single-digit sales and gross profit growth is a reasonable expectation for 2014. This expectation is premised on our continuous improvement in execution, leveraging our ongoing investments in people, tools and resources that provide a unique and comprehensive value proposition to professional trade customers.

Our expenses remained in control, increasing a modest 2% in 2013, with our expectation being that they will increase closer to a mid-single-digit percentage in 2014, based on our opening of 7 to 10 new locations; the full-year impact of recently opened and expanded locations; our investments in new tools and resources, and an increase in performance-based variable compensation.

Given the above expectations for sales, gross profit and expenses, diluted earnings per share should increase by the mid- to upper-teens percent, and potentially 20%, with the impact of share repurchase. To this last point, our strong cash flow generation and conservative capital structure should enable us to continue repurchasing shares as we have the past several years, with a diluted EPS impact weighted by when during the year the repurchases take place.

The expectations for 2014 are consistent with our three- to five-year diluted earnings per share growth expectations, with the caveat that our expectations are premised on normal weather conditions overall for the year, which has not been the case the past three years. Altogether, we are fortunate to be in the position that we are in. This is primarily the result of our long-term investments in our people; and, in turn, our people's commitment to our Company and to their customers. I feel privileged to hear about the extraordinary things that our -- and commitment and services and values that our people provide to our customers, as well as to our suppliers. And to that end, I thank them.

And I will now turn the call back over to Mark for his financial commentary.

Thank you, Manny. First of all, I'd like to clarify a comment we made in our press release related to our gross profit results for the fourth quarter, just in case there's any confusion there. As noted, our gross margin declined 90 basis points in the quarter, or 30 basis points more than the 60 point decline we experienced for the year. The reason for the greater decline has to do with accounting adjustments to true-up our actual vendor rebates for the year, which are recorded based on estimates for the first three quarters, and then adjusted to actual at year-end.

These Q4 adjustments are normally favorable, as they were in both 2013 and 2012, but they happened to be more favorable in 2012 than they were in 2013, resulting in the majority of the comparative margin decline in the fourth quarter. Excluding these rebate adjustments, our margin decline for the quarter would have been closer to 30 basis points, reflecting ongoing impact of mix, as discussed previously.

Our 2013 base business SG&A cost grew 1.9% over 2012 for the year. This growth was right in line with our target of growing base business expenses at no more than half the rate of gross profit growth, which was 3.9% for the year. One of the shock absorbers we had built into our cost structure is our performance-based compensation, which flexes with our results. For 2013, this component of our cost declined $3.6 million, given that our results were below our expectations. Of course, given our expectations for improved performance in 2014, this will be a bit of a headwind, as Manny had mentioned, but we still expect to be able to hit our target of base business SG&A growth of half the rates of gross profit growth for the year.

Turning to our balance sheet and cash flow, you can see that our year-end total net receivables grew roughly in line with our fourth-quarter 11% sales growth, while our inventories grew a more modest 7%. The quality of both of these asset categories remains excellent. Our DSO, or days sales outstanding, improved to 28.1 days for the year, down from 28.8 days last year, while 99% of the growth in our inventories was in our top velocity and new products inventory categories. Our cash flow from operations for the year, of $105.1 million, was 108% of net income, or right in line with our target of equaling or exceeding net income for the year.

Turning now to our share repurchases and share counts, we have remained active in the share repurchase arena, purchasing a total of 1,773,000 shares during the 2013 calendar year, at an average price of $53.21, for a total use of cash of $94.3 million. This includes 792,000 shares purchased in the fourth quarter. Thus far during 2014, we have repurchased 484,000 shares at an average price of $54.56, for a total use of cash of $26.4 million. This leaves us with $70.4 million remaining under our current Board authorization.

For those of you that would like some help with our 2014 share counts, I'll take a minute now to go through our share count estimates by quarter, which are on a fully diluted share basis except for Q4, which are basic, given the expectation for a seasonal loss that quarter. Q1, we expect 46,334,000 shares outstanding. Q2, 46 million even shares for the quarter; year-to-date, 46,087,000 shares. Q3 for the quarter, 45,773,000 shares; year-to-date, third quarter, 46,087,000 shares. Q4, 44,347,000 shares; and for the full-year 2014, 45,970,000 shares.

That concludes my prepared remarks, so I'll turn the call over to our operator to begin our question-and-answer period.

Gary?

(Operator Instructions). Matt Duncan, Stephens, Inc.

Good morning guys. First question I've got, if we look at the revenue growth that you guys had in the quarter, pretty strong, continues to improve a little bit. Obviously I think the market is a little stronger. You guys obviously are doing a very good job taking share. Are there any, maybe, numbers you can give us around how much share you think you are taking, how much of your revenue growth do you think is market share? And as I look at the various product categories you guys sell, did any stand out as being stronger than others here in the back half the year?

Sure. First of all, expectations -- our numbers, our estimates, are that the market overall grew by probably something closer to 1% to 2%. And that includes the seasonal markets actually going down, given the very late start to the season year-on-year in those markets, with items like chemicals, parts, and accessory items down year-on-year. In fact, from an industry standpoint, when you weigh the whole package together, chemical sales, which is obviously non-discretionary, we believe were down modestly year-on-year. And that's the biggest, single-largest product category. Parts were, at best, flat year-on-year, and accessory items were no better than flat year-on-year. So that's what weighs down the overall market. And, again, that's largely driven by the seasonal markets, not just for us, but the entire industry, and the fact that the season got off to a very late start in 2013.

In terms of the -- for us, what is reflective of, call it, differences in organic share growth, the one standout category -- which is not new news -- is building materials. Overall, we continue to make investments in that product segment, not only from a product line offering standpoint, but also in terms of the resources that we assign to it and some of the programs that we do to help create demand in that area. And building materials overall, those sales in GP dollars were up over 20% in 2013, and that's a track record that we've had. We have been helped there to some degree by increased consumer discretionary spend on renovation, and products and refurbishment. But I think that at least half, if not more -- somewhat more than half of that growth year-on-year is market share growth. Again, that's driven by the investments we make: people, resources, programs, tools; and, of course, the execution of our people at every level in the organization.

Manny, I know you guys are continuing to put a lot of emphasis on building products. Would you expect that category to continue to outpace the total Company growth? So if you're looking at mid- to high-single-digits total Company, would that one would be up into the double-digits in 2014?

The answer is an overwhelming yes.

Okay. And then, last thing for me -- with the residential construction market appearing to still be in recovery here, does that influence, Manny, your appetite for M&A in the irrigation and landscape market any? I know that's a market that you view as a good opportunity for Pool. I'm curious if it -- maybe with the market continuing to get better, do you have an appetite for more, maybe even bigger deals in that irrigation and landscape piece of your business?

We have been looking progressively at building out that network. And frankly, given our long-term view and how we view investments, we were just as aggressive talking to people in 2007, 2008, and 2009, as the market was crashing; as we continued to be, 2010, 2011, 2012, 2013 and to date. The balancing there is having a solid understanding of what that business brings to the table; an understanding that, for us, we constantly evaluate the market and what the market is comprised of, how that market is served, and what the opportunities are from a return on capital standpoint. And we weigh the opening of new locations, as we do acquisitions, as a way to enter a market. So constantly looking at it, no change there. But it has to make sense. If it doesn't make sense, we don't do it. And that making sense means that, from an acquisition standpoint, is that that provides us something to build on. Because we look at the acquisition as an entry point, not as an end point, in terms of our market position.

Sure. Thanks for the insight, Manny. Appreciate it.

Garik Shmois, Longbow Research.

First question is, if you could provide a little more color on your outlook for discretionary versus non-discretionary sales in 2014, given the context of your guidance.

Sure. This is in part the market, and in part our continuing to grow share, given our investments in those areas. But we believe that the discretionary product sector, which for us would include anything related to renovation, replacement, as well as new construction -- that those areas collectively will grow, for us, in the double-digits. And whereas the maintenance and repair component of our business, which is over half the total business, will grow closer to the low- to mid-single-digits.

Great, thank you. I was wondering if you could talk a little bit about inventories in the channel; if you are noticing any disruptions, given the winter weather, and if there's any read-through this early in the year on how the spring selling season is shaping up.

There really isn't a lot of inventory in the channel to speak of. Our customers, by and large, have little to no inventory. Typically, in the great majority of the cases, their inventory is what we deliver every day, or what they pick up every day. So our customers have limited inventories, if any.

In terms of distribution, generally speaking, it is certain product categories. Many manufacturers have programs to level their manufacturing load; and, therefore, they shift some volume that would naturally happen into spring and early summer -- they shift that to the winter to be more efficient. And to that end, that's pretty normal. So I would say that at this juncture, in mid-February, there is nothing unique or -- unique at all in terms of inventories versus previous years.

Okay. Than just the last question, just a clarification question. Within your EPS guidance you provided the share count and the buyback walk through the balance of the year. Are the buybacks that you identified, and the share count that you identified, embedded within the $2.35 to $2.45 guidance?

Yes, they are. (multiple speakers)

We executed last year and through the first quarter this year, certainly included in those share counts that I gave you.

Okay. Thank you.

David Mandell, William Blair.

Good morning. First off, could you guys provide sales growth in the fourth quarter by the blue and the green businesses?

Sure. One second. Go ahead with your next question.

The next one is, can you provide an outlook on pricing, and how you're thinking about pricing into next year? And then some of the other pluses and minuses, as you think about gross margin for 2014?

Sure. With respect to the first question, in the fourth quarter, the green business was up 7.3%. And the blue business was up 11.2%.

Thank you.

With respect to pricing, it depends on the product category. In the case of chemicals, there is more supply than actual demand. And to that end, chemical pricing, accessory pricing, those product categories are going to be flattish. There will be some inflation. Equipment manufacturers announced price increases in the fall that are effective this year; and, therefore, there will be some price inflation on the equipment side. Overall, when I look at the entire mix of products, we're looking again at something like a 1% to 2% weighted impact from inflation.

And then as far as the gross margin, are there any other key positives or negatives looking into next year?

Sure. We will still have a bit of a headwind from a product mix standpoint, not so much -- not on building materials at all, since the building material gross margins are very similar to Company average. But on the equipment side, which is our lowest gross margin percent product category -- equipment, as there is more replacement activity, particularly more activity, as we upsell equipment and try to drive more to higher efficiency units -- whether they be variable-speed pumps, high-efficiency heaters, LED lighting -- those products provide us with more GP dollars, in that they are higher price points, but they are also at lower margin percent. So net-net, that reflects poorly on percent margin percent but very favorably in GP dollars, which is why we are such big advocates of that migration, despite the margin percent optics. So, therefore, that's where the headwind is on the margin percent -- again, not margin dollars, which is far more important than margin percent.

The other factor that plays into it is that in 2013, the very late start to the season in the seasonal markets resulted in the non-discretionary product sales being down year-on-year, and down versus what our expectations were. In a more normal weather year, those non-discretionary products should have some bit of recovery. And those products tend to be lower-dollar items which carry with them a higher margin percent. So in 2014, you'll have those two factors kind of mitigating one another.

Again, the recovery of maintenance and repair items, which carry a higher margin percent because they are lower dollars, as well as the ongoing migration, particularly toward higher efficiency, higher GP dollar equipment items, which carry a lower-margin percent.

Net-net, we are expecting gross margins to be roughly the same in 2014 as they were in 2013. But our focus -- just to make sure everybody understands -- our focus is driving GP dollars. I would much rather, for example, from a Company standpoint, replace, for example a heater, which is a lower-margin percent, than selling the part to repair a heater, which has a much higher-margin percent, but much lower GP dollars.

Thank you, Manny.

David Manthey, Robert W. Baird.

Good morning. First off, Manny, thus far over the past several years, the recovery has played out pretty much as you outlined back in 2009. And I'm wondering you're looking out over the next several years here, I think you had some projections out to like 2020. Any course correction or anything that you think could derail the client back, barring another great recession?

First of all, I'm not that smart. And just to qualify, when we made those long-term projections, we were very careful to note that we expected that to be on average, and that there could be year-to-year fluctuations. Now to answer your question specifically, when we look out over the next 5 to 7 years, we see the same trendlines and the same recovery taking place, with a bigger impact of waiting from replacement remodeling activity in the early part of the recovery -- we'll just call it from 2011 through 2015, 2016. And then, new construction being more of a factor in the weighting of the recovery in the latter part of this decade. And again, barring like a one-year, year-to-year blip, the overall trend line I think is consistent with what we talked about back in 2009.

Okay, thank you. And you gave us the blue and the green, I assume that's domestic only. Mark, do you have the international -- I apologize if that's in the release, but I didn't catch that.

We did not have the international. And the numbers, by the way, are comprehensive on the blue business. So the 11.2% includes Europe and Canada and Mexico and Colombia.

I see. Okay. Okay. And then, finally, I'm just wondering, with the trend toward saltwater systems over the past several years, are you seeing any discernible trends in chemicals over time, or are you not seeing anything?

That's a great question, David. The impact of salt has progressively been a factor over the past 12, 13 years. And, today, we estimate that about 25% to 30% of inground pools domestically use salt as the primary sanitizer. They still need chemicals for complete balancing and pool sanitation and pool maintenance, but the primary sanitizer comes in the form of salt, and how chlorine is extracted from salt.

That has certainly resulted in the chemical side of the business, and chemical -- natural chemical demands to be essentially flat over the course of the past 12, 13 years for chlorine-based products, whether it be bleach, 3-inch tabs or whatever. So that is a fact. And that's, in fact, one reason why pricing on chemicals hasn't gone up with inflation. And certainly, that has compressed margins for our suppliers over time.

All right. Thanks, Manny.

(Operator Instructions). David Mann, Johnson Rice.

Yes, good morning. Another question on gross margin, Manny. I guess this gross margin this year, if we look at the long-term, this is the lowest gross margin I think since 2007. And it's been down the last three years. I'm just curious, when you look out over the next several years, especially given you're not looking for a rebound in 2014, how should we think about the cadence of gross margin as it drops to the P&L?

If you look out over the next 3 to 5 years, our expectations are that gross margin percent should stay fairly consistent with where we are now. That's not to say that we don't have -- we won't have years that may be up 30 bps or down 20 bps. But, overall, we are not looking for any significant change in gross margin over the next 3 to 5 years -- gross margin percent in 3 to 5 years. Again, what you have there is you have a number of initiatives -- ongoing initiatives, whether it be improving our sales execution, improving our purchasing disciplines, improving our pricing management, improving or increasing our use of exclusive and private label products, our sourcing investments; all that helps naturally raise margins. On the offset, there is the ongoing migration, which we continue to drive demand for higher-efficiency products, which come with a lower-margin percent, generally speaking, since they are higher price points, but more GP dollars.

So the focus from our standpoint is -- and if you think simplistically about distribution -- and, by the way, since I know you're heavily weighted towards retail, I look at retail the same way. Our compensation is the gross profits that are generated. And that's really our compensation for the services we provide. So, therefore, that's where the focus of attention is. And what does it cost us to provide those services? And what value are we realizing for providing the services we provide? And, again, that's captured best in gross profit as distinguished from sales.

Great. In terms of the green business, curious, can you quantify the level of improvement you saw in operating income in 2013? And do you expect that to -- the outperformance you saw there in 2013 to continue in 2014? And maybe provide some metrics, if you could, on that.

Sure. Our green business continued to recover. Their trajectory was about one-year lag from an external market standpoint compared to the blue business. And they improved their operating profits in 2013 by over $4 million year-on-year. Our expectation is for a like improvement again in 2014. When you look at the metrics there, again they are about one year behind the blue on the recovery side. But from a process and management standpoint, they are basically there. I would expect that, if not in 2014, certainly in 2015, all the metrics will line up very close to the blue side, is not right on top of the blue side, by 2015.

Okay. And then lastly, the fourth-quarter base business growth was higher than your 5% to 7%, or even, I think, higher than your guidance for the quarter. If that's correct, can you just talk about what you thought went on there? And does that have any predictive ability about the first quarter, given the reliance on these year-round markets?

Not really. And I would not read too much into the fourth quarter because it's seasonally a very small quarter. So when you have smaller numbers, obviously percentages are not as useful as a metric. So, therefore, I wouldn't read too much into it. It was fine, and obviously it's nice growth, but I wouldn't read too much into it for 2014.

Very good. Thank you, Manny.

(Operator Instructions). As there are no further questions, this concludes our question-and-answer session.

I would like to turn the conference back over to Manny Perez de la Mesa for any closing remarks.

Thank you, Gary. And thank you all for joining us for our 2013 results conference call. Our next call -- mark it on your calendars -- April 17. Same time, 11 AM Eastern; 10 AM Central; 8 AM Pacific, where we will be discussing our first-quarter results for 2014. Thank you again, and have a great day.

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