Pool Corp (POOL) 2014 Q1 法說會逐字稿

Good morning, and welcome to the Pool Corporation's first-quarter 2014 conference call.

(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 Mr. Mark Joslin.

Thank you. Good morning, everyone, and welcome to our 2014 first-quarter 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.

Thank you, Mark, and good morning to everyone on the call.

We had a solid first quarter with sales heavily weighted by the year-round markets. One item highlighted in our release was the increase in customer early buys. These early buys are primarily directed to help our customers, especially retailers, position themselves for the upcoming season. The year-to-year net increase of $8 million in customer early buys represents sales recognized in February/March of this year that are typically recognized and were recognized in April/May of last year.

Building material sales again increased by over 20%, reflecting the ongoing recovery in remodeling activity, are capturing a greater share of this business, and our ongoing broadening of our product offering. Building materials' gross margins are comparable to our overall Company gross margins.

Equipment sales increased by almost 13% in the quarter, reflecting primarily, the ongoing recovery and replacement activity. Equipment gross margins are lower than our overall Company gross margins, and the increase of equipment in our sales mix since 2011 represents an important factor in the decline of our gross margins since then.

Given first quarter activity, and our visibility for the balance of the year, we continue to believe that mid- to upper single-digit percentage sales and [full] gross profit growth is a reasonable expectation for 2014. Of course, no business is taken for granted, as we start each year with zero market share, just like in most sports, start with a 0-0 score.

During the course of the year, we earn our customers' businesses, or business, by providing exceptional value with a value proposition unique to the needs of each customer and each unique market. Our people are the ones who provide both our customers and suppliers a value which is unique within our industry.

Part of the value we provide our customers are training events, like our retail summit, with many such events held in the first quarter. As these events have evolved over time, more and more customers are attending, reflecting positively, once again, on the value being provided.

At this juncture of the year, our daily sales are increasing consistently, and we look forward to another successful year. With that, I'll turn the call over to Mark for his financial commentary.

Thank you, Manny.

I'll start with a few comments on our SG&A costs. As I've mentioned on past calls, our goal here, for 2014 and over the long-term, is to grow our operating expenses at about half the rate of our gross profit growth. We can do this by taking advantage of underutilized capacity in our workforce and facilities, leveraging our gross profit growth into greater operating income growth.

A challenge that we face in 2014 in meeting this goal is the growth in our management incentive pay, which is inherent in our performance expectations for the year after the relatively weaker performance year in 2013. We expect our 2014 performance-based pay will be $4 million to $5 million higher than in 2013, with most of that being booked in the second and third quarters. This makes achieving our 50% GP growth goal a bit more challenging this year.

One other P&L comment is on our interest expense line, which was up about $300,000 from last year. This increase was actually the result of exchange losses on settlement of foreign currency purchases in the quarter and not through interest expense, which was down slightly year-over-year.

Our average debt for the quarter, of $278.2 million, was up 13% from last year, while our effective interest rate on debt was down from 2.6% in 2013 to 2.2% in 2014. We continue to have ample debt capacity with leverage of 1.44 on a trailing 12-month basis at the end of the quarter.

Turning to our balance sheet and cash flow, you can see that our total net debt -- I'm sorry, our total net receivables grew 12% year-over-year, which was roughly in line with our sales growth, while our inventories grew at a more modest 7% rate, with nothing of note to discuss here. Our cash flow goal for the year is -- our cash flow goal for the year, as it is every year, is to generate cash from operations that meet or exceed net income. At this point, we see no issues in achieving that in 2014.

Moving onto to share repurchases and share account. We repurchased a total of 484,000 shares in the quarter, at an average price of $54.56, for a total use of cash of $26.4 million. No shares have been repurchased since the end of March.

Our share count forecast by quarter, which is based on repurchases to date, and which are fully-diluted shares except for 4Q which are basic, is as follows. For Q2, 46,409,000 shares. Q2 year-to-date, 46,303,000 shares. Q3, 46,636,000 shares. Q3 year-to-date, 46,510,000 shares. For Q4 basic, 45,638,000 shares. And for the full year of 2014, 46,596,000 shares.

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

Thank you.

(Operator Instructions)

At this time, we will pause momentarily to assemble our roster. Our first question comes from Matt Duncan from Stephens Inc.

Good morning, guys.

Good morning.

Morning.

Manny, I'm curious if you can talk a little bit about why you think maybe your customers were buying products in February and March that they normally would have bought in April and May. What is it that you think they're seeing that caused them to make those earlier buys?

Well, I think that, when you look at last year, last year -- and particularly, in the seasonal markets, was a very late start. And given that late start, the expectation, general sentiment, started toward the end of the year and reflected in our stronger growth as we finished the year.

I think there's a sense of optimism regarding 2014. And it's -- in many cases, it's a matter of a few weeks, in terms of when they decide to receive their orders and get their stores fully stocked up. So that's really, largely a reflection, I think, of the optimism, particularly given last year's very late season.

Okay. That helps.

And then, looking at your revenue growth for a minute here, it seems as though it's being driven primarily by refurbishment and, obviously, some replacement activity. You guys have added a lot, in terms of adding building materials products to your portfolio over the last five years.

And I guess there's been this thought that there's a lot of pent up demand of refurbishment activity. How much more of that market do you think you are now in position to participate in because of how much you've broadened your product portfolio of building materials products that are used in the refurbishment of existing pools?

Great question, Matt. When you look at 2013, the building materials product segment represented approximately 10% of our sales. And we see that segment growing at a much greater rate, much higher rate than our overall business over the next five years, at least.

And that's -- several factors play into that. One is what you mentioned, in terms of the gradual recovery of discretionary spends, where some deferred refurbishment activity is now taking place. A second factor is our increasing our bandwidth, in terms of product offering, to further be a complete supplier of anything and everything for the outside. And third is our increased rollout of showrooms where we now have over 80 such locations in North America.

So when you couple the breadth of offering with the ability to help our customers sell that breadth of offering through our new and expanded showrooms and then, the overall macro environment, I think, is a very powerful statement for the opportunities that exist in building materials.

Okay. Thank you for the color, Manny.

Thank you, sir.

And our next question comes from Ryan Merkel from William Blair.

Good morning, everyone.

Good morning.

Good morning.

So to start off, what was the growth rate for the maintenance products in the quarter? And then, you gave some color, I think, on some of the discretionary product. But what -- as you define that category, what was the growth rate there, too?

In the maintenance category, which would include chemicals and accessories and parts, you're talking about sub-3% growth.

And then, discretionary products -- is that up double digits?

Yes. Discretionary product, the two primary product categories there, Ryan, would be building materials, which are up just over 20%, and equipment, which is up almost 13%.

Okay. You know, and I think, maybe it was last quarter, we talked about the outlook for the year was that the discretionary business would be up high-single digits and the maintenance business would be up mid-single digits. Is that still a fair characterization?

Yes. I think that, once the season kicks in, that's when a lot of maintenance items are sold. And therefore, I think that is, in fact, still the case.

Okay. And then, coming into the quarter here, there was a lot of discussion of weather and how that might hurt the quarter. I didn't hear you talk about that in the prepared remarks. Did weather have an impact at all?

Not significantly, no. I mean, when you look at the markets -- and I know you in Chicago have had a very long winter, although you had a great weekend last weekend.

We did.

The real bad weather pools are basically closed. So there's no real impact.

I think the weather impact is, in the seasonal markets, more in the shoulders of the season. And that really is March and April -- March, April, May. And then, as you come out, September, October, and November. When you look at that, and we look at March activity, March was really not -- it was very similar to last year.

Yes.

So no impact there. So it's really April and May on the common terms of what that looks like.

Got you. And last one for me -- do you still expect gross margins this is year to be flattish?

Yes. I think the fact that, if you back out early buys, or the change in early buys year-on-year, the actual margins in the first quarter were flat. I think that provides me, certainly, a lot more confidence. And frankly, some of the things we're seeing in April -- the fact that we'll be flat for the year is, I think, a very fair statement.

Thank, thanks a lot.

Thank you, sir.

Thank you.

Our next question comes from David Manthey with Robert W. Baird.

Thank you. Good morning, guys. The shift in early buy timing -- this was just customers deciding to do this. There was nothing that you did from your end?

We typically sell early buys. We start selling early buys to customers in the fourth quarter preceding. And then, the customers then make the decision in terms of when they take delivery.

Yes.

And basically, coordinate that with us. You also got to figure that -- I mean it's, I think, a mutual decision. There's not a one hard -- no, it's their call or our call -- it's usually a mutual decision as to when they receive the product.

The payment terms for early buys typically are May/June timeframe. So as a matter of course, they're aware of that. And if they take delivery a few weeks earlier, that's all good and fine.

Okay.

And the reason that the reported gross margin was a little bit lower than what the core would have been at flat -- is that because of the discounts that you're giving to your customers based on those purchases?

Yes. Exactly. In fact, when we do early buys, David, instead of providing our customers onesie, twosie type [meets] to replenish their stock at their stores, in a number of product categories, we provide pallet quantities. And with those pallet quantities comes a little bit lower price.

Okay. And then, to close the loop on this -- was there any related change or shift in your buying behavior to support that? It doesn't sound like there was. But anything in terms of the timing or level of the rebates that you get from your suppliers related to this change at all?

Not at all. Zero.

None. Okay. Great. And then, just the last question -- in terms of the large expenditures and sort of the replacement/remodel activity, it clearly seems like there's some element of catch-up to it, in terms of some of the big-ticket items that had been deferred when consumers weren't feeling as good about the economy.

But when you look at the demand trends you're seeing today, do you feel these are sustainable? There might be a pent-up demand component to it, but you're feeling better about the underlying demand trends? That they can continue long-term, just because of the economic cycle where we are today?

Yes. Specifically, for example, to building materials. Building materials growth, which is primarily for refurbishment at this juncture, has been growing at a similar type -- around 20% rate for the past now two or three years. Equipment sales, which is primarily driven for replacement activity, has been growing at a double-digit rate now for the past two, three years. So those are the two big elements, in terms of refurbishment and replacement. So that's been strong now for the past two or three years. And we don't see that changing anytime soon.

New construction has really not recovered to any significant degree. That's where the real big ticket is. And at this juncture, we have not seen any significant movement from a recovery of new pool construction.

And you would have seen that -- or you would be seeing that right now, in terms of as you're talking with your customers, they're taking orders for pools for the season by now. Right?

Oh, yes. Certainly. And by the way, when I'm saying there's no significant recovery, it means that the numbers are creeping up. But the order of magnitude sampling, how that translates to our sales -- the big driver, in terms of both building materials and equipment, have been related to refurbishment and replacement.

Got it. All right. Thanks a lot, Manny.

Thank you, sir.

(Operator Instructions)

Our next question comes from David Mann of Johnson Rice.

Hi. Yes. Good morning. Thanks for taking my question.

In terms of the green business, can you comment? Just an update on how that business performed in the quarter. And any change in that outlook for the year?

Let me see. I appreciate you bringing up the Horizon network data. Sales were a solid 8% up for the quarter. Operating profit was up nicely. So I think that business is performing at expectations.

And they are also benefiting -- given the weighting of that, of the product we sell in that network, it's weighted toward the recovery of new construction. And we are begin to see some level of new construction activity -- recovery.

And although the national statistics aren't as positive, given the delays in the weather, we're experiencing some level of recovery there in what we're selling. And also, I think we're gaining some share without having to compromise margins.

Great. In terms of expense growth, can you quantify the couple of items that you mentioned in the release? The professional fees and the marketing event?

And then also, Mark, I thought that I heard on the last call and read in the K that you seem to have expected growth at about -- expense growth at about half of the sales or GP growth rate. Is there something going on now to get you a little more, you know, a little -- pulling back a little bit from that kind of guidance for the year? And if so, what's that issue?

Yes, David. Just on the expense growth -- as I said in the prepared remarks, our target there is the rate of growth to be about half the rate of GP growth. And we feel good about being able to achieve that. A little bit of pressure from the incentive cost.

First quarter is a little bit of an anomaly because the sales are lower, and it has a bigger impact. So to get to half of the rate of GP growth in the first quarter, our expenses were only up to about $2 million beyond what they would have been if they were growing at a half the rate of GP growth.

And that was really the magnitude between the two items that you mentioned, or that we brought up in the press release, on the sales meeting retail conference as well as professional fees. So about half each.

Okay, great. And then, one last question. Manny, you talked about the trend in April, as far as it pertained to margins. Any comment can you make about how sales are going this quarter relative to sort of that annual growth rate you're talking about?

Sure. I mean, I'll just -- for the month-to-date, I think we're tracking pretty well along the lines of what we did in the first quarter -- adjusting out the early buys.

Perfect. Good luck in the season. Thanks.

Thank you, sir.

And our next question comes from Anthony Lebiedzinski.

Good morning. Just a follow-up on the gross margin. Last year, you guys talked a lot about some mix shift changes to lower-margin categories.

As we look at the first quarter and for the balance of 2014, is that no longer the case? Or how should we think about the fact that more people are buying variable speed pumps and other higher-priced but lower-margin items?

Anthony, we still have the headwinds from the shift, as I mentioned in my remarks, for equipment. And the fact that equipment margins are lower than our Company average.

And secondly, within the context of equipment -- what you just mentioned, in terms of LED lighting, variable speed pumps, high-efficiency heaters, all of those kind of products, which are higher-ticket items -- do drive our gross margins percent down. Although they generate more GP dollars.

There are two factors that play favorably for us this year. One factor, having kicked in just yet to speak of, is the geography mix. Last year, the seasonal markets, which tend to have a little bit higher gross margin given a slightly higher operating cost as a percentage of sales than the year-round markets. They, last year, were a little bit lower as a percentage of our overall Company mix than the normal. And therefore, as they become a bigger part of our overall mix this year back to normal, that'll be a little bit of a geography mix benefit that we get this year.

The other is -- as we look at our business, we're constantly searching for ways to improve every facet of our business. And certainly the pressure -- not the pressure, per se -- but the margin reductions that we've seen in the last two years is something that has moved up as a priority. So we have invested significant resources internally, as well as some external, to really address margins and find ways to improve our -- basically pricing management as we look at our business.

Okay. Thanks for that clarification for that.

And in response to I think the first caller, Manny, you talked about the fact that you now have 80 showrooms with an expanded product offering. Now, potentially down the road, like three to five years from now, where could the number of showrooms go up to?

It would be roughly around 100 in terms of North America. The emphasis there was always to have one in every major market. Currently don't need as many as we have shipping locations. But certainly, we intend to be in every market of any significance.

Okay. And can you comment on your international business?

Sure. Canada is digging out of the snow. And Europe had a decent first quarter, in terms of year-on-year.

They are weighted toward the north, as you well know. And this year was a more normal weather year than last year, which was a little bit on the cold side. So therefore, they are off to a good start from a sales standpoint.

Okay. Got you. And lastly, as you are doing more of these retail marketing events, I think one of the issues in years past was that a lot of the independent pool retailers were either closed on weekends or they had -- their operating hours were shorter than what most customers would like to.

Have you been able -- have you seen any changes, in terms of how the independent pool retailers are operating their stores? Can you just comment on that?

You have very good notes, Anthony.

One of the items that, certainly, I have been preaching and a number of others in the industry have been preaching, is the fact that storefront retailers need to be open when customers need to buy. And over the course of the past 15-plus years, we have seen a gradual shift to expanded hours when customers are buying.

Sunday remains a big void in my mind. But certainly, a good many more retailers are opening on Saturdays, and in many cases, full day on Saturday. So that wave is happening. Certainly, not at the pace that I believe is appropriate.

And they're customers; they're not part of Pool Corp. So they're customers, and they have their own businesses. And some listen and reap the benefits, and some listen and don't do make any changes. And they suffer the consequences.

The reality is that those that have listened -- have extended their hours; have made sure to enhance their store merchandising; their point of sale activity; bolster their planograms, in terms of positioning and rotation; invest, together with us, in marketing to drive store traffic -- those retailers are succeeding and doing very well. But those that still follow the practices they did in the 1960s and 1970s are certainly under pressure.

Okay. Thank you very much.

Thank you.

(Operator Instructions)

Our next question comes from Anjali Voria of Wunderlich Securities.

Good morning. My first question is, we've had two very tough second quarters over the past two years now for a variety of weather-related seasons. And it seems like April has had some interesting weather dynamics, such as that snow in the upper midwest.

Can you talk about your expectations for the timing of the start to the pool season this year? And, more specifically, would you mind discussing the status of pool season openings on a regional basis?

Sure. Typically what happens is -- there are two factors here in play. One is, if you are in the pool business, and you open pools on behalf of the pool owners, typically you have already circulated some communication to your customers to get those pools open. And typically, those communications begin in February and early March. And then, depending on the response from those communications, that prompts openings typically in April -- I mean March, April, and May.

And obviously, it's earlier as you are further south. Call it, in Tennessee, maybe April. As you go a little bit further north into Kentucky, southern Ohio, and then maybe early May, as you get into the rest of the country. And Canada. That's on the ones that are open by a third party.

In the case of the pool owners that open up their own pools -- in those cases, typically what prompts that is two, three days, four days of good weather. And whenever that hits, that happens.

For example, I mentioned earlier, when Ryan Merkel was asking a question, since he lives in Chicago. Chicago had a very nice weekend. It broke 70 both Friday and Saturday. Unfortunately, Sunday turned cold again, and Monday was cold again.

Instead of two days, had that lasted three or four days, that would have prompted pool owners in Chicago to open up their pools. And again, it's almost market by market.

And while I can't give you a blow-by-blow, I think, if you look at having four days of 70-plus weather, that basically does it. And then at that point, there's a mass opening of pools in the marketplace.

Okay. And would you mind discussing some trends that you've observed in some of the larger states that you're in? And as a follow-up to that as well, could you maybe discuss if there has been any impact on demand from water shortages in Texas and California by any chance?

Sure. Okay. Let's see. Larger markets -- I'll start with California. California -- all the news about the drought and the lack of rainfall is certainly an issue. It's more accentuated in Northern California than Southern California.

And at this juncture, and again it's more of an isolated case, but in Northern California, what that has translated to is a reduced rate, or slowdown, in the issuance of permits for new pools. It has not really affected the existing pools to any degree because they still are open and need to be maintained. But it has reflected some slowdown in the issuance of new pool permits in certain isolated municipalities. Haven't seen that in Southern California, which is a much bigger market than Northern California.

Texas, to speak of at this juncture, haven't heard or seen anything of note. And then, with respect to Florida -- Florida is fine. In fact, if anything, it's too wet.

And Arizona, it's desert as a matter of course. And with a strong base of water underneath. So Arizona has no issues on water.

Okay. And then lastly, gross margins have increased sequentially from Q1 to Q2 by, call it, 60 basis points in the last three years, and even more in the past. Can you talk about what that normal is? What the primary drivers behind that list are? And what really would make 2014 different from prior years?

Two factors play into that. One is geography, and the other one is increased sale of non-discretionary products.

So what happens here is, if you look, for example, at our first quarter. Our first quarter is heavily weighted by the big four states. California, Florida, Texas, Arizona. Those four states in the quarter represent close to, not quite, but close to two-thirds of our total sales in the quarter.

When you go to the full year, those four states represent just over 50% of our total sales. So what happens is that, from a geographic mix, those four states become a much smaller percentage of the total mix in the second and third quarters of the year.

There is, as I mentioned, and mentioned before, in the seasonal markets, seasonal markets are obviously not having a flat or almost a flat sales curve, have some, in essence, built-in inefficiencies by virtue of the fact that your staffing, your facilities, are all geared toward serving the market in the peak season. So because of that, your operating expenses as a percentage of sales are higher than in the big four states.

And that's not unique to us; that's the market. And the market recaptures that with a little higher average prices in those seasonal markets than in the big four states, with similar operating margins when is it's all said and done. So that's factor number one.

Factor number two is what I mentioned earlier, which is the fact that you have -- when basically every pool is open, call it, by the end of May, June, July. In those months, you're consuming a lot of product. These are maintenance and repair type products. Low dollar. Non-discretionary. And because of that, the gross margin percents are higher.

Okay, perfect, thank you.

And this concludes our question and answer session. I would like to turn the conference back over to Manny Perez de la Mesa for closing remarks.

Thank you, Betty. And thank you all for listening to our first-quarter results conference call. Our next call is scheduled for Thursday, July 17, when we'll discuss our second-quarter 2014 results. Have a great day.

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