Pool Corp (POOL) 2014 Q2 法說會逐字稿

Good day, and welcome to Pool Corporation's second-quarter 2014 earnings 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, VP and Chief Financial Officer. Please go ahead, sir.

Thank you and good morning everyone, and welcome to our call. I'd 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.

As reported, we had solid sales and gross profit growth in the quarter despite the lack of a benefit from weather. By way of example, in the year-round markets, California, Florida, Texas, Arizona, base business sales increased by 8.1% in the quarter, and 8.3% year-to-date. Excluding Canada, sales increased by 7% in the -- excuse me, 7.1% in the quarter, and 8.1% year-to-date in the seasonal markets.

After 2013's late start to the pool season, we were looking for a comparative benefit this year but as evidenced in our sales results, that benefit did not materialize. Canada base business sales were down 12.7% in the quarter and 12% year-to-date, given colder weather with much-delayed pool openings. Nonetheless, we believe that 6.6% base business sales growth in the quarter and 7.5% base business sales growth year-to-date is solid.

Please recall that there was a shift of roughly $8 million in sales from the second quarter to the first quarter this year, primarily in seasonal markets with the earlier shipment of customer early buys. So, in essence, the base business sales growth rate has remained constant at 7.5% in the first half.

Building Materials again led the way with 22% sales growth in the quarter and 21% sales growth year-to-date, reflecting both the gradual recovery of pool remodeling activity as well as market share gains. Building Materials gross margins are very similar to overall Company average gross margins.

Equipment sales increased by 9% in the quarter and 11% year-to-date with the sales growth continuing to reflect the gradual recovery of replacement activity. Retail product sales, on the other hand, increased by only 4% in the quarter and 5% year-to-date. This lower growth reflects both the recent years' modest growth of the pool install base, which drives pool maintenance expenditures and the lack of a weather benefit in seasonal markets as those markets year-on-year maintenance sales performance is similar to year-round markets.

Turning to gross margins, our ongoing efforts in sourcing, purchasing and sales execution, coupled with reduced sales mix headwind from equipment, enabled our realizing a 25 BPS increase. Going forward, we expect the equipment sales growth will continue to outpace our overall sales growth, but our ongoing execution improvements should enable us to maintain gross margins at roughly 2014 levels for the foreseeable future. We believe that 7.4% base business gross profit growth in the quarter, and 7.7% growth year-to-date is certainly solid in the present environment.

While Mark will cover expenses, base business growth, expense growth, is higher than it should be, and this should moderate in the second half as we lap certain new location openings from 2013 and other expenses incurred earlier this year. Please recall that our base business expenses were flat year-on-year in the first half of 2013 compared to the first half of 2012.

In the second half, we expect our base business sales and gross profits to grow at a similar rate as in the first half with base business expense growth at a lower rate, resulting in our reaffirming our 2014 diluted earnings per share expectations of $2.35 to $2.45 per diluted share.

Our results are not possible without the commitment of our people. As customers constantly testify, it is our people's engagement and their use of the tools and resources that we have invested in over the course of over 20 years that enables us to provide exceptional value. We continue to invest to promote the growth of the industry, the growth of our customers' businesses, and we continuously strive to operate our business more effectively.

Now 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 mentioned on the last couple of calls, our goal for 2014 and over the long-term is to grow our base business operating expenses at about half the rate of our gross profit growth and that one of our challenges this year was the normalization of management incentive costs which we expected would add $4 million to $5 million in expense in the second and third quarters over 2013.

Now that we are halfway through the year, and excluding the impact of incentive costs which we now think will increase a bit more modestly, meeting our expense growth goals this year will be a challenge. This is due to the softer than expected market conditions in some seasonal markets to greater personnel and technology infrastructure investments made to support current and future growth, and to higher freight costs this year as driver shortages have pushed freight rates up. While I expect back-half improvements in our expense growth more in Q4 than in Q3, it is unlikely that we will be able to achieve this objective this year. Over the long-term, I believe leveraging our infrastructure to grow SG&A costs at around half the rate of GP growth is a good goal for us, one which we have in fact achieved over the last five years.

Looking back at our base business results for 2009 through 2013, our base business gross profit compound annual growth rate for this time period was 7.9% while our SG&A compound annual growth rate, excluding incentive costs, given their variability, was 4.1%, adding credence to this being an attainable goal for us going forward.

Moving on to our balance sheet and cash flow at quarter end, you can see that our total net receivables grew 9% and our inventories grew 6% year-over-year, both roughly in line with our sales growth. Our accounts payable balance, however, decreased 3%, resulting in the additional cash used in operations this year versus last. The accounts payable decline was a result of vendor payment timing differences, so we expect to normalize in Q3 and put us back on track for meeting our operating cash flow goal of exceeding net income for the year.

Cash used for open market repurchases in the quarter was $58.2 million, resulting in 1.006 million shares repurchased at an average price of $57.85. For the year, we have used $85 million to repurchased 1.5 million shares and have $112 million remaining under our current board authorization.

I should let you know as well that our leverage at quarter end as measured on a net debt to trailing 12-month EBITDA Asus was 1.48, which is a comfortable to conservative level of leverage for us.

Given our share repurchases in the quarter and so far for the year, I thought it might be useful to provide you with our estimate of our share count for the rest of the year, just rolling in the share repurchases we've completed to date. For Q3, our fully diluted share count estimates for the quarter and year, respectively, are 45.370 million and 45.941 million. Our estimate for Q4 basic shares outstanding is 44.328 million and our estimate for our full-year 2014 fully diluted shares outstanding at year-end is 45.864 million shares.

Now I'll turn the call over to our operator to begin our question-and-answer session. Denise?

We will now begin the question-and-answer session. (Operator Instructions). Ken Zener, KeyBanc.

Good morning, Manny. I wonder, the northern weather that you talked about in seasonal markets, I think in the past, I know last year was wet. I think we had talked about perhaps a $50 million drag from last year. How much of that drag was -- if that was the easy comp from last year, what was the drag from the northern markets dollar-wise?

There's two parts here. The seasonal markets in the northern US, we expected them to -- for it to warm up at a normal schedule. They warmed up at a schedule very similar to last year, which is later than normal, so the year-on-year impact was basically net zero in the northern US overall although we expected it to be a benefit given again how 2013 was a late season.

The real issue from a weather standpoint was Canada. And Canada this year was abnormally late, and our sales reflect that with our being down 12%. And in various discussions with manufacturers there in the Canadian market, we are performing at least as well, if not better, than the marketplace. So that is reflective of what's going on there from a weather standpoint. And the impact there, the dollar impact, is about $5 million to $6 million.

Sales.

Sales, yes.

And then Mark, you had talked about the base costs, the $4 million to $5 million, more difficult costs that gross profit versus the fixed cost. But could you perhaps just translate those type of costs? Generally from an EBIT leverage perspective, I think about you guys doing about 15% on the corporate line. That's still your target, correct, excluding all these base costs comments that you've made?

Yes.

And now freight, you called freight out as somewhat of a drag. How in the past has freight been offset from a cost basis? Is that something that works through into next year's pricing scheme and not in the current year when you get higher freight costs, or could you please comment how that worked in the past? Thank you very much.

Sure. We have our own fleet of trucks that handle a preponderance of the deliveries, but we also, where it's more efficient, we outsource that and use third-party carriers, whether it be LTL or small parcel. And it's those third-party costs that have specifically gone up. Typically, we try to pass that on to our customers where the market permits us to do that, those cost increases, but that tends to be more reactionary. So what's happened this year with the tightening of rates in the last six to 12 months, we are kind of, in the timing sequence, behind the eight ball. We will certainly endeavor to pass that on next year, and hopefully the market cooperates.

Thank you.

Matt Duncan, Stephens Inc.

Good morning guys. Just on sort of what you guys are seeing in the marketplace, is the decline in existing home sales, do you think that will have any impact on the pace of refurbishment that you guys are seeing, Manny?

We have not seen an adverse hit on the remodel replacement sector. In fact, we continue to see improvement.

Now, the perspective here, just for sake of understanding the point, is that replacement and refurbishment activity or remodeling activity really took a hit in 2008 and 2009, and it was flattish in 2010 and began to recover in 2011, but we are still a ways away from what we view as normal behavior. So while you can argue that the recovery may have moderated a bit or has moderated a bit in 2014 versus the rate of recovery in 2013, we are still in a recovery mode, and therefore that is helping two points of reference, equipment being one, where we have 11% year-to-date sales growth, and second and more specifically in Building Materials where we have 21% sales growth. So basically what we are talking about here is these are areas that are directly affected by the recovery.

Certainly, in the case of Building Materials, we continue to gain share, and we do that at a very strong rate. Our share gains are a lot more modest in the equipment side, and therefore when you see 11% year-to-date growth there, you are seeing an industry that is growing probably in the very high single digits in terms of that activity, which again reflects a recovery component for that sector.

Very helpful, Manny, thank you. In terms of the slight difference in growth rate you saw in the northern US and the sort of non-seasonal markets, the Texas, Arizona, California, Florida markets, is it -- I assume that's really just a minor maybe delay in some of the chemical sales and just the maintenance stuff from a slightly later opening, but not quite as bad maybe as last year? It sounds like maybe it's pretty similar to what you saw last year in some of those northern US markets.

What happens here is the year-round markets are fairly consistent in terms of from a weather impact standpoint --

Sure.

-- it's not very significant. In the seasonal markets, when pools -- remember, by the way, that goes back to the fact that in year-round markets the pools are basically open year-round, whereas seasonal markets, they are more inclined to be closed in the fall, winter and reopen in the spring. What happens here is that we were looking for an earlier opening in those seasonal markets than last year because last year was later than normal. And in fact, this year was -- they opened at about the same time as last year.

So I think what's happened -- and at some point there is going to be a normal weather year, and when that happens, we will get a little bit a lift in the seasonal markets, and those will grow at a rate a little greater than the year-round markets.

Okay. And the last thing from me, just on the green business, what are you guys seeing there? What was the growth like there in the quarter and what's the outlook for that business?

Sure. The growth in the green business in terms of gross profit was very much in line with the blue business, both for the quarter and year-to-date. And that business is tied closer to new home construction, so they are not getting the same level of tailwinds that they maybe were getting in 2012 and 2013, but nonetheless we continue to improve our execution and I believe, at the rate of growth that we are realizing, continuing to grow share.

Okay, very helpful. Thank you Manny.

David Mann, Johnson Rice.

Thank you. A couple of questions. First, Manny, can you talk about the current turn of the Europe business?

The Europe business is a positive story this year. The economy is still at best probably a very, very small positive on a GDP level, but given what we have done in terms of our people and their execution, we have continued to grow share. And as a result of that, Europe had double-digit sales and GDP dollar growth in local currency, both for the quarter and year-to-date. And therefore, reflecting positive results in the bottom line.

We still have a ways to go in Europe, and their performance from every metric to speak of does not compare with the domestic results from whether it be return on capital, some of the efficiency measurements like GP dollar per headcount, payroll as a percentage of sales, things of that nature. So we have a ways to go. Some of that is obviously going to be hard to overcome, given the inherent inefficiencies of having the need for higher administrative costs for each individual country, which we are not able to operate as efficiently as we are in the US where we have a significant scale. But it's a positive story, certainly versus last year, which was a bottom of that market. And I think, with our continued share growth and improved execution, we will continue to get better there.

And then in terms of use of cash, your share repurchase activity this year is already at sort of the level of the last two or three years. How should we think about your appetite for continued activity in line with that? Where should we think your year-end debt level should be, given you're at a little higher absolute level right now?

Sure. Our objective is that our trailing 12 debt to EBITDA would be 1.5 to 2 times, and at the end of June, we were at 1.48, so we were in fact a shade under our target. So therefore, expectations are that we will continue to be active in the marketplace.

The other part of that equation, David, as well as you know very well, is that we have a wind up and a wind down of working capital through each season. So the lion's share of our cash, essentially, from our operating results comes in between the June through November timeframe. So, therefore, we are going to be deleveraging naturally in the next -- in the back half of the year, so therefore to the extent that that is offset with share repurchase, we expect that our debt levels will be very similar to what they are now.

Thank you.

Ryan Merkel, William Blair.

Thanks. Good morning everyone. So my first question on guidance, should I think about the low end versus the high end as really weather-based sales growth, 6% versus 8%?

Yes.

So -- and then the follow-up, any revenue swing factors you are monitoring, or are you just hoping for consistent?

We do a little more than hope. But from an execution standpoint, what we are driving to is certain activity and behavior and results. And obviously, to that end, we compare that with other monitors that we use to see how the industry is doing. So just as a matter of course, if we have 8% sales growth and the industry is growing at 8%, then that's not particularly good in our minds, our general standards, whereas if we are growing 6% and the industry is growing 3%, that would be very good. So there are extraneous factors, weather certainly being one that directly affects maintenance and repair activity. And that is what it is.

July and August are not as weather-sensitive. Weather begins to come into play a little bit in the back half of the year, September/October, as pools begin to close down in seasonal markets. But the impact of weather in the back half of the year is naturally less than in the front half because it's when pools are open that there is a trigger of expenditure at the pool level that affects our business and our industry.

Okay. And then in the past, when the second quarter is soft in the seasonal markets, does it tell us anything about the second half? And what I mean is can business kind of pop back, some things that were deferred kind of pop back in the third quarter, or is there just some business that is lost?

It would be business lost. So therefore, just a point there, Ryan, if somebody opens their pool on May 15 instead of April 15, that's a month less of expenditures of call it mid-April to mid-May. And that's lost. Typically, by the end of June, the pools are open, so therefore it's done.

Right, I figured. Okay. And then last question from for In Canada sales were down 13% roughly in the quarter you said. Is that in US dollars?

That is in US dollars, yes.

That is in US dollars. And then you mentioned Canada, we had the weather obviously. But I wonder. Is the softer consumer backdrop there also potentially partly to blame?

Yes, but we believe that it's -- yes, but it's primarily weather.

Okay, great. Thanks.

Anthony Lebiedzinski, Sidoti.

Good morning. Just wondering, as far as the seasonal markets such as Canada and the northern US, can you just tell us typically what percentage of your second-quarter sales these markets are?

Hold on one second. Let me get my glasses.

I just wanted to get a better perspective on the importance of these markets --

Sure.

-- just for the second quarter.

In the second quarter, these represent close -- 56%, 57% of the total number.

Okay. And --

Whereas in the year they would be more like 47%.

Got it, okay. Thanks for that. And also I was wondering if -- was there any notable impact of inflation in the second quarter? And also what do you expect for the balance of the year?

Inflation in the first half was very, very modest. On maintenance chemicals, accessories, virtually nil. That could be a little bit in the back half. At least, we are looking for a little bit in the back half given some of the -- what's going on in the chemical market.

In terms of equipment, modest increases that were announced late last year by the manufacturers that became effective earlier this year. So, overall, I think when you weigh everything out, we are looking at probably closer to 1% in the first half of the year. And that may be a little higher, but still in the 1% to 2% range in the back half.

Okay, thank you for that. And also you mentioned earlier that you had some driver shortages in the quarter. How do you see that shaking out during the balance of the year?

I think that is a tough dynamic certainly not unique to us. It affects everybody that uses third-party carriers. I know third-party carriers are scrambling for drivers. Increasing regulations, some put forth July 1 of last year, has really tightened that marketplace in a significant way. I've heard estimates, or read about estimates of there being in the US are being 2 million to 3 million drivers short of natural demand, or basically need. So, if you have a friend that wants to be a driver, there's plenty of jobs available. And what's happened consequently is, because of that driver shortage, it's tightened up freight capacity. And across the board, when that happens, rates go up. So --

All right. Thanks for that information.

Garik Shmois, Longbow Research.

Hey, good morning. This is Mark on for Garik today. I'm just curious about the sales cadence month-to-month during the quarter and how it's kind of impacted by the pull forward of demand you said you saw in the first quarter.

Sure. Really outside of the fact that we had, from a calendar standpoint, one more sales day in June and one less sales day in May, the sales cadence was very consistent on a year-on-year daily sales rate basis April, May, and June.

Okay, that's helpful. I guess can we get an update on any sales trends in July?

Sure. Very similar to what we saw running at about call it close to 7% on a daily sales rate basis through yesterday.

Okay, that's all for me. Thank you.

David Manthey, Robert W. Baird.

Thank you. Good morning guys. First off, could you give us specific growth rates for the blue and the green business? And I don't know. I suppose that's US. If you could give us international separately?

We have it all together, and we don't have it -- let me see. In terms of GP dollars, as I mentioned, which is really the big driver, basically the green was 8% in the quarter. And the overall number I gave you earlier, and that really didn't -- wouldn't change very much because the green is about 10% of the total company. So yes (technical difficulty) number very much right on top of it. And I mentioned Europe was double-digit growth overall, but Europe overall is 5% of the total, so it doesn't affect the total very much as well.

Okay, great. And then Manny, your long-term targets, when you were kind of blue-skying it during the downturn and looking out to 2018 and 2020, you were talking about growth in new pools as well as the major repair and refurbish being sort of double-digit growth. And it seems like now we are tracking to that pretty well, recently anyway. Is there anything that changes your outlook? As you look out sort of longer-term, is there anything in the industry that has changed that viewpoint?

No. What we have seen, David, is -- this is one call that we made that was right, which was that we anticipated that 9% was the bottom and that there would be a recovery with the recovery being first driven by remodeling and replacement activity, and then later by new construction. And that's kind of worked out that way.

Remodeling and replacement activity is probably going to be, by the end of this year, about 20% or so below normalized levels. So, there's some room left to go there from a recovery standpoint. Frankly, new pool construction is still hovering around 60,000 pools, which as you know very well is about 70% below what it used to be and almost 70% below what we consider to be normalized levels at about 170,000 and 180,000 pools a year. I'm talking about inground pools.

So, we are waiting for the single-family home residential market to really establish a solid foundation, and when that happens and financing begins to revert back to normal, we believe that new pool construction will begin to recover in earnest. We may be one or two years away from that, but in the meantime, we still have the pace of recovery from remodeling and replacement.

So the bottom line in a long-winded answer is there's no change in our expectations. We are still looking at 6% to 10% GP dollar growth over the next five to seven years.

Okay, thank you. And then just last question on GP, you had mentioned that Building Materials gross profit was similar to the overall. I'm just wondering. Can you give us an idea of kind of the range? I know we've talked before about customers and products, but can you talk about, from a product standpoint, what is the differential as you look from sort of the high end to the low end? How tight is that gross profit range, just so we know, as mix shifts here, what that can do?

Sure. If you look at overall, our equipment is overall the lowest from a gross margin standpoint. Also from a fees of handling, it is, relatively speaking, easier to handle, so the cost to serve there is lower. And within the context of equipment for example, heaters are the lowest margin items because they are the highest value in light boxes, for example a sand filter. So we are talking about equipment being overall running around 20% all-in from a gross margin standpoint.

When we look at some of the lower dollar items, accessories, parts, things of that nature, where the cost to serve as a percentage of sales is a lot higher, those will be in the mid to high 30s%.

And Building Materials in much the same way runs the gamut. Now, the overall average is around 30%, but when you look underneath it, there are some product categories that will be in the teens, some components that will be in the teens percentagewise margin, and there will be others that will be 40% or north of 40%. Again, the lower dollar items tend to have a higher margin percentage because there is a higher cost to serve. They're relatively easier to handle, bigger dollar items, than to have a lower margin percentage, because proportionally the cost to serve there is lower.

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

(Operator Instructions). Brent Rakers, Wunderlich.

Good morning. This is Anjali filling in for Brent today. I just had a quick question on gross margins. I understand that, in this quarter, they benefited from I think you highlighted lower equipment sales, and I assume that that $8 million customer early buy sure helped as well. Were there any other factors that sort of helped give you that boost this quarter, or are those the two primary areas?

Good morning. Two things. We still had a little bit of a headwind, not much, but a little bit of a headwind from equipment. The equipment growth rate of 9% was a little higher than our overall Company growth rate. And as I just mentioned earlier, equipment as a category overall has our lowest gross margin percent.

The other part of that equation is we continue to improve every facet and work on improving every facet of our execution. When you look at what we do from a sourcing standpoint worldwide, what we do from a purchasing execution standpoint, as well as in sales execution, as we provide better service to our customers and our customers recognize and appreciate that, there is less push back on pricing and where we price vis-a-vis the competition. So I think all those factors come together.

The level of improvement year-on-year at 25 BPS is not -- it's certainly positive, and we believe it's something that we can sustain in terms of those levels of margins, but there's a lot of factors that play into it. For example, we did not get the geographic benefit that we were looking for, and yet we had a positive result.

So, I think, when you look out, and I am focused on the long-term more so than the quarter-to-quarter or year-to-year, when I look at it long-term, I think it's very reasonable to expect that our GP dollars and sales will grow at almost exactly the same rate for the next five to seven years. As we have some negative factors, equipment continuing to grow at a faster rate adversely affecting the mix on the one hand, but on the other hand, our continuous working on improving every facet of our execution offsetting that.

Okay, that's great. And if I'm thinking maybe not quite as long-term, maybe more the -- if I'm looking at maybe the second half of the year, is there factors in the second-quarter rate that should help give a better than flattish trends type outlook for the second half? Or do you think that maybe restoration and some of better equipment sales brings you back to that flattish rate? Any color on how you are looking at that second half?

I would look at the second half from a gross margin standpoint at like rates as last year.

Okay. Fair enough. Thank you very much.

This will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you Denise, and thank you all for listening to our second-quarter results conference call. Our next call is scheduled for October 16 -- mark it on your calendars -- when we will discuss our third-quarter results. Thank you again and have a great day.

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