Pool Corp (POOL) 2015 Q1 法說會逐字稿

Good morning and welcome to the Pool Corporation first-quarter 2015 results conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mark Joslin. Please go ahead, sir.

Good morning, everyone, and welcome to our 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 2015 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 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. We had a solid first-quarter buoyed by our increase of customer early-buy shipments. These shipments are primarily geared to helping our retail customers better prepare earlier for the upcoming pool season.

Separately, the favorable weather benefit in year-round markets was essentially offset by the impact of the stronger dollar on international sales. Overall, a solid sales first quarter.

Building material sales again led the way with 17% sales growth, reflecting both the ongoing gradual recovery of remodel activity and our continued capturing of market share. Commercial product sales were also strong with 14% sales growth as we continue to gain share in this market segment. Retail product sales were up 11%, spurred by our increase of early-buy shipments, but within retail our chemical product sales were up almost 10% driven primarily by a combination of favorable weather in year-round markets and market share gains.

Our estimated base business first-quarter sales growth, adjusted for early buys, was approximately 7%, which is roughly double the overall industry growth rate and is more reflective of our sales growth expectations for the year.

Turning to gross margins, the small decrease is due to our increase in early-buy shipments. Given logistical and scale efficiencies, early-buy sales are typically at modestly lower margins. Our expectation is that 2015 gross margins will be essentially flat with 2014.

Our operating leverage continued to benefit us in 2015, as it has historically, which should result in 2015 being another strong year of earnings growth combined with strong cash flow and return on invested capital. Of course, it is important to appreciate that we compete in many individual markets, each of whom has its own unique set of customers and market dynamics.

While every market participant starts the year with zero market share just like us, it is incumbent on us to provide ever-greater value in each case to each individual customer in each individual market in order for us to realize the results that we strive for. Nothing can ever be taken for granted and we must continue to invest, as we have done historically, to further enhance our value proposition to our people, our tools, and the many resources that we deploy to help our customers succeed.

Now I will turn the call over to Mark for his financial commentary.

Thank you, Manny. Looking first at our SG&A costs for the quarter, our 4% total 1% base business growth over last year was a very good result. We were helped here by the translation of foreign-currency-denominated operating expenses into dollars, as we noted in our release, and to a lesser extent by the impact of lower fuel costs on deliveries. We also benefited from good cost management in many areas throughout our business.

As usual, our goal for the year is to grow operating expenses at around half the rate of gross profit growth, which is challenging, but we are off to a good start in meeting that objective this year.

On the balance sheet and cash flow statements, results were in line with expectations as one less billing day in February and one more billing day in March resulted in slightly higher accounts receivable growth at the end of the quarter compared to last year, with resulting higher cash usage in the quarter. Our goal here this year, as it is every year, is to grow cash flow from operations in line with our earnings growth. We see nothing at this point that should prevent us from doing this.

Turning to share repurchases, we used $2.6 million during the quarter to buy 38,800 shares at an average price of $67.83 per share. This leaves us with $62 million at capacity under our existing Board authorization.

Before I turn the call back over to the operator to begin the Q&A session, I would like to take a minute to add a little color to our expectations for the year. As anticipated and discussed on our last call, and as we highlighted in our press release and in Manny's comments, our Q1 results benefited from a shift in the timing of customer early-buy shipments from Q2 to Q1, which resulted in higher sales and lower gross margin in the quarter compared to last year.

The flip side of this is that we expect our Q2 sales and profitability to be impacted in the opposite direction with the net result being relatively weaker year-over-year results in Q2 compared to other periods in the year. While this sales shift has no impact on our expectations for the year, we want to make sure that investors tweaking their forecast models take this into account.

At this point I will turn the call back to the operator, Maureen, to begin our question-and-answer session.

(Operator Instructions) Matt Duncan, Stephens Incorporated.

Good morning, guys. This is Will on the call for Matt. Congrats on the great quarter.

First off, I was wondering if you could elaborate a little bit on what products you were selling in the 1Q that would normally be sold in the 2Q that added the 3 points of growth in the quarter.

Sure. This is primarily products geared to getting retailers prepped for the season, so it would include, for example, pool cleaners; certain chemicals, particularly specialty chemicals that we want to make sure they are well-stocked in; accessories; etc. It's a pretty full breadth of products geared to getting retail stores stocked and ready to go.

Okay, that helps. Switching gears a little bit, regarding the California executive order to reduce water usage by 25%, I'm wondering how you expect that order to affect the 18% piece of your business and if it's more skewed towards new pool construction or if the green business is going to be affected as well. So I'm just wondering if you could talk on that a little bit.

Sure, two parts. It would affect both the blue and green side of our businesses and it would be geared to affecting both new pool construction as well as the remodeling of pools when the pool is resurfaced. Does not affect at all maintenance and repair; does not affect replacement, so you are talking about it affecting perhaps something to the order of magnitude of 15% to 20% of our total business, including the green business.

And now, having said that, you've got to adjust a few factors here. I think we all understand that there are two fundamental issues in California. Certainly one issue is the drought. The second issue is how California is responding to the drought.

The agricultural sector, as an example, consumes over 80% of the water in California and their rates are heavily subsidized. In fact, the individual water boards in municipalities, counties throughout the state have in many cases artificially low prices for water; not only for ag -- obviously that is the most extreme case, given how much of the water they consume -- but also for residential commercial use.

In essence, there is a lot of opportunity to reduce the consumption of water in a way that is not detrimental to society and, in fact, just by bringing in the free market. Part of that is the fact that we, on the green side, sell a lot of products that are specifically geared to efficient water consumption. These smart water products could very well be an instrument used to help reduce water consumption in a smart way with proper pricing of water in the marketplace, using the market to price water as opposed to again subsidized rates.

What that would drive is investment in tools to significantly reduce water consumption and that is something that can be easily addressed. Again, if those in position have the wherewithal to act in the best interest of the state of California. That is my soapbox on that subject.

That helps a lot. I appreciate it.

But fundamentally to our business, there could be some impact in the back half of the year in the slowing of issue of permits for new pools. We have not seen that yet, but there's certainly a lot of discussion going on. It is a shame that that discussion is going on because the solutions are so readily available. It just takes a little bit of backbone to make them happen.

Great, I appreciate that. That helps a lot. Last from me and I will jump back in the queue. I'm wondering if you can break out the growth rates between the blue business in the green business in the quarter and maybe some insight on how the international business is performing.

Sure, let me give you context here. The blue business base business sales growth was 10%, consistent with the overall. So there are two elements here.

The green business grew a little slower than that, in part because we exited the sale of one particular manufacturer's products. That is the reason why that is a little lower. And then our European in global currency was, in fact, higher than the 10% sales growth. But when you adjust for dollars, it came in in fact lower year-on-year in dollars, but in local currency it was up a little higher than 10%, which reflects our continuing capturing of market share.

I want to take this opportunity. Mark mentioned the benefit that we got in the expense side from the stronger dollar in the first quarter. Just make note of the fact that in the second quarter when our international business, both Canada as well as Europe, are profitable, the stronger dollar is going to cause us a little bit of a hit. We get a benefit net in the fourth and the first quarters from the stronger dollar, but we get a hit in the second and third.

And just for those again that are tweaking their models, there is a little shifting there because of the stronger dollar.

Okay, great. Thanks, guys.

Garik Shmois, Longbow Research.

Thank you, congratulations on the quarter. First question is around the early-buy program, if you could maybe touch upon how you are observing inventories in the channel right now. Do you think that the early-buy was more of a traditional early-buy, given this stage of the recovery, or was there anything abnormal that occurred in the first quarter that stood out with respect your customer purchasing patterns?

Sure. It's a great question, Garik. Let me just step back and give you a little perspective. The lion's share of our customers have no inventory to speak of. They buy on a day-to-day basis. Those are the guys that do maintenance, repair, replacement, remodeling, and new pool construction.

The only segment of our customer base that has any kind of inventory is the retail customers and these retailers obviously have their stores and they have the inventory in their stores. When you -- and I'm giving you that for context just to give you a perspective. What happens here is that, as the industry has developed over the last few years, typically what happens is there is a selling season for retail, and the selling season really begins in the fall and runs through typically through February. That is when we try to capture additional shelf space with retail customers.

Typically, we begin shipping those early buys, which are really to stock -- the initial stocking of customer shelves. Typically that begins in February and runs through April. Given the improved condition of the economy, given improved credit activity, we have been a little bit more aggressive last year and this year in getting those out there and getting our customers fully loaded and ready for the season earlier, which enables us to better serve them and the rest of our customers in season.

Okay, thanks for the color. I guess switching to building products, another very strong quarter. How much more runway do you have in this category, specifically delivering double-digit revenue growth rates?

For a long time.

Would you care to expand on that?

When you look at the whole outdoor lifestyle products category, which is where we are focusing our long-term attention and business on, when you look at that a lot of that ground has not yet been plowed. In other words, there was nobody there that is really providing the full suite of distribution services that we are endeavoring to provide.

And when you look at the demographics and homes being more and more of a destination, the demographics with the growth of household formation in the southern markets where you can enjoy the outside of your home extensively basically year-round, all of those types of dynamics are very favorable for us. And there's a lot of market that we are gaining within the market that exists, but we are also creating new market for products because of the ready availability and the ongoing investment that we also make in working with our customers to help develop them as advocates for investing in the outdoor space.

Okay, it makes sense. My last question is on chemical costs. If you could, perhaps, touch upon your expectations for that for this year -- I think previously you had anticipated some inflation -- and talk, perhaps, if that's still the case; your confidence in your ability to get out in front of the potential inflation later on this year.

Sure. The logic is that overall price inflation of products that we are buying will run in the 1% to 2% range for the year. At this juncture I would venture to say it's still 1% to 2%. In certain product categories manufacturers announce those product increases in the fall and we have passed those on, or attempted to pass those on, in the marketplace. So that is at this juncture largely behind us.

There could be spot increases, but other than commodities, which go up and down almost on a weekly basis, I think our basic pricing is set at this juncture. Pricing into us and pricing to our customers for the pool season domestically, where we are having more of a challenge, is in the international markets as our suppliers there, in some cases, are -- their cost base is dollar-weighted.

And therefore, to the extent their cost base is dollar weighted, in those local currency, whether it be the Canadian dollar or the euro, they're having to raise prices to compensate for the margin hit that they are incurring. So therefore they are trying to pass that on to us and we're trying to pass that on in the market in those local currencies, whether it be euro or Canadian dollar.

But in terms of the domestic market, it is pretty steady-as-she-goes at 1% to 2% and no significant aberrations from that.

Thanks so much and good luck.

Anthony Lebiedzinski, Sidoti & Company.

Good morning, gentlemen. Just wanted to follow-up on California. I have been reading that -- I guess because of the efforts to conserve water usage there could be an increase in the sales of pool covers. Have you in fact seen that or do you anticipate that to happen?

That's very forward-looking. At this juncture I don't anticipate any significant change in the sales of pool covers in Southern California. Given temperatures there, it would run against logic for many pool covers to be sold in Southern California.

It would be more applicable in Northern California, which is a smaller part of the overall market, and there could be some increase there, but nothing big picture significant.

It could be more of a pool blanket than a pool cover, which is a much lower cost point.

Okay. All right, thanks for clarifying.

By the way, we also sell products that help chemically reduce evaporation and there could be a little bit of a pickup in sales in those product categories as well. But the net-net is, whether it be a chemical blanket or a physical blanket on the pool, I don't anticipate that that is going to be a huge deal in the big picture given the weighting of where pools are in California.

Got it, okay. Well, thanks for that color. Could you give us an update on Australia, how that's tracking for you?

Sure. Australia represents about 1% of our business. The three locations are progressing I'll call it fine at this juncture. No major surprises one way or the other and, in fact, we had a call earlier this week on update on status and plans.

As you know, they are counter-seasonal, so basically they are wrapping up their current pool season and we are making plans for the next pool season as we speak.

Got it, okay. And lastly, can you quantify the impact of lower fuel prices on your delivery costs in the first quarter?

Mark mentioned it. It was not material in the big picture, but it did help a little bit in the fact that fuel costs were down in terms of the cost on our delivery fleet.

Yes. I did mention the impact on SG&A of exchange and this was lower, less of an impact, in terms of fuel. So think about half the rate of exchange impacts, something like that.

And that would be less than $1 million.

Got it, okay. Thanks for the information. Okay, thank you.

David Mandell, William Blair.

Good morning, guys. I recall last year the seasonal markets were pretty difficult. First off, can you confirm that this was true? And second off, if those markets were to normalize this year, what kind of tailwind could you guys expect?

For color and context, the 20 -- and I'm just giving you a little history here, 2012 was a very good year in terms of weather in the seasonal markets and, therefore, that means that people opened up their pools earlier than normal. 2013 was the opposite.

2014 was still below average, but not quite as bad as 2013. And at this juncture it's getting warm, so I would say probably in the next four weeks or so we will be able to gauge whether it's a little earlier, normal, or a little later than normal.

And we have already kind of baked that into our expectations for the year, so --.

Yes. In the overall picture, when you look at the fact that the biggest four states represent over half of our business, and that's pretty steady from a weather standpoint. The biggest variable is -- could it affect us maybe by 1% this year? Yes, and that's kind of baked into our numbers.

All right, that's helpful. And then how big was the FX headwind on the sales line?

It would've been about 1% on our sales, about the same as the benefit that we got from the little bit better than normal weather in California and Florida.

All right, thank you for taking my questions.

Ken Zener, KeyBanc.

Good morning, gentlemen. If you did around 11% and 3% was pulled forward, your base business is doing 8%. That 8% in 2Q would be subtracted by the 3% you picked up in 1Q. Would that be the proper logic, Mark, that you were trying to move us towards?

Let me walk you through the math a little differently, because I exclude the 1% that we got from acquisitions and new openings in new markets. So our base business was up 10%. Take 3% out, you're back to 7%.

Now, I would expect second quarter you can adjust 3% off that number because it's -- the weighting is different. So I would expect the second quarter to be more between 5% and 6%. Perhaps closer to 6% on GP, closer to 5% on sales because we get a little bit of margin pickup in the second quarter because of that shift.

So that's the essence on the sales. And then third quarter, fourth quarter would be more in the back to 6%, 7% range.

Appreciate it. Calling you from 65 degree California; pools -- that shouldn't be such a big deal one way or another. Is there -- if you guys look back at prior drought periods, whether it's water restrictions, is there any real reason to think there will be any impact on new pool construction relative to water restrictions? I mean we never saw it really in Phoenix, so --.

Historically, almost every year there is some drought impact somewhere. Obviously California is the biggest market and it's been now several years, so the -- perhaps we have to consider this a little bit more serious than we do the one-off case that we have in a typical year. But at this juncture we have not seen anything other than a lot of churn, given all the media frenzy around it.

But, again, you live in Northern California; you are aware of the environment and situation there. Let the market solve the problem as opposed to trying to create artificial fixes.

There was another data point today pointing to new home sales not reaching the cyclical acceleration that many had hoped for. Realizing new pools are generally in existing homes and existing homes did well the other day, price appreciation continues. Equity continues to build for those middle-aged existing homeowners that have put in pools.

Have you really --? Obviously you said the green business didn't do as well due to some product dislocation, but are you starting to see signs of new construction picking up? Or you obviously refer to the outdoor space, which I view kind of as more of a greenfield I guess for you guys, but --.

Are you starting to see that R&R side or that new construction side pick up more? Is there any things that you are seeing that point to that equity being spent in terms of lending loosening or home equity lines of credit or anything like that? Thank you.

On the remodel/replace side, we began seeing that recovery in 2011. That continues to date and we are not back to normal behavior yet, but we are certainly on our way there.

In terms of new pool construction, that is lagging and I think that we are beginning to see a term that was used in the financial community about five years ago, four or five years ago, green shoots. So we are beginning to see green shoots both on the psychology of homeowners to invest in their homes. Obviously that took a hard hit back in 2008-2009, so that is beginning to happen now in the form of home improvements.

And, second, we are beginning to see several financial institutions going back in and providing lending based on home equity, whether that's redoing a first or second or a home equity loan. We are beginning to see that. So I am not expecting a big pickup there in 2015, but I expect that as we move through the balance of this decade we're going to get progressively more traction there.

Thank you.

(Operator Instructions) Jill Nelson, Johnson Rice.

Good morning. If you could provide some insight into the Texas market performance, just given the drop in oil prices and the impact on the energy industry.

Sure, two things. Texas did not have a particularly strong first quarter, but when you look underneath that it wasn't so much because of energy or the economic environment in Texas. It was driven primarily because the weather was not particularly good in Texas. And when you look at the activity that we are seeing in April, we are seeing more normalized levels of activity.

So net-net is -- we haven't seen any headwinds, noteworthy headwinds because of energy. Again, most of the business that we do, whether it's Texas or anywhere else, is basic pool maintenance and repair and then associated remodeling and replacement activities on existing pools. So that, other than weather moving it up a month or two or back a month or two in the year-round markets, is not a big deal in terms of having any macro impact.

And new pool construction, I looked at the permits through the end of March last week and in all of the markets in Texas -- Dallas, Houston, San Antonio, and Austin -- where I looked at permit information on a monthly basis, in all those cases it was either flat or better than last year.

Okay. Then just a follow-up on the comment you made about April. Could you talk about maybe just broad-based overall how you are seeing performance April to-date?

Consistent with the guidance in terms of what I just spoke about a minute ago and in terms of the second quarter and then going on through -- well, second-quarter guidance that I gave earlier.

All right, thanks so much.

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Manuel Perez de la Mesa for any closing remarks.

Thank you, Maureen, and thank you all for joining us on the call. We are now totally engaged in the biggest sales and profit quarter of the year with our sales increasing almost every day. Our team is making it happen and we look forward to reporting our results to you on our next earnings call on Thursday, July 23. Have a great day.

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