Pool Corp (POOL) 2015 Q3 法說會逐字稿

Good morning and welcome to the Pool Corporation 3Q 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, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, Kate. 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.

And with that 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. I would like to start my comments this quarter with a bit of reflection.

As many of you know, our mission is to provide exceptional value to our customers and suppliers, creating exceptional return for our shareholders while providing exceptional opportunity for our employees. Without providing exceptional value to our customers and suppliers, we cannot achieve an exceptional return for our shareholders or provide exceptional opportunities for our employees. To that end, we have invested consistently over the course of over 20 years to further our value proposition and further distinguish us in the marketplace.

It is our employees who make our exceptional value proposition a reality every day, the same employees who have been provided exceptional opportunities; in many cases having started with us as drivers, working in the warehouse, in customer service, or in management training programs and who are now running businesses, regions, or divisions within our company.

As to our shareholders, earlier this month we celebrated 20 years as a public company. The bottom line was a 26% total shareholder return compounded annual growth rate, ranking us in the top 1% amongst S&P 1500 companies public for the past 20 years. A special thank you to all who helped make this happen, but we still have much left to do.

In the third quarter we were fortunate to have a mild September helping extend the season a bit in northern markets, which contributed to our domestic blue businesses 8% base business sales book in the quarter and 7% base business sales growth year-to-date. Texas and adjacent markets recovered to normalized growth rates in the quarter after the heavy rains in the second quarter, while the pool industry in California continued to educate authorities to protect against shortsighted decisions.

In an industry that increased sales by an estimated 2% to 3% this year, our results are clear evidence that once again our unique value proposition is being recognized and rewarded by our customers and suppliers.

Building materials again led the way with 12% sales growth in the quarter and year to date. We continue to gain share with building materials as well as expand the market, working in partnership with our customers and suppliers.

Equipment sales increased 10% in the quarter and 8% year-to-date, reflecting both the continual gradual recovery of replacement activity and an improved mix with higher-priced, more efficient energy efficient products. Commercial product sales were up 9% both in the quarter and year to date as we continue to capture share in this product category.

Retail product sales increased 4% in the quarter and 3% year to date, despite recent years' negligible growth of the pool install base and there being virtually no price inflation. In chemicals, by far the largest product category sold through the retail channel, our sales were also up 4% in the quarter and 5% year to date, which is in contrast to the overall industry results as we, together with our customers, continue to gain market share.

Our growth in international markets in local currency was very similar to our domestic blue business at 6%, both in the quarter and year to date, as we've continued to increase share in targeted markets and product categories.

Our green business sales declined modestly both in the quarter and year to date, due primarily to our discontinuing several unprofitable product lines, although in this case shortsighted decisions in California to pave or cover in plastic lawns and landscaping also impacted sales.

As expected, our gross margins were essentially flat versus prior year, as were our base business expenses in the quarter. Year to date our expenses were modestly lower given the impact of the stronger dollar. This leveraging of our infrastructure enabled us to increase our base business operating margin by 80 bps, both in the quarter and year to date. The leveraging of our structure carried over to our asset base with our after-tax trailing 12-months' return on invested capital increasing by 120 bps to 19%.

These results incorporate our ongoing investments in facilities, people, technology, marketing, etc., as we continue to strive to further enhance our value proposition for the future. All together, our base business operating profit increased by 13% in the quarter and 12% year to date with earnings per share increasing by 15% both in the quarter and year to date, despite the adverse currency impact.

With the season winding down, our expectations are more of the same in the fourth quarter with our realizing another successful year of solid growth driven by improved execution in every facet of our business. Effectively, we are executing our mission as we have for over 20 years, creating exceptional value for our customers, suppliers, shareholders, and employees alike. Our results and our success are premised on the commitment of our people. It is their dedication, their engagement, and their use of the tools and resources uniquely available to them that enable us to provide exceptional value.

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

Thank you, Manny. Starting with operating expenses, you can see that we have continued to have very good results here. Our goal this year, as it is every year, is to leverage gross profit growth by driving efficiencies through our operating structure, resulting in operating margin expansion. 2015 looks to be a very successful year in that regard, as we have the opportunity to set a new high mark of exceeding 9% operating margin for the year.

In 2015 we benefited from currency translation of the stronger US dollar on our non-US operations, which resulted in a $2.4 million reduction in reported expenses for the quarter and $6.5 million year to date. Offsetting this for the quarter was $2.8 million in higher incentive comp expense, based on our improved performance expectations for the year, with year-to-date performance comp expense up nearly $1 million.

Our biggest cost, which is labor, was relatively flat for the quarter and up very modestly for the year, as we've been able to handle most of the increased volume with the existing staff with year-over-year headcount as of the end of September increasing just 1.5% over last year.

Moving down the income statement to interest expense, we reported $600,000 higher expense for the quarter, which was primarily due to the currency settlement losses in the quarter rather than interest expense, which was relatively flat compared to last year. This was offset by a lower tax rate in the quarter as we benefited from our usual annual Q3 tax rate true-up.

Looking at our balance sheet, our increase in total net receivables at quarter-end was 6% and was consistent with our sales growth, while our net inventory balances were flat year over year. These results, along with our growth in income, helped put us in a good position on cash generation at the end of September with cash flow from operations of $78 million, which was up $41 million from last year.

We've continued to use excess cash to repurchase shares throughout the quarter, with 414,000 shares repurchased since we last reported, at an average price of $69.18 per share for a total use of cash of $29 million. This gives us 1.3 million shares repurchased year to date at an average price of $67.86 for a total use of cash of $86 million, leaving us with $78 million under our current share repurchase authorization.

Despite our ongoing share repurchase program, we've continued to maintain a relatively conservative capital structure. Our leverage at the end of September, which is measured on the basis of a trailing 12 debt to EBITDA, was 1.65, which compares to 1.60 a year ago. At this level, we were at the lower end of our target leverage of 1.5 to 2 times debt to EBITDA.

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

(Operator Instructions) Matt Duncan, Stephens.

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

I just wanted to start -- you mentioned the California drought and the water restrictions; I wanted to start there. I was wondering if you are still growing above that 5% year-to-date rate that you were in the second quarter. And possibly update us, maybe a little more color, around the education process of the pool efficiencies there and how that's being received in the market.

Sure. When you look at our California blue business, our California blue business has been pretty solid all year, growing 5% in the quarter and 6% year to date. What we have done there is we, together with other important members of the industry, including the industry association as well as local builders, remodelers -- so basically our customer base -- and important manufacturers in the industry, we've gotten together efforts.

And it's almost like a very basic blocking and tackling of providing those that are making decisions at the local water boards and the rest on, in fact, how much water is or is not consumed by existing pools, as well as ways to mitigate water loss through evaporation and also reflecting on the economic contributions that swimming pools as an industry make in California. When you translate the economic contribution as well as the employment created by the pool industry in California, how that translates to per gallon of water, we rank very favorably. In fact, we rank ahead of many other industries including the energy industry, the agricultural sector.

So there's a lot of industry that benefits -- what we are seeing, there's a lot of industries where our economic contribution far exceeds theirs on a per-gallon basis. So that's the effort that we have undertaken on the blue side of the business and we have been effective in doing that at avoiding any hits to speak of.

That is not the case on the green side of our business. The watering of lawns is now basically socially unacceptable in many circles, and even those that have invested in smart irrigation systems to keep their turf, which generates oxygen and reduces surface temperatures, those are disparaged in some cases by virtue of the fact that they invested in smart irrigation to really help the environment. And, therefore, there is almost like a populist mentality of turf and landscaping being bad, which is ironic given the, generally speaking, environmentally sensitive nature of people in California.

And in that regard, our sales on the green side of our business in California are down both in the quarter and year to date. We are working with industry association, manufacturers to educate those in California from continuing -- from continuing to make shortsighted decisions in covering what was formerly lawns with plastic, which is I don't think the best thing you can do for the environment. It simply results in increasing surface temperatures as well as reducing the generation of oxygen, neither one of which is good for the environment.

So that is the situation on the green side. Hopefully, we can rally forces together to do a better job educating the authorities in that area.

Very helpful, Manny. I appreciate that. Sticking with the green business a little bit outside of California, have you seen an overall improvement from the 2Q mark of I think it was down 7 within the total company green business?

Yes. Overall, the green business is down I believe it's 2% on a year-to-date basis. So that is -- and that includes not only the impact in California, but even more so the fact that we discontinued certain product lines that were unprofitable. So, overall, our green business profitability is up on a year-to-date basis despite the decline in sales.

Okay. Last thing for me and I will hop back in queue; just on the share repurchases. Trying to think about where your stock is today, how you guys are thinking about share repurchases going forward through the remainder of the year; should we expect you guys to remain active throughout the fourth quarter as we head into 2016?

When you look at our share repurchase program, it really comes back to our capital structure, both in the near-term and longer-term, as well as the cash generation that we have in the business. In the 10-K we describe our priorities and use of cash, and those priorities start with the ongoing investment in our business that we continue to do to further our value proposition.

Secondly, acquisitions, to the extent they make sense, to help us enter new markets or enhance our share position in markets that we are weak in. And then, third, dividends, which are basically targeted at 35% of net income. And then after that it's a matter of where we are in our capital structure.

Our target debt to EBITDA on a trailing 12-month basis is 1.5 to 2 times. We finished the quarter at 1.65, which is, as Mark mentioned, at the lower end of our targeted range. So you can expect us to continue to buy shares during the course of time to stay in that 1.5 to 2 times, ideally a little higher than 1.65.

The timing of that; it's really a matter of all the rules surrounding when we can buy back shares. But I think what you have seen over the course of the years now from us is that we are pretty deliberate and we continue to do that every year. Ends up being some quarters a little more than others, but a lot of that is really outside of our control given that we set established parameters and the market just solved itself over the course of time.

Great. Thanks a lot, guys.

David Mann, Johnson Rice.

Thank you and congratulations on the 20-year run. Look forward to the next 20 years.

Thank you, sir. Appreciate it, David. You've been around for 20 years.

Yes, thank you for reminding me.

Question, you talked about the recovery you saw in Texas to normalize growth; that seems to contrast with some just general comments from consumer-related companies about slowdown in Texas. So can you just talk a little more about what you are seeing, whether it's just pockets of strength or what you envision for the health of your Texas market?

Well, if you look at Texas as a market, first of all, you've got an install base of pools and that install base of pools, a number of those continue to age and there are opportunities to either replace the equipment or, for that matter, remodel the pool. And both those areas are areas that we have been growing with, not only in Texas but throughout the country, and that continues to bode well.

When you look at new pool construction in Texas, for the year it is marginally down year on year, given largely to the hit that we had in terms of activity or reduced activity in the April, May, and early June timeframe when it was really wet and everything got pushed back. We have seen in August/September new pool permits creep up a little bit above last year, but still I think for the year new pool construction in Texas will be down modestly year on year. And I think, given the August and September activity, given the realities that we saw of actual work being pushed back, I think it is largely driven by the weather impact that we had where we lost -- our customers lost workdays back in -- for about a six- to eight-week period of time.

So big picture, yes, there are certain areas within the Texas economy that are getting hit, but if you look at overall Texas, Texas is still growing jobs. The Texas economy has really diversified significantly over the past 30 years. And this isn't the 1980s Texas; this is a new Texas and a very healthy environment overall. When you look at Texas GDP growth, when you look at Texas job growth, I think it's still certainly above average from a national standpoint.

Great. Then if I could follow up. When you start looking at your initial glance at 2016 in terms of the puts and takes, factors that could affect your business, can you call out anything that you would see that could help you accelerate from your sort of 15% growth rate in EPS or anything that could be a headwind?

Sure. I'll tell you, right now, we don't see anything significant in either case. As you know, we had an estimated $0.04 hit year to date on currency. That's not a reflection on our international performance, which is very solid.

I mentioned earlier 6% growth in sales, both in the quarter and year to date in local currency, with very strong cost controls, very similar to the US market. And although Mark mentioned the fact that our expenses are down year on year because of exchange, in local currency our expenses are pretty much flat, which means that the increased GP went to the bottom line.

So I don't think we will have that same hit next year in terms of currency year on year. And really outside of that I'm looking at overall the market; certainly in the second quarter we got a hit from the heavy rainfall in Texas and adjacent areas. In essence, in a very rough sense, we believe we got that back with the milder weather in the northern markets helping us, particularly in September. So I think those two, more or less, offset.

When it's all said and done, it works out to basically an average weather year, a little hit on currency, but for next year look forward to an average weather year. Hopefully, it rains a bit more in California and the overall West. That will hurt us and help us, depending on which side of the business you are in, but net should be a net negligible impact to the Company overall.

I mean, we are going to continue to get better at what we do and that is one of the things that sometimes gets lost in our numbers over time. When you look at our growth in sales and gross profits and you look at our growth in expenses and hone in on base business in both regards, you have seen that over the course of 20 years we have increased our efficiency in how we conduct our business by virtue of the fact that our GP sales and GP growth rates far exceed our expense growth rates. And that is given the investments we constantly make in our talent, the development of that talent, plus the tools that we use in our business to execute better but also more efficiently as well.

Great, good luck with that. Thank you.

Ken Zener, KeyBanc.

Good morning, gentlemen. Manny, since you are concerned around plastic increasing heat in Texas, maybe you guys are going to get into the nursery business as well.

If you just describe this year in terms of headwinds or tailwinds, next year is average because Texas, California, 2Q is offset by a milder northern climate and later weather is what I just heard you summarize. El Nino is talked about and that seemed to bring a lot of rain. Do you think this --? Could you -- because there's different regions -- Texas, California, North helped you this quarter -- can you quantify -- that drag that we had in California and the deceleration we had in Texas, which are very large markets, was lost sales. It's hard to imagine that that North just really offset that, so it seems like you would have a tailwind potentially next year associated with that.

And because California recovered -- that was what concerned me most about last quarter was the deceleration in California. Was there a really a big product mix deceleration? So chemicals slowed down in California and that's what accounted for the decline? I didn't explore that with you last quarter, but was there particular segments that slowed down in California that then recovered or were the competitors acting differently? If you could just maybe do a little more postmortem on that, because that was such a big surprise last quarter and now it's gone.

Sure. Going back to California, California started off from a winter standpoint, and you live in California so you know this firsthand. California started the year with very mild winter, so it started off with a very strong start to the season, but then they had cooler-than-normal temperatures particularly in May and June.

And what that does is basically water -- the chemicals don't burn off the water as much so therefore you need less chemicals to maintain the water properly sanitized, so that really impacted our business. But then it reverted back to normalized weather in the third quarter in California from a temperature standpoint and, therefore, chemical sales picked up back to normal.

So nothing from a competitive standpoint unique or different. It was mainly due to little shifts of weather; not little, but the shifts of weather from period to period versus normal.

In terms of California and El Nino, all the expectations for next year, the first expectation or the first hope is that the increased rainfall is in fact retained in California and not shift into the Pacific Ocean as California tends to do with a lot of its rainfall every year. So that's hope number one and, therefore, they do a better job of managing the water they do get naturally.

If that's the case, how that impacts our business, well -- and again, these are offsets. Water tends to unbalance the water, the pool water. On the other hand, the cooler temperatures means that you burn off less chlorine, so those two wash off against each other.

When you talk about more rainfall in California, this is not like what happened in Texas this year or what happens in Florida every year when you may be receiving 10 inches of rain in a month. California may go through 10 inches of rain in a year and that would be a great thing for California. So, therefore, you don't have the issues of really affecting the water temps that much or the water unstabling that much.

Net-net it's going to affect our business. And just like this year, it may affect is positively a little bit one quarter, hurt us a little bit in the other quarter, but when I look at the entire year for California net-net I'm not expecting any big swings one way or the other from an El Nino impact.

And then in terms of Texas, Texas really we lost a couple of months or really our sales were down for those couple of months year on year, very unusual. Picked back up to normal as soon as the rains went away. And we did get that, in essence, value back in Northeast, Midwest, and Canadian markets with a little bit extended season.

Okay, I appreciate that detail, and the only reason I asked is because it obviously impacted your impression of earnings in the second quarter. And Mark or Manny, do you guys really think you're going to be a public company in 20 years the way you are buying back stock?

(laughter) Well, 20 years is a long time. But, you know what, those that still hold on to their shares 20 years from now I think will be very richly rewarded.

Thank you.

Garik Shmois, Longbow.

This is Mark on for Garik today. I just have two questions.

Just looking at the base business; you've done a really good job of chipping away at SG&A over the last couple of years and operating margin in this quarter was the best 3Q we've seen, I think, in some time. You talked on currency and labor a little bit. Just wondering are we witnessing a structural change in the business's overall profitability right now or is it more so related to timing and seasonality?

Well, I think it's better, Mark, if you look at things from a year-to-date standpoint or quarter on quarter is the same thing. What you've seen is in our history, up until 2006, you saw a gradual increase of our operating margins year on year as we continue to invest in people, technology, tools, etc. Therefore, become progressively more efficient in providing our value to the customers and our suppliers and doing that more efficiently.

So that pattern continued steadily until 2006. 2007 through 2009 --.

By the way, our operating margins were 8.8% in 2006.

Which was a previous peak.

Previous peak on that.

Therefore, what happened is 2007 to 2009 you saw a significant reduction, basically 80% reduction, in new pool construction in the United States as well as close to a 40% reduction in replacement activity, the more somewhat discretionary areas. Huge hits which affected us adversely in our structure, but the way we look and manage our business is longer term, so we didn't make any short-term decisions or short-sighted decisions. We continued to make investments as we needed to and we took a hit knowing we took a hit in 2007, 2008, 2009 where our margins contracted given the industry impact on the reduced new pool construction and reduced replacement and remodeling activity.

Beginning in 2010 that was really more of a transition year, but after 2010 you have seen a gradual recovery of remodeling and replacement activity. You have seen very little recovery overall in terms of new pool construction over that period time, but you've seen more consistent recovery on the replacement and remodeling activity. So, therefore, the industry has begun to recover; still 70% less new pools being built this year than were built back in 2005.

But through that we continue to invest, continue to get better, continue to carry market share and continue to gain efficiencies in how we do our business. So you've seen a constant, gradual process of recovery and increase in operating margins really following along the same patterns that we had from our genesis in 1994 through 2006.

Okay, that's helpful. In terms of guidance, you have a $0.05 spread between the upper and lower end of the range. Just wondering what are some of the puts and takes there? That's it for me, thanks.

Sure. Puts and takes, well, we've got 2.5 months left to go. We have certain expectations on sales; that could be plus or minus a little bit. Gross margins, again our assumptions are basically flat for the quarter, but that could be plus or minus 10, 20 bps depending on mix of products primarily.

So those are the two biggest factors. Not anything to speak of on the expense side. So that's really the main factors. Anything else, Mark, that you can think of?

Just a reminder, this time of year we're really talking about Southern market, year-round markets and the Northern markets really shutdown. Weather becomes important in those markets. If El Nino should hit sometime next week, next month, whatever that would obviously have an impact given the overweighting of the Southern market business to our results.

Net $0.05 is a comfortable range, given the fact that we've got 2.5 months left to go.

(Operator Instructions) Anthony Lebiedzinski, Sidoti.

Good morning. Thank you for taking the question. Now that 2015 is almost over, Manny, what is your expectation for pool construction overall? Plus also any possible outlook for next year, that would be very helpful.

Sure. Currently -- again some states lag in their reporting; we see the bigger states on a monthly basis. Overall, we're still looking at 60,000 to 65,000 pools for the year domestically and then for next year we're expecting that to improve a little bit, probably to the tune of 65,000 to 70,000 for next year. Again, it pales in comparison to the 215,000, 220,000 that the industry did back in 2005.

But I think here what we are looking at is the lack of a robust recovery in single-family home construction, particularly the medium to upper end of single-family home construction. We have seen new home construction recover in the multifamily side, which is really not reflective of the environment that would prompt people to put a pool in their existing homes. So I think until such time as you see a real recovery of the single-family homes, particularly on the mid to upper end of single-family homes, you won't have the environment for a really robust recovery where we could see 15,000, 20,000 more pools built a year.

Again, we are waiting for that to happen. We are anticipating that will happen. We have been -- it's a little later than we would've expected it to happen at this juncture, but nonetheless we are still plugging along and gaining share and building out our services and tools so we can compensate for that.

Do you think part of this issue is the fact that I think a lot of Millenials has seen their parents or other relatives struggle and saw what happened during the housing crisis that perhaps there's just no need to rush into buying a new home?

I think there are two factors here. Certainly the psychological impact of home values declining is one since they were viewed as -- homes were viewed as the ideal and most important investments for most households and had a pattern of never going down since World War II. So I think that is important and certainly a factor.

I think the other factor is, given what happened economically and the shock that our system had back in 2008/2009, you have had people deferring basically getting married, deferring having children. So all those factors I think is a postponement of what will, in theory, take place; it will just take place later.

Again, a generation ago people were getting married an average four or five years earlier than they are in this current generation. So I think that's just -- that deferral is all part of the process and I think that generational change, coupled with the psychological change, I think those are the two that are causing this delay in terms of homeownership and young people's desire to invest in homes.

Got it, that's very helpful color. And then switching gears to the green business, you mentioned before -- well, today and also on the previous call as far as the sales impact of the discontinued product lines. I was wondering if you could -- if you were to strip out the discontinued product lines on a same-product basis, what would the green business do in terms of base business sales for the quarter and year to date?

They would be up like 2% to 3% both in the quarter and year to date. And then if you take out California, it would be humming along just like the blue business at the 8% type range.

Okay, that's helpful. Lastly, what is your outlook for acquisitions for both the blue and green segments?

First of all, understanding criteria. Criteria is entering markets that we are currently not in. Certainly there's more open space or green space in our green business, given that we are basically only covering about half of the Sun Belt. So that is certainly something that we continue to look at.

There are very few pockets like that on the blue side of the business domestically. There are some pockets internationally, but again we were very deliberate as to the markets and how we enter those markets there. So that's one.

The other factor is where we have a weaker share we look at it as well; the criteria is a little different than what we have no presence whatsoever. So those are the two.

It's not going to be a big part of our business. When you look at -- from our transaction standpoint, in the last 10 years, I think after 2005, 2006 to 2015, probably our sales contribution from acquisitions averaged probably no more than 1% of total sales per year with a negligible contribution of any bottom line. So it's a form, a way for us to enter the market. We compare that always with opening up our new locations and, in fact, we have probably done more in terms of new locations over the 10-year period than we have in terms of acquisitions.

And again, those are more resource intensive; sometimes more challenging than doing more of the same. So our first bias is always growing more of the same and then looking at what else we can sell to existing customers. An example of that would be building materials and then after that then we get into new markets because the return on capital and the risk profile, the resource intensity is greater in those areas, so therefore we have to balance the whole equation.

Got it, thank you very much.

(Operator Instructions) There are no additional questions at this time. 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, Kate, and thank you all for listening. Again, we have had a very good 20 years. Some of us in the Company were disappointed that we were ninth in terms of 20-year return; okay that we were in the top 1%, but still we were ninth so we have eight more to go. Hopefully we will be there at the next mark in five years.

Our next earnings call is scheduled for February 18, when we will discuss our full-year 2015 results. Have a great day, thank you.

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