Pool Corp (POOL) 2016 Q2 法說會逐字稿

Hello and welcome to the Pool Corporation's second-quarter 2016 conference call and webcast. All participants will be in listen only mode.

(Operator Instructions).

Please note, this event is being recorded. I would now like to turn the conference over to Mr. Mark Joslin, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Good morning everyone, and welcome to our Q2 2016 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 2016 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 President & CEO, Manny Perez de la Mesa.

Thank you Mark and good morning to everyone on the call. Our team managed to navigate the stops and starts of the season to realize 21% earnings-per-share growth year to date and 13% earnings-per-share growth in the quarter. While generally favorable industry conditions contributed to our results, it is our execution derived from the commitment of our people that make it all happen.

Looking at sales, our domestic blue base business sales were up 8.6% year to date including an increase of 5.1% in the quarter. The lower second-quarter sales growth was related to the early start of the season as communicated last quarter with our sales as projected in the second quarter. We believe that we continue to grow market share especially in targeted product categories like building materials and commercial consistent with our history.

Building materials realized 11.6% sales growth year to date and 9.4% in the quarter. We continue to gain share with building materials, as well as expand the market working in conjunction with our customers and our suppliers. Equipment sales increased 11% year to date and 8.1% in the quarter reflecting both the gradual recovery of replacement activity and an improved mix with higher-priced, more energy-efficient products.

Commercial product sales were up 18.4% year to date and 17.9% in the quarter as we continue to capture share in this product category. Base business retail product sales increased 7% year to date and 3% in the quarter reflecting our acceleration of early buy shipments in the first quarter. Within retail chemicals, by far the largest product category sold in the retail channel, our sales were up 6% year to date, which is greater than the industry as we, together with our customers, continue to gain market share.

Separately we estimate that industrywide Internet retail sales were up 10% to 12% year to date maintaining, the trend of the past 5 to 7 years, with sales growth a bit greater than storefront retail but with growth not as significant as was taking place 10 to 15 years ago. An estimated 5% of the domestic blue industry activity is via the Internet channel.

Staying within the blue business, our international sales were up 9.9% in US dollars year to date and 9.7% in US dollars in the quarter, with a modest adverse currency impact as we continue to grow share.

Turning to our green business, our base business sales were up 6.1% year to date and up 9.6% in the quarter. Here are the results are due to the slower start of the year in the Western markets where our business is weighted with a seasonal recovery in the second quarter.

In addition to our base business, we also closed on the acquisition of a regional irrigation distributor earlier in the quarter that contributed $8 million in sales and $1 million in operating profit. Our gross margins were up slightly due to improved purchasing and logistics execution. Basis expenses were 5.6% in the quarter and 4.2% year to date due primarily to volume and performance-based costs.

Our base business operating margins increased by 90 BIPS to 12% year to date and by 35 BIPS to 15.5% in the quarter. Our year to date base business contribution margin on sales was 22.6% and 72.3% on gross profits.

In the second half, we expect to see sales growth more like the second quarter on a base business level together with comparable growth margins and the usual disciplined expense controls. Altogether, we should have another year of solid operating profit and earnings-per-share growth as reflected in our updated annual earnings-per-share guidance of $3.30 to $3.45 per diluted share.

Our results and our success are founded 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. At this, the midpoint of the year, I'm very happy to report that we are on track with our financial objectives for the year pretty much across the board. Our sales and gross profit growth, which Manny has just provided additional color on, are doing well so far for the season with base business gross profit up 9% year-to-date. Operating expenses are growing to support our expanding business, but by focusing on efficiencies and leveraging our existing infrastructure, we are growing expenses at a rate well less than gross profit growth, which is 4% year to date resulting in base business operating income growth of 17% year-to-date.

Working capital is also right in line with expectations for the year as both inventory and receivables balances are adequate to support our business growth but not excessive. As a result, our seasonal cash use is moderate and we are on track towards meeting our annual goal of generating cash flow from operations exceeding net income for the year. With our earnings growth, strong working capital management and limited cash usage we were able to pay down debt resulting in low leverage at the end of the quarter. On a trailing 12 month average debt to EBITDA basis, our leverage at June 30 was 1.5 times, which is right at the low end of our targeted 1.5 to 2 times range.

With our strong start to the year and assuming we are able to post a solid second half, we have a shot at achieving a double digit operating margin for the year for the first time and exceeding 20% return on invested capital. Both milestone operating performance metrics for us. I will also take a moment to note that this, the second quarter, marks our 25th consecutive quarter of year-over-year growth in sales, gross profit and operating earnings.

Before beginning our Q&A, let me provide you with an update on our share repurchase program. We continue to buy back shares on the open market in the quarter adding 166,000 shares repurchased an average price of $88.11 which used $15 million in cash bringing us to 988,000 shares repurchased for the year and what is now a bargain average price of $78.74 for total use of cash of $78 million. That leaves us with $144 million under our existing authorization for additional repurchases.

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

(Operator Instructions)

Matt Duncan, Stephens Inc.

Nice quarter.

Thank you, good morning.

Manny, can you talk a little bit about on the discretionary spending that you say you think you guys are benefiting from right now. How much is it first, helping your sales growth, and is it manifesting itself more from additional [refurb] remodel activity, is it more construction? Are you seeing a mix up effect where people are opting to higher end items? How is that discretionary spend increasing showing up in the business?

We see it in two areas, Matt. First, and by the way, this is all within the context of remodel and replacement activity.

Obviously maintenance and repair is not affected and new construction, the impact there has been very modest. So really the biggest component of the increase has been within the context of remodel and replace and particularly in the product areas that are more discretionary. If you go to the equipment pad it's would be in items like heaters and lights and controls.

Obviously in terms of the remodel it would be the remodeling of the pool itself replacing the plaster finish. And associated tile and coping.

The other element which you touched on is that as part of that process, there has been a gradual migration to higher end products. If you go to, for example, plaster, we have several brands of a proprietary pool finishes and the highest end of those brands, JEWELSCAPES, which is a glass beech finish, is capturing progressively a bigger share of the pie and we just launched that a few years ago and that is again, gaining progressively more traction every year. And the same thing applies when you go to the equipment pack, the replacement, the enhancements, given the investments and developments part of manufacturers in those product categories as they develop new tools that make the equipment either more energy-efficient or providing more value in terms of, for example, I will call it the light show that you can create in your pool, increasing aesthetic appeal all the way around. All of those kinds of investments and development on their part have also increased the mix in terms of, again within remodel and replace, to a higher end product line or more higher end products.

Very, very helpful. I will nitpick just for second here, the SGNA costs of percent of sales were flat year-over-year despite pretty good sales growth. Is that a catch up on incentive comp accrual or is there some other cost that was added there?

Matt, just recall that in last year we had a relatively weak second-quarter and therefore our incentive costs for the year were low, so looking at the year-over- year incentive they were up about $4 million due to better performance this year relative to last year.

Makes sense. Last thing just on the guidance. You beat by $0.05 in the quarter and it sounds like the acquisition that you did is profitable. Just curious why maybe the guidance didn't move up a little bit more than the $0.05. Is a just a little bit of conservatism as we wait to see the year play out?

Mark, you made a comment that there's a chance you could put up a 10%, a double-digit operating margin for the year. It seemed like if you did, you would be at the high-end or above the guidance range. So just curious, sort of, what the thought process was on the $0.05 increase.

Two parts. One is the $0.05 is what we realized in the quarter. The benefit from an accretion standpoint for most transactions happened, in fact, in the second quarter with the contribution and the balance of the year being either very modest or nonexistent. And we're shooting for 10%. That's our goal to achieve and, again, that is on the high end as you well know and it's something we're striving for but not something that may very well be realized this year but certainly next year.

Basically we're treating it like the 10% is not a lay-up, it's a good stretch goal. You think you can get there, and if you got there you would be at the high-end of the range is they way we should interpret that?

Exactly.

Ken Zener, KeyBanc.

I apologize if I missed it in the first few minutes. Last year in the second quarter -- last year, you had a rare lowering of estimates tied to lower flat sales I believe specifically in Texas and California. Did you comment on those states at all today?

I did not comment by states.

Would you mind giving that?

You will have to bear with me for a second. First, last year in Texas, we had very high levels of rainfall. This year the impact was still high levels of rainfall but not as bad as last year.

So Texas, in our blue business, which is obviously the biggest part of our business, was up 4%. Now, again that 4% means that it wasn't particularly great either. So Texas was again relatively modest a little lower than our 5% overall growth in the domestic blue business.

That is for the quarter.

Yes for the quarter. In terms of California, California was a bit cool last year. This year the weather was, frankly, nicer. You live there yourself, so you experienced it and in that particular case, our domestic blue business sales quote for the quarter there was just over 10%.

So California lifted our average up a little bit. Texas brought it down hair, again in terms of our 5.1% that we realized in domestic base business for the quarter.

Last year California drought, Texas obviously the rain, but in California specifically do think it was up 10%, and what was that year to date, was that because of that weak comp last year or are we seeing the strong home prices that the states have seen really driving a lot more business.

I wouldn't read too much into it. For the total year, last year California was up seven so it was fine.

It comes and goes.

Exactly. This year on a year-to-date basis, California is up nine. So again, not earthshaking.

Understood. Last year seemed like an anomaly when you had that weakness and adjusted your estimate. The deals that you've done in the last year, even including the recent irrigation company, have you been working on that, do they just show up at your door? Is that something that perhaps might accelerate?

(laughter) No, they don't show up at our door. First of all, it's tough to get to Covington without directions. So therefore that's highly unlikely to happen.

Even with instructions it's hard. (laughter)

We have ongoing contacts within the domestic and international pool business and within the domestic irrigation business with distributors, period. There is an openness that we tried to convey in terms of knowing who they are and knowing what their objectives are. And within that context, to the extent that a particular distributor falls into our target geography, we try to cultivate a greater relationship to see if they want to be part of the organization.

That sometimes takes a year or two years to come to fruition and sometime it's taken more than ten years to come to fruition. We are, Ken, as you know, very deliberate and patient in our approach in terms of building our business and we're not going to run and try it to do 20 transactions in one year because first of all, integrating those is a nightmare, and secondly, our key is building value and over time for shareholders and that's not going to happen if we try to rush and do too many things at one time. It's a very deliberate process and its looked at on a market by market basis looking at the attributes of the market and whether an acquisition makes sense.

We've also opened up over 100 of our own locations where an acquisition didn't make sense and we just decided to do it ourselves. So we look at, and as you also know, our markets are very unique, so our customers are unique to the market and in many cases our products are unique to the market, that applies whether blue or green, or teal or brown. And therefore given the uniqueness of each market we look at the dynamics of the market, the attractiveness of the market long-term, how that market is currently being served and by who and whether an acquisition or a new opening is best, and if it's an acquisition being best, then we look at who the best one or two alternates to be and fill that void for us.

Thank you.

David Mann with Johnson Rice

Nice quarter. Couple of questions, just curious if you can give us the domestic blue comps by month and given the warm weather, the heat wave, what are the trends looking like July to-date?

In terms of that comps by month, I don't have it readily available but I will tell you that May was the softest of the three months. And particularly in the season markets in the sun belt, it was largely the same or very close to the same. Each one of the three months adjusted for the sales date of the month but in the seasonal markets, snow belt basically, May was soft and in June got back to normal. In terms of July, pretty much as expected, pretty much as we expected it to be happening for the first 13 businesses days.

In terms of the acquisition, can you give you a sense of what the sales and EBIT contribution would look like for the year. Also what kind of multiple did you pay for that acquisition?

First of all, and just for context and color, we highlight the acquisition in Texas that we did on the irrigation side but we also did a couple of smaller acquisitions on the blue side, well blue and the brown. Blue was a three location distributor in the Northeast that closed at the end of last year and that, by the way, all of those are referenced in our schedule that we have for base business in our release. As well as two location distributor on what we call the brown side, the NPT side, in Arizona and California. One location in Arizona, one location in California.

Altogether those acquisitions will contribute somewhere in the neighborhood of $0.03 a share of accretion this year. Basically with probably $0.02 of those $0.03 coming in the second quarter and basically that $0.01 would be over the other three quarters of the year.

In terms of valuation and multiples, different dynamics in each particular case. We typically don't disclose that but to the extent that it made sense and there was goodwill paid, That would have been typically in the, I'll call it, 6 to 7 range whereas in most cases it averages more like 5.

Manny you talked a little bit about the industry and the Internet and how it's sort of changing. I guess recently, Leslie's has moved to become a more active omni-channel retailer. I'm curious if you'd give some thoughts on how you think that will possibly affect your business, either more business with them as a customer or impact on some of your smaller retail customers as they become a more active omni-channel retailer.

Two parts. As we all know Internet has been around for 20 years. It was -- I can't say disruptive is the proper term because that would be exaggerating the impact. It was a factor, started becoming a factor in the late 1990s and early 2000's. It's really moderated over the last five, seven years of terms of its impact.

Having said that, it still continues to grow at a rate a little bit faster than storefront retail. A lot of that, David, perhaps in contrast with other retailers that you would follow, is given the nature of the products that we sell and that the great majority of them are not friendly to the Internet channel.

Leslie's has had an Internet presence for at least 10 years if not 15, and over the past several years they've acquired individual Internet retailers, or companies that had [awaiting] of their business toward Internet retail. In part because those businesses, the growth of those businesses were moderating and the attractiveness is that those principles had in terms of increasing the value of the business was virtually nonexistent, so Leslie's opportunistically stepped in and has acquired several of them again over the last four years or so. And that really complements their store network as a result of that they are doing what any good retailer is doing, which is complementing their store network with an Internet presence. The so-called omni-channel.

Not a new concept and that's something that we've been encouraging our retail store customers to do to better serve the local markets that they are in. The difference that Leslie's, given their largely national footprint is that they can be a little bit more efficient in that regard, than perhaps a local or regional retailer could.

In terms of our business with Leslie's, certainly as they continue to grow, we continue to support them in terms of they buy more from us. And secondly, in terms of the fact that being on the Internet, the breadth of offering may not be all that they carry in their DCs. We can serve them further as a customer and us being their vendor to the extent that it makes sense for them and for us.

Manny thank you for all the insight.

David Manthey, RW Baird.

First off Manny, in your slide deck you often talk about the aging of the installed base of pools and I'm wondering just as we're looking at that and thinking about how that plays out, do you have an assumption for the average life of a Gunite Pool?

That's a very good question, David. Properly maintained, the Gunite Pool can last somewhere between one 1,000 to 2,000 years. (laughter) And the caveat is properly maintained.

Just like a house needs the roof to be replaced every so often and painted, the same thing applies to a pool. The actual structure itself again, properly maintained, can last virtually forever at least longer than our lifetimes.

The caveat is the individual products, right? So for example let's take the pool structure of the pool surface itself, not the structure but the surface. The surface is analogous of the paint on a house or on a wall.

Typically the challenge there is the water and how well-balanced the water is not. If the water is well-balanced, the pool surface can last 15, 20 years and not have any real significant discoloration or impairments. On the other hand, if the water chemistry is not properly balanced, that life could be shortened to maybe as little as seven or eight years. So the big variable there is the water and how well balanced the water is or not.

In terms of the equipment, there's some degree of impact there in terms of how the equipment is run and how often is used and how it's used. But typically of the equipment pad items, the pump is usually first one to break down and historically the average life on a pump is something in the neighborhood of seven to eight years. That may change a little bit over time with variable speed pumps that are not stressed as much as what I'll refer to a single speed pumps and then the other items on the equipment pad did tend to last a little longer whether it be the filter or the heater or the controls.

That's great. Thank you. As you are discussing e-commerce and online purchasing that sort of thing, you mentioned that the influence of that channel has declined over time. I'm wondering if you can talk a little bit about your Pool360 app and -- it's not really online purchasing by consumers, but maybe more of the trade, doing research, looking up things, what has been the impact of that app relative to your business and do you see that continuing to grow?

Great question David, thank you very much, because it is important to distinguish B2B versus B2C. As you all know, we don't deal in B2C but we are very active in B2B. Pool360 is a tool that we launched a number of years ago which is a further enhancement of previous versions of a tool since we launched B2B back in the year 2000.

When you look at the comprehensive nature of Pool360 in terms of all the functionality that is provided and you talk to, and I talk to all the time, to for example, retail store customers that tell me they run their business around Pool 360, you talk to service guys that have that, particularly the mobile version of the app on their phone or on their iPad and the fact that they use that and have it with them religiously all the time as they look up products and try to find solutions, try to see the schematics online that we provide. It's invaluable and really endears us to the customers because it helps them run their businesses far better than the otherwise could. And it's something that, while we launched it, I think it was six years ago now, what we now coin Pool360, we have two releases per year of upgrades, and we have, call it high use customers, throughout the country that are constantly providing us insight that help further enhance the tool and again our software engineering team have that as well as a number of other projects that they work on, but have that as one that they upgrade every six months or so.

David Mandell with William Blair. Can you provide a little more color about the gross margin improvement in the base business? What kind of initiatives you have going on there? Are they new?

Yes, there's two parts to that. One is, when we look at our business, the highest leverage growth opportunity is selling more of the same to the same type customers or the same customers. And to that end, initiatives are focused on even further refining and improving our service levels as well as our sales execution to drive awareness and further integrate ourselves with the customer using tools like Pool360 that I had mentioned earlier, as well as a plethora of other tools, marketing and technology tools that we have to again, help our customers sell more so we in turn sell more to them as well as gaining share of existing customers. So more of the same to the same is a big driver, highest leverage item overall given the leverage priority number one.

Part two is selling more products to existing customers and again, second-highest in leverage, selling more products to existing customers. For example, best example of that is order of magnitude is building materials. As we have broadened our offering and brought that offering to more and more individual markets, that's enabled us to grow our share of customers high for products they may have been buying from other sources, because frankly, we did not offer those products in that market. So as we brought those products to market in those markets it's enabled our customers also to be much more efficient, dealing with one supplier that provides, again, a higher level, a much higher level of service than the marketplace does as well as all these tools and all these programs that we have to help them grow their business.

Third in that spectrum of order is selling the products that we sell to a broader array of customers and that's finding tangential opportunities, for example we touch on commercial products. There is a crossover opportunity with distinctive customers in the commercial space that focus on commercial pools, these are usually the pools, competitive pools and greater from a vessel size standpoint and again we have a number of individuals that have the technical expertise and are more astute in the longer sales cycle process that is involved with commercial, a particular larger commercial, that cater to that customer base, selling products that, in many cases are the same as existing products that we sell in the residential space and in other cases they are distinctive products. So that's the third highest leverage but another one very complementary to the overall base.

Within everything we do, it goes without saying that we are constantly challenging how we do it in order to drive a higher service level, higher value add to the customers more efficiently. And in that regard, we are constantly trying to ferret out what best we do in multiple areas looking specifically at the better distributors that serve other segments, other customer segments or channels and trying to learn from them so we can adapt and deploy within our organization to the extent it makes sense.

Thanks for the color. For the full year, do you still think that operating expenses can grow at half the rate of gross profit dollars?

Yes.

(Operator Instructions)

Garik Shmois, Longbow.

This is Mark Zikeli on for Garik today. Manny in your prepared remarks, I think you said it was a quote start-stop type of year. After a good Q1, I've just been curious what you meant by that and were there any weather headwinds in the quarter?

Yes, great that you picked that up. As I mentioned earlier, I think in the question from David Mann, on a bimonthly what happened in the quarter, basically the season got off to a really strong start because as a, relatively speaking, milder winter, so guys that were involved remodeling pools started working earlier than they otherwise would or certainly earlier than they did last year as one example. Retail stores, because of the mild winter were stuck earlier than they otherwise would have been.

But what happens is, once you got to the third week of April and this is more in the snow belt -- third week of April it got cold. For the better part of a month or so it was a lot colder than normal. Basically the season got off to a very strong start and then it kind of stopped and then just before Memorial Day, it got warm again and then it got back to normal, the balance of the quarter. So the impact there and maybe given the waiting that the snow belt has, to our business, particularly in the May-June months, May, June, and July months, the fact that it started, stopped and started again is the point I was making and the impact again is what I just described.

As far as the M&A goes of the irrigation business as impact of this year, you said it was $0.03 for the year. Is that included in your new guidance?

Yes. $0.02 already in the bag of sorts and the other $0.01 is factored in, yes.

Any chance of the share count assumption?

I believe that nothing significant, because our second-quarter share repurchases were pretty modest in the big picture. So no changes of note there.

Best of luck.

As there are no more questions, I would like to return the call to management for any closing comments.

Thank you Keith and thank you all for listening. Our next earnings call, mark on your calendars, is scheduled for October 20. Thursday, October 20 same time, 10 AM Central, 11 AM Eastern, 8 AM Pacific. Where we'll discuss the third-quarter results. Have a great day.

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