Pool Corp (POOL) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Pool Corporation Second Quarter 2018 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. Mr. Joslin, please go ahead.

Thank you. Good morning, everyone, and welcome to our second quarter 2018 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 2018 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.

In addition, we may make references to non-GAAP financial measures in our comments. A description and reconciliation of our non-GAAP financial measures is posted to our corporate website in our Investor Relations section.

Now I'll turn the call over to our President and CEO, Manny Perez de la Mesa. Manny?

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

My prepared remarks this quarter will be more limited than in the previous 77 quarterly investor calls, as Pete Arvan will provide color on sales and operations; while Mark provides color on expenses and the balance sheet.

In terms of the 2018 season, after a slow start in March and April, activity reverted to expected levels in May and June, albeit constrained by customer capacity and reduced work days due to higher rainfall in selected markets.

As a benchmark, we had our first billion-dollar sales quarter, which is noteworthy for our industry.

We are expecting ongoing growth in the second half as demand remains strong, and the main constraint to growth is customer capacity.

As mentioned in previous calls, we were expecting greater and earlier-than-normal manufacturer price increases in 2018, given materials and operating cost pressures. Those increases have now started to be communicated and are starting to be passed on through the channel.

While the impact will be felt primarily in 2019, given the late 2018 season timing, there will be some impact on sales and some noise on gross margins in the last 4 months of 2018.

For 2018, the bottom line impact should be fairly mute, but it should add to our sales in 2019 and beyond. As I look at our business, we are stronger and better across the board. Our ongoing investments in people, facilities, product lines, fleet, technology, marketing and customer service continues to separate us in the marketplace.

These investments occasionally result in lumpy expense growth. But that's historically been followed by higher operating leverage in the subsequent years.

To that end, we have largely kept our EPS guidance intact for 2018 by incorporating the $0.04 pickup in the second quarter due to ASU 2016-09 into our range.

Beyond 2018, our model for sustained organic growth is intact, with 6% to 9% sales growth, leading to double-digit operating profit growth and solid mid-teens-plus EPS growth.

Now I'll turn the call over to Pete for his business commentary.

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

Thank you all for taking the time to join us today. Let me start by introducing myself to those of you whom I've not had the pleasure of meeting. I am Pete Arvan, the Chief Operating Officer of POOLCORP. I joined the company in January of 2017, and have been leading our North American blue and green businesses along with marketing, IT and operations ever since.

As you all saw in our announcement, we had a respectable second quarter, with revenue growth of 7% overall and 6% from our base business. This is on top of last year's 7.5% overall and 7% base business growth for the same period.

As Manny mentioned, the delayed spring in our seasonal markets led to a slower-lower-than normal April. But once the water broke in May, overall demand for our products ramped up in the seasonal markets, and that continued into June.

In fact, on a same-selling days basis, our base business sales increased 1% in April followed by 9% growth in May and June.

Of our 4 largest markets, only Arizona saw normal weather patterns, while in California, we saw unseasonably cool weather for most of the spring, which delayed pool activity. Wetter-than-normal weather in Florida for May and June and a very wet spring in South Texas also impacted construction days, further compressing the year. Understand that these are year-round markets, so we should make up much of this in the second half, as again underlying demand is strong.

Despite these challenges, the markets collectively saw a 7% growth for the quarter, which reflects solid share gains as we estimate the markets grew at roughly 4% collectively. For the same period, our green business grew at 7%, all of which is organic.

Switching to gross profit. Our base business gross profit grew at 6%, while the total business saw a 7% growth rate. Operating income for both the base business and total company grew at 5% for the quarter. Mark will provide more commentary on expense growth in the period and how that affected operating income.

The delayed spring pushed back openings of pools in the seasonal markets, with the greatest impact falling on pool retailers with weak April demand for chemicals and maintenance products. Despite the slow start, as soon as the weather warmed up in May, pools opened, demand spiked, with retail sales up 4% overall for the quarter.

In the commercial areas, strength in share gains continue as we experienced 8% growth in the quarter.

From a product view, sales of building material and associated outdoor living products were strong as we saw revenue increase 12%. Equipment growth in the quarter was 8%, again reflecting the strength of the discretionary market.

Now I'd like to provide an update on our POOL360 sales as this has been a focus area for us. Our POOL360 app allows customers to place orders, search for product and even pay their bills without ever leaving the job site. Sales over this platform are up 21% year-to-date, which shows the inherent value to our customers.

To facilitate faster service in our sales centers and higher productivity, we have added specialty equipment in priority pick areas to reduce the wait times for our customers, getting them back on the job faster, further differentiating our value proposition.

Moving on, I would like to comment on 2 areas that we have been focused on that I think are appropriate to discuss in today's environment, which are inflation pressures on transportation cost and a tight job market as it relates to turnover.

On transportation, year-to-date, the teams have worked very hard to contain inflationary pressures that exist. In fact, the increase in our net transportation costs, including third-party freight and fuel, are in line with our sales growth.

Lastly, I would like to point out that even in today's competitive job market, our attrition rate is down. Our employer of choice focus has allowed us to attract, retain and develop the best team in the industry. Between our suppliers and our exceptional team, we're able to provide unparalleled value to more than 100,000 customers.

Thank you for your time today. I will now turn the call over to Mark for his financial commentary.

Thank you, Pete. I'll start with a quick comment on gross margins. As discussed in some detail at our last Investor Day meeting, our base business results for any given quarter will reflect normal year-over-year changes in product mix, which will drive some variation in the year-over-year margins. However, on an annual basis, margins should be relatively flat.

Our results this year reflect that, with mix changes driving 10 basis points lower gross margin in the quarter and no change in year-to-date gross margin, as you can see when looking at our base business results schedule.

With 5 acquisitions and 7 new locations opened since June of last year, we had a bit more noise in our financials this quarter than in most, so let me focus your attention for a minute on that base business addendum included in our press release.

Note here that the excluded business results for the quarter included just 5 acquired businesses but not the 7 new locations which were opened in existing markets and, per our base business definition, are not excluded from base business results.

These acquired locations contributed $4.4 million in gross profit and added a like amount in operating expenses. So there was no profit contribution from these in the quarter and a $1.2 million operating loss year-to-date.

In addition, the 7 new locations also had a negative contribution to results in the quarter and year-to-date. As we have discussed in the past, new locations and most acquisitions take a number of years to grow into our expected return, and are normally dilutive in the short term, as has clearly been the case this year.

Despite the negative contribution from acquired businesses and new locations, base business operating expenses, as a percentage of sales, were flat year-over-year for both the quarter and year-to-date. So we did not pick up any operating leverage as we would normally expect, and flat year-to-date operating margins at 12.2% this year and last.

So let me fill that back a bit to help you understand where we're at when looking at base business expense growth and our outlook for contribution margin improvement.

First, as we mentioned in our press release, the U.S. dollar weakened against major currencies compared to a year ago. This favorably impacted our sales and margins, while unfavorably impacting operating and nonoperating expenses with no bottom line impact, net.

The impact to our operating expenses was to add $700,000 for the quarter and to add $1.8 million year-to-date. The U.S. dollar now sits about where it was a year ago, so I wouldn't plan on substantial additional impact for the year, although there may be some.

A bigger contribution to our expense growth in the quarter relates to changes made to non-executives' performance-based compensation, which shifted some of the incentive opportunity for certain employees to the peak of our pool season. This resulted in approximately $1.5 million greater expense in the quarter than Q2 last year. We expect this higher Q2 cost will be more than offset in the remainder of the year, particularly Q4.

Backing out the FX and incentive comp timing impact, base business expense growth and the impact of new locations of approximately $500,000, our base business operating expenses would have been closer to 4% growth for the quarter, which is more in line with what we were looking for given our expected sales growth.

With the sales contributions we're expecting as contractors catch up on their backlog over the next few months and the positive impact I just mentioned from expense recognition timing, we expect to see some of the operating leverage we're looking forward in Q3 and even more in Q4. This should get us to our targeted 20 to 40-basis-point base business contrition margin growth for the year.

I'll comment now on interest and other nonoperating expenses, which were $2 million higher than last Q2 -- last year's Q2. We've already mentioned the currency exchange impact, which added $0.5 million to this line in the quarter, with the remainder of the cost increase related to both higher debt levels and higher interest rates. And I cautioned about -- which I cautioned about on our last call.

For the quarter, our average debt was $627 million, which is up 20% over Q2 last year, while our average interest rate on debt was 3.23%, up 35 basis points from a year ago.

We will continue to see elevated costs in this line for the remainder of the year, adding roughly $2 million in interest cost compared to last year over the back half of the year.

As a reminder, we look to keep our leverage as calculated on a trailing 12-month debt-to-EBITDA basis at between 1.5 and 2x. We ended Q2 at 1.7 leverage, so right in line with our target.

Moving down to taxes. You'll note that we picked up a slight benefit from the ASU 2016-09 accounting, which was similar to the benefit we recorded in Q2 last year.

Excluding this benefit, our tax rate in the quarter was 26% or 50 basis points higher than the 25.5% pre-ASU tax rate I discussed last quarter as our forecast for the year.

This 25.5% rate is still a good number to use for the year, and we will get there by making up for a slightly higher Q2 rate, with a slightly lower Q3 rate.

Turning to the balance sheet. Total receivables increased from $370 million last year to $404 million this year, which was a 9% increase, so it was right in line with our sales growth for the month of June.

Inventories grew a bit more at 12% year-over-year, reflecting the roughly $40 million in deliveries made on midyear purchases discussed by Manny and Pete.

As we grew accounts payable at 10% year-over-year, the impact on our cash flow from operations was not significant. As you can see from our cash flow statement, our cash flow from operations improved by $5 million year-over-year, resulting in a seasonal use of cash for the year of $37 million in 2018.

Note that given the vendor pricing dynamics and how that will impact our purchases this year, it is likely that our cash flow from operations will not exceed net income for the year, although that should recover and return to normal in 2019.

I should also point out that our PP&E expenditures are down $10 million year-over-year at $25 million year-to-date, which is in line with the forecasted $40 million total capital expenditure forecast for the year that I provided on our last call.

Next on my list is share repurchases which, for the quarter, were 250,000 shares, repurchased at an average price of $140, using $35 million in cash. As a reminder, we target $100 to $150 million in share repurchases for the year to return excess cash to shareholders and to keep our debt levels within our targeted leverage range.

I will finish with a mention of our return on invested capital at the end of the quarter, which is calculated on the basis of a trailing 12-month after-tax operating income over net invested assets.

This metric reached a new high of 28.6% at the end of June compared to 24.2% last year.

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

(Operator Instructions) Our first question today comes from Ryan Merkel with William Blair.

So I wanted to start off, Manny, you mentioned some noise on gross margins in the last 4 months of the year, but you also said that there would be a muted impact to gross margin from some of the supplier price increases. So can you just clarify that comment? What did you mean by noise?

Okay, sure. So given cost pressures, primarily on raw materials, steel being one prime example, given the profile that steel has with tariffs and everything else. But just the raw material cost increases that manufacturers have been incurring as well as what I've mentioned for the last at least 2, if not 3 calls on some of the impact on chemicals, there are price increases taking place and some of them have already been announced. As they are being announced and there is a set date that they are effective, we typically buy into those increases and how much we buy will depend on how much the increases are at the individual SKU level. When that -- and then following that, we typically raise prices in the marketplace 30 to 60 days later. The noise happens on how our competitors follow or not follow our lead in terms of passing on those price increases. The great majority have the business sense to realize that there's a higher cost and, therefore, they -- just like we do, and they pass it on. In some cases, they don't realize that their facility costs money and it costs money to -- they borrow money. So they don't have that business sense and, therefore, they don't pass those increases on. And we have to selectively respond to that. So the noise there is as those time frames come into place, which is really going to start in the September and then move on through the fourth quarter, the noise is that we could have some inventory gains on the margin side from the fact that we bought in on certain SKUs; and that's how the accounting regs capture it, although we price on replacement cost. And then in some cases, depending on how some of our competitors react in certain markets, they may hold prices and, therefore, in certain markets, we may not -- we maybe have a price compression or margin compression dynamic. Overall, I don't see any significant impact. But again, that's largely premised on the fact that our competitors have the same business sense we have in terms of realizing that there are higher costs of doing business and those costs are not only products but also facilities and the cost of capital. The last point there, Ryan, is that for 2019, the expectation is that inflation will be more than the norm, and you've been following the company for a number of years. And when we talk about our long-term trajectory, we're normally talking about a 1% to 2% average inflation rate. As you know very well, for the past 6, 7, 8 years, that's been closer to 1%, if that. And this is kind of like one of those -- 2019 will be one of those blip years where we'll have a little higher-than-normal inflation, which will transfer itself to logically sales growth and all that. So.

Okay. So a little worry on price cost as it relates to the fourth quarter, might be offset with some inventory profits. But what about into 2019? Would you be worried about price cost into 2019? Or with the smaller competitors just be -- it would be a timing issue and they would eventually pass along the supplier price (inaudible)?

By 2019, those that haven't passed it on will be out of business. So the logic is that, that would happen in the normal course. And it's typically -- that transition period is usually -- we may go up in 30 to 60 days from the effective date. Some may do it 90 days or 120 days. But at some point in time, as they start replenishing their inventories to higher cost, they're already very marginal as it is, so they will just go under water very quickly.

Got it, okay. Moving on to OpEx growth. So it sounds like fourth quarter is going to have the slowest year-over-year operating expense growth of the year. I'm just hoping you can give us a little color. What should be the range of OpEx growth in the third quarter? And then also the fourth quarter, just to calibrate our models?

Ryan, I would say, not to be too specific, but growth rate that we experienced in the second quarter, really the first half of the year, which was similar to the second quarter, that'll come down I would say by a couple basis points -- or a couple hundred basis points in the third quarter and then, a couple hundred more in the fourth quarter. So I'll just give you kind of a general expectation of where we're headed there. And that has a lot to do with that some of the timing differences on incentives and some other costs.

And just a little clarity there. So is it that the incentive comp dollars are actually going to go down in the third quarter and fourth quarter?

Year-on-year, yes.

Year-on-year, yes. Okay, good. Just lastly...

And remember, last year, we had a very good fourth quarter. And so that's part of the incentive comp change story.

Got it. Okay. And just lastly, and I'll pass it on, it sounds like you're still excited about the end markets. Things are still strong. You're expecting a solid second half. I'm wondering, can you just comment on July month-to-date, I don't know if you normally do that, but it would just be helpful if you had a little bit of color there.

Yes. I would say, Ryan, it's consistent with what Pete mentioned, that we were 9% in May and June, and the backlogs are still very strong. And we're tracking at a similar rate in July.

The next question comes from David Manthey with Baird.

Okay. First off, Mark, you mentioned other expenses being $2 million higher in the second half of this year. I assume that's for the full half, so it's roughly, give or take, $1 million in each of the quarters?

Right. And yes, other expenses specifically was interest and other nonoperating income so that's really interest. So looking at the higher debt levels and the higher interest rates. And of course, it depends a bit on share repurchases, timing on execution of that, just roughly looking at $2 million higher expense for this whole second half.

Okay. And then on the topic of price increases, could you talk about what sales benefit you saw in the second quarter from price specifically? And then Manny, last quarter, you said you're expecting 1% to 2% price increases. I think you said closer to 2% than 1% in the back half of this year. And it sounds like you're no longer expecting it for 2018, but you're pushing it out to '19, am I reading that right?

No. First of all, no impact in the second quarter on price increases in terms of the manufacturer price increases that started to be announced. They started to announce them in the second quarter, but they're effective mainly starting in the third. To date, all starting in the third, given what we've been communicated to date. No, the expectation was typically in most years, or on a long-term basis, we look at inflation being 1% to 2%. And it's run, as I mentioned a few minutes ago, run closer to 1%. And this year, it will run closer to 2% for the year, and that'll be back-end weighted. So the front part of the year was pretty much the normal, a very low-to-no inflation. But the back half, as you weight those for the year, it'll be closer to 2% for 2018 full year and it will be greater than 2% certainly in terms of 2019.

Okay. All right. So let's talk about the operating expenses here for a bit. When did the comp plans change? Was that a January 1 change?

No. We decided on the change in March. And what we essentially did, this is more granular than probably you guys are interested in, but what we did was we changed about 3,000 employees' bonus programs that were tied to monthly sales and profitability, changed those to be focused more on the 5 biggest months of the year, which are April through August. And same metric, just from 12 months of the year to 5 months of the year, which is when, obviously, we're the busiest, people are working longer hours and that's when the -- call it, it's all stressed.

Okay. So let's see, so second quarter expenses...

Just to fill that in. So normally, the second quarter would have represented 25% of the bonuses for that -- those 3,000 employees in prior years. This year, it represents 60% of the annual bonus.

I see. So third quarter and fourth quarter this year will both be lower than they were a year ago. And then even the first quarter of 2019 will be lower than the first quarter of '18, because that change rolls over, is that right?

Yes.

Okay. All right, that's helpful too. And then finally, I'm just trying to understand, I think you explained it a little bit, but -- so the program, it's still tied to the same behaviors, you're not trying to drive any new behaviors. It's just that you're more closely aligning it with when the sales happened. Is that correct?

And when people are working the longest hours.

The next question comes from Anthony Lebiedzinski with Sidoti & Company.

So just wanted to follow up, Manny, you may have said this and I may have missed this. As far as the extent of the midyear vendor price increases. Is there a way you can quantify this?

Well, they range from 0 to about 10% from -- at a SKU level. And this is on the equipment side. On the chemical side, it's around 4% to 5%.

Got it, okay. And as far as your inflation expectations for 2019. You said it would be greater than 2%, but are you -- it sounds like you're maybe reluctant to give us a bit more specific range for 2019?

Well, that's true. And the reason for that is that typically the vendors in the business, to the extent they have a price increase, they typically communicate them in the fall. So we have only seen some of the price increases to date. And it'd be premature for me to speculate as to what the total would be for next year.

Right, okay. And if there are additional price increases, is it safe to assume that you would purchase inventory ahead of those price increases?

Yes. Yes, depending on the amount of the increase and the space available within our facilities.

Got it, okay. And as far as the share buybacks, so if I heard correctly, it sounds like you're still targeting about $100 million to $150 million of share buybacks for the year, right?

Correct.

Right. Right, so I guess you have some catching up to do, I guess, in the back half.

The next question comes from Garik Shmois with Longbow Research.

I'm just wondering if you can comment on your expectations for base business growth for the rest of this year. I think coming out of the first quarter, you had expected (inaudible) full year base business growth to be closer to the low end of the 6% to 7% range. You're tracking in line with that in the first half, but now you've got price increases coming through. So -- and you actually had a very strong last several months. So I'm just wondering if you could provide some color on how that should end up tracking for the remainder of the year.

Garik, there is the -- first of all, the annual weighted impact from the fourth quarter and the price increases will obviously, by virtue of the fact it'll be the fourth quarter, which is a soft quarter for us on a percentage of sales for the year, and the fact that it only affects a certain set of vendors, the impact's kind of diluted. But I think that the year, we're still at 6% to 7%. We feel very -- I'll call it this way, I feel better about where we are on the 6% to 7% range than I did 3 months ago, given what we've seen in May and June and month to date July.

Okay. And I did want to follow up on the recent trends, the acceleration, the 9% growth that you saw May and June, the continuation here in July. Anything specific that you can call out that's driving that pickup?

No, it's across the board. Pool owners obviously have their pools, they're maintaining their pools. And that's always been the case. On top of that, they're renovating. Pete mentioned building materials growth up 12%, I mean, they're still spending money and we're still continuing to grow share. And so both of those things fundamental to us is continuing to happen. The constraint, frankly, is customer capacity. And in some cases, like Florida, Pete mentioned about the fact that they had a lot of rain in May and June, were it not for that, I feel that we probably would have grown faster than 9% in those 2 months, certainly. So there's -- customer constraint is the fundamental limitation and the capacity there to how much they can do in a certain given day.

Okay. And then just on the constraint, just to follow up. Is this beyond just the labor constraints for new pool installations? Are you seeing constraints as well on the normal day-to-day maintenance piece as well?

No, the constraint is primarily weighted on the more heavy -- more labor-intensive portions of the business. So for example, since you opened the door with the new pool comment, it could very well be given the late start of the year. And given just labor constraint in general, that new pool construction may be flattish this year. It isn't because of demand. It's because of the window available to actually do the jobs. And when you look at a new pool, typically, our products, our materials that we provide to that builder of that pool, typically represents 20% to 25% of the total cost of the pool. Whereas, when you look at other aspects that are proportionately a lot labor -- a lot less labor-intensive, like for example the replacement of equipment, in those particular cases, there's really no impediment there.

And our next question comes from Ken Zener with KeyBanc.

Welcome, Pete.

Thank you.

Interest expense. Mark, you're talking about clicking up a bit, obviously 3Q but also the back half. Given what rates are doing, I mean, can you help us think about, perhaps, what FY '19 would look like? Would it be wise to assume just $1 million more in the front half of '19 given the trends we're seeing in the back half versus the front half of '18, and that would kind of put it at a higher rate obviously?

Yes, Ken. I mean, certainly '19 will be up. It's a question of both the debt level and interest rates. And we are maintaining that leverage so you have to kind of model out what that leverage is going to be at, let's call it, middle of our range, 1.75 leverage, how much debt would that translate into? And so -- it's going to be more than $1 million, I'm sure, in the first half of the year when you factor in both the rate and the debt level.

And what is your guidance -- I apologize, but just quickly; you probably have it. How much of your debt is kind of tied to the front end of the curve?

Well, debt is both working capital related and it's -- we use debt just on share repurchases. So the timing on that depends on when the share repurchases take place, number one. It's definitely front-end loaded on the working capital investment in mid-spring.

All right, and I'll look into that. Now Manny, obviously there's been more questions around price, consistent with your highlighting it. Price increases with manufacturers to you guys, and you guys out to the market. Are you trying to put this in the context that while it's higher than last year and the year before for -- certainly for chemicals and some of these other components, but is it really all that different from your experience in general or is there something unique about this versus the last 15 years?

No. This is unique. And what happens here, Ken, is that typically, price increases are pretty mute -- muted in the overall scheme of things. But every so often, there are triggering events. And I think the last time something like this happened was I think in either 2009 or 2010, where there was a higher-than-normal level of inflation that kicked in. So this is what -- that's why when we talk about this in the long-range expectations, we look at 1% to 2%. And really what happens is there's 5 years of 1% and maybe 1 year of 4% or 5%, right? And that's what we could be looking at depending on what happens with vendor -- the rest of the vendors announcing their changes, if any, in the back half of the year.

Okay. Then just for the weather comps. I mean, it's amazing. You just kind of look at the NOAA mean temperature percentiles for the country and see that you're going to have a weak April and then a fine May and June. As it relates to your -- the pools up, running, et cetera, et cetera, that's part of the business. I understand that. Is there some different impact as it relates to the commercial and/or landscaping business related to those weather patterns? I assume, obviously, we're talking chemicals and pumps, but I mean, the discretionary component, is that influenced by the weather as much?

Well, there's -- okay, there's 2 parts to weather. One is on the seasonal markets when pools are opened. That's part 1. Part 2 is in the year-round markets and in the seasonal markets, precipitation is the next factor in terms of certain bodies of work; for example, renovating a pool or building a new pool. You need to be reasonably dry to be able to do that, and that affects also irrigation. So on the irrigation side of our business, yes, if it's too wet, typically, it delays that body -- that aspect of work. Now for us, we still have very strong -- I mean, as Pete mentioned, we were up 7% in the quarter organically on the irrigation side of our business as well as we were like 8.5% on a year-to-date basis on that side of the business. So we're clipping along well across the board. And the 4 biggest markets, again, as Pete mentioned, 4 biggest markets, despite some of the weather challenges, we were still up 7% in the quarter. So that speaks volumes about how we're transacting business. It also speaks well about the fact that demand is there and as soon as our customers can work, they work.

Yes. No -- It's very tight. I wonder -- going just back to the price, given that you talked about it in '09 and '10 -- if tariffs, chemicals, other things are adding to prices. Because in other building material categories, what we've seen is obviously the price affected by the underlying commodities, so when it goes up, prices go up. Can you talk about the potential deflation that not -- right at the back half of '18, not the front half of '19. But if steel tariffs, other tariffs, these inflationary components were to subside, what is your perspective on what that might mean for pricing relative to what we're seeing right now retreating?

It depends on the manufacturers. It depends on the order of magnitude. It depends on a lot of variables, so it would be difficult for me to speculate.

Is there context for Hayward or Pentair, I mean, is that -- getting the price that they need to and then retreating and them just holding margins at a much higher level, realizing 2 of the 3 are private?

Well, no -- two are now public, because Zodiac is now part of Fluidra and are now public. But going back to the answer to the question, steel certainly affects their cost. But there's a lot of other factors, for example, plastic and the cost of oil; that plays into some of their costs. Some of the actual raw materials used in, for example, our salt chlorinator or a salt cell, that's gone up a lot specifically. So therefore, there are some materials independent of the higher-profile, call it, steel will be affected by tariffs potentially. That may go up or down, but there's a lot of underlying other elements as well that have put cost pressure on them, which has prompted to them to do what they're doing. And labor is certainly a factor.

(Operator Instructions) The next question comes from Brennan Matthews with Berenberg.

I wanted to ask real quickly on the POOL360 app, which I believe you said was up around 21% year-to-date. Is there any, like, efficiencies like coming into play? I mean, any savings on labor on that, that we should think about going forward with -- as more people kind of use this tool?

Sure. Certainly, there's going to be some, but it's still relatively small. So it's growing at a 21% rate. So in the future, it would have a larger impact. But the percentage of our total right now would suggest that the overall impact in the short term is going to be small.

Okay, great. And then, just kind of on the inflation, and I understand that it's getting higher, but -- and this is more so related to new pool construction. I mean, is there a point where you think that when you think about higher labor cost and labor tightness and then more inflation on kind of the products side, where people maybe put off installing a pool? Or is just the demand so great there that, that should not be an issue for the near future?

Yes. If you look at and have a perspective here, pool -- new pool construction is still down about 60% compared to what it was 12 years ago. And if you look at other like discretionary expenditures, they have in fact, recovered faster than new pool construction has. And there is, I think, 2 key reasons for that. One reason is the availability of financing since a new pool is viewed as a home improvement, and home improvement lending is still very depressed. And then the second factor is labor capacity. When you are manufacturing something in a plant and you're protected from the environment, you can work pretty much every day. And that's not the case when you're building a pool, so -- or basically redoing your outside space. So that's been a constraint in terms of the ability for that to ramp up, together with the other like discretionary expenditures.

This concludes our question-and-answer session. I would now like to turn the conference over to Manny Perez de la Mesa for any closing remarks.

Thank you, Anita, and thank you all for joining us today. Our next call will be on Thursday, October 18, when we will discuss our third quarter 2018 results. Thank you, and have a great day.

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