Pool Corporation (POOL) — Q1 2021 Earnings Call Transcript

Thank you. Good morning, everyone, and welcome to our first quarter 2021 earnings call. I'd like to remind our listeners that our discussion, comments, and responses to questions today may include forward-looking statements, including management's outlook for the remainder of the year 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 included in our press release and posted to our corporate website in our Investor Relations section. I'll turn the call over now to our President and CEO, Peter Arvan. Pete?

Thank you, Mark, and good morning to everyone on the call. I simply could not be prouder of our team, or more energized by these results. As you saw this morning, we announced that our first quarter sales came in at $1.1 billion, which is the first time in our history that we have crossed the $1 billion mark in the first quarter. This represents a 57% increase over the same period last year, and was the result of strong demand and strong execution in virtually all our markets in North America, both blue and green, and even stronger market conditions and execution in Europe. Our dedicated and talented teams have worked very hard to ensure we provide the very best service to our customers, allowing them to help families enjoy the healthy outdoor living lifestyle that we support. From a geographic perspective, our four largest North American markets were strong. California saw a very robust 30% gain in the quarter. In Florida, we saw sales grow by 33%. In Arizona, sales grew by 29%, while Texas grew by 68% in the quarter. The February storm in Texas positively impacted our total sales by approximately 1% to 2% or $15 million to $20 million. Overall, these year-round markets are experiencing the same elevated demand and saw a 40% increase for the quarter, while seasonal markets sales increased by 66%, highlighting the strength and depth of the industry order backlog. Turning to product sales. No surprises here with equipment sales posting gains of 61% driven by strong demand for heaters, lighting pumps, filters, all used in the maintenance and construction and remodel of swimming pools. This is following the fourth quarter gains of 51%. Chemical sales were up 18% in the quarter, including the effects of the increased dichlor and trichlor product pricing resulting from the previously discussed industry supply shortages for these products. We are encouraged by this growth given that the installed base grew by approximately 2% overall, which highlights greater pool usage by homeowners. Building Materials sales increased 34% in the quarter, reflecting a very healthy demand for construction and remodeling products. Retail-related product sales were up 43% in the quarter, reflecting strong confidence by our dealers, and increased early buy activity compared to last year. We believe that new pool construction was approximately 96,000 units in 2020. And with very strong permit data from our major markets, we are anticipating that 2021 new pool construction will exceed 110,000 units for the first time since the Great Recession, but still well below historical peak levels. Commercial pool category sales growth turned positive for the first time since the onset of the pandemic, posting 3% growth after declining for the past three quarters. This is an encouraging sign. With people beginning to travel more, we expect this market to continue to strengthen. For perspective, this is a relatively small part of our business making up only 4% of our total sales. Our 2020 acquisitions are performing well and as expected contributed significantly to overall growth adding approximately $45 million in sales or about 4% of total net sales for the quarter. Now, let me provide some commentary on our European operations. Our team in Europe posted some astonishing results in the first quarter with sales up 115% with the month of March being the largest month ever for the POOLCORP team in Europe. Like in North America, consumers are investing in their backyards and keeping our dealer base extremely busy. Our team in Europe has done a tremendous job focusing on the customer experience and operating execution, which has enabled share gains in a competitive market. All countries in our Europe business are experiencing record growth highlighted by particularly strong growth in France, Spain and Germany, the three largest markets. I would now like to provide some commentary on Horizon. We could not be happier with the trajectory that this business is on. Building on a strong fourth quarter, Horizon posted 24% base business growth in the first quarter and is poised to gain momentum throughout the year. We are confident that this platform will continue to excel with strong execution, our team's intense focus on the customer and a robust housing market fueling demand. The team is assimilating the TWC distributors acquisition that we closed in December expanding our Florida market presence with nine additional sales centers. Horizon is also expanding its footprint with two new greenfield locations opening soon in key markets in Florida and California. We will continue to strategically invest in this business. Turning to gross margins. We are pleased to see a 40 basis point gain for the quarter including a 70 basis point growth in the base business. Higher volume-based purchasing incentives, a favorable sales mix and some inflation benefit combined to provide a slight lift year-over-year. Switching our discussions to operating expenses. We have a very good story to share. In total, operating expenses were up 17% net of the impairment expense in Q1 of 2020 and including the impact from our four acquisitions that we closed in 2020. Excluding the impairment last year, our base business operating expense increased only 10% on revenue growth of 51%. This led to a reduction of our overall OpEx of 650 basis points as a percentage of sales for the quarter. Driving these operating leverage improvements are the benefits from our capacity creation activities and the tremendous effort and dedication of our teams. Of note, our POOL360 sales accounted for 11% of our total sales. We saw an incredible 90% increase in revenue through the tool compared to the same period last year and a 45% increase in line volume processed. Wrapping up the P&L brings us to the operating income line. For the quarter, we reported operating income of $129 million. This is a 263% increase over last year and brought our first quarter operating margin to 12.2% compared to 5.3% last year at the same time. This is truly an amazing performance and one that we are all quite proud of. Once again, I would be remiss if I did not acknowledge the incredible execution and tireless effort that our team displayed to accomplish these amazing results. Now with the first quarter behind us, let me try and provide some context for how we see the remaining portion of the year shaping up. First, as noted in our previous call, our builders ended the year with a considerable backlog. This has continued to grow as homeowners' desire for a family-friendly outdoor living environment is increasing. Contractors continue reporting strong leads and contracts deep into the 2021 season with many quoting 2022 completions. The flexibility of the new work-from-home norm that many professionals have switched to has proven to be a catalyst for investing in home improvements with the backyard being near the top of the list. This, along with the continuation of the de-urbanization trends, strengthening of the southern migration and more active participation of the millennial population in the housing market should be great for our industry. Second, we previously said that inflation would be in the 2% to 3% range, but now believe it will be in the 4% to 5% range with some products into double-digits. We don't anticipate any of this getting hung up in the channel so that will provide a tailwind for the year. Considering that most of our costs of constructing a new pool or remodeling an existing pool is tied up in labor, we don't anticipate this inflation having a meaningful effect on demand. As it relates to nondiscretionary products such as chemicals, inflation is simply passed through again with no real effect on demand. Third, with demand being so strong and some manufacturers struggling to keep up, we have experienced some product shortages that up to this point have been manageable by utilizing the strength of our network to keep critical product flowing to our dealers and providing alternative options when certain products are in short supply. Our back orders have certainly increased in most markets, but our team has done a remarkable job taking care of our customers in a very challenging environment. Fourth, labor is in very high demand across all construction segments. And this continues to pressurize the industry keeping demand greater than supply, which we have seen for many years. Crews are working longer and the fair weather has helped expand capacity for the industry, but the labor market tightness is something that we continue to watch. Finally, we just announced that we have acquired Pool Source, a single location pool distributor in the strategic Nashville, Tennessee market. We have a robust M&A pipeline that we continue to develop. Greenfield activity has picked up as well as we expect to open seven or more new locations on the blue side this year in addition to the Horizon locations I mentioned earlier. Considering all of this and the amazing first quarter, our confidence in growth for the season and the rest of the year has improved considerably. As a result, we are raising our guidance for the year to $11.85 to $12.60 earnings per share from the previous guidance of $9.12 to $9.62.

Thanks, Pete. I want to start by discussing the adjustment in our guidance range for the year, which is now increased by 30% at the midpoint compared to what we communicated during our year-end call just over two months ago. So, what led to this change in such a short timeframe? There are several reasons for our more optimistic outlook, which I'll outline in order of importance. First, our exceptionally strong Q1 results and our positive expectations as we transition into the second quarter, despite relatively average weather conditions in the US during Q1, built on the exceptionally strong end of 2020. We utilized that momentum to achieve remarkable results, which have carried into the second quarter, significantly exceeding our expectations from February. Second, we have observed a rapid increase in inflationary price hikes from our vendors in recent months, which have roughly doubled the expected inflation impact for the year, moving from our previous guidance of 2% to 3% to now 4% to 5% on average across our product range. Since price increases are primarily pass-throughs in the pool industry, these changes should enhance our sales and gross profit opportunities for the year. Third, we now have more clarity on positive external factors influencing our business for the remainder of the year. This includes our increased confidence that the new normal will see many more individuals working from home, leading to greater focus on home improvement spending. This spending will be supported in the short term by favorable homeowner dynamics such as rising home values, low interest rates, a robust job market, government stimulus, and more millennial involvement in the housing market. Our first quarter showed that we can achieve significant operating leverage by effectively managing our expenses in strong market conditions. Although I expect some decline in our operating leverage as we progress through the year, it should still be greater than our typical annual target. Additionally, since February, we've seen increased contributions from our 2020 acquisitions, including our recently completed Pool Source acquisition in the Nashville market. However, we are somewhat cautious due to strains on our supply chain, as many suppliers are struggling to maintain product flow in this active market while customer labor constraints might affect their capacity to meet demand. We anticipate that our suppliers will face challenges in maintaining sufficient product flow as we enter and navigate through the season, but we believe we've factored this into our projections. With that background on the conditions that led to our guidance change, I will briefly touch on our Q1 results before summarizing our expectations for the rest of the year. During our year-end call, I mentioned that a current-day Michael Angelo might depict our fourth quarter results as a perfect quarter. Now that Q1 is behind us, it's evident that our fourth quarter was merely a warm-up for a true masterpiece. Every aspect of our first quarter performance was exceptional, with excellent management of working capital and cash generation. Compared to a strong Q1 last year, sales increased by 57%. Our operating income was over 3.5 times greater, operating margin was more than twice as good, and return on invested capital reached 44% on a trailing four-quarter basis, all record levels of performance. Clearly, our teams remained focused on meeting customers' needs while navigating significant daily challenges and effectively utilizing available resources to create capacity, resulting in phenomenal outcomes. Instead of a typical line-by-line commentary on results, I think it’s more useful to discuss our expectations for the rest of the year, starting with sales. As mentioned earlier, the demand environment is exceptionally strong, and we do not anticipate any slowdown as we enter the peak of the season, with acquisitions and inflation contributing to our growth opportunities. These positives are mitigated by potential constraints from vendors, contractors, and labor challenges, along with more challenging sales comparisons as the year moves on. As a reminder, our base business sales growth by quarter last year recorded 13%, 14%, 27%, and 39%. Capacity and supply constraints may become more pronounced mid-season, but we expect that our year-over-year sales growth will peak in Q2 and diminish as the year proceeds. Weather will play an important, albeit currently unpredictable, role. For the full year, we now project year-over-year total sales growth to be in the range of 20% or more, assuming that supply constraints do not escalate significantly. Alongside the increased sales volume, our gross margin expectations for the year have also improved. Previously, I anticipated a decline of 20 to 40 basis points in margin for 2021, but I now conservatively adjust that to a flat to 20 basis points decline in gross margin, with the most significant challenges likely arising later in the year. In the last year, we have seen very modest growth in operating expenses relative to our sales and gross profit growth. While this trend should continue overall, our operating margin improvement may decline sequentially throughout the year as we compare against favorable results from the previous year and increase spending in certain discretionary expense areas that supported our results last year. For the full year, I expect our operating margin to improve by more than 100 basis points, which would significantly surpass our standard annual target of 20 to 40 basis points. Given our strong start from Q1 results, we are on a good path. Regarding our tax situation, we continue to expect our tax rate, excluding the ASU impact, to hover around 25%, consistent with previous years, with a lower effective rate due to ASU-related tax benefits on stock options and restricted stock. As noted in our release, our guidance does not factor in additional ASU benefits beyond the $0.10 recognized in the first quarter. It's important to mention that there has been considerable discussion regarding a potential increase in corporate federal taxes from the current administration and Congress, with proposals suggesting increases of up to 7%, likely taking effect in 2022. Given that a large portion of our profits are generated in the US, any tax rate increase would directly lead to higher taxes owed and a corresponding reduction in earnings. The positive side is that investors likely anticipated this and have already integrated it into our stock price. In terms of our share count, we successfully executed $66 million in share repurchases during the quarter, resulting in the buyback of 198,000 shares at an average price of $332 per share. Historically, we believe share repurchases represent the best use of our excess cash while maintaining a conservative balance sheet, so we expect more such repurchases in the upcoming year. For share count projections, I will reduce our forecast by 300,000 shares for each remaining quarter and year-to-date period, reflecting the Q1 repurchases we completed. Lastly, as previously announced, I plan to retire later this year, although a specific departure date has not been established. Melanie Hart, our current Chief Accounting Officer, has been appointed as my successor and is preparing to take over as CFO. With that, I will turn the call back to our operator to start the question-and-answer session.

Hey everyone. Congrats on another strong quarter.

Good morning.

Good morning Ryan. Thank you.

So first off typically the first quarter is 11%, 13% of EPS for the year. And I'm wondering will seasonality be different this year? And was there anything in the first quarter that won't repeat?

I don’t believe seasonality will change significantly. The year began well, and the weather was fairly favorable. Regarding the absence of repeat factors, we have now moved past the expense reductions we implemented last year, which started in the second quarter, including cuts to travel, meeting expenses, hiring constraints, and advertising expenses. Therefore, we won't experience those operating expense benefits again. However, from a sales perspective, there shouldn't be any notable changes in seasonality going forward.

Okay. That's helpful. You mentioned that the chemical business is up 18%. How much of that increase is due to price? Are prices improving for chemicals this year, or are we at this higher level now and it will remain the same?

Yes. Prices vary by parts of the country. Overall, I would say the price on dichlor and trichlor, which are the products affected by the shortage, has increased about 60%. Looking ahead to the rest of the year, I expect prices to remain elevated because there will likely be a shortage in the industry for the season. This means that people may switch their sanitization methods to either granular or liquid products. However, there are plenty of options to sanitize pools. It simply indicates that, at some point, consumers will adapt. Additionally, we have noticed an increase in certain areas of the country using salt as a method of sanitization as well.

Right. Okay. And just lastly and I'll turn it over. You mentioned Texas. I think you said it was maybe $20 million in the quarter. Will there be more for Texas in the second quarter, or was that just a one quarter event?

Are you talking about the ASU benefit?

No. The Texas storms I thought you mentioned.

Oh Texas. I'm sorry I thought taxes too.

Yes. So Ryan I think it's best we can tell, it's about halfway done. And I think that there was some initial triage that was done to get some water moving, but there's still a product shortage on some things, so that when products are available then they'll have to go back. So, we think that it's about halfway done.

Got it. That’s helpful. Thanks.

Thank you.

Hi, good morning guys. I'm under the assumption that the majority of the overage you're seeing in the off-season here is new pools and major renovations in the Sunbelt as opposed to a massive influx of just higher pool usage. First of all, is that how you're thinking about it? And then as it relates to the new pools versus major renovations, I don't know to the extent you can discern between those? Are you seeing trends one way or the other that might give us an indication about how things will play out in the future?

Certainly. Let me address that. When considering the situation in the Sunbelt, it’s clear that there is a significant amount of construction and remodeling taking place. The backlogs for both activities in that region are very strong. The seasonal markets are also showing a robust backlog. I believe the strong backlog is a key factor, along with weather conditions, which have been average for us. This has led people to continue working as much as possible and even start earlier than usual. Consequently, we've observed a notable increase in new pool construction as well as a hefty backlog in remodeling projects. Regarding usage, we assess this primarily through maintenance activities, specifically by tracking chemical usage. With only a 2% increase in our installed base, the 18% rise in chemical usage suggests that more people are utilizing their pools, which positively impacts the maintenance aspect of our business. Does that address your question?

It does. And the 18 includes price too, right or no?

Correct.

It does. Okay. Okay. Thank you for that. And you discussed some of the supply chain constraints and labor constraints at your customers and your suppliers. And for your business it's obviously easier to absorb excess activity into the system in the fourth quarter and the first quarter than it is in the main selling season. Can you talk about the status of your capacity creation initiatives and how you're positioned to absorb incremental activity in the second and third quarter of this year? And then related those capacity creation initiatives, do those potentially soften downside decremental margins if activity levels slow by their nature?

Okay. That's a lot. Let me see if I can provide what you need. Regarding capacity creation and our current run rate, it's important to break it down into seasonal and year-round markets. The year-round markets are quite active, primarily with construction and remodeling, especially in places like Dallas, Texas, where swimming isn't yet common. However, construction activities are significant, leading to an increase in products used for maintenance. Our spending on chemicals will rise notably in the seasonal markets as pool usage increases, albeit this time of year, usage remains much lower than during the summer months, except for areas like South Florida. We anticipate a continued increase, and our capacity creation efforts will yield benefits in both markets as the nature of the business evolves. For example, POOL360 will remain central to our productivity improvements, alongside factors like truck utilization and velocity slotting, all of which enhance our capacity and help control cost increases relative to revenue growth.

In response to your second question, it's certainly an interesting topic to discuss. If we experience a recession and there is reduced demand, we need to consider whether our capacity creation initiatives will help mitigate the impact. I believe the connection between lower demand and our business is important, particularly since a substantial portion of our operations is linked to maintenance and we have leverage in our model. Our incentive compensation tends to decrease in a downturn, which is a factor to consider. However, when demand rises, we may not hire additional staff, meaning we also won’t have to let anyone go if volumes decline. Therefore, I don't see the capacity creation initiatives alleviating the potential downsides.

Okay. All right, that’s helpful guys. Thank you.

Sure. Thanks.

Good morning and thank you for taking the questions. So, first, Mark congratulations on your pending retirement. So, as far as inflation, so I know you mentioned that you're riding your forecast of 4% to 5% for the year. Was that where you were in the first quarter? I just wanted to just circle back to just to firm that up.

Yes. Thank you Anthony for your kind words. The first quarter was less. So, some of the price increases that we've seen as we said we raised our guidance just in the last two months. So, we're looking at 2% to 3% kind of across the board coming into the year which is what I would say our first quarter saw in terms of inflation. And then price increases have been announced by a fairly wide variety of vendors with some different implementation dates but generally late first quarter into early second quarter. And so as we look at those and the overall impact on the year we think it's now at the 4% to 5% range.

Got it. Pete, you mentioned earlier that the primary cost of a new pool is largely related to labor. Are any of the pool builders you work with experiencing signs of labor and wage inflation? I'm curious about this and how it might affect future demand for pools.

Yes, I think the labor market has been tight for quite some time. So, there are certain positions that are in short supply for virtually every business drivers for instance. In the construction trade though, I mean, labor has been tight for quite some time. There's certainly been some inflation on that side, but I haven't heard of crazy increases. So, I don't know that even the inflation that they're seeing on labor would act as a throttle on demand at this point.

Got it. Okay. And in terms of the product shortages, I mean, if you could just talk about the top areas we're seeing or expecting to see some product shortages. Thanks.

Yes. As I mentioned, chemicals like the 3-inch trichlor and dichlor tabs are among the most affected by industry-wide shortages. In the equipment category, heat has been in very high demand for almost a year now. This is where we truly stand out for our customers. Many of our competitors have only one or two locations in a market, and if they don’t have a product, they simply don’t have it. However, due to our presence in most major markets, if I don’t have it in one location, chances are it’s available in another location or I have another brand. Dealers are becoming more brand agnostic about the highest shortage products, which has been beneficial for them and ultimately advantageous for the pool owners looking to use their pools.

Got it. Okay. Thank you and best of luck.

Thanks.

Good morning guys. Thanks for taking my questions. The first one is a follow-up on the previous question regarding capacity and at company level. Given the current ramp in new pool construction, when do you think we get to a point where you need to expand existing locations, add another centralized shipping site, or make some other expansion decisions to fulfill demand? And I asked this because I wasn't covering the company back in the early 2000s when new pool construction peaked. So I'm just not sure how you manage capacity back then, if it was any different. And I'm just trying to figure out if something's changed.

Sure. So as I mentioned, new pool construction last year was 96,000 units. And it was about a 23% increase. I think this year, given the strong demand, it will be 110,000 plus. If you think about historically how POOLCORP has grown, we've grown by continuing to expand our network. So we try and add capacity within the four walls and grow the business, which creates the operating leverage that we've been able to do. But at a certain point, as new pool construction continues to grow and the installed base continues to grow, proximity of our locations to those pools matters. So there's two reasons for us to expand our footprint. One is we're simply out of capacity. And then, when we look at the geographic circle that an individual branch or sales center covers, we simply look at and say, all right, where is the market growing? We take a piece of the existing branch. That becomes seed business for the new branch and we push it out further and closer to where the pool density is increasing. That takes load off of the existing branch, which allows them to grow again. And then, by having a new sales center on the ground in a new growing area, that allows us to grow.

That's extremely helpful. Thank you. And then, second question is just on the guidance for the rest of the year. Do you see a possibility for a flat to higher Q4, now that you've got better visibility into contracted backlogs?

I think Q4 will be challenging, but achieving flat to positive results is certainly within the realm of possibility. While I wouldn't bet on it, it is feasible. However, as I've mentioned, the comparisons to last year are tough. We experienced very favorable weather, which is a significant factor in our business, especially during the transitional periods of the season. If we see similar weather conditions, that could be beneficial. Additionally, considering inflation and our acquisitions, we remain optimistic about Q4 performance.

Okay. That’s all for me. Thank you.

Thank you.

Good morning, everybody.

Good morning.

Good morning, Ken.

Wow, Mark congratulations. And Melanie, I'm sure you're listening, so congratulations to you.

We thank you.

Thank you.

Yes. I'm sure you're going to go painting, obviously. This isn’t a roofing kit from your old industry, but the appeal of pools is that much of it is recurring revenue in terms of maintenance. The results are impressive. Homeowners have more disposable income and there's a trend toward outdoor lifestyles. In our view, all this financial momentum is linked to increasing homeowner equity. Could you walk us through and give us an update, because it truly is remarkable? Regarding construction versus remodeling, what is the current situation to support what Mark has mentioned about new construction? How do people typically finance or purchase pools compared to repairs or remodels, which I assume are generally paid out of pocket? Can you provide some context on that so we can understand how this demand is being financed?

Yes. That's a good question, Ken. I think, it varies, of course. Historically, there is a second mortgage market, which did a lot of the financing for pools. That market doesn't exist in the same form. However, there's a lot of home equity out there that consumers have tapped into with home equity loans, lines of credit. And they're using that for expansions of the home environment, remodeling and additions. At the same time, the stock market has been healthy as you know. And so, people have more discretionary spending coming from that. They've cut back other discretionary expenses. So I would say, in general, there's more discretionary funds that people have available. But at the same time, they're taking advantage of, let's call it easy financing from home values, which have accelerated significantly over the last several years. So it's a combination, and it's – roughly, my guess would be 50% to 60% of new pool purchases, which are big spends, right? So the pool itself might be $40,000 to $50,000, and then you throw in the landscaping and patio, and maybe some furniture could be an $80,000 to $100,000 spend. And for most people that would be some financing involved in getting that spend completed.

And then – I appreciate that. So I finally completed my pool here, and gave you guys copious amount some money. And during that process, because there are a lot of different SKUs that are in that process, heaters thank goodness I got mine four months ago, because now they're backlog in a lot of cases. How much share do you think you're getting from these smaller distributors? Because where I'm in Northern California, there's two real competitors for you generally speaking. But I mean, they don't have the product necessarily that you do. So, how much share gains do you think are embedded in your current 20% guidance this year? If there's four or five points of price that means the market is 15. I mean, you must be gaining share. And how do you think about that? How do you measure that operationally?

Yeah. It's a – share as you know, because there's not any external reporting that everybody reports into similar to other industries. So it's basically an estimate. So every time they – excuse me – update the market and new pool construction then we – basically that starts our work to try and back into what's going on from a share perspective. So what I can tell you Ken is, we are – we are very confident that we are taking share. And the reason we're taking share as I mentioned before, it's simply the strength of the network, because we have more options for any dealer than anybody else bar none. What's difficult though is to say at this stage, how much of it is – is pure share gain. So we're confident that, we're taking share in a considerable amount, I would bet. But we're not certain enough for me to blurt out a number to you just yet.

Right. Yes. I mean, I couldn't get stuff from other people. So even though you were raising prices. Operationally, because you do have people right out in the branches and they're very, very, very busy. And you're doing things like COVID, right, training on top of all of that stuff. Obviously POOL360 is helping efficiencies. But, how are you managing the employee base here? Are you seeing higher turnovers given how hard they're really working and how much productivity you're getting through the system? And how are you really changing the system, so you don't bring those people out? Thank you very much.

That's a great question. As you know, I focus on four key areas: safety, growth, profitability, and being an employer of choice. The employer of choice aspect is relevant to your inquiry. It begins with ensuring we have the right resources in place and that we are organized with a clear plan. Our leadership team has extensive experience, whether it's the region managers or general managers, who have been in their roles for a long time. Even when we are busy, having structure and a plan ensures everything runs smoothly. While we are certainly busier now, it's about maintaining organization, structure, and utilizing the right tools. The initiatives we've undertaken for capacity creation, such as improving warehouse efficiency and our training programs, were implemented even during our busiest first quarter. I expect our first quarter results will be outshined by our second quarter performance. We've made time, even in the fourth quarter, to focus on these improvements which will ultimately benefit us as we continue to grow busier. It’s a continuous process, and we recognize the hard work and dedication of our team. The results we achieved would not have been possible without their effort and effective leadership. Our bonus plan reflects this, as it rewards everyone based on the company's overall performance. It's about energizing and equipping the team to excel.

Thank you. Mark, regarding your 20% growth that you mentioned, could you clarify when you said that the results from the second quarter were significantly better than those from the first quarter? That's quite an impressive statement. The 20% you referred to, is that related to your top line sales, which factors in the four to five points of inflation?

Yes, I believe that the comparison of Q1 to Q2 is significant. From a sales perspective, the 20% growth is for the entire year, which takes into account our strong first quarter. It also reflects inflation expectations for the rest of the year, the acquisitions we've made, and the comparisons with last year's growth rates.

Right, with 4Q being in a flat range.

Right.

Great. Thanks and congrats on the results. First question is just on the gross margin outlook. Previously you had expected margins to be up in the first half down to the second half maybe a little bit more significantly. Even now just with the improved gross margin outlook, it sounds like you're getting some pricing ahead of inflation here. But should we still think of maybe directionally the kind of the order of magnitude as being consistent with your prior expectations?

Yes, that's correct. I mean it wasn't a big change in outlook. It went from 20 to 40 down to flat to 20 down. So basically a 20 basis point improvement in expectation. And definitely the trajectory of that would be better earlier and more difficult later, particularly the fourth quarter, I think our fourth quarter gross margin improvement was around 160 basis points last year, so significant. And that will be very surprising to get close to that number this year.

Okay. Thanks. Second question is just on the revenue outlook. Just curious how you'd answer the question just around with the economy opening up, it seems like more people are certainly looking to take vacations in the summer. Will you anticipate more on the non-discretionary piece just because the new pool construction side is so strong and backlogs are full and the work is going to continue through the year? But is there any risk to air pocket in the summer months around people taking vacations for the first time in over a year, and they might end up skipping a bit on some of the nondiscretionary aspects of pool maintenance?

Yes. During the summer months, when the water is warm, you cannot just decide not to run the pool or skip putting chemicals in it because you're on vacation. If you do, the pool will turn green, and restoring it becomes quite challenging. These projects are long-term investments. It's not just about taking a vacation, which is a short-term consideration. Many customers who are having their pools installed today signed their contracts long before now. The agreements being made are typically for future installations, and this is usually a significant investment. Therefore, even if people start traveling and go on vacation, we don't see that affecting their plans for backyard investment projects.

Great. That's helpful. Last question is just on the commercial business recognizing it's about 4% of revenues. But just curious as to anything that in particular that contributed to the turnaround there?

I believe it's quite widespread. It wasn't due to a number of large projects failing. For instance, hotels, which were largely closed in March last year, are now seeing more activity. People are traveling, and bodies of water are being utilized, especially considering the safety concerns about pools a year ago. So, I don't think there was a single significant factor at play. It seems that the economy is gradually opening up, leading to increased travel. Public pools have been confirmed as safe as long as they are properly maintained. Overall, I think that's the situation.

Great. Thanks again. Best of luck.

Yep. Thank you.

Thank you.

Great. Thank you. In closing, I would like to extend my sincere thanks to the entire POOLCORP family and to our customers and suppliers, because without their combined effort these extraordinary results would not have been possible. Thank you for joining us on our call today, and we look forward to reviewing our second quarter results with you on July 22. We hope everybody has a great day. Thank you.