Pool Corporation (POOL) — Q2 2021 Earnings Call Transcript

Thank you, operator. Good morning everyone and welcome to our second 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'm joined here today by our President and CEO, Peter Arvan, and I'm very happy to say by our next CFO, Melanie Hart. We'll start as usual today with opening remarks by Pete.

Thank you, Mark, and good morning everyone on the call. Since May of last year, as the country adapted to the pandemic and its effects on daily life in North America and Europe, the interest in swimming pools and outdoor living increased significantly. The consistent growth we've observed over the years accelerated as people recognized that investing in their backyards allowed them to enjoy a safe and healthy outdoor living experience at home. This led to a spike in demand for inground and above-ground pools, luxury patios, and outdoor kitchens, quickly exhausting builder capacities. The demand surge persists, as many builders and remodelers tell us they are booked through the end of the year and often into 2022. Our retailers have also noted strong store traffic. This morning, after a remarkable first quarter, we announced that our total sales for the second quarter reached a record $1.8 billion, representing a 40% increase over the second quarter of 2020, which was up 14% compared to 2019. This quarter is our largest ever and seasonally the most significant. Thanks to the incredible efforts of our dedicated team, the support from our suppliers, and the determination of our customers, we have helped more people experience a healthy outdoor living environment than ever. From a base business standpoint, sales climbed 32%, with acquisitions contributing 8% to our quarterly growth. Despite inflation being above average this year, projected at 5% to 6% for the year overall, it hasn't affected demand meaningfully and has been passed through the channel as expected. The overwhelming demand for our products has put pressure on manufacturing capacity and supply chains across the industry. In these times, we leverage our strong balance sheet, extensive network of sales centers, and exceptional execution to assist our customers in keeping projects on track so families can enjoy their backyard spaces. Manufacturers are generally finding ways to boost production, which, coupled with the industry's seasonal trends, should help alleviate some shortages that have impacted the industry this year, allowing supply chains to operate more normally as the year advances. In our four largest markets, California sales increased by 33%, Florida saw a 35% rise, Texas experienced a 30% decline, and Arizona grew by 24% for the quarter. Overall, our year-round business markets increased by 31%, while seasonal markets grew by 33%. This growth demonstrates the robust demand throughout the business. Now, regarding product sales for our base business. Despite supply chain challenges, equipment sales—including heaters, pumps, filters, lighting, and automation used in pool construction, remodeling, and maintenance—rose 35% for the quarter, following a 62% increase in the first quarter. What's notable about this performance is its occurrence during our peak season when industry capacity is most strained and comparisons most challenging. Chemical sales faced their own supply issues this year due to known industry shortages but still increased by 28% in the quarter, with pricing accounting for 19% of this growth and volume for 9%. Ongoing shortages of trichlor and dichlor have heightened demand for alternatives like liquid chlorine and calcium hypochlorite, which have recently also faced supply interruptions and stockouts across our network, leading to occasional shortages lasting a day or two. As demand for chemicals peaks seasonally soon, we anticipate this situation will start to improve in the coming months. Demand for building materials remains robust due to active construction and remodeling. Sales in this category surged by 33% this quarter, matching similar growth in the first quarter. Retail products grew by 20%, spurred by a larger installed base and increased usage levels, although shortages in chemicals and other products are hindering growth. Sales for commercial pool products rebounded as leisure travel returned, leading to a 45% increase in sales for the quarter compared to a weak second quarter in 2021, where sales had dropped by 21% due to COVID lockdowns. Presently, sales in this category are mainly driven by maintenance and repair products as significant commercial construction projects are just starting to gain momentum. Last year, we completed four acquisitions—three in blue and one in green—and have since completed two additional blue acquisitions, all performing well and integrating into our network for further improvement. Our deal pipeline and growth plans are strong and remain a priority for the business. So far in 2021, we have opened nine new locations: seven on the blue side and two on the green side. Now, let’s turn to our European business. Sales are strong and growth remains robust. In the second quarter, we experienced a 42% sales growth, leading to a remarkable 62% increase year-to-date. Our team is performing exceptionally well, benefiting from a market that mirrors the strong North American trends. Being a multi-line distributor rather than a distributor manufacturer gives us flexibility and a broader range of options for customers in a constrained supply environment, allowing us to capture significant market share. Regarding our Horizon business, sales have continued to grow at a strong rate, increasing by 31% this quarter, with base business sales rising by 24%. Year-to-date, we opened two new locations, one in California and one in Florida, while we continue to focus on organic growth, Greenfield expansion, and acquisitions as we build our pipeline in targeted areas. I’ll now discuss gross margin, expenses, and operating income. We are pleased to report a 170 basis point increase in gross margins for the quarter, with a 200 basis point improvement in our base business, driven by effective supply chain management, inflation advantages, and product mix. Melanie will elaborate on this later. Operating expenses performed excellently given the volume growth, with OpEx as a percentage of sales improving by 117 basis points due to our team’s execution and focus on capacity creation. Sales from POOL360 grew by 56% and represented 12% of our total sales for the quarter, showcasing the importance of this tool in enhancing efficiency for both our customers and Pool Corp. In terms of operating income, I’m incredibly proud of our team’s achievement with a record $339 million for the quarter, a 64% increase from last year. Our team's expertise, dedication, and commitment to the customer experience are unparalleled, and our business model continues to differentiate us from the competition and enables us to capture more market share in this challenging environment. Our capacity to drive organic growth consistently while managing costs through effective execution reflects the dedication of the Pool Corp team. Now, with half the year complete, we are updating our EPS guidance for the year, raising it from a previous range of $11.85 to $12.60 to a new range of $13.75 to $14.25 per diluted share, which includes a $0.29 year-to-date tax benefit received. Looking ahead, several factors and trends give us confidence for continued growth beyond 2021. First, the single-family housing market remains strong, driven by millennials entering the market, deurbanization, and a migration to southern regions, all of which bode well for both our blue and green business segments. As people relocate to warmer states with longer outdoor living seasons, they recognize the value of investing in pools, patios, outdoor kitchens, and remodeling, fueling demand for our products. Second, the shift to remote work is allowing more time to enjoy luxurious backyard retreats, a trend projected to continue long-term. Third, innovative products like automation and connected pools enhance our sales opportunities for every project as users become accustomed to this new technology. Fourth, last year saw 96,000 new inground pool installations, projected to increase to over 110,000 pools this year, as builders report stronger backlogs extending into 2022. Each new pool contributes to the ongoing maintenance and repair market, which is the largest sector of our industry. Fifth, inflation, currently higher than normal, is likely to persist into 2022. Sixth, new legislation for variable speed pumps taking effect this month is expected to generate an additional $30 million to $40 million in revenue. Seventh, our strong commitment to customer experience and expansion plans are enabling us to gain significant market share, a trend we expect to continue. Lastly, acquisitions will continue to support our growth as we advance our strategic plan and build our deal pipeline. With all these factors in mind, we have ample reason to feel optimistic about the future, and we anticipate maintaining our history of success. I will now hand the call over to Melanie Hart for her financial commentary.

I am very pleased to be joining you all this morning. I will cover some of the details of our second quarter financial results. As Pete has provided an overview of our sales activity in the quarter, I will begin my commentary with some additional discussions on gross margins. Gross margins increased 170 basis points during the quarter with base business gross margin of 200 basis points. These increases exceeded the expectations expressed on our first quarter call. First, we saw benefits from our supply chain initiatives, which included a focus on accelerating purchases ahead of vendor price increases to limit stockouts where possible in today's tight supply conditions. Next, with our increased purchase volumes, we also expect improvements in the rate earned under our vendor progress. Additionally, we realized some improvements in gross margin during the 2021 second quarter from product mix changes as a larger portion of our sales was comprised of lower margin, bigger ticket items in the prior year. Lastly, customer mix changes also had a positive impact on margins for the quarter. Moving down the P&L to expenses, our consolidated quarter-to-date operating expenses were up 27% with base business operating expenses increasing 18% over the prior year on base business sales growth of 32%. Base business operating expenses were down 140 basis points as a percentage of sales. Variable expenses such as those related to personnel and freight costs that are necessary to serve our increased business activity were very well managed by the team during the quarter. Included in these expenses is our performance-based compensation. We recorded an additional $7 million over prior year during the quarter and $19 million more year-to-date, given our exceptionally strong performance. Operating margin grew 280 basis points to 18.9% for the quarter. The five acquisitions added since the second quarter of last year have performed well contributing $11 million — or 11% operating margin. The operating margin contribution from these acquisitions was below our base business operating margins and like underperforming sales centers and new locations of which we opened nine new locations in the past 12 months, represent additional opportunity for operating income growth over time. Interest expense declined from the same time last year as lower debt levels resulted in lower overall borrowing costs. Our average debt for the second quarter of 2021 was $376.8 million compared to the same period last year of $493.4 million. Our recurring tax rate continues to be around 25% on pretax earnings, excuse me. We realized an additional ASU tax benefit $7.7 million or $0.19 per share from stock option exercises that occurred during the quarter, bringing the reported rate to 22.9% for the quarter. I'll now move to our balance sheet and cash flows. Our growth in current assets over last year reflects an increase in total net receivables of 29%, including the effect of acquisitions made after the second quarter of last year. This is driven by sales growth in the quarter offset by strong collections activity. We realize a reduction in DSO or days sales outstanding to 25.8 days, down from 28.5 days during the same quarter last year. Inventories were up in total 42% or 36% not considering the inventories we added for acquisitions. We continue to leverage our capital strength and sourcing scale to add inventories to support the demand increases and maintain customer service levels. Inventory turns on a trailing four-quarter basis increased to 4.1 from 3.5 in the second quarter of 2020. Cash provided by operations through the end of June was $187.2 million. This is down $33.9 million from the same quarter last year, primarily due to increased inventory investments. The prior year also benefited from deferred tax payments that shifted from June to July in 2020 as part of the COVID relief package. Cash flows for the year are expected to remain strong, but we may continue to prioritize investments in inventory over cash generation as we believe our strong inventory position has allowed us to gain share. For the year, we've also been focused on returning excess cash to shareholders. In May, the Board increased the authorization of share buybacks by $450 million. During the quarter we spent $19 million in addition to the $66 million repurchase in the first quarter, returning a total of $85 million to shareholders year-to-date. These repurchases resulted in total shares acquired of almost 243,000 for an average price paid of $348, leaving $542 million on our repurchase authority. We also increased the quarterly dividend rate during the quarter by 38%. Our debt levels remain lower than our targeted range, with a trailing 12-month ratio of 0.5 at quarter end, giving us substantial capacity and flexibility to support our businesses and execute on capital investment opportunities. I'll now turn the call over to Mark to provide comments on our expectations for the remainder of the year.

Thank you, Melanie. I'll start my comments today with some perspective on our second quarter financial results. For each of the last two quarters, I've alluded to our results looking like the work of some sort of modern-day Renaissance master. In hindsight, I think I should have saved my superlatives for this Q2 result, which is the real work of the master. At the peak of the season, when demand is greatest, our customers' needs are most urgent, and our supply chain is the most stressed. Delivering the kind of results we achieved this quarter is the embodiment of a team effort that is truly exceptional and demonstrates an incredibly high level of execution. Our second quarter was a combination of a frenetic year in the pool industry that really showcased the talent of our team as well as the value of our business model. Looking back over the last year, our trailing 12 months of financial highlights included 40% revenue growth and cumulative sales of $4.8 billion, 84 basis points of gross margin expansion, and 350 basis points of operating margin expansion, while delivering a return on invested capital of 50%. All remarkable results. In addition, we had a balanced deployment of capital over this 12-month period, with $125 million in capital used to acquire five companies and nearly $200 million returned to shareholders evenly split between dividends and share repurchases. And we invested $26 million in PP&E, primarily to support investments in technology and new locations. We also invested just over $200 million in working capital in 2021 ahead of our seasonal business peak to be in the best position possible to serve our customers throughout our supply-constrained environment. As a matter of note, our sales growth over the last year of $1.4 billion was just a bit more than our total sales when I joined the company back in 2004. Clearly, our marketplace has evolved at a rapid pace over the course of the last year and so has our performance and our outlook for the future, which continues to be very positive. At this point, I'll share some insights into the factors included in our guidance range. Using the midpoint of our new guidance range as a measuring stick and comparing the new range to the old, you can see that we raised our expectations by 15% for the year. This is a result of three factors: better overall Q2 performance than expected with higher sales growth and bigger gross margin gains than we had factored into our previous range; expectations for somewhat higher sales growth and better gross margin performance for the remainder of the year; and lastly, the $7.7 million or $0.19 share benefit from our ASU tax gain in the second quarter that was not in our previous range. Our previous range had anticipated sales growth for the year in excess of 20%. Our new range, which of course has Q2 baked into it, anticipates sales growth in excess of 25% for the year with greater growth in Q3 than in Q4 as the path becomes increasingly difficult. As a reminder, our Q3 2020 sales growth was 27%, while Q4 2020 sales growth was 44%, which was aided by very favorable weather conditions and included acquisitions which will be lapped this year. While we assume normal weather for the rest of the year in our guidance range, favorable fourth-quarter weather this year could see us reach a milestone of $5 billion in revenue for the full year. As I noted, our gross margin expectations for the remainder of the year have also improved with year-over-year gross margin gains now anticipated in both the third and fourth quarters, though much less improvement in the fourth quarter given the 70 basis points of margin pickup we recorded in Q4 of 2020. Despite inflationary pressures on our operating costs and growth in certain discretionary business expenses that have been pared back during the pandemic, we expect to continue to manage expenses well and could achieve as much as 250 to 300 basis points of operating margin improvement in 2021 over 2020 with the majority of the additional gains for the back half of the year coming in Q3. With that, I'll turn the call back over to our operator to begin our question-and-answer session.

All right. Thank you. Good morning, everyone.

Good morning.

Yes, and Mark, congratulations. What a run. That's been fantastic. Good luck.

Yes. Thank you, David.

Yes. So, as far as the quarter goes here, I think the gross margin is a good place to start. This quarter, you can clearly jumped outside of the typical band for a second quarter. And you sort of implied that the back half would continue to be higher year-on-year. But I guess if I look at the 160 basis points better than the five-year average, assuming no major fall off in business, when you look at that sort of overage, how much of that do you think is structural versus transitory assuming the same level of business activity?

I'll take that, Dave. When we look at the margin gains in the second quarter, we benefited from last year. There's some margin pressure from the larger ticket items with lower margin sales that we did not see in the second quarter this year, and we don't expect that going forward, which makes it not transitory. One benefit mentioned about customer mix relates to internet sales. We sell to both internet and store-based retailers, and due to the lower margin on internet sales and supply outages, our growth in that area didn't match our store-based retail performance. Will that come back in the future? It's possible, but I see it as a longer-term scenario, likely not within the next year given the industry's high revenue growth and our need to continue prioritizing store-based sales. We are implementing supply chain initiatives, which are also affected by the inflation we've been experiencing. As Pete noted, we anticipate ongoing inflation through the rest of this year and into next year. However, I don't see that being an issue over the next 12 to 18 months. Additionally, Melanie mentioned vendor incentives, which we will navigate with our vendors moving forward, but I can't predict that at this moment. Overall, I feel optimistic about sustaining the margin gains throughout the remainder of this year and into the next. We will reassess after that. That's a long answer to your question, but I hope it provides some insight.

Yes, that's helpful, for sure. And second if we could talk about the kind of deconstructing the growth. Pete, I think you mentioned that chemicals' unit volumes were up like 9%, which I think about that 60% of your business, which is maintenance and minor repair that probably correlates fairly well. So, the outsized growth you're seeing has to be coming from the refurb and the new pools and I think you've talked about new pools being up like from 96,000 last year to 110,000 this year, which is kind of a team grow. So, that leaves us with the refurbishment as well as the content in those pools. Can you just touch on kind of when you see this outsized growth and we sort of know the pieces that aren't growing at 40%, sort of what pieces do you see driving those? And how sustainable are those factors?

Yes, good question Dave. I think when you try and deconstruct the growth, we commented on the chemical volume, you're zeroed in on a couple of things, the new construction going from 96,000. So, last year, new construction was up 26%. So, this year, we think the new number is going to be 110,000. So, when you have new pool construction that you're bringing into play a lot of different product groups, right? So, you're bringing in building materials, which from a year-over-year comp perspective, remember, the second quarter of last year, we had essentially little to no construction in many markets across the country because of restrictions due to COVID. So, that has certainly rebounded. So, we see that building materials or construction materials product sales driving growth, and that's a function going into two places, right? It's going into remodel, which by far is the bigger portion of the market. I mean, a lot of folks zero in on the new construction as new construction got to be 110,000, 112,000, 115,000 whatever. To me, that is, it's all good, but the lion's share of the market and where we're seeing a lot of activity as well is in remodel. So, when I looked at the growth — and one of the major drivers of our growth is A, the pools are being used more, right. So just general maintenance equipment is a piece of that as technology, we're seeing more homeowners adopt or opt for technology or more high-tech products, which is again driving the value of the ticket for us. And then when you do a remodel project, those can go from a few thousand dollars for a new piece of equipment to all the way up to resurfacing the pool and adding decks and patios around it, changing tiles, and changing structural features in the pool, all of which are very good. And again, the opportunity for that given the age of the install base is very good.

That's very helpful. Thanks very much, guys. All the best.

Yes. Thank you.

Hey, everyone.

Good morning.

Good morning.

Congrats on some incredible numbers yet again.

Thank you.

So I guess first off, Pete, it sounds like you have enough evidence now to say the pool industry has entered a new normal with work-from-home, migration to the suburbs, migration south. Is that a fair statement?

Yes. As I said, in the end, towards the end of my comments, when I was sitting back, reflecting upon what is driving the numbers, and whether it is a short-term thing, or a longer-term trend when I started listing those out, which is why I purposely did it, there are several factors, as you mentioned, that change the outlook for our industry, and give us great confidence that the growth will continue that it wasn't just a COVID driven bubble.

Right. Okay. I just want to make sure that was the message. And then on gross margins, I just want to get a better view of the cadence during the second half, Mark, not to put you on the spot here, but maybe up 100 basis points year-over-year in Q3 and maybe up something like 40 basis points year-over-year in Q4, that in the ballpark?

You want to send me your model, and I can just fill it out for you. You know, I would say maybe a little bit better than what you're thinking certainly in the third quarter, fourth quarter a little bit tougher. But we see more benefits and as I said, expect some of that to continue in the next year or so. I feel good about the gross margin opportunity for us, as we exit the second quarter and/or the third.

Okay. Sounds good. And just lastly, inventory levels still up massively year-over-year, obviously, demand is a big part of that. But are you also using your scale to buy inventory just given the shortages? And then are you also buying ahead of price increases still?

Yes. I think there's three factors, right? So inventory dollars are up. But when you look at it in terms of days of inventory, we're actually down. We — this is where in this environment is where a company like Pool Corp really excels, because we use the strength of the balance sheet to kind of lean in to make sure that we have product available for our builders. So part of it is that there's still periodic shortages of product and every — but that's a widely known fact. But what happens is, it could be one product, right? So if I look at the inventory balance in total, it could be a couple of products that are missing for to ship a job complete. So when that comes in, it will go. But by and large, it's a couple of factors. One, business is up. So our days of inventory are down because of the shortages. We're buying ahead, certainly to make sure that we have as much product as we can. And then we're still dealing with intermittent shortages of specific items that may be holding up the shipment of a complete job.

Sounds good. Thanks for the comments. And Mark, all the best.

Yes. Thank you, Ryan.

Thank you. Good morning, everyone and congrats on a great quarter.

Good morning. Good morning. Thank you.

My first question is going back to the gross margin. I know that you mentioned that you definitely saw some lift from an improved mix shift. I guess, when we think about what's going on the ground, you know you mentioned the fact that you're still seeing a lot of refurbishment, a lot of new pool construction going on. How does that mix today compare to where you were in kind of a more normalized period 2019, 2018, whatever it was? And is there more to go in terms of that normalization over time?

Yes. In terms of — you’re saying as the increased construction activity, kind of impact that?

Yes. So what are the sales of that…

...the mix question is kind of a complicated one, but if you focus just on construction, so with pool bills is going from let's call it 75,000, 80,000 to 90,000 to 100,000, 110,000, those are typically larger customers that are doing the construction. And that's a little bit lower margin customers, just because they're buying more and have more — a little more purchasing power, generally speaking. But that's just one part of the overall story and margins. There's a lot of other things going on there. We're selling more building materials, which are a higher margin category for us. And that's growing, and we have other product categories that are higher margin growing as well. So, I wouldn't focus just on the construction, and that piece of it has — because if you look back over time, our margins have been very stable, even with growth from 2010 really up through 2020 of construction. We've managed a very stable gross margin story. So, does that answer your question, Susan?

Yes. No, it definitely does. And I know, it's tough, because there's a lot of moving pieces there. But like I said, I was just trying to think about the fact that that new construction piece has really risen pretty significantly in the last, call it year and a half, two years now, and how to think about what that means relative to where we were before.

Right.

Yes. My second question is around, you've obviously gained quite a bit of market share. And it seems like that's continuing to come through. Is there anything that you can talk to whether it's in terms of, I don't know, maybe historical retention rates or other initiatives around how sticky that business is and your ability to really kind of keep these customers engaged going forward?

Sure. If you look at over time, we have consistently gained share over time. So I think our — we have a tremendous focus on the customer experience. And we — every time we get a new customer, we treat that as a golden opportunity to make sure that we maintain that. And if you look back historically, on our market share, it's been — we've been consistently growing that now. In the last year, we certainly have grown faster, given the circumstances that have played out. But if you look back over time, those tend to be very sticky relationships with a customer. So it's not like they come to us, they jump back. Over time, we've been able to demonstrate that as people come to us, we engage them, we work with them, we cover that business, take care of their service as best we can and focus on execution, and that business generally stays with us.

Okay. That's helpful. Thank you. Good luck.

Thank you.

Good morning, and thank you for taking the questions. And then Mark, congrats again on your impending retirement.

Thank you.

So I guess first, in terms of capacity creation, how should we expect that to evolve over the next few years for you?

I mean, it has been a focus area for us for the last several years. It's one of my personal focus areas, and I believe it has yielded significant benefits moving forward. There are various aspects to consider, such as capacity creation within the facility, our truck fleet, and labor productivity. I think we've improved, but we are still not as consistent across the network as I would like, meaning there is still room for improvement in this area. We see POOL360, for instance, in our BlueStreak application, continuing to grow and adding value for both us and our customers. So I believe it's a very important area for us and has been very beneficial, and I don't think we have reached the limit of what we can achieve from this focus.

Got it. And in terms of your customers, whether it's pool remodelers or — been much increased capacity for them, or is it over the last few months or so? Can you just comment on that? I know there have been labor constraints for a while, but I just wanted to see if there has been any changes that you have seen from your customers?

Yes. That's a great question. And I was talking to several of our field folks over the last couple of weeks about that. And I'm encouraged by what I heard several times from our folks that they — our customers are adding labor and expanding their crews in many cases, which I think is going to expand capacity for the industry. And as you know labor has been the single biggest limiting factor on the industry growth over time. But I think given the how desirable this space is outdoor living and pools and patios and such, I think builders are growing more comfortable and more confident in the opportunity, and they're starting to add labor to their teams. Now, there hasn't been a step function increase in that yet. But I can tell you having been here for almost five years, that's not been a common thread that we see crews expanding. But I think what we've seen year-to-date this year are some very positive signs in that area.

Got it. Okay. And then the last question for me. In terms of higher costs, I know you mentioned freight, I think in your release that, anything there is other than that — I just wanted to get a better sense basically as to where are you seeing the greatest pressure points in terms of cost increases?

Sure. Certainly, freight is an area of freight, fuel, as a component of that, typically that from an inbound freight perspective is captured in our cost of product line. From an outbound perspective, we actually have an advantage in this area, and again, it's part of our capacity creation in that most of our freight happens on our own fleet. So, by working on the things that we have done over the last couple of years, with truck utilization, smarter routing, better loading, and such, we have been able to minimize some of the effects that have happened in the industry. Other areas, real estate is an issue that we all face and that the demand for warehouse space is going up. So every time we renew a lease, that's an area that is we're seeing inflation in as well. And there's always been or there has been of late some inflation on labor as well.

Got it. Okay. Well, thank you, and best of luck.

Yes, thank you.

Thank you, Anthony.

Hi, good morning, guys. Still morning here. Thanks for taking my question. And Mark, if you want to do my model too, I appreciate it.

I need something to do. You can send it to me in the future. Just kidding.

Understood, I would never send you my model. Seriously. I think a lot of this has been asked, but I guess what I'm trying to just think of is longer term. I don't maybe this is a peak question. But you guys have this pool financial model slide you include in lots of your presentations and sort of lays out what you think the model is. And I guess what I'm wrestling with is, has this changed? Is this 6% to 8% revenue growth the stable gross margin kind of over the long-term? Have you kind of accelerated this to another level at this point? Or where do you think we are in that process?

Yes, yes.

As your party question would you like to do it or.

I'd be happy to. First of all, I think we'll be giving an update in September. We'll have investors — and shareholders and we'll kind of go through our longer-term expectations and initiatives that we see. As Pete mentioned in his comment, one of the earlier questions, there's definitely been a step up in industry volume and activity. And as we look forward, I think there's more growth opportunity over the next several years from an industry perspective than perhaps we've seen certainly, you look at pool construction and the acceleration there. And then the aging, the installed base and some of the factors, Pete mentioned about the long-term activities that should continue to drive demand in the pool industries. So I see us being fairly optimistic about the growth opportunity and our model will reflect that, not significantly, but some modest uptick there.

And just to push you on the next level down, your gross margin has been ridiculously stable for such a long time. Is it now stepping up a little bit going forward? Or is this more temporary?

Well, I think that, that sounds like the question I addressed earlier. But certainly, in the short term, it's picked up. We've done a good job over time with maintaining stability. Some of what we see in the short term may not continue long-term. But I think there's some opportunity to bring the margin level up from what it has been over the last couple of years. So that certainly will be an effort that will be focused on.

All right. So we'll call that medium term then maybe. And the final one for me. I'm just curious, maybe this is more of a peak question. But I wasn't expecting a lot of inflation next year, because it felt like the chemical situation normalizes and some of the supply constraints through the industry normalize, it just felt like a less inflationary outlook to me, but you seem pretty confident that this will continue. So just curious about that?

Yes, it's a little early to tell you exactly what I think the number is going to be next year, because this is the time of year when our manufacturers are trying to read the tea leaves as to what their inflation is and what they're going to pass along. I think by deconstructing what you said for a moment on the chemical side, I don't think the chemical situation will return to normal in my opinion until probably the third quarter, end of the third quarter, fourth quarter of next year, because our information when the plan come back online, puts it out into the end of the second quarter for a startup. So, by the time it has a meaningful impact on the industry, it will be later in the year. So, from a chemical perspective, I don't see a whole lot of change in that area. From an equipment perspective, again, it's a little bit early, but if you ask me to call it right now, I would say that it's going to be above the normal, which for us, remember has been in the 1% range. And I'm pretty comfortable that it's going to be above that number for next year. But again, as the year goes on, as we normally do, we'll give you a much better read on that in future calls.

Super. Thank you guys.

Yes.

Yes. Good morning, and great quarter. Mark, congratulations on your retirement.

Thank you.

I had a question on the new construction. I guess the question is just to what extent is your forward visibility in new construction improving through a change in technology, the use of POOL360 gives you a lot more for visibility, I don't know, maybe online engagement with your customers. But I'm just trying to get a sense of if you're getting a little better forward look on new construction now, as a consequence of some of the changes that occurred?

Yes. We actually have — I think we have better visibility now than we ever have. And it's a result of a couple of things. Obviously, we have always had access to permit data, just like you all do. So it's one of the things that we tracked. But given the tightness of supply of the major components in pool construction, whereas in the past, there was plenty of inventory in the pipeline and builders didn't put a lot of orders in advance saying, hey, I'm going to need this product on this day. So, we have in order to make sure that we can accommodate their needs and that we have the equipment set on the day that they needed in the future or that we have the plaster there to deliver on the day that they're going to deliver, builders are sharing more information with us now about hey, these are the jobs I have in the pipeline. So, oftentimes when they go sell a job and get a contract, they're coming into us saying, okay, here's the job that I sold, I'm going to need equipment, I'm going to need the plumbing kit here, the steel kit here, and I'm going to need the equipment and finished kit on this date. So, one of the benefits of the situation that we're in is we do have better visibility to what the backlog is in the industry.

Right. I guess, one of the reasons I ask is just thinking about new construction, there's always the question out there with respect to what extent has stay at home pulled forward into 2020 and 2021? And therefore, maybe create some risk around new pool sales in 2022? I realize you've walked through some factors, you've been very helpful in that sense, but I'm just trying to get a sense of what the downside scenario might look like. And is it — would it be returned back to the 95,000, 96,000 pools or maybe a little bit better than that? And how are you thinking about kind of the risk around that? That's it.

I think you got to consider like what could cause that. I mean, the builders have significant backlog in place, as we mentioned. And from a macro trend, people moving to the south, the work from home, those things are going to continue. Millennials entering the housing market, a strong housing market in terms of value, and frankly, people valuing having the backyard escape. So, frankly, I don't — but for a major economic issue, I don't think that there is anything in the near term that would say, well, the 110,000, there's going to drop back down to 95,000. That's really not how we read the tea leaves today.

One potential exception is weather, of course.

Sure.

Great, great. Okay. Thanks for that. And then just follow-up question, I guess, just regarding Texas, Florida, to what extent did the quarter benefit from kind of one-time spending on the repair or replacement of equipment damaged in the freeze earlier in the year? Are you able to size that?

Yes, it didn't affect Florida, right. It was really a Texas issue in terms of the…

Yes, Texas issue.

And we said that there was a lot of repair that was done in the first quarter. And then due to equipment shortages, I think it's still going on. I think it's going to go on between now and year-end, although at a much smaller pace than what we saw in the first quarter. So I think it's something that we'll see continued tailwinds on, albeit at a much smaller level than we saw in the first quarter.

Okay. Thank you very much.

Yes.

Great. Thanks for taking my questions squeezing me in. Just wanted to follow-up on the inflation comments. You mentioned you haven't seen any impact from inflation on demand. But if we're going to be in a modest inflationary environment again next year, is there a point in which inflation is going to start to impact volumes? I mean, I guess, do you worry at all about price elasticity at all? Are there any lessons from this experience this year, that makes you feel even more confident about the, I guess, the pool owners ability to withstand much higher pricing?

Yes, it's important to analyze how inflation affects the business. When it comes to maintenance and repair, if a filter or pump is needed, it must be replaced regardless of a 5% price increase from last year. For pool owners, this amount is generally manageable, and they won't postpone necessary changes just because of a slight increase in cost. Therefore, maintenance and repair are not significantly impacted. Regarding construction inflation, it can vary based on the type of pool being built and may affect the overall project budget more. However, it’s essential to consider that labor typically constitutes most of the cost of a backyard project, whether it’s a renovation or new construction. So, even if material costs rise due to inflation next year, we believe it won’t significantly deter demand or influence decisions about proceeding with projects, as the overall cost allocation should be taken into account.

Helpful. I guess, my follow-up question is, I know it's relatively minor considering the revenue base is about $5 million now. But how quickly do you expect the $30 million to $40 million in revenues from the variable speed pump legislation that's going to affect? How quickly do you think that might start showing up?

So, as we've mentioned before, the way the rule is written, it says that they can't make the pumps anymore, right? So they've now had to switch to only variable speed pumps, but the product that is in the pipeline can be sold. I guess, fortunately, for us, in this case, there isn't a lot of inventory left in the pipeline. So we think that we'll start to see the benefits this year, and then we should essentially see the full benefit next year in terms of what the opportunity is. So it's a gift given the shortages in this case, it basically — it pulls that in. But you also have to consider the seasonality too. And the impact on us is earlier in the year, right? So, during the peak season — so most of the effect that you would see, I wouldn't look for a meaningful bump in 2021, I think you're going to see it in 2022.

Okay. Thanks again. Great quarter. And Mark, best of luck on your retirement.

Yes. Thank you, Kevin.

Hello, everybody.

Good morning.

Good morning, Ken.

I look forward to seeing you in New York on September 15. I'm sure you'll provide us with a lot more insight. In the meantime, let's discuss a few topics. How do you measure stockouts? How can we assess how disrupted the supply channels are? I experienced a situation at a hotel over the 4th of July where their hot tub wasn't operational because they lacked parts. How do you gauge stockouts in relation to the stress levels in the supply chain?

Yes. Our goal on stockouts is to be at less than 5%, right, that's been the goal that we've been chasing — excuse me — for many years. And we in terms of our attention to it, and weighting of it as a business, we actually put much more emphasis on it during the peak season than we do on the shoulders of the season. So we do kind of a weighted average in our measurement. So, the goal is 5%. On some products, it is higher than that. And I would say, overall, obviously, because of the shortages, the number has come up. And it really varies by location. And it varies by product.

But you're not suggesting it's actually something meaningful, I guess, in terms of backlog?

Meaningful, so it is — we take — we treat every one of those knockout situations as a really bad situation. So to us, they're all very meaningful. Because anytime that occur — and says, hey, do you have something? And I have to say no. But now you know, we look at the system. And we can tell the customer hey, here's what it is. Here's what it is scheduled to arrive, so that we can coordinate with the customer on what and provide an expectation. In some areas that's been very challenging on the chemical side, because we certainly don't have the same visibility as we do on the equipment side. So it is elevated. And I would tell you, in some cases, it could be some crazy products that can be approaching 10%. And but by and large, I would say the increase is slightly above the 5% target that we have established.

Okay. You've talked about gross margins a little bit. Mark, I think you've talked about positive gross margins as we're moving into the second half. You could, you're talking about product mix and stuff. But it seems as though, if you're moving into a positive mix, in the second half, that would have a positive carry into the first half of 2022 given those variables. But you know, related to that, your SG&A has come down quite a bit is my assumption here? Well, we see it as certainly versus the prior years. So can you and I tend to think about your company when you get it a gross your SG&A, it's not such a concern to me. But I mean, we are getting questions on that gross margin. So can you talk to if that SG&A is kind of something's changed in that relative to where you were a few years ago or is that to another COVID metric that would be set to normalize? Kind of a two part question there as it relates to EBIT. But could you expand on that a little bit?

Well, yes, a little bit, I guess. Your question or your comment about gross and SG&A coming down, you're referring to SG&A as a percent of sales. SG&A is obviously — is growing businesses ground — that people and the support added locations, facilities, vehicles, and so our SG&A and obviously got up, it's come down as a percent of sales last couple of years. In part, I think I've mentioned this before, at some point, you know, leverage is easier when sales growth is higher. So we've had, obviously a great sales growth over the last year and this year. And that makes getting that SG&A leverage a little bit easier. But at the same time, you know, we've talked a lot about capacity creation initiatives, and those are things that we do throughout the organization to focus on getting more out of existing investments. And that is a big part of our operational initiatives. And we've made good progress there. We have more to come. We also pared back expenses during the pandemic initially. We talked about that last year. We're seeing some growth in those costs in gross and other cost areas, as Pete mentioned, things like leases and labor. Insurance is another area. And then, incentives, we talked about incentive costs were up substantially last year, we thought they'd be down this year, year-over-year. We talked about that earlier in the year, and in fact, there is going to be up. So those are a big component of the cost structure and should be coming down next year. Most likely, it'll be a tailwind for us. So a lot of different components there, I think that, if I look at our long-term model, I feel good about the opportunity to continue to provide operating leverage. And that is going to continue to be a big focus for us, which is in that kind of mid-teens plus area in terms of operating leverage we expect. So, I don't know if that covered both parts of your question, but that's kind of how we —

It's interesting, right? Because you're running over 200 basis points below. I'm not sure if your gross margins will hold or rise slightly this year, but your SG&A is expected to decrease by about 200 basis points. Maybe this will be addressed more at the Analyst Day. Operating leverage needs to come from your gross margin or your SG&A, but it seems like there's been a significant drop, indicating something structurally different. I'm looking forward to discussing that further. Shifting topics, Pete, you come from roofing, which is different from prior roles in distribution. In roofing during 2008, manufacturers faced high oil input costs, and distributors often tried to pre-buy to navigate pricing, which affected demand and pricing. Eventually, they realized margins could improve. Do you see anything similar with your competitors and manufacturers given the high demand and input costs, potentially indicating a structural shift in the industry due to the volatility we’ve experienced?

Yes. So we have taken share, as I mentioned, we think we've taken in three to four points of share this year. And that's based on the fact that, in a particular market we have in most markets. We have multiple locations. So if I don't have it in one location, I may have it in another. I mean, the irony of the situation that we're in now is that we use that to benefit our customers, but it is creating a lot more work for our teams. I mean, I can't express how hard our teams are working to do what we do in a tight, constrained environment. Because they are having to move product from one location to another, and to coordinate deliveries and really look very specifically at what days people need things, so that we get product to them. This is where we separate ourselves though, because in most markets we're the only ones that have multiple locations, and nobody has as many locations as we do. Nobody has the buying power to place the orders as big as we do in the beginning anyway. So we're doing that, we're working very hard to make sure that we can take care of the customers, and certainly, it's creating a benefit for us, and I think a benefit for the customers as well.

Thank you very much. See you guys soon.

Thank you.

Thanks, Ken.

Thank you. Before we disconnect, I would just like to take a moment to thank Mark for his 17 years of dedicated service to Pool Corp. His leadership, technical knowledge, and passion for the business have contributed greatly to our success over the years. Since I joined the company five years ago, Mark has been a valued partner, and I've often benefited from his experience and advice. He also has done well to trends to ensure a smooth transition for Melanie as she has seamlessly prepared to step into the CFO role for Pool Corp. We wish Mark well as he transitions into his next phase of life. He will certainly be missed here at Pool Corp. Finally, as a reminder, we look forward to sharing our third-quarter results on October 21, of 2021. So please mark your calendars. Have a great rest of your day. Thank you.