Pool [POOL] Conference call transcript for 2022 q1
2022-04-21 16:22:14
Fiscal: 2022 q1
Operator: Good day and welcome to the Pool Corporation First Quarter 2022 Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Ms. Melanie Hart, Vice President and Chief Financial Officer. Please go ahead, ma’am.
Melanie Hart: Welcome everyone to our first quarter 2022 earnings conference call. Our discussion, comments and responses to questions today may include forward-looking statements, including management’s outlook for 2022 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 from projected results are discussed in our 10-K. In addition, we may make references to non-GAAP financial measures in our comments. A description and reconciliation of any non-GAAP financial measures will be included in our press release and posted to our corporate website in our Investor Relations section. I will now turn the call over to our President and CEO, Peter Arvan. Pete?
Peter Arvan: Thank you, Melanie and good morning to everyone on the call. Earlier today, we released our first quarter 2022 results and they were nothing short of spectacular. Revenue grew by 33% in the quarter, ending at $1.4 billion. This marks our fifth consecutive quarter with sales over $1 billion and is the second biggest quarter ever for POOLCORP. Making this even more notable is that this tremendous growth compares to a very strong first quarter in 2021 when we posted growth of 57%. Outdoor living remains a priority with homeowners across North America, which continues to keep demand for our products strong. New pool construction backlogs are solid and will keep builders busy for much of this year. Families continue to invest in their backyards and enjoy the benefits of a healthy outdoor living lifestyle. Pent-up demand for renovation continues on the installed base of pools and hardscapes fueled by a tight housing market and rising home values. The maintenance and repair business is strong with the most maintenance companies commenting that the tight labor market isn’t allowing them to expand as fast as the market opportunities will allow. Fortunately, we have seen some improvements in the supply chain issues that plagued the industry last year. Our investment in inventory, infrastructure and relentless focus on execution, when combined with our vendors’ capacity investments, had eased some shortages and allowed us to provide a better customer experience than a year ago. Geographically, we continue to see strength in our four major Sunbelt markets as well as our seasonal markets despite some adverse weather in the Midwest and Northeast markets during this quarter. Arizona showed the strongest growth rate with base business sales increasing 33%. Followed by California where we saw base business increase 31%. Florida was also very strong with 30% base business increased growth. And Texas, which had an extremely tough comp due to the freeze event last year, posted a 7% gain in its base business. As a reminder, we believe this event last year added approximately $20 million of revenue to our first quarter in 2021. With that in mind, we are quite pleased with the Texas results. Demand was also robust in our seasonal markets as we saw base business grow by 28%. Overall, we view the weather in the first quarter of 2022 as much less favorable than we saw in the same period of last year. When we reported full year 2021 results, we said that we believe new pool construction in 2021 was approximately 120,000 units. PK data has released their final number for 2021 and confirm the number of in-ground pools constructed was 117,000 units, which equates to a 22% growth rate over 2020. With 9 months left in the year, we think it is a bit premature to call the 2022 number given the many unknowns, which include weather, labor availability and other economic indicators, but we remain very encouraged by what we are seeing so far this year. Most of our builder and remodel customers are reporting strong backlogs for new pools and a growing backlog of remodel projects created by builders focusing on new construction, more on new construction than remodeled during the last couple of years. Clearly, the southern migration where the attachment rate of swimming pools is much higher, de-urbanization, the continuation of the work from home trend and a tight housing market are all combining to fuel the industry’s growth. It is important to remind you that new pool construction, albeit very important to us and the industry represents the smallest portion of our business at less than 20%, with maintenance and repair, renovation and remodel representing approximately 60% and 20%, respectively. We believe this is a very healthy balance and continue to invest in the margin-accretive maintenance and repair portion of our business that provides consistent growth with attractive margins. Porpoise Pool & Patio represents the latest and most significant investment in this area. Turning to end markets, Commercial Pool revenues were also very healthy as we saw sales increase 34% in the quarter. This compares with the 26% growth that we saw in the fourth quarter and 24% growth that we saw for the full year of 2021. This market is healthy with maintenance and repair demand growing and a healthy backlog of construction and renovation projects in the pipeline. Our base business sales to independent retailers buoyed by strong demand in the year-round markets and strong early buy activity grew by 28% in the quarter. Results from Pinch A Penny were very similar and quite encouraging. As we closed the first quarter, we crossed the first 100-day mark of our ownership of this strategic acquisition. Store traffic is brisk and demand is solid across the platform. Pinch A Penny added two new franchise locations in the quarter and have a robust development pipeline. We have combined resources on chemical sourcing and product management and have begun packaging some products for our independent pool stores under the proprietary POOLCORP brands. The operations teams have begun prioritizing the many synergies that we have identified. We are quite pleased with this investment as we believe it significantly strengthens our value proposition and extends our reach in the nondiscretionary part of the market serving the DIY pool owner, an estimated $3 billion market opportunity. Next up, let me provide some context on our base business product sales. Equipment, which includes heaters, pumps, filters, lighting and automation, grew by 18%. Considering the impact of the Texas freeze, we are very pleased with these results. By and large, the supply chain issues that continue to improve or these products with some exceptions that I will comment on shortly. Chemicals grew by 58%, which was driven by much better supply, coupled with solid demand. Finally, building material sales, which is being fueled by strong demand in new construction and renovation activity grew by 29%. This follows 20% growth in the fourth quarter and 28% growth for the full year in 2021, further supporting the theme that demand remains strong. Looking across all products, it is easy to see the strength in our business and how our unique value proposition allows us to leverage growth opportunities by providing unparalleled service to our customers while being the best channel to market for our supplier partners. Switching continents now, I’d like to provide some comments on our European business. For the quarter, Europe grew by 5%, which compares to a very strong first quarter in 2021, where we saw sales increase by 115%. The weather situation in Europe when compared to last year’s same period was clearly a challenge and product availability was also impacted by logistical slowdowns in Southern Europe. The war in Eastern Europe is also having an effect on – as consumers are grappling with higher energy costs and the overall uncertainty in the East. We expect that as the weather warms demand will increase. However, our seasoned team remains focused on execution and vigilant of market conditions. As a reminder, in 2021, this business represented approximately 5% of our overall revenue and 4% of our profit, so the impact is small and is contemplated in our guidance. Horizon continues to perform very well. Overall, the base business in Horizon grew by 32% for the quarter, which compares to 22% growth in the fourth quarter and 24% growth for the same quarter in 2021. We are very pleased with our sustained progress on this growth platform and continue to invest in expanding the business. Overall, demand for housing, commercial construction and renovation of outdoor living spaces continues to grow and remains strong across all geographies and all products. Working down the income statement, I’ll discuss gross margins. For the quarter, we reported gross margins of 31.7%, a 330 basis point improvement over the same period last year. Our supply chain initiatives, pricing, the Porpoise Pool & Patio acquisition, all combined to drive the increase. Melanie will add more color on this topic in her prepared remarks. Operating expenses as a percent of sales came in at an impressive 15% as compared to 16.2% for the same period last year. Our relentless focus on capacity creation and execution continue to pay dividends for us and help offset the inflation that we are seeing on operating costs. Pool 360 utilization, which is a cornerstone of our capacity creation activity grew by 28%, which shows how much customers value the convenience and time-saving and functionality that it provides. Completing my comments on the income statement, we proudly reported operating income of $236 million, an 83% improvement over the first quarter of 2021. Not only is this another record first quarter profit, it is also the second most profitable quarter in our company’s history. To do that in the first quarter of the year makes it even more impressive. Operating margins came in at 16.7%, a 450 basis point improvement over the first quarter of 2021. Diluted earnings per share for the quarter totaled $4.41 an 82% increase over the same period last year. Moving to the balance sheet, we significantly expanded our inventories during the quarter compared to the first quarter last year as supply chain issues eased, and we bought ahead to ensure adequate supplies to meet the strong demand of the early buy season. We are in a very strong inventory position heading into our peak selling season to include chemicals where supply has been extremely tight in 2021. We expect that this will enable us to continue to gain market share, utilizing our capital strength and sales center network, leverage to meet the continued strong customer demand. Melanie will give more specific details on the balance sheet and cash flow in her comments. Before I provide comments around our updated guidance, I’d like to add some color on a few topics that I ensure are on everyone’s mind: inflation; material availability; and the near-term outlook. When we discuss the full year 2021 results, we mentioned that we believe inflation would be in the 9% to 10% range for the 2022 season and that we would expect that to pass through the channel as is normally the case. So far this year, this has generally played out as we expected on both accounts. Inflation is higher in the first part of the year, but because of the timing of increases, we expect that it will end the year between 10% and 11%. Because this inflation traditionally passes through the channel, we made a strategic decision last year to invest incremental capital and inventory to address the supply chain uncertainties and improve our ability to fulfill elevated demand. In addition, in some cases, it provided us an opportunity to buy ahead of some anticipated price increases. This has and continues to provide benefit to our customers and our suppliers by bringing valuable inventory into the most expansive network of sales centers in the industry. As of now, we have 414 locations, up from 410 at the end of the year with an additional 6 to 8 planned for the balance of the year. To date, this inflation has yet to dampen demand as many of the current projects are part of a robust backlog that the industry carried into 2022. At this point, very few cancellations or customer-driven delays are being reported, so we expect 2022 to be a very solid year. As you would expect, this inflation, along with the rising cost of labor and other costs have increased the average price of an in-ground pool. PK Data, a well-known source for information on the swim coal industry just released their 2021 report, and they show that the average price of an in-ground swimming pool in 2021 to be approximately $56,000, a 17% increase over 2020. Given this year’s inflation, we would expect that to climb again in 2022. Many of our builders report that $100,000 plus pools are becoming more and more common and a focus area for many of our customers. Our customers tell us that they remain focused on the bigger projects, planning to catch up on smaller opportunities as time and labor allow. The pool remodel market continues to have strong demand and a growing backlog with many builders and remodelers focusing on new construction for the last couple of years as demand grew. Most builders are reporting that they have sufficient demand to carry them through the season. Those same customers are reporting that the backlog for renovation and remodel is healthy and will provide growth opportunities going forward, especially when you consider the aging installed base and the new construction focus that we have seen for the last two seasons. As it relates to maintenance and the repair part of our business, which let me remind you, is the largest portion of our business making up approximately 60% of our revenues and is essentially nondiscretionary and continues to grow with the installed base growth. New products also are helping this category grow as many customers or consumers are opting for smart and energy-efficient technology when repair replacements are needed. Material availability continues to improve. Capacity investments by our manufacturing partners, when combined with the increased investment in inventory are allowing us to provide better service to our customers when compared to a year ago. Our chemical inventory, Trichlor, in particular, is in much better shape than a year ago. This is driven by strategic sourcing activities along with the Porpoise Pool and Patio chemical packaging operation capabilities of Suncoast Chemical. Equipment inventories are also much improved this year, enabling us to start the season in a much better position than we did a year ago and not having to contend with the shock demand that the weather event of the Texas freeze triggered last year. Lighting, automation and some variable speed pumps and motors are still suffering from the global chip shortage, but other products like heaters and valves are improved. We have seen some signs that products like above-ground pools and even spas may have peaked and are showing some weakness when compared to the elevated COVID demand. But in total, these products represent less than 2% of our revenue. Over time, POOLCORP has consistently demonstrated that our execution and strategic investments have enabled us to deliver solid results in a variety of economic environments. We expect to continue building upon our stellar track record. Considering all of this information and reflecting our confidence in the remainder of the year, we are pleased to update and raise our guidance for the full year 2022 to $18.34 to $19.09 per share, including the $0.18 ASU tax benefit in the first quarter from the previous $17.19 to $17.94, which included $0.19 ASU tax benefit. Lastly, and before I turn the call over to Melanie for her comments, we would like to thank the team here at POOLCORP. Our customers and our supplier partners for their collective and tireless effort to help bring outdoor living to life, we could not be prouder of the team, more thankful for our customers and more appreciative of the partnerships with our manufacturers. I will now turn the call over to Melanie Hart, our Chief Financial Officer, for her commentary.
Melanie Hart: Thank you, Pete and good morning everyone. First quarter 2022 continued with record sales and earnings results. We remain focused on having the right products in the right locations to provide for the best possible customer experience as we all collectively continue to navigate supply chain challenges. Sales activity in the first quarter benefited from inflation between 10% to 12% compared to the first quarter 2021, as our vendors had multiple price increases throughout the year in 2021. We also realized a 7% to 8% increase from acquisitions and an estimated 5% growth in the quarter from an additional selling day and increased early buy activity from our customers. Total gross margins increased 330 basis points to 31.7%. Base business gross margin increased 270 basis points to 31.1%, resulting in an increase in base business gross profit dollars of 38%. Higher inventory levels, reflecting some quantities on hand received prior to the most recent vendor price increases, provided some margin benefits during the quarter. However, there are other key components to our margin changes year-over-year. Our recent Porpoise Pool & Patio acquisition increased our consolidated margins. We also had favorable product mix during the quarter. As Pete mentioned, chemical sales were up more than 50% for the quarter and we have more access to supply than we did a year ago. We also saw sales increases in Construction Materials and plumbing at a higher rate than overall growth for the quarter. In addition, we noted continued positive impacts to our gross margins from our ongoing pricing efforts. The purchasing and supply chain improvements we’ve implemented in 2020 and 2021 will continue to provide benefits as we go forward. As we have seen historically, our margins and margin improvements will vary from quarter-to-quarter as a result of product and customer mix. Operating expenses grew 23% during the quarter and includes approximately $18 million in additional expenses from recent acquisitions. Higher compensation and employee-related expenses are the most significant growth contributor. The increased headcount to support our recent acquisitions and our ongoing sales growth, and we aligned our employee reward programs with company performance and market rates. Higher expenses for building rent, freight and other operating costs reflect recent increases in rental rate renewals and inflation. Continued investments in our ongoing digital transformation activities generated higher technology-related expenses in the quarter and the 4 greenfields we opened also added to our operating expenses in Q1. Operating income increased 83% from first quarter of 2020. Our continued ability to manage higher volumes of sales activity through our existing infrastructure and locations while adding Greenfield and strategic acquisitions in the highest growth markets has generated significant operating margin leverage. Our capacity creation efforts to improve customer experience reduce customer wait times and provide efficient technology solutions has also contributed to strong operating margin growth. Our scale and operating processes has positioned us to be able to continue to provide significant operating leverage in the future. We continue to maintain a conservative leverage of 1.06x. Our average interest rate was 1.5% for the quarter based on average outstanding debt of $1.3 billion compared to $397 million at the end of first quarter of 2021. We expect to see higher interest expense throughout the year as our average debt levels will remain higher than in 2021 and we will see higher borrowing costs in today’s increasing rate environment. We record an ASU benefit of $7.3 million or $0.18 per diluted share. This was slightly less than the $0.19 included in our guidance for first quarter as the stock price in effect is time of restricted stock vesting and option exercises impacts the tax benefits realized. Consistent with prior periods, our updated guidance range only reflects the amounts we have realized to date. Moving to our balance sheet and cash flows, we made increased investments in working capital to support a robust sales growth of 33%. Net receivables increased 39% related to our sales growth, including sales from recent acquisitions. Days sales outstanding improved to 26.4 days from 26.6 days in 2021, highlighting our continued strong collections and positive aging trends. Investments in inventory, we began in the second half of 2021 and discussed at year-end, supported a higher sales growth during a time characterized by significant supply chain challenges, and we are now well prepared with the appropriate inventory levels for the upcoming full season. Our inventory dollars of $1.6 billion at March 31 are up 68% from Q1 2021, on a consolidated basis and are up 62%, excluding inventory from acquisitions. Seasonal inventory increases from year-end levels are consistent with our prior practices as we built $302 million in first quarter 2022 compared to $196 million in 2021. Our inventory turn days of 116 are consistent with historical norms at the start of the season. The additional inventory that we have strategically placed throughout our 414 locations will allow us to meet customer needs and continue to gain share. We believe this level of inventory is appropriate from a current business standpoint and would not expect to continue to further build inventory levels. We are beginning to see some lead time improvement on certain products, which is a positive sign that some of the supply chain challenges we have effectively managed over the last 12 months may be easing. In prior years, we have seen significant uses of cash in the second and third quarters when amounts became due on vendor-sponsored early buy programs. As these programs were not offered in a similar manner in 2021, we have paid for our inventory purchases on current terms, which negatively impacted our Q1 cash flows, but will provide a positive influence later in the year. Compared to 2021, our cash returned to shareholders through dividends increased $8.8 million to $32 million, reflecting the 38% quarterly dividend rate increase that our Board of Directors authorized last year. During the quarter, we spent $62 million of the $495 million available to us at the beginning of the year under our authorized share repurchase program. In total, returning $95 million to shareholders to start off the year. Reflecting a stellar first quarter, we have increased our EPS guidance for the full year 2022. Our new range is $18.34 to $19.09, including the $0.18 ASU tax benefit realized to date. This represents an additional 7% expected increase in earnings for the year on top of the 12% to 17% growth we projected coming into the year for a total estimated growth of 20% to 25%. This increased full year performance estimate reflects the positive results for the first quarter and continued confidence in our expectations for the remainder of the year. We now anticipate for the full year, we would realize sales growth more in line with the high end of our previous net sales guidance range of 17% to 19%. We expected to have strong growth in Q1 and results came in favorable, but largely in line with our expectations. So our revenue growth outlook for the rest of the year remains strong. We did realize 10% to 12% inflation in the first quarter and expect full year inflation to be at least 10%. Contribution from acquisitions for the full year are still expected to provide approximately 5% growth. We had one additional selling day in first quarter that will be offset with one less selling day in third quarter, resulting in the same number of days for the year. We have also begun to see some impact from currency during the quarter, which could negatively impact sales growth by 1% to 2% for the year. We continue to forecast gross profit margins for the full year, in line with a record 30.5% we achieved in 2021. As we discussed, these will come in higher in the first half of the year and then moderate in third and fourth quarters. No significant changes were made in our updated range as it relates to operating expenses. We expect that our operating expense growth will come in higher than our historical levels, but still lower than the gross profit growth rate. Inflationary pressures on operating costs will be partially offset by our continued efforts in capacity creation initiatives, generating operating leverage, and so we expect improvement off of the record 15.7% operating margin realized in 2021. For the year, we are expecting to generate significant cash and our debt levels are projected to decrease by the time we reached December. There has been interest rate increases that have occurred so far in 2022, which pushes our interest expense estimates closer to the higher end of the range previously provided at $28 million. We are now projecting that our weighted average shares outstanding for 2022 will be approximately 40.6 million shares. In conjunction with our annual report, we introduced our ESG framework, highlighting the areas we are focused on to ensure a safe and sustainable environment for our employees, customers, vendors and the communities we live and work in. Commitment to our sustainability efforts comes from the top of the organization with our Board of Directors providing oversight as we continue to establish our baseline processes and metrics and incorporate these actions into our everyday practices. We are excited to share with you where we are on our journey. First quarter 2022 has started off the year strong. Our proven ability to continue to effectively serve our customers provides us an amazing opportunity to grow earnings in 2022 and into the future. I will now turn the call back over to the operator to begin our question-and-answer session.
Operator: And the first question will come from Ryan Merkel with William Blair. Please go ahead.
Ryan Merkel: Hi, everyone. Good morning and congrats on the quarter.
Peter Arvan: Good morning. Thank you.
Melanie Hart: Thank you.
Ryan Merkel: So I wanted to start off with a high-level question, Pete. You hit on this a little bit about sustainability of demand it sounds like with backlogs and what we’re seeing out there today, ‘22 is going to be a great year. But everyone’s worried about ‘23. And I am hoping you can sort of just speak to why you think demand can sustain in ‘23? Why is pull forward not a big risk, like everyone thinks?
Peter Arvan: Thanks, Ryan, that’s a good question. And here’s the way we think about it. We have to look at kind of the underlying factors that are driving demand, things like the southern migration. So if you look at the number of people that are moving to Florida, Texas, Arizona and the rest of the Southern year-round market states, it is significant. We don’t see that changing. I don’t think that the work-from-home shift that happened in the workforce is going to change either. So when I look at the fact that people are enjoying the outdoor living lifestyle from years ago when Saturday night it was – a lot of people gathered around the TV inside. Now everybody wants the outdoor, whether it’s a patio, whether it’s an outdoor kitchen or whether it’s a swimming pool event. I don’t think those macro drivers are going to change. Now when I look at the growth that we have seen over the last couple of years, I think that new pool construction certainly is elevated, and it grew a lot in 2020, and it grew a lot in 2021. And we’re seeing sustained demand into 2022. What I think we’re bumping up against is a couple of things, and that is capacity there is only so much capacity in the industry to continue to install new pools. However, what I would remind everybody is that new pool construction, as I mentioned in my comments, is very important to the industry and certainly very important to us. But for perspective, about 80% of our revenue comes from pools already in the ground. So when I think about the market opportunity that we have and I look at where we have invested to grow where we are putting our capital and where we are strategically focused, I think the sustainability of the growth is very likely. So too soon for me to call, as evidenced by my comments, the 2022 season, let alone to 2023 season because of there is, frankly, so many unknowns with weather probably being at the top of the list for everything. But I think unemployment remains very low. The housing market is tight. Demand for new houses and housing, especially with the millennials entering the housing market is going to continue to keep the housing market tight, and I think that’s good for home values. So when I put all of that together, I don’t foresee a shift that says, pools are going to fall out of favor. Rather, I see us just continuing to grow, albeit at maybe not quite as fast a rate in the latter years. I think we mentioned during our Investor Day a month or so ago that we see in the future, will return back to our normal 6% to 9% growth for the company.
Ryan Merkel: That’s very helpful. I guess, I put it in my own words, it sounds like even though we’ve had supercharged growth the last 2 years, do you think there is a tail to this demand. So while more people invested in the pool and want a pool, you think that continues? Plus you’re more of an aftermarket business.
Peter Arvan: Yes. The other thing I would mention, too, that I should have mentioned up front with your question is the new technology, I also think is playing a part in the renovation and remodel and, frankly, expanding the market opportunity. Remember, I haven’t seen an updated number, but let’s say, 1.5 years ago, over 60% of the pools we’re running on a mechanical time clock. Now the percentage has certainly – of automation has certainly improved, albeit at a very slow rate because the major driver of that improvement is on – we see more automation adoption on new pool construction, but the remaining installed base still offers a tremendous, tremendous benefit. And every time a homeowner is replacing a piece of equipment, rather than replacing the one is that we – that was mandated by DOE was the simple one is a variable speed pump, right? So that’s now legislated and it has to happen. But then when you look at the rest of the automation and control that is available, the smart pool that everybody wants versus the pool that you had to go around the corner and hit switches and valves versus being able to do everything from your phone. I think that alone continues to provide an increased market opportunity and expand our ability to grow the business for many years going forward.
Ryan Merkel: Got it. Well, you convinced me. Second question on gross margin, I am curious – well, I just want to make sure everyone is on the same page. So how should we think about the second quarter? Can you hold on to the extremely strong rate that we saw in 1Q? Or should we think about that as the peak and we start to – we bleed down gross margin as we go through the year?
Melanie Hart: Yes. No, consistent with our earlier expectations, we did expect that our margin for first quarter. If you’re looking at it kind of on a year-over-year comparable, we will expect to have higher growth in the first quarter. If you look at kind of absolute margins, we do typically see a little bit higher margins in second quarter just from the seasonal pricing aspect of it. But the growth we would expect to moderate starting in the second quarter.
Ryan Merkel: Okay. So nothing’s changed with midyear price increases you’ve seen from some of the OEs about the second half and being able to hold on to price cost in a bigger way?
Melanie Hart: Yes. We’re still working through – there was a little bit – there was a few announcements that we saw just kind of late last week and we’re still evaluating those, and there is many others that we haven’t heard from. So our current guidance really doesn’t project out any future increases that may come through in the rest of the year.
Peter Arvan: Ryan, the way to think about it, I said another way, is that inflation in this industry has traditionally always passed through the channel. And as Melanie mentioned, we’ve seen a couple of notices late last week that we are still working through. But the gross margin performance of the business, we continue to see is strong.
Ryan Merkel: Perfect. Thanks so much. That’s enough.
Operator: The next question will come from David Manthey with Baird. Please go ahead.
David Manthey: Hi, good morning, everyone.
Peter Arvan: Good morning.
Melanie Hart: Good morning.
David Manthey: Do you know the mix of your revenues that would be in the Sunbelt today versus, say, 10 or 15 years ago, you’ve seen outsized growth in the South, and I would imagine that’s tipped the scales a bit. Could you give us any estimates as far as what you think that mix is today?
Peter Arvan: That’s a really good question, but I don’t know that I have that answer off the top of my head. What I can tell you is logically with the growth that we have seen in the Sunbelt and the southern migration, I would expect it to be higher, but I don’t want to quote a number on the phone with you right now because I’d rather get back to you with the actual, but just logically, given the southern migration and the fact that pool construction in the year-round markets is going to be higher than in the seasonal markets, I would expect it to be bigger. I just don’t want to quote the number off the top of my head to you.
David Manthey: Yes. Okay. Yes, we could follow-up. And as it relates to your renovation and remodel business, how much of that do you think is non-discretionary? Meaning the consumer has some structural issues that require work versus a homeowner just saying, hey, I’m going to choose to upgrade my outdoor living space. Do you have any thoughts on that?
Peter Arvan: Yes. I think that’s actually a really good question. The way we characterize the renovation and remodel business is semi-discretionary. Because a portion of it is, you know what I just don’t like that color of tile anymore. And I want to go from a brick coping to a travertine coping because I want to modernize the pool. And I want to add more decking around the outside of the pool versus the 1.5 feet of concrete that was there. I want to cover the concrete deck. A portion of it, though, is necessary because if you think about the pool, all of the elements, you have the equipment which has a life – a useful life assuming that you keep your water balanced, right, because unbalanced water can wreck even a brand-new set of equipment in months, not years. But if you assume that if you adequately take care of your water chemistry and you keep it balanced, equipment could last, let’s call it, in the – depending on the type and how much you use it, 7 to 10 years. But the surfaces on the inside of a pool are very similar to the surfaces on the outside of your house. And that is they are exposed generally to the sun and the water chemistry, and that will degrade the surface over time. So some of it is, as you mentioned, I just don’t like the color, and I bought – I just bought the house. It’s got a pool, which I’ve always wanted, but it looks dated, so I want to update it. So that could be as simple as a tile and a replastering because I don’t like the color. But there’ll be a portion of that and probably a rather significant portion of it that is I have to do this because the tile is falling off or the finish is bad, the finish is stained or in the case of the equipment, the equipment is starting to fail and not performing as desired. A portion of that too is going to be the search for a more energy-efficient pool. So, going through high-efficiency equipment and LED lighting versus halogen lighting, high-efficiency heaters versus standard gas heaters or heat pumps. So we’re adding things like UV, which has become very popular of late and the zone for another way to sanitize the water. So there is just – there is a lot of new products that come by way of renovation and remodel that are desired. And a portion of it is – a large portion of it is, hey, you really need to do this just like you need to maintain the outside of your house.
David Manthey: Yes. That will make sense. Thanks a lot Pete.
Peter Arvan: Yes. Thank you.
Operator: The next question will come from Susan Maklari with Goldman Sachs. Please go ahead.
Susan Maklari: Thank you. Good morning, everyone.
Peter Arvan: Good morning.
Melanie Hart: Good morning.
Susan Maklari: My first question is you mentioned in your commentary that chemicals were up about 58% in the quarter. Can you give us some sense there of how much of that was versus volume, assuming a lot of that was the chlorine situation coming through? And then how are you thinking about that going forward?
Peter Arvan: Yes. On the chemical side, I think it was about 40% price and 20% in volume. Our chemical supply on the key chemical that everybody that was focused in on a year ago from a shortage perspective, a Trichlor tablet, was – we were very tight a year ago. And I would tell you that through a lot of hard work from our supply chain team and manufacturers stepping up. And with the addition of Pinch A Penny, I think we are in a much, much, much better position. If you look it from a price perspective, it’s not all that different than it was towards the end of the year, but certainly, there was a big – on a year-over-year basis, it was significantly higher.
Susan Maklari: Yes. Okay, that’s helpful. My next question is, you mentioned that you are seeing some improvement in the lead times in some of your products. As we look out and we think about the potential for a more normalized situation in terms of volume as well as price. Can you talk to one, the stickiness of the pricing that you are seeing today, the ability to sustain a lot of this as some of these pressures do ease? And then on the volume side as well, I think if we kind of parse out the quarter, it seems like volumes were up maybe about 4%, 5% or so. I guess one, is that correct? And then two, do you think that as you do get these improvements in the supply chain, there is the potential that volumes could improve and maybe come in a bit ahead of where you had been thinking?
Peter Arvan: Sure. First, I would tell you, from a volume perspective, we look at the first quarter closer to 10%. As in regards to – in regard to your question on pricing sustainability, historically, in the industry, and if I think about major categories like equipment and such, I don’t really think that there is going to be a reduction. I don’t think those prices are going to roll back. I think there are certain areas where there is a much higher commodity element to the product, whether you are talking about PDC or even chemicals to some degree where I think there could be some elasticity in price. Remember, there was a big run up on the chemical pricing last year when the chemical plant fire happened in the end of 2020. So, that brought on a lot of import material and the import material comes with a tariff and also elevated transportation costs. Demand is still very strong for that product. There is a new plant that will be coming online. I think they are rebuilding and we would expect to see some contribution from that plant to the industry next year, how much we don’t know. But I think when it does come online, I suspect that the price for chemicals will come back a little bit or it could, I should say. But I also don’t think it’s going to go back to anywhere near what it was because I think the input cost on manufacturing those chemicals has also come up, and I don’t see it returning back to the, let’s call it, the 2019 levels.
Susan Maklari: Okay. Got it. That’s very helpful color. Thank you and good luck with everything.
Peter Arvan: Thank you.
Operator: The next question will come from Andrew Carter with Stifel. Please go ahead.
Andrew Carter: Hi. Thanks. Good morning. First question I wanted to ask kind of returning to the gross margin kind of question. If you got the math right here, your trailing 12 is 31.2%. Your guidance would imply the full year is 30.5%. The first part of that is you have got another nine months of Porpoise, which came in at 40%. And any reason that comes in at a much lower level? And just help us understand why you are not kind of kind of holding on to some of the gross margin gains? And anything we should be looking at that were unique tailwinds and emerging headwinds over the next nine months? Thanks.
Melanie Hart: So, on the margin side, it does vary quarter-over-quarter. And if you are looking at it just on the trailing 12, you will see that the contribution that we experienced in the first quarter for the Porpoise acquisition. When you look at our guidance for the year, it’s probably similar for the full year guidance is what we expect to pick up from that. And so the current expectation does not include any additional future inflationary increases from the vendor side. So, that could evolve as we move through the rest of the year.
Andrew Carter: Okay. So, the second question I ask, and I don’t know if you have the great data to quantify this because it’s a question we are getting all the time. In terms of like the new construction and remodel activity in the pool industry, how much is kind of cash buy and how much is kind of refinancing – is the refinancing with kind of rates going higher, pressure on kind of refinancing applications? Any color you can give is just that other kind of demand indicators we are looking at right now? Thanks.
Peter Arvan: Yes, that’s a great question. And I would tell you, we have had that discussion with our builders and pool dealers for quite some time. It’s probably in the neighborhood of, I would say and it really depends on the area. But it’s probably in the neighborhood of 50-50, maybe 60-40 in some areas. But I was just talking to one of our very large dealers this week, as a matter of fact. And I asked if there has been any change in how people are paying for financing the projects, and he said there isn’t. And I said has there been any difficulty in financing from their perspective, and they said there has been essentially none. So, all good in that vein.
Andrew Carter: Thanks. I will pass it on.
Peter Arvan: Thank you.
Operator: The next question will come from Trey Grooms with Stephens. Please go ahead.
Trey Grooms: Hey, good morning. Congrats on the great performance here this quarter. Pete, you mentioned you expect to continue to gain market share. So, as we are looking through this year, would this be more in line with your historical pace, or do you think that you could continue to see market share gains at a more elevated level like we have seen over the last few years?
Peter Arvan: I can tell you – that’s a great question, and thank you for it. We work very, very, very hard on market share. And we do that by focusing on the customer experience. And I can tell you, and I think you have seen it over the last several years, we have been hyper-focused on that and making sure that we are providing the best level of service. The PK Data report just came out, so we haven’t updated our share, but I can tell you that there is no less focus on gaining customer share. And if you look at the investments that we made, whether it’s in inventory or whether it’s in new sales centers or whether it’s in Pinch A Penny or Porpoise Pool & Patio acquisition and all of the capabilities that come with that, I would tell you that we are relentlessly focused on share.
Trey Grooms: Thanks Pete. And then this one is for Melanie, and it’s more kind of housekeeping, make sure I have it right. But I am going back to your top line bridge for this year. So top line, higher end of the 17% to 19%. And it sounds like really the only thing that’s changed there versus the prior guide was that you bumped up the inflation expectation to at least 10%, I think is what I heard. So – and then I think you said you had acquisitions, 5%. And then you mentioned some headwinds of a few basis – a few hundred basis points as well. So, is it right in trying to back into kind of a 5% or 6% kind of underlying growth rate this year based on what you gave us?
Melanie Hart: I think that will be a reasonable estimate at this point.
Trey Grooms: Okay. Perfect. Thank you.
Operator: The next question will come from David MacGregor with Longbow Research. Please go ahead.
David MacGregor: Yes. Good morning everyone.
Peter Arvan: Good morning.
David MacGregor: Congratulations on a great quarter. I guess going back to maybe Ryan’s question at the beginning of the call and just thinking about kind of that longer-term view up to 2023, just given the trajectories that you are seeing right now in the maintenance and repair business and the renovation business, how much of a decline do you think you could incur in new pool construction and still withstand earnings per share from going negative year-over-year?
Peter Arvan: A number that probably wouldn’t – you wouldn’t see happen in terms of a decline. Because remember, if you look at new pool construction, we say it’s under 20% of our revenue. So, if you take our normal contribution margins and you say, even if new pool construction cell was the population cell by half, which nobody sees happening. The impact on the business is, I would tell you, it’s insignificant, but I would tell you that it is minimal when you look – when you consider that 80% of our business is derived from the installed base of pools.
David MacGregor: Got it. And I guess just what you are hearing would be helpful from your construction customers, our new construction customers regarding their – for visibility and downstream labor availability and how much visibility do you think they have to 2023 right now? And if so, what kind of color are you getting back from them on that?
Peter Arvan: They don’t really have a lot of visibility into 2023. I think they have a very good look at what’s in the pipeline and how 2022 is going to play out. But from a 2023 perspective, I don’t think they have a lot of visibility with the exception of the remodel and renovation business, right, because they know that they have been focused on that or they have been focused on new pool construction. And they realize that with that focus on new pool construction, it has meant that the queue, if you will, and the pent-up demand for renovation and remodel, is significant. So, I don’t know that they are forecasting less work or they are looking at 2023 and say, I am going to have a lot less work or any less work, I think it’s going to be a function of the work may be different. They may be building – new pool construction may not grow at the same rate that it grew in 2020 and 2021, 2022. But the amount of pent-up demand that there is surrounding the installed base of pools is significant. And I think that’s how they are viewing the world.
David MacGregor: Got it. Thanks and congrats on the progress.
Peter Arvan: Thank you.
Operator: The next question will come from Ken Zener with KeyBanc. Please go ahead.
Ken Zener: Good morning everybody.
Peter Arvan: Good morning.
Melanie Hart: Good morning.
Ken Zener: Well, you guys obviously held on to a lot of information at the time of your Analyst Day. So, I wonder you are obviously well positioned from an industry market structure. And I think that’s the most important thing, notwithstanding anyone’s uncertainty about the growth rate. But because there is so much inflation in the system right now, of the 300 basis point gross margin gain. And I know gross margin SG&A can kind of move around. But can you give us a sense of what is half of that pre-buy, and I am sorry if I missed your description of this, if you have done that. So, how much was – I know you talked about the ports being a benefit, but how much of that is LIFO/FIFO pre-buy benefit etcetera? Just so we can have a sense of how much this inflationary tailwind is helping you all.
Melanie Hart: Yes. We haven’t gone through in that much detail and quantified it because it’s – we actually – we value our inventory at average cost. So, even when we are getting products in at the new higher inflationary costs, that’s averaging out what they are lower. And so you will see that, that trail may take a little bit longer to move through the channel.
Peter Arvan: And it’s also changing, Ken, as it has to do with what’s going to happen with future price increases, too. So, for us to kind of forecast the benefit is – benefit changes with new announced inflation, right, for the inventory that we have in stock. So, we are I think wisely invested in inventory. And I think that will be a benefit in the environment that we are in.
Ken Zener: Yes. And I am looking at a slide that you guys have market trends, increased pool content. I am not sure the date. I think it’s – it’s this year. But where you basically have product category ‘21 growth versus 2019, I am sure you are familiar with this. So, automation controls, heaters, robotic cleaners, on papers, all up 100%. And this just goes to the question, I think that we all have and you guys feel, I wonder if you could just perhaps answer it differently. It seems hard to imagine that down volume is not out there somewhere, considering we have doubled sales. And I know there is recurring revenue in the majority of your business, and I still have a – on Internet-based pool system myself. But how – I mean is it just so busy right now, it seems to me the factor that separating you from, let’s say, homebuilders or other building product companies is that you are gaining so much share, that’s really enabling you to increase your served market. So, if you could just explore that. And I know you said you don’t have the numbers yet, but I mean, could you give us some sense of why that market share is going to be sustainable versus in ‘07 when you expanded your branch has that actually led to a lot of operating leverage on the downside. You obviously haven’t done that now. But it seems to me what really separates your story from everybody else is that you are dramatically gaining share that’s sustainable. Comment, please. Thank you.
Peter Arvan: There is a lot to that question. So, let me see if I can dissect it a little bit. If you go back to 2007, and you look at the percentage of our business that was tied to new construction of pools, it was actually much higher on a much smaller base. So, if I look at our business model today, it’s very different. If I look at the process that we use to open branches, it has been refined for what, 20-plus years – or not 20-plus years for almost 20 years from when it was started. So, I think we have gotten better at strategically placing branches. I think we have gotten better with our opening process and where to open and how to open so that the locations don’t become a drag on the business. I think when we add branches today, it’s because we are adding capacity, needed capacity and capabilities because the markets are growing. When I think about the other additions that we have made strategically and where we have invested and as late as recently as the Pinch A Penny acquisition or Porpoise Pool & Patio acquisition, that adds significant capabilities that we think will add to our ability to provide value to our independent pool customer invented pool store customer with tools and product offerings that we couldn’t do before. So, when I look at our focus on the customer, I don’t think anybody is more focused on the customer than we are. When I look at our investments in systems and process, I don’t think anybody is doing what we are doing. So, when I look at our ability to add value to the customer, whether it’s the maintenance and repair customer that’s using POOL360 or some of our other products or just the vast number of branches that we have, which is now 414, whether it’s our technology tools like Bluestreak, which allows them to get in and out of those branches much faster than they could have before. When I look at our focus at speed at the counter, which we have, essentially, a time clock that starts every time a customer walks in, so we know exactly how long it takes to get them in and out. I think that we have lots of opportunity to continue to grow share because we are focused. We are investing in the right areas. There is a tremendous sense of accountability. And as always, in POOLCORP, there is a – the focus around execution is unlike anything I have ever seen. So, I think we are very comfortable that our ability to keep growing share, and I think the market too continues to expand because as I keep pointing out, 80% of our revenue is derived from the pools that are already in the ground. And if you look at the technology, as you mentioned a minute ago on your own pool, if you look at the technology on most of those, most of those pools, it is either non-existent in terms of technology or it is in the very early stages of what is possible. If you look at the millennials that are becoming part of the homeowner population and what their expectation is around smart technology in a connected pool and a connected backyard, it’s very different than it was 10 years ago, right. When you look at all of that together, it gives us great comfort that, a, our focus on the customer is going to allow us to continue to grow share because we are adding value, and I hope that we earn it. I think the market continues to get larger in terms of the new products that can be used and retrofitted into the installed base. And I think the simple fact that the installed base continues to grow, and the majority of our business is non-discretionary, I think gives us great comfort that the future is bright.
Ken Zener: Thank you very much.
Peter Arvan: You’re welcome.
Operator: Our next question will come from Garik Shmois with Loop Capital. Please go ahead.
Jeff Stevenson: Hi. This is Jeff Stevenson on for Garik. Thanks for taking my questions today.
Peter Arvan: Sure.
Jeff Stevenson: I just had two questions on pricing. First, obviously, employees came in stronger than expected and the first quarter. And I was wondering if you could call out any product categories that saw pricing above your prior expectations coming into the year.
Peter Arvan: I don’t think we saw it as above what we said. We said inflation just because of the nature of how the price increases rolled out last year was going to show a higher at the beginning of the year and taper off as prices came up throughout last year.
Jeff Stevenson: Okay. Got it. And if I missed this, I apologize, but just on the new at least 10% pricing assumption in your guidance. Can you talk about how much of this is kind of already been secured versus how much you intend to pass along in the future?
Peter Arvan: Yes. I mean everything that has been previously announced is out in the market today. So, what I can’t account for is what hasn’t been announced yet.
Jeff Stevenson: Okay. Got it. Thank you.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Peter Arvan for any closing remarks. Please go ahead, sir.
Peter Arvan: Thank you. Listen, I just wanted to thank everyone for joining us today. We look forward to speaking with you again on July 21st, when we will discuss our second quarter results. We hope you all have an amazing day, and thanks again for joining us.
Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
