Pool Corporation

Good morning and welcome to the Poole Corporation second quarter 2020 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mark Jocelyn, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you. Good morning, everyone, and welcome to our second quarter 2020 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 2020 and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and variables that could cause actual results to differ materially from projected results is discussed in our 10-K. In addition, we may make references to non-GAAP financial measures in our comments. A description and reconciliation of our non-GAAP financial measures is included in our press release and posted to our corporate website in our investor relations section. I'll turn the call now over to our President and CEO, Peter Arban. Pete?

Thank you, Mark, and good morning to everyone on the call. Where outdoor living comes to life, that's one of our registered trademarks, which happens to characterize the work product and aspirations of our nearly 4,500 employees worldwide. And frankly, I can think of no better description for what has taken place in the first half of this year. We've managed to navigate through an unprecedented combination of events in our business this year, which I'll briefly summarize for you. As you know, despite the effects of the COVID-19 pandemic, which began to impact our business in mid-March, we started off the year very strong with 13% growth in revenue for the first quarter and adjusted EPS growth of 20%. On our first quarter call, we explained that our April sales were trending down 5% to 10% year over year due to the COVID-related restrictions put in place and that we were pulling back on discretionary and capital spending in anticipation of a more normal more cautious consumer spending environment in the months ahead. Then, as we moved into May, government restrictions in many jurisdictions began to ease, and we saw new trends emerging above and beyond our normal seasonal trends. These were driven by the new stay-at-home and social distancing restrictions further complemented by favorable weather. Seasonal market pool owners who typically delay pool openings until warmer weather arrives wanted to use their pools sooner rather than later, which drove a significant increase in demand for repairs and equipment purchases like heaters and cleaners. Most of our dealers quickly became inundated with repair and upgrade requests from pool owners who wanted to enjoy the safety and fun of their own backyard earlier in the season. It should be noted that due to this, we believe many dealers shifted resources to maintenance and repair and away from construction, which was delayed by the closing of permitting and inspection offices in many parts of the country. Second, as consumers sheltered in place, interest in and demand for new pools picked up significantly. But as consumers soon found out, many people had the same idea, which quickly soaked up builder capacity in this labor-constrained industry. This was further exacerbated by the already compressed building season resulting from the COVID-related delays. At the same time, homeowners were turning to other ways to turn their backyard into a recreational oasis, seeking out above-ground pools and spas. Early on, these products were readily available, but with the unfavorable predicted surge in demand, they quickly became scarce as the supply chain was stretched beyond its capacity. All combined, these trends caused accelerated growth for our business throughout May and June, which continues now into the third quarter. And we believe the renewed interest in swimming pools and outdoor living is not only great news for our industry, but also for homeowners who will benefit from a safe, happy environment for their families now and for years to come. This story would not be complete without commenting on just how exceptional our employees are performing in these challenging and uncertain times. Considering the initial confusion surrounding government restrictions and their impact on our sales centers and customers, the ensuing work-life balance issues that our teams encountered, the new procedures put in place to safeguard our employees and our customers, together with the environment of accelerating demand which stretched our customers, employees, and our supply chain, The obstacles our employees faced over the last several months and their determination to rise above them is truly remarkable. I am very proud of our team and their ability to stay focused on delivering outstanding customer service in a safe and effective manner throughout this challenging and unprecedented period. Their dedication and resiliency is second to none. The outcome of all of this is one of the best quarterly operating results in the history of our business. The rare combination of significant sales growth and intense expense management drove substantial growth in income and cash generation. From where we started the quarter and how our business environment has progressed, I believe our results are truly exceptional. Even more encouraging is the fact that our builders, remodelers, and retailers are all reporting continued strong demand, with many builders reporting that their backlogs will take them out into next year. I mentioned earlier that the unprecedented demand has strained our supply chain, but the strength of our balance sheet and our scale has allowed us to keep back orders and stock up to a minimum, which has also helped drive our results. For the quarter, our total revenue was a record $1.28 billion, an increase of 14%, which is truly amazing considering how the quarter started out. In our year-round blue markets, revenue was up 11%, while the seasonal markets grew an impressive 18% as pools opened sooner than normal. Florida was up 9% for the quarter and on a year-to-date basis as well. Arizona saw a 21% increase in revenue for the quarter to bring the year-to-date number to 20%. Texas was up 14% in the quarter, bringing the year-to-date number to 12%. California saw 6% growth in the quarter as they were impacted by a wet start to the quarter coupled with the lingering effects of the COVID shutdown. On a year-to-date basis, California is up 9%. From an end market perspective, retail sales were up 22% for the quarter and 20% year-to-date. Strong demand for swimming pool maintenance supplies, above-ground pools, spas, and automatic pool cleaners drove most of this increase. The resilience of our retailers allowed them to successfully navigate the pandemic and its associated challenges, as many adapted to the restrictions and concerns by devising touchless service and curbside pickup. Commercial revenue, which accounts for about 4% of our U.S. blue business, was down 21% for the quarter and down 10% year to date, driven by the COVID-related closures and the decline in both business and leisure travel, and the continuing health directives limiting commercial pool operation. Chemical demand has waned and new projects have slowed. We are anticipating continued softness for this market for the foreseeable future. From a product perspective, equipment sales were up 22% quarter-to-date and 20% year-to-date, again driven by people opening pools sooner and using them more frequently. Heaters, pumps, lights, and filters are all seeing strong demand. A very encouraging sign we are seeing is that more and more homeowners are opting for some level of automation during construction and remodel and repair, which is providing added sales opportunities and convenience for the pool owner. Chemical demand was up 5% for the quarter and 8% for the year, with results being impacted by stronger-than-normal residential and service-sized chemical demand being somewhat offset by softer commercial chemical demand. Building materials in the quarter were up 7%, reflecting the pause in construction we saw in the first half of the quarter, driven by the restrictions and shutdowns in permit offices in many markets. As mentioned, this caused many pool contractors to divert resources to serve the surge in maintenance and repair requests. Demand for building materials accelerated as the quarter progressed, reflecting the resumption in construction and the strong demand for new pools. Switching to Europe, We saw a remarkable comeback in the latter half of the quarter as sales rebounded from the drag created by numerous mandated closures throughout most of the EU. For the quarter, Europe posted a 21% gain in revenue, bringing the year-to-date revenue growth to 11%. France, Spain, and Germany were all strong, as were most of the other markets. We believe that demand across Europe is being increased by similar COVID-related changes in consumer behavior. Horizon saw second quarter base business revenue growth of 5%, bringing the year-to-date growth to 5% as well. Demand in the Sun Belt has come back strong, while Northern California and the Pacific Northwest have seen only modest recovery in demand. Turning to gross margins, overall gross margins for the quarter was 29.2%, 30 basis points lower than the same period last year, where we recorded 30 basis points of margin improvement. MIX certainly contributed slightly to the decline, but overall, we are happy with this ability here. Operating expenses were favorable in the quarter, up a modest 6%. Clearly, the actions we put into place early in the quarter together with the benefits of our capacity creation activities contributed to these strong results. Our team's focus on execution has allowed us to create significant operating leverage while still providing unparalleled service to our customers. Pool 360, our B2B tool, along with Blue Streak, our remote sales counter application, both experienced significant growth during the quarter. Pool 360 sales have increased 32% year-to-date, while the number of transactions processed on Blue Streak has surpassed 30,000. Our other digital applications, like the NPT Backyard app and swimmingpool.com, also gained significant traffic and traction in the quarter. Mark will provide more details in his commentary on operating expenses. Moving on to operating income, I'm very pleased to report that for the quarter, operating income was a record $205.9 million, representing a 19% increase. Operating margin was 16.1%, which was 70 basis point improvement over the previous year. As you can see, the second quarter was extraordinary and I'm extremely proud of what our team has accomplished. Current demand trends remain strong and contractors are reporting significant backlog. We are optimistic about the outlook for the remainder of the year, but remain cautious regarding the potential impacts of the pandemic on business conditions. With this in mind and assuming similar conditions for the remainder of the year, we are updating our full year 2020 adjusted diluted earnings per share guidance to $6.90 to $7.30 per share, or $7.05 to $7.45, excluding impairment charges. Our previous 2020 Earnings Guidance Range disclosed in our April 23, 2020 call was $5.30 to $5.90 per diluted share, or $5.45 to $6.05, excluding the impact of non-compatible impairments. Thank you, and I will now turn the call over to Mark Jocelyn, Senior Vice President and Chief Financial Officer for his commentary.