Pool Corporation

Good morning and welcome to the Poole Corporation third quarter 2020 conference call. All participants will be in 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, Gary. Good morning, everyone, and welcome to our third quarter 2020 earnings call. I would like to remind our listeners that our discussion, comments, and responses to questions today may include forward-looking statements, including management's outlook for the remainder of 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 majors in our comments. A description and reconciliation of our non-GAAP financial majors is included in our press release and posted to our corporate website in our investor relations section. I'll turn the call over now to our President and CEO, Peter Arvind. Peter?

Thanks, Mark, and good morning to everyone on the call. This morning, we released our third quarter results, and they were truly incredible. I could not be prouder of the extraordinary accomplishments of our team. It was the first time in our history that we delivered back-to-back quarters with over a billion dollars in revenue. Additionally, earlier this month, we marked our 25th anniversary as a public company. Over that period, we had an amazing 28% compounded growth in total shareholder return. Also in the quarter, we were very proud to be added to the S&P 500 index. None of this would have been possible without the talent and dedication of the 4,500 plus people on the Pool Corp team. And we are so thankful for everything that they do. For the third quarter, I'm very excited to report that total revenues were 1.14 billion, which is a 27% increase over the third quarter of last year with substantially all of this growth coming organically. Our diluted earnings per share was $2.92, which is a 50% increase over the same period last year. As noted in our earnings release, demand for swimming pool and outdoor living products has been strong throughout North America and Europe. Work from home, school from home, the lack of vacation travel, and the de-urbanization trend have resulted in many families wanting to invest in their own outdoor living retreats. We have also experienced favorable weather across our markets, which drives higher demand for maintenance and repair items and allows new pool construction and backyard renovations to pace nicely. Our builders and remodeler customers are reporting deep backlogs, which should carry them into the first half of next year in many markets. Looking at our four largest markets, Florida and Arizona were up 23% respectively, while Texas gained 26% and California grew 12%. While California lags the other large market, delays in renovation and construction caused by permitting and inspection restrictions appear to be easing as we saw stronger growth as the quarter progressed. Collectively, these year-round markets grew 20 percent in the quarter, while seasonal markets saw revenues grow 33 percent. We believe that the pent-up demand from permitting delays earlier in the year, combined with favorable weather and the extended season, all contributed to the seasonal versus year-round market variance. Looking at end markets, commercial demand remains soft with sales down 10% in the quarter and down 10% year-to-date. As you can imagine, this market is heavily affected by the lack of travel and public pool usage. Retail sales, on the other hand, are extremely strong as pool owners seek the expertise and convenience of the independent pool retailer as we saw retail sales increase 28% in the quarter. From a product perspective, heaters, pumps, filters, and lighting continue to be in high demand. Sales for these products in aggregate increased an impressive 36% in the quarter. While there have been product shortages as demand surged, back orders are on the decline as seasonal demand recedes. Our teams did a great job utilizing our broad network to minimize disruption as manufacturers struggled to keep up. Chemical sales for the quarter were up 9%. Like last quarter, strong residential demand is being somewhat offset by lower commercial demand as public pools and lodging-related facilities either remain closed or are operating on reduced hours, which curtail chemical usage. Building materials sales were up 29%, reflecting a very healthy construction and remodel market. As the quarter progressed, we saw demand of these products increase significantly as our customers were able to get permits more easily and they shifted resources to construction and remodel. As I mentioned earlier, our builders are reporting significant backlogs, which is very encouraging. Turning to Europe, the same strong demand that we noted in the end of the second quarter continued throughout the third quarter as we set new sales records in most of our European locations. Europe posted sales growth of 45%, which is indicative of a very healthy market and tremendous execution by our team. Europe is benefiting from the same trends that are driving increased demand across North America. Turning to our green business, we were quite happy with the 14% increase that we saw in Horizons-based business for the quarter. Almost all markets saw double-digit growth with irrigation, landscape and power equipment product sales leading the way. We see strong demand in residential and multifamily construction, but office and retail projects continue to lag for the time being. Moving on to gross margins, we reported a healthy 28.9% gross margin for the quarter, which is a 20 basis point improvement increase over the third quarter of 2019. We are benefiting from volume-related purchase incentives this quarter, with some of that gain being offset by the heavier mix of lower margin equipment and an unfavorable customer mix. Operating expenses increased 18% in the quarter, with most of the increase being driven by incremental incentive compensation. As you know, we have a relentless focus around execution and capacity creation, which is helping drive significant operating leverage across our entire business. One of our most important tools is Pool360, our B2B platform, which for the third quarter saw sales growth of 43%, bringing the overall percent of our sales processed in Pool360 to 11.4%. I would also like to mention that as you would expect, our other digital tools like Blue Streak, the Backyard app, and swimmingpool.com have all seen significant increases in activity. Turning to operating income, I'm very pleased to report that we delivered a record $148.2 million, which is a 42 percent improvement over the same period last year. Operating margin was 13 percent, which is a 138 basis point improvement over the previous year. As you can see, the momentum that we started to build in the back half of the second quarter has continued right through the third quarter. Our team has done a tremendous job dealing with many unforeseen circumstances, both personally and professionally, but managed to provide unparalleled service to our customers, allowing them to serve the increase in demand for our products. We executed part of our strategic growth plan by closing on two acquisitions, Jetline Distributors with nine locations in New York, New Jersey, Florida, and Texas, and Northeastern Swimming Pool Distributors with three locations in Eastern Canada. The new locations and talented teams will allow us to provide even better service to our valued customers going forward. Both acquisitions were well known for strong relationships and great customer service, and we are happy to have them as part of the Pool Corp team. We continue to be optimistic about the future, both near-term and within our five-year outlook. As we progress through this seasonally less significant fourth quarter and head into 2021, let me provide you with a few thoughts. First, we believe that some of the COVID inspired trends will continue to favor home improvement spending with the pool industry being an ongoing beneficiary. We believe that inflation will be a bit higher in 2021, around two to 3% compared to the one to 2% for 2020. Strong builder backlogs and an easier comp in the first half of next year should help us get off to a strong start as we see nice contributions from our newly acquired locations and newly opened green fields. While we have some expense headwinds to make up for coming out of 2020, the tailwinds provided by this year's higher than normal incentive compensation costs should help ease the transition. Longer term, we expect that our historic organic revenue growth rate of six to nine percent, driven by new construction, renovation and repair combined with inflation, the expanding installed base, market share gains and new products will prevail. Of course, this is predicated upon a stable economy, normal weather patterns and adequate labor supply and other external forces. With three very successful orders behind us in 2020, I'm happy to update and narrow our full year guidance. Our new range is $8.05 to $8.35 per diluted share, or $8.20 to $8.50, excluding the non-cash impairment charges. Our previous guidance was $6.90 to $7.30, or $7.05 to $7.45, excluding impairments. Thank you very much. I will now turn the call over to Mark Jocelyn, Senior Vice President and Chief Financial Officer, for his commentary.

Thanks, Pete. Our Q3 results are a continuation of our really remarkable year. So let me start off with a few of the financial highlights before walking through some of the details. Starting with sales for the quarter, we had a $241 million or 27% increase in sales over last year, almost all of which was organic. In dollar terms, this was greater than the sales growth we've had in any single year over the last decade. and was about 20% more than our growth in all of 2019, which at 7% for the year wasn't too bad. Our Q3 operating income of $148 million was up 42% or $44 million from Q3 last year, while our operating margin in the quarter of 13% was 140 basis points better than a year ago, 300 basis points better, excluding the 160 basis point drag from incentive compensation. The contribution margin from our Q3 sales increase, which is the incremental operating margin contributed by our incremental sales, was 18.2%. Year-to-date, our operating income was 390 million, which was 14% more than our operating income for the full year of 2019. All of these are truly outstanding achievements for our business, and I can't say enough about our field team and the remarkable jobs they have done to meet our customers' challenging needs while maintaining great operating discipline and delivering these stellar results. Now for some of the details. Looking at our operating expenses for the quarter, the big story here is performance-based compensation. As reported last quarter and as reflected in our press release for this quarter, our results have warranted a sharp increase in performance-based employee compensation. This expense was up $20 million in the quarter and $32 million year-to-date. We believe this variability in our employee compensation is good for both employees and investors, providing appropriate rewards for strong performance while cushioning downside results when conditions are less favorable. Our elevated compensation expense is well above historical levels given our exceptional performance this year and should provide a tailwind for our expense management plans next year as we expect these costs to return closer to the historic norms. For the year, that should be roughly $15 to $20 million lower than this year's level. Excluding the increase in incentive compensation, our operating expenses would have been up a very modest 5% in both the quarter and year-to-date periods. Considering the substantial sales growth we experienced, this reflects great expense management by our entire team, with the every year savings realized in a number of areas that I detailed on our last call. In addition to our operating expense results, we reduced interest and other expenses by $3.6 million in the quarter and $9.2 million year-to-date. As we've used our cash generation to pay down debt, which was $208 million lower than this time last year, we've also benefited from lower Rates, as our average interest rate for the quarter was 1.6%, down from 3.2% in Q3 last year. Moving down the P&L to the tax line, we recorded $22.6 million of ASU tax benefit, without which our tax rate would have been 24.5% for the quarter. This is in line with our usual lower Q3 tax rate. Excluding ASU benefits, we are on track for the 25.5% rate that we would expect for the year, as I mentioned on our first call back in February. With the ASU benefit utilized so far this year, we now estimate we'll have $1 million of ASU tax benefit for options that will expire in Q1 of next year, which I would expect to recognize between now and then, along with any pull forward of option expenses that may otherwise expire in future years. Moving over to the balance sheet and cash flow, growth in our total net receivables of 19% reflects our sales growth in the quarter somewhat offset by improved collections from last year. Our DSO at the end of the quarter was 27.6 days, down from 29 days last year, as the extended season has helped our customers' cash flow. Looking at inventory, we ended Q3 with inventory levels that were essentially flat with last year, continuing to reflect the strong pace of sales and some stress on our vendors to keep up with demand. Our inventory turns calculated on a trailing four-quarter basis were 3.7 times this year, an improvement from 3.2 times a year ago. Our inventory and receivables management, combined with our earnings growth, has led to great cash generation and ROIC. As for cash, we've generated $389 million in cash flow from operations year-to-date, which is 127% of net income and improvements of $146 million over last year. As mentioned, much of this cash was used to pay down debt, which resulted in leverage just above one times at quarter end. Our return on invested capital jumped to an all-time high of 36.4% from 29.5% last year, while our return on equity was 71%. I should point out that we did a small share repurchase in the quarter, buying 20,000 shares at an average price of $299 per share, which is $6 million in cash. Also, just a couple of comments on our recently completed acquisitions. Northeastern and JetLine added a substantial 12 net new locations to our network and were bigger than many of the acquisitions we've made over the last decade. but also are more seasonal given the predominantly northern market exposures of their businesses. We expect them to add roughly 4% to our revenue growth over the next 12 months at lower operating margins than our existing business and with appropriate seasonal weighting of their sales and profitability, including a seasonal operating loss in Q4 this year. With that, I'll turn the call back over to our operator to begin our question and answer session. Gary?

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from David Manthe with Baird. Please go ahead.

Yeah, hi. Good morning. Can you hear me?

Yes, good morning. Morning, Dave.

Hey, guys. So historically, fourth and first quarter have been dependent on when the weather turns and the seasonal markets. And when you're thinking about the length of this season overall, is it different this year? I mean, do you think the stronger than normal – pool construction trends that you might see in your year-round markets could make it a little different in the fourth quarter and first quarter that we're looking at?

Yeah. If you think about the way a typical year plays out, as you mentioned, it would wane quickly because builders would have, for the most part, worked through the majority of their backlog. This year with the backlog being what it is and permits, I mean through September, building permits pulled through September exceeded the entire number for 2019. So I think it's fair to suggest that the season this year will be stronger in the fourth quarter and first quarter than we would normally see as builders have plenty of work to do. Now, seasonal markets are going to be affected by weather, but the year-round markets, there's still plenty of work that needs to be done.

Okay. And on that note, Pete, with the strong trends we're seeing right now and these solid backlogs reported by the pool builders, do you think that industry pool building capacity can increase by more than we've seen, say, since the great financial recession? which it's probably averaged, I don't know, 5,000 new pools incremental per year. Do you think we could see a little bit more than that if the pool builders themselves are feeling more confident based on the backdrop today?

Yeah, I think a couple things to consider there. One is that weather really is the biggest factor in terms of capacity, and we've been very fortunate with great weather. So you know, building capacity is up if for no other reason, just that. But your comment about are there additional capacity coming online, what I would say is anecdotally we've heard from several large home builders that are starting to build their own pools simply because they can't wait for the pool builders to catch up. So it's hard for us to say how much capacity, additional capacity that will represent. But it's also the first time that we've heard that in many, many years.

Okay. Thanks very much. Thank you.

The next question is from Ryan Merkell with William Blair. Please go ahead. Hey, guys.

Congrats on another stellar quarter. Morning. So first off, can you discuss the cadence of organic growth through the quarter and into October? I'm just trying to tease out how we should think about sales growth in the fourth quarter and which I know can be weather dependent to some degree?

Yeah, I guess I'll talk about it in two parts. So as I mentioned in my comments, California started slower as they were, again, slower coming out of the permitting and inspection restrictions that they had, and they exited the quarter and have begun the fourth quarter at a very strong rate. I would say that the rest of the country was strong and is strong from an organic perspective.

Okay, and any help on the fourth quarter in terms of what we should expect for base sales growth year over year?

I would say that we're still very busy, and a lot of it is going to be dependent on the weather. So, you know, I can tell you that there is substantial demand that can result in a very, very strong quarter. A lot of that is going to have to do with how much work can get done. I mean, the same thing, the same trends of, you know, as I mentioned, stay at home, school from home. So pools are going to be open longer where they can and will be used more. But hard for me to give you a number because, as you know, the fourth quarter, the biggest – predictor we have there is weather. So if that snow that's in the upper Midwest were to move into the northeast and it were to get cold, that would curtail things quickly. But as I mentioned before, year-round markets are very strong.

Okay, fair enough. Second question, 27% base business growth is just well beyond what I thought was possible. Pool maintenance is generally a stable business. My question is, I'm trying to understand why would people using their pools more and maybe upgrading and remodeling a little bit more because they're stuck at home, why is that driving such strong growth? Retail of 28%, that's one of the strongest growth rates that I can remember. I know you mentioned the weather was great and a bit of pent-up demand, but 27% growth is just really, really strong. Any other color you can add?

Yeah, I think I mentioned a lot of it. There really isn't a silver bullet there that says, oh, this is it. I mean, there was a lot of pent-up demand in the seasonal markets because of the restrictions that were early on. Normally, those guys would have been closing down on the end of their season and that most of the pools that they had to build were already well underway. This year there was a significant backlog, so they kept working. We had great weather. It was very warm and dry. If you look at Southern California, a huge market, they've had great weather. It's been very hot out there, so a lot of usage. And there was still backlog for equipment and upgrades that people were waiting on. And as people started using their pools earlier in the year and said, hey, I want to I want to remodel. Well, they had to get in line with their builders to start those. So what we saw was, you know, the maintenance business has been strong, but the construction business, you know, came back very strong in the third quarter as builders and our customers switched from, you know, just trying to keep up and get a pool operational to now we can start working on remodel and renovation as well.

Okay, that's helpful. Yeah, I guess I didn't appreciate the pent-up demand aspect that really kicked in there, so that's helpful. I'll pass it on. Thanks. Thank you.

The next question is from Anthony Lebezinski with Sedodian Company. Please go ahead.

Yes, good morning, and thank you for taking the question. So I may have missed it. Did you guys give a sales growth number for chemical sales for the quarter?

Yeah, I think the chemical growth for the quarter was 9%.

Got it. Thank you for that. As far as the sales trends, obviously, as pointed out by previous people on the call, obviously very strong. How should we think about the sustainability of these trends? Do you think there is anything to think of as far as any pull forward of future demand? How should we think about that?

I guess here's what I would say. When I look at what's in the future for us, when I consider the fact that the number of permits is up so significantly and the fact that the labor really hasn't changed all that much yet, there is still significant demand and backlogs and people that want to get pools built. I mean, again, anecdotally, but I know several builders that are essentially sold out for the 2021 season. I think about the trends that are driving our growth, which, you know, you can call it stay at home, stay at home, school from home, cocooning, whatever you want to call it. I don't see travel and, you know, I would call normal life returning anytime soon. So the same things that drove our business in 2020, I think are going to drive 2021 because I don't see that the overall market dynamics are going to shift. So labor is still constrained, so it's not like there's unlimited labor that can just put a bunch of pools in. Having said that, with an elevated demand for new pools and new pool construction being up, you know, remember for us, it's not over when the pool is built. That just happens to be another pool, a customer for life that has to be maintained. So, I mean, we're very encouraged by what we see coming down the road.

Got it. Okay. And so as far as new pool construction, do you have an estimate as to where that will be for the full year? And any early thoughts for next year, obviously taking into account some of the labor constraints?

I can tell you the latest number I've heard is up to 100,000 new pools, and that's coming off of 75,000 last year. I would tell you my number is probably between 90 and 100,000 new pools. depending, again, on how long the weather holds so that they can continue to work in the seasonal markets. I mean, I was speaking to dealers in the seasonal markets in the last few weeks, and their backlogs are huge, and they're hoping to get as many of those pools as they can in the ground before the snow flies. And whatever they don't get in the ground, they'll start as soon as they can in the first half of next year. And, again, then to hold a number of pools is really going to be a function of weather because demand, I think, will remain pretty consistent.

Got it. Okay. Thank you for that. And I guess, you know, last question as far as the margin impact for the increased volume incentives. Mark, can you quantify how much that was?

Yeah, thanks, Anthony, for asking me a question. Sure. That was the majority of the increase. So if you look at the 20 basis points, it was actually a little bit more than that. And then, as Pete said, offset a little bit with some mixed on both product and customer. So, you know, not a huge amount, but certainly helpful.

Okay, got it.

All right, well, thank you, and best of luck.

Thanks.

Thanks. The next question is from Stephen Volkman with Jefferies. Please go ahead.

Hey, good morning, Mark. I had a question for you, if that's all right. Sounds good. So actually, for anybody who's interested, so it sounds like you guys are fairly optimistic, at least for the first half of next year, based on backlogs, et cetera. And then, Mark, I think you said you're going to have a little bit higher price increase than normal. And I wonder if that means there's an opportunity to perhaps front-end load some inventory and you know, have some impact on gross margins in 2021?

Yeah, what we're expecting, as you mentioned, price is really inflation. So inflation looks to be a little bit higher next year, 2% to 3% versus the 1% to 2% normal. And, you know, we typically try to buy a little bit more when that happens, but vendors are struggling a bit to stay up with demand. So it's not clear that we'll have as much opportunity as we might otherwise like to benefit from that.

Okay. All right. Good point. And then maybe back to Pete. Is it possible, maybe I guess it's even hard to get visibility, but what do you think new build versus retrofit and upgrade breakdown looks like in terms of growth?

Very hard to tell. I don't know that we have good visibility on how much of it is new build and remodel. I don't think it's going to be much different than the historic norms, given the installed base and the aging of the remodel. I just think the more time people are spending in pools, if you have a pool and it's old, are aging and now you're using it a lot more, those folks are calling the builders and wanting to remodel. And then there's obviously a bunch of new people trying to get into a pool. So it's an interesting question, but I don't know that we have a way to tease apart how much of that business is remodel versus new construction.

Okay. All right. Great. And then maybe my final one, I'll pass it on. Just again, I guess everybody's sort of stunned at the growth numbers here, but... How much do you think share gains have played into this, or maybe another way of asking it, are there certain niches where you've done really well on share? I mean, was Europe up 45% overall, or just anything to call out on share, I guess?

Yeah, I think clearly it would be fair to say that we picked up some share in certain markets. I wouldn't be so bold as to say we gained a lot of share in every market, but I think we Certainly gain share. It's still a little bit too soon to tell. The year's not over. You know, at the end of the year, I think we'll have a better idea based on what actually gets built. But I think we're very comfortable saying that we picked up some share this year. Okay. Great. Thank you. That's a function of the service that we provided and that we had product.

Thank you, guys.

Yep. Yep. Thank you.

The next question is from Ken Ziener with KeyBank. Please go ahead.

Mark, Peter, be bold. That's what I would suggest to you. So I am getting my pool read on, so it's fortunate you're not hearing the concrete demo as we speak. But this was delayed from March, and I'm out in California. So there's a couple different angles that I want to ask you, and I apologize in advance that it's going to be a little ranging. But I clearly think you're getting, Cher, because, for instance, yesterday we were just getting hardscapes from because your NPT has a very good supply chain compared to one of your largest competitors, MSI, which goes through distribution out here. Could you talk to, Pete, given your distribution background, what share gains and perhaps opportunities you're seeing as your competitors' supply chains aren't as perhaps well managed as yours, and specifically at hard scales? Because that must be a takeaway from your data that you're talking about internally. That's my first question.

Okay, let me try and answer that. When I think about share gain specifically in building materials and hardscape, I mean, not many of our competitors are full line in terms of having everything that the pool builder remodeler needs. So we're unique in that fashion in that we have such a broad range, number one. Number two, we have a very broad network and deep inventories which allows us to keep up with demand much better than others. Having said that, all of the manufacturers are stretched at this point in terms of capacity. So you can have a great supply chain, but if the ultimate demand outpaces what the collective output is of the plants, then you're going to struggle. So I would tell you in certain parts of the country where We did great in other parts of the country. We had builders that wanted products sooner than we can get, but by and large, better than most.

Okay. Mark, you outlined a few details that I'm just trying to do my math on here regarding FY21, which had no explicit guidance. However, you are giving us the beginning of a growth ladder. So inflation, 2% to 3%, you said. I heard you say M&A, roughly 4%. That's on a 12-month basis. So it's more northern, I believe is what you said. So the bulk of that 4% 12-month growth will occur in FY21. Is that accurate?

Yes. Yeah, basically I'm saying that those acquisitions are made at the end of the third quarter. So we won't get that fourth quarter next year. So expect a 4% growth from Q4 to Q3.

Largely two and three.

Yeah, with greater growth in the kind of April through September time period.

Now, it's an acquisition, so you said it's not flowing at the same EBIT margins. But, you know, if you have an 11% margin, I mean, is 7% reasonable? Try to think about an EPS contribution.

Yeah, in the 5 to 7 range.

Okay. Now, you explicitly called out COP. Congratulations. Well done this year. Being lower next year of $15 to $20 million. comma, all else equal. Is that accurate? Because that's about 20 cents there. I mean, is that fair?

Well, basically what I was saying, Ken, was this year our operating costs have been extraordinarily low given the revenue growth, and we probably will have a little bit of catch-up on that next year. That's kind of base operating costs. So a little bit higher growth than normal, which will be offset largely by the higher incentive comp that we've had this year. So the $15 to $20 million reference that I gave was just on incentive costs. That is the amount of, let's call it, higher than average over the last several years incentive costs this year. So that will offset... what I would expect to be kind of higher operating costs otherwise, given that we have some makeup to do in our branches for delayed hirings and other things that they've done this year.

Right. So your 2% to 3% inflation, 4% M&A, that's separate. I mean, your base case, what you're kind of guiding to next year is, you know, it's a high single-digit. if we assume conservative core demand, given what we're seeing on your M&A and inflation. That's clearly the, you know, what I'm hearing from you. Would you disagree with that?

I wouldn't disagree, but I'd also say this is October. We typically don't get specific on our guidance until we... No, no, I understand, but just generally speaking, because it's very robust.

due to those factors, you isolated singularly. Okay. Very well. Thank you very much for your time. Thank you.

The next question is from Garrick Schmoy with Loop Capital. Please go ahead.

Yeah, thanks. Congrats on the quarter. Just on the early buys, it sounds like there won't be as many incentives as usual, but do you think you'll be able to get everything you need, all the product in stock and set for the next season. I mean, it sounds like some of the product on back orders beginning to normalize, but just want to make sure that you're feeling comfortable going into next year as far as kind of inventory position is concerned.

Yeah, I think for the most part we'll be fine next year. There's absolutely going to be an early buy. Typically, manufacturers are already working on the early buy, but because The strength of the 2020 season, many of them are still shipping product that as soon as we get it, we'll turn around and ship it out the door. But obviously, there is a natural seasonal wane in demand, which will allow the manufacturers to catch back up, and they'll basically start shipping the early buys. So for the most part, I don't think there'll be a problem with material availability next year. I expect to start the season with a full warehouse, so to speak.

Okay, thanks. I had a question just to follow up on some of the market share questions that came earlier. Do you think you're seeing any change in behavior by pool owners if they're maybe previously somebody who had performed a lot of the maintenance work themselves? Are they starting to outsource things? the work to pool professionals, whether it's, you know, a function of COVID restrictions or, you know, maybe just a way to devote their time elsewhere. Do you think that's a change at all or, you know, are we overthinking that perhaps?

Yeah, I think we might be overthinking that a little bit. I think in general the amount of folks that are taking care of their pool is versus having it done professionally. I don't think that's changed, or I don't think we've picked up on any significant change in that regard.

Okay. And then the last question, just around the comments around builders looking to do more of the pool construction themselves. Is this something that you've seen in prior up cycles that they normally take the task of pool construction? You know, now that we're approaching 100,000 pools, I mean, historically that was the average, if not a little bit below the long-term average. So as we move more towards a historical normal level of pool activity, you know, should we expect the builders to take on some of the construction activity, you know, more so than they've had to do over the last 10 years?

I think it's supplemental capacity for certain builders. I think the trades are essentially the same. There's plumbing, there's electrician, and there's masons involved in building a pool. So I think that historically some of the home builders were doing their own, and then they outsourced it when there was essentially capacity to do that, and they focused on the home itself. Now with limited capacity to get pools built, they want to complete the home and turn it over for the homeowner. So some of them have said we've done it before and we'll do it again.

Great. Helpful. Thank you.

Thank you.

The next question is from Alex Marocchia with Barenburg. Please go ahead.

Hey, guys. Good morning. First, I have a question for Mark on margins. Last quarter, we saw lower gross margin due to the product mix being heavier towards higher ticket items, but you also mentioned that we would see stable gross margins in the back half of the year. Obviously, we had that kick up this quarter, but we had similar strength in some of those lower margin products. So how should we think about the mix impact in 2021 if new construction and remodel remain strong? But you get a positive offset from rebates.

Yeah. Well, by the way, I consider 20 basis points to be pretty stable. That's a minor change. We're going to have some natural fluctuations in our business every year, quarter over quarter. So that's, you know, 20, 30 basis points up or down either way, relatively flat for the year. is kind of our expectations over time. And I think that'll be the same for next year where we're coming off of high volumes this year. We're looking for good growth in the business next year, maybe not as significant, but continuing to see sales of these bigger ticket, lower margin products which provide a little bit of product mixed down. So, you know, expectation, again, relatively flat next year. Could be some ups and downs by quarter, but not a big change from this year.

All right, that's helpful. And then secondly, you know, recently we've had some of these hurricanes hit your golf markets and hope your employees have been doing well, but In late Q3 and early Q4, were you able to give us a sense of what that impact was on sales in the bottom line and then how it will flow through in the coming quarters?

Yeah, I would say, you know, it's a terrible situation for those impacted, but, you know, these weren't major population centers. So from our standpoint, really... No impact on the business of significance.

Okay. Understood. I appreciate everything.

Yep. Thank you. Thanks.

Again, if you have a question, please press star, then 1. The next question is a follow-up from Stephen Volkman with Jefferies. Please go ahead.

Mr. Volkman, your line is open on our end. Yes, it helps if I'm not muted. Sorry about that. Thanks for taking the follow-up. Just curious, the discussions around some home builders starting to maybe do some of their own pool work, would you still be a supplier to that project? Or if they're doing multiples, do they have other options?

No. I mean, that business is still going to flow through us. The inventory that we have is specific to the pool industry. That's not things that the rest of their trades are typically going to have. Can they buy rebar and PVC pipe from somebody else? Yes. Can they get the specialty fittings and everything else that's required and equipment to build a pool? No.

Got it. My actual follow-up was really more around logistics. We're seeing quite a bit of inflation in logistics markets, but I know you guys have had some focus on managing that. Just any thoughts about that going forward into 21?

David Morgan Yeah, I mean, remember, from a transaction perspective, 70% of our transactions take place over the counter. So, you know, we benefit in situations like this. We're seeing the same inflation that others are seeing as it relates to, you know, transportation costs. But you also know that we've been working on, as part of our capacity creation initiatives, stretching the capacity we have and getting more out of our existing fleet by, you know, better routing market-based transportation and such that we've been able to, you know, all things considered, bring to bear to help control those costs.

So net-net kind of stable going forward, or do you get some benefits?

I mean, I think we saw a slight improvement in terms of a percentage of sales this year, and I would think that that would continue into next year unless there's a step function increase in transportation rates, external transportation rates. Because remember, a lot of our deliveries happen on our own trucks as well. That's the vast majority of our expenses.

Got it. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Peter Orvan for any closing remarks.

Great. Thank you. I want to thank all of you for joining us on the call today. We look forward to reporting our fourth quarter and full year 2020 results on February 11th of 2021. Have a great day.

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