Pool Corporation

Good morning. Welcome to Poole Corporation fourth quarter 2020 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing a star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mark Jaslin, Senior VP and Chief Financial Officer, please go ahead.

Thank you. Good morning, everyone, and welcome to our year-end 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 2021 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. Now I'll turn the call over to our President and CEO, Peter Arvind.

Thank you, Mark, and good morning to everyone on the call. Never in my wildest imagination could I have envisioned a year like 2020. The impact from the global pandemic created both unprecedented challenges and opportunities. The demand for our products was unparalleled. The challenges to keep up with that demand while remaining safe were extraordinary, but we found innovative ways to get things done and deliver amazing results. I could not be prouder of our employees and all their accomplishments as they proved once again, while the Pool Corp team is simply the best. Despite the uncertain times brought on by COVID, thousands of families affirmed that owning a pool, a patio, or an outdoor kitchen is a wonderful way to enjoy the great outdoors in a safe, family-friendly environment. This heightened interest in enjoying existing pools and outdoor living spaces combined with the insatiable demand for new tools created an amazing opportunity for our industry. In 2020, our total sales came in at $3.9 billion, a 23% increase over 2019. In the fourth quarter, we saw sales grow an amazing 44%, capping off a phenomenal year by any measure. From a base business perspective, our sales grew 39% in the quarter and 22% on a year-to-date basis. Demand in virtually all of our geographies remains strong with particular strength noted in our seasonal markets. For context, as I recap the quarter and the year, I think it may be helpful to remind you of how 2020 played out. The year started out strong with revenues up 13% in the first quarter before any real impact of COVID could be felt. The second quarter, which started off with sharp declines as COVID related shutdowns took effect, quickly rebounded and we finished up 14%. In the third quarter, the business fueled by high demand and strong execution continued to accelerate and ended up with sales up 27%. And as we reported, the fourth quarter was even better, up 44%. 2020 was also a busy year for us on the acquisition front as we completed four acquisitions. three on the blue side of the business and one for Horizon. Master Tile, Northeastern Swimming Pool Distributors, Jetline Products, and our newest addition, TWC Distributors, all joined the PoolCorp family and are integrating well. Now let me provide a little more color on how the business performed in our four largest markets for the quarter and for the year. As you can imagine, all benefited from strong demand and favorable weather conditions. Florida saw revenue in the quarter up 25%, bringing the year-to-date growth to 16%. Arizona posted a 36% gain in the quarter and 23% for the year, while Texas revenues grew by 47% in the quarter and 23% for the year. California, still the largest market in the country and the last to recover from the shutdowns, grew by 26% in the quarter and 13% for the year. Overall, our year-round markets were up by 32% for the quarter and 18% for the year, while seasonal markets were up 50% in the quarter and 27% for the year. All markets benefited from strong pool construction trends, which we believe grew about 25% for the year from approximately 80,000 new pools in 2019 to approximately 100,000 new pools in 2020. Considering the slow start to the year, this was a big step forward for the industry in 2020 as milder weather late in the year enabled builders to make up for lost time. Looking at our end markets, our commercial pool category was down 8% for the quarter and 10% for the year, comprising 4% of total sales for the company. Continued softness in the public pool and travel industry is behind the slowdown, and we don't see that recovering in 2021. There are some projects starting to bid, but the lack of travel is likely to continue to weigh heavily on this market. Retail sales, on the other hand, were up 34% in the quarter and 24% for the year. A larger installed base, more in-season pool usage, and consumers trying to stretch the season all increased demand for cool supplies and maintenance products. Retail-sized chemicals, automatic cool cleaners, and above-ground pools and spas all had strong growth. At the key product level, the story is much the same. Demand is strong. Equipment sales, which includes pumps, filters, heaters, and lights, were up 51% in the quarter and 31% for the year. Due to significant construction backlogs and favorable weather conditions, most of our dealers kept building and remodeling, which helped drive the strong increase in equipment sales. Chemical sales in the fourth quarter were up 16% and 10% for the year. As I mentioned, Demand for consumer-sized chemicals was very strong throughout the quarter and the year, but commercial pool chemical demand declined with the COVID-driven diminished use. For the upcoming 2021 season, I'd expect supplies to be tight but manageable for most chemical products, with trichlor, a very popular pool sanitizing product, being a notable exception. In this case, the industry lost significant production when a major plant was destroyed by a fire in August, which accounted for approximately 40% of the industry's capacity of this product. I'd expect to see the supply of trichlor be very tight, and prices elevated depending on how much additional capacity comes online and how much import product can be sourced to supplement the constrained supply. Certainly, weather will play a role in determining how the supply and demand balance works out for chemicals. Building material sales, a great indicator of the health of the construction remodel segment, are strong. In the fourth quarter, we saw sales grow by 42%, bringing the year-to-date 2020 sales increase to 23%. We are quite happy with this result, given, as I said earlier, the uncertain and delayed start to the construction season in many of our seasonal and some of our year-round markets. When you look at the results of our business across the categories, it's evident that we took significant share in 2020. The contributions from our seasoned and customer-focused teams utilizing unique tools and resources available to us allowed us to adapt and thrive in the COVID environment better than anyone in the industry. Turning to Europe, this is a continuation of the same strong story that we discussed during our third quarter update. Europe had a very robust quarter once again and grew revenues by 48% in the quarter and 24% for the year. Continued strong demand, favorable weather, and excellent execution all contributed to a great year for Europe as well. What makes this result even more impressive is that Europe felt the impact of the virus sooner and experienced more pervasive shutdowns and restrictions than most of the North American markets. Now I'd like to switch gears and provide some commentary on our green business, Horizons. We're pleased to see this business continue to gain momentum and grow. For the quarter, Horizon-based business was up 13% and 9% for the year. Strong demand for residential construction and outdoor living fueled by growth in the year-round markets that we serve. Additionally, in December, we completed the acquisition of TWC Distributors with 10 locations in the strategically important market of Central and Southwest Florida. We continue to invest and improve in Horizon and remain very optimistic about the future growth opportunities in the green business. Moving to gross margins, we saw our overall gross margins increase to 28.5% in the quarter, a 70 basis point increase from the same period last year. For the full year, we finished at 28.7, down 20 bps when compared to a full year of 2019. The slight decline on the year-to-date basis was primarily driven by stronger big-ticket, lower-margin product sales as we discussed in prior quarters. Turning to operating expenses, we're very proud of our performance in this area as we saw operating expenses as a percentage of sales improved by over 300 basis points for the total business and over 400 basis points for our base business in the quarter. On a year-to-date basis, we improved by 130 basis points in the total business and 150 basis points in the base business. Contributing to our success was continued strong growth in sales through our Pool 360 B2B tool, which became especially useful for customers with the onset of COVID and restricted access to our sales centers for order processing. For the year, we saw Pool 360 sales increase 40%, and this is on top of a 30% increase in 2019. Clearly, our focus on capacity creation and the hard work of our team is paying off. Wrapping up the P&L, I'm thrilled to report that our operating income for the quarter was $74.4 million. This is an amazing increase of 188%. For the year, operating income was $464 million, an increase of 36%. Operating margins were 11.8% for the full year of 2020 compared to 10.7% for the full year of 2019. As you can all see, 2020 was an incredible year for the business on every level. Our team's focus on service and value-driven organic growth, combined with stellar concentration on safety, capacity creation, and execution, all while working towards being the employer of choice, were second to none. Our team performed at an amazing level, and we are humbled by their efforts. If that's not impressive enough, we added four strategic acquisitions and opened two greenfields in what had to be the most challenging operating year imaginable. In addition, in October, we celebrated 25 years as a public company, having delivered a remarkable 28% total shareholder return over the time period, and we were recognized for our consistent growth by being added to the S&P 500. 2020 is now in the rearview mirror, but the operating environment and market conditions are largely unchanged. As we turn the page to 2021, builders report large backlogs in virtually every market that should carry us through the first half of the year and perhaps beyond. Strong housing markets with the continuation of the de-organization and southern migration trends and the public's desire to find safe outdoor spaces for family recreation and entertainment are helping position 2021 as another strong year. The work-from-home trend is likely to continue expanding, which bodes well for investments around the home, particularly in the backyard. Our supply chains, which were certainly stretched to capacity in many areas, held up well in 2020. Our size and scale allowed us to keep product flowing to provide unparalleled service in a challenging year. As we exited the year, we saw our back orders drop and our inventory increase as the manufacturers worked to clear backlog and shift the early buy orders. As the season starts, we are in great shape to provide the products that our customers need. Early indications are new pool construction activity will remain robust. Keep in mind the weather and labor availability are the two most significant external factors in the industry's ability to satisfy the increased demand that we are seeing. Lastly, we should start to see the benefit of the Department of Energy's regulation on variable speed pump applications in the back half of this year. but most of the benefit will be seen in 2022 as the channel inventory is depleted. In the first half of the year, our comps will be much easier than we will face in the second half as the industry will no doubt bounce up against labor constraints and potentially less favorable weather than we saw in a very strong second half of 2020. We also realize growth from acquisitions closed in 2020 and expect overall inflation to be in the 2% to 3% range in 2021. Taking all of this into consideration, we expect to see revenues grow in the upper single to low double digit range for the year with some pressure on gross margins, as Mark will discuss, and operating margins growing in line with our historical 20 to 40 basis point improvement range. From a capital allocation perspective, our approach remains essentially unchanged. We will invest what we need to maintain our business and add growth capacity. PROVIDE AN INCREASED DIVIDEND TO OUR SHAREHOLDERS AND CONTINUE TO BUY BACK SHARES OPPORTUNISTICALLY IN LINE WITH OUR AUTHORIZATION FROM THE BOARD OF DIRECTORS. WE ANTICIPATE OPENING AN ADDITIONAL EIGHT TO TEN SALES CENTERS IN KEY LOCATIONS FOR BOTH THE BLUE AND THE GREEN BUSINESS AND EXPECT TO MAKE ADDITIONAL ACQUISITIONS AS WE CONTINUE TO HUNT FOR STRATEGICALLY IMPORTANT BUSINESSES TO ADD TO OUR PLATFORMS BOTH HERE AND IN EUROPE. CONSIDERING THESE ASSUMPTIONS, WE WOULD EXPECT EPS TO BE BETWEEN $9.12 A SHARE and $9.62 per share, which includes an 11-cent benefit from ASU 2016-09. Excluding the ASU benefit in both years, this is an increase of 7% to 13% over our very strong 2020 results. In closing, I would like to thank our customers, suppliers, and especially the Cool Court team for their support and dedication. I will now turn the call over to Mark Jocelyn, Senior Vice President and Chief Financial Officer, for his commentary and perspectives.