Pool Corporation

Good morning, and welcome to the Pool Corporation first quarter 2021 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. 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. Go ahead, Mark.

Thank you. Good morning, everyone, and welcome to our first quarter 2021 earnings call. I'd like to remind our listeners that our discussion, comments, and responses to questions today may include forward-looking statements, including management's outlook for the remainder of the year and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and variables that cause actual results to differ materially from projected results is discussed in our 10-K report. 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 over now to our President and CEO, Peter Arben.

Pete? Thank you, Mark, and good morning to everyone on the call. I simply could not be prouder of our team or more energized by these results. As you saw this morning, we announced that our first quarter sales came in at $1.1 billion, which is the first time in our history that we have crossed the billion-dollar mark in the first quarter. This represents a 57% increase over the same period last year and was the result of strong demand and strong execution in virtually all our markets in North America, both blue and green, and even stronger market conditions and execution in Europe. Our dedicated and talented teams have worked very hard to ensure we provide the very best service to our customers, allowing them to help families enjoy the healthy outdoor living lifestyle that we support. From a geographic perspective, our four largest North American markets were strong. California saw a very robust 30% gain in the quarter. In Florida, we saw sales grow by 33%. In Arizona, sales grew by 29%, while Texas grew by 68% in the quarter. The February storm in Texas positively impacted our total sales by approximately 1% to 2%, or $15 million to $20 million. Overall, these year-round markets are experiencing the same elevated demand and saw a 40% increase for the quarter, while seasonal markets' sales increased by 66%, highlighting the strengthening and depth of the industry order backlog. Turning to product sales, no surprises here with equipment sales posting gains of 61%, driven by strong demand for heaters, lighting, pumps, filters, all used in the maintenance and construction and remodel of swimming pools. This is following the fourth quarter gains of 51%. Chemical sales were up 18% in the quarter, including the effects of the increased dichlor and trichlor product pricing resulting from the previously discussed industry supply shortages for these products. We are encouraged by this growth given that the install base grew by approximately 2% overall, which highlights greater pool usage by homeowners. Building material sales increased 34% in the quarter, reflecting a very healthy demand for construction and remodeling products. Retail related product sales were up 43% in the quarter, reflecting strong confidence by our dealers and increased early buy activity compared to last year. We believe that new pool construction was approximately 96,000 units in 2020. And with very strong permit data from our major markets, we are anticipating that 2021 new pool construction will exceed 110,000 units for the first time since the great recession. but still well below historical peak levels. Commercial pool category sales growth turned positive for the first time since the onset of the pandemic, posting 3% growth after declining for the past three quarters. This is an encouraging sign. With people beginning to travel more, we expect this market to continue to strengthen. For perspective, this is a relatively small part of our business, making up only 4% of our total sales. Our 2020 acquisitions are performing well and, as expected, contributed significantly to overall growth, adding approximately $45 million in sales, or about 4% of total net sales for the quarter. Now, let me provide some commentary on our European operations. Our team in Europe posted some astonishing results in the first quarter, with sales up 115%, with the month of March being the largest month ever for the PoolCorp team in Europe. Like in North America, consumers are investing in their backyards and keeping our dealer base extremely busy. Our team in Europe has done a tremendous job focusing on the customer experience and operating execution, which has enabled share gains in a competitive market. All countries in our Europe business are experiencing record growth, highlighted by particularly strong growth in France, Spain, and Germany, the three largest markets. I would now like to provide some commentary on Horizon. We could not be happier with the trajectory that this business is on. Building on a strong fourth quarter, Horizon posted 24% base business growth in the first quarter and is poised to gain momentum throughout the year. We are confident that this platform will continue to excel with strong execution, our team's intense focus on the customer, and a robust housing market fueling demands. The team is assimilating the TWC distributors acquisition that we closed in December, expanding our Florida market presence with nine additional sales centers. Horizon is also expanding its footprint with two new greenfield locations opening soon in key markets in Florida and California. We will continue to strategically invest in this business. Turning to gross margins, we are pleased to see a 40 basis point gain for the quarter, including a 70 basis point growth in the base business. Higher volume-based purchasing incentives, a favorable sales mix, and some inflation benefits combined to provide a slight lift year over year. Switching our discussion to operating expenses, we have a very good story to share. In total, operating expenses were up 17% net of the impairment expense in Q1 of 2020, and including the impact from our four acquisitions that we closed in 2020. Excluding the impairment last year, our base business operating expense increased only 10% on revenue growth of 51%. This led to a reduction of our overall OpEx of 650 basis points as a percentage of sales for the quarter. Driving this operating leverage improvements are the benefits from our capacity creation. Leverage improvements are the benefits from our capacity, I'm sorry, Driving this operating leverage improvement are the benefits from our capacity creation activities and the tremendous effort and dedication of our teams. Of note, our Pool 360 sales accounted for 11% of our total sales. We saw an incredible 90% increase in revenue through the tool compared to the same period last year and a 45% increase in line volume processed. Wrapping up the P&L brings us to the operating income line. For the quarter, we reported operating income of $129 million. This is a 263% increase over last year and brought our first quarter operating margin to 12.2% compared to 5.3% last year at the same time. This is truly an amazing performance and one that we are all quite proud of. Once again, I would be remiss if I did not acknowledge the incredible execution and tireless effort that our team displayed to accomplish these amazing results. Now, with the first quarter behind us, let me try and provide some context for how we see the remaining portion of the year shaping up. First, as noted in our previous call, our builders ended the year with a considerable backlog. This has continued to grow as homeowners' desire for a family-friendly outdoor living environment is increasing. Contractors continue reporting strong leads and contracts deep into the 2021 season, with many quoting 2020-22 completions. The flexibility of the new work-from-home norm that many professionals have switched to has proven to be a catalyst for investing in home improvements, with the backyard being near the top of the list. This, along with the continuation of the de-urbanization trends, strengthening of the southern migration, and more active participation of the millennial population in the housing market, should be great for our industry. Second, we previously said that inflation would be in the two to three percent range, but now believe it will be in the four to five percent range, with some products into double digits. We don't anticipate any of this getting hung up in the channel, so that will provide a tailwind for the year. Considering that most of the cost of constructing a new pool or remodeling an existing pool is tied up in labor, we don't anticipate this inflation having a meaningful effect on demand. As it relates to non-discretionary products such as chemicals, inflation is simply passed through again with no real effect on demand. Third, With demand being so strong and some manufacturers struggling to keep up, we have experienced some product shortages that, up to this point, have been manageable by utilizing the strength of our network to keep critical product flowing to our dealers and providing alternative options when certain products are in short supply. Our back orders have certainly increased in most markets, but our team has done a remarkable job taking care of our customers in a very challenging environment. Fourth, Labor is in very high demand across all construction segments, and this continues to pressurize the industry, keeping demand greater than supply, which we have seen for many years. Crews are working longer, and the fair weather has helped expand capacity for the industry, but the labor market tightness is something that we continue to watch. Finally, we just announced that we have acquired PoolSource, a single-source technology a single location pool distributor in the strategic Nashville, Tennessee market. We have a robust M&A pipeline that we continue to develop. Greenfield activity has picked up as well as we expect to open seven or more new locations on the blue side this year in addition to the Horizon locations I mentioned earlier. Considering all of this and the amazing first quarter, our confidence in growth for the season and the rest of the year has improved considerably. As a result, we are raising our guidance for the year to $11.85 to $12.60 earnings per share from the previous guidance of 912 to 962. I will now turn the call over to Mark Jocelyn, Senior Vice President, Chief Financial Officer, for his commentary and perspective. Mark?

Thanks, Pete. I'm going to start by commenting on the change in our guidance range for the year, which at the midpoint is up 30%, from the guidance we gave on our year-end call just over two months ago. So what changed in that relatively short period of time? The answer is there are a number of reasons for a more optimistic outlook, which I'll describe in order of magnitude. First is our very strong Q1 results and our short-term expectations as we move into the second quarter. Despite relatively average U.S. weather, Q1 market conditions built on the exceptionally strong 2020 end of year, and we're able to capitalize on that to deliver phenomenal results. This momentum has continued into the second quarter and taken together is meaningfully better than what we expected in February. Second, we've seen an acceleration in inflationary price increases announced by our vendors over the last couple of months, roughly doubling the inflationary impact we expect to see for the year from our earlier guidance of 2 to 3 percent on average across our product portfolio to 4 to 5 percent now. As vendor price increases are primarily pass-throughs in the pool industry, these increases should add to our sales and gross profit opportunity for the year. Third, we have more clarity on positive external factors impacting our business throughout the remainder of the year. These factors include our increased confidence that new normal, will be many more people working from home in the future than in the past, with greater focus on home improvement spending. This spending will be fueled in the short term by favorable homeowner dynamics, including rising home valuations, low interest rates, a healthy job market, government stimulus, and greater millennial participation in the housing market. As our first quarter demonstrated, we generate significant operating leverage by effectively managing expense growth in vibrant market conditions. While I expect our operating leverage to decline as we progress through the year, it should be better for the year overall than our typical annual target. Finally, adding to our opportunity since February are slightly larger contributions from 2020 acquisitions and our just-completed pool source acquisition in the natural market. Tempering our enthusiasm To some degree, the strains on our supply chain is many suppliers struggle to maintain product flow in the midst of this vigorous market environment and constraints on customer labor that could impact their ability to fulfill demand. Our suppliers' ability to maintain adequate product flow, particularly as we head into and through the season, will be a challenge, but we believe we've adequately factored this into our projections. With that color on the conditions that resulted in our guidance change, I will comment briefly on our Q1 results before summarizing our expectations for the rest of the year. As I mentioned on our year-end call, a present-day Michelangelo painting a picture of a perfect quarter might have painted our fourth quarter results. With our first quarter now behind us, it's clear that our fourth quarter was just a warm-up for a true masterpiece. Every aspect of our first quarter performance was exceptional top to bottom on the P&L with excellent working capital management and cash generation. Compared to a strong Q1 last year, sales were up 57%. Operating income was more than three and a half times greater. Operating margin was more than two times better. And return on invested capital was 44% on a trailing four-quarter basis. All record levels of performance. Obviously, our teams in the field stayed focused on their customers' needs in the face of the many significant challenges facing them each and every day, took advantage of the resources available to them to create capacity, and in general were just phenomenal. Now, rather than doing my usual line-by-line results commentary, I believe it would be more helpful to discuss our expectations for the remainder of the year, starting with sales. As mentioned, the demand environment is very strong, and we don't see any letup here as we head into the heart of the season with acquisitions and inflation adding to our growth opportunity. These positives are tempered by potential vendor-contractor labor constraints, as well as our own increasingly difficult sales comps as the year progresses. As a reminder, our base business sales growth by quarter last year was 13%, 14%, 27%, and 39%. Capacity and supply constraints potentially become more of an issue mid-season, but our year-over-year sales gains should be highest in Q2 with diminished growth as the year progresses. As usual, weather will have an important but as yet unknown impact. For the full year, we now expect year-over-year total sales growth to be in the range of 20% plus, assuming supply constraints don't accelerate significantly. Along with the additional sales volume, our gross margin expectations for the year have also improved. On our year-end call, I forecast 20 to 40 basis points of margin decline for 2021. I would temper that now with a more modest flat to 20 basis points decline in gross margin, with the biggest challenges here coming later in the year. Very modest operating expense growth in relation to our sales and gross profit growth has characterized our results for the last year. While that should be the case for the year overall, our operating margin improvement should decline sequentially throughout the year as we lack favorable comps and ramp up in some discretionary expense categories that benefited our results over the last year. For the full year, I expect our operating margin will improve in excess of 100 basis points, which would be far more than our typical annual target of 2040 basis points, 2240 basis points. We obviously have a good start on that based on our Q1 results. Our tax line is an area of continued focus, so I have a couple of comments here. First, we continue to see, continue to expect Our tax rate, excluding the ASU impact, to be around 25%, as has been the case for the last several years, with a lower effective rate as we book ASU-related tax gains on the exercise of stock options and the vesting of restricted stock. As we mentioned in our release, our guidance range doesn't include additional ASU benefit beyond the $0.10 we realized in the first quarter. Of note, there has obviously been a lot of discussion about raising corporate federal taxes, both by the administration and in Congress, with varying proposals ranging up to a 7% tax rate increase, which most likely would be effective in 2022. Given the high proportion of our profit earned in the U.S., any rate increase would likely have a direct and proportional increase in our taxes paid, and a corresponding reduction in earnings. The good news, if you can call it that, is that investors seem to have anticipated this and already priced it into our stock. Looking at our share count, you'll note that we were able to complete 66 million in share purchases in the quarter, which resulted in 198,000 shares being repurchased at an average price of $332 a share. As has been the case historically, we believe share purchases remain our best use for excess cash balanced with our desire to keep a relatively conservative balance sheet. So expect more of this to come in the year ahead. For share count forecasting purposes, I laid out a detailed forecast on our last call, which I would now reduce by 300,000 shares for each remaining quarter and year-to-date period based on the Q1 repurchases completed. Finally, as we announced previously, I plan to retire later this year with no specific departure date set at this point. Melanie Hart, who is our current Chief Accounting Officer, has been named as my successor and is preparing to assume our CFO responsibilities. With that, I'll turn the call back to our operator to begin our question and answer session.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your headset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Ryan Markle from William Blair.

Hey, everyone. Congrats on another strong quarter.

Good morning. Good morning, Ryan. Thank you.

So, first off, typically the first quarter is 11%, 13% of EPS for the year. And I'm wondering, will seasonality be different this year? And was there anything in the first quarter that won't repeat?

Well, Ryan, I don't know that seasonality will be different per se. Obviously, the year started off well, and weather was relatively cooperative. In terms of not repeating, we've lapped now the expense reductions that we had last year, which began really with the second quarter last year. Things like travel and meeting expenses, some of the restraints on hiring, advertising expenses. So we won't have those operating expense benefits. But from a sales standpoint, nothing really different going forward from a seasonality view.

Okay, that's helpful. And then you mentioned the chemical business is up 18%. How much of that was price? And I don't know, do prices, do they improve through the year for chemicals, or are we at this higher level now and it'll just stay here?

Yeah, prices vary by parts of the country. I mean, overall, I would tell you the price on dichlor and trichlor, which is the product that was impacted by the shortage, they're up about 60%. So if you think about how that's gonna shake out for the balance of the year, it'll probably remain at elevated level because I believe that the industry is gonna be short for the season. Now, that simply means that people are going to move their method of sanitization to another product, either a granular product or a liquid product. But there's no shortage of ways to sanitize the pool. It just simply means at a certain point people will shift. We've also seen certain parts of the country accelerating the use of salts as a method of sanitization too.

Right. Okay, and just lastly, I'll turn it over. You mentioned taxes. I think you said it was maybe $20 million and a quarter. Will there be more for Texas in the second quarter, or was that just a one-quarter event?

You're talking about the ASU benefit?

No, the Texas storms. I thought you mentioned Texas.

I'm sorry. Yeah, so, Ryan, I think it's, best we can tell, it's about halfway done. And I think that there was some initial triage that was done to get some water moving, but there's still a product shortage on some things so that when products are available, then they'll have to go back. So we think that it's about halfway done.

Got it. All right. That's helpful. Thanks.

Thank you.

The next question comes from David Manthe from Baird.

Hi, good morning, guys. I'm under the assumption that the majority of the overage you're seeing in the off-season here is new pools and major renovations in the Sun Belt as opposed to, you know, massive influx of just higher pool usage. First of all, is that how you're thinking about it? And Then as it relates to the new pools versus major renovations, I don't know to the extent you can discern between those. Are you seeing trends one way or the other that might give us an indication about how things will play out in the future?

Yeah, let me try and take a crack at that. So if I think about it from a – you know, you mentioned in the Sunbelt a lot of construction and remodels. That is absolutely true. So the backlogs in the Sun Belt for both of those things are very strong. The seasonal markets also have a very strong backlog. And because of the – frankly, I think it was as much because of the backlog as the weather was, I would call, average for us. Because of that, I think people kept working as best they could and or started earlier. So what we've seen – is a big increase in new pool construction. And we've also seen a big backlog in the remodel. Now, as it relates to usage, you know, the only way that we look at that is what's going on on the maintenance side. So, you know, we use chemical usage as a proxy for that. And as I mentioned in my comment, you know, with the installed base only being up about 2%, The fact that the chemical usage was up like 18, that leads us to believe that more people are using the pools, which is good for the maintenance part of our business. Does that answer what you're looking for?

It does. And the 18 includes price, too, right, or no?

Correct.

It does. Okay. Okay. Thank you for that. And you discussed some of the supply chain constraints and whatever constraints that your customers and your suppliers – For your business, it's obviously easier to absorb excess activity into the system in the fourth quarter and the first quarter than it is in the main selling season. Can you talk about the status of your capacity creation initiatives and how you're positioned to absorb incremental activity in the second and third quarter of this year? And then related, those capacity creation initiatives, Do those potentially soften downside decremental margins if activity levels slow by their nature?

Okay, that's a lot. So let me see if I can get you what you're looking for. As far as the capacity creation and the run rate that we're seeing, you have to consider that you really can't think through that unless you parse it into seasonal markets and year-round markets. So the year-round markets are very busy, right? But they're busy with construction and remodel because in places like Dallas, Texas and such, there aren't a whole lot of people swimming yet. But there's a lot of construction going on. So we'll see an uptick in those areas in the products that are used in the, you know, maintenance products, if you will. So our chemical spend, if the water warms up, chemical spend will go up. significantly in the seasonal markets as people start using the pools more, I'm sorry, in the year-round markets. So people, even this time of year, usage is vastly diminished over what it is in the summer months except for places like South Florida. So what we'll see is that there'll continue to be an increase and the capacity creation initiatives that we have will continue to pay dividends in both those markets because the nature of the business will shift So Pool 360, for instance, will continue to be a big part of our productivity result. The truck utilization, the velocity slotting, all of those things continue to help us. They simply add capacity to us and hold the cost levels from increasing nearly as fast as the revenues are.

Yeah, in terms of the second part of your question, that's an interesting question. So I guess it was, you know, if there was a recession, let's say, and some slack in demand, does the capacity creation initiatives result in less downside? Which, you know, we'd have to think about a little bit. It's interesting. I tend to think of, you know, less demand, the fact that we have so much of our business tied to maintenance. as well as the leverage we have in our model, which has a fair amount of incentive compensation that goes down in any kind of downside environment. But I don't know, instead of adding a person when demand picks up, we don't have that person to let go, let's say, when the volume drops. So I don't necessarily see the capacity creation softening the downside.

Okay. All right. That's helpful, guys. Thank you.

Sure. Thanks. The next question comes from Anthony Libidzinski with Sidoti & Company.

Good morning, and thank you for taking the questions. So, you know, first, Mark, congratulations on your pending retirement. As far as inflation, I know you mentioned that you're bringing your forecast to 45% for the year. Was that where you were in the first quarter, or did you want to just circle back just to firm that up?

Thank you, Anthony, for your kind words. The first quarter was less, so some of the price increases that we've seen, as we said, we raised our guidance just in the last two months, so we're We're looking at 2% to 3% kind of across the board coming into the year, which is what I would say our first quarter saw in terms of inflation. And then price increases have been announced by a fairly wide variety of vendors with some different implementation dates, but generally late first quarter into early second quarter. And so as we look at those, And the overall impact on the year, we think it's now at 4% to 5% range.

Got it. Okay, thanks. And then, so, Pete, you mentioned before that, you know, the overall cost of a new pool is most of that tied to labor. Are any of the pool builders that you guys work with, I mean, are they seeing signs of labor wage inflation? Just curious in regards to that and how could that – possibly in the future, impact demand for pulls?

Yeah, I think the labor market has been tight for quite some time. So there are certain positions that are in short supply for virtually every business, drivers, for instance. In the construction trade, though, I mean, labor has been tight for quite some time. There's certainly been some inflation on that side, but I haven't heard of crazy increases, so I don't know that even the inflation that they're seeing on labor would act as a throttle on demand at this point.

Got it. Okay. And in terms of the product shortages, I mean, should we just talk about the top areas we're seeing or expecting to see some product shortages before things?

Yeah. As I mentioned, certainly chemicals, the three-inch trichlor and dichlor tabs are probably at the top of the list from an industry-wide shortage position. If you go into the equipment category, so heat is in very high demand and, frankly, has been for almost a year now. But, again, this is where we really distinguish ourselves for our customers because many of our competitors may have one or two locations in a market, and if they don't have it, they simply don't have it. But given the density that we have in most of the major markets, if I don't have it in one location, chances are I have it in another location or I have another brand. So the dealers are becoming much more brand agnostic for the products that are in the highest shortage position, which has been good for them and good ultimately for the pool owner that wants to use the pool.

Got it. Okay. Thank you and best of luck. Thanks.

Our next question comes from Alex Morosia from Barenburg.

Good morning, guys. Thanks for taking my question. The first one is a follow-up on the previous question regarding capacity at a company level. Given the current ramp in new coal construction, when do you think we get to a point where you need to expand existing locations, add another centralized shipping site, or make some other expansion decision to fulfill demand? And I ask this because I wasn't covering the company back in the early 2000s when new pool construction peaked. So I'm just not sure how you managed capacity back then, if it was any different. And I'm just trying to figure out if something's changed.

Sure. So as I mentioned, new pool construction last year was 96,000 units. And it was about a 23% increase. I think this year, given the strong demand, it will be 110,000 plus. If you think about historically how Pool Corp has grown, we've grown by continuing to expand our network. So we try and add capacity within the four walls and grow the business, which is what creates the operating leverage that we've been able to do. But at a certain point, as new pool construction continues to grow and the installed base continues to grow, proximity of our locations to those pools matters. So there's two reasons for us to expand our footprint. One is we're simply out of capacity. And then when we look at the geographic circle that an individual branch or sales center covers, we simply look at and say, all right, where is the market growing? We take a piece of the existing branch that becomes seed business for the new branch and we push it out further and closer to where the pool density is increasing. That takes load off of the existing branch, which allows them to grow again, and then by having a new sales center on the ground in a new growing area, that allows us to grow.

That's extremely helpful. Thank you. And then second question is just on the guidance for the rest of the year. Do you see a possibility for a flat to hire Q4 now that you've got better visibility into contractor backlogs?

I think Q4 will be a challenge, frankly, but The flat to positive is certainly not out of the cards. I wouldn't bet on that, but it's possible. But again, I mentioned the comps. That's a really tough comp. We had very favorable weather. Weather is always an important factor in our business, particularly in the shoulders of the season. And if we have similar weather, then okay. With the inflation and the acquisitions, That certainly helps our optimism about Q4 performance.

Okay, that's all for me. Thank you.

Thank you.

Our next question comes from Ken Zenner from KeyBank.

Good morning, everybody. Good morning. Good morning, Ken. Wow. Mark, congratulations, and Melanie, I'm sure you're listening, so congratulations to you. Pete? We thank you. Thank you. Yeah. I'm sure you're going to go painting, obviously. This isn't roofing, Pete, from your old industry, yet the backstop attraction of the pool is that a lot of this is a recurring revenue model in terms of maintenance, so You know, just amazing results. And I'm with the homeowners have more money. There's a lifestyle focus outdoors. You know, in our view, all the money is tied to rising homeowners' equity. But can you just walk us through and update us? Because it is remarkable. In terms of construction versus remodeling, What is the current landscape of, you know, to support what Mark's been talking about on the new construction side, what is, you know, generally your impression of how people finance or purchase pools as opposed to, you know, the repair and remodel, which I assume is strictly out of pocket? Can you give us a little background on that just so we can have a context for how this demand is being funded?

Yeah. That's a good question, Ken. I think it varies, of course. Historically, there was a second mortgage market, which did a lot of the financing for pools. That market doesn't exist in the same form. However, there's a lot of home equity out there that consumers have tapped into with home equity loans. lines of credit, and they're using that for expansions of the home environment, remodeling and additions. At the same time, the stock market has been healthy, as you know, and so people have more discretionary spending coming from that. They've cut back other discretionary expenses, so I would say, in general, there's more discretionary funds that people have available, but at the same time, they're taking advantage of what's called easy financing from home values, which has accelerated significantly over the last several years. So it's a combination, and it's roughly, my guess would be, 50% to 60% of that. New pool purchases, which are big spends, right? So the pool itself might be $40,000 to $50,000, and then you throw in the landscaping and patio and maybe some furniture. It could be $80,000, $100,000 spend. And for most people, that would be some financing involved in getting that spend completed.

And then... I appreciate that. So I finally completed my pool here and gave you guys copious amounts of money. You know, and during that process, because there are a lot of different SKUs that are in that process, you know, heaters, thank goodness I got mine four months ago because now they're backlogged in a lot of cases. How much share do you think you're getting from these smaller distributors? Because where I'm in Northern California, there's two real competitors for you. generally speaking, but, I mean, they don't have the product, you know, necessarily that you do. So how much share gains do you think are embedded in your current, you know, 20% guidance this year? If there's four or five points of price, that means the market's 15. I mean, you must be gaining share. And how do you think about that? How do you measure that operationally?

Yeah, it's share, as you know, because there's not any external reporting that everybody reports into, similar to other industries. So it's basically an estimate. So every time they update the market and new pool construction, then basically that starts our work to try and back into what's going on from a share perspective. So what I can tell you, Ken, is we are very confident that we are taking shares. And the reason we're taking share, as I mentioned before, it's simply the strength of the network because we have more options for any dealer than anybody else, bar none. What's difficult, though, is to say at this stage how much of it is pure share gain. So we're confident that we're taking share in a considerable amount, I would bet, but we're not certain enough for me to blurt out a number to you just yet.

Right. Yes, I mean, I couldn't get stuff from other people, so even though you were raising prices. You know, operationally, because you do have people, right, out in the branches, and they're very, very, very, very busy, and you're doing things like COVID, right, training on top of all of that stuff. Obviously, Pool 360 is helping efficiencies, but how are you managing, you know, the employee – Are you seeing higher turnovers given how hard they're really working and how much productivity you're getting through the system? And how are you really changing the system so you don't burn those people out? Thank you very much.

Yep. That's a very good question. So we actually, part of, as you remember, I have four operating pillars, right? Safety, growth, profitability, and employer of choice. So employer of choice is where this activity that you're talking about comes into play. So it starts out with making sure that we have the right resources and, frankly, that you have a plan. So if you look at the depth of our experience bench at the leadership level, whether you're talking about the region manager or the general managers, these folks have been doing it for a very long time. And even though you're busy, when you're organized and when you're structured and you have a plan, it just works. Now, we're busier, certainly, no question, but it's about organization and structure and tools. So the efforts that we put on capacity creation, whether it's the velocity slotting in the warehouse or Pool 360 training or Blue Street, all of those things, for instance, we did a lot. Even as busy as we were in the first quarter, our first quarter results will pale in comparison to the second quarter, so that's where we had time, and even in the fourth quarter to work on some of those things so that they pay dividends for us as we ramp up and get even busier. It's a process. We don't take for granted the dedication and the hard work of our folks. The results that we posted would be impossible without people working very, very hard and very good leadership. But I think our bonus plan rewards those folks, right? Because it's a total add-em-up for everybody. So the better the company does and the better they do. So I think it's a lot of things that we use to make sure that the team stays energized and equipped.

Thank you. And then, Mark, your 20% growth, I think, is what you said. Could you, you know, just when you said 2Q or 1Q will pale in comparison to 2Q, it's kind of an impressive statement. You talked 20%. That's your top-line sales, correct, which includes the four to five points of inflation?

Yes. I think the sponsor with the Q1 tailing into comparison to Q2 referred to that question. But from a sales standpoint, yeah, the 20% is overall for the year, which obviously includes our first quarter, which was very strong. It includes inflation for the remainder of the year. It includes the acquisitions that we have completed and also the kind of comps that we have, as I mentioned, of last year's growth rates.

Right, with 4Q being in the flat range. Right.

Right.

Amazing. All right. I'll talk to you guys soon. Thank you so much.

All right, Ken. Thank you.

Again, if you have a question, please press star, then 1. The next question comes from Derek Shemus from Loop Capital.

Great. Thanks, and congrats on the results. First question is just on the gross margin outlook. Previously, you'd expected margins to be up in the first half, down in the second half, maybe a little bit more significantly. But now, just with the improved gross margin outlook, you know, it sounds like you're getting some pricing ahead of inflation here. But should we still think of maybe directionally kind of the order of magnitude is being consistent with your prior expectations.

Yeah, that's correct. I mean, it wasn't a big change in outlook. I went from 20 to 40 down to flat to 20 down, so basically a 20 basis point improvement in expectation. And definitely the trajectory of that would be, you know, better, you know, earlier and more difficult later, particularly the fourth quarter. I think our fourth quarter gross margin improvement was around 160 basis points last year, so significant, and that will be very surprising to get close to that number this year.

Okay, thanks. The second question is just on the revenue outlook issue. Just curious how you'd answer the question just around with the economy opening up, seems like more people are certainly looking to take vacations in the summer. Will you anticipate more of the non-discretionary piece, just because the new pool construction side is so strong and backlogs are full and the work is going to continue through the year, but is there any risk to an air pocket in the in the summer months around people taking vacations for the first time in over a year, and they might end up skimping a bit on some of the non-discretionary aspects of pool maintenance?

Yeah, I don't think you can, especially in the summer months when the water is hot, you simply can't say, well, I'm going on vacation, so I'm not going to run the pool or I'm not going to put chemicals in the pool. You simply can't because it turns green and, frankly, then becomes a very difficult thing to return back to the normal So I don't think that's the case. I guess the way I think about it is these projects are long-term investments, right? It's not a question of whether I want to go on a vacation or not, which tends to be a shorter-term decision. That and many of these folks that are about to have their pool started, if somebody's starting your pool today, I promise you that that contract was signed a long time before today. So the contracts that people are signing are really for future projects. for future installation, and this is typically a large investment. So I don't really think that even if people start to travel and say, I'm going to jump on a plane and I'm going to go somewhere on vacation, we don't really see that altering their plans for an investment project in the backyard.

Great, that's helpful. Last question is just on the commercial business, recognizing it's about 4% of revenues, but just curious as to Anything in particular that contributed to the turnaround there?

I think it's fairly broad-based. It wasn't like a lot of large projects broke. I think you had hotels, which in March last year were essentially shuttered. So people are traveling, and bodies of water are in use, because remember a year ago there was questions about the safety of the pool and such. So I don't think it was any one large thing. I just think it's the economy is opening up a little bit. People are starting to travel more. And the public pools have been deemed safe as long as they're treated properly. So I think it's just that.

Great. Thanks again. Best of luck.

Yep. Thank you. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Peter Arvin for any closing remarks.

Great. Thank you. In closing, I would like to extend my sincere thanks to the entire PoolCorp family and to our customers and suppliers because without their combined effort, these extraordinary results would not have been possible. Thank you for joining us on our call today, and we look forward to reviewing our second quarter results with you on July 22nd. We hope everybody has a great day. Thank you.

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