Pool Corporation

Good day and welcome to the Poole Corporation second quarter 2021 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. 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 Josman, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to our second 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 could cause actual results to differ materially from projected results is discussed in our 10-K. In addition, we may make references to non-GAAP financial measures in our comments. A description and reconciliation of our non-GAAP financial measures is included in our press release and posted to our corporate website in our investor relations section. I'm joined here today by our President and CEO, Peter Arvin, and I'm very happy to say by our next CFO, Melanie Hart. We'll start as usual today with opening remarks by Pete.

Thank you, Mark, and good morning to everyone on the call. Beginning in May of last year, as the country came to grips with the pandemic and its effects on everyday life across North America and Europe, homeowners' interest in swimming pools and anything to do with outdoor living surged. The steady growth that we had seen over the years kicked into overdrive as people realized that investing in their own backyard was They could enjoy a family-friendly, safe, healthy outdoor living experience right at home. Demand for in-ground pools, above-ground pools, luxury patios, and outdoor kitchens spiked, creating demand that quickly soaked up any available builder capacity. This surge in demand has not let up and continues through today as our builders and remodelers are telling us for the most part they are booked through year-end and in many cases into 2022. Our retailers are also reporting robust store traffic as well. This morning, following an exceptional first quarter, we reported that our second quarter total sales came in at a record $1.8 billion, which is a 40% increase over the second quarter of 2020, which was up 14% over 2019. This is our largest quarter ever and our seasonally most significant quarter of the year. Thanks to the tremendous efforts and hard work of our team that is executing at an incredible level, the support from our supplier partners, and the perseverance of our customers, together we helped more people enjoy the healthy, safe, outdoor living experience than ever before. From a base business perspective, sales increased 32% with acquisitions, accounting for 8% of our quarterly growth. Inflation, as we have previously mentioned, has been above average this year and is trending to 5% to 6% for the year in total. This has had no meaningful impact on demand and has passed through the channel as is typically the case. Overall, the unprecedented demand for our products has strained the manufacturing capacity and supply chains in the industry. In times like this, we use our strong balance sheet, the robust network of sales centers, and tremendous execution to help our customers keep projects moving forward so families can enjoy their backyard escape. By and large, the manufacturers are finding ways to increase production, which when combined with the industry's seasonality should ease some of the shortages that have plagued the industry this year, allowing supply chains to function more normally as the year progresses. Looking at base business in our four largest markets, California saw sales increase 33%, Florida sales increased 35%, Texas saw sales climb by 30%, and Arizona sales increased 24% for the quarter. Overall, our year-round base business markets increased by 31%, while the seasonal markets increased by 33%. This growth is a testament to the strong demand throughout the entire business. Now, let me provide some product sales details for our base business. Even with the strained supply chains, equipment sales, which include heaters, pumps, filters, lighting, and automation, all used in the construction, remodel, and maintenance of swimming pools posted record sales up 35% in the quarter, following a 62% gain in the first quarter. Again, what is most significant about this result is that it occurred in our seasonally biggest quarter when industry capacity is most challenged and our comps the most difficult from an industry perspective. Chemicals, which have been a challenge to supply this year with the widely known industry shortages, saw sales increase by 28% in the quarter. Pricing represented 19% of the increase, while volume accounted for nine. Persistent shortages in trichlor and dichlor have driven increased demand for alternatives such as liquid chlorine and calcium hypochlorate, which most recently have seen supply interruptions of their own in elevated stock outs across our network as teams grapple with industry shortages. In most cases, this results in intermittent stock outs across some of our network that can last a day or two. As seasonal demand for chemicals is peaking soon, we expect the situation to ease in the coming months. Building material demand remains strong as construction and remodel activity is brisk. Our sales in this product category grew by 33% in the quarter, following a similar growth number in the first quarter. Retail products posted a 20% gain driven by a larger installed base and elevated usage levels, although here, too, the shortage in chemicals and other products is limiting growth. Commercial pool products continue to rebound as leisure travel has resumed and resort, hotel, and municipal pools reopen. For the quarter, sales in this product group increased 45%, coming off a weak second quarter in 2021, where sales fell by 21% due to the COVID lockdowns. Currently sales in this category are being dominated by maintenance and repair products as large commercial construction projects are just beginning to get traction again. Last year we completed four acquisitions, three blue and one green, and to date we have completed two more blue acquisitions. All are performing well and being integrated into our network, which will make them even better. Our deal pipeline and expansion plans are robust and remain a focus area for the business. Year-to-date 2021, we have opened nine new locations, seven on the blue side and two on the green side. Let me now take you across the Atlantic and provide some commentary on our European business. Sales remains brisk and growth strong. For the second quarter, we saw sales grow by 42%, bringing the year-to-date growth to an incredible 62%. Our team is executing at the highest level and benefiting from a similarly strong market that we are seeing in North America. Being a multi-line distributor versus a distributor manufacturer allows us to be more flexible and provide customers more options in a supply-constrained environment. This has allowed us to take significant share. Turning to our Horizon business, we are very pleased to report that sales growth continues to be strong, as the business posted another terrific quarter with sales up 31%. For the same period, base business sales increased 24% versus last year. As mentioned above, year-to-date we have opened two new locations, one in California and the other in Florida, while continuing to execute our strategic plan of organic growth, greenfield expansion, and acquisitions as we develop our pipeline in targeted areas. Let me now switch my commentary to gross margin, expenses, and operating income. First, on gross margins, we are very pleased to have reported a gain of 170 basis points for the quarter and a 200 basis point gain from our base business. This improvement was driven by supply chain execution, inflation benefits, and product mix. Melanie will provide more color on this topic. Operating expense performance was spectacular given the volume growth. Our OpEx as a percentage of sales improved by 117 basis points for the quarter, as being driven by the team's execution and a relentless focus on capacity creation activity. Pool 360 sales grew by 56% and accounted for 12% of our sales for the quarter. The importance of this tool continues to increase as it enables both our customers and Pool Corp to be more efficient in how we operate. Wrapping up the income statement, I could not be prouder of what our team delivered in operating income. The record $339 million in operating income for the quarter was a 64% increase over the same period last year. Our team's skill, dedication, and commitment to the customer experience is second to none. This, along with the benefits of our business model, continue to set us apart from the competition and enable us to continue to take share in this challenging environment. Our ability to consistently drive organic growth and manage our cost structure through execution and capacity creation is a testament to the team here at Pool Corp. With this in mind, and the half of the year behind us, we are raising and narrowing our EPS guidance for the year from previously $11.85 to $12.60 to $13.75 to $14.25 per diluted share, including the $0.29 year-to-date tax benefit that we have received. Looking forward, there are several factors and trends that give us confidence for continued growth beyond 2021. First, the single-family housing market remains strong, driven by millennials entering the housing market for the first time. Deurbanization and the southern migration, all of which are very positive factors for both the blue and the green business. As people move to the Sunbelt States with longer outdoor living season, they see the value of investing in a pool, patio, outdoor kitchen, or remodel project, which is driving demand for our products. Second, the work from home change that has swept across North America is also creating more time to enjoy a luxury backyard retreat. This trend looks like it will continue longer term. Third, new products such as automation and the connected pool simply increase our sales opportunity on every project as people become familiar with this new user-friendly technology. Fourth, new in-ground pool installations were 96,000 pools last year and are forecast to grow to more than 110,000 pools this year as our builders are reporting stronger backlogs that continue into 2022. Each new pool adds to the maintenance and repair market going forward, which by far is the largest part of our industry. Fifth, inflation, which is higher than normal this year, will likely continue at elevated levels into 2022. Sixth, the new variable speed pump legislation that goes into effect this month will add $30 to $40 million of incremental revenue opportunity going forward. Seventh, Our relentless focus on the customer experience and our expansion plans are allowing us to take significant share and we see that continuing going forward. Finally, acquisitions will continue to play a role in our growth as we continue to build and execute our deal pipeline as part of our strategic plan. As you can see, we have many reasons to be optimistic about the future and we expect to continue the track record of success that we have demonstrated over the years. I will now turn the call over to Melanie Hart for her financial commentary.