Pool Corporation (POOL) Earnings Call Transcript & Summary

Okay. Good afternoon, everyone, and welcome to the POOLCORP presentation. I'm Ryan Merkel from William Blair's research department. Before we begin, I need to remind you that a complete list of disclosures and conflicts of interest is available on our website. With us today is Pete Arvan, President and CEO. We also have Mark Joslin, Senior Vice President and CFO. POOLCORP is the #1 distributor of swimming pool and backyard bidding products, operating in over 375 locations in North America, Europe and Australia. So let me throw it to Pete. They're going to go through the slide deck for 10 or 15 minutes, and then we'll open it up to Q&A.

Great. Thank you, Ryan, and good morning, and good afternoon to everyone on the phone. Mark and I are going to walk you through a very short slide deck, and I will do the first part of the presentation, then Mark will join in for the back half of the presentation. And then, I guess, we're going to do some Q&A afterwards. Before we get started, though, I must remind everybody that what we will be talking about are considered forward-looking statements. I'm not going to read that whole paragraph that is in front of you. But keep in mind that actual results may differ materially from those factors, blah, blah, blah. And everything that's in the statement, as I said, I won't read it to you, but just keep that in mind. So Mark, if you will go ahead. The first page of the presentation we will talk about is -- I'm starting on Page 3. And on this page, what I want to do is frame up for you the industry and talk a little bit about POOLCORP. Thank you, Mark. So from an industry perspective, the industry has a high nondiscretionary recurring revenue stream that's driven by the 5.5 million in-ground pools and the 3 million aboveground pools that are in North America. The industry is highly fragmented. It's also a niche industry. It's highly specialized. It's not one that easily bolts on to other distribution businesses. And if you think about the number of in-ground pools that we see across North America compared to the number of single-family homes, you would see that the long-term growth characteristics are very favorable. Recently, the stay-at-home trend supports demand for pool and pool-related outdoor living products. So we feel good about that. And now if I pivot to talk specifically about POOLCORP, the way to think about us is we are a value-added distribution business that is focused on high customer retention and providing unparalleled service for our many customers across North America and Europe. The business has a history of tremendous focus on execution and discipline, which drives the high margins and operating leverage that comes along with the strong organic growth that the company has generated a very strong track record on. And if you look at our financial performance over time and the shareholder returns, I would say that they are nothing short of exceptional. Mark? Go ahead, please. Page 4, back 1?

Sorry.

Here we go. So as you think about our network, so for -- if you think about POOLCORP in total, 85% of our business is the North American Pool business. 9% of it is the Horizon irrigation business that we also operate, and about 6% of our revenues come from outside of North America, in Europe and in Australia. The network today stands at about 378 locations. Obviously, the vast majority of those being in North America. The Horizon business by itself today constitutes 67 locations. When we talk about value-added distribution, the thing to keep in mind is when we look at the overall market potential, right, 70% of the products in this market flow through the wholesale trade business, which makes it somewhat unique. There we sit between 2,200 manufacturers and 120,000 customers. When you think about what we do for manufacturers and what we do for customers, they're a bit unique. So from a manufacturer's perspective, we're virtually everybody's largest customer selling into this space, but we are also their most efficient channel to market and their most efficient sales. So rather than them trying to figure out how to serve many, many different locations or customer direct, since the majority of this business flows through wholesale trade distribution and when you have a customer the size that POOLCORP is, we tend to be a very efficient sale for them. We take about 200,000 products to market. We help them create demand for those products. We provide product training, supply chain and logistics support. And for our customers, one of the things that we do that makes -- many things that make us unique. Certainly, we have the local availability with the 378 locations. Our B2B presence, our POOL360 presence is a great productivity tool for us, frankly, and for our customers as well. Our 378 locations, as I mentioned, are strategically located so that we provide the best service for our customers' convenience. So if you look at an individual market, we may -- we may have several facilities in most of the major markets, so that we have a location that is nearby where our customers are working so that they spend less time on the road. And why that's important is that about 70% of our transactions actually happen at the counter, which is also somewhat unique for us. We have a field-based sales force. Every branch or sales center that we have has outside salespeople, and counter salespeople that are totally dedicated to helping our customers find what they need and get them back out to the field and working. We have unique retail support programs that help our independent retail customers continue to grow. We have marketing programs. We have technology programs, like our NPT backyard app, which our dealers can use to help get a homeowner started in envisioning their backyard and creating the pool of their dreams and then turning that over -- that picture over to the builder so that they can get a quote to get that pool built for them. And of course, we do the other things that distributors do, and that's provide credit. About 60% of our business is around the maintenance and repair of the 5.5 million in-ground pools. About 25 -- and that's essentially a nondiscretionary business. The 3 things that have to happen for a pool is moving the water, filter the water and treat the water, and that has to happen regardless of whether you are using the pool or not. About 25% of our business today is in the renovation and remodel of the installed base. Pools have a finite life, the equipment and the interior of the pool and the surfaces on the pool have a finite life, so periodically they have to be refreshed and maintained. And then about only 15% of our business is actually tied to new pool construction, and that's down from its peak when new pool construction made up a much larger portion of our sales. And for context, at one time, new pool construction in North America was over 200,000 units. And last year, it was about 78,000 units. So as the -- we have grown, so has our percentage of nondiscretionary revenue. Our competitive advantages are the strategic market reach and penetration that we have. Certainly, our network of sales centers is unmatched. We have a very broad product selection in our branches that is focused on making sure we have the right product for the customer. We have a tremendous focus on making sure that specifically during the very busy season that we don't stock out, that we have the quantities that they need. We also have a private label and exclusive brand program, which makes up about 25% of our margin and revenue, and that will continue to grow as the business continues to grow. Also unique for us in the industry, given our size and scale, is our global reach from a sourcing and supply chain operation and the flexibility that goes along with that with our CSLs, which allows us to bring in containers from overseas, break those down and redistribute those directly to our locations so that it is -- the product is in market available for our customers. Our capital strength is second to none, and our capital allocation model is time-tested. It is -- we have -- we're very fortunate in the business, generates a lot of cash, which has allowed us to reinvest in our business. It allows us to remain active in the acquisition space. We pay a nice dividend. And we also continue to have share buybacks as part of our capital allocation model. And all of that is possible because of the performance-driven culture that POOLCORP has and a tremendous focus on return on invested capital. So now I'll turn the call over -- or the presentation over to Mark, who will walk you through the next couple of pages.

Thanks, Pete. Hopefully, when you look at this particular slide, which is our financial performance over the last 5, 6 years, one word should come to mind, which was on the bottom of Pete's last slide, and that should be execution. And a few more words, what you're looking at is steady, consistent performance over time. So from a sales perspective, over the last 5 years, 7.5% compound growth in sales, almost all of which is organic. We take that sales and we turn it into higher operating income growth by focusing on operating margin and improving that consistently over time. 230 basis points of improvement over the last 5 years in our operating margin. And then adjusted EBITDA is what results from doing a good job on sales and operating margin improvement, with a 12.5% gross adjusted EBITDA growth over the last 5 years. What does that mean for shareholders? That is what this slide shows, which is my favorite slide in the whole deck. Looking at it graphically, shareholder return over time. Cool compared to the S&P MidCap 400 and the S&P 500. This is what it looks like graphically speaking. So a pretty good performance difference between us and the benchmarks. And then if you look at it in dollars, just a little fact is that if you invested $10,000 in our IPO in 1995, 24 years later, you'd have an investment worth about $3 million. So again, significant improvement in performance over time and one that provides exceptional return for shareholders. This next slide is a little complicated, but has a fairly simple message. And if you look at our business over time, 2007 compared to 2020, we're bigger. But what we do hasn't materially changed. What has changed a little bit is the mix of our business. And we picked 2007. It was the last pre-recession period. And what you see is a lower amount of nondiscretionary business, which we described here as North American pool maintenance. 43% of our total business in 2007 compared to the beginning of this year, 50% of nondiscretionary business is pool maintenance. And then the most discretionary part of our business is new pool construction. That is down as a percentage of our total business from 22% down to 15%. What that means for investors is lower risk and, hopefully, higher returns. We started with a very strong balance sheet coming into the pandemic period here, and I think there's no better way to demonstrate confidence in our balance sheet than the dividend increase that we announced at the end of April and the fact that we are going to continue to repurchase shares opportunistically over time. And so we're very committed to returning cash to shareholders. And even in this uncertain economic environment, we feel we have the financial strength and the flexibility to do that. Looking at what that means longer term, what does all this current environment mean to our long-term expectations, and the outlook is no different. So our long-term thesis remains intact, 6% to 8% top line growth, stable gross profit margins by increasing our operating margins and buying back shares. We expect to have earnings per share growth in the mid-teens. And that is similar to what we have done historically. So no real difference going forward than what we've done in the past. For 2020, our expectations are evolving. We have here our guidance that we issued back in April. We've since said that second quarter has been stronger than what we noted back in April. And so we'll be updating our guidance when we get to our earnings results for the second quarter in July. So in summary, we have a great balance sheet, strong cash generation, high recurring revenue. All of that mitigates risk for investors. We have sustainable competitive advantages. As Pete walked through, we have a very experienced team. We think the stay-at-home trends that we're experiencing now support demand for pool and related products. And we believe we can continue to generate consistent exceptional investment performance over time. So with that, I will turn it back to Ryan. Ryan, can you start us with questions?

Absolutely. Thanks for that intro. So I want to start with sort of the current environment. From what I'm hearing, the pool business is booming. People are stuck at home, they're not going on vacation, public pools are closed for the most part. Just give us an update on what you're seeing right now.

Yes. We are fortunate in that with the stay-at-home orders came a great deal of interest in the backyard. With kids being out of school, certainly, that prompted pools to open sooner than they would normally have. So it has pulled forward some of the normal maintenance business that we would see happening over time as people opened their pools. And it's also changed our mix a little bit in the recent past as it relates to big-ticket item purchases. Things like heaters that may have trickled in over time now that people -- everybody open their pool all at once, everybody wanted the pool fixed. So it has led to an increase in business much more than what we had originally talked about when we did our earnings release. And that's on the residential side. On the commercial side, as we mentioned, we still see continued headwinds in that area as the fate of public pools at this point. And even if the pool opens, the amount of people that will actually go to those is a bit up in the air at this time. So our residential pool business is strong. The builders are reporting very active phones, lots of leads, lots of requests to get the pools opened, serviced and moving. So we feel good about that.

Yes. From what I'm hearing, contractors are seeing 4x to 5x inbound calls for new pools than they've seen at any point in the past. So what's your view of new in-ground pool construction this year? And could there be a long tail? Could backlogs go up next year pretty quickly as well?

Yes. I think so, Ryan. The thing to consider is that the biggest single limiting factor, even before this pandemic, is the fact that labor is tight. And labor in the pool industry was tight last year, it was tight going into this year. So before the pandemic demand for new pool construction was strong, but it was really limited by the 2 factors that have historically limited the industry. One is labor and the other is weather. So when you compound the fact that there -- we had more demand than there has been labor to build the new pools, with the fact that sometimes weather gets in the way and it cuts down on the number of buildable days, it really does -- it basically just keeps the industry pressurized, is the way I like to look at it. And I think 2020 is no exception. Now our builders are reporting that the number of inquiries and leads that they have for new pools are higher. I haven't heard the number broadly. I've heard the number you mentioned a couple of times. I haven't heard it quite that high across the country, but certainly, it's -- leads are very strong. And I think the builders are all thinking that this season will be good, and they will enter next season with a nice backlog.

And then something that CDC said that COVID-19 cannot survive in properly treated water. So you may have hit on this already, but are you seeing more chemical sales than usual because of this?

I think the chemical sales kind of go in line with pool usage, right? So the more you use a pool, then the more chemicals it's going to take. And weather also has an impact on that, too. If it rains, you're going to need chemicals. If you have a lot of sunshine, then that's going to burn off chlorine. It really -- chemicals really are a function of just the use and the weather more than anything else. So it's not like because of COVID, people are putting more chemicals in there. I think chemical sales are just being driven by more use of the pool in general.

Got it. Okay. I know one of the trends in the pool industry is smaller pools, but more personalized pools. So what does this mean for your business?

So it's actually -- that's a really good question, because pools over time have changed. So it used to be that a pool was just a big vessel in the backyard with a tile line around it and maybe a ribbon of concrete around the outside edge, and now pools have become more elaborate, like the one in the picture that you're looking at. There are so many features that are available for a pool that allows a homeowner to customize their pool. There's fire features, there's water features, there's tanning ledges, there's spas, hot tubs. And then decking around the pool is also becoming much more popular. If you talk to any builder today about the amount of decking in relation to water that they're putting in pools today versus what they were, even as recent as 5 years ago, they would tell you that the amount of decking that people want, because they want that outdoor living experience, right? They want the fire pit, they want the outdoor kitchen that goes along with the investment in the backyard like that. And all of that is good for us because that's simply -- it's more products that we offer, part of our building material product offering and our NPT product offering, where we bring those products to market. The other thing that's driving the pool is technology. And as we have spoken in the past, technology has not always been a big player on the pool pad. I mean most pools today, there's 5.5 million in-ground pools, about 3 million of those operate on a mechanical time clock. The industry has been late, frankly, I believe, in bringing technology to the pool owner. And now, all the manufacturers are coming out with technology that makes the pool more convenient and easier to own, and all of that represents incremental opportunity to us. Things like variable speed pumps also make pools more energy efficient, and again, that just simply creates more opportunity for us and in the industry.

Could you give some examples of the connected pool and some of the products you sell? And I assume those are higher ASP products.

Yes. I mean, if you think about a mechanical time clock, a mechanical time clock is an item that costs -- it's about, let's call it a $125 item. And that has been replaced. The things -- so it basically means you set the timer for when your pool would turn on and when your pool would turn off. That's now -- can be replaced with a smartphone application that allows you to turn your pool on or off, turn the heater on or off, change the temperature, change the lights. And that, on the low end, can be a $600 installation if you simply want basic function, all the way up to a several-thousand-dollar application if you want to integrate all of the things in your backyard, including sprinkler systems and light -- outdoor lighting and things that all can be run on similar apps.

Okay. What's been the feedback on the new customer app that allows homeowners to visualize the pool in their backyard? Has this helped conversion rates? Or is it a little early?

It's a little early to tell about conversion rates. I can tell you that the number of downloads that we have, we saw a big surge in downloads towards the end of March and early April as people were starting to spend more time in their backyard and they realize, from the comfort of their own home, they basically can design the pool of their dreams or remodel the pool that they have. It's actually -- it's an augmented reality app. That's available on iTunes and for Android, which allows you basically, through a download, you can design, you pick a pool shape, you pick the different finishes you want. You don't want this tile, you take that tile out, put this one in. You can take it and you can actually place it through the augmented reality technology in your yard, turn it, spin it, move it to see exactly what the finished product would look like. And we think that the feedback from our builders, especially during the early stages of the stay-at-home orders, where our builders couldn't get out to see customers, it allowed customers to download that and get a head start on things that they may want to do as far as a backyard project. So early to tell on what the conversion rate is because that's a process that they design it, they have to get it quoted, they have to get it permitted before we would start to see direct revenue from that. But the feedback from the dealers and from the end users that have used it has been very positive.

Going back to the last call, one of the risks that you mentioned was smaller competitors trying to monetize inventory and how that might impact pricing in the second half of the year.

Yes.

Is it fair to say, given the resurgence in pool interest that, that's probably less of a risk today?

Yes, that's right. As everybody is busy right now because all of the pool owners want to get their pool opened and repaired or built, so everybody is busy. So the one fear that we had that if there was a downturn and people would be -- distributors would be cash-strapped that they would try and liquidate that. That has turned out not to be a concern as of now.

That's good news. Okay. And then what percent of new pools are saltwater pools today? And I remember, that was a risk going back 10 years ago, and I think that, that really didn't catch on as fast as we originally thought. Why is that exactly?

So from a percentage basis, I think it's about half. It really does vary by area. I mean, there's merits to both. I mean, I know builders that won't put a saltwater pool and I know builders that only put in saltwater pools. So there's a bit of a misnomer that says, "I have a saltwater pool. There's no chlorine in my pool." But the reality is that a saltwater pool, actually, the chlorine comes from the salt in your pool. So there's certainly benefits to both. But I really think it comes down to a dealer preference, number one, that's steering the customer. But as far as mix goes, I would tell you, I think it's about 50-50.

Okay. And then we have, I think, just 2 minutes left. So just hit on how can Pool benefit in the post-COVID world? Population growth to the South, more outdoor investment, shift to single-family from apartments, migration out of the city. I would think these would be supportive for your business.

I think you are doing a great job. I'd just let you keep going, and you keep the list going. All of those things are good for POOLCORP and for our industry. I mean, look, we're in a very unique industry, where we allow people to take a normal backyard and turn it into to a staycation. I think if you look at the recent trends, where people's concerned about travel and being in resorts or cruise ships or international travel these days is something that plays right into the reason why, if you were contemplating having a pool, that maybe now is the time to build a pool. If you look at the demographics, if there continues to be that southern migration, with the southern migration becomes an extended swimming pool season. And sometimes the people up north, say, "Well our swimming season is so short, and I don't know if I want to pool." But then when you move south, you realize you can use the pool for -- in some areas, year round, and it becomes a much easier investment to justify. I believe that the -- just the whole outdoor -- healthy outdoor living is also a trend that will continue and again, plays into our strength. And I don't think that anybody is better positioned to capitalize on that than POOLCORP. I think we've got a great network of very dedicated people. We've got great supplier relationships. I think we're a great channel to market for our suppliers. It's very collaborative, and I think in their attempt to bring those new products to market to eliminate the barriers of pool ownership. It used to be that some people said, "I'd like a pool, but owning a pool is really difficult. And that's a pain in the neck." And now quite frankly, with the technologies that's available, the issues on why you might not have wanted a pool in the past are somewhat mitigated by the advent of an introduction of technology. And again, we're in a great position to benefit from those products being brought to market.

Great. Great to hear. Pete, Mark, thanks so much for your time. Thanks, everyone, for joining the call today. We'll talk to you soon.

Thank you, Ryan.

Thank you, Ryan.