Good morning and welcome to the Pool Corporation Third Quarter 2020 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mark Joslin, Senior Vice President and Chief Financial Officer. Please go ahead..

Thank you, Gary. Good morning, everyone, and welcome to our third quarter 2020 earnings call. I would like to remind our listeners that our discussion, comments and responses to questions today may include forward-looking statements, including management's outlook for the remainder of 2020 and future periods.

Actual results may differ materially from those discussed today. Information regarding the factors and variables that could cause actual results to differ materially from projected results is discussed in our 10-K. In addition, we may make references to non-GAAP financial 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 Arvan.

Pete?.

Jet Line Distributors, with nine locations in New York, New Jersey, Florida and Texas; and Northeastern Swimming Pool Distributors, with three locations in Eastern Canada. The new locations and talented teams will allow us to provide even better service to our valued customers going forward.

Both acquisitions were well-known for strong relationships and great customer service, and we are happy to have them as part of the POOLCORP team. We continue to be optimistic about the future, both near-term and within our five-year outlook.

As we progress through this seasonally less significant fourth quarter and head into 2021, let me provide you with a few thoughts. First, we believe that some of the COVID-inspired trends will continue to favor home improvement spending, with the pool industry being an ongoing beneficiary.

We believe that inflation will be a bit higher in 2021, around 2% to 3% compared to the 1% to 2% for 2020. Strong builder backlogs and an easier comp in the first half of next year should help us get off to a strong start as we see nice contributions from our newly acquired locations and newly opened greenfields.

While we have some expense headwinds to make up for coming out of 2020, the tailwinds provided by this year's higher-than-normal incentive compensation costs should help ease the transition.

Longer term, we expect that our historic organic revenue growth rate of 6% to 9%, driven by new construction, renovation and repair, combined with inflation, the expanding installed base, market share gains and new products, will prevail.

Of course, this is predicated upon a stable economy, normal weather patterns and adequate labor supply and other external forces. With three very successful orders behind us in 2020, I'm happy to update and narrow our full year guidance. Our new range is $8.05 to $8.35 per diluted share or $8.20 to $8.50, excluding the noncash impairment charges.

Our previous guidance was $6.90 to $7.30 or $7.05 to $7.45, excluding impairments. Thank you very much. I will now turn the call over to Mark Joslin, Senior Vice President and Chief Financial Officer, for his commentary..

Thanks, Pete. Our Q3 results are a continuation of our really remarkable year. So let me start off with a view of the financial highlights before walking through some of the details. Starting with sales for the quarter, we had a $241 million or 27% increase in sales over last year, almost all of which was organic.

In dollar terms, this was greater than the sales growth we've had in any single year over the last decade, and was about 20% more than our growth in all of 2019, which at 7% for the year, wasn't too bad.

Our Q3 operating income of $148 million was up 42% or $44 million from Q3 last year, while our operating margin in the quarter of 13% was 140 basis points better than a year ago, 300 basis points better excluding the 160 basis point drag from incentive compensation.

The contribution margin from our Q3 sales increase, which is the incremental operating margin contributed by our incremental sales, was 18.2%. Year-to-date, our operating income was $390 million, which was 14% more than our operating income for the full year of 2019.

All of these are truly outstanding achievements for our business, and I can't say enough about our field team and the remarkable job they have done to meet our customers' challenging needs, while maintaining great operating discipline and delivering these stellar results. Now for some of the details.

Looking at our operating expenses for the quarter, the big story here is performance-based compensation. As reported last quarter, and as reflected in our press release for this quarter, our results have warranted a sharp increase in performance-based employee compensation. This expense was up $20 million in the quarter and $32 million year-to-date.

We believe this variability and our employee compensation is good for both employees and investors, providing appropriate rewards for strong performance, while cushioning downside results when conditions are less favorable.

Our elevated compensation expense is well above historical levels given our exceptional performance this year and should provide a tailwind for our expense management plans next year as we expect these costs to return closer to historic norms. For the year, that should be roughly $15 million to $20 million lower than this year's level.

Excluding the increase in incentive compensation, our operating expenses would have been up a very modest 5% in both the quarter and year-to-date periods.

Considering the substantial sales growth we experienced, this reflects great expense management by our entire team, with the year-over-year savings realized in a number of areas that I detailed on our last call.

In addition to our operating expense results, we reduced interest and other expenses by $3.6 million in the quarter and $9.2 million year-to-date as we've used our cash generation to pay down debt, which was $208 million lower than this time last year.

We've also benefited from lower rates as our average interest rate for the quarter was 1.6%, down from 3.2% in Q3 last year. Moving down the P&L to the tax line, we recorded $22.6 million of ASU tax benefit, without which our tax rate would have been 24.5% for the quarter. This is in line with our lower -- usual lower Q3 tax rate.

Excluding ASU benefits, we are on track for the 25.5% rate that we would expect for the year, as I mentioned on our first call back in February.

With the ASU benefit utilized so far this year, we now estimate we'll have $1 million of ASU tax benefit for options that will expire in Q1 of next year, which I would expect to recognize between now and then, along with any pull-forward of option expenses that may otherwise expire in future years. Moving over to the balance sheet and cash flow.

Growth in our total net receivables of 19% reflects our sales growth in the quarter somewhat offset by improved collections from last year. Our DSO at the end of the quarter was 27.6 days, down from 29 days last year as the extended season has helped our customers' cash flow.

Looking at inventory, we ended Q3 with inventory levels that were essentially flat with last year, continuing to reflect the strong pace of sales and some stress on our vendors to keep up with demand. Our inventory turns calculated on a trailing four-quarter basis were 3.7 times this year, an improvement from 3.2 times a year ago.

Our inventory and receivables management, combined with our earnings growth, has led to great cash generation and ROIC. As for cash, we've generated $389 million in cash flow from operations year-to-date, which is 127% of net income and an improvement of $146 million over last year.

As mentioned, much of this cash was used to pay down debt, which resulted in leverage just above 1 times at quarter end. Our return on invested capital jumped to an all-time high of 36.4% from 29.5% last year, while our return on equity was 71%.

I should point out that we did a small share repurchase in the quarter, buying 20,000 shares at an average price of $299 per share, which is $6 million in cash. Also, just a couple of comments on our recently completed acquisitions.

Northeastern and Jet Line added a substantial 12 net new locations to our network, and we're bigger than many of the acquisitions we've made over the last decade, but also we're more seasonal, given the predominantly northern market exposures of their businesses.

We expect them to add roughly 4% to our revenue growth over the next 12 months at lower operating margins than our existing business and with appropriate seasonal weighting of their sales and profitability, including a seasonal operating loss in Q4 this year.

With that, I'll turn the call back over to our operator to begin our question-and-answer session.

Gary?.

Our first question is from David Manthey with Baird. Please go ahead..

Hi, good morning.

Can you hear me?.

Yes. Good morning. I did..

So, historically, fourth and first quarter have been dependent on when the weather turns in the seasonal markets.

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

Yes. If you think about the way a typical year plays out, as you mentioned, it would wane quickly because builders would have, for the most part, worked through the majority of their backlog.

This year, with the backlog being what it is and permits, I mean, through September, building permits pulled through September exceeded the entire number for 2019.

So, I think it's fair to suggest that the season this year will have -- will be stronger in the fourth quarter and first quarter than we would normally see as builders have plenty of work to do. Now seasonal markets are going to be affected by weather, but the year-round markets, there's still plenty of work that needs to be done.

There's still plenty of work to do. Seasonal marketers can be affected by weather, but the year-round market, there's still plenty of work that needs to be done..

Backlogs reported by the pool builders, do you think that industry pool building capacity can increase by more than we've seen, let's say, since the Great Financial Recession, which -- it's probably average, I don't know, 5,000 new pools incremental per year? Do you think we could see a little bit more than that if the pool builders themselves are feeling more confident based on the backdrop today?.

Yes. I think a couple of things to consider there. One is that weather really is the biggest factor in terms of capacity, and we've been very fortunate with great weather. So, building capacity is up if, for no other reason, just that.

But your comment about, are there additional capacity coming online? What I would say is, anecdotally, we've heard from several large homebuilders that are starting to build their own pools, simply because they can't wait for the pool builders to catch up.

So, it's hard for us to say how much capacity -- additional capacity that will represent, but it's also the first time that we've heard that in many, many years..

Okay. Thanks very much..

Thank you..

The next question is from Ryan Merkel with William Blair. Please go ahead..

Hey, guys, congrats on another stellar quarter. Good morning.

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

Yes. I guess, I'll talk about it in two parts. So, as I mentioned in my comments, California started slower as they were, again, slower coming out of the permitting and inspection restrictions that they had. And they exited the quarter and have begun the fourth quarter at a very strong rate.

I would say that the rest of the country was strong and is strong from an organic perspective..

Okay.

And then any help on the fourth quarter in terms of what we should expect for base sales growth year-over-year?.

I would say that we are still very busy, and a lot of it is going to be dependent on the weather. So, I can tell you that there is substantial demand that can result in a very, very strong quarter. A lot of that is going to have to do with how much work can get done.

I mean the same thing -- same trends of, as I mentioned, stay-at-home, school-from-home, so pools are going to be open longer where they can and they'll be used more. But hard for me to give you a number because, as you know, the fourth quarter, the biggest predictor we have there is weather.

So, if it -- if that snow that's in the Upper Midwest were to move into the Northeast and it were to get cold, that would curtail things quickly. But as I mentioned before, year-round markets are very strong..

Okay. Fair enough. Second question, 27% base business growth is just well beyond what I thought was possible. Pool maintenance is generally a stable business.

And so, my question is, I'm trying to understand why would people using their pools more and maybe upgrading and remodeling a little bit more because they're stuck at home? Why is that driving such strong growth? Retail up 28%. That's one of the strongest growth rates that I can remember.

I know you mentioned that weather was great and a bit of pent-up demand, but 27% growth is just really, really strong. Any other color you can add.

Yes. I think I mentioned a lot of it. There really isn't a silver bullet there that says, "Oh, this is it." I mean there was a lot of pent-up demand in the seasonal markets.

And because of the restrictions that we're early on, normally, those guys would have been closing down on the end of their season, and most of the pools that they had to build were already well underway. This year, there was a significant backlog. So, they kept working. We had great weather. It was very warm and dry.

If you look at Southern California, huge market, they've had great weather. It's been very hot out there. So, a lot of usage. And there was still backlog for equipment and upgrades that people were waiting on.

And as people started using their pools earlier in the year and said, "Hey, I want to remodel." Well, they have to get in line with their builders to start those.

So, what we saw was the maintenance business has been strong, but the construction business came back very strong in the third quarter as builders and -- or our customers switched from just trying to keep up and get a pool operational, so now we can start working on remodel and renovation as well..

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

Thanks..

The next question is from Anthony Lebiedzinski with Sidoti & Company. Please go ahead..

Yes, good morning, and thank you for taking the question. So, I may have missed it.

Did you guys give a sales growth number for chemical sales for the quarter?.

Yes. I think the chemical growth for the quarter was 9%..

Got it. Okay. Thank you for that. Okay. So, as far as the sales trends, obviously, as pointed out by previous people on the call, obviously, very strong.

So as far as -- how should we think about the sustainability of these trends? I mean -- and do you think there is anything to think of as far as any pull-forward of future demand? Or how should we think about that?.

I guess, here's what I would say. Really, when I look at what's in the future for us, when I consider the fact that the number of permits is up so significantly, and the fact that the labor really hasn't changed all that much yet, there is still significant demand and backlogs and people that want to get pools built.

I mean, again, anecdotally, but I know several builders that are essentially sold out for the 2021 season. I think about the trends that are driving our growth, which you can call it the stay-at-home, school-from-home, cocooning, whatever you want to call it. I don't see travel, and I would call normal life, returning anytime soon.

So, the same things that drove our business in 2020, I think, are going to drive 2021, because I don't see that the overall market dynamics are going to shift. So, labor is still constrained. So, it's not like there's unlimited labor that can just put a bunch of pools in.

Having said that, with an elevated demand for new pools and new pool construction being up, remember, for us, it's not over when the pool is built. That just happens to be another pool, a customer for life, that has to be maintained. So, I mean we're very encouraged by what we see coming down the road..

Got it. Okay.

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

I can tell you the latest number I've heard is up to 100,000 new pools, and that they're coming off of 75,000 last year. I would tell you, my number is probably between 90,000 and 100,000 new pools, depending again on how long the weather holds so that they can continue to work in the seasonal markets.

I mean I was speaking to dealers in the seasonal markets in the last few weeks and their backlogs are huge, and they're hoping to get as many of those pools as they can in the ground before the snow flies. And whatever they don't get in the ground, they'll start as soon as they can in the first half of next year.

And again, in the whole, the number of pools is really going to be a function of weather, because demand, I think, will remain pretty consistent..

Got it. Okay. Thank you for that. And I guess last question.

As far as the margin impact for the increased volume incentives, Mark, can you quantify how much that was?.

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

Good. Got it. All right. Thank you, and best of luck..

Thanks..

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

Hey, good morning. Mark, I had a question for you.

If that's all right?.

Good..

So, it's actually for anybody who's interested. But -- so it sounds like you guys are fairly optimistic, at least for the first half of next year or based on backlogs, et cetera. And then, Mark, I think you said you're going to have a little bit higher price increase than normal.

And I wonder if that means there's an opportunity to perhaps front-end load some inventory and have some impact on gross margins in 2021?.

Yes. What we're expecting, as you mentioned, price is really inflation. So, inflation looks to be a little bit higher next year, 2% to 3% versus the 1% to 2% normal. And we typically try to buy a little bit more when that happens. But vendors are struggling a bit to stay up with demand.

So, it's not clear that we'll have as much opportunity as we might, otherwise, like to benefit from that..

Okay. All right. Good point. And then maybe back to Pete.

Is it possible, maybe, I guess, it's even hard to get visibility, but what do you think new build versus retrofit and upgrade breakdown looks like in terms of growth?.

It's very hard to tell. I don't know that we have good visibility on how much of it is newbuild and remodel. I don't think it's going to be much different than the historic norms, given the installed base and the aging of the remodel.

I just think the more time people are spending in pools, if you have a pool and it's old or aging and now, you're using it a lot more, those folks are calling the builders and wanting to remodel. And then there's, obviously, a bunch of new people trying to get into a pool.

So, it's an interesting question, but I don't know that we have a way to tease apart how much of that business is remodel versus new construction..

Okay. All right. Great. And then maybe my final one, and I'll pass it on. Just again, I guess, everybody is sort of stunned at the growth numbers here.

But how much do you think share gains have played into this? Or maybe another way of asking it, are there certain niches where you've done really well on share? I mean Europe -- was Europe up 45% overall? Or just anything to call out on share, I guess..

Yes. I think clearly, it will be fair to say that we picked up some share in certain markets. I wouldn't be so bold as to say we gained a lot of share in every market, but I think we certainly gained share. It's still a little bit too soon to tell, the year is not over.

At the end of the year, I think we'll have a better idea based on what actually gets built. But I think we're very comfortable saying that we picked up some share this year. And I think that's a function of the service that we provided and that we had product..

Thank you, guys..

Yup..

Thank you..

The next question is from Ken Zener with KeyBanc. Please go ahead..

Mark, Peter, be bold. That's what I would suggest to you. So, I am getting my pool read on, so it's fortunate that you're out here in the concrete demo as we speak. But this was delayed for March, and I'm out in California. So, there's a couple of different angles that I want to ask you, and I apologize in advance that it's going to be a little ranging.

But I clearly think you're getting share because, for instance, yesterday, we were just getting hardscapes because your MPT has a very good supply chain compared to one of your largest competitors, MSI, which goes through distribution out here.

Could you talk to, Pete, given your distribution background, what share gains and perhaps, opportunities you're seeing as your competitors' supply chains aren't as perhaps well-managed as yours? And specifically, at hardscapes because that must be a takeaway from your data that you're talking about internally. That's my first question..

Okay. Let me try and answer that. The -- when I think about share gains, specifically, in building materials and hardscape, I mean, not many of our competitors are full line in terms of having everything that the pool builder remodeler needs. So, we're unique in that fashion, and that we have such a broad range, number one.

Number two, we have a very broad network and deep inventories, which allows us to keep up with demand much better than others. Having said that, all of the manufacturers are stretched, at this point, in terms of capacity.

So, you can have a great supply chain, but if the ultimate demand outpaces what the collective output is of the plans, then you're going to have -- you're going to struggle. So, I would tell you, in certain parts of the country, we did great. And in other parts of the country, we had builders that wanted product sooner than we can get.

But by and large, better than most..

Okay. Mark, you outlined a few details that I'm just trying to do my math on here regarding FY 2021, which had no explicit guidance. However, you are giving us the beginning of a growth ladder. So, inflation, 2% to 3%, you said. I heard you say M&A roughly 4%, that's on a 12-month basis. So, it's more northern, I believe, is what you said.

So, the bulk of that 4% 12-month growth will occur in FY 2021.

Is that accurate?.

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

Largely two and 3, exactly..

Yes. Greater growth in the kind of April through September time period..

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

I would say a little -- yes, I mean, in the 5% to 7% range..

Okay. Now you talk -- you explicitly called out comp. Congratulations, well done this year. Being lower next year of $15 million to $20 million, all else equal, is that accurate? Because that's about $0.20 there.

I mean is that fair?.

Well, basically what I was saying, Ken, was this year, our operating costs have been extraordinarily low, given the revenue growth. And we probably will have a little bit of catch-up on that next year as kind of base operating cost.

So, a little bit higher growth than normal, which will be offset largely by the higher incentive comp that we've had this year. So, the $15 million to $20 million reference that I gave was just on incentive costs. That is the amount of, let's call it, higher-than-average over the last several years, incentive costs this year.

So, that will offset what I would expect to be kind of higher operating costs, otherwise, given that we have some makeup to do in our branches for delayed hirings and other things that they've done this year..

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

Would you disagree with that?.

I wouldn't disagree, but I also say this is October. We, typically, don't get specific on our guidance until we....

Yes. No, I understand. But just generally speaking, because it's very robust..

Right..

Due to those factors, you isolated figuratively..

Okay..

Very well. Thank you very much for your time..

Right. Thank you..

The next question is from Garik Shmois with Loop Capital Markets. Please go ahead..

Yes, thanks. Congrats on the quarter. Just on the early buys.

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

Yes. I think, for the most part, we'll be fine next year. There's absolutely going to be an early buy. Typically, they're -- the manufacturers are already working on the early buy. But because the strength of the 2020 season, many of them are still shipping product. But as soon as we get it, we'll turn around and ship it out the door.

But, obviously, there is a natural seasonal wane in demand, which will allow the manufacturers to catch back up, and they'll basically start shipping the early buy. So, for the most part, I don't think there'll be a problem with material availability next year. I expect to start the season with a full warehouse, so to speak..

Okay, thanks. And I had a question just on -- a follow-up on some of the market share questions that came earlier.

Do you think you're seeing any change in behavior by pool owners? If they're maybe previously, somebody who had performed a lot of the maintenance work themselves? Are they starting to outsource the work to pool professionals, whether it's a function of COVID restrictions or maybe just a way to devote their time elsewhere? Do you think that's a change at all? Or are we overthinking that perhaps?.

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

Okay. And then the last question, just around the comments around builders looking to do more of the pool construction themselves.

Is this something that you've seen in prior up cycles that they normally take the task of pool construction, now that we're approaching 100,000 pools? I mean, historically, that was the average, if not, a little bit below the long-term average.

So, as we move more towards a historical normal level of pool activity, should we expect the builders to take on some of the construction activity more so than they've had to do over the last 10 years?.

I think it's supplemental capacity for certain builders, right? I think the trades are essentially the same, right? There's plumbing, there's electrician, and there's masons involved in building a pool.

So, I think that, historically, some of the homebuilders were doing their own and then they outsourced it when there was essentially capacity to do that, and they focused on the home itself. Now, with limited capacity to get pools built, they want to complete the home and turn it over for the homeowner.

So, some of them have said, "We've done it before, and we'll do it again.".

Great. Helpful. Thank you..

Thank you..

The next question is from Alex Maroccia with Berenberg. Please go ahead..

First, I have a question for Mark on margins. Last quarter, we saw lower gross margin due to the product mix being heavier towards higher ticket items, but you also mentioned that we would see stable gross margins in the back half of the year.

Obviously, we had that tick up this quarter, but we had similar strength in some of those lower-margin products.

So, how should we think about the mix impact in 2021 if new construction and remodel remains strong, but you get a positive offset from rebates?.

Yes. Well, by the way, I consider 20 basis points to be pretty stable. That's a minor change. We're going to have some natural fluctuations in our business, every year, quarter-over-quarter. So, that's 20, 30 basis points up or down either way. Relatively flat for the year is kind of our expectations over time.

And I think that will be the same for next year where we're coming off of high volumes this year, we're looking for good growth in the business next year, maybe not as significant, but continuing to see sales of these bigger ticket, lower-margin products, which provide a little bit of product mix down.

So, expectation, again, relatively flat next year. Could be some ups and downs by quarter, but not a big change from this year..

All right. That's helpful. And then secondly, recently, we've had some of these hurricanes hit your Gulf markets, and I hope your employees have been doing well.

But in late Q3 and early Q4, are you able to give us a sense of what that impact was on sales in the bottom line? And then how it will flow through in the coming quarters?.

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

Okay. I missed that. I appreciate everything..

Yes. Thank you. Thanks.

[Operator Instructions] The next question is a follow-up from Stephen Volkmann with Jefferies. Please go ahead. Mr. Volkmann, your line is open on our end..

Yes. It helps if I'm not muted. Sorry about that. Thanks for taking the follow-up. Just curious, the discussions around some homebuilders starting to maybe do some of their own pool work.

Would you still be a supplier to that project? Or would -- if they're doing multiples, do they have other options?.

No. I mean, that business is still going to flow through us. I mean the inventory that we have is specific to the pool industry. That's not things that the rest of their trades are typically going to have. I mean can they buy rebar and PVC pipe from somebody else? Yes.

Can they get the specialty fittings and everything else that's required and equipment to build a pool? No..

Got it. And my actual follow-up was really more around logistics. So, we're seeing quite a bit of inflation in logistics markets, but I know you guys have had some focus on managing that.

Just any thoughts about that going forward into 2021?.

Yes. I mean, remember, from a transaction perspective, 70% of our transactions take place over-the-counter. So, we benefit in situations like this. We are seeing the same inflation that others are seeing as it relates to transportation costs.

But you also know that we've been working on, as part of our capacity, creation initiatives, stretching the capacity we have and getting more out of our existing fleet by better routing market-based transportation and such that we've been able to, all things considered, bring to bear to help control those costs..

So, net-net kind of stable going forward? Or do you get some benefit?.

I mean if -- I think we saw a slight improvement in terms of a percentage of sales this year. And I would think that, that would consider -- that would continue into next year, unless there is a step function increase in transportation rates -- external transportation rates. Because remember, a lot of our deliveries happen on our own trucks as well.

That's the vast majority of our expenses..

Got it. Thank you..

Yes..

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

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

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