Good day and welcome to the Pool Corporation Second Quarter 2021 Conference Call. All participants will be in a 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 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 Arvan 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 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've seen over the years kick into overdrive as people realize that investing in their own backyard, they could enjoy a family, friendly, safe, healthy outdoor living experience right at home.

Demand for inground 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 led 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 earnings -- 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 is 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 of 33%, Florida sales increased 35%, Texas saw sales declined by 30%, and Arizona sales increased 24% for the quarter. Overall, our year round base business markets increased by 31%, while the season the 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% of 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 increased by 28% in the quarter, pricing represented 19% of the increase, while volume accounted for 9%.

Persistent shortages in trichlor and dichlor have driven increased demand for alternatives such as liquid chlorine and calcium hypochlorite, which most recently have seen supply interruptions of their own in elevated stockouts across our network as teams grapple with industry shortages.

In most cases, this results in intermittent stockouts 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 Materials 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 acquisition.

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-constraint 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 has been driven by the team's execution and a relentless focus on capacity creation activity. POOL360 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 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, single family -- 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 inground pool installations were 96,000 pools last year and are forecasted to grow to more than 110,000 pools this year as our business -- or as our builders are reporting stronger backlogs that continue into 2022. Each new pool adds to the maintenance and repair market which going forward which by far is the largest part of our industry.

Fifth, inflation, which is higher than normal this year, will likely continue with elevated levels into 2022. Sixth, the new variable speed pump legislation that goes into effect this month will add $30 million 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..

I am very pleased to be joining you all this morning. I will cover some of the details of our second quarter financial results. As Pete has provided an overview of our sales activity in the quarter, I will begin my commentary with some additional discussions on gross margins.

Gross margins increased 170 basis points during the quarter with base business gross margin of 200 basis points. These increases exceeded the expectations expressed on our first quarter call.

First, we saw benefits from our supply chain initiatives, which included a focus on accelerating purchases ahead of vendor price increases to limit stock outs were possible in today's tight supply conditions. Next, with our increased purchase volumes, we also expect improvements in the rate earned under our vendor progress.

Additionally, we realized some improvements in gross margin during the 2021 second quarter from product mix changes as a larger portion of our sales was comprised of lower margin, bigger ticket items in prior year. Lastly, customer mix changes also had a positive impact on margins for the quarter.

Moving down the P&L to expenses, our consolidated quarter-to-date operating expenses were up 27% with base business operating expenses increasing 18% over prior year on base business sales growth of 32%. Base business operating expenses were down 140 basis points as a percentage of sales.

Variable expenses such as those related to personnel and freight cost that are necessary to serve our increased business activity were very well managed by the team during the quarter. Included in these expenses is our performance based compensation.

We recorded an additional $7 million over prior year during the quarter and $19 million more year-to-date, given our exceptionally strong performance. Operating margin grew 280 basis points to 18.9% for the quarter. The five acquisitions added since second quarter of last year have performed well contributing $11 million -- or 11% operating margin.

The operating margin contribution from these acquisitions was below our base business operating margins and like underperforming sales centers and new locations of which we opened nine new locations in the past 12 months, represent additional opportunity for operating income growth over time.

Interest expense declined from the same time last year as lower debt levels resulted in lower overall borrowing costs. Our average debt for second quarter 2021 was $376.8 million compared to the same period last year of $493.4 million. Our recurring tax rate continues to be around 25% on pretax earnings, excuse me.

We realized an additional ASU tax benefit $7.7 million or $0.19 per share from stock option exercises that occurred during the quarter, bringing the reported rate to 22.9% for the quarter. I'll now move to our balance sheet and cash flows.

Our growth in current assets over last year reflects an increase in total net receivables of 29%, including the effect of acquisitions made after the second quarter of last year. This is driven by sales growth in the quarter offset by strong collections activity.

We realize a reduction in DSO or days sales outstanding to 25.8 days, down from 28.5 days during the same quarter last year. Inventories were up in total 42% or 36% not considering the inventories we added for acquisitions.

We continue to leverage our capital strength and sourcing scale to add inventories to support the demand increases and maintain customer service levels. Inventory turns on a trailing four-quarter basis increase to 4.1 from 3.5 in second quarter of 2020. Cash provided by operations through the end of June was $187.2 million.

This is down $33.9 million from the same quarter last year, primarily due to increased inventory investments. Prior year also benefited from deferred tax payments that shifted from June to July in 2020 as part of the COVID relief package.

Cash flows for the year are expected to remain strong, but we may continue to prioritize investments in inventory over cash generation as we believe our strong inventory position has allowed us to gain share. For the year, we've also been focused on returning excess cash to shareholders.

In May, the Board increased the authorization of share buybacks by $450 million. During the quarter we spent $19 million in addition to the $66 million repurchase in first floor, returning a total of $85 million to shareholders year-to-date.

These repurchases resulted in total shares acquired of almost 243,000 for an average price paid of $348, leaving $542 million on our repurchase authority. We also increase the quarterly dividend rate during the quarter by 38%.

Our debt levels remain lower than our targeted range, with a trailing 12 month ratio of point five at quarter end, giving us substantial capacity and flexibility to support our businesses and execute on capital investment opportunities. I'll now turn the call over to Mark to provide comments on our expectations for the remainder of the year..

Thank you, Melanie. I'll start my comments today with some perspective on our second quarter financial results. For each of the last two quarters, I've alluded to our results looking like the work of some sort of modern day Renaissance master.

In hindsight, I think I should have saved my superlatives for this Q2 results, which are the real work of the master. At the peak of the season, when demand is greatest, our customers' needs our most urgent and our supply chain is the most stressed.

Delivering the kind of results we achieve this quarter is the embodiment of a team effort that is truly exceptional and demonstrates an incredibly high level of execution. Our second quarter was a combination of a frenetic year in the pool industry that really showcased the talent of our team as well as the value of our business model.

Looking back over the last year, our trailing 12 months of financial highlights included 40% revenue growth and cumulative sales of $4.8 billion, 84 basis points of gross margin expansion, and 350 basis points of operating margin expansion, while delivering a return on invested capital of 50%. All remarkable results.

In addition, we had a balanced deployment of capital over this 12-month period, with $125 million in capital used to acquire five companies and nearly $200 million returned to shareholders evenly split between dividends and share repurchases. And we invested $26 million in PP&E, primarily to support investments in technology and new locations.

We also invested just over $200 million in working capital in 2021 ahead of our seasonal business peak to be in the best position possible to serve our customers throughout our supply constrained environment.

As a matter of notes, our sales growth over the last year of $1.4 billion was just a bit more than our total sales when I joined the company back in 2004. Clearly, our marketplace has evolved at a rapid pace over the course of the last year and has our performance and our outlook for the future, which continues to be very positive.

At this point, I'll share some insights into the factors included in our guidance range. Using the midpoint of our new guidance range as a measuring stick and comparing the new range to the old, you can see that we raised our expectations by 15% for the year.

This is a result of three factors; better overall Q2 performance than expected with higher sales growth and bigger gross margin gains than we had factored into our previous range; expectations for somewhat higher sales growth and better gross margin performance for the remainder of the year; and lastly, the $7.7 million or $0.19 share benefit from our ASU tax gain in second quarter that was not in our previous range.

Our previous range had anticipated sales growth for the year in excess of 20%. Our new range which of course has Q2 baked into it anticipate sales growth in excess of 25% for the year with greater growth in Q3 than in Q4 as path become increasingly difficult.

As a reminder, our Q3 2020 sales growth was 27%, while Q4 2020 sales growth was 44%, which was aided by a very favorable weather conditions and include acquisitions which will be lapped this year.

While we assume normal weather for the rest of the year in our guidance range, favorable fourth quarter whether this year could see us reach a milestone of $5 billion in revenue for the full year.

As I noted, our gross margin expectations for the remainder of the year have also improved with year-over-year gross margin gains now anticipated in both the third and fourth quarters, though much less improvement in the fourth quarter given the 70 basis points of margin pickup we recorded in Q4 of 2020.

Despite inflationary pressures on our operating costs and growth in certain discretionary business expenses that have been pared back during the pandemic, we expect to continue to manage expense as well, and could achieve as much as 250 to 300 basis points operating margin improvement in 2021 over 2020 with the majority of addition gains, excuse me -- the majority of additional gains for the back half of the year coming in Q3.

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

We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from David Manthey with Baird. Please go ahead..

All right. Thank you. Good morning, everyone. .

Good morning..

Yes -- and Mark, congratulations. What a run. That's been fantastic. Good luck..

Yes. Thank you, David..

Yes. So, as far as the quarter goes here, I think the gross margin is good place to start. This quarter, you can clearly jumped outside of the typical band for a second quarter. And you sort of implied that the back half would continue to be higher year-on-year.

But I guess if I look at the 160 basis points better than the five-year average, assuming no major fall off in business, when you look at that sort of overage, how much of that do you think is structural versus transitory assuming the same level of business activity?.

I'll take that Dave. I guess, structural versus transitory, that's interesting way I guess the phrasing it. I think, first of all, when you look at the margin gains in the second quarter, as Melanie kind of went through them, we got some benefit from last year.

A little bit of margin pressure from the bigger tickets, lower margin sales that we had -- that we didn't have in the second quarter this year and frankly, we don't expect going forward. So, that's really not transitory. The one benefit we mentioned customer mix are that relates to internet sales.

So, we do sell to internet retailers and store-based retailers and given the lower margin on internet and supply outages, we didn't have as much growth there as we have in our store-based retail.

Is that going to come back in the future? It's possible, but I see that being longer term, perhaps not necessarily over the next year or more given the higher pace of revenue growth in the industry, and the need to continue to prioritize store-based sales for us.

We have those kind of supply chain initiatives that we discussed, which also involve the inflation that we've seen. And as Pete mentioned in his comments, we expect continued inflation as we move through the rest of this year and into next year. So, that may not -- well certainly won't be a long-term issue.

I don't see that being an issue over the next 12 to 18 months. And then vendor incentives, Melanie mentioned as well, and that's something that we'll be working through with our vendors in terms of what that looks like going forward. And I don't want to try to predict that at this point. So, I think there's a combination there.

But I feel pretty positive about the margin gains, certainly continuing through the rest of this year and into next year. And then we'll see what happens after that. So, long answer to your question. Good question and hopefully, gave you a little bit of insight..

Yes, that's helpful, for sure. And second if we could talk about the kind of deconstructing the growth. Pete, I think you mentioned that chemicals' unit volumes were up like 9%, which I think about that 60% of your business, which is maintenance and minor repair that probably correlates fairly well.

So, the outsized growth you're seeing has to be coming from the refurb and the new pools and I think you've talked about new pools being up like from 96,000 last year to 110,000 this year, which is kind of teams grow. So, that leaves us with the refurbishment as well as the content in those pools.

Can you just touch on kind of when you see this outsized growth and we sort of know the pieces that aren't growing at 40%, sort of what pieces do you see driving those? And how sustainable are those factors?.

Yes, good question Dave. I think when you try and deconstruct the growth, we commented on the chemical volume, you're you zeroed in on a couple of things, the new construction going from 96,000. So, last year, new construction was up 26%. So, this year, we think the new number is going to be 110,000.

So, when you have new pool construction that you're bringing into play a lot of different product groups, right.

So, you're bringing in building materials, which from a year-over-year comp perspective, remember, the second quarter of last year, we had essentially little to no construction in many markets across the country because of restrictions due to COVID. So, that has certainly rebounded.

So, we see that building materials or construction materials, product sales driving growth, and that's a function it's going into two places, right? It's going into remodel, which by far is the bigger portion of the market. I mean, a lot of folks, zero in on the new construction is new construction got to be 110,000, 112,000, 115,000 whatever.

To me, that is -- it's all good, but the lion's share of the market and where we're seeing a lot of activity as well is in remodel. So, when I looked at the growth -- and one of the major drivers of our growth is A, the pools are being used more, right.

So, just general maintenance equipment is a piece of that as technology, we're seeing more homeowners adopt or opt for technology or more high-tech products, smarter products, which is again driving the value of the ticket for us.

And then when you do a remodel project, those can go from a few thousand dollars for a new piece of equipment two all the way up to resurfacing the pool and adding decks and patios around it, changing tiles, and changing structural features in the pool, all of which are very good.

And again, the opportunity for that given the age of the install base is very good..

That's very helpful. Thanks very much, guys. All the best..

Yes. Thank you..

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

Hey, everyone..

Good morning..

Good morning..

Congrats on some incredible numbers yet again..

Thank you..

So I guess first off, Pete, it sounds like you have enough evidence now to say the pool industry has entered a new normal with work-from-home, migration to the suburbs, migration south.

Is that a fair statement?.

Yes.

We're -- as I said, in the end -- towards the end of my comments, when I was sitting back, reflecting upon what is driving the numbers, and whether it is a short-term thing, or a longer-term trend when I started listing those out, which is why I purposely did it, there are several factors, as you mentioned, that change the outlook for our industry, and give us great confidence that the growth will continue that it wasn't just a COVID driven bubble..

Right. Okay. I just want to make sure that was the message.

And then on gross margins, I just want to get a better view of the cadence during the second half, Mark, not to put you on the spot here, but maybe up 100 basis points year-over-year in 3Q and maybe up something like 40 basis points year-over-year in 4Q that in the ballpark?.

You want to send me your model, and I can just fill it out for you. You know, I would say maybe a little bit better then what you're thinking certainly in the third quarter, fourth quarter a little bit tougher. But we see more benefits and as I said, expect some of that to continue in the next year or so.

I feel good about the gross margin opportunity for us, as we exit the second quarter and/or the third..

Okay. Sounds good. And just lastly, inventory levels still up massively year-over-year, obviously, demand is a big part of that.

But are you also using your scale to buy inventory just given the shortages? And then are you also buying ahead of price increases still?.

Yes. I think there's three factors, right? So inventory dollars are up. But when you look at it in terms of days of inventory, we're actually down.

We -- this is where in this environment is where a company like Pool Corp really excels, because we use the strength of the balance sheet to kind of lean in to make sure that we have product available for our builders. So part of it is that, there's still periodic shortages of product and every -- but that's a widely known fact.

But what happens is, it could be one product, right? So if I look at the inventory balance in total, it could be a couple of products that are missing for to ship a job complete. So when that comes in, it will go. But by and large, it's a couple of factors. One, business is up. So our days of inventory are re down because of the shortages.

We're buying ahead, certainly to make sure that we have as much product as we can. And then we're still dealing with intermittent shortages of specific items that may be holding up the shipment of a complete job..

Sounds good. Thanks for the comments. And Mark all the best..

Yes. Thank you, Ryan..

The next question comes from Susan Maklari with Goldman Sachs. Please go ahead..

Thank you. Good morning, everyone and congrats on a great quarter..

Good morning. Good morning. Thank you..

My first question is going back to the gross margin. I know that you mentioned that you definitely saw some lift from an improved mix shift. I guess, when we think about what's going on the ground, you know you mentioned the fact that you're still seeing a lot of refurbishment, a lot of new pool construction going on.

How does that mix today compared to where you were in kind of a more normalized period 2019, 2018, whatever it was? And is there more to go in terms of that normalization over time?.

Yes.

In terms of -- you’re saying as the increased construction activity, kind of impact that?.

Yes. So what are the sales of that….

Yes, I mean, you know….

Yes. Exactly like that..

…the mix question is kind of a complicated one, but if you focus just on construction, so with pool bills is going from let's call it 75,000, 80,000 to 90,000 to 100,000, 110,000, those are typically larger customers that are doing the construction.

And that's a little bit lower margin customers, just because they're buying more and have more -- a little more purchasing power, generally speaking. But that's just one part of the overall story and margins. There's a lot of other things going on there. We're selling more building materials, which are a higher margin category for us.

And that's growing, and we have other product categories that are higher margin growing as well. So, I wouldn't focus just on the construction, and that piece of it has -- because if you look back over time, our margins have been very stable, even with growth from 2010 really up through 2020 of construction.

We've managed a very stable gross margin stories.

So, that answer your question, Susan?.

Yes. No, it definitely does. And I know, it's tough, because there's a lot of moving pieces there.

But like I said, I was just trying to think about the fact that that new construction piece has really risen pretty significantly in the last, call it year and a half, two years now, and how to think about what that means relative to where we were before..

Right..

Yes. My second question is around, you've obviously gained quite a bit of market share. And it seems like that's continuing to come through.

Is there anything that you can talk to whether it's in terms of, I don't know, maybe historical retention rates or other initiatives around how sticky that businesses and your ability to really kind of keep these customers engaged going forward?.

Sure. If you look at over time, our -- we have consistently gained share over time. So I think our -- we have a tremendous focus on the customer experience. And we -- every time we get a new customer, we treat that as a golden opportunity to make sure that we maintain that.

And if you look back historically, on our market share, it's been -- we've been consistently growing that now. In the last year, we certainly have grown faster, given the circumstances that are -- that have played out. But if you look back over time, those tend to be very sticky relationships with a customer.

So it's not like they come to us, they jump back. Over time, we've been able to demonstrate that as people come to us, we engage them, we work with them, we cover that business, take care of their service as best we can and focus on execution, that business generally stays with us..

Okay. That's helpful. Thank you. Good luck..

Thank you..

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

Good morning, and thank you for taking the questions. And then Mark, congrats again on your impending retirement.

So I guess first, in terms of capacity creation [Technical Difficulty] how should we expect?.

Anthony you broke up. All we heard was in terms of capacity creation, and then you broke up..

Oh, sorry. So let me repeat that.

So in terms of capacity creation, how should we expect that to evolve over the next few years for you?.

I mean, it's -- as you know, it's been a focus area for us for the last several years. It's one of my personal focus areas, and I think it's paid great dividends going forward. I think you -- it -- there are various parts of it, right? There is capacity creation within the facility, within our truck fleet and within labor productivity.

I think we've gotten better. We are still not as consistent across the network as I would like. Meaning that there is still opportunity in this area, we see POOL360 for instance, in our BlueStreak application. We see those continuing to grow and add value for not only us, but for our customers as well.

So I think it's a very, very important area for us and has paid great dividends and I don't think we are anywhere close to the end of what we can extract out of that focus..

Got it.

And in terms of your customers, whether it's pool remodelers or -- been much increased capacity for them, or is it over the last few months or so? Can you just comment on that? I know there have been labor constraints for a while, but I just wanted to see if there has been any changes that you have seen from your customers?.

Yes. That's a great question. And I was talking to several of our field folks over the last couple of weeks about that. And I'm encouraged by I heard several times from our folks that they -- our customers are adding labor and expanding their crews in many cases, which I think is going to expand capacity for the industry.

And as you know labor has been the single biggest limiting factor on the industry growth over time. But I think given the how desirable this space is outdoor living and pools and patios and such, I think builders are growing more comfortable and more confident in the opportunity, and they're starting to add labor to their teams.

Now, there hasn't been a step function increase in that yet. But I can tell you having been here for almost five years, that's not been a common thread that we see crews expanding. But I think what we've seen year-to-date this year are some very positive signs in that area..

Got it. Okay. And then the last question for me.

In terms of higher costs, I know you mentioned freight, I think in your release that, anything there is other than that -- I just wanted to get a better sense basically as to where are you seeing the greatest pressure points in terms of costs increases?.

Sure. Certainly, freight is an area of freight, fuel, as a component of that, typically that from an inbound freight perspective is captured in our cost of product line. From an outbound perspective, we actually have an advantage in this area and again, it's part of our capacity creation, and that most of our freight happens on our own fleet.

So, by working on the things that we have done over the last couple of years, with truck utilization, smarter routing, better loading and such, we have been able to minimize some of the effects that have happened in the industry. Other areas, real estate is an issue that we all face and that the demand for warehouse space is going up.

So every time we renew a lease, that's an area that is we're seeing inflation in as well. And there's always been or there has been of late some inflation on labor as well..

Got it. Okay. Well, thank you, and best of luck..

Yes, thank you..

Thank you, Anthony..

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

Hi, good morning, guys. Still morning here. Thanks for taking my question. And Mark, if you want to do my model too, I appreciate it..

I need something to do. You can send it to me in the future. Just kidding..

Understood, I would never send you, my model. Seriously. I think a lot of this has been asked, but I guess what I'm trying to just think of is longer term. I don't maybe this is a peak question. But you guys have this, pool financial model slide, you include in lots of your presentations and sort of lays out what you think the model is.

And I guess what I'm wrestling with is, has this changed, is this 6% to 8% revenue growth the stable gross margin kind of over the long-term? Have you kind of accelerated this to another level at this point? Or where do you think we are in that process?.

Yes, yes..

As your party question would you like to do it or..

I'd be happy to. First of all, I think we'll be giving an update in September. We'll have investors -- and shareholders and we'll kind of go through our longer-term expectations and initiatives that we see. As Pete mentioned in his comment, one of the earlier questions, there's definitely been a step up in industry volume and activity.

And as we look forward, I think there's more growth opportunity over the next several years from an industry perspective, then perhaps we've seen certainly, you look at pool construction and the acceleration there.

And then the aging, the installed base and some of the factors, Pete mentioned about the long-term activities that should continue to drive demand in the pool industries. So I see us being fairly optimistic about the growth opportunity and our model will reflect that, not significantly, but some modest uptick there..

And just to push you on the next level down, your gross margin has been ridiculously stable for such a long time.

Is it now stepping up a little bit going forward? Or is this more temporary?.

Well, I think that, that sounds like the question I addressed earlier. But certainly, in the short term, it's picked up. We've done a good job over time with maintaining stability. Some of what we see in the short term, may not continue long-term.

But I think there's some opportunity to bring the margin level up from what it has been over the last couple of years. So that certainly will be an effort that will be focused on..

All right. So we'll call that medium term, then maybe. And the final one for me. I'm just curious, maybe this is more of a peak question.

But I wasn't expecting a lot of inflation next year, because it felt like the chemical situation normalizes and some of the supply constraints through the industry normalize, it just felt like a less inflationary outlook to me, but you seem pretty confident that this will continue.

So just curious about that?.

Yes, it's a little early to tell you exactly what I think the number is going to be next year, because this is the time of year when our manufacturers are trying to read the tea leaves as to what their inflation is and what they're going to pass along.

I think by deconstruct what you said for a moment on the chemical side, I don't think the chemical situation will return to normal in my opinion until probably the third quarter, end of third quarter, fourth quarter of next year, because our information when the plan come back online, puts it out into the end of second quarter for a startup.

So, by the time it has a meaningful impact on the industry, it will be later in the year. So from a chemical perspective, I don't see a whole lot of change in that area.

From an equipment perspective, again, it's a little bit early, but if you ask me to call it right now, I would say that it's going to be above the normal, which for us, remember has been in the 1% range. And I'm pretty comfortable that it's going to be above that number for next year.

But again, as the year goes on, as we normally do, we'll give you a much better read on that in future calls..

Super. Thank you guys..

Yes..

The next question comes from David MacGregor with Longbow Research. Please go ahead..

Yes. Good morning, and great quarter. Mark, congratulations on your retirement..

Thank you..

I had Question on the new construction. I guess the question is just to what extent is your forward visibility in new construction improving through a change in technology, the use of POOL360 gives you a lot more for visibility, I don't know, maybe online engagement with your customers.

But I'm just trying to get a sense of if you're getting a little better forward look on new construction now, as a consequence of some of the changes that occurred?.

Yes. We actually have -- I think we have better visibility now than we ever have. And it's a result of a couple of things. Obviously, we have always had access to permit data, just like you all do. So it's one of the things that we tracked.

But given the tightness of supply of the major components in pool construction, whereas in the past, there was plenty of inventory in the pipeline and builders didn't put a lot of orders in advance saying, hey, I'm going to need this product on this day.

So, we have in order to make sure that we can accommodate their needs and that we have the equipment set on the day that they needed in the future or that we have the plaster there to deliver on the day that they're going to deliver, builders are sharing more information with us now about hey, these are the jobs I have in the pipeline.

So, oftentimes when they go sell a job and get a contract, they're coming into us saying, okay, here's the job, that I sold, I'm going to need equipment, I'm going to need the plumbing kit here, the steel kit here and I'm going to need the equipment and finished kit on this date.

So, one of the benefits of the situation that we're in is we do have better visibility to what the backlog is in the industry..

Right.

I guess, one of the reasons I ask is just thinking about new construction, there's always the question out there with respect to what extent has stay at home pulled forward into 2020 and 2021? And therefore, maybe create some risk around new pool sales in 2022? I realize you've walked through some factories, you've been very helpful in that sense, but I'm just trying to get a sense of what the downside scenario might look like.

And is it -- would it be returned back to the 95,000, 96,000 pools or maybe a little bit better than that? And how are you thinking about kind of the risk around that? That's it..

I think you got to consider like what could cause that. I mean, the builders have significant backlog in place, as we mentioned. And from a macro trend, people moving to the south, the work from home, those things are going to continue.

Millennials entering the housing market, a strong housing market in terms of value, and frankly, people valuing having the backyard escape. So, frankly, I don't -- but for a major economic issue, I don't think that there is anything in the near term that would say, well, the 110,000, there's going to drop back down to 95,000.

That's really not how we read the tea leaves today..

One potential exception is weather, of course.

Sure..

Having favorable weather.

Buildable days..

Buildable days, particularly in the shoulder to the season that allows a more construction days, builder days..

Great, great. Okay. Thanks for that. And then just follow-up question, I guess, just regarding Texas, Florida, to what extent that the quarter benefit from kind of onetime spending on the repair or replacement of equipment damaged in the freezer earlier in the year.

Are you able to size that?.

Yes, it didn't affect Florida, right. It was really a Texas issue in terms of the….

Yes, Texas issue..

And we said that there was a lot of repair that was done in the in the first quarter. And then due to equipment shortages, I think it's still going on. I think it's going to go on between now and year end, although at a much smaller pace than what we saw in the first quarter.

So I think it's something that we'll see continued tailwinds on, albeit at a much smaller level than we saw in the first quarter..

Okay. Thank you very much..

Yes..

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

Great. Thanks for taking my questions squeezing me in. Just wanted to follow-up on the inflation comments. You mentioned, you haven't seen any impact from inflation on demand.

But if we're going to be in a modest inflationary environment again next year, is there a point in which inflation is going to start to impact volumes? I mean, I guess, do you worry at all about price elasticity at all? Are there any lessons, from this experience this year, that makes you feel even more confident about the I guess the pool owners ability to withstand much higher pricing?.

Yes, I think you got to break down the inflation and where it and how it impacts the business. So in terms of maintenance and repair, if you need a filter, you need a filter. And if you need a pump, you need a pump. And if it costs 5% more than it did last year, a, that's not typically for a pool owner an insurmountable amount.

So it's nothing need say, well, I'm not going to change the filter, because it costs 5% more, I have to do it in order to keep the pool operating. So in terms of maintenance and repair, we see very little impact.

Your question on inflation as it relates to construction is a little bit -- is a little bit different, because depending on the type of Pool construction. It can have a -- excuse me, a bigger impact on the total project.

But one of the things that we have, you have to consider when you think that through is that most of the cost of a backyard project, whether it's a renovation or whether it's a new construction project.

Most of that cost in most cases is labor, right? So in terms of, a material cost increase, and if there is inflation next year -- is again, what we think above normal. I don't think it will have a material impact on demand and somebody deciding that I am going to do the project, or I'm not given how the cost lays into the project..

Helpful. I guess, my follow-up question is, I know it's relatively minor considering the revenue base is about $5 million now.

But how quickly do you expect the $30 million to $40 million in revenues from the variable speed pump legislation that's going to affect? How quickly do you think that might start showing up?.

So, as we've mentioned before, the way the way the rule is written, it says that, they can't make the pumps anymore, right? So they've now had to switch to only variable speed pumps, but the product that is in the pipeline can be sold. I guess, fortunately, for us, in this case, there isn't a lot of inventory left in the pipeline.

So we think that, we'll start to see the benefits this year, and then we should essentially see the full benefit next year in terms of what the opportunity is. So it's a gift given the shortages in this case, it basically -- it pulls that in. But you also have to consider the seasonality too.

And the impact on us is earlier in the year, right? So, during the peak season -- so most of the effect that you would see, I wouldn't look for a meaningful bump in 2021, I think you're going to see it in 2022..

Okay. Thanks again. Great quarter. And Mark, best of luck of your retirement..

Yes. Thank you, Kevin..

[Operator Instructions] The next question comes from Ken Zener with KeyBanc. Please go ahead..

Hello, everybody..

Good morning..

Good morning, Ken..

Look forward to seeing you guys in New York on September 15. I'm sure you're going to give us a lot more insight. However, let's talk about a few things now.

How do you guys measure stock outs? How much -- which is a way to think about how disrupted the supply channels? I was at a hotel over the 4th of July and their hot tub wasn't working? Because they didn't have parts, I mean, how do you measure stock outs relative to a stress level in the supply chain?.

Yes. Our goal on stock outs is to be at less than 5%, right, that's been the goal that we've been chasing -- excuse me -- for many years. And we in terms of our attention to it, and weighting of it as a business, we actually put much more emphasis on it during the peak season than we do on the shoulders of the season.

So we do kind of a weighted average in our measurement. So, the goal is 5%. On some products, it is higher than that. And I would say, overall, obviously, because of the shortage is the number has come up. And it really varies by location. And it varies by product..

But you're not suggesting it's actually something meaningful, I guess, in terms of backlog?.

Meaningful, so it is -- we take -- we treat every one of those knockout situations as a really bad situation. So to us, they're all very meaningful. Because anytime that occur -- and says, hey, do you have something? And I have to say no. But now you know, we look at the system. And we can tell the customer hey, here's what it is.

Here's what it is scheduled to arrive, so that we can coordinate with the customer on what and provide an expectation. In some areas that's been very challenging on the chemical side, because we certainly don't have the same visibility as we do on the equipment side. So it is elevated.

And I would tell you, in some cases, it could be some crazy products that can be approaching 10%. And but by and large, I would say the increase is slightly above the 5% target that we have established..

Okay. You've talked about gross margins a little bit. Mark, I think you've talked about positive gross margins as we're moving into the second half. You could, you're talking about product mix and stuff.

But it seems as though, if you're moving into a positive mix, in the second half, a, that would have a positive carry into the first half of 2022 given those variables. But you know, related to that, your SG&A has come down quite a bit is my assumption here? Well, we see it as certainly versus the prior years.

So can you and I tend to think about your company when you get it a gross your SG&A, it's not such a concern to me. But I mean, we are getting questions on that gross margin.

So can you talk to if that SG&A is kind of something's changed in that relative to where you were a few years ago or is that to another COVID metric that would be set to normalize? Kind of a two part question there as it relates to EBIT.

But could you expand on that a little bit?.

Well, yes, a little bit, I guess -- your question or your comment about gross and SG&A coming down, you're referring to SG&A as a percent of sales. SG&A is obviously --.

Right..

…is growing businesses ground -- that people and the support added locations, facilities, vehicles and so our S&GA and obviously got up, it's come down as a percent of sales last couple of years. In part, I think I've mentioned this before, at some point, you know, leverage is easier when sales growth is higher.

So we've had, obviously a great sales growth over the last year and this year. And that makes getting that SG&A leverage a little bit easier. But at the same time, you know, we've talked a lot about capacity creation initiatives, and those are things that we do throughout the organization to focus on getting more out of existing investments.

And that is a big part of our operational initiatives. And we've made good progress there. We have more to come. We also paired back expenses during the pandemic initially. We talked about that last year. We're seeing some growth in those costs in gross and other costs areas, as Pete mentioned, things like leases and labor. Insurance is another area.

And then, incentives, we talked about incentive costs were up substantially last year, we thought they'd be down this year, year-over-year. We talked about that earlier in the year, and in fact there is going be up. So those are a big component of the cost structure and should be coming down next year. Most likely, it'll be a tailwind for us.

So a lot of different components there, I think that, if I look at our long-term model, I feel good about the opportunity to continue to provide operating leverage. And that is going to continue to be a big focus for us, which is in that kind of mid-teens plus area in terms of operating leverage we expect.

So, I don't know if that covered both parts of your question, but that's kind of how we --.

Its -- yes, it's interesting, right? Because I mean, the fact is, you're running, 200 plus basis points below. I'm not sure, if your gross margins hold, rise a little bit this year -- your SG&A is basically going to be down about 200 basis points, and maybe you guys will address this at the Analyst Day more so.

But operating leverage needs to come through your gross margin or your SG&A. But it seems like I fell off a lot. So there's something structurally different. But I look forward to exploring that a little more in time, I'll shift topics here for you.

Pete, you came from obviously, roofing, which is a different category, before that you're doing other things in distribution.

But, in roofing in 2008 had this as relates to the manufacturers, they had high oil input costs, the distributors were always going after price pre-buying, creating these swings in demand, which affected pricing, provision came to that category the needing to get price, and then they just realized margins can be better.

Is there anything that you see relative to your competitors you all -- and the manufacturers given how high demand is and how there's input cost, and that's perhaps creating a structural shift in the industry given how much demand we've had, and given all this volatility?.

Let me see how I'm going to answer that, we have a lot in there --.

As your competitors, I mean, it's just -- they can't -- they don't have as good as supply chain as you do. And especially things like hardscape, much less, the core parts of the business. It's just -- it seems like this has been a very structural benefit to you all..

Yes. So we have taken share, as I mentioned, we think we've taken in three to four points of share this year. And that's based on the fact that, in a particular market we have in most markets. We have multiple locations. So if I don't have it in one location, I may have it in another.

I mean, the irony of the situation that we're in now is that, we use that to benefit our customers, but it is creating a lot more work for our teams. I mean, I can't express how hard our teams are working to do what we do in a tight, constrained environment.

Because they are having to move product from one location to another, and to coordinate deliveries and really look very specifically at what days people need things, so that we get product to them.

This is where we separate ourselves though, because in most markets we're the only ones that have multiple locations, and nobody has as many locations as we do. Nobody has the buying power to place the orders as big as we do in the beginning anyway.

So we're doing that, we're working very hard to make sure that we can take care of the customers, and certainly, it's creating a benefit for us, and I think it benefit for the customers as well..

Thank you very much. See you guys soon..

Thank you..

Thanks, Ken..

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

Thank you. Before we disconnect, I would just like to take a moment to thank Mark for his 17 years of dedicated service to Pool Corp. His leadership, technical knowledge and passion for the business have contributed greatly to our success over the years.

Since I joined the company five years ago, Mark has been a valued partner, and I've often benefited from his experience and advice. He also has done well to trends to ensure a smooth transition for Melanie as she has seamlessly prepared to step into the CFO role for Pool Corp. We wish Mark well as he transitions into his next phase of life.

He will certainly be missed here at Pool Corp. Finally, as a reminder, we look forward to sharing our third quarter results on October 21, of 2021. So please mark your calendars. Have a great rest of your day. Thank you..

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