Good day, and welcome to the Pool Corporation 2nd quarter 2021 conference call. All participants will be in a listen-only mode. Should you need assistance please signal please signal a conference specialist by pressing star then zero. After today's presentation there will be an opportunity to ask a question. To ask a question you may press star then one on your touchtone phone. To withdraw your question please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Mark 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. Good morning to everyone on the call. Beginning in May of last year, as the country came to grips with the pandemic and its effects on everyday life across North America and Europe, homeowners' interest in swimming pools and anything to do with outdoor living surged. The steady growth that we had seen over the years kicked into overdrive as people realized that investing in their own backyard, they could enjoy a family-friendly, safe, healthy outdoor living experience right at home. Demand for in-ground pools, above ground pools, luxury patios, and outdoor kitchens spiked, creating demand that quickly soaked up any available builder capacity. This surge in demand has not let up and continues through today, as our builders and remodelers are telling us for the most part, they are booked through year-end, and in many cases, into 2022.
Our retailers are also reporting robust store traffic as well. This morning, following an exceptional first quarter, we reported that our second quarter total sales came in at a record $1.8 billion, which is a 40% increase over the second quarter of 2020, which was up 14% over 2019. This is our largest quarter ever and our seasonally most significant quarter of the year. Thanks to the tremendous efforts and hard work of our team that is executing at an incredible level, the support from our supplier partners, and the perseverance of our customers. Together, we helped more people enjoy the healthy, safe outdoor living experience than ever before. From a base business perspective, sales increased 32% with acquisitions accounting for 8% of our quarterly growth. Inflation, as we have previously mentioned, has been above average this year and is trending to 5%-6% for the year in total.
This has had no meaningful impact on demand and has passed through the channel as is typically the case. Overall, the unprecedented demand for our products has strained the manufacturing capacity and supply chains in the industry. In times like this, we use our strong balance sheet, the robust network of sales centers, and tremendous execution to help our customers keep projects moving forward so families can enjoy their backyard escape. By and large, the manufacturers are finding ways to increase production, which when combined with the industry seasonality, should ease some of the shortages that have plagued the industry this year, allowing supply chains to function more normally as the year progresses. Looking at base business in our four largest markets, California saw sales increase 33%, Florida sales increased 35%, Texas saw sales climb by 30%, and Arizona sales increased 24% for the quarter.
Overall, our year-round base business markets increased by 31%, while the seasonal markets increased by 33%. This growth is a testament to the strong demand throughout the entire business. Now let me provide some product sales details for our base business. Even with the strained supply chains, equipment sales, which include heaters, pumps, filters, lighting, and automation, all used in the construction, remodel, and maintenance of swimming pools, posted record sales up 35% in the quarter, following a 62% gain in the first quarter. Again, what is most significant about this result is that it occurred in our seasonally biggest quarter when industry capacity is most challenged and our comps the most difficult from an industry perspective. Chemicals, which have been a challenge to supply this year with the widely known industry shortages, saw sales increase by 28% in the quarter.
Pricing represented 19% of the increase, while volume accounted for nine. Persistent shortages in trichlor and dichlor have driven increased demand for alternatives such as liquid chlorine and calcium 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 material demand remains strong as construction and remodel activity is brisk.
Our sales in this product category grew by 33% in the quarter, following a similar growth number in the first quarter. Retail products posted a 20% gain, driven by a larger installed base and elevated usage levels, although here too, the shortage in chemicals and other products is limiting growth. Commercial pool products continue to rebound as leisure travel has resumed and resort, hotel, and municipal pools reopen. For the quarter, sales in this product group increased 45%, coming off a weak second quarter in 2021, where sales fell by 21% due to the COVID lockdowns. Currently, sales in this category are being dominated by maintenance and repair products, as large commercial construction projects are just beginning to get traction again. Last year, we completed four acquisitions, three blue and one green, and to date, we have completed two more blue acquisitions.
All are performing well and being integrated into our network, which will make them even better. Our deal pipeline and expansion plans are robust and remain a focus area for the business. Year-to-date 2021, we have opened nine new locations, seven on the blue side and two on the green side. Let me now take you across the Atlantic and provide some commentary on our European business. Sales remains brisk and growth strong. For the second quarter, we saw sales grow by 42%, bringing the year-to-date growth to an incredible 62%. Our team is executing at the highest level and benefiting from a similarly strong market that we are seeing in North America. Being a multi-line distributor versus a distributor manufacturer allows us to be more flexible and provide customers more options in a supply-constrained environment. This has allowed us to take significant share.
Turning to our Horizon business, we are very pleased to report that sales growth continues to be strong as the business posted another terrific quarter with sales up 31%. For the same period, base business sales increased 24% versus last year. As mentioned above, year-to-date, we have opened two new locations, one in California and the other in Florida, while continuing to execute our strategic plan of organic growth, greenfield expansion, and acquisitions as we develop our pipeline in targeted areas. Let me now switch my commentary to gross margin expenses and operating income. First, on gross margins, we are very pleased to have reported a gain of 170 basis points for the quarter, and a 200 basis point gain from our base business. This improvement was driven by supply chain execution, inflation benefits, and product mix. Melanie will provide more color on this topic.
Operating expense performance was spectacular given the volume growth. Our OpEx as a percentage of sales improved by 117 basis points for the quarter, as being driven by the team's execution and a relentless focus on capacity creation activity. 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 PoolCorp to be more efficient in how we operate. Wrapping up the income statement, I could not be prouder of what our team delivered in operating income. The record $339 million in operating income for the quarter was a 64% increase over the same period last year. Our team's skill, dedication, and commitment to the customer experience is second to none.
This, along with the benefits of our business model, continue to set us apart from the competition and enable us to continue to take share in this challenging environment. Our ability to consistently drive organic growth and manage our cost structure through execution and capacity creation is a testament to the team here at PoolCorp. 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-$12.60, to $13.75-$14.25 per diluted share, including the $0.29 year-to-date tax benefit that we have received. Looking forward, there are several factors and trends that give us confidence for continued growth beyond 2021. First, the single-family housing market remains strong, driven by millennials entering the housing market for the first time.
De-urbanization and the southern migration, all of which are very positive factors for both the blue and the green business. As people move to the Sun Belt states with longer outdoor living season, they see the value of investing in a pool, patio, outdoor kitchen, or remodel project, which is driving demand for our products. Second, the work from home change that has swept across North America is also creating more time to enjoy a luxury backyard retreat. This trend looks like it will continue longer term. Third, new products such as automation and the connected pool simply increase our sales opportunity on every project as people become familiar with this new user-friendly technology. Fourth, new in-ground pool installations were 96,000 pools last year, and are forecasted to grow to more than 110,000 pools this year as our builders are reporting stronger backlogs that continue into 2022.
Each new pool adds to the maintenance and repair market going forward, which by far is the largest part of our industry. Fifth, inflation, which is higher than normal this year, will likely continue at elevated levels into 2022. Sixth, the new variable speed pump legislation that goes into effect this month will add $30 million-$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, and 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 margins up 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 stockouts where possible in today's tight supply conditions. Next, with our increased purchase volumes, we also expect improvements in the rate earned under our vendor programs.
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 costs 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 the 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 pre-tax earnings.
Excuse me. We realized an additional ASU tax benefit of $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 realized 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 to inventories to support the demand increases and maintain customer service levels. Inventory turns on a trailing four-quarter basis increased 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- 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 repurchased in first quarter, 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 increased 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 0.5 at quarter end, giving us substantial capacity and flexibility to support our business needs 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 the Q2 results which are the real work of a master. At the peak of the season, when demand is greatest, our customers' needs are most urgent, and our supply chain is the most stretched. Delivering the kind of results we achieved 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 the culmination 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. 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 note, 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. Lastly, the $7.7 million or $0.19 share benefit from our ASU tax gain in the 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, anticipates sales growth in excess of 25% for the year, with greater growth in Q3 than in Q4, as comps become increasingly difficult. As a reminder, our Q3 2020 sales growth was 27%, while Q4 2020 sales growth was 44%, which was aided by very favorable weather conditions and included 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 weather 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 expenses well and could achieve as much as 250 to 300 basis points operating margin improvement in 2021 over 2020, with 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.
The first question comes from David Manthey with Baird. Please go ahead.
All right. Thank you. Good morning, everyone.
Morning.
Yeah. Mark, congratulations. What a run. That's been fantastic. Good luck.
Yeah. Thank you, Dave. Appreciate it.
Yeah. As far as the quarter goes here, I think the gross margin is a good place to start. This quarter, you clearly jumped outside of the typical band for a second quarter. You sort of implied that the back half would continue to be higher year-on-year. I guess if I look at the 160 basis points better than the five-year average, assuming no major falloff 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 an interesting way of phrasing it. I think, first of all, when you look at the margin gains in the second quarter, as Melanie went through them, we got some benefit from last year, a little bit of margin pressure from the bigger ticket, lower margin sales that we had that we didn't have in the second quarter of this year. Frankly, we don't expect going forward.
That's really not transitory. One benefit, we mentioned customer mix, part of that relates to internet sales. We do sell to internet retailers and store-based retailers, and given the lower margin on internet, and the supply outages, we didn't have as much growth there as we had 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. As Pete mentioned in his comments, we expect continued inflation as we move through the rest of this year and into next year.
That may not, well certainly won't be a long-term issue. Don't see that being an issue over the next 12- 18 months. Then vendor incentives, Melanie mentioned as well. That's something that we'll be working through with our vendors, in terms of what that looks like going forward. I don't want to try to predict that at this point. I think there's a combination there. I feel pretty positive about the margin gains, certainly continuing through the rest of this year and into next year, then we'll see what happens after that. A long answer to your question. Good question, hopefully give you a little bit of insight.
Yeah, that's helpful for sure. Second, if we could talk about the deconstructing the growth. Pete, I think you mentioned that chemicals unit volumes are up like 9%, which if I think about that 60% of your business which is maintenance and minor repair, that probably correlates fairly well. 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 from 96,000 last year to 110 this year, which is kind of teens growth. 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?
Yeah. Good question, Dave. I think when you try and deconstruct the growth, we commented on the chemical volume. You zeroed in on a couple of things. The new construction going from 96. Last year, new construction was up 26%. This year, we think the new number is going to be 110. When you have new pool construction, you're bringing into play a lot of different product groups, right? 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. That has certainly rebounded. We see the building materials or construction materials, product sales, driving growth, and that's a function that'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 going to be 110, 112, 115, whatever? To me, 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. When I look at the growth, and one of the major drivers of our growth is, A, the pools are being used more, right? 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.
When you do a remodel project, those can go from a few thousand dollars for a new piece of equipment, 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. Again, the opportunity for that, given the age of the installed base, is very good.
That's very helpful. Thanks very much, guys. All the best.
Yep.
Thank you.
The next question comes from Ryan Merkel with William Blair. Please go ahead.
Hey, everyone.
Morning.
Congrats on some incredible numbers yet again.
Thank you.
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?
Yeah. As I said 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. Just wanted to make sure that was the message. 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. Is that in the ballpark?
You want to send me your model, and I can just fill it out for you? I would say maybe a little bit better than what you're thinking. Certainly, in the third quarter. Fourth quarter, a little bit tougher. We see more benefits, and as I said, expect some of that to continue into next year. I feel good about the gross margin opportunity for us as we exit the second quarter here and enter the third.
Okay. Sounds good. Just lastly, inventory levels still up massively year-over-year. Obviously, demand is a big part of that, are you also using your scale to buy inventory just given the shortages? Are you also buying ahead of price increases still?
I think there's three factors, right? Inventory dollars are up, but when you look at it in terms of days of inventory, we're actually down. In this environment is where a company like PoolCorp 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. Part of it is that there's still periodic shortages of product, and that's a widely known fact. What happens is, it could be one product, right? If I look at the inventory balance in total, it could be a couple of products that are missing to ship a job complete. When that comes in, it will go. By and large, it's a couple of factors. one, business is up, so our days of inventory are down because of the shortages.
We are 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. Mark, all the best.
Yeah. Thank you, Ryan.
The next question comes from Susan Maklari with Goldman Sachs. Please go ahead.
Thank you. Good morning, everyone. Congrats on a great quarter.
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 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 compare to where you were in kind of a more normalized period, 2019, 2018, whatever it was? Is there more to go in terms of that normalization over time?
Yeah. In terms of, you're saying the increased construction activity?
Yeah. like, are the sales of the.[crosstalk]
I mean [crosstalk]
Yeah, exactly.
The mix question is kind of a complicated one but if you focus just on construction, so with pool builds going from, let's call it 75,000, 80,000 -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 a little more purchasing power, generally speaking. That's just one part of the overall story in 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. That's growing and we have other product categories that are higher margin growing as well. I wouldn't focus just on the construction and that piece of it, 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 story. Does that answer your question, Susan?
Yeah. No, it definitely does. I know it's tough because there's a lot of moving pieces there. 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 one and a half, two years now, and how to think about what that means relative to you know where we were before.
Mm-hmm. Right.
Yeah. My second question is around, you've obviously gained quite a bit of market share. 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 business is and your ability to really kind of keep these customers engaged going forward?
Sure. If you look at over time, we have consistently gained share over time. I think we have a tremendous focus on the customer experience. Every time we get a new customer, we treat that as a golden opportunity to make sure that we maintain that. If you look back historically on our market share, we've been consistently growing that. Now, in the last year, we certainly have grown faster given the circumstances that have played out. If you look back over time, those tend to be very sticky relationships with the customer. 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 covet that business, take care of their service as best we can, and focus on execution, that 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. Thank you for taking the questions. Mark, congrats again on your pending retirement. I guess first, in terms of capacity creation [inaudible]
Anthony, you broke up. All we heard was, In terms of capacity creation, and then you broke up.
Oh, sorry. Let me repeat that. In terms of capacity creation, how should we expect that to evolve over the next few years for you?
As you know, it's been a focus area for us for the last several years. It's one of my personal focus areas. I think it's paid great dividends going forward. I think 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, and our Bluestreak application. We see those continuing to grow and add value for not only us but for our customers as well. I think it's a very important area for us and has paid great dividends. I don't think we are anywhere close to the end of what we can extract out of that focus.
Got it. In terms of your customers, whether it's pool remodelers or been much increased capacity for them 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 have been any changes that you have seen from your customers.
Yeah, that's a great question. I was talking to several of our field folks over the last couple of weeks about that, and I'm encouraged by what I heard several times from our folks, that our customers are adding labor, and expanding their crews in many cases, which I think is going to expand capacity for the industry. As you know, labor has been the single biggest limiting factor on the industry growth over time. I think given how desirable the 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.
I think what we've seen year to date this year are some very positive signs in that area.
Got it. Okay. The last question from me. In terms of higher costs, I know you mentioned freight, I think in your release. Anything there other than that? Just wanted to get a better sense, basically, as to where you're seeing the greatest pressure points in terms of cost increases.
Sure. Certainly, freight is an area. Freight, fuel is 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 in that most of our freight happens on our own fleet. 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. Every time we renew a lease, that's an area that we're seeing inflation in as well. There has been of late some inflation on labor as well.
Got it. Okay. Well, thank you and best of luck.
Yep, 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. Mark, if you want to do my model too, I'd appreciate it. One more assignment.
I'll do something too. You can send it to me in the future.
One more assignment before you leave.
Just kidding.
Understood. I would never send you my model. Seriously, I think a lot of this has been asked, I guess what I'm trying to just think of is longer term, I don't know, maybe this is a Pete question, you guys have this pool financial model slide you include in lots of your presentations, sort of lays out what you think the model is. I guess what I'm wrestling with is, has this changed? Is the 6%-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? Where do you think we are in that process?
Yeah.
Yeah.
Yeah.
As your parting question, would you like to do it?
I'd be happy to, yeah.
Okay.
First of all, I think, we'll be giving an update in September. We'll have an investor and shareholders, and we'll kind of go through our longer term expectations and initiatives that we see. As Pete mentioned in his comments, to one of the earlier questions, there's definitely been a step up in industry volume and activity. As we look forward, I think there's more growth opportunity, over the next several years from an industry perspective than perhaps we've seen. Certainly, you look at pool construction and the acceleration there, and then the aging installed base and some of the factors Pete mentioned about the long-term activities that should continue to drive demand in the pool industry. I see us being fairly optimistic about the growth opportunity and our model. Yeah, we'll reflect that. Not significantly, but some modest uptick there.
Just to push you on the next level down, your gross margin's 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 sounds like a question I addressed earlier. Certainly in the short term, it's picked up. We've done a good job over time of maintaining stability. Some of what we see in the short term may not continue long term but I think there is some opportunity to bring the margin level up from what it has been over the last couple of years. That certainly will be an effort that we'll be focused on.
All right. We'll call that medium term then, maybe. The final one from me, I'm just curious, maybe this is more of a Pete 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. You seem pretty confident that this will continue. Just curious about that.
Yeah. It's a little early to tell you exactly what I think the number's 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, if I 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 on when the plant come back online, puts it out into the end of second quarter for a startup. By the time it has a meaningful impact on the industry, it will be later in the year. From a chemicals 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. I'm pretty comfortable that it's going to be above that number for next year. 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.
Yep.
The next question comes from David MacGregor with Longbow Research. Please go ahead.
Yes, good morning. Great quarter, Mark. Congratulations on your retirement.
Thank you.
I had a question on the new construction and I guess the question is just, to what extent is your forward visibility in new construction improving through any change in technology, the use of Pool 360 gives you a little more forward visibility. I don't know, maybe online engagement with your customers. 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 have occurred.
Yeah. 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. That's one of the things that we tracked.
Given the tightness of supply of the major components in pool construction, whereas in the past there was plenty of inventory in the pipeline, builders didn't put a lot of orders in advance saying, Hey, I'm going to need this product on this day. In order to make sure that we can accommodate their needs and that we have the equipment set on the day that they need it in the future, or that we have the plaster there to deliver on the day that they're going to deliver, the builders are sharing more information with us now about, Hey, here are the jobs I have in the pipeline. Oftentimes when they go sell a job, get a contract, they're coming into us saying, Okay, here's the job that I sold.
I'm going to need the plumbing kit here, the steel kit here and I'm going to need the equipment and finish kit on these dates. 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 factors, 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 would it be a return back to the 95,000, 96,000 pools, or maybe a little bit better than that? How are you thinking about the risk around that setup?
I think you've got to consider what could cause that. 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. Frankly, but for a major economic issue, I don't think that there is anything in the near term that would say, Wow. The 110,000 is going to drop back down to 95,000. That's really not how we read the tea leaves today.
Yeah. The one potential exception is weather, of course.
Sure.
Having favorable weather.
Buildable days.
Buildable days.
Yes
particularly in the shoulders of the season.
Yeah.
That allows more construction days, build days.
Yeah.
Great. Okay. Thanks for that. Then just a follow-up question, I guess. Just regarding Texas and Florida, to what extent did the quarter benefit from one-time spending on the repair or replacement of equipment damaged in the freeze earlier in the year? Are you able to size that?
Yeah. It didn't affect Florida, right? It was really a Texas issue in terms of-
Yeah, Texas. That's right.
We said that there was a lot of repair that was done in the first quarter. 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. 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.
Yep.
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's going to start to impact volumes? I guess, do you worry at all about price elasticity at all, or are there any lessons from this experience this year that makes you feel even more confident about, I guess, the pool owners' ability to withstand much higher pricing?
Yeah, I think you've got to break down the inflation and how it impacts the business. 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, that's not typically for a pool owner an insurmountable amount. It's nothing you'd say, Wow, 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. In terms of maintenance and repair, we see very little impact. Your question on inflation as it relates to construction 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.
One of the things that 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? In terms of a material cost increase, and if 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.
That's helpful. I guess my follow-up question is, I know it's relatively minor considering the revenue base is about $5 billion now, but how quickly do you expect the $30 million-$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?
As we've mentioned before, the way the rule is written, it says that they can't make the pumps anymore, right? They now have 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. 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. Given the shortages in this case, it basically pulls that in, but you also have to consider the seasonality too, and the impact on us is earlier in the year, right? Sorry, during the peak season. 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, Mark, best of luck in your retirement.
Yeah, thank you, Garik.
As a reminder, if you have a question, please press star then one to be joined into the queue. The next question comes from Ken Zener with KeyBanc. Please go ahead.
Hello, everybody.
Good morning.
Morning, Ken.
Look forward to seeing you guys in New York on September 15th. I'm sure you're going to give us a lot more insight. Let's talk about a few things now. How do you guys measure stockouts? How much, which is a way to think about how disrupted the supply channel is. Because I was at a hotel over the Fourth of July, and their hot tub wasn't working because they didn't have parts. How do you measure stockouts relative to a stress level in the supply chain?
Yeah. Our goal on stockouts is to be at less than 5%, right? That's been the goal that we've been chasing excuse me, for many years. 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. We do kind of a weighted average in our measurement. The goal is 5%. On some products, it is higher than that, and I would say overall, obviously because of the shortages, the number has come up, and it really varies by location, and it varies by product.
You're not suggesting it's actually something meaningful, I guess, in terms of backlog.
Meaningful. We treat every one of those stockout situations as a really bad situation. To us, they're all very meaningful because anytime that a.
Yeah
Says, Hey, do you have something? I have to say, No. Now, we look in the system, and we can tell the customer, Hey, here's when 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. It is elevated. I would tell you in some cases, it could be some crazy products that can be approaching 10%, but by and large, I would say the increase is slightly above the 5% target that we have established.
Okay. You talked about gross margins a little bit. Mark, I think you talked about positive gross margins as we're moving into the second half. You talked about product mix and stuff. 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. Related to that, your SG&A has come down quite a bit, is my assumption here. Well, we see it, certainly versus the prior years. I tend to think about your company as whether you get any gross or SG&A, it's not such a concern to me, but we are getting questions around that gross margin. 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?
Is that too 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, yeah, a little bit, I guess. Your question or your comment about gross or SG&A coming down, you're referring to SG&A as a percent of sales. SG&A is obviously.
Correct
growing. Our business has grown. We've added people and the support, added locations, facilities, vehicles. Our SG&A has obviously gone up. It's come down as a percent of sales the last couple of years. In part, I think I've mentioned this before at some point, leverage is easier when sales growth is higher. We've had obviously great sales growth the last year and this year, and that makes getting that SG&A leverage a little bit easier. At the same time, 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.
That is a big part of our operational initiatives, and we've made good progress there. We have more to come. We also pared back expenses during the pandemic. Initially, we talked about that last year. We're seeing some growth in those costs and growth in other cost areas, as Pete mentioned, things like leases and labor. Insurance is another area. The incentives. We talked about incentive costs were up substantially last year. We thought they'd be down this year-over-year. We talked about that earlier in the year, and in fact, they're going to be up. 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. 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. 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. I don't know if that covered both parts of your question, but that's kind of how we view that.
Yeah, it's interesting, right? The fact is you're running 200+ 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. Maybe you guys will address this at the Analyst Day more so, operating leverage needs to come through your gross margin or your SG&A, it seems like it fell off a lot. There's something structurally different, 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 were doing other things in distribution. Roofing in 2008 had this, as it 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. Religion came to that category via needing to get price, and then they just realized margins can be better. Is there anything that you see relative to your competitors and you all and the manufacturers given how high demand is and how there's input costs, 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.
Your competitors, they don't have as good a supply chain as you do, and especially things like hardscape, much less the core parts of the business. It seems like this has been a very structural benefit to you all.
Yeah. We have taken share. As I mentioned, we think we've taken 3 to 4 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. If I don't have it in one location, I may have it in another. 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 can't express how hard our teams are working to do what we do in a tight constraint environment because they are having to move product from one location to another and to coordinate deliveries and to 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. 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 a 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 PoolCorp. 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 ensure a smooth transition for Melanie as she has seamlessly prepared to step into the CFO role for PoolCorp. We wish Mark well as he transitions into his next phase of life. He will certainly be missed here at PoolCorp. As a reminder, we look forward to sharing our third quarter results on October 21st of 2021. 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.