Good day and welcome to the Pool Corporation Third Quarter 2021 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Melanie Hart, Vice President and Chief Financial Officer.

Welcome to our third quarter 2021 earnings call. I would like to remind our listeners that our discussion, comments and responses to questions today may include forward-looking statements, including management's outlook for the remainder of 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. We will begin our call today with opening comments from our President and CEO, Peter Arvan. Pete?

Thank you, Melanie, and good morning to everyone on the call. This morning following exceptional first half results and up against a very difficult comparison from the third quarter of 2020, the POOLCORP team once again raised the bar to record heights. We proudly posted net sales for the third quarter of 2021 of $1.4 billion, which is a 24% increase over the prior year quarter. Our base business grew 19% in the quarter with acquisitions contributing 5%. Our diluted earnings per share for the quarter were $4.54, which is a 55% increase over the very strong third quarter of 2020. The earnings per share were $4.44, a 64% improvement when excluding the ASU benefit from both periods in both 2020 and 2021. People's desire to spend more time outside in the comfort and safety of their backyard pool or outdoor living space remains strong. Our builders and remodelers are reporting very solid backlogs going into 2022 and in some cases through the 2022 season. Our retailers are recording elevated demand and our service professionals are working long hours just to keep up with service requests. From a supply perspective, lead times for our products are still above normal and in some cases well above normal. Component shortages, a tight labor market, and the global logistics crisis may keep up with the elevated demand of the industry a challenge for most of our vendors. Our talented teams have leveraged the unmatched scale of our network and the powerful balance sheet to mitigate supply interruptions by providing more products and options for our customers that are typically available everywhere else. Our teams have worked tirelessly in the most challenging environment of our times to make sure we can provide unparalleled service to our customers. Our network is strong. Our people are skilled and creative with a tenacious work ethic, and this combination has allowed us to once again prove we are the best in the business as we continue to take share from our competitors. In accordance with our strategic plan, we have opened 10 new locations and completed two strategic acquisitions during the year as we relentlessly pursue service excellence and capacity creation. Now let me share the specific results from our four largest markets. Florida and Texas continued to benefit from favorable demographic trends with base business growth of 26% and 25%, respectively. California grew 17%, while Arizona grew 18%, further proof that the industry is seeing strengths in all major markets. In total, year-round markets had base business growth of 22% in the quarter, which was slightly better than the 20% growth that we reported for the third quarter of 2020. Seasonal base business markets grew 16%, but this compares to a very strong third quarter of the previous year where we reported 33% growth for the same quarter. For context here, weather conditions were generally favorable in most markets for the quarter. Looking at end markets and excluding the impact of acquisitions, I am happy to report that commercial pool product demand has come back to greater than pre-pandemic levels. For the quarter, commercial product sales increased 25%, bringing the total year-to-date growth rate to 24%. We saw more pools reopened with elevated usage, driving maintenance and repair spending and construction projects are starting to flow again. This is a very encouraging sign as this market was impacted the most during the COVID travel and public gathering restrictions. Retail product sales were encouraging with demand up 16%, which compares to the 28% growth that we reported in this end market for the same quarter of 2020. Chemical shortages have impacted this part of the business more severely than others as it is a key product for a retail-focused customer. From a product perspective, equipment sales growth was strong posting gains up 23% for the period. This category includes pumps, heaters, lights, filters, and automation. Chemical sales were up 10% for the quarter as the industry grappled with shortages and managed rolling stock-outs on key products. As mentioned previously, the reduction in industry capacity after a major fire at the BioLab plant last year left the industry in a net short position on Trichlor and drove significant inflation on available product. Fortunately, there are several ways to sanitize a pool and the industry has adapted and improvised to keep pools clean and safe. This tightness in chemical supply is likely to continue into next season as BioLab rebuilds its plant. In the meantime, capacity expansion from the remaining players, product substitutions, and imports should mitigate the effects, albeit at elevated price levels. Lastly, building material demand remains strong in all markets, sales for this product line grew 24% in the quarter, and this is on top of the 29% growth that we posted in the third quarter of 2020. On a year-to-date basis, we were up 30%, which is driven by a very robust construction and remodel market. Turning to Europe, sales grew 5% in the quarter, but bear in mind, we had a very difficult comparison here as last year for the same period our European sales grew 45%. Like North America, demand remains strong, but cooler and wetter weather and supply shortages had a significant impact on the team in the third quarter. Horizon continues to accelerate, posting overall revenue growth of 25% in the quarter, bringing the year-to-date sales growth to 28%. Base business sales growth was 20% and 22% respectively for the quarter-to-date and year-to-date results. We are very pleased with how this business is performing, and we continue to invest in this platform. Like the blue business, supply shortages and extended lead times continue to be a challenge for our team, but their great determination and focus on the customer have driven solid share gains in the industry. Now let me turn to gross margins. For the quarter, our overall gross margin was 31.3%, which is a 240 basis point improvement over 2020. On a year-to-date basis, we are up 170 basis points. Like last year and last quarter, this improvement is driven by supply chain execution, certain volume-related incentives, inflation benefits, and product mix. In addition, we have been focused on more strategic and disciplined pricing, which is helping us in the current environment and will continue to help us going forward. Our ability to strategically leverage our balance sheet has been a key factor in our success in both the 2020 and 2021 seasons. This is a key differentiator for POOLCORP and has allowed us to provide industry-leading customer service while capturing greater value and positioning us for a great start to the 2022 season. From an expense perspective, the team again delivered incredible results. Our operating expenses for the quarter were up 13%, which is outstanding given our 24% revenue growth for the quarter. Yet again, the team is focused on execution, hard work, and capacity creation initiatives allowed us to achieve record levels of operating leverage. Pool360 continues to be a cornerstone of our business, comprising 12% of our revenue and growing 47% in the quarter. We are excited to announce that beginning in the fourth quarter, we will be rolling out the next generation of this strategic platform that we think will further drive adoption and help our customers be more efficient. Wrapping up the income statement, I could not be more pleased to report that our operating income increased 60% in the quarter to $237.3 million. By any measure, a masterful performance and a true reflection of the incredible team and unmatched capabilities at POOLCORP. Finally, with three full quarters behind us and a very favorable outlook for the balance of the year, we are updating our earnings guidance for the full year of 2021 to $14.85 per share to $15.35 per share. Excluding the ASU benefit, the range is $14.46 to $14.96 per share. Before turning the call over to Melanie, let me offer some closing thoughts. Beginning with the onset of the pandemic in 2020, we saw a change in consumer behavior that created a significant increase in demand for our products as people with pools use them more and those without a pool or outdoor living area began looking for someone to build them their own backyard retreat. We believe that this trend will endure as the flexible work-from-home arrangements continue and people recognize the many benefits of an enjoyable outdoor living lifestyle. When you add this to a healthy housing market where equity levels have increased nicely in the last couple of years, and with pools now regarded as a highly desirable feature according to the National Association of Realtors, it simply furthers our confidence in the long-term growth prospects for the industry. We believe people will continue to move away from urban and higher costs of living areas to more affordable suburban housing in pool-friendly markets, furthering their desire to invest in the outdoor living lifestyle. We feel that the Southern migration will continue for the foreseeable future, giving those people a year-round environment to enjoy pools, patios, hot tubs, and outdoor kitchens. Further, we have been encouraged to see industry capacity start to expand as our customers seek to expand their businesses, albeit in a very challenging labor environment. From a supply perspective, manufacturers are also adding capacity, which should allow them to capture more of the elevated industry demand. Inflation this year will likely be in the 6% to 7% range, up from our previous estimate of 5% to 6%. And it looks like that will repeat again for next year, given the global supply chain issues. To date, this has done little to temper demand, and in time this inflation passes through the supply chain. All in all, we are positioned incredibly well to continue our tremendous performance. Demand is strong, the team is focused, and by working very closely with our vendors and customers, we bring outdoor living to life. Thank you. I will now turn the call over to Melanie Hart, our Vice President and Chief Financial Officer for her commentary.

Thank you, Pete, and good morning, everyone. I am thrilled to provide some additional commentary on our exceptional third quarter financial results. We have continued to see positive growth trends in the third quarter related to both our net sales growth and gross margins. Net sales benefited approximately 7% from inflation and 5% from acquisitions in the quarter. We once again realized higher than normal increases in gross margins. Gross margins saw an increase of 240 basis points during the quarter, with base business gross margins up 250 basis points. Consistent with our discussion on our second quarter earnings call to address the anticipated supply chain constraints, we took the opportunity to purchase ahead in product areas where we forecasted continued high demand. Our strong inventory position has allowed us to gain share and continue to provide exceptional service in a high demand and tight supply chain environment. As we have seen product cost increases come more frequently than in the past, we have established systematic pricing updates to ensure we quickly adjust to the more rapidly changing environments. Additionally, we have an ongoing process in place to focus on a judicious evaluation of all customer pricing, taking into consideration the cost to serve each specific customer. Having the capital strength to be able to confidently move forward with increasing the amount of materials in the supply chain is a strength for POOLCORP that sets us apart from many of our competitors. Our higher purchasing levels resulted in higher volume-driven vendor incentives, which also benefited gross margins for the quarter. Given the better than expected third quarter results, we now anticipate gross margin improvements of more than 170 basis points for the full year 2021 compared to 2020 versus the 100 basis point improvement we were expecting at the end of the second quarter. Record sales growth and improving gross margins only tell a portion of the story of our results for the quarter. We have also reduced our quarter-to-date consolidated operating expenses as a percentage of net sales by 130 basis points. These expenses excluding the net recoveries were up 14%, while consolidated net sales grew 24% in the quarter. Base business operating expenses were down 160 basis points at 14.2% of net sales for the quarter and sales growth of 19%. We have seen inflationary cost increases in the areas of compensation, healthcare, freight, and rent. Our continued effort on capacity creation in our existing locations has generated strong operating expense leverage. Our gross margin expansion and strong operating expense management have allowed our operating margin to grow by 380 basis points, coming in at 16.8% of net sales for the third quarter compared to 13% in third quarter of the prior year. Interest expense of $2.3 million is up slightly compared to $1.9 million in the prior year. Third quarter 2021 average debt was $354.3 million compared to $331.5 million for 2020. Our trailing 12-month leverage ratio was right around 0.5 at quarter end. During the third quarter, we amended our revolving credit agreement to increase the total borrowing capacity from $750 million to $1 billion. The renewal allows for lower available interest rates and favorable terms on covenants, and also provides us substantial capacity and liquidity to maintain our strong balance sheet and efficiently manage our capital structure going forward. Our annual tax rate excluding the ASU benefit is expected to be around 25% on pre-tax earnings for the full year, coming in slightly lower for the third quarter at 23.2%. Our ASU tax benefit in the third quarter was $4.2 million or $0.10 per share. This was less than the $8.5 million or $0.21 realized in the same quarter of last year. As these benefits result from employee stock option exercises that occurred during the quarter, the timing is difficult to forecast and therefore not included in our guidance range until realized. We do have an additional $1.4 million of ASU benefit related to stock options that should be recognized between the fourth quarter of 2021 and the first quarter of 2022 based on expiration date and calculated at the current stock price. Next, I'll discuss our balance sheet and cash flows. Increases in our total net receivables of 30% reflect our sales growth in the quarter. Our days sales outstanding at the end of the quarter was 25.7, down from 27.6 days in 2020. Looking at inventory compared to 2020 reflects an increase of 70% or 63% on a base business comparison as we invested in inventory to efficiently serve our customers and better manage supply chain disruptions. We have also added inventory to support our 10 new locations opened since last year. Inventory levels at September of 2020 were less than we would have liked and virtually flat with 2019 coming off of the strong selling season. Our third quarter two-year sales growth was 57%. Our deliberate purchasing actions have us well-positioned to support ongoing sales growth into 2022. We saw our inventory turn days improved from 97.5 in 2020 to 94.7 in 2021. Cash from operating activities is $359 million on a year-to-date basis driven by strong earnings contribution and also reflecting the investments made into inventory. Our return on invested capital of 50.9% is up from the prior year of 36.4% and highlights our sound deployment of capital. Operating cash flows for the quarter benefited from deferred income tax payments as we took advantage of the IRS relief for those impacted by Hurricane Ida. We were able to defer payments that would typically be made in third and fourth quarters of 2021 until January of 2022. In the ordinary course, we would have made our third quarter estimated federal tax payment of $56 million. I want to pause to thank all of our teams that were in the areas impacted by Ida. Certain of our sales centers were operating on generator power to get products to our customers so they could begin repairs as quickly as possible. Many of our support teams relocated out of the area to continue to serve our fields. Overall, our disaster recovery plans operated flawlessly and without major disruptions to our customers. In support of our Employer of Choice initiatives, we have established during the quarter the POOLCORP Employees' First Fund to support any employees that are impacted by natural disasters. So far in 2021, we have executed on $132 million of our authorized share buybacks, leaving $495 million available under our repurchase authorization. Share buybacks so far in 2021 exceed the amounts repurchased in 2019 and 2020 combined and continue to be an area of value added to the shareholders as part of our overall strategic plan. We have repurchased 343,000 shares year-to-date at an average price of $386 per share. Acquisitions added 5% to our sales growth for the third quarter and 7% for the year-to-date results. However, as we move into the fourth quarter, we begin to lapse several of the larger acquisitions completed in 2020, so the impact of acquisitions on the results for the remainder of the year will not have as significant of an impact. We would expect acquisitions to add only about 1% to our sales growth in the fourth quarter. As we look at how we think we expect to close out the year, sales growth momentum from the third quarter has shown that demand continues to be strong. For 2021, we have one fewer selling day than we did in the fourth quarter of 2020. We expect sales growth of over 30% for the full year. This considers our projected fourth quarter sales growth rate to moderate with one less selling day. Normal weather assumptions for the fourth quarter this year compared to the favorable weather last year and net results from our Jet Line acquisition are included in both comparable periods. Fourth quarter prior-year sales growth was 39% for base business. Gross margins should remain with a positive outlook as a result of our inventory investments with improvements in the range of what we were able to achieve in both second quarter and third quarter of this year. Purposeful expense management will allow for a full-year operating margin improvement of 350 basis points. This improvement is well in excess of our historical results, and while it may have been bolstered by exceptional top-line and gross margin growth, the principle underlying our ability to improve over time remains strong. We have increased the range for the full year 2021 to consider earnings results for the third quarter including an additional $0.10 from ASU, expected positive demand trends, and have provided updated guidance of $14.85 to $15.35 per diluted share. I will now turn the call back over to our operator for our question-and-answer session.

We will now begin the question-and-answer session. Our first question will come from Ryan Merkel from William Blair. Please go ahead.

Hey, everyone. Good morning.

Good morning.

So first off, Pete, gross margins really jumped off the page. How should we think about sustainability of roughly 30% margins you put up for the full year as we think about 2022?

Yes. It’s obviously a little early to provide guidance for 2022, but I can tell you as I said in my comments that demand is strong. We are in a very good position from a supply chain. We've made investments in inventory to do two things really; one is to make sure, and most importantly, that we can continue to serve customers and fill orders as they need and certainly to keep pace with inflation. And secondly, I think we've put a lot more rigor around our pricing processes and discipline, and we've added some analytical horsepower too that will help us. So again, a little bit early to give you guidance on what we think about gross margins for 2022. But I can tell you that the things that we outlined in my comments should sustain.

Okay. Yes. That's fair. You mentioned that price inflation is going to be up nicely again next year, so that certainly helps. But with that in mind, are you planning to do a bigger than normal winter pre-buy since you can enjoy a little margin lift in the first half of 2022? Is that dynamic in play?

Yes. So we have a considerable amount of product down to order and have had really throughout the year just trying to keep pace with demand. So I would tell you that the amount of product that we have on order today would be more than we would typically have on order.

Got it. Okay. And then last one, I know you made some good comments about 2022 with the backlogs and everything you're seeing. But if I can get a little more granular, as we think about 2022, should we think about going back to normal industry growth, let's say 4% to 6% just off the higher base? Or is there a reason to believe that it remains a little bit elevated relative to history?

Yes. I think that's an interesting question, right. And I guess I would unpack that a little bit and look at the elements, right. So you have inflation, which again is a little bit early to tell you what the total inflationary effect is going to be for 2022, but inflation is certainly going to be elevated. We think new pool construction this year will be between 110,000, 115,000 units, which puts new pool construction up 20%. So the installed base has grown nicely over the last couple of years, demand is still strong, the commercial business has come back, and backlogs are good. So I would say for – again, we're not ready to call it 2022 number, but I would just go back and look at the elements that we think are driving demand. I think the work-from-home dynamic is going to stay in place. I think Southern migration will stay in place. The housing market is in good shape. So we're encouraged by the results. And if you break down what drives our growth, we'll have – I think we said we opened 10 locations this year, we should have a similar number for next year, a couple of acquisitions this year, we have a good M&A pipeline going, so it's – the elements are in place for another good year.

All right. Well said, Pete. Thanks. I'll pass it on.

Thank you.

Our next question will come from David Manthey from Baird. Please go ahead.

Thank you. Good morning, everyone. Pete, my first question is on gross margin as well. You clearly have had some nice tailwinds here. But you also mentioned some of the enhancements and things that you've changed as it relates to pricing and so forth. Is it too optimistic to think that 30% is the new 29%, or do you think about it, hey, we can recapture or maintain half of the gross margin improvement we've seen? How are you thinking about the step function that we have here today relative to what we should expect not just next year, but five years from now?

I think there's a lot of things in play, right. When you look at what drives gross margin, mix is a huge factor. The inflationary effect is a factor, pricing execution and discipline is a factor, the volume-related incentive programs are a factor. So I can tell you we're paying very close attention to it, but for me to tell you that, hey, I think this is the new floor, I just think it's way too soon to call anything like that certainly out for five years. But the way we think about it is really kind of on an element and by element basis and make sure that we're executing on all of those. Certainly, the robust demand environment is a very positive thing.

Right. Okay. And then as conditions change going forward whether that's price or the economy, can you just give us an idea of what levers you have to pull if sales or gross profit dollars are down moderately at some point in the future? What are the key factors that you would look to lean into?

Okay. First of all, you mentioned our performance-based incentive compensation. And so coming out of 2020, we had mentioned that we expected that number to be down around $30 million going into 2021. And in fact, our projections for this year now, we’re thinking that we're actually going to be $10 million to $15 million higher than where we were in 2020. So that gives us quite a range of flexibility on the incentives compensation side. But really outside of that, there's more direct factors that I would want you to take into account. So I know that we've talked a lot about capacity creation, so we've covered those historically. But the other thing that's really not evident in these numbers because of the hard work that the team has put through is the fact that within this environment a lot of the market share that we've gotten and a lot of the share gains have come from our ability to serve our customers, but doing that is not without additional cost. So we have had the opportunity where we've had to move product around in order to serve our customers and do other things that from an out-the-door operating expense side has cost us more in the current year. And so those costs we also expect to come out of the next year base when the supply chain is more in line.

All right. Congratulations and thank you.

Thank you.

Thank you.

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

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

Thank you.

My first question is as we think to 2022 and obviously all the tightness that is in the labor markets and the supply chain, can you talk about your supplier's ability to support incremental growth next year? Are you having to further expand that supply base and perhaps rely a little bit more on imports and what that might mean as we think about some of those global logistics?

Yes. Very good question, Susan. And the way I would think about it is you really have to think – you have to consider what products we're talking about. So if you look at the major equipment suppliers in North America, I think they're going to be in better shape for next year. Certainly they would – you'll ask them the same questions, I'm sure. But based on what we are seeing, they won't have the COVID hangover that they started the year with. So I think production rates, at least the amount of inventory that we are getting is much better than it was. So we feel good about their ability to – and I think I mentioned that in my comments that they'll be able to pace better with us going into the 2022 season. Number one. And number two, our inventory position starting the 2022 season is going to be better, which again creates a little breathing room for them. One exception, notable exception would be on chemicals, as I said because in that situation with the BioLab fire, that was a huge chunk of the industry's capacity of the Trichlor product. So that pool is being made up a couple of different ways. So in that case, there is some import product that is coming in. And as you know, with the snarled supply chains, it's taking longer and it's more expensive when it gets here. But I think the domestic – the remaining domestic producers are also going to be in a better position from a capacity perspective to provide more product. And then there's also alternatives for sanitization, which is – primarily either salt system or liquid chlorine chalk, which will again, I think be in a better position. So all in all, I think the industry is ramping up and has ramped up and worked very, very hard. We mentioned our folks working very hard this year, our suppliers have worked equally as hard trying to keep pace with the industry. But I think we'll be in a better position going forward. I don't really see major changes in the supplier landscape.

Okay. That's very helpful color. And then my next question is, obviously the weather has been very favorable especially in the seasonal markets heading into the fourth quarter. Can you talk about the level of new construction that you're seeing and any comment on the backlogs as we think about coming into the end of this year and into 2022?

Certainly. Again, I think I mentioned it in the comments. We've spoken obviously to all of our dealers to see where they are positioned and in virtually all of the geographies the dealers have very robust backlogs. I mentioned one of the things that's also very encouraging is that many of our dealers are now looking to expand their own capacity. But they're having to contend with the tight labor market that the entire world is having to manage through right now. So from a new construction basis, we think that new pools are going to be up. As I mentioned, about 20% could be a little bit more plus or minus depending on what happens in the shoulder or in the remaining months of the fourth quarter. But activity is very strong. So it's going to leave them with a very good backlog to start the season. So I think from new construction, there's plenty of work and we feel good about that continuing. Remodel is another area, which is also a big portion of our business and with the strong housing market and strong home equity values, the remodel and renovation market is good and many of our dealers are also booked out for many months with pending remodel and renovation projects. So again, just gives us further confidence in the long-term outlook for the industry.

Great. Okay. Thank you for all that color and good luck.

Thank you.

Our next question comes from Noah Merkousko from Stephens Incorporated. Go ahead.

Thank you, and good morning.

Good morning.

So you mentioned a little bit about the share gains that you're continuing to see as you're able – your size has allowed you to secure product when others maybe haven't sounds like these supply chain issues are going to continue at least into 2022. But any sense of how sustainable these share gains might be? If capacity does really improve maybe later next year, do you think you'll start to maybe give up some of the share gains you've got? Or just trying to understand how sticky you think some of that might be?

I can tell you – first of all, that's a very insightful question. So thank you for asking it. What I will tell you is that we are very focused on the customer experience. So we recognized that we are busy. We recognized that demand is elevated and people need product. But we also don't take that for granted. So our team works tirelessly to make sure that we provide the best value for our customers. So it's not just about having the product, it's about having the product, and it's competitively priced and it's available when they need it, and other tools that allow the dealers to be more productive, tools that allow the dealers to expand and grow their business, whether it's our marketing programs or whether it's our digital marketing tools or whether it's the Pool360, which allows remote access, they can look up schematics, they can order parts, they can put things in priority pick. So I can tell you that we measure things like speed at the counter. And for our dealers, time is one of their most critical resources. So it's not just – we don't just look at sales dollars even as busy as we have been. We still measure cycle time to serve a customer at the counter because in a business like ours, approximately 70% of our transactions take place at the counter. So nobody knows for sure how much of the share gains will remain with us. But I can tell you that my entire team all the way down right through every employee in POOLCORP is very focused on providing the very best customer experience. And we think that in the long run that wins out. So if you have the right product, we have the right locations, that's why we're expanding our footprint so that we have capacity and that we're conveniently located for our dealers, and that we have robust inventory management programs in place. So that we have more product than anybody else available, that we have the technical expertise, that we have the marketing programs that we appreciate the time with them at our sales centers and don't ever take that for granted and we try and get them in as quickly in and out as quickly as possible. We think that in the end that's going to serve us best and that gives us the best chance of retaining the share gains that we have received.

Thanks. That's certainly helpful. And then as a follow-up here, it sounds like when you're looking across the different channels that you guys operate in, sounds like demand is strong across all of them and looking into 2022. But I guess, where are you most cautious or where do you see possibly signs of any demand cooling off as you look into next year?

We surveyed dealers really coast to coast, right. And we are in – we talk to our customers, we talk to them each and every day. And I can tell you right now, the amount of leaves that they have and the amount of work that they have booked would suggest that for the time being they're in very good shape. But then I fall back to the macroeconomic conditions that we think are driving the result. I would tell you that, as I mentioned, this work-from-home dynamic has certainly enhanced people's desire for a pool or a patio or an outdoor living because frankly, they're spending more time at home and less time in the car commuting or at an office. We think that people moving out of high-cost living areas. And when they're exiting those areas, they're exiting with very nice gains on home equity. So they're armed with very good down payments that they can use for renovations and remodels on the new home that they purchased in a lower-cost living area. In many cases, that happens to be in more year-round markets. So quite frankly, we're very encouraged by the outlook. We don't look at it as a short-term gain; we look at the underlying fundamentals and say that things are good now that a lot of that is tied to the housing market. So if the housing market – as long as the housing market stays strong, people feel that their financial condition is good and improving, then we think that the desire to spend money on outdoor – the outdoor living experience, whether it's a pool or patio or hot tub or an outdoor kitchen, we think has a lot of legs and will continue.

All right. Thanks for taking my questions. I'll leave it there.

Thank you.

Our next question comes from Stephen Volkmann from Jefferies. Please go ahead.

Hi. Good morning, guys.

Good morning.

I'm working from home today just to help prove your point. So thanks for taking my question. A couple of quick end market questions, if I may. It seems like the building materials, I guess, has been growing a little bit faster than the rest of the business. I'm curious, how would you describe sort of new build and remodel as a percent of total these days?

Yes. I think historically we've said that new build is in the kind of 15% to 18% and renovation and remodel would be in the 23% to 25% range. I would tell you, Stephen, is probably still – it's still in that range. Last year I think we saw more focus on new construction than remodel. But I think as the builders have added some capacity and frankly gotten caught up in some markets, I think there's been a bigger desire for renovation and remodel, which is where I think there's a lot of pent-up demand independent of the backlog and desire for new pools. So I would say that I don't think that the percentages have shifted all that much, but I can tell you that they both have significant backlogs.

Okay. And I think you mentioned in your prepared comments that you thought that the industry was adding capacity as well. So what do you think new pool builds could be in 2022? What do you think the industry could do?

A little too soon for me to tell you what 2022 will be. I can tell you that it's been a long time since I've spoken to dealers that told me that they're adding crews, and we've heard that – we've heard that several times, so it's not – it's more than an incidental comment. But again, it's a very challenging labor environment. So I think we can give you a better estimate on that when we give our wrap on 2021 and provide guidance for 2022. But I can tell you that's really one of the most encouraging things that I've heard of late is that the dealers are adding capacity to their crews.

Great. Okay. Makes sense. And then the final one, maybe I'll take just a different whack at this margin question, if I may. I think long-term sort of your algorithm, I think we thought of sort of the mid-teens incremental margin over a long period. Do you think that's changed just given some of the dynamics we're seeing?

Yes. So from an operating margin standpoint, we've certainly seen accelerated growth in 2020 and 2021. But from a long-term standpoint, we're still reiterating kind of our 20 basis points to 40 basis points expected improvements on the new higher base of numbers that we should see going into 2022.

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

Hi. This is Joe Nolan on for David MacGregor.

Hi, Joe.

I was just hoping for a capital allocation update just at current share prices. Does share purchasing continue to be your best use of cash or is there other areas where you might want to allocate that cash at this point?

Yes. So from a capital allocation standpoint, we do first look to support the current business, which from an overall turnover standpoint, we have done that very well. We also look to invest and expand, and so we've added 10 new locations this past year. We've also completed four acquisitions in 2020 and spent quite a bit more. We spent about $125 million, which is higher than our traditional level. This year, so far, we've completed two additional acquisitions. And so from a long-term perspective, we certainly see the benefit of adding to the network and including those acquisitions. And then after that, we did also increase our dividend policy earlier in the year to increase the dividend rate that we're giving back to our shareholders. And then once we've kind of taken a look at all of those various opportunities, we do continue to believe that share buybacks is a very accretive benefit to the company. And so as I mentioned, we did increase actually the total dollars that we've spent on share buybacks in the current year, and we'll continue to look at that as it makes sense going forward.

Very helpful. Thank you. And then just as a follow-up, you mentioned the rolling out of the next generation of the Pool360 platform, I believe you said that was in the fourth quarter. Just any details you can provide on that? Any features that are going to be added?

Yes. We'll start to roll out in the fourth quarter of – we've already – we've frankly already started, we have customers in beta right now, and that will be rolled out in full force really after the first of the year. It's a very robust upgrade over the tool that we have traditionally used; it is much more user-friendly for the customers, the search function and the available functionality on there. We have captured really the voice of the customer, concerns and suggestions and ideas and kind of wrap them into the tool, and it kind of goes hand-in-hand with our BlueStreak kind of a kiosk or counter application that we're using. We're also arming our BDRs to be able to use the BlueStreak tool when they're actually out with the customer. So we are investing nicely in kind of the whole customer experience as it relates to technology. So I think customers will be very pleased and very happy with the improved functionality and that we listen to them with things that they suggested would make the tool more user-friendly for them and certainly make them more inclined to use it.

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

Hi, thanks. Thanks for taking my question. Just wanted to ask first off on freight inflation. I think if I recall correctly, you own your own fleet, and it seems like you've managed that really well, particularly on the outbound freight side. But just curious if you're impacted at all whether it's respect to drivers or how your fleet capacity is set up moving forward to handle this order demand?

Yes. Certainly, we are not immune from the increased cost as it relates to fleet. We've seen inflation on the driver side. Certainly, fuel is up considerably over where it was a year ago and even the cost of vehicles is up. But if you remember, a few years ago, we started our capacity creation initiative in earnest, and one of the things – one of the key elements of that was truck utilization. So the key for us is actually getting higher utilization rates on the truck, which allow us to absorb the increase in operating cost, but still create operating leverage with the truck. So in a type of environment that we're in, given that most of our products that are delivered are delivered on our own trucks, that actually has worked in our favor, so the team works very, very hard on execution as it relates to the truck utilization and the overall transportation rate because we know what's coming down the pipe with fuel and driver cost and other associated maintenance and repair.

Okay. And then I guess that just leads to my next question just around operating leverage into next year. Clearly, there's a lot of focus today on gross margin. But just curious how we should start thinking about the drop-through on incremental margin for OpEx into next year? Should it be consistent with the normal algorithm? Or is there going to be any change just given how strong you've managed it this year?

Yes. So in a year where we return to our normal growth as we've talked about to 6% to 8%, we would expect to see kind of a normal drop-through, we would expect in the event or in the year that we finally do return to that normal growth that we would have a benefit from some of the incentive compensation. And also we do continue to work on our capacity creation that will allow us to continue to reduce our operating expenses as a percentage of overall sales. But the operating margin leverage on that would be similar to what we've seen historically within the 20 basis point to 40 basis point improvement.

Got it. And just lastly, on the M&A environment, it seems like the pipeline is full. But just wondering if you're seeing maybe incrementally more activity maybe on – some sellers are looking to capitalize on market strength or maybe even smaller players just are finding themselves unable to compete with your scale, so I'm just curious. Has the pipeline stepped up a bit in activity or has it just remained full throughout the year?

Yes. We certainly have seen the pipeline step up from a seller's perspective. A lot of them have gotten much more interested because of some of the pending tax changes that are coming. And so we do continue to evaluate those opportunities as they come through. We do take a very focused look on them and ensure that from a strategic standpoint, we believe that any of those acquisitions would add value to the overall consolidated financial statements going forward. So we do have some specific criteria that we look at as we evaluate those acquisitions.

Okay. Makes sense. Thanks again. Best of luck.

Thank you.

Our next question comes from Ken Zener from KeyBanc. Please go ahead.

Good morning, everybody.

Good morning.

So interesting time to be a distributor. I asked you this last quarter, Pete, could you kind of talk about stockouts? You have a lot of products, you can move products around. I just want to give you a little context. So let's make sure, right, they couldn't get chemicals to put into their paint. They said they missed sales in the high single-digit, that's very clear and material constraint. So I'm trying to kind of parlay that into your business for two reasons. One, the very strong sales you had delivered, was there any lost business owing to stockouts? And I think the nuance of the question is really, you might have had the material, so you got market share, but did that mean the market couldn't grow as much as it could have? And I'm just trying to think about right, how that's working from your business versus what you think the market could grow?

Okay. Interesting question. It's a – stockouts really vary by product. So I would tell you – it's a different answer. So if we talk chemicals for instance, we talk Trichlor, there's certainly a different answer as it relates to stockouts. As I mentioned in my comments, we had rolling stockouts as it relates to Trichlor; there simply wasn't anything we had, I couldn't move it around from one facility to the other. We took whatever product we could find. We tried to be fair with customers and didn't allow people to stockpile and took care of as many customers as we had, but we were net short. In that situation, customers have a couple of choices; they can go to someplace else and see if they have the product, which in the case of Trichlor, in most cases, the answer was if we didn't have it then nobody else had it. And then they move down…

Right. But it sounds different. In pumps or filters, it could be very different. Like, I just had to explain to my neighbor that his pump was broken because it was so loud. But he could go to you or to someone else, but if someone else didn't have it, could they always get it basically from you? Like, were you out on equipment, for example, anywhere? Was that really just not an issue for you guys?

Yes. What I would say Ken is that we had certain items that were in short supply from the manufacturers and in those cases, the value – one of the biggest values that we provide our customers is that we may not have it in one location, but I may have it in another. And if it's just generally net short in the industry and it doesn't exist like some key products were early on in the season then there is another alternative or another vendor. So if you need a pump, you may have wanted vendor A, and that pump wasn't available, but it's not like we said, hey, I don't have anything to offer you; we said you wanted – you asked for pump A, but we have B, C and D that we can offer you, which will get you up and running and get your water cleaned up to use your pool. And that's frankly, the area that we excelled because it was a) the chances of us having it in the multitude of facilities that we have in the market were better than virtually anybody we compete with in general. But in those cases that we still didn't have the particular item because it was sold out and backed up on the vendors unable to produce then we had another product. So it wasn't like we said, I don't have anything to offer you in most cases. I'm sure there were some cases where a specific product we may not have had an alternative, but given the fact that sales were up so nicely and at the same time our inventory was growing kind of shows you the flexibility that we have and the power that we have in the market to offer a better solution to customers.

Right. Yes. That's a very enviable position to be in. As you said that – it heard to me, are you getting stronger? I mean part of your guidance obviously reflects your cost; your cost partly reflects how much you sell, but also rebates and things. Is there any large rebate dynamics that we should or you'd like to call out that are moving through your margins given the volume you're having?

I think certainly part of the gross margin calculation for the business are certain volume-related programs. So we are having a very good year. So it stands to reason that that part of the gross margin is enhanced. Now the year starts again next year, there's a new program again next year and we have to work through that.

Right. I wonder going down to the human level here, your facilities are operating at a very high rate. How are you handling your employees not burning out because they're probably one of the busier elements of the supply chain right now in the pool market? How are you kind of handling that given all the demands on them?

If you remember, when we first met, I told you that there are four things. My four operating principles are safety, growth, profitability, and employer of choice. And what makes employer of choice so important is that there's really nothing that you can buy from me that you can't buy from anybody else. It simply is the team and the value proposition that they create around those things – those products that you can get from other folks that makes the difference. We are very fortunate, very blessed to have an extremely dedicated team. And I couldn't be prouder of the results and more appreciative of the results and the hard work that they have put in, order...y to accomplish and to frankly, to facilitate our dealers and our customers ability to accomplish what they've done. So we strive to take very good care of our employees we have. I think Melanie mentioned that our incentive compensation, which a year-ago, we were telling you well could be the source of some cost savings, our operating – sorry, our bonus program, this year incentive compensation, whatever you want to call it is up significantly and will be up. So we're basically taking the bounty that of the terrific results we have, and we are sharing it with the folks, but it's not just about money; it's about appreciation and recognition of their efforts. And I think we've done more of that this year than we ever have done. And it's something that has allowed us to keep the workforce together behind us and engaged.

Last question. Thank you for that. With manufacturers' capacity not meeting your 100% target rate, and that's the way you're feeling smaller distributors from our pool survey that we just conducted, we're seeing that distributors are perhaps over-ordering right, 130, they really want to get a 100 units. Can you give a little context for why you think that dynamic which you also expressed might not be sending the wrong signal through the chain, through the manufacturers, i.e., if everybody is over-ordering a little bit, right, backlogs for everybody look a little stronger when they're not there. Thank you very much.

Yes. I think what you have to keep in context is that, Melanie pointed out in her comments that the inventory is up in dollars quite a bit. But if you look at it in days, our days of inventory are actually down. So it really is about getting your head wrapped around what the true demand signal is and making sure that we have products in place. Now the demand signal from the market is very strong, right, so the backlog, the amount of work that they have today and the amount of work that they have for going into 2022, and as I mentioned, sometimes all the way through the 2022 season, if you simply just look at the amount of product that is on order and you turn the crank on how much product we're going to need through the balance of the 2022 season, it doesn't really give me much concern at all in terms of, wow, we have too much product, frankly, at this point, I'd really rather air on the high side because it allows flexibility on our customer side to keep them moving forward because every time one of our dealers has to go back to a job to complete it because maybe they didn't have the whole good that they needed or the part that they needed. That simply is a huge productivity drain on them. So we've worked very hard to make sure that we have as much of that product on a first-time fill rate to allow them to keep going. So again, given the dollars, given the seasonality that this is the time of year that we should be ramping up from inventory to start and be prepared for the 2022 season. So I'm not really concerned with the amount of product that's on order because we will certainly go through it.

Thank you very much.

Thank you.

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, everyone, and thank you for your support and for joining us today. We hope you all have a safe and happy holiday season because the next time that we will talk together will be on February 17, 2022, where we will be reviewing the fourth quarter and full-year results for 2021 and providing guidance on our outlook for 2022. Thank you. And we hope you all have a wonderful day.

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