Pool Corporation (POOL) Q1 2017 Earnings Report, Transcript and Summary

Good morning, and welcome to the Pool Corporation First Quarter 2017 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mark Joslin, Senior Vice president and Chief Financial Officer. Please go ahead.

All right, thank you. Good morning everyone, and welcome to our First Quarter 2017 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 2017, and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and variables that could cause the 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 posted to our corporate Web site in our Investor Relations section. Now, I'll turn the call over to our President and CEO, Manny Perez de la Mesa.

Thank you, Mark, and good morning to everyone on the call. Our challenge this first quarter was to surpass the extraordinary first quarter that we had last year, and we accomplished that. In fact, we realized 5% base business sales growth on top of last year's 13% growth, without the same weather benefit. In addition, we continue to make investments in our business as we continue to build for the future, and yet, we were still able to realize growth in our base business operating profit; all together, a strong first quarter as we solidified our foundation as a value-added distributor. Our base business sales growth in our largest four markets, California, Florida, Texas, Arizona, was 6%, while the growth in the rest of the markets was 3%, as these markets were the primary beneficiaries of the mild winter last year. These base business sales results include our green business, which had a modest base business sales decrease in the quarter, although their sales were up when including the acquisition that we closed in April, of 2016. On the product side of sales, Building Materials and Related Outdoor Living Products continued its strong performance with 14% growth, while Commercial had 12% growth. Pool Equipment growth was 8% despite the challenging comparable from last year. The growth in these product categories reflect both the ongoing recovery in the remodel and replacement sectors of our business, as well as our consistent market share gains. The retail products side of our business increased by 4% in the quarter, as the installed base of pools grew by 1% with virtually no inflation, and our performance reflecting market share gains. Our gross margins were modestly up due to minor product and customer mix differences. These differences in mix should largely work themselves out as we proceed throughout the year. While our base business operating margins reflects a modest declines, that's largely due to both the extraordinary first quarter of 2016 and certain expense timing differences. For the year, we expect operating margins as well as our ROIC to increase. We increased our annual guidance by $0.12, to $4.12 to $4.32 per share, reflecting both an increase in our estimated benefit from the new ASU from $0.20 to $0.30 per share, and an increase of $0.02 in our diluted EPS using 2016 GAAP based on our first quarter results. We are cognizant that we are just now entering the seasonally busiest time of the year, which is one of our service level and value proposition are most distinctive as we work to help our customers succeed. Of course, these results are only possible because of the commitment of our people throughout the company to our customers, our suppliers, and each other. We are extremely fortunate to be involved in a business where every day we help people realize their dreams of a better home life, while simultaneously assisting over 100,000 customers realize success. We look forward to making 2017 another successful year as we continue to create exceptional value. Now, I'll turn the call over to Mark for his financial commentary.

Thank you, Manny. I'll start off by commenting on our base business operating expenses in the quarter, which were 7% higher than Q1 2016, and didn't provide the kind of operating leverage that you might be used to seeing. There's a couple of reasons for that. First, while we had a tough comp overall for the quarter, this was particularly true for our operating expenses given that base business expenses were up just 3% on 13% sales growth in the first quarter of 2016. Looking at the two-year growth rate on sales and expenses provides a better view of how expenses have been managed, as well as the leverage we have. Without going into details here, there were also some timing issues on expense recognition, which contributed to the high growth rate this year. One factor of note is our employee-related costs, which accounted for 58% of our total operating expenses in the quarter, and are primarily driven by headcount. Our total base business headcount was up less than 2% at March, 31, 2017, compared to the prior year period, so no issues here. The bottom line on expenses is that our Q1 expense growth rate does not cause us concern in meeting our projections for the year. Next up for discussion is our tax expenses, which excluding the ASU adoption, were in line with our previously stated guidance of 38.5% for the year. The higher-than-expected positive impact from adoption of the new accounting standard was due to the higher-than-forecasted stock price in the quarter on invested [ph] equity and restricted stock, as well as the acceleration or pull-forward of option exercises in the quarter from what we had forecasted. This pull-forward of exercises largely came from exercises that we would've expected to take place over the remainder of the year. As we look out at the rest of the year, and knowing that the higher stock price has a positive impact on our ASU-adjusted tax expense, while the pull-forward will reduce the benefit, and largely offset the impact of the higher stock price. We are leaving intact our forecasted ASU tax benefit of $0.18 per diluted share per quarters two through four that I communicated on the February call. As previously stated, we will continue to be very transparent about the impact from this accounting change as we report our quarterly results, and we'll be excluding this when evaluating management performance for compensation purposes. Turning to our balance sheet, and the two major components of our working capital, receivables and inventory, you can see that net receivables increased 2% year-over-year, which was in line with our sales growth. Our net inventories grew $52 million or 9% year-over-year, $51 million of which was for our domestic blue business. 90% of that increase was for new products, and our highest velocity items or what we internally categorize as classes 0 through 4 items, which is out of 14 classes of inventory we carry. So we have no concerns about carry too much inventory into our peak selling season. Looking at our statement of cash flow, let me first point out how the tax accounting changes impacts the statement, which essentially moves the benefit of excess tax deductions we've historically reported as a financing activity up into the Operating Activities section of the cash flow statement. As the benefit is recorded in our reported tax expense and net income, and is therefore now included in operating activities, this increased our operating cash flow by $5.5 million over what would've been reported under the old accounting guidance. One more item to point out in our statement of cash flow is our $19 million purchase of property, plant, and equipment in the quarter, which is up nearly $6 million from Q1 last year. The increase is primarily related to timing of delivery vehicle purchases which were put in service before the season this year, and also resulted in additional depreciation expense in the quarter. Overall for the year, we expect our capital expenditures to be plus or minus $40 million or about 1.5% of revenue. Finally, you will note, we did not repurchase any shares on the open market in the quarter, although we do expect to repurchase 100 million to 150 million of shares for the year. We ended the quarter with a very comfortable leverage level of 1.59, which is calculated on a basis of debt-to-trailing-12-months-EBITDA. At this point, I'll turn the call back over to our operator to begin our question-and-answer session.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Matt Duncan with Stephens. Please go ahead.

Hey, good morning guys, great quarter.

Thank you, Matt.

Manny, you mentioned something about it sounds like there was a little bit of difference in growth rates in the base business, maybe green was down a little bit, can you guys maybe quantify what the base business growth was in the U.S. blue, International blue and green business for us?

Well, we don't have it cut quite that way, but the blue business, basically the surrounding air [ph] from a number of standpoints. So the blue business was just over 5%. Overall base business and the green business was modestly down. And given the weighting to the green business, it's about 9% of the total. It still hovers around the same. And the green business was affected primarily by the much higher levels of rainfall that took place in the Western part of the country, which is where our green business is concentrated.

Okay, that makes sense. What about in the blue business, did you notice any difference in growth rates in year-round markets versus some of the seasonal -- it sounds like last year the weather was more helpful than this year. This year was more helpful than normal, but obviously that creates a little bit of a year-over-year headwind, so just curious if you saw much of a difference in growth between seasonal and year-round markets?

Yes, the year-round markets were a shade stronger than the overall, as indicated in my comments, up 6%, whereas the seasonal markets were up 3% and the reason that they were up a smaller amount was logically -- is that it was in the seasonal markets where we had the toughest comps.

Okay, makes sense. As we've gotten into the second quarter, have you guys had the usual pre-buy at this point? Has that begun to happen? I know it helped last year. And as we think about the impact that that may have on margins, I guess it helped you from a mix perspective in the second quarter. Is it therefore maybe hurt a little bit from a mix perspective in the second quarter?

Yes. What basically happened, just to give you a little color, last year was an exceptionally mild winter. So we basically got just about all our early buys out and shipped by the end of the quarter. This year, for those of you in the northern states, you realized a little bit of a cold snap in the middle-to-latter part of the month. So that delayed some of the shipments, and that basically have already taken place in April. But it impacted us about 2%, about $10 million that shifted from last year -- or we shifted in March, this year we shifted in April.

Okay, that's helpful. And then last thing I've got. One of the things you guys have done very well over the years is continue to add product. And I think you're picking up share of wallet in refurbishment activity as a result. And I'm just curious if you have any way to maybe break out how much you think that's adding to your growth rate here in terms of -- and then maybe talk about what you believe your share of wallet is in the pool refurb today versus what it maybe would've been five or 10 years ago.

Okay. Well, two parts. The latter part I really can't answer. We don't have that quantified quite like you ask for. But in terms of -- when you look at our categories, our Building Materials and Related Outdoor Living Products were up 14% overall for the quarter. And that level of strong growth rate includes, just like you describe, a fair amount of just market share gains on the same items that we were selling a year ago, but also include our continual rollout of adjacent complimentary product categories. And that's something that has a very long ledge to it for the future. In terms of order of magnitude, those typical categories don't amount to much from an overall company standpoint in the first two or three years, but certainly over time they continue to build progressively more and more traction, and as you know, the whole category of Building Materials and Outdoor Living Products is north of 12% of our business overall. And perhaps to answer your question, if you look back, let's say to 2011 timeframe, it was less than half of that in terms of share of our company.

Okay, very helpful…

It's adding certainly collectively at least 1% a year to our growth rate, sales growth rate.

And then to be clear, you said that's got a long tail left to it, so that benefit you are seeing is not going to end anytime soon?

As long as people have houses and want to spend money on outdoor living space, and that's obviously a big deal in the Sunbelt, that is a long ledge for the next 20, 30 years.

Okay, great. Thank you, guys.

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

Thank you. Good morning, everyone.

Good morning, Ryan.

Good morning, Ryan.

So, first question from me, Manny, you had a nice start to the season and I just want to try to calibrate Q2 organic sales growth. So it's 6%, 7% of their range even though you've had such a good start or should we be dialing that back?

Last year, we had 6%. That was a very solid number. For the year, our expectations are five to seven. So, put it this way, if seven possible certainly, but I would say six is much more realistic.

Okay, fair enough. I could be optimistic at times, so I thought I would ask. And then secondly, I was hoping for a little more specific guidance on incremental margins for the remainder of the year, specifically 2Q and 3Q, so I know you gave guidance for the year and we can sort of back into it, but any extra color on what incremental margins can look like in 2Q and 3Q?

When you look at the year for us to have on a base business level contribution margins of 15%, that's a reasonable expectation for the year, obviously that didn't materialize in the first quarter, but some timing things think that we will get back for the course of the year. So I think 15% contribution margins for the year are reasonable and obviously that means that given the weighting of our business in the second and third quarter it's going to be 15%, 17% in the second and third quarters.

Got it, okay. And then, just lastly in a green business, I recall the fourth quarter was down a little and now the first quarter is down a little as well, and I know you had the rain, but what's going on and I think you were making some changes. Maybe just give us an update there because your main public peer is doing a bit better?

Well, not necessarily. I think if you read the recent S1 they know that they were also down in the first quarter in base business sales. So they don't report a number but I suspect it's similar to ours. So the bottom-line is that whether it was not favorable in this first quarter that businesses is -- in our case the weather sensitivity is weighted towards the west coast given our presence being in the west coast, heavily weighted since west coast and so everything is fine moving right along. We expect obviously as we proceed through the year for the comps to be positive and that business took a linear growing both top line and certainly bottom-line.

Okay. Fair enough. Thank you.

Thank you, sir.

Our next question comes from David Manthey from Baird. Please go ahead.

Thank you. Good morning.

Good morning, David.

Good morning. First quarter is for Mark, in your model log you mentioned that the OpEx -- so you grew a little bit faster than you would have like and it was a little faster than gross profit dollar growth in the quarter given some of those cost timing issues that you sighted, would you expect the first half in aggregate OpEx still to be growing at about half the rate of GP and is that a reasonable expectation for the year overall. I would imagine is just timing?

Yes, well. Actually it's a little more challenging for the first half given that we are halfway through the first half, but for the year that is certainly still the target whether we are on that or outside of that a little bit, I think that our expectation is we will be close to that a little bit I think that our expectations as will be close to that here.

Okay. And again with the $0.12 benefit from the ASU 2016-09, and you mentioned that $0.18 remaining for the rest of the year, is that -- you think the cadence of that will be equal three to the three quarters or would it be weighted towards one of the other or already…

No, no, I had gone through that the year-end call in terms of how I thought that broke out by quarter. I just the first quarter that the difference was significant, but my comment on the $0.18 relates not only to the total, but also to how it breaks out by quarter. And I have to go back and look, but it's generally smaller benefit in the second quarter and third quarter and the bigger benefit in the fourth quarter.

Got it, okay and then finally, Manny, just wondering as you look at the new pool construction market this cycle, does it feel like it's evolving as you were expecting and same I guess for replacing refurbished, did those continue to evolve as you thought they would this cycle?

Yes, David. If you look at replacement and remodeling activity, that's been strong since -- and recovering since 2011. And obviously when you look at our building materials growth rate over the course of time and our equipment growth rate over the course of time in those last six years, it's been certainly very strong. New construction is in fact recovering there is more appears to be more consumer demand. At present and then perhaps we've seen it last two or three years so that's, that's strong I will caution though that how much that can grow is limited because of a labor capacity issue not to say, not going to grow but it's not going to grow from 65,000 in ground pools to a 100 even though that may be the demand. And I'm not saying that it is that the 100s of demand this year but, but certainly the demand is stronger and certainly it's going to grow but how much is grows is going to be in part limited by labor availability.

Okay, thank you.

Thank you, sir.

Our next question comes from David Mann with Johnson Rice. Please go ahead.

Yes, good morning, and let me add my congratulations on the solid start to the year.

Thank you, sir.

My question relates first question relates to Q2 and sort of the outlook that you just talked about the remember correctly last year whether was not as favorable in later April into May and if we look back a couple years you kind of had a flattish base business growth so you seemed to have a fairly easy comparison I'm just curious why you might not be a little more optimistic going back to the earlier question for the potential in Q2 and also if you just comment a little bit on trends in the quarter to date. Thank you.

Sure. The I am, I think confidence in what we're going to be doing in the second quarter and as I mentioned just a ago one of the issues we are having and this is not unique to our space but at certain times of the year and given that our business is seasonal and the second quarters, the biggest quarter of the year. There is essentially a capacity limits on the part of our customers. As even know though on the call know what we sell to our customers is for them largely to utilize as they do what they do so, that while they're selling their, their time and their talent. They're using the materials and supplies that we provide to them to provide that at, their customer experience. So therefore our growth from an industry standpoint is limited by the customer's ability to grow and in fact the labor is a constraint and some of the more labor intensive services that they provide. So therefore my reference to 6% earlier in response to Ryan's question is more along the lines of how much share can we grow and how much is the industry overall capacity well. If it were, if it were more like the retail side of our business that is not as Labor constricted then perhaps it would be higher than six right sine the line of our business is in fact labor constricted, I think six is a very reasonable number.

And the trends to date pretty much in line with that?

Yes.

Okay and then Mark somewhat housekeeping question on the ASU impact or for the rest of the year you basically assuming the current price or range around the current price.

That is correct.

Okay. And then one last question sort of bigger picture Manny, Peter have been I guess in Covington now for a few months, can you just give your sense on where he's focusing, what the opportunities might look like and you just sort of the early puts and takes of what might be happening there? Thank you.

Sure. He'd been involved on board now. Three and half months and during that time he is I think visited round 50 of our sales centers throughout the company primarily in well entirely in the U.S. He is actively participating and every decision of any consequence in the, in the company he is and he's actively involved meeting not only our people and looking at operations and providing input into how we can get better but also meeting with our more strategic vendors as well as the number of customers so, he is I don't know about and contributing to our, to our business to help us get better faster.

Thank you. Good luck, and see you soon.

Thanks, sir.

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

Yes, good morning and thank you for taking the questions. So, first I just want to follow up on the SG&A for the quarter so I guess Mark if you were to exclude the timing issues would you have been able to leverage your SG&A expenses for the quarter or not?

Well, Anthony, I would say yes we would certainly have leverage but maybe not to the historic degree because timing has to do both how expenses recorded last year as well this year and then we had some acceleration of expenses leading into the second quarter so as we're preparing for the peak season we got a head start in some areas to make sure that all the infrastructure is in place and ready to go so, I think that contributed to a little bit higher expense load just from a first quarter standpoint so. That's helps there.

Okay, yes, of those the -- thanks for that and also I guess Manny are there any potential new product categories that you can share with us obviously you have done a great job over the years expanding your offering of products to your customers and I think noteworthy that you could share with us as to what, what else you could offer to your customers.

Sure, there is no one silver bullet and our process there is we're constantly evaluating different product categories that enhance the entire outdoor living space and we bring those in typically and one or two regions of the country gauge, customer and ultimately consumer reaction and then based done what we see then, we begin to roll out in adjacent are markets gradually over the course of time so, but there's no one silver board there's no $1 million product category or anything like that, that we see as one, we but there are a number of a lot of product categories that, that I mean gradually over time will gain more, more, more traction and continue to add to our overall business growth. One of the other, the references there is appreciating the fact that our focus is our customer base and the highest point of leverage is to sell more to our, to our customer base and while we - as we gain traction in doing that certainly our product availability may enable us to sell those same products to other adjacent customers, that's a tougher sale process and it doesn't have the same overall leverage. So again the - it's both an opportunity but also a limitation is our focus being selling more through the same channel.

Got it, yes. Thanks for the clarification. And then, lastly you did touch on a commercial sector I believe it was up 12% overall looking at that piece of the business, what are the opportunities there and can you just also share with us, so we have a better perspective, what percentage of your sales is now tied to commercial?

Sure, if you look at it in perspective. There are approximately 335,000 commercial in-ground pools in the United States. The great majority of those pools are in the HMAC sector hotel apartment condominium sector. So and then you have competition pools and then you have water parks. When you look at that space last year our sales -- net sales were close to $100 million, which would round up to 4% of our total business and those are specifically the way we captured is products that are primarily sold to the commercial space so our actual sales in the commercial space is greater than that because there are some products that are for example a lot of our chemicals. Our many of the same chemicals that are also sold to the residential sector, so we don't capture that as commercial since most of the volume goes residential the bottom-line is that when you look at that and our share of that business, we should be going there at a double-digit rate for a number of years going forward as we continue to further our presence from inventory standpoint and regionally to other the country as we continue to add talent on the sales side to be more of a resource to the customers in that space and frankly also as we build our portfolio or product that we sell near to the commercial customer phase.

Okay. Thank you everyone.

Thank you.

[Operator Instructions] Our next question comes from Al Kaschalk with Wedbush. Please go ahead.

Good morning gentlemen.

Good morning.

Good morning, Al.

Mark, I just wanted to clarify to get out some more color to this expense question. The ramp in support cost for the peak selling season, is that -- are you reference - what are you referencing there?

Well, I made one reference already, which was tax. So we had -- you know, just seeing our CapEx, we had a high CapEx for the first quarter and about half of what we'd expect to spend for the year. So there is depreciation expense on that and that is really anticipation of having the right equipments and our location says they gear up for the season. So that's really the type of thing I'm talking about just the timing issue as well as preparing for the season ahead.

All right. Okay. So if the DNA piece that I wasn't picking up that's in that general line category. Okay, the other question I have is and then maybe this is a lot of a broader question and maybe it's a trend but nothing to worry about, but it seems like the trade expense maybe some growth driven labor I don't know if that's the phrase you use, but is the mix of business causing a little bit more demand from customers for you to be shipping product therefore higher freight cost or what's -- is there anything that decide for other than those comments?

Two parts; Certainly on the freight side, we had been playing catch up the last few years as we entered the season getting our fleet straight away and this year or last year we made the decision to order those delivery vehicles earlier, which is what Mark referenced a minute ago. Part two is, fuel costs are marginally higher than last year. But when you get to essence of your question, which is mix, there isn't anything significant from a mix standpoint in terms of delivery versus pickup that we've seen so far this year, and don't anticipate anything significant from a delivery versus pickup mix to take place for the year.

Okay. And then a follow-up to a question earlier and on the green business, in my observations it appears you're proceeding, well, strategically but also cautiously. Is that fair, or is it a function of just not seeing the right business opportunities out there to further expand that business, whether that be geographically to the East Coast or less reliance on the West Coast?

Sure. First of all, given our overall business, we have a high filter from a returns standpoint. A much higher filter than most companies, as evidenced by our own ROIC after tax being over 20%. And not that we are adverse, because we do everyday make investments where on a short-term basis dilute ROIC, we got to look at ultimately that they're going to have the right level of ROIC to make sense from an overall company and a price valuation standpoint. So, switching over to our irrigation business, in our irrigation business we're very focused on certain product categories and certain customer segments, as well as some certain geographies that we believe have the opportunity to realize the same or very similar ROICs and organic growth rates over time, as the swimming pool business does. And to that end, yes, we are not geographically going after every nook and cranny in the country, or nor are we interested so much in certain product categories, for example, the perishable side, which have different distribution dynamics. Those are good businesses, but not as good as -- or don't meet our filter test. So circling back, we're also cognizant of how we do things. And while our focus is very much Sun Belt-oriented in the irrigation space, we continue to have dialogue. But again, we're not going to just do deals to do deals. We're going to do deals that make sense not just for the short term to drive EPS, because that's a very, very low hurdle. We're looking at driving and concerned about long-term organic growth, we're concerned about long-term return on invested capital. And that's the filters that we have in place. We did do a good sized regional -- we did make an acquisition or a good size regional distributor in the irrigation space in April of last year. And they in fact met their profit objectives for the rest of 2016, and continuing to positively contribute in the first quarter of '17. So that business is good, and we continue to look for opportunities like that throughout the Sunbelt.

Correct. And just a clarification -- Manny, that was very helpful. Given the broader governmental policy and potential in lower tax rates, does that open up more opportunities for sellers because of their ability to have maybe a higher reinvestment rate or is the nature of the candidates that come through the filter or get to the filter line, are those maybe because of broader events like death, divorce, et cetera?

Yes -- no, there's a number of factors that motivate a business owner to exit it. The more common one over time is age, but other factors also play in. And certainly when there is a tax change -- and I remember when taxes were going to be going up years ago, that certainly was a motivation for people to act. So, yes, the taxes, ages, other events in business owner's lives, those are all factors, and we have the practice do not buy businesses unless the owners want to sell. And that's an important distinction in the whole process.

Great. Thanks a lot, and good luck guys.

Thank you.

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

Gentlemen.

Good morning.

Hi, Ken.

So, lot of ground cover today; you know, -- within the dialog, a lot of it's been talked about in prior quarters to accomplish what was noticeable this year, but you know, you're really a company, when you think about your 6% to 10% growth rate guidance, core being that one to two -- everything is one to two, everything is singles and doubles for you guys. Not bad, right, if that runs in that way -- That's true. So, I am just going to try to taking this a little bit different calculus, within our housing research, we are noticing that older owners, homeownership rates, older owners are actually about 52% of owners today, from kind of a low 40s a decade ago, and that's kind of getting into your sweet spot, so to speak, if the demand -- you know, if your volume constraints tie to your customer constraints, how -- is there a way that you think about demand drivers a bit more locally, could you guys always talk about the stage and then seasonal, not seasonal, but are there -- outside of that you know, those two variables like, for example, you know, if there is greater price depreciation or greater job growth, or is really just you know, what the Pool is up and running it steady, doesn't matter what other macro factors are happening?

Okay. Two parts; first, on the basic maintenance and repair, right, the pools are there, they are going to consume. That's it. On the discretionary part, and the discretionary part comes, replacement, remodeling and the most discretionary being new construction. I put them in that order, because from a labor standpoint, that's how it is; in other words, tying into the products that we sell. So, to replace a heater or a pump, it takes a certain amount of time, and you tie that time to the products that we sell and the products that we sell may represent depending on the product 30% to 60% of the cost of that activity, all right. When you get to remodeling, more labor-intensive proportionately and the cost of materials that we provide there represent a smaller percentage of the total bill to that consumer. And then, when you get to new construction, that's obviously the much -- the most comprehensive and the most labor-intensive since you are building the foundational structure of the pools, and not just dealing with the surface. And in that case, the percentage of materials that we sell is even less. So, when you look at all those pieces, I see -- we see that the dynamics that you are identifying being very positive for the industry, we have not yet seen the financing elements come into play as it was back in the 1980s and 1990s, where people could borrow 80% against the value of their home. That has not been really in play just yet. But certainly the native demand is there, the desire is there, but there is only so much capacity from a labor standpoint. And therefore, I don't see any constraints whatsoever in basic maintenance and repair. I see very little constraints on the equipment replacement side. I see some constraints on the remodeling side, and the greatest constraint is on the new pool side, which is the one that is the most labor-intensive. And again, the constraint is not a negative; it's a constraint on how much it can grow.

Right. Okay, thank you, Manny.

Thank you, sir.

[Operator Instructions] Our next question comes from Garik Shmois with Longbow Research. Please go ahead.

Hi, thanks for squeezing me in. I just had a question on California. You mentioned poor weather impacted sales in the green business, mainly due to the Western exposure, but how did weather in California impacts sales in blue, because from the South, the sales are up 6%, your largest markets. There is not much of an impact, or should we assume just see other large markets like Texas, Arizona, Florida, were just tracking little bit higher in California in the quarter?

It didn't really impact the blue business for the quarter. It impacted it in January and February, but March was a big recovery month, and part of the answer is that as you mentioned California is a very large market, and is a significant install base of pools, so therefore while it may have constraints in the construction side, which is what's most impeded by rain, it didn't -- the basic maintenance, the basic repairs and a large part of the remodeling took place -- replacement took place in the normal course. So, we didn't -- our customers did not lose as many days there as they did -- in the construction side, which is where the green is weighted.

Okay, got it. That's helpful. And then, just lastly, just to put a ball around, the guidance and your view of some of the capacity constraints, you raised [technical difficulty] excluding the tax benefits, just to reflect the strength in the first quarter, is it just fair to assume that the relative conservatism and taking up the guidance for the rest of the way isn't much a concern about underlying demand, but that's just more of an issue around capacity as you…

That is correct. That is correct.

Okay, thank you so much.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Manny Perez de la Mesa for any closing comments.

Thank you, Anita, and thank you all for listening to our call. Our next conference call is scheduled for July 20; mark it on your calendars, when we will discuss our second quarter 2017 results. Thank you very much and have a great day.

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