Pool Corp

NASDAQ:POOL

Earnings Call Transcript 2019-Q4

[Operator]

Good day, and welcome to the Pool Corporation Fourth Quarter 2019 Conference Call. [Operator Instructions] Please note, today’s 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, sir.

[Mark Joslin]

Thank you, Rocco. Good morning, everyone, and welcome to our year-end 2019 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 2020 and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and variables that could cause actual results to differ materially from projected results is discussed in our 10-K, the latest edition of which will be filed at the end of this month.

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.

Now I’ll turn the call over to our President and CEO, Peter Arvan.

[Peter Arvan, President and Chief Executive Officer]

Thank you, Mark, and good morning to everyone on the call. 2019 was another solid year for POOLCORP. Overall demand remained healthy and our dealer base optimistic. While the weather caused some challenges early in the year, the team’s focus on execution, capacity creation and organic growth drove record sales and profitability while helping our customers be more productive as well.

For 2019, total sales came in at $3.2 billion. This represents a $200 million or 7% increase over 2018. In the fourth quarter, our revenue also increased by 7%, which was on top of the 6% overall growth we saw in the fourth quarter of 2018 and the 15% growth that we saw in 2017.

From a base business perspective, sales increased 7% in the fourth quarter, bringing the total year base business increase to 5%, which is a nice recovery from earlier in the year. For reference, we reported a 1% base business sales growth in the first quarter and a 4% in the second quarter. So through the first half, we had posted a 3% gain, which highlights the significance of the 5% base business growth for the full year 2019.

Looking at just the year-round market, the base business grew by 6% for the quarter. And on a full year basis, we saw revenues up 5%. Again, poor weather in the first and seasonally significant second quarter weighed heavily on the total year, particularly in California and Texas, where it was colder and wetter than 2018. The resilience of our team and the markets allowed us to make up significant ground as the year went on. Our dealers are reporting a very solid backlog for 2020 season, which is yet another positive sign of the overall market conditions.

Moving on to a few notable end markets. We continue to gain traction in the commercial pool area, as we saw revenue growth of 8% for the year and 6% for the quarter. This was on top of the very strong performance in 2018, where we posted a 13% gain in the fourth quarter and 11% overall.

Looking at major product categories. Equipment sales and building materials posted another strong quarter, buoyed by strong demand and favorable weather in the quarter and the back half of the year. We saw 9% growth in equipment sales for the quarter, which resulted in 7% growth for the full year. Building material sales followed with 9% growth for the quarter and for the year. This is encouraging further evidence of a healthy market. Retail and chemical sales, which are part of our nondiscretionary demand, were both up 4% for the year. Overall, this is encouraging, as demand was skewed and delayed until the back half of the year as pools opened later than normal because of the colder and – weather in key markets. For the fourth quarter, chemical sales were up 1% while retail sales overall grew by 4%.

In Europe, we saw revenue grow 4% in the fourth quarter, bringing the full year growth rate to 12% in local currency. The largest markets in Europe: France, Spain, Germany and Portugal, all remain very solid and we continue to grow and improve our business there. The base business in Horizon saw revenue grow 9% in the fourth quarter and 5% for the full year. Demand in key markets for irrigation and building materials remained solid while we continued to drive integration between our two platforms. The year-to-date number was impacted, again, by the wetter season in Texas and California.

Switching to gross profit for the quarter. We saw total gross profit dollars increase 1% and 6% on a year-to-date basis. Gross margin in the quarter compressed by 170 basis points in both our base business and in total, with the major driver being the cost advantage on pre-price-increase products that we enjoyed last year and certain vendor incentive programs also affected by that buy. For the year, gross margins remained stable and in line with our long-term outlook. Mark will provide more color on this and other financial topics in his commentary.

Now let me provide commentary on some of the growth and capacity-creation activities that the team has been focused on. In 2019, we opened 9 new locations after opening 9 in 2018 and continue to build our pipeline. And we expect to add a similar number in 2020. Our POOL360 sales app and website continued to gain traction as we ended the year up 29%. This tool now accounts for 12% of our total revenue. We continue to implement our capacity-creation plan that includes many facets, such as open merchandising, improved point-of-sale technology, truck utilization and other supply chain initiatives. The programs help us achieve our expense management targets and provide exceptional customer experience, further differentiating our value proposition from the competition.

Moving on to operating margin. For the year, we are pleased to report a 20 basis point improvement in our overall operating margin to 10.7%. Considering the poor weather that persisted for almost the entire first half in most of our key markets, I’m very proud of what the team did to support our customers and get as much work done as possible in a very compressed season.

As for the fourth quarter, it turned out largely as we expected, given the tough comps from last year. Looking specifically at our base business, we are very pleased with the 40 basis point improvement in operating margin, ending the year at 10.9%, a good testament to our capacity-creation activities and disciplined expense management. This helped propel our return on invested capital to 29.3% for 2019 from 27.7% in 2018.

Looking ahead to 2020, we are anticipating a solid year. As noted, overall demand is good and contractor backlogs are healthy, but persistent capacity constraints inherent to the industry remain. Considering this and in line with previous guidance, we anticipate 6% to 8% base business revenue growth, stable gross margins and a 20% to 40% improvement in operating margin for the year. We anticipate opening 8 to 10 additional locations in key markets and continuing our focus on execution across the business.

We expect our diluted earnings per share range to be between $6.47 and $6.77 per share, including a 6% tax benefit related to the ASU 2016-09, which equates to 10% to 15% growth excluding that tax benefit. Finally, before I turn the call over to Mark for his commentary, I’d like to thank our customers, our suppliers and our employees for the tremendous support and dedication. Our team works very hard every day to be the best channel to market and our – best channel to market for our suppliers and to provide exceptional service and value to our entire customer base. We are very fortunate to have the best team in the industry, and we strive every day to be the employer of choice.

I will now turn the call over to Mark Joslin, Chief Financial Officer, for his commentary.

[Mark Joslin]

Thanks, Pete. I’m happy to say that with 2019 now in our rearview mirror, we met the majority of the expectations we communicated to you for both the quarter and the year overall. I’ll recap a few of those expectations here.

First, our reported EPS for the year, excluding tax benefits, was in the middle of the range we provided on our Q3 earnings call and down only 3% from the middle of the range we provided at the start of the year, despite the impact from weather in the first half of the year. As Pete mentioned, looking out from our midyear results, this was a very good outcome.

We said throughout the year that our gross margin would be relatively flat on a full year basis, which was the case: Flat for base business and down 10 basis points in total with our acquisitions added in. We had a tough gross margin comp in the fourth quarter, and because of this, said that on our third quarter call, that our fourth quarter operating income would be down year-over-year, which it was, but only slightly as very good expense management with flat base business operating expenses mitigated the gross margin hit in the quarter.

For the year, we targeted base business operating expense growth of 60% of the rate of gross profit growth and we’re right on target with that objective. This allowed us to post base business operating margin improvement for the year of 40 basis points, which was at the high end of our expected 20 to 40 basis points of base business operating margin improvement.

One final P&L metric I’ll quote is our base business contribution margin for the year, which was 17.1%. This is the ratio of the incremental operating income generated by our incremental revenue and shows the leverage we achieved on our sales growth. Compared to our 10.9% base business operating margin, this is also a good indicator of the continued operating margin growth opportunity we have in the future.

Moving over to the balance sheet and cash flow, I’ll highlight a couple of things. First, on the balance sheet. Our working capital, excluding the lease accounting change, grew 4.8% for the year compared to our 6.7% sales growth. So we had a positive contribution from working capital to our returns. As you can see on our statement of cash flows, we generated $299 million of cash flow from operations for the year, which was 114% of our net income and $180 million more than our 2018 cash flow from operations.

Although we had a little help here from our 2018 inventory pull-forward, this was a good outcome for us. As always, working capital management and cash generation will continue to be a focus for us in 2020. Given both the solid growth in our earnings and our positive working capital management, we’re able to increase our return on invested capital to a record 29.3% for the year, which was up 160 basis points from our 2018 ROIC of 27.7%. Our ROIC includes the benefit from the ASU tax gain. But excluding those in both years, we still gained 90 basis points of ROIC improvement. So a very good result here.

I should note that our earnings per share in 2019 as well as our guidance for 2020 largely excludes the benefit from share repurchases. In 2019, we repurchased only 149,000 shares at an average price of $148 a share, which used just $21 million in cash. As a consequence, excess cash was used to pay down debt, which was 25% lower at the end of the year from the end of 2018. Our leverage, which is measured on a trailing 12-month debt-to-EBITDA basis, finished the year at 1.61, which is approaching the lower end of our preferred 1.5 to 2x.

Our belief is that rather than competing with investors for our shares, which were up 43% for the year, it made sense to be patient and save our debt capacity for the time being until external factors create an opportunity for us to buy in more robustly. As you are refining your models for 2020, let me give you some perspectives to keep in mind. As Pete said, we are expecting 6% to 8% base business growth for the year, assuming normal weather, with greater growth in the first half of the year and particularly in the first quarter, given last year’s tepid first half results, and a bit lower growth in the back half of the year. The first quarter may also pull forward some sales from the second quarter as early indicators are that the normal spring early buys may move up from last year, resulting in roughly $10 million to $15 million in lower-margin sales moving from Q2 into Q1.

On gross margin, we look to once again be relatively flat for the year overall, with a decline in the first half and more significantly in the first quarter, while the back half of the year should be modestly positive. I should note that in 2019, there were a couple of forces driving our gross margin comparisons to 2018, both as a result of the pre-price-increase purchases in 2018. One impact of this was on selling price, which provided us with a customer pricing benefit in the first half of the year and was a drag on our margin comparison in the second half of the year due to the tough comp from 2018.

Recall that our Q1 2018 base business gross margin was up 90 basis points and was up 30 basis points in Q2. The other impact was from vendor pricing, where volume-related purchase incentives helped our gross margin in the back half of 2018 but hurt our gross margin throughout 2019 as we were about – the benefit of the purchase volumes moved into 2018. As we return to normal purchase volumes in 2020, we expect these vendor incentives to help offset the first half margin challenges, leaving us with relatively flat base business gross margin for the year.

On operating expenses, we continue to aim for base business expense growth at 60% of the rate of gross profit growth. And although that may not happen every quarter, we think that’s a reasonable but stretch target for the year. Having said that, we had a couple of benefits on expenses in 2019 which may not recur in 2020: One was the impact of the stronger U.S. dollar which positively impacted our expense line by $3 million spread throughout the first nine months of the year. Note that there’s an offsetting decline in sales in GP from currency, so only a modest negative impact on operating income for the year.

The other positive expense impact was $3 million in lower incentive-based pay in Q4 as a result of our flat operating income compared to Q4 2018. So we had a $6 million in positive 2019 expense results which we aren’t counting on in 2020. Another area that could impact our 2020 expense performance is a ramp-up in technology investments of roughly an additional $1 million per quarter for a number of projects. For these reasons, I have labeled our 60% GP growth spending goal a stretch target this year, but one which we aim to achieve.

Moving down the P&L. We had $3 million in higher interest and other nonoperating income for the year, which includes the impact of higher debt and interest rates for most of the year. As interest rates have moderated and our debt balances have come down, this could provide a bit of a tailwind for us in 2020.

One other noteworthy comment on our 2019 results was the impact of closing our branch in Colombia, where we pulled the plug at year end after five years of effort to develop that market. The impact from this closure was a $2 million loss, with about half of the hit in operating income; and the other half, a currency hit included in the $3 million I just called out on our interest line. This created a $0.05 EPS hit for the year, and $0.04 of this was in the fourth quarter.

Finally, we finished the year with an effective income tax rate, excluding the impact of the ASU benefit, of 25.1%. And we expect this to inch up slightly to about 25.5% for 2020. As I look at sell-side numbers for 2020, the biggest disconnect from our 2020 guidance, appears to be on the tax line and the estimate of our ASU impact.

That concludes my prepared remarks. So I’ll turn the call back over to our operator to begin our question-and-answer session.

[Operator]

Thank you. [Operator Instructions] And today’s first question comes from David Manthey at Baird. Please go ahead.

[David Manthey, Baird]

Hi. Good morning, guys.

[Mark Joslin]

Good morning.

[David Manthey, Baird]

First off, can you discuss any strategic buy programs entering this year that you may have participated in? And I guess you gave us the implications for the quarterly gross margin trends, but it doesn’t feel like there’s much of anything. But with the gross margin for the year being stable last year, expected to be stable this year, can you broadly outline the biggest moving parts there in terms of what’s pushing it up, what’s pushing it down, to lead you to this net zero area?

[Mark Joslin]

Sure. Sure. Let me handle that, Dave. So first of all, in terms of strategic buy, you’re really probably referring to what we did in 2018 and the pre-price-increase purchases. And in 2018, as in 2019, we also do our normal seasonal buy-in with vendors. So we commit to purchases in the fall for delivery at the vendors’ convenience throughout the fall and into the spring. And then we pay for those in the late spring and summer.

So for 2019, inflation – I’m sorry, for 2020, inflation expectations were a return to normal, and that’s what we’ve seen. And so we did our normal kind of fall buy that we’ve done in years past. And nothing unusual from that perspective. In terms of gross margins and the comment about them being flat for the year, I provided some kind of highlights in my commentary, but just to recap those. Going back to 2019 first quarter, we had the benefit of the pre-price-increase inventory that we had purchased.

Selling prices increased at the start of the year for all of our customers, and so we were able to sell that lower-priced inventory in the first quarter and a little bit into the second quarter, which gave us a margin benefit, which was 90 basis points in the first quarter last year and 30 basis points – 20 to 30 in the second quarter. At the same time, because those purchases that we did were in 2018 instead of 2019, that affected the vendor incentives that we received, and those were higher in 2018 and a little bit lower in 2019.

And so that impacted our margins overall for 2019 and left us with a flat margin in 2019, considering the big comp difficulty that we had in the fourth quarter. So 2020, we have that tough comp in Q1, tough comp in Q2. We’ll benefit from getting back to normal vendor incentives, which gives us that flat expectation for the year. So a lot of background there. So if you have any follow-up on that, Dave, let me know. But that’s how it lays out.

[David Manthey, Baird]

Yes, it’s very helpful. Thanks Mark. Could you also talk about product mix and customer mix? And where you’re seeing the strength? I think you mentioned some of the renovation and construction products. You’ve got commercial moving up the curve. Any puts and takes there as it relates to the gross margin for the company, maybe offset by the core day-to-day maintenance and minor repair products?

[Peter Arvan, President and Chief Executive Officer]

Sure, Dave. I’ll take that. When I look at our product groups that are growing, if you consider that building material for us has been an area of strength. Over time, it continues to build. So we had a very good year with building materials last year. As I said in my commentary, it was up 9%. The margin profile on building materials is good. Of course, your cost to handle building materials sometimes can be a little bit more expensive than the lighter boxes. Commercial is another area that we continue to gain traction in. And commercial – the margin profile in commercial is going to be a little bit lighter on the very large projects.

So that is an area that we’re continuing to grow, and that has a slight impact on our overall margin mix. If I think about the chemical portion of our business, the – that’s more of a discretionary – or nondiscretionary part of our business that will follow the weather and how often that – when the pool opens and how often it gets used. And if I think about the inflation that we’re looking at this year on chemicals, if we have a normal weather year, inflation is normal. So from a mix perspective, I don’t look for any overall impact.

And equipment this year from a margin profile, so equipment follows, obviously, the maintenance and repair and in new construction. Last year, construction, we think, was down year-over-year – I’m sorry, the – yes, the new pool construction, we think was down about 3%. Although the numbers are still preliminary, this year, assuming a normal year and without having the benefit of price increases on equipment, I think our margin profile on that returns back to normal.

[David Manthey, Baird]

All right. Appreciate the color guys. Thank you.

[Peter Arvan, President and Chief Executive Officer]

Thank you.

[Operator]

And our next question today comes from Ryan Merkel with William Blair. Please go ahead.

[Ryan Merkel, William Blair]

Thanks. So a couple of questions. First off, sticking with the gross margin. In the fourth quarter, the decline of 170 basis points, how much of that was the price/cost goodness not repeating? And then how much was lower rebate? I think that’s what you said.

[Mark Joslin]

Ryan, I can’t break that out precisely – or I won’t break it out precisely. But it was – probably 80% is – was the tough comp, and the smaller piece of it was the incentive piece, maybe 90%, 85%. But most significantly was just the tough comp from the year before.

[Ryan Merkel, William Blair]

Okay. That’s really what I was getting at, so that kind of gets me there. And then I want to get a little more specific on gross margins in 1Q 2020, if we can. I just want to get a sense of what should the decline be year-over-year? Is down 100 basis points sort of the right range? You’ve got the price/cost issue again, and then you mentioned the early buy that may move into 1Q. So I’m just trying to think about those two pieces.

[Mark Joslin]

Yes. I mean, that’s a reasonable expectation. So the 90 basis points from last year plus the early buy maybe brings it down another 10 to 20 basis points. So you’re in the neighborhood there.

[Ryan Merkel, William Blair]

Okay. So the early buy is not that impactful at 10, 20 bps.

[Mark Joslin]

Yes, that sounds about right.

[Ryan Merkel, William Blair]

Okay. Okay. And then I realize I’m getting a little picky with this question. But 2020, the guidance for 10% to 15% EPS growth, that’s a little below your goal for mid-teens. I’m just trying to figure out what’s really the difference? Is it some of the investment, Mark, that you talked about? And then you mentioned a non-repeat of some SG&A tailwinds. Just what’s different? And why isn’t 15% or better? Because it sounds like an easy weather comp and the market’s healthy.

[Mark Joslin]

Yes. Well, one difference, first of all, Ryan, is share repurchases which have been stock and trade for us for a number of years and add generally a couple of percent to earnings per share. And we’re – we really didn’t have any to speak of in 2019, so no benefit there moving into 2020 from 2019 purchases. And at this point, we’re not anticipating that, that will happen. We don’t generally reflect those in our guidance in any case. So that’s probably a bigger impact there. But yes, a little bit of caution on expenses, given some investment in non-recurring that we had – non-recurring benefit that we had last year. So generally, we have constraints on industry labor. So we think we have good opportunity from a demand standpoint, but we have to wait and see how well the contractor base can deal with that given the labor constraints that we and other building industry participants have so.

[Ryan Merkel, William Blair]

Okay. Great. That’s helpful. I’ll pass it on. Thanks.

[Operator]

And our next question today comes from Anthony Lebiedzinski of Sidoti & Company. Please go ahead.

[Anthony Lebiedzinski, Sidoti & Company]

Yes. Good morning and thank you for taking the question. So just wondering, so with the higher capacity that you have, just wondering, are there any new – potentially new product categories that you guys could get into? Or do you think 2020 sales growth will be more or less kind of more from the same types of product categories that you’re in already?

[Peter Arvan, President and Chief Executive Officer]

Yes, good morning. I’ll take that one. So when I think about new categories, I wouldn’t characterize it as new categories. As we said during our Investor Day presentation, there is an opportunity with automation. So instead of a time clock – mechanical time clock, to have IoT-type products that you can see and control your pool from your phone, we think there’s an opportunity to continue to move from the single-speed pumps to variable-speed pumps. We think that there’s some new product opportunities as it relates to some of the green products, and if you think about UV systems on pools which contribute to a healthier pool and less chemicals.

So I wouldn’t say that there’s a lot of new categories. What I would say is that there’s a big opportunity with automation because of the 5.5 million in-ground pools, over 3 million of them essentially have no automation. So what we see in the market is as those pools need to be repaired and maintained, that the dealers are starting to offer the automation instead of just a one-for-one replacement, or instead of changing out the halogen light like-for-like, talking to the homeowner about moving that to an LED. So I don’t think it’s new categories, I just think it is a switch towards higher-technology products. And if you look at our building material products, we’re continuing to see growth in outdoor lighting and some of our other hardscapes, which are newer for us, certainly as compared to the legacy pool products. So I think that’s what you’re going to see driving our growth.

[Anthony Lebiedzinski, Sidoti & Company]

Okay. Thank you for that color. So what’s the margin profile of these products that you – that Pete, you just mentioned, whether it’s automation or LED? Can you give us any color?

[Peter Arvan, President and Chief Executive Officer]

Yes, I think it’s similar overall. I think the margin profile on lighting is very similar. When I think about pumps, for instance, single speed to variable speed, probably a little bit lighter on the variable speed than a single-speed pump, but that’s nothing unusual that we haven’t seen that trend growing over time. And then when I look at the overall automation margin profile on that, very similar to the items that it would be replacing.

[Anthony Lebiedzinski, Sidoti & Company]

Got it. Okay. So next year, there’s some new regulations taking effect that requires variable-speed pumps. Is there any other new regulation that you are aware of that could impact you guys?

[Peter Arvan, President and Chief Executive Officer]

No, I don’t think so. And that one on the variable-speed pump replacement for all single speed, remember, that takes effect next year, mid-July of 2021. And honestly, manufacturers are all trying to figure out which pumps they have that could hit the DOE specification. Some of the manufacturers think that they can do it with single-speed pumps. Others are saying no and will have to be switched to variable speed. And then, of course, you have – it happens later in the season anyway, or midway through the year. And then by the time inventories are worked through, I really see that as a 2022 play. There will be limited impact in 2021. I see it taking effect more in 2022. But honestly, I think we’ll have a better view of the impact on that as the manufacturers sort through their product portfolio and figure out what they’re going to do to meet those regulations.

[Anthony Lebiedzinski, Sidoti & Company]

Got it. Okay. And lastly, as far as new sales centers, what’s kind of the breakdown you guys are thinking for blue versus green for this year?

[Peter Arvan, President and Chief Executive Officer]

I think it will be a similar number this year. We had one – in 2018, we had one new green center. We had one in Canada, blue; one in Europe; and then the rest were in U.S., blue. I would think it’s probably going to be a similar profile going into the 2020 season.

[Anthony Lebiedzinski, Sidoti & Company]

Okay. Thank you and best of luck.

[Operator]

And our next question today comes from Ken Zener with KeyBanc. Please go ahead.

[Ken Zener, KeyBanc]

Good morning, all. Glad you’re not charging more for those mixed up products, as a potential customer of yours.

[Peter Arvan, President and Chief Executive Officer]

Only for you.

[Ken Zener, KeyBanc]

So given your comments about 1Q gross margins because of prebuys, et cetera, in 2018, since you’re addressing the gross margin, Mark, could you talk to if you expect the base operating leverage to degrade by the amount you said in gross margin? Just so no one’s surprised.

[Mark Joslin]

Yes, for sure, there will be a reduction in operating leverage in the first quarter.

[Ken Zener, KeyBanc]

Would the EBIT change be similar to the gross margin change?

[Mark Joslin]

I will let you model that out, Ken. But it’s…

[Ken Zener, KeyBanc]

You want to say 50-50 just so we can understand the SG&A actions you’ll be taking?

[Mark Joslin]

I’m not going to comment, Ken. I’d have to pull out my model and go through it.

[Ken Zener, KeyBanc]

Oh, boy. Oh, boy.

[Mark Joslin]

I’m prepared to, but I think you can figure that out.

[Ken Zener, KeyBanc]

Well, there’s no reason SG&A operating leverage would change at all just because the gross margin’s swinging around, right? I mean in short.

[Mark Joslin]

No. For the year, no. I believe we would expect similar kind of performance as we’ve had. And as I said, we look for 20 to 40 basis points of operating margin improvement. That our contribution margins last year was 17%, so that’s well above our operating margin, and it provides a healthy ramp opportunity for us to continue growing operating margins over time.

[Ken Zener, KeyBanc]

All right. General question, Peter, about the backlog comment, I mean, with new sales down last year. I mean, is there anything really changing? You keep bringing up labor constraints. But there’s no new – the contribution or the level of backlog in your comments thinking today seems to be very similar to where we were last year, which is supporting 6% to 8% base growth. I mean, is that a simple way to assess it? Or is it stronger?

[Peter Arvan, President and Chief Executive Officer]

Yes. I would tell you that the backlog is good. I just attended a bunch of industry shows and dealer meetings in the last month. And I will tell you that my sense is, is that optimism is very, very high with the dealers. And I mean – and from just my take on it is, everybody is upbeat and there is a fair amount – or good backlog that everybody is sitting on right now. So…

[Ken Zener, KeyBanc]

So about financing? Are people talking about – when you’re out there with the dealers or folks, I mean, just give us a context for how much is paid out of cash as opposed to borrowed? And is there any easing of credit that – any commentary you picked up there.

[Mark Joslin]

Yes. I mean, I don’t see any significant shift in financing, Kenneth. Still banks are skewed towards better creditworthy the borrowers and the lower end of the credit spectrum is more challenged. So if you look at it from an industry standpoint, we had a big middle market business years ago that really never came back after the recession. And that really hasn’t changed.

[Ken Zener, KeyBanc]

Then the last area, buybacks. If you’re not buying back and you’re not going to necessarily tell us when you’re buying back, can you give us some more thinking? I mean, you talked about opportunity. Can you just expand on that? That is a little bit of a – I want to say a shift. But I mean, you guys have pulled back what would at least be a very steady cadence, right? You’re going to invest in the business, you’re going to do dividends, and the rest is coming back to shareholders. It seems like it’s eased up a little bit, please clarify if that interpretation is wrong. And what does an opportunity look like, I guess? I mean, if you could expand on that a little bit.

[Mark Joslin]

Yes. I mean, really, Ken, there’s no change in our long-term capital allocation strategy, always very, very consistent over time. Which is, invest everything in the business, make acquisitions, what we have done and we will continue to do. And we think, by the way, there’s good opportunities in this market environment for acquisitions. So that will get some attention. And then a dividend program which should grow with earnings over time. And then excess cash going to share repurchases. It just so happens that in the short term, with the 43% run-up in stock price last year and where we sit today, we think that saving some capacity for a time when we’re not competing with shareholders is going to be good for us. But that’s not going to be two, three years down the road. That should be in the foreseeable future. So that’s about as specific as I want to get. But there’s really no change in long-term strategy, just how we’re executing in the short term.

[Ken Zener, KeyBanc]

Okay. Thank you very much.

[Operator]

And our next question today comes from Blake Hirschman with Stephens. Please go ahead.

[Blake Hirschman, Stephens]

Good morning, guys. First off, within the top line outlook for 2020, curious to hear how you’re thinking about the relative growth between new pool construction because you mentioned – I think you said it was down most likely in 2019. If you expect that to come back kind of versus the large and small R&R work.

[Peter Arvan, President and Chief Executive Officer]

Yes. Good question, Blake. As I said, the preliminary numbers show that the new pool construction year-over-year is probably going to be down 2% to 3%, and they’re still buttoning that up, so that’s why I cautioned that was a preliminary comment. I think that is almost 100% driven by weather. And consider that there’s only a certain number of buildable days during the year as where weather permits. And we lost many of those days in the first half of last year. And then there’s only a certain amount of labor that can be applied to those projects. So I say that demand is very solid for new pools. I see nothing that would indicate that there’s any softening of demand in – for new pools and new construct or remodel.

So when I think about the mix, I think it returns to our normal – if you look at us, our new pool construction probably makes up 15% to 16% of our total business. And reno is another 25%. And then you’ve got the maintenance and repair, the nondiscretionary part, makes up the balance. And I think that from a mix perspective, 2020 is probably going to look an awful lot like that. I don’t see people saying, I’m not going to do remodel, I’m going to do this or that. I think it really – I think there’s general pent-up demand for both, and I don’t see any of the dealers changing their profile of work.

[Blake Hirschman, Stephens]

Got it. And then I could have missed it, but did you guys say what the top four market growth looks like versus the seasonal markets? Or anything along those lines?

[Peter Arvan, President and Chief Executive Officer]

Yes. When we look at the overall, I think the top four markets, we had relative strength in Florida. Florida was very good. Arizona had a tough – so above the total business, Arizona was lighter simply because of a very poor first half. The back half of Arizona was strong. Texas was probably about in line with the business, but again, much skewed towards the back half of the year. And California, stronger in back half than the first half because they were very cold and wet. But in California, the fourth quarter was, specifically in Southern California, they got a fair amount of rain which kind of dampened things out. So they were slightly below the total.

[Blake Hirschman, Stephens]

Got it. And then just lastly on M&A, are you guys still pretty focused on green, commercial, international? Are those kind of some of the bigger spots that you’re looking to expand in now?

[Mark Joslin]

Well, yes, domestic blue as well. So we look across all aspects of the business and we see a fairly active market. We’ve been in 10 years of economic growth. So if there’s someone out there looking to sell their business, now it’s probably not a bad time for them in their minds. And so we’ll see what happens, but we think there will be some good opportunities for us.

[Blake Hirschman, Stephens]

Got it. Thanks so much. I will get back in queue.

[Operator]

And our next question today comes from Alex Maroccia of Berenberg. Please go ahead.

[Alex Maroccia, Berenberg]

Hey, good morning, guys. So I’m looking at the commercial business right now, and you’ve stated in the past that it typically grows around 4% a year. So how are you beating that market at the moment?

[Peter Arvan, President and Chief Executive Officer]

I think we’ve invested in salespeople. We’ve invested in inventory. I mean, on the commercial business, you have to have – it’s a different expertise because it’s largely a bid and spec job for a portion of it on the new construction. And then when it comes to maintenance and repair, when you have competition pools, you have to have it in stock. So if there’s a competition pool that has a pump go down or a heater go down, it’s not a question of, well, who’s got the best price? It really is a question of, hey, do you have it in stock? So we’ve invested in regional inventory to make sure that we have kind of all the important inventory within a reasonable lead time to where the concentration of pools are, and like I said, we’ve invested in talent. And I think we’ve gotten a lot smarter and a lot better in tackling that business. So I think it’s just – it’s share gain based on our investments in people and products.

[Alex Maroccia, Berenberg]

Got it. And just a follow-up on that. Given that it’s about 5% of total sales currently, how much larger do you think that could get in the future?

[Peter Arvan, President and Chief Executive Officer]

Well, I think our overall market share on commercial pool, we’re in the 10% range. And if you look at what our overall market share is on the rest of the business, that implies that there’s a fair amount of room for us to grow. So – but there’s also a portion of that business that we don’t participate in that has to do with bulk chemicals. So of what we consider the addressable market, I think we could easily double the business that we have.

[Alex Maroccia, Berenberg]

Okay. Got it. And then second question for me is, I’m just looking at the inventory number from 2018 and 2019, you’re around 22% as a percentage of sales there, trying to think of free cash flow for 2020. Do you see that inventory number dropping anywhere near the historic 20 or so percent range any time soon?

[Mark Joslin]

Yes. In terms of the percent, I’m not as – I would say that the inventory growth should be modest this year. We have an opportunity to grow that a little bit less than we have the last couple of years. We’ve had an impact from acquisitions. Of course, we had an impact this year-end from vendors who shipped a bit more on early buys than they normally do. Now those were on dated terms, so it didn’t impact cash flow, but that helped push up inventory growth a little bit. And then we had the big inflation on inventory from 2018 into 2019. So add 4% to the inventory levels for inflation which pushed it up a little bit. So given all those factors and really a focus on our part to look at making sure that we’re managing that well, I don’t expect to see the same kind of growth, and probably getting back closer to the historic levels that you’re talking about.

[Alex Maroccia, Berenberg]

All right, great. Thanks for the answer, guys.

[Operator]

[Operator Instructions] Today’s next question comes from Garik Shmois of Loop Capital. Please go ahead.

[Jeff Stevenson, Loop Capital]

Hi. This is Jeff Stevenson on for Garik. And yes, my first question is just on the 6% to 8% base business forecast. Anything you could call out on differences between the blue and green businesses as far as expectations for next year?

[Peter Arvan, President and Chief Executive Officer]

Yes, good question, Jeff. I think about growth opportunities for both businesses a little bit differently. The green business is – has a big irrigating component. Irrigation is tied to new construction, and new construction has been relatively strong and continues to look that way. So from a base business growth, probably the green business growth profile in that area is a little bit better than blue, but not significantly different.

[Jeff Stevenson, Loop Capital]

Got it. No, that makes sense. And then at your Investor Day, you mentioned that cost inflation will be more modest in 2020, in that kind of 1% to 2% range. Just wondering, is that still a good way to look at it? And have there been any changes that you would call out that are more or less than original expectation?

[Mark Joslin]

Yes. No, I think that’s still the way we’re viewing things based on the feedback from suppliers and the increases that were announced, it looks to be a much more normal year in that regard.

[Jeff Stevenson, Loop Capital]

Got it. And the last one, I know you only called out the first quarter ASU tax benefit. But just when you look at 2020, is there anything you could call out? Do you think it could be more front half loaded? Or anything as far as steady cadence here to help with modeling purposes?

[Mark Joslin]

Well, we gave some guidance. If your parse our comments, I think we gave some guidance throughout the P&L, starting with the top line and the revenue growth expectations, greater in the first quarter due to the easier comps we have. Really, first quarter, first half with less growth in the back half. Some early buy from a customer standpoint, moving from Q2 into Q1, gave quite a bit of color on margins, on expenses, didn’t really provide a lot of modeling color other than overall for the year. So I think that we’ve given about as much – or more than we normally do in terms of kind of how the year looks like it’s going to shape up at this point. So I’ll leave it at that, I think.

[Jeff Stevenson, Loop Capital]

Understood. Thanks and best of luck.

[Operator]

And ladies and gentlemen, this concludes the question-and-answer session. I’d like to turn the call back over to Mr. Arvan for any closing remarks.

[Peter Arvan, President and Chief Executive Officer]

Yes, thank you. Thank you all for joining our call today. Our next call will be scheduled for April 30, where we’ll discuss the first quarter results for 2020. Have a great day.

[Operator]

Thank you. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.