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Pool Corp (NASDAQ:POOL)
Q2 2019 Earnings Call
Jul 18, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Pool Corporation Second Quarter 2019 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Chief Financial Officer, Mark Joslin. Please go ahead.

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Thank you, Ben. And good morning, everyone, and welcome to our second quarter 2019 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 2019 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.

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

Peter D. Arvan -- President and Chief Executive Officer

Thank you, Mark. And good morning to everyone on the call. I'm pleased to report Pool Corp delivered solid financial results for the quarter and the demand for pool and outdoor living products remains strong. Despite the effects of very challenging weather conditions, our total sales were up 6% to a record $1.12 billion for the quarter, while our base business sales grew by 4%, including a 1% negative currency exchange impact for the quarter.

Before discussing how weather affected our four largest markets, we think it is important to remind our listeners of our often repeated statement that weather is the most significant factor affecting sales in our industry in the short term. So I'll start my comments by quantifying the weather conditions that our builders, remodelers, retailers and homeowners have contended with in the 2019 season and what effects it has on various parts of our business.

There are two major factors that affect weather, precipitation and temperature and they both impact our business in different ways. Weather than normal weather can delay the construction and remodel process, because contractors generally don't work during inclement weather and saturated earth is unstable and unsuitable for excavation which stalls new pool projects and prevents significant work on remodels such as pool finish, coping and decking from being completed. This affects the timing of building materials and equipment as projects are delayed deferring sales of our projects. Extensive rain also delays landscape and irrigation projects, as well as equipment purchases and associated repairs.

Consider that this is further exacerbated by a tight labor supply. So typically, there is only limited ability to make up any lost days in the season because their crews have so much capacity and finding additional labor to add new crews is extremely challenging in this economy. In year round markets, contractors and builders simply extend lead times for new projects and hope to make up lost days in the spring and fall by working earlier and later in the season as weather permit. The same is true in seasonal markets, but in these areas, weather plays an even more important role as the swimming season is shorter. The other component of weather, as we mentioned is temperature. When it is unseasonably cool in the year round markets as we saw in California and Arizona in May of this year, retail sales for pool chemicals and maintenance supplies are hampered as pools are used less and the need -- and need fewer chemicals to maintain water chemistry.

In seasonal markets pools are open later and not used, minimizing the need for chemicals supplies and the associated equipment repairs. Another consideration when contemplating the effects of weather is how this year's weather compared with the same period a year ago. If last year's whether it was important -- if last year's weather was warmer or drier than normal, it can make challenging comps, but not reflect the overall health of the industry. In the second quarter of this year, most of the US markets experienced favorable weather in April. And we were encouraged as the demand for a product was strong and the business posted good results, only to see the weather turn cooler and wetter in May and June curtailing demand.

May 2019 was the second wettest May on record with year-to-date June being the wettest first half of year in the Continental US in 125 years. Temperatures were also below normal in most markets in the second quarter. The combination makes for a challenging short-term environment. But again, it is not indicative of the health of the industry. In reviewing how the weather affected specific markets, we're going to share some more detailed information than we typically have in the past or will likely share in the future.

But we feel it is important in helping understand the significance of the weather to our results for the quarter. Turning to the US swimming pool product sales. We have been encouraged by the strong sales performance in the areas where the weather has not been an issue like the Southeast as demand for construction and remodel products has been strong as have the sales of maintenance products. In fact, sales in the entire Southeast increased 11% for the quarter.

In contrast, our California sales were only up 2% for the quarter, as cooler and wetter temperatures curtailed construction and use of pools, particularly in May, when temperatures in Southern California were off approximately 20 degrees for the traditionally strong Memorial Day holiday.

What is encouraging though is that, even with unseasonable temperatures once the rain stopped in California, construction activities quickly recovered and building material demand in the region showed solid growth for the quarter. Similarly, Texas sales increased 2% in the quarter is both cooler temperatures and higher precipitation curtailed construction activity and the need for chemicals and supplies.

Arizona sales increased 6% in the quarter with strong growth in building material sales, reflecting good demand for new pools and remodel products as more normal weather prevailed in that area.

Rounding out the remaining US regions, the Northeast and Midwest regions struggled with record wet and cool conditions and experienced growth consist with base business in the quarter. In a whether year like 2019, especially in year round markets, we see construction continuing late into the year weather permitting, as builders and remodelers try to catch up and get the pools already sold in the ground. A tight labor market will make this a challenge, but strong builder backlogs are indicative that underlying demand is healthy in our key markets, which will translate into growth for us and our industry as the weather allows.

Now looking at North American end markets. Retail sales for the quarter were only up 1%, clearly affected by poor weather. We expect that now that pools are open, the retail business will improve, but will not catch up on what was lost early in the season. Commercial sales remains strong and sales for the quarter were up 8%. Building material also -- building materials are also showing strength and resilience as sales in this category were up 9% for the quarter. Equipment sales, which typically occur at the latter end of most renovation and new pool projects were up 6% in the quarter.

Now I would like to provide some additional color on our horizon business. Base business revenues for the quarter were flat, but are up 2% year to date. Weather, again, is the lead story here, but for the quarter, sales in Florida and Arizona achieved double-digit increase reflecting more favorable weather and strong execution. Conversely, California and Texas contended with unfavorable weather and reported lower sales for the quarter compared to last year. Our focus on execution, this business continues and we remain encouraged by the progress we are seeing.

Switching to Europe, after a great start to the year we saw sales up 5% in local currency for the quarter as they too experience unfavorable weather from April until the latter parts of June. Year-to-date, Europe is up 14% in local currency, a reflection of the team's focus and strategy. Our sales rate improved to previously strong levels once the weather turn favorable toward the end of June, showing a healthy market and solid execution.

Moving on to gross margins. The gross margin rate was up 28 basis points for the quarter ending at 29.5%. As mentioned in the previous call, we expected gross profit margins to increase slightly as we sold down the remaining pre-price inventory -- pre-price increase inventory purchased late last year.

The benefit from this activity should be all, but gone at the end of the second quarter with margin rates expected to decline in the third and fourth quarter as compared to last year. In total, gross profit for the quarter was up 7% on a 6% revenue increase with the base business delivering a 5% increase in gross profit [Indecipherable] 4% increase in revenue for the quarter with both adversely impacted by about 1% currency exchange effects.

Now let's turn to operating expenses where you will see total operating expenses increased approximately 8% and the base operating expenses increased 5%. Mark will add some color on the impact of our new locations and acquisitions. But I would like to describe a few areas of growth and capacity creation that we have been investing in. POOL360 is one area where we have continued to invest and are seeing good results. Year-to-date sales on the app are up 29%, which adds capacity for our team and convenience and value for our customers.

In total, 11% of our sales orders are now coming in through this portal. We are in the process of redesigning and remerchandising our customer service areas and showrooms and implementing enhancements to our order picking process, which are showing positive initial results in driving incremental sales and speed at the counter and creating more capacity for our customers and sales centers. Additionally, we have begun to see success in our truck utilization by moving to market based transportation, which has curtailed the need for more drivers and truck.

Looking at operating income for the quarter, you will see our focus on execution delivered a 6% increase, resulting in a 15.4% operating margin for the quarter, an improvement of 7 basis points above last year. The base business operating income improved over 6% resulting in a 15.6% operating margin, an increase of 21 basis points. On a year-to-date basis, operating income was up 8% reflecting the team's focus on finding ways to grow, while managing price and expenses in what was a very challenging weather period.

Looking at the year-to-date period, our base business operating profit is up 7%, improving operating margins by 49 basis points to 12.5%. Turning to cash flow, we delivered another very strong cash generation period with cash flow from operating activities at $97 million, an increase of $134 million over the same period in 2018.

Although, inventory has increased to support our new locations and acquisition, the team remains focused on solid cash generation. Mark will provide additional color on this area. Lastly, we remain confident in the team's ability to provide unparalleled value to our more than 120,000 customers and to be the best channel to market for our over 2200 suppliers.

Additionally, in our discussion with several pool builders throughout the country, we are confident that the underlying health of the industry is good and the backlog is solid. With a little help from weather between now and year-end some of this backlog of new builds and remodels will get cleared, particularly in the year round markets and it is likely that the 2020 season will start with many projects already on the books.

In view of the first half results and our confidence in the second half opportunity. We are narrowing our EPS guidance for the year to $6.09 to $6.34 from $6.09 to $6.39.

I will now turn the call over to Mark for his financial commentary.

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Thank you, Pete. I'm going to start by revisiting comments I made earlier in the year related to our gross margin expectations for the year. As I've said, we had expected a meaningful Q1 margin gain due to the carryover pre-price increase inventories from 2018 and then our margin gain should moderate substantially in Q2 and Q3 and become a headwind in Q4, based on our strong Q4, 2018 results. Giving us relatively flat gross margins for the year, in line with our long-term expectations.

Now, the second quarter is behind us. I can update you about how these expectations have evolved. Q1 turned out to be largely as expected with 90 basis points of margin improvement as seen in our results. Those gains moderated in Q2 to 30 basis points as we work through the remaining pre-price increase inventories. This was better than we had expected for Q2, primarily because a slower start to the year pushed the sales of some of this product out. Where our expectations will likely change is in the back half of the year, where we now expect lower gross margin than in Q3, 2018, as well as in Q4, which is up against a much tougher 100 basis points margin increase over Q4 '18.

The reason for this lower gross margin forecast for the back half of the year than previous is due to our reduced sales and purchase expectations for the full year based on our first half results and the impact that has on our volume based vendor purchase incentives for the remainder of the year. The bottom line here is that, we expect our gross margins to be relatively flat for the full year with second half declines offsetting first half gains.

Moving down to expense. Our $11 million operating expense growth in the quarter was adversely impacted by expenses added from two acquisitions. We acquired Turf & Garden in Q4 2018 and W.W. Adcock in Q1 this year, which combined added $4 million in expenses for the quarter, while contributing 5% operating margin to our results. As is typical with acquisition, as these are integrated into our business, performance should gradually improve over time, in line with other parts of our business.

Excluding these, our base business expense growth was a more modest 5% for the quarter and only 3% year-to-date, including a 1% currency benefit. In terms of employee count, we had 3.5% over [Phonetic] growth in employees over last year, but only a modest 1.4% growth when you back out employees from acquired businesses. This 1.4% growth includes the impact of new employees needed to staff new locations.

As Pete mentioned, one of the investments we are making for future business growth is in the opening of new locations. We did nine of these over the last 12 months, including seven in our US Blue business. As these new locations are expansions and markets where we are already participating, we include them in our base business results and like acquisitions, they are dilutive until they are able to grow and contribute in line with our expected results over time. In both the second quarter and year-to-date, these new locations contributed approximately 1% to our base business expense growth. The bottom line on our expenses is, we believe we are making the right level of investment to support both existing and future business growth opportunities.

Moving down to operating income. Our base business operating margin for the quarter improved 30 basis points over Q2 2018, getting us to 50 basis points of operating margin improvement for the year, which is a very good result, given our more modest top line growth and a reflection of our capacity creation initiatives, as Pete has mentioned. With the challenges on our gross margin for the remainder of the year, as previously mentioned, it is likely will give some of this operating margin improvement back by the end of the year, but we still expect to finish the year with 20 to 40 basis points of base business operating margin improvement, which as I've said in the past, is a good annual target for us.

On the tax line, the increase in our share price resulted in a higher level of employee stock option exercises in the quarter, which under ASU 2016-09 reduced our tax expense by $7.8 million or $0.19 in earnings per share. Excluding this, our effective tax rate for the quarter was 25.6% and in line with our previous guidance. We have not included any additional tax benefit from ASU 2016-09 in our guidance for the remainder of the year. Excluding the ASU benefit, we still expect our tax rate to be just over 25% for the year with a slightly lower rate in the third quarter as in the past.

Moving on to our balance sheet and cash flow statement, our total net receivables increased a modest 3% compared to last June, while inventories grew 14% year-over-year due to the combination of slower sales growth, a couple of modest opportunity buy [Phonetic] that we participated in during the quarter, cost inflation over last year and the $13 million of inventory added from acquisitions. This inventory increase was partially offset by a corresponding 14% increase in our accounts payable.

For the year, largely as a result of the $100 million pre-price increase purchases made in 2018 for the 2019 and good discipline over working capital management, our net cash from operations of $97 million is an improvement of $134 million over 2018 results through June. At the end of the quarter we had $692 million of debt outstanding, of which, our trailing -- I'm sorry, which given our trailing 12 months of EBITDA gives us leverage of 1.76 and over $300 million of capacity on our revolving credit facility. This in combination with our existing share repurchase authorization of $250 million gives us plenty of capacity for share repurchases in the coming months.

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

Questions and Answers:

Operator

Thank you very much . We will now begin the question-and-answer session. (Operator Instructions) Our question is from David Manthey of Baird. Please go ahead.

David J. Manthey -- Robert W. Baird & Co. -- Analyst

Hey. Good morning, guys. First off, I was hoping you could give us the price and volume components of both the Blue and Green based businesses?

Peter D. Arvan -- President and Chief Executive Officer

Yeah. Well, roughly speaking, David, this year was an unusual year from an inflation standpoint. So that impacted the price and gave us a little more price and volume. I don't want to be real specific in what that looks like, but figure that's little more than half of the growth is price related and volume was more modest, in general. Certainly, more on the Blue side than on the Green side. We saw a little higher inflation on Blue and Green. Green had some inflation as well, but not as significant as on the Blue side.

David J. Manthey -- Robert W. Baird & Co. -- Analyst

Okay. It makes sense. And then given your outlook in the way you're seeing things. I guess, the comparisons in the second half of last year pretty tough, but based on the great detail you gave us. Thank you. As well as your exit velocity here coming out of the quarter, it seems like if you have normal weather, a couple of points of price, the extra selling day, high single-digits growth in the third quarter sounds reasonable. Is that a fair statement?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

I think that's a fair statement. We're looking at roughly 6% to 7% growth for the entire year, first half include. And that growth depends on whether largely, so lower end based on kind of normal weather and hopefully weather is our friend and we can do a little bit better.

Peter D. Arvan -- President and Chief Executive Officer

Weather -- so for the beginning of July, finally, it seems that most of the weather issues have abated, so we are encouraged.

David J. Manthey -- Robert W. Baird & Co. -- Analyst

Yeah. And then just one harder question here on the cost side. By my math, if you would have hit Street expectations for gross profit, I think the SG&A that you reported, even without assuming any kind of increased variable costs would have been about 70% of the gross margin growth. So I'm just -- I wanted to flag that and just ask you, as we look to the second half of this year assuming trends are more favorable in terms of growth trends. Do you think that we should see SG&A trends more consistently with that 60% target formula?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Yeah. That's a good quick math, David. And that is true. It certainly is more of a challenge. Going into the season, we're expecting normal weather and we staff for that and when sales are more modest than we expect, that makes getting that SG&A leverage more difficult. So, more normal in the second half, which is more of that 60%. And again, as I said, 20 to 40 basis points of operating margin improvement for the year is where we expect to end up.

Peter D. Arvan -- President and Chief Executive Officer

Dave, consider that in the first half of the year we opened up seven locations and many of those didn't come online until late into the quarter. So those will start to -- remember, those mature over time, but certainly in the second half of the year those will be much more productive than they were in the first half of the year.

David J. Manthey -- Robert W. Baird & Co. -- Analyst

Great. Thank you.

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Sure.

Operator

Our next question is from Ryan Merkel of William Blair. Please go ahead.

Ryan Merkel -- William Blair & Company -- Analyst

Hey. Thanks, everyone. And thanks again for all the great details. So my question is, for the second half of the year are you making an explicit estimate for deferred sales and how much you think you can make up from the first half?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

It's not -- we don't have an exact number, Ryan, on what we think we can make up. I mean, remember, when we exited the first quarter we thought that it was $10 million to $15 million. Second quarter looks more like, call it, $25 million to $35 million. How much of that we make up really is going to be a function, as we've said before of how late in the year the builders and remodelers are able to work, weather permitting. So, very tough at this point to say what we will be able to make up. I think we'll have a much better view of that at the end of third quarter, but right now, I think it's a little premature to call a number on how much of that we think we can make up.

What I can say is that, demand is good, everybody is working. So as long as the sun stays out and rain stays away then we are encouraged. But I think it's -- given what's happened in the first half of the year with whether, I think I would be premature in calling a number right now.

Ryan Merkel -- William Blair & Company -- Analyst

Yeah. No, that makes sense. That's helpful. All right. Then secondly, on the second half gross margin commentary. I just want to dig in a little bit more. The third quarter -- should we think about gross margins being down kind of in the 20 to 30 basis point range? And then 4Q seeing a bigger decline just due to the comparisons? I'm just trying to hone in on exactly how we should think about modeling that?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Yeah. Well, as I guess the bottom line was that, margins will be relatively flat for the year. So think of relative inverse to the first half of the year. And one way of looking at it, fourth quarter is a smaller quarter, less volume than first quarter, third quarter is a little smaller than second quarter. So as you get back to relatively flat for the year you can kind of after factor that in and look at -- from a modeling standpoint, how third and fourth quarter down get you back to flat for the year.

Ryan Merkel -- William Blair & Company -- Analyst

But I guess, fourth quarter you would expect to be down more year-over-year than the third quarter, is that a fair statement?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Yeah. Significantly more because of the 100 basis points of inventory gains we had in the fourth quarter last year. Yes, so on a relative basis third quarter will be down, fourth quarter will be down a lot more.

Peter D. Arvan -- President and Chief Executive Officer

But remember, it's a smaller quarter in revenue.

Ryan Merkel -- William Blair & Company -- Analyst

Right. Okay. And then just lastly I wanted to ask a longer-term question on in-ground pool market potential size and rate of penetration. Can you just revisit that for us? Where do we stand today in terms of the in-ground pool market and longer term, where do you think it could grow to?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

So, I would tell you that the number today on the in-ground pools is somewhere in the neighborhood of 5.3 million pool. Last year, remember, we said we added about 80,000 pools, this year we thought that we would be up slightly above the 80,000, we were thinking it would look more like 85,000 pools for the year. Given the slow start to the season and the inclement weather, I think we will be somewhere between 75,000 and 80,000 pools in the 2019 season depending on what happens with weather between now and year-end.

We see that continuing to grow back to more normal levels. So I think what we've called out in our investor information is that, we think more normal pool construction assuming the economy stays healthy and things -- and housing holds up, we think it could -- new pool construction could come back to the low 100's would be a more normal run rate. But again, the biggest limiting factor we have on that is; A, weather; B, followed by labor. So the good news is that, there -- the labor supply hasn't really changing for our builders. So they're not losing labor, but they're also not gaining them. So I think demand may be better, but it's going to be a function of; A, weather for them; and B, being able to get pools in the ground. Now there are a lot of factors, so a play here, so calling out a number on where we think it could get to. I would just take a look at the growth rate that we have been on and don't look for any significant spikes in the growth rate. I'd like to think about the industry is kind of being pressurized and that demand is better than supply right now. So it will continue to build over time.

Ryan Merkel -- William Blair & Company -- Analyst

Very helpful. Thanks .

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Yeah.

Operator

Our next question is from Steve Volkmann of Jefferies. Please go ahead.

Steve Volkmann -- Jeffries -- Analyst

Hi. Good morning, guys. Just one quick clarification Mark to lead us. Just the ASU benefit of $0.40 is in your guidance, but nothing further as we go forward. Correct?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Yes. Correct, Steve.

Steve Volkmann -- Jeffries -- Analyst

Okay, great. And then, can we just talk a little bit about the price cost side? What are you seeing with respect to cost from your suppliers? We've, obviously, had a little bit more of a tariff ramp up in certain things. I'm just curious how that's sort of manifesting for you guys. And I assume you'll just sort of try to price for that over time, but just any discussion would be helpful.

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Sure. It's a little bit early because we are now -- thankfully this year doesn't look like we're going to see mid season increases like we had last year. So it looks to be a more normal year on timing. So this is a time of year when our major suppliers are formulating what their pricing strategy is going to be for next year. I would tell you that what -- from what I'm hearing and we really don't have firm numbers from anybody, but I would tell you that the general sentiment is that, it will be a more normal year in terms of price increase, but perhaps slightly above that. But not like we had for the 2019 season.

Steve Volkmann -- Jeffries -- Analyst

Okay, great. And then as we think about the sort of the gross margin trajectory. Obviously, we're going to sort of end the year a little bit weaker than we started, but sort of flat overall as you've said. Is there any reason not to think about that flat overall? I know that's kind of your long-term hope. Is there any reason to think that 2020 wouldn't be kind of flattish overall?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Looking ahead to 2020 already, Steve, it's just mid '19.

Steve Volkmann -- Jeffries -- Analyst

I don't want to get kind of [Indecipherable] here.

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

I think you're going to steal from my third quarter commentary. But I would say first half 2020, I can tell you this, that's going to be a challenge from a gross margin standpoint. Second half should be OK. But first half given the gains we've had certainly without -- As Pete said, we're early on in the pricing discussions, but it's unlikely we'll have the kind of inventory buying opportunities that we had last year. And the inventory gains that we had in the first year. So I think -- first half of this year. So it's going to be tough in the first half of next year.

Steve Volkmann -- Jeffries -- Analyst

Okay, great. That makes sense. If I can just sneak in one more. Are you going to continue to open more stores? In other words, that we should sort of think about this run rate of kind of bringing on new stores that are going to take some time to ramp is kind of the normal? Or do the store openings fade and then we start to get the actual benefits in the numbers of the improvements?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

I think we're going to continue. So we'll continue on the pace that we're on. So for the balance of this year, we have four more planed to open. So a typical year for us is in the four to eight range. And this year will be slightly above that, but I think that reverts back to a more normal rate after that. But remember, when we are opening -- typically, when we're opening, because there are many markets that we are not in already. So when we open it is a -- it's out of the need for capacity.

So -- and you take a larger markets as they grow and they grow further into the suburbs, our current facilities become tapped out now. As Mark said, we have and as I said in my comments, we are spending a lot of effort and some money on improving our capacity creation within the existing four walls. And in fact if you look at our expense growth for the first half of the year. The reason we're able to achieve that and including the new locations is because of the work that we're doing. So I think the pace of new facilities may slow a little bit, but we're doing those out of the need to add capacity. But we're also working on the internal tools as well.

Steve Volkmann -- Jeffries -- Analyst

Understood. Thank you, guys.

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Yeah.

Operator

Our next question is from Blake Hirschman with Stephens Incorporated. Go ahead.

Blake Hirschman -- Stephens Inc. -- Analyst

Yeah. Good morning, guys.

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Good morning.

Blake Hirschman -- Stephens Inc. -- Analyst

First one, just some clarification on the top line outlook commentary. I think you said 6% to 7% growth is now the expectation for the year. Is that base business or overall top line? And what's kind of the FX, I know it's been a bit of a drag to the first half, what's the expectation built in for that through the rest of the year?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Yeah. 6% to 7% is overall, so including acquisitions. In terms of FX, it's obviously been an headwind for us through the first half of the year, but looking out to the second half, if we -- and the year about where we are now from an exchange, which is primarily euro, we would not have much of a headwind there.

Steve Volkmann -- Jeffries -- Analyst

Yeah. And then on inventory and the channel. I know there was noise coming into the busy part of the year and just with the weather we've seen and everything else, just wanted to get an update on how inventories and the channel stack up is for us, you can tell?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Well, when you say in the channel, I mean, we're -- I guess, we're in the middle of the channel from a distribution standpoint. So we are kind of well-positioned where we are in terms of inventory, they are up over last year, which were also up over the year before because of some midyear purchases we did last year. So we're in pretty good shape in terms of getting us through the third quarter, we'll see how demand plays out with weather and what kind of opportunities there are when we look at the vendors and their pricing for the 2020 season. So, I guess, we'll give you an update on that in the third quarter.

Steve Volkmann -- Jeffries -- Analyst

Got it. Sounds good. I'll leave it there. Thanks, guys.

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Thank you.

Peter D. Arvan -- President and Chief Executive Officer

Thank you.

Operator

Our next question is from Anthony Lebiedzinski of Sidoti & Company. Please go ahead.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Yes. Good morning and thank you for taking the questions, and thanks for providing all the details in regards to the weather impact. So just wanted to follow up on the previous question, as far as the opening of new sales centers in your market. So just wondering and I assume, you probably haven't seen too much of any cannibalization effect as you've opened new sales centers in existing markets, is that a safe assumption?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Yeah. So what happens when we open, we -- because, again, remember, these are not new areas. So we find that we -- as the areas are growing and we need more capacity, typically, when we open a location we take a chunk of business from a donor location, if you will. And that seeds the new location. And then what we have seen in the past and it is really as part of our pro forma model as we bring these up for approval is the whole market has to continue to grow. So what we found historically is that, the locations are out of capacity, we add a new location, we take a portion of the business that has been shift to the adjacent market that we now operate in with a facility. And then the new location continues to grow and the old location will eventually grow back to where we started from in terms of anticipating the need for a new location.

But that's been historically how we have done these greenfield for many, many years. But our pro forma model includes the entire market, new and a recovery of the sales that we removed from the donor center.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Okay. Understood. Okay. And you mentioned before that retail was up around 1%, so does that imply that your sales of chemicals were up around 1% as well?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Chemicals were up 3%.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Okay. So a little bit better. Okay, got it. Okay. And then I noticed that there were no share buybacks in the second quarter, anything to read into that or is that just timing of when you expect to be in the market?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

I guess the only thing you can read into it is, we have plenty of capacity for future share repurchases.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Okay. All right. Thanks and best of luck.

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Thanks, Anthony.

Operator

Our next question is from Garik Shmois with Longbow Research. Please go ahead.

Garik Shmois -- Longbow Research -- Analyst

Hi. Thank you. I just wanted to follow up on gross margins in the second half of the year. Just wanted to be clear. The only thing that's really changed in your outlook the timing of the vendor discounts. And can you remind us, when do you usually see those discounts? Is it really in the -- just in the fourth quarter or do you tend to take advantage of them throughout?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Yeah. Well, that's a good question. And really, it's not so much timing. We anticipate what those discounts will be. Obviously, every year we're talking to our vendors and they're putting their programs out there, and then we're looking out ahead for the coming year and saying, what are our expectations, what are purchases will be with our various vendors and we are forecasting that out and then as we go through the year we make adjustments to that forecast. And so, there is some adjustments along the way, but it's based on what we expect to do for the entire year. So that's kind of how the process works for us.

Garik Shmois -- Longbow Research -- Analyst

I wanted to ask on commercial, you had a nice step-up in the quarter. I think you were tracking at about 2% in the first quarter, now you're up at 8%. How much of that was catch up from 1Q deferrals versus strength in the overall market versus share gains?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

I think it's more reflective of strength in the overall market. So in the first quarter of the year because of the weather there were several projects that were impacted, but again it goes back to capacity. There's only so much capacity, and if you look at the quarters -- the quarter with the least amount of capacity to catch-up is really the second quarter, because the cruise our busiest. So I think it is more indicative of the health of that space and the opportunity that we have versus catching up.

Garik Shmois -- Longbow Research -- Analyst

Okay, thanks. And then just lastly on inflation. You had previously talked about inflation running about 2 points above normal. It sounds like that's pretty much where you're still at for the year. I just wanted to see if you can confirm that?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Well, yes, it is for the year, but remember, in the fourth quarter we had -- fourth quarter of 2018 is really when our inflation to cold and we're able to push price increases through. So when you get back to fourth quarter of this year, then that lapse the inflation we saw last year. And as Pete said, going forward, still very early, but probably more like. And the 2% was over normal, let's call it, 1% has been historic inflation. So this year was 2% on top of that, which is more like 3% overall. And then going back to more modest historic levels plus, I guess, I would say, so maybe 1% to 2% is what we're looking at this point for 2020, but still very early.

Garik Shmois -- Longbow Research -- Analyst

Okay. Thank you.

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Yeah.

Operator

Our next question is from Ken Zener with KeyBanc. Go ahead.

Kenneth Zener -- KeyBanc Capital Markets Inc. -- Analyst

Good morning, gentlemen.

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Hi, Ken. Good morning.

Kenneth Zener -- KeyBanc Capital Markets Inc. -- Analyst

Hopefully you can hear me clearly. So, Pete, it's -- you guys have your Analyst Day coming up in September, I think it's probably about two years -- when you were -- you're there at the last Analyst Day. And you described -- just for perspective what this question is about. You describe the demand is pressurized, so the weather is there, you're going to have good sales is what you're effectively saying. Can you talk about perhaps how that is different, or how you're thinking about you're demand environment given your prior industry and whether. You guys handle it very well at Pool Corp, how is your kind of thinking changed about the volatility of the weather in the two plus years that you've really been at Pool and obviously taken leadership of it?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Yeah. The demand -- here is what's different between here and where I was previously, demand is very consistent here. The industry is healthy, people want pools, people are remodeling pools, the whole outdoor living lifestyle is very healthy and in high demand. There is a finite amount of capacity in the industry. And when the weather is good, everybody is working very hard and when the weather is bad, it puts everybody behind. What we are working on at Pool Corp though is making sure that we are doing everything we can to extend and expand the capacity of not only ourselves, but our contractors and remodel and retailer customers by giving them tools that allow them to spend less time with us and less time procuring material and more time on the job. So part of, if you remember, we mentioned that we remodeled our showrooms and we changed many of our picking processes and we're actually now looking at and monitoring the amount of times that customers actually spend in our facility it hopes of driving that down and allowing them to be more productive. So they're more productive and we think we are also be rewarded with share for doing that.

So, I mean, as I said, the industry is pressurized and what that mean -- from my perspective and what that means is that, there is more demand for pools and remodel and there are people to do it. So when the weather is good, it's good. but when the weather is bad then things are going to back up. And like I said, we're working on things to make -- to allow the contractors to be more effective and to create some capacity by doing that.

Kenneth Zener -- KeyBanc Capital Markets Inc. -- Analyst

Right. And I apologize if I'm breaking out. And the part of the reason I ask that, is this preceded GP, but Mark you were there in 2015 I believe, Texas was very wet, California was very wet, you had flat volume, you actually took down revenue guidance. But what happened the quarter two later is that, because demand was there it actually came back. And I'm not asking you, obviously, your guidance is out there. But does the volatility and weather and you obviously try to make people more efficient, but are you seeing it, we're really should kind of be extended in terms of -- you have the labors there and the weather is there. I mean, are you guys seeing more of those customers productivity perhaps change the balance of sales like it was in 2015 when you guys actually ended up beating guidance?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Well, I mean, going back to 2015. If I remember correctly, Ken, we had a very mild fall and winter season that year. And what we've seen, if we look back over the last four, five years when we have mild winters, whether it's end of the season or the start of the season. We can have very good finishes are starts to the year. Some of our best quarters from a growth -- sales growth, operating profitability growth, contribution margins happen on the balance of the year or to the start of the year based on mild weather conditions. And as Pete said, the demand is really pretty consistent and strong. And so the mild weather allows our contractors to really extend their work and their ability to meet the demand that comes to them. So if that answers you question. That's really what we've seen and continue to expect to see with milder weather conditions on the shoulders of the season.

Kenneth Zener -- KeyBanc Capital Markets Inc. -- Analyst

Right. Thank you very much.

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

All right.

Operator

[Operator Instructions] Our next question comes from Alex Maroccia of Berenberg. Please go ahead.

Alex Maroccia -- Berenberg -- Analyst

Hi, guys. Good morning, and thanks for taking my questions. On the previous quarter's call you outlined the $20 million to $30 million impact on revenue from Easter and then the $10 million to $15 million from cold and wet weather. I was wondering if you could just do a similar quantification for this quarter in terms of the deferred sales?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Yeah. And Alex, I think we covered that briefly. What Pete mentioned earlier is, the weather impact estimate for the second quarter for us was $25 million to $35 million. And then the first quarter $10 million to $15 million, we really didn't get in the second quarter and didn't really expect to, because of capacity on the part of our builders. So the total deferred revenue, if you will, I don't know that I can characterize it as deferred revenue as much as revenue that we had expected to get in the first half of the year that we didn't get is more on kind of $40 million to $50 million range.

Alex Maroccia -- Berenberg -- Analyst

Okay, got it. That's great. And then the second one is just a clarification point, because you said that inventory pre-buying opportunities might be a little limited early next year. So do you expect the levels to remain relatively confident now seeing that they are about 250 basis points higher than the average over the past three years?

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

I'm sorry, you're talking about inventory levels or you talking about --

Alex Maroccia -- Berenberg -- Analyst

Yes, just inventory as a percentage of sales.

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Yeah. I mean, that should certainly come down. As -- assuming, of course, no significant buying opportunities. We're very strategic in our purchasing process and when we feel that we can take advantage of pricing, we do that and that's beneficial for us. So it's hard to say, but we certainly don't expect that kind of environment going into the next year to be similar to the one we had in the last year, which will be as a percent of sales inventory should be lower.

Alex Maroccia -- Berenberg -- Analyst

Got it.

Peter D. Arvan -- President and Chief Executive Officer

Consider that part of the inventory gain was from acquisitions number one and two from the new locations that we opened. And, obviously, we load them first with inventory and then start to sell.

Alex Maroccia -- Berenberg -- Analyst

It makes sense to me. All right. Thanks a lot guys. I appreciate it.

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Yeah. Thank you.

Operator

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

Peter D. Arvan -- President and Chief Executive Officer

Great. Thank you. Thank you all for joining us today. Our next call will be October 17, 2019, when we will discuss our third quarter results. Have a great day.

Operator

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

Duration: 50 minutes

Call participants:

Mark W. Joslin -- Senior Vice President and Chief Financial Officer

Peter D. Arvan -- President and Chief Executive Officer

David J. Manthey -- Robert W. Baird & Co. -- Analyst

Ryan Merkel -- William Blair & Company -- Analyst

Steve Volkmann -- Jeffries -- Analyst

Blake Hirschman -- Stephens Inc. -- Analyst

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Garik Shmois -- Longbow Research -- Analyst

Kenneth Zener -- KeyBanc Capital Markets Inc. -- Analyst

Alex Maroccia -- Berenberg -- Analyst

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