Pool Corp (POOL) 2002 Q1 法說會逐字稿

Good morning. My name is and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the first quarter SCP Pool Corporation earnings release conference call. All lines have been placed on mute to prevent any background noise.

After the speakers remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad, and questions will be taken in the order they are received. If you would like to withdraw your question, press the pound key.

I would now like to turn the call over to Rusty Sexton, Chairman of the Board. Thank you, Mr. Sexton. You may begin your conference.

OK. Welcome again and good morning all and thank you for joining us for the SCP conference call.

I'll make a few remarks. We have of course, as usual, Manny Perez, our CFO and President, and Craig Hubbard, our CFO. And I'll make a few remarks and then I'll turn it over to Craig for financial details, and then I will -- Craig will to for and to more description on the activities of the quarter.

Anyway, the year is off to a good start. We got out of the gate well and we've passed the first turn. Sales are up 10 percent. Margins yet again improved by 80 basis points. Operating income up 34 percent and the same store sales up eight percent.

And best of all, Earnings Per Share up 75 percent, seven cents for the quarter. That's a pretty good start I think. If you'll remember back, as a public corporation, a few years ago that the first quarter was marginally profitable at best, and sometimes a small loss. So the last few years we've been improving this quarter to where I think it's very respectable.

All again we've done this recovering economy, and we recovered, I think, very well considering the debacle that all businesses experienced from the September problem we had.

As I've said many times, the Pool business in general and SCP specifically has always proven to be very reasonably resilient to ups and downs of the economy, and I think again what you've seen in the fourth quarter, and now again in the first quarter pretty well proves this point.

The weather continues to be favorable for us. Consumers seem to be buying. And our construction dealers are writing good business orders and are optimistic for the season.

So we're off to what looks like a good season.

So with that, Craig, why don't you pick it up and give them the financial details, please.

Thank you very much, Rusty.

Before I get into my discussion of the financial commentary, I won't to point out to our listeners that our discussion, comments, and responses to subsequent questions may include forward-looking statements, including management's outlook for the remainder of 2002 and future periods.

Information on factors and variables that could cause these actual results to differ materially from those anticipated results discussed today is available in our most recent Form 10-K which is on file with the SEC.

Net sales for the first quarter of 2002 was 171 million. This is up $16 million or 10 percent from the 155 million recorded in the first quarter of 2001.

As Rusty indicated, same store sales growth of eight percent contributed almost $10 million to the increase, while service centers acquired in 2001 contributed five million to the increase. The balance of the increase was attributable to new service centers.

Gross profit for the first quarter of 2002 was 43-and-a-half-million. This is up almost five-and-a-half-million or 14 percent over the same period last year.

Same store gross profit growth of nine percent accounted for two-and-a-half-million dollars of the increase. Service centers acquired in 2001 contributed 900,000 to the increase, and new service centers contributed approximately $1 million.

Gross Profit Margin increased 80 basis points to 25.4 percent in the first quarter of 2002 from 24.6 percent in 2001. This increase is due to several factors including our purchase leverage on our volume buys through our preferred vendors, increased sourcing of products through the company's four centralized shipping locations, and continuous improvements in pricing disciplines at the point of sale.

On January 1, the company adopted FAS 142, Goodwill and Other Intangible Assets. Under this new accounting rules, Goodwill ...

... I would like to state that our 10-K included an expanded discussion of SCP's critical accounting policies, including our new recognition policy which has remained unchanged since the company's inception.

SCP offered these expanded disclosures in response to recent SEC releases encouraging companies to increase disclosures regarding critical accounting policies so that the investing public can make more informed decisions.

With that, I'd like to turn the conference call over to Manny Perez.

Thank you, Craig, and good morning to all.

As Rusty indicated and as I usually do in these calls, I'll provide some highlight on the P&L and the balance sheet, and then open the call up for questions.

In terms of sales in year-around markets like California and Florida, we had very strong same store sales growth in the quarter, double-digit-percent increases the first quarter of 2001. In the balance of the country, we had more modest growth, low to mid-single digit percent growth versus the same time last year. The logic there is the year-around pool business more indicative of what the real trends are for the year and we're very optimistic given that information, and given the fact that our builders and retailers are collectively very optimistic about the year.

SCP has launched media campaigns in 51 markets for this pool season to increase the awareness of pools and the merits of pool ownership. In combination with our dealer programs, these campaigns have proven effective at providing leads to our builders. For us this is very important long-term, as it drives our future recurring revenue stream from the installed pool base.

As indicated by both Rusty and Craig, our growth margins continue to expand, reflecting our continuous improvement and pricing , the increase value provided by SCP and the supply chain, and the benefits from the expanded in the later part of 2001.

Selling and administrative expenses increased due to the reclassification of expenses mentioned by Craig earlier, but strategically more important because of the opening of new service centers. We've opened five new service centers this year and that is combined with five new service centers that we opened up in the later part of 2001, all together, 10 new service centers for the 2002 pool season.

That, together with the acquisition of the pool division of Hughes that came in at the end of January of 2001, as well as our Canadian and Portuguese acquisitions in the later part 2001, all together comprise the majority of our increase in SG&A expense.

Overall though, which is important for, I think, the investing public to understand is that overall our SG&A expenses were, in fact, slightly below our budget for the first quarter.

The result of activity was the increase in operating margin and profitability noted by those previously, as well as in the press release.

Other than incorporating those first quarter results, we believe the consent estimates for the balance of the year to be reasonable.

Switching over to the balance sheet, we continue to improve our accounts receivable position, finishing the March quarter with less receivables despite the higher sales. In fact, 89 percent of our receivables were current at quarter end and only four percent were over 60 days past due. That's a reflection on our efforts to have discipline in the collection and credit process.

On the inventory side, our inventory per service center is up 10 percent versus where we were a year ago, which is approximately two percent higher, or roughly $5 million more than we intended to have at the end of the quarter.

This slight different is due entirely to our ability to absorb the 2001 which resulted at that time in an additional $35 million of product over and above what we would normally have at year-end.

We've been able to absorb or balance out 30 million of that 35, and the last five will be balanced out in April; in fact, I think it's been balanced out by now.

Overall, though, we feel very strong about the season in that respect, and our position for the season from an inventory standpoint.

Craig mentioned our debt-to-total-cap is at 42 percent at the end of the quarter, which is consistent with the 42 percent that we had in terms of debt to total cap at the end of the first quarter of 2001.

The bottom line is increased profitability and increased return on our investment capital, and in addition, we continue to invest in the future of the young swimming pool industry, with the extended marketing programs I mentioned, the opening of 10 new service centers for the 2002 pool season, and having more than 13,000 of our employees participate in a formal training program in the first quarter of 2002 alone.

With that summary, I'd like to now open the call for questions.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on their telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Mike Marinacci.

Yeah, hi, Craig.

Just a couple of things I was hoping you could help me out with here.

Sure.

Do you have the AR allowance dollars at the end of March?

Hang on one moment.

And also, when you're digging for that, the inventory reserve?

I don't seem to have that readily available.

Mike, this is Manny. I'll jump in.

At quarter end, and consistent with our past practice, our focus on the reserves on the receivable side is our past-due balances, and generally speaking, we hover around 70 percent reserve of our past-due balances.

Our actual experience is better than that, but we tend to be conservative in that estimate. And when we look at that number, that's basically the emphasis.

The current portion of our receivables has very little reserve given our history of being, our bad-debt experience being between .1 and .2 percent of sales.

OK.

So the is on the past-dues, and that, again, runs about 60 to 70 percent.

OK. So then since you said the past-dues were four percent of the total receivables, could we then use 2.8 percent and 70 percent of that?

That's correct. In fact, one second. Craig just put it up here and the total company -- because we have it by division -- you have it right there?

Yeah, at 3-31 balance was 2.4 million which is up slightly from 12-31-01, which was around 2.2 million.

The AR allowance?

Yes, bad-debt.

OK. The number in the 10-K for 12-31 was 2.777 -- what's the difference between that and the 2.2 you're talking about?

That's . This is just the domestic part of the equation.

Oh, OK. Domestic. And Craig, do you happen to have that number at 3-31-01?

Do you have any other questions while ...

Well, the inventory reserve, which I'm assuming he's going to have to look for.

Craig, the five million revenues from acquisition ...

Yes.

... How much of that is used? How much of that is capital? How much of that is Portugal? And is it ...

primarily used.

Primarily used? Is it used for the entire first quarter?

I'm sorry?

Is it ...

No, no, used only for January.

Just January?

just January.

OK. So that's the way you've presented it in the past? Just for the incremental period? Is that correct?

That's correct.

OK. Got you. All right. That's helpful.

the inventory reserves -- you have it consolidated there?

OK. allowance for was $4.3 million at March 31 ...

Yes ...

.

Does that compare to the 3.9 that was at the end of the year?

Correct.

All right.

And then, and 2.9 is the number for receivables consolidated.

The total?

Yes.

And did you have those numbers for the March '01 period? Receivables and the allowance on the inventory shrink reserve?

In the by the way, I mentioned how we did the receivables calculation in the case of inventory. It's a similar logic, it applies to the slow-moving inventory ...

yes.

... There's no or very nominal reserve established for the high-velocity items.

Right.

And we've made significant in-roads in that respect, much like we have in the receivable side, by, in the case here of inventory, selling-off or disposing of the non-moving items or very slow-moving items, and that's become, that has become a significantly smaller portion of our total inventory, much like the past-dues have been significantly reduced over the past several years, and they're progressively becoming a smaller and smaller portion of our total receivables position.

I don't have the ...

You don't have them last year. OK. Well, I can get that off-line.

Do you have the break-down between the actual pre-paid expenses and the preferred income taxes in that bulk number?

In a -- which number is that?

The number you gave on the balance sheet was something like 8.7 million? And it says, "Pre-paid expenses and deferred income taxes." I was just wondering, you break it out in the queue between the two categories, do you have that?

Deferred income taxes it's 2.9, pre-paid expenses is 5.8.

5.8. OK. So the pre-paid expenses are up about -- that doesn't look right -- up about 40 percent year-over-year? Any particular reason?

No, a lot of those pre-paids tie-in with the new facilities and deposits and things of that nature.

And the biggest part of that is probably our pre-paid insurance.

OK. How much would that be and how much -- why would that have increased the year-over-year?

It's our new policy year, our insurance expires February 26. We record the new premiums and the pre-paid, and amortize throughout the year.

And the premiums have increased significantly not only because of our size, but because of also the insurance market being a lot tighter.

OK. Do you actually have those ...

We don't have those, Mike, readily available, but ...

All right. I will let someone else take over.

Thanks a lot.

Your next question comes from the line of Stephen Shank.

Hi. Good morning.

Good morning.

The vendor rebate that you get, are those typically -- typically do you get those when you purchase -- when you increase your purchases year-over-year, is that how that works?

We have approaching a 100 different vendor rebate programs with our suppliers. They are all over the place in terms of how the calculations are made.

There is a baseline which is the most pervasive, which is on a certain volume base of business, and that's the biggest driver.

There are usually some growth components tied-in to that for the share of the rebate dollars and aggregate come from the sheer dollars purchased.

The way we account for those rebates, Stephen, is that we, those rebates come in to inventory, so it goes to the balance sheet at a time of purchase, and then it goes to the P&L when that inventory is sold.

And by the way as a matter of course, those rebates and the percentage of sales have not changed significantly in the past three years.

Right. My second question is, you know, since you're starting '02 with a higher level of inventory, you know, would you expect to get the same kind of rebates this year as you did last year?

Yes. As a percentage of sales, yes. Particularly from a P&L standpoint since a lot of those rebates are, you know, those rebates are still in inventory, so therefore as that inventory goes to sales, then is when it goes to the P&L.

OK. So if you get the same kind rebate dollars this year, that implies that you expect your purchases in '02 to be larger than your purchases in '01? Would that be a fair ...

No. Let me restate that. I expect that the rebates as a percentage of sales will remain very similar as they have been in the past three, four years.

I expect that to be the case again in 2002 and 2003.

What happens in terms of buying-in inventory at year-end or not, is over and above the regular rebate calculation in terms of extended terms, certain pricing on those purchases, and other such considerations.

All right. Thank you.

Yes.

Your next question comes from the line of .

Hi. Yes, I was hoping you could elaborate a little bit further when it comes to competition, specifically from the large discount retailers such as Wal-Mart and others, and the source?

The merchants are in this industry have been for many, many years, and they don't really speak with us at all.

Indirectly, they compete with our, with us, they compete with our specialty retailers. They are not a destination for pool products. Their sales are basically on convenience basis for those consumers that are already at that store, usually to get something else, unlike the specialty pool retailers that, in their case, they are a destination for those consumers that have pools and they clean their own pools.

Thank you.

So that's, it's not really a competition, and in fact, it's a convenience and it's complimentary to our business.

Thank you.

Your next question comes from .

Yes. Good morning.

Just wonder if you could comment on the sales trends actually right now in the second quarter. They were up eight percent in the first quarter. Can you actually give us some color actually on what's happening right now?

Good morning, .

During the first six months of the year, the daily sales rate increasing with each day, and then basically, in the later six months of the year, the daily sales rate .

At this point we're mid-way through April and the prognosis for April is very good, and as the daily sales rate have continued to increase, it is at a rate that is higher than last year's April sales rate, so we feel good about what is going on now, but we don't want to rush out and say something out-of-line one way or the other, because we're still very early in the season ...

Yes.

And in that vain, the that's out there in terms of for sales growth and the bottom line EPS for the second, third, and fourth quarters of the year, we believe those numbers to be reasonable at this juncture.

OK. And my second question is about your long-term debt, that actually increased to 108 million from 59 million a year ago. Do you feel comfortable with this level of debt at this point?

Oh, very, very comfortable. In fact, last year, if you look at the balance sheet, there was another 30 million and change that was classified as short-term. Our total debt at this time last year was 90.

When you look at our EBITDA, last year was over $70 million, this year we'll be comfortably over 80. Our debt-to-EBITDA is just barely one, and that fine prime the fact we are way under-leveraged.

Despite the tightening of the finance world on the banking side, we borrowed two-and-a-half times EBITDA is something that's very, very modest in this day and age, and I would think that most companies that are out there, most public companies have debts, total debts that exceed two-and-a-half EBITDA, and we're just over one. So that tells you that we're less than half a conservative rate borrowing.

OK. And also, your gross margin improved by 80 basis points in the first quarter. What kind of gross margin can we expect for the full year?

That's an area of emphasis. As you know, we've improved that over three points in the past three years, primarily on pricing disciplines.

That is an area, again, that will continue to improve. Part of the increased improvement in the first quarter is some of the incentives or benefits that we got with the four that were done in the later part of 2001, so I wouldn't factor in 80 basis point increases for the later part of the year.

But I think that as it reflected in the past several years, there's going to be some improvement and again, as I said, what's reflected in the models out there on a consensus basis are reasonable expectations.

OK. All right, well thank you very much.

Thank you, .

Your next question comes from the line of Stewart Goldberg.

Good morning, gentlemen. A quick question. I'm sorry, I didn't catch it.

Did you announce or did you say what the CFFO was?

I'm sorry?

Cash flow from operations?

It was a negative ...

It was a negative 19 ...

... million for the quarter.

19 million for the quarter. And can you just warrant, run through for me the stores in your same store calculation, how that breaks-out again?

Yeah. I've got some information on that.

Currently, as of the end of March we had 114 units that were in the same store sales calculation, and 60 units were excluded. And of those 60 units, 35 were new service centers that we acquired within the last 15 months, and 16 were excluded due to the fact that they were new or acquired service centers, and they opened in similar markets.

New or acquired -- but, OK. And then the other nine?

The other nine were new service centers.

Nine. What's the difference between the 35 new service centers ...

Well, the 35 were required in 2001, the nine service centers were opened, some within the first quarter of this year, and some during the fourth quarter of last year.

OK. So the nine is actually Greenfields?

Correct, yeah, right.

OK. And then, OK, the question I guess I have on the 16 new markets that are either new or acquired service centers and new markets, and part of the 35 that were acquired, why withhold those for the 15 month period if they're already established?

Because what we do there, Stewart, and then we do this both in consolidations when we fire somebody and consolidate the two facilities into one, or when, for example, in the same market we carve out and basically take some of that customer base and channel it to a new location twenty minutes away ...

Yes.

And one way in one case if we did not eliminate the consolidation, it would overstate our same stores sales growth, because obviously that's artificial, and also in the same way, if we take an service center with an existing market, and carve out, carve out one-third of the customer base, if we just kept the old one obviously that would unfairly penalize it.

So, from a management standpoint it's where there's clean impurity on a constant basis is where we measurement from a management standpoint.

Well, you lose me a little bit. If you acquire a service center in a location and that place, that service center has already been operating for more than 15 months itself -- somebody else's unit, you bought it -- wouldn't you want to put that into the same stores sales base in that I understand you may be merging some of the operations or even sending inventory over.

But what was the point of buying that service center if you're going to do some of that shifting?

I'm sorry. Let me just go back.

In a scenario we keep both open, which is the majority of the cases by the way ...

Yes.

We exclude them because they're newly acquired and we've always historically done that. There is no change in that criteria.

If, for example, if we take and we acquire a service center and we close it and fold it into one of our existing ones, that business fold into a one, then we exclude it because at that point it was be artificially raising the sales of that location that was not, I'll call it, earned from the standpoint of the same store salesman, and that criteria.

Right. But then you would have a net decrease in your comp days because you're closing one service center. I mean, it would all wash out mathematically, wouldn't it?

Not quite.

OK. All right, thank you very much.

The next question comes from the line of .

Good morning, Manny, and Rusty, and Craig. It's actually . Manny, I'm not going to spend 20 minutes having you explain why insurance costs are going up.

What I would like to ask you guys, though, last year I heard a lot about rain obviously not being good the builders and it slowed builder activity. This year, I guess that's the atmosphere we're in, I've heard a lot about draught not being good for you.

Maybe the question is for Rusty. I've got to think that hot, dry weather is going to be good, and that, you know, if the builders build the pool, we'll find a way to fill it up. Maybe we'll fill it up with dirty water and sell more chemicals to clean it.

Rusty, what is your experience?

Yeah, my experience is that we've had periods of draught in different parts of the country over the years. It's never really had a serious impact on the business because you may impact some pool sales, but pool people have got to be in business, so we find a way to get water in the pool, if you have to truck it from another state and sell it as part of the package.

So, even though it will have some impact if they continue to have some restrictions on pool building in the east, and that's a very narrow corridor again, remember, where particularly in part of New York and eastern New Jersey where you really have got a serious water problem.

we've experienced that in the past, and you know, we've managed to manage. We'll manage to manage.

That's good, Rusty.

Manny, one category that was off last year, and I think you guys will probably point to weather, was the above-ground pool sales, not just for you guys, but for the industry. Seasonally when should we start to see whether or not those sales are happening this year? Is it an April, May timeframe?

It's April, May, June. In fact, that was one of the areas that for a number participants, in that above-ground pools were down significantly year-on-year.

That's very much of an impulse item sale, and those sales take place primarily from now, from call it mid-April through Independence Day. That maybe 80 percent of pools out-the-door in the season. That's a very narrow window of about two-and-a-half months.

What drives, what drives those sales are basically hot, dry weather in the Northern half of the country. If those kids want to get wet and the parents and go and buy a pool.

So, they're very much impulse items and this season in that vain is, we're optimistic that it'll be -- well, obviously significantly better than last year, but given all the other conditions we're seeing, we're very optimistic.

OK. And finally, I think you eluded to it earlier, but on the builder base of in-ground builders, last year I don't think the back-log really seemed to shrink a whole lot and I guess that was, building was prohibited because of weather.

Would you agree that the back-log is as healthy going into this year as it was going into last year, despite, you know, what some people thought was, you know, perhaps a squeeze coming on discretionary spending because of the economy.

How does that back-log look year-over-year for the in-ground pool, the higher ticket items?

We are very fortunate industry that still is in its relative infancy. And the penetration rate is still exceeding low and because of that, despite the economic downturns last year, there was as you mentioned and as we've said, there was really no, no really slow-down in terms of the building of new pools, pools specifically.

And that continues through this year. The programs that we've launched, that launched early in 2000 and expanded in each of the past two years, have served to further accelerate that store and increase that demand.

And really, the limitation on pool building, other than the logical weather limitations, are that it rains, you know, a lot in a defined period of time, or when the ground freezes in the northern part of the country.

Other than those limitations, those external limitations, really primary limitation is the number of pool builders that are out there. Good pool builders in '99, 2000, '01, '02 are building as many pools as they can build or want to build. And that's -- I mean, if that goes well for us, not only nearly term, but also long-term because, Doug, as you well know, a major part of our business is the recurring revenue stream from that install base of pools.

And as that install base grows, that only serves to augment our recurring revenues dream of the future.

OK. Well, great work in the off-season, and good luck for the coming season.

Thank you, Doug.

Your next question comes from the line of Mike Marinacci.

That was quick. Craig, the share count was lower by 700,000 year-over-year. Did you guys buy back stock? What was the reason for that?

That was the result of a share buy-back program where we bought primarily shares back in the early part of 2000, late part of 2000, early part of 2001.

September and October of 2001.

September, October, '01?

Yes.

OK. And how many shares was that? Was it about the 700,000 ...

About 800,000 shares.

Perfect. Thanks so much.

Craig, do you happen to have the vendor rebate balance sheet number that's inside the receivables at the end of March?

That's going to be a number, but it's about $10 million overall.

And again, do you have that ...

I don't have a break-down of that.

You don't have the versus last year?

I'm sorry. It's not quite ten. It's a in the high 8, $9 million, somewhere in that neighborhood.

OK. And you don't have it from the year-and- period, is that right?

It would be about the same percentage of inventory, so it would be about 15 percent less.

Of receivables you mean?

Of inventory. Vendor rebates are tied-in to inventory.

Oh, OK. Sorry.

Just one other quick thing. The previous question asked about the excluded stores, that number keeps growing. Is that, can you give us an idea of how many stores are going to be excluded in Q2, 3, and 4; and how much that benefited the comps in the first quarter?

It didn't benefit the comp.

Did not?

the main inclusion will be the 31 service centers that came about with the pool division of Hughes acquisition. The 15 month term will lapse at the end of April, so therefore they'll be in the May and June comp.

The other ones will be, basically the main exclusion from there on will be just the new service centers, and then the Portuguese and Canadian acquisition.

So, the main increase will be up to about 140 to 150 locations in our base when the 31 from Hughes fall in.

OK. But I'm asking about that particular category of excluded stores, the one that was 16 this quarter versus four a year ago.

And just again, regarding the vendor rebates, and I that they're part of receivables. I don't know, maybe your's is different.

Well, it's a vendor receivable, but it is the calculation is tied-in to inventory.

Oh. OK.

Excuse me. There two, there's two different things , Mike. One is a vendor receivable, OK. Now I know where you're coming from.

One is a vendor receivable, those are the rebates that have not yet been paid.

Right. That's the number that's eight, the nine million?

They're both about the same.

The other one is the rebates that are inventory, OK. And the rebates that are inventory are the ones that have not been sold yet.

Got -- that I understand.

OK. Both numbers are very similar. The vendor receivable number at the end of the first quarter is basically zero in terms of what was there in 2001. The only ones that are, that will be there now is the accrual for 2002, based on 2002 purchases.

OK.

OK? Now, to come back to your point or your question, if -- if, for example, we are in Atlanta and we have just one service center in Atlanta, we open up a new service center 20 minutes away, and we take one-third of the customers that are currently being served out of the original service center over to the new service center location, we exclude both service centers from the same store comp.

If we were to measure say market comp, we would have an inflated share market because one of the incentives for that new location is to get, get increased business in a part of town that we don't have the same share of market that we have in the other part of town.

On the other -- and that's on the one hand.

On the other hand, we would be unfairly penalizing our same store sales comp if we included the old ones in the base, or left the old one in the base, because we just transferred one-third of the business over to another new location.

So, for those reasons we chose to just leave it aside and progressively over time as those things normalize themselves, we have a better, from a management standpoint, clearly far superior basis, and basis that's cleaner then we'll adopt it.

But at this point it's the cleanest, most independent, most one we've found.

OK. All right. Fair enough. Thanks.

Your next question comes from the line of .

Yes, good morning. Manny, if we could move to the new centers that you're opening. Can you give a sense on the performance of those centers? Are they tending to be smaller generating, you know, lower than average sales versus your historical openings?

And are they superior Hughes being added to that network or the pool network?

OK. On -- Of the 12 service centers open since January 1, 2001, one is in Europe, one is superior, and 10 are SCPs. That's the first part of the question.

On the -- about half of those, and I've got go through mentally all 12, but I'd say about half of those are really, what we've done is what we call satellite centers where we, in fact, try to address a growing market that is better served by having two physical presences as opposed to one physical presence in that market.

And that's about half the cases of the 12, and the other half, they are markets that heretofore we weren't serving at all.

The satellite would tend to be -- not tend to be -- the satellites would definitely be smaller in size physically, and a lower head count. As they ultimately grow to become full fledged centers, but we are able to manage that growth and balance that growth with the original service center and using that capacity as well.

So, again, it's a way for us to better penetrate a market collectively by having an additional location to better serve particularly the walk-in trade.

Manny, when do you start adding in a more accelerated pace to the superior network, if at all? Or how many centers do you anticipate over time the superior network having?

The superior network will have about 70 centers, 70 to 80 centers inside of five years.

And when do you start, you know, when do you start adding there?

We will be doing that, there's two elements there. One is as you know we acquired the superior in July of 2000, and the superior east in January of 2001. We've gone through systems conversions. We have -- we're changing and enhancing their business practices. Progressively, as we also learn from those Hughes and businesses and , but basically the first year or two the primary focus is improving the base. And as you saw in the K, the operating margins of those acquired operations are significantly lower than the operating margins on the SCP side.

So we have to get base stronger, more stable, and more ready for growth. And at that point, then we'll be adding more.

We added one in the later part of 2001. We will be adding more in the later part of this year, or early part of next year for the 2003 season. And such that we do that in a manageable way to get to the 70 to 80 locations within five years.

When you look at the gross margin you reported this quarter, how does it compare in terms of your comp based business versus the superior network, in terms of that 80 basis point improvement? How much of it came from superior?

Most of it came from SCP. And that goes with the fact that there's some of those disciplines and practices have been in place longer, although the superior side is coming along very well.

They're, in some respects, are, you know, one or two years behind. That's on one hand of the equation.

The other side is that the marketing programs that help us create that value and help create differentiation for other distributors, that has also been a couple years ahead on the SCP side the superior side, and that also helps justify that increase in margins.

One last question. On the inventories, you said you were a little higher on the opportunistic buy in term of how, you know, how you were going to clear that in the quarter. Can you give us a target for inventories at the end of the second quarter, in terms of year-over-year growth?

What you'll see at the end of June is the inventory for service center being basically up within five percent. So you have to take the base of locations and our location number is up almost 10 percent versus what it was at June 2002 versus June 2001. That's up 10 percent. And then on top of that, you add about five percent for the projected increase sales growth.

So we're looking at about a 15-percent increase inventory June 2002 versus June 2001.

Thanks a lot, Manny.

At this time there are no questions.

Let me wrap up by concluding and saying that we are -- or we believe we have concluded a good first quarter which is as most of you know as slow period in our year. But we are very optimistic about the balance of the year, and longer-term, given the nature of the investments we're making, whether it be the investment we're making in marketing programs, or the investments we're making in new locations, or the investments we're making in the training and developing of our people. These are all investments that we believe are appropriate given where our industry is in its evolution, that being very young.

And the opportunities that we have, and frankly, the responsibilities that we have within the industry to help it's growth and provide long-term returns for our shareholders, as well as opportunities for employees.

Thank you very much for your participation.

This concludes today's conference. You may now disconnect.