Pool Corp (POOL) 2002 Q3 法說會逐字稿

Good morning. My name is Christy and I will be your conference facilitator today. At this time, I would like to welcome everyone to the third quarter and nine month results for the SCP Pool Corporation conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 1, on your telephone keyboard. If you would like to withdraw your questions, express star and the number 2 on your telephone keypad. Would I now like to turn the call over to Mr. Rusty Sexton. You may begin.

Good morning and welcome to the SCP conference call. The Pool guys, as most of you know us. The third quarter was a pretty busy quarter for us. We were pretty busy implementing the acquisition integration of the last business we acquired, and we came about acquiring another major company, as you know. Ft. Wayne Pool,a $90 million revenue.

Weather for the quarter was pretty good. It finally got hot around the Fourth of July and we had good results, even though it was scattered some areas. Again, the same store sales were out outstanding. If you average them over the nine months, we were begin at double-digit results. So 10% plus same store sales is pretty unusual in this economic environment. Earnings per share up 21%. Not only did we meet expectation but we beat it a little bit. So overall, I think we did very well. Granted, we bought back some shares and results and we are measuring September of this year against last year's with the 9-11 event.

Nonetheless, the results are encouraging, especially considering the economic situation and all of the other circumstances that we have. And especially, I think, if you try to compare this business relative to other businesses in the environment. So we have with us this morning, as usual, Craig Hubbard, our CFA and Manny Perez, our CEO. Will turn it over and Craig will give you some financial information. Craig, will you take it please?

Before I get into my financial commentary, I want to remind our listeners that our discussion, comments and responses to subsequent questions may include forward looking statements including management's out look for the remainder of this year and future periods. Information on factors and variables that could cause actual results to differ materially from those anticipated results that are discussed here today is available in our most recent form 10-K as filed with the SCC. Net sales fort third quarter of 2002 were up $289 million. I'm sorry. Were $289, up $53 million or 23% from the $236 million in the third quarter of 2001. Same store sales growth of 14% contributed almost $29 million to the increase. And service centers acquired from Ft. Wayne pools in mid August contributed slightly more than $14 million. New service centers and stores acquired in the second half of 2001 accounted for the remaining increase.

Net sales for the nine months ended September 30 were $824 million. This is up almost 102 million, or 14% from the $723 million a year ago. Gross profit for the third quarter of 2002 was $75 million, up 13.4 million or 22% over the third quarter of last year. Same store gross profit growth of 15% accounted for 7.3 million of the increase, while the service centers acquired from Ft. Wayne pools contributed $4 million. New service centers and service centers acquired in the second half of 2001 accounted for the remaining increase.

Gross profit margin decreased 20 basis points to 20% for the third quarter of 2002 compared to 26.2% in the same quarter last year. Primarily due to an increase in freight-in expense between periods resulting from an increase in freight cost and a higher proportion of non-fright qualifying purchases made during the third quarter of 2002 compared to 2001. However, same store gross margin actually increased 20 basis points between periods. Gross profit for the first nine months of 2002 was $215 million, up almost $28 million or 15% over last year. Gross profit margin for the nine-month period increased 10 basis to -- compared to 26% in 2001 with same store gross profit margin increasing 20 basis points. On January 1, we adopted FAZ142, good will and other tangible assets. Under these new rules, good will is no longer amortized but is tested annually for impairment. My discussion of operating expenses and operating income will compare our 2002 results to the 2001 proforma results which exclude good will amortization.

Operating expenses increased $11.3 million or 29% to 50.6 million for the three months ended September 30, compared to proforma operating expenses of $39 million in the third quarter of 2001. Operating expenses is a percent of net sales increased -- for the quarter compared to 16.7 last year, primarily due to the margin impact of new service centers and the Ft. Wayne acquisition as well as higher insurance costs and the continuing investment in advertising and promotional activity. Same-store operating expenses as a percent of sales increased 60 sales points between quarters. For the year to date period operating expenses increased approximately $20 million or 17% to $138 million in 2002 from $118 million in 2001. Operating expenses is a percent of net sales increased 40 basis points year to year on a proforma basis but decreased 40 basis points on a same-store basis.

For the year to date period, higher insurance, marketing, and Ft. Wayne costs were offset by the growth in sales. In the third quarter of 2002, operating income increased 2.1 million or 9% to $24 million from the $22 million in the third quarter of 2001. Due to the increase in operating expenses discussed previously, operating profit margin decreased 100 basis points to 8.5% in 2002 from 9.5% in 2001. But increased 70 basis points on the same-store basis. For the nine-month period ended September 30, operating income increased 7.7 million, or 11% to $77 million from $69.5 million.

Operating profit margin decreased 20 basis points to 9.4% in 2002 from 9.6% in 2001 but increased 60 basis points on a same-store basis. In the third quarter of 2002, interest expense increased slightly to 1.2 million from $1 million last year. Hiver average debt outstanding in 2002 was partially offset by nearly a hundred basis point reduction and the effect active interest rate between periods. Earnings per share for the quarter increased 21% to 57-cent per diluted Sharon net income of 14.2 million compared to 47% per Sharon net income of $12.8 million last year.

Excluding good will amortization in 2001, earnings per share increased 19% from 48-cent per diluted Sharon that income of $13.1 million in the third quarter of last year. Earnings per share for the first nine months of 2002 increased 18% to $1.73 per diluted Sharon net income of the -- million compared to 1.46 per Sharon shared income of 49.3 million in 2001. Excluding good will amortization in 2001, earnings per share increased 15% from $1.50 per diluted Sharon net income of $40.3 million in the first nine months of 2001. On September 30, 2002, receivables were approximately $114 million, up $26 million or 30% compared to September 30, 2001.

Excluding the Ft. Wayne accounts receivable balance of approximately 12.2 million, AR increased 16%, which is less than the increase in September 2002 sales versus September 2001. The allowance for -- accounts increased to 4.2 million on September 30, 2002 compared to $3.8 million in 2001. As of September 30, 20002, the greater than 60 days past due receivables were $5.5 million, compared to $5.8 compared in September 30, 2001. A significant majority of the allowance for -- accounts is assigned to the greater than 60 days of past due receivables of write-offs less than 60 days past due receivables had an average of less than 20 basis points of net sales over the past several years. Inventories were up 5.5 million or 4% to $138 million in 2002, from $133 million in 2001. Excluding Ft. Wayne, inventory balance of 15.6 million at 930, 2002, inventory increased 8% from the balance of the end of the third quarter 2001 despite the service centers added to our network over the past year. As we improve the quality of our inventory, the inventory reserve decreased to 4.1 million in

September 30, 2002, from 5.8 million in September 30, 2001. We have decreased the class 13 and nonstop classes of inventory to 5.4% of total inventory of September 30, 2002 from 8% at September 30, 2001. Our reserve as a percent of class 13 and non-stock inventory has remained consistent between periods however. In addition, inventory classes 1-3 which represent more than 80% of our total net sales accounted for approximately 65% of our inventory balance as of September 30, 2002.

Prepaid expenses were up approximately 1.1 million or 40% to 3.9% in 2002, from 2.8 million in 2001, primarily due to an increase in prepaid insurance and prepaid rent. On September 30, 2002, the balance sheet reflected long-term debt of 147.1 million and shareholders equity of $147.3 million. For a debt to cap ratio of 50%. Depreciation expense and other intangible amortization expense for the third quarter, 2002, were approximately $1.1 million and 600,000 respectively.

For the nine-month period, net cash provided by operating activities was $41 million compared to 40.8 million last year. In 2002, third quarter estimated income taxes of approximately $20 million were paid in September, 2002, while the third quarter of 2001 estimated income taxes of 13 million were paid in the fourth quarter of 2001.

In 2002, we repurchased 1.8- million shares of our common stock at an average price of $25, approximately 1.3 million shares were acquired during the third quarter of this year. Approximately $40 million remains authorized under the board's repurchase program. At this point in time I would like to turn the conference call over to Manny Perez who will add some more color. Thank you. Manuel Perez de la Mesa: Thank you, Craig. Good morning. And thank you for joining us today. I will start by just highlighting some points in the P&L, dot same with the balance sheet, then go on to the cash flow statement, Inc., rating both perspective and identifying opportunities in the process. Starting with sales, the 14% same store sales for fourth quarter was positively affected by the comparison to last year, which included the business destruction caused by September 11.

Nevertheless it was a positive result and reflective of the strength in the swimming pool industry, as well as the impact of favorable weather on our business. On a month by month basis, we had strong double-digit same store sales growth in July, reflecting the favorable weather, more modest mid-single digit sales growth in August, and mid double-digit sales growth in September. Although a more normalized comparison would have reflected single-ding it sales growth in September. Year to date, after a slow seasonal start that included cool weather through mid June, the third quarter contribution is resulted in 2002 of being more of a normal good-weather year for the industry.

Our estimates are that the industry will realize mid single digit sales growth in 2002 and the SCP will begin grow share. The main driver for SCP's growth and share is the value proposition provided with sales and marketing programs, the customer tools and resources, the technology and systems that translate into better service, and that people in our service centers that put it all together to add value to our customers' businesses.

Moving on to gross margins, while our selling margins improved by 30 basis points, we gave that plus a little more back with higher freight end expense. This increase in freight end expense contributed to fewer purchases and higher freight rates. The greater proportion and number of non-freight-qualifying orders were, in turn, due primarily to the stronger-than-anticipated sales in the latter part of the pool season when our service centers are motivated to reduce inventories, therefore buying in smaller non-freight-qualifying increments. More importantly, though, is that our same-store gross margins increased by 20 basis points despite the higher freight costs. We still believe that we can realize further progress and selling margins and this is an area of continued focus for 2003.

Going on to operating expenses, the higher ratio reflects primarily new branches and the Ft. Wayne acquisition, as the timing of the acquisition includes the weaker sales portion of the third quarter, as well as much higher insurance expense and our continued investments in sales and marketing programs. Exempting insurance, these other expenses were all within budget.

The key, though, is that our same-store operating expenses as a percentage of sales decreased by 60 basis points in the quarter due to the strong sales growth and our overall control of expenses. Summarizing the P and L at the operating margin level, the decrease in third quarter margin is to higher freight and expense, higher insurance expense, our continued investment in sales and marketing, the margin diluted impact due to the timing of the Ft. Wayne acquisition, and new locations.

Year-to-date, these items are largely diluted given the positive increase in sales. Again, it is important to understand that on a same-store basis, our operating margins actually increased by 70 basis points and 60 basis points for the quarter and year to date respectively.

Looking forward into 2003, our continued focus on selling margins and our ongoing pressure on expenses should result in operating margin expansion as we have realized historically. Changing gears to the balance sheet are results in accounts receivable continue to be very impressive. These results are a reflection of the discipline in both the credit and the sales processes, together with the management team's understanding that a sale is not complete and the profits are not realized on the -- until the proceeds are collected. Our inventory results are reflective of the seasonal nature of our industry and should be educational for those that need to develop a better understanding of our business. Particularly important is our continued reduction of slow moving inventory and the overall better balance of inventory to better serve our customers throughout our service center network.

Humidifying this fact is that our inventory, excluding Ft. Wayne, actually decreased by $10 million versus 2001 despite our having 10 additional service centers in the network.

Cash flow from operations was strong, as expected, and compares favorably with 2001, when you factor in that we paid $20 million in estimated income tax in September of this year. As Craig said, estimated taxes in 2001, which were $13 million were paid in the fourth quarter due to September 11.

Before closing, I would like to make a few remarks about the Ft. Wayne acquisition. First, we viewed Ft. Wayne historically as a very good competitor, and they certainly are a valuable addition to the superior network and S and P corporation. Second, after analysis of the 22 service centers acquired in the Ft. Wayne network, combined with the 47 superior service centers, we have decided to consolidate 10 sensors and close one, resulting in 58 superior service centers at the end of the season. Combined with the SCP network, we will finish the 2002 season with 188 service centers in total. Third, Ft. Wayne added approximately a penny to our third quarter earnings, which we will be giving back in the fourth quarter. Or in other words, they will be effectively neutral for 2002, in terms of earnings per share.

For 2003, we expect that the Ft. Wayne acquisition will add eight to 10 sense per share in earnings and coupled with 15% earnings were share growth on the basis equates to approximately a dollar 95 in projected earnings share for 2003, assuming, of course, reasonable weather and continued execution. With these comments, I would like to open the call to questions.

Thank you. At this time I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q and A roster. Your first question is from Mark Allen of SunTrust Robinson Humphrey.

Good morning, guys. Congratulations on a very solid quarter.

Thank you, Mark.

The first question I have is regarding the revenue growth. You mentioned that a portion of the revenue growth was attributable to new centers and some other acquisitions other than Ft. Wayne. Craig, do you have that breakout? How much revenue was contributed by the other acquisition?

I have that acquisition. Give me just a second and I will look that up for you.

Those, by the way, Mark, were the acquisition in Canada as well as part gallon in the last the latter part of last year. Go on to your second question while Craig looks that up.

I guess just a general question regarding the SG&A line-the same store sales were very good yet your expenses per net revenues went up, which is, I guess, counterintuitive. Can you provide any color or quantification relative to the items in SG&A. How much does insurance impact you. What are you doing in the way of marketing investments. What is that related to?

I will take them one at a time. First, sales and marketing programs are an initiative that we launched in 2000 to promote the growth of the industry and also provide increasing tools for our customers to help them grow their business. And, in fact, when you look at our sales growth and our -- specifically our market share growth, that's come about as a direct result of those programs. In fact, I don't have the September-to-abut through August better than half of our sales growth were through customers on those programs. So it's very important that we continue those programs because they add significant value as well as contributing to our ability to continue to improve our selling margins. So that being said, that's an ongoing investment.

Those costs continued to go up, although they're well in check when you look at them on a same-store basis. And the reason for that is that in the new markets where we have new locations, as you know, we open up a number of new locations each year, together with a couple of small acquisitions in the latter part of last year, in those cases, we're not getting the same leverage there as we do in the more mature locations where we already have a jump start in relationships and being established as a service standpoint hat we can build on. Insurance is up significantly, in terms of percent. That's cost area that I think is common to all of our industry, including property, casualty, workers' comp, etc.

Some of that was caught up in the latter part of the third quarter as the renewals come into place and all of the files are updated. Those are the two kind of individual components. Besides that, obviously you have the fact that when we acquired Ft. Wayne, we acquired them halfway through the quarter, but it's the weaker part of the quarter, being that sales begin to drop progressively during each month in the second half of the year, and theirs expense as percentage of sales are significantly higher than had we acquired them at the beginning of the quarter.

New service centers are basically a break-even proposition the first year. And obviously to that end significantly affect all margin comparisons in terms of operating margins and expenses of new sales. Let me go back and see if Craig has the information for the Canadian and part gallon acquisitions.

These numbers from the prior year. Canada, $3.8 million. That was the increase. Part gallon was $120,000. Fort Wayne was 14.3 million. Same store sales was 28.a 5. -- 28.5. France was 5,000. [Inaudible] and new service centers was about 6 million. Those are the major components on a quarter to date basis.

Other than Ft. Wayne, about $4 million from Canada and Portugal?

Correct.

And then I guess I will ask one of my questions and come back later in the cue. On the inventory balances, as I recall, last year, you had -- a lot of manufacturers ship product to you in the fourth quarter. That was a little unusual. Do you have any thoughts on what should happen to your inventory levels now sequentially September to December?

Our inventories between now and the year-end will up marginally but they will not go up anywhere near significantly as they did last year. This year was, as I mentioned in my comments, a year that industry grew somewhere in the mid single digits, so, therefore, there isn't the overhang of inventory that existed at the tail end of last season, so therefore there is not the same incentive on the manufacturers from the fourth quarter of last year.

You will do the forward buy back again but you're not anticipating the manufacturers will have so much left over inventory this year.

Exactly.

Thank you. I will come back later.

The next why question is from Anthony Lebiedzinski at Sidoti and Company.

Good morning. I just have a couple of questions. Your sales numbers were certainly impressive. Is there any particular reason that stood out from the rest?

No particular area stood out. I will tell you that basically the major markets, Florida, California, they were all positive in the same light as the overall numbers. Florida was a little bit less than California but not much less. The northern part of the country was overall a little stronger than the norm, given that they were the ones that are most affected by the poor weather last year.

OK. And as far as your long-term debts, that's up to $147 million. What is your credit facility right now.

Our credit facility is 150. But there's a little reference, if you go up to the cash side, there's, like, and I can't recall the exact number but well over $10 million in cash at quarter-end. And we have some play there in terms of opportunities to -- well, have more positive cash flow between now and the end of the year.

So you are planning on paying that down, I assume?

Yeah. We will continue to pay down debt as we need to. The primary use of cash for the year, if you look at it from a macro perspective have been a worthy Ft. Wayne acquisition in all as well as defined backup of shares. So were it not for those two events, our debt would be obviously significantly lower.

OK. And the Ft. Wayne acquisition, also they had a manufacturing side also?

Yes.

Have you guys decided what you will do with that?

Yes. The manufacturing business is -- has historically been an integral part of the distribution or tightened to the distribution -- a tight end of the distribution business and -- with the expansion of that network in combination with superior, that becomes even a stronger tie-in for us, and given the nature of the products that are made, it's a very good fit.

OK. Thank you very much.

Thank you.

Our next question comes from -Jeffrey Germanotta [ph] of William Blair and Company.

Good morning. Could you please shed a little more color on the changes in your receivables and reserves as well as the adjustment tax rate.

First let me take the easy one. The tax rate has been 39% all year. So there's really no change there. In terms of receivables, Craig has the specific numbers. But basically with respect to receivables, we had -- of theory receivable balance, our receivables are up but they're up less than September sales. The reason for that is because we attempted to improve our DSO's and greater than 60 day balance is down versus September of last year. And then specifically within that, our reserves, which are calculated consistently with the prior year are also, you know, commensurate with that. We -- Jeff, we reserve -- reserve is primarily calculated on our greater than 60 day balance. Because as a matter of course, our more current receivables, our track record there of collections is well in excess of 99.8% of those receivables.

On inventory, calculation on inventory from a reserve standpoint, is driven by what we referred to in our class 13, our slowest moving inventory bucket, together with our non-stock inventory. And when we look at that number, September 30 it was 4.1 million and September 30 of this year, in contrast with 5.8 million of September 30, 2001. The reason for that is that the inventory has come down fairly significantly. As of September 30, 2001, those classes of inventory represented 8% of our inventory. And at the end of this period, at the end of September, that was down to 5.4% of our total inventory. So, again, as that inventory goes down, the slowest moving inventory, the reserves go down with it.

Thank you.

Thank you, Jeff.

Our next question comes from the line of David Mann with Johnson Rice and Company.

Yes, good morning. Congratulations, Manny, on the inventory reserve question, since you were talking about that, it looks like the amount of inventory went up sequentially. Is there a reason for that? Last quarter I think you said it was $3.9 million.

Manuel Perez de la Mesa: To be honest, the actual number has come down. What we're including in here is also the Ft. Wayne numbers.

OK.

Manuel Perez de la Mesa: Because on the network side, it actually went down. When you include the Ft. Wayne numbers, it's marginally up.

On inventory, you said you expected to increase [narj that will by year end -inaudible]. Were you speaking year over year or sequential live from the third quarter.

Manuel Perez de la Mesa: Sequentially from the third quarter. That's thank good point, David. Let me clarify. On a year round basis, our year end 2002 inventory, even including Ft. Wayne and even including our new locations will be down versus December of last year. They will be up sequentially over September 2002.

OK. And in terms of accounts payable leverage, it looks like there was a slight decrease year over year. They're still at a high level historically. Can you just give a little color on what is going on there and how you expect that trend going toward?

Manuel Perez de la Mesa: On the accounts payable side, it's pretty much a reflection of what was purchased in August, received in September. That had not yet been processed. When you look at this year versus last year, accounts payable specifically, our purchases in August of last year were stronger than this year. And that's why that difference would exist. When you look at year-ends, to the extent suppliers ship those products from the fourth quarter - there will be some build up of AP at that point. And I would expect of year-end accounts payable to be higher Sequentially than September of this year but perhaps not quite as high as it was last year at year end.

In terms of the operating margin comment you made, You said you expected that to expand in 2003, how would You expect gross margin SBA gross margin to be?

Manuel Perez de la Mesa: David, we always expect it to expand. That's what we endeavor to do. In terms of gross margin, I mean, our selling margins are up strong this year. Selling Margins being sales price minus the cost of goods -- the plain cost of goods without including freight in expenses. So the fact that is up this year by 30 basis points, I think, is a very positive statement. And the fact that gross margins, even factoring in the spike in trade-in are up, it's also a very positive comment. And an expectation of that continuing to increase somewhere in the neighborhood of 20 basis points were year is a reasonable expectation. And that would be 20 basis points for the year, figuring that the spike in freight rates together with the spike in freight-in expenses we had as a result of a lower percentage of freight-qualifying orders being processed, particularly in the third quarter of this year, that those things will be no worse than they were this year in the -- going forward. When you look down to the operating margin side, what we try to do is we try to contain our basis line expenses and the growth of baseline expenses at a rate lower than our sales growth so there is some ref ridge there. So -- some leverage there. So to that end, that will be increased 10 to 20 basis points. So all together, a reasonable expectation would be about 30 basis points increase year around year.

Thank you, Manny.

Manuel Perez de la Mesa: Thank you, David

The next question is from Jenny Hubbard of Avondale partners.

Good morning. A couple of broader brush questions, the first being that you site your same store sales growth pools are up over the company average. I was wondering, many, if you could talk about when you expect to bring the margin centers not from those pools are up to the same store standard and how you plan to do that.

First, let me take them in increments. The branches that came -- that come with the Ft. Wayne acquisition, those will be very close to the overall levels next year. The only impact there was just the timing of the acquisition. They came in the latter part of the quarter, which is far and away the weakest part of the quarter. There are some things being done. Part of it is the consolidation that I mentioned in my comments where we would be scolding 10 locations within the superior network including Ft. Wayne, so therefore that in and of itself would help operating margins. Second is the group of branches that are excluded when we open up our location in those same markets. And to that end, those are going to be coming back up in a couple of years and it's just a matter of getting the volumes back to where they were before we carved out some of that business over for the new locations. Again, that is just a matter of working down the existing overhead as you pump more volume through there. And the third case, and that's the one that takes the longest, would be the new locations. The new locations are an operating basis, approximately they break even in their first 12-month period and then make a little bit of money and make some marginal improvement each year. That improvement comes about primarily in the fact ref ridging the operating expense structure. When the infrastructure that is required for a $2 million branch is not significantly different than was required for a $4 million branch. In other words, of the marginal increase in sales and gross profits to go from $2 to $4 million primarily goes to the bottom line and the same thing applies for $6 million. So, therefore, in those new locations where we're building up the volume base, as that base builds, the profitability begins to really materialize.

OK. And can you talk a little bit about how you plan to drive top line growth in your existing same-store centers in 2003? I know we have the Ft. Wayne acquisition. But what are you looking at, any new initiatives looking now into 2003?

Well, I would say, Jenny, there are no new initiatives per se. We have several initiatives under way that still have significant leg room left in them. First, we have the initiative of the sales and marketing programs and the value they're providing to our customers in generating needs for them and helping them close higher-end sales, whether it at the builder, retail, or sales service level. And in fact the customers on those programs have contributed through August. I don't have the numbers yet. But through August contributed over half of our sales growth. That's from a minority of our customer base. Those are programs that continue to gain momentum and continue to add value.

A second initiative that we now have in place for several years is our complimentary products initiative. In the case of complimentary products, on a test basis, in 1999, those revenues from complimentary products were approximately equivalent to $3 million. In 2000 that was over 9 million. In 2001, approximately 18 million. This year, we're on track to do better than 35 million. So that speaks for the opportunity there.

Then we are very fortunate to be in the industry we're in, with a majority of our sales coming from the existing installing of pools, and that install base of pools continues to grow. To that end, we have a natural base of industry growth on a year around basis.

Let me close with one final comment in response to the question, and that is that we have made significant strides and continue to make significant strides in terms of our service level at the point of sale. That comes by a significant lower rate of stack buy-outs with our service centers being tied together and being able to provide far and away better service than our

competitors, as well as really the extra effort that our

people expend every day trying to serve their customers

and go the extra mile. That should never be under

stated because that is really the key to our overall

success.

OK, thank you. And one final question. The number of organic service centers that you plan to open in 2003, any ideas there?

To date, I have approved seven. There are still a couple of others under debate. But we will close that loop shortly but to date there are seven.

Thanks very much.

Thank you, Jenny.

Our next question cops from Joe of Sales Fund [ph].

Good morning. I apologize. I know the inventory has been touched on but I'm not sure I understand the classifications. If we were to look at the change in two reserve accounts, -- and inventory ons havens [inaudible], what kind of sequential change might we see there in terms of actual numbers.

Going forward?

From last quarter, this quarter, and going forward would be great.

Well, I can't tell you what it would be next quarter.

In both cases, it's tied to, in the case OFRY receivables, it's tied to the greater of the succeeding balance. In the case of inventory, it's tied to where we are with the slowest moving inventories. Let me -- Craig has the information here in terms of the sequential relationship on both.

Thanks.

Yeah. If you look at our A/R reserve, historically going back really to September 30, 1999, our A/R reserve has gone from approximately 3.4 million in September 30, 1999, and 3.6 million in 2000, $3.8 in 2001, and currently we're at about $4.2 million. But, again, we still have the three months of 2002 that we have to get through. And typically that's the period of time that really you're settling up a lot of your accounts. So it's hard to say where we will be at the end of the year. But, on a percentage basis, it should be approximately where we've been on a percentage basis at the end of the last year.

OK. Thanks. And then is that -- that's not broken out between doubtful accounts and the inventory on excellence account?

No. They are two different accounts.

That was AR reserve. If you look at inventory, we have several different components of our reserve account. We have a reserve for warranty and warranty havens and also have a reserve for inventory shrink. We accrue these on a monthly basis. And we settle up inventory shortfall and reflect on account on a monthly basis. Where we end up at the end of the year is based on the inventory we have in the null and non-stock categories.

Do you have a current be number for those accounts?

In terms of the reserve?

Yes.

Yes. September 30 of 2002, other inventory reserve, and this covers warranty and shrink was approximately $4.1 million.

I see. They're not broken out separately. You don't have a shrink and warranty category?

No, they're combined.

Thank you.

Our next question comes from the line of Douglas Col with Morgan Keegan.

Good morning, guys.

Good morning, Doug.

Congratulations on a good quarter. Craig, could you recap? Buy back year to date for me?

Yes. Thus far this year, we have acquired approximately $1.-- 1.8 million shares and a little bit in excess of $25 per share. It's about $25.20 per share. Of the 1.8 million, approximately 1.3 million has been bought back during the third quarter. We still have approximately $40 million remaining on the board of authorization for share repurchases.

OK. Thank you. Many, one of the items you guys worked on in the past couple of years is your marketing the industry. Can you talk about the dollars spent there? Do you designate some percentage of sales each year to go to industry initiatives? And is that number increasing? How do you think your return Hass been on those investments?

First of all, the way we do that, and the bucket is not just for the promotional industry, but also tying that promotion to specific customer support and customer promotion, which includes, for example, direct mail for retailers, direct mail for service companies, and it includes all sorts of advertising and dealer creation or lead creation for builders, the creation of a website. All of that is encompassed on the program. The way we look at that is basically to retain that within 1% of sales. OK? The way we measure that specifically is we look at the amounts expended and we take that amount expended over or relative to the increasing gross profits of the customers on those programs by market versus what the other customers in that market did in terms of growth and growth profits. So, for example, if you look apt this year, and I will use the same store references. This year, year to date we're up 10% on a same store basis and the gross profits on a same store basis are up a little more than 10%. When you Luke at the increasing gross profits, you say what is the increasing gross profits on the programs? The guys in the programs, their growth in gross profits are in excess of 20%. And you take the difference versus what the rest of the guys, and obviously the rest of the guys would be something less than the overall average. So there's a gap there of gross profit dollars. And to the extent that our sales and marketing expenses to support those customers on the programs are less than the increasing growth profit dollars, we're ahead of the game on a current-year basis.

More importantly though, strategically what that means for us, a lot of those efforts are steered toward the building of enough pools. The reason for that is because, as you well understand, our revenue stream is built on that install basis of pools. Therefore to the extent that we build and have more pools in the ground, our recurring revenue stream in the future will be all that much greater. So what we're looking to be is ahead, and we clearly are, on a by-market case, increase GP dollars versus increasing marketing expense but also, more importantly, providing a bigger base for a recurring revenue in the future.

OK. Thanks. And the industry initiatives that direct people not website and all of that, that is within the 1% of sales that is spent on the more direct programs?

Part of that number, yes.

How would you characterize, now that we're through the season, you are rusty, categorize the above ground market this season. That is typically an impulse item based on the weather and how they feel about their pocketbook. What did you guys see there this year?

This year, above ground started slow, very slow in fact. Much like last year, given the fact that it was very cool through mid June. Since then, there was a catch up. And when awful of the industry states are in, we expect that above ground sales this year will be up versus last year but not quite to 2000 levels. And certainly nowhere near as high as they were when we had a good, hot, early summer in 1998 and 1999.

OK. And just finally, on you were, anything to talk about there? You have been there a couple of years now. Is it what you expected? Are there more opportunities now that you are kind of feeling your way around there, are there any acquisition candidates that are over there? What do you see in that market the next two or three years.

We will continue to grow our base of business there. We did an acquisition in Portugal and opened up a new location in Leon Spring of this year. We will open one of the locations approved for opening in 2003 in Europe. So therefore we will continue to add to our network there. The growth in Europe will be slower in terms of building the business base than was realized in the U.S. because there aren't really any significant regional distributors to acquire and help accelerate the building of the network. So that increases will be more in the lines of 1, 2, increases per year. But over time, we will be a very substantial force in Europe, again, equal filing that for the European market is 1/4 the size of the U.S. market.

OK. That's it for now. Thanks, guys.

Your next question comes from the line of Gary -- of J.P. Morgan Fleming.

Can you talk about your off-balance sheet commitments and then talk about if you saw any of the home improvement centers add any FKUs that overlap with you guys?

OK. In terms of off-balance sheet, the only thing that we have is leases on our facilities and the vehicles which are disclosed in terms of what those commitments are when we do R, Q and Q filings. There are no other off-balance sheet commitments. So we're a pretty straightforward company in that respect. Turning over to the mass merchants, masses really haven't expanded their product offering significantly over the last "X" number of years and they are a major presence in the case of the retail side competing in part with our independently owned retail stores that we serve.

Again, they cater to a different market. They are more geared toward the consumer that is already walking through those isles and that in and of itself creates enough volume to make them a Norris. But that change of mix of what sold the retail mass versus independently owned retail store has not changed in the better part of 10 to 15 years.

Great. Thank you.

Our next question comes from the line of Bill Dearman with Atlas Capital.

Actually my question has been answered. I appreciate you taking my call though.

Thank you. Your next question comes from the line of Ryan Delaney of Express Capital.

Good morning, gentlemen. Congratulations on a great quarter.

Thank you.

I was wondering if you could help me out. I'm trying to do a reconciliation between the quarterly change and your receivable and inventory balances and what I'm seeing in terms of the quarrel cash flow benefit from those items. I guess a part the that is from the acquisition. Is there any way to give us insight into how much in terms of receivables and inventory and accounts payable were acquired and then how I can try to reconcile the reduction of $31 million inry receivables and 31 million in inventories to the source of cash of habit $47 in receivables and 15 million in inventory I see in the quarrel cash flow. Is there any benefit in the quarter from that in a cash flow perspective and how does that correspond to the increase in AR that is attributed to still what is in the balance in the acquisition at the end of the quarter?

Give it a shot.

When we go through and calculate cash flow from operations, we back out the in-flow of the acquisitions. If you're looking at Ft. Wayne in the neighborhood of receivables, we backed out about $16.5 OFRY receivables and close zero to $20 million in inventory, $800,000 of prepaid expenses, $2.9 million of PP and E and good will was about $28.8 million. So those are the components that impacted NASDAQs.

So included in the 114 million receivable balance only 12 million of that relates to, I guess, the acquisition?

As September 30, it's 12.2 million yes. It's about 15.5 million of inventory.

And how much is it for accounts payable? I'm sorry?

Accounts payable? September 30 is... Hang on one minute.

So accounts receivable went to -- it was reduction or source of cash of 31 million. And the reason why, it's is source of cash -- 16 million came from this acquisition [inaudible].

Exactly. The difference, Brian, in the numbers is basically the acquisition. Accounts payable and accrual was approximately 14.5 million since September 30.

And then just -- the quarterly other, which was a 4 million-dollar benefit last year versus 13 million-dollar use this year, what was the 13 million use. 20 million was a tax payment but you're saying other stuff is in there. Is there a seven million dollars benefit.

Looking at the statement of cash flow?

I went through and looked at it from a quarterly perspective. For the quarter was a 13 million use of cash for the other account. I'm just trying to get -- year over year it was compared to a 4 million source last year.

The major number there is the tax where last year we paid in the fourth quarter because of September 11. And this year, it's a use because of the fact we paid that tax in September. There is still an increase in some of our pools. For example, our incentive comp, we have accrued during the year based on the operating performance of the individuals on the program. So, therefore, that would be a source and captured under "other" every quarter during the year. That represents probably the other factor of that source.

And to last questions and thank you very much. In terms of the acquisition were there any receivable or inventory reserves that were acquired and then now included in the change in your balance so is non-cash budget part of the overall balance?

Yes.

How much were those, please?

It was very minimal. I want to say probably less than a couple hundred thousand dollars.

And in terms of the volume discount reserves, was there any activity there during the year?

I'm sorry?

In the past people have asked about volume discount reserves and rebates, was there any activity during the quarter at all for those reserves?

No.

Thank you very much. I appreciate it.

Thank you.

Next question is from Steve Tang for PreSid [ph] I don't.

Good morning: Might the change in inventory overhang that is out there now and also in my -- any change --

We can barely hear you.

Can you hear me now?

That is better.

In light of changes in the amount of inventory overhang out there now and also in light of the change in your quantity of purchases, could you talk about what kind of pricing you're getting on your purchases and, you know, how that compares with last year and what you expect going forward?

First of all, Steve, you're barely audible. But let me -- you mentioned inventory overhang. I'm not sure where you're coming from. If you're talking about our class 13 available non-stock inventory, those are the numbers that have been coming down.

Not your own inventory overhang. I mean --

Oh, the industries?

Yeah, the industry, being less inventory out there from your vendors and at the same time you folks are purchasing a little bit less.

Right.

Can you talk about what kind of pricing you're getting on your purchases now compared with last year and what you expect going forward?

Oh, OK. There is, as I commented to an earlier question, there is less inventory overhang post this season or inventories available after this season, significantly less than may were that was of the case last year at the end of the last pool season. The early buyer, off-season programs that the manufacturers typically offer are being offered this year, as they have been in prior years. There were some additional marginal incentives offered last year that will not be applicable this year. Those numbers in the overall scheme of things are not significantly material in that -- what it basically motivates you do is maybe add another 1 or 2% of discounts if you go out another one or two months and turn over the orders. The big difference will be that -- will be that they will not be shipping this year in the fourth quarter anywhere near what they were shipping last year. In terms of how far that plays itself out for us in our P and L, no significant difference. I mean, we had a marginal pickup in the first quarter of this year, from some of that -- some of those orders placed last year shipped in the fourth quarter and sold in the first quarter. But that in the overall scheme of things, by the time you got to march, that inventory was long gone and that 1 to 2% inventory was history. When you look at our overall history it's not significant at all.

Would you say the prices you're getting on your purchases, are they up or down versus last year and what you expect going forward?

Overall, our unit costs will be up a little bit this year versus last year. Some areas that are more commodity oriented are beginning to tighten up and prices are increasing, for example, steel being at a case in point, where prices have increased during the course of 2002 and, therefore, going into 2003 are in fact higher than they were a year ago. When you look at whole goods, chemicals, and other classes of products, they're largely unchanged.

OK. And how about in going forward, do you expect those prices on commodities to be up slightly versus 2002?

Slightly particularly on the commodities side as the economy recovers, some of that will tighten up a bit but in the overall scheme of things, it's negligible. Inflation has not been a big factor in our industry overtime. In fact, the value of pool continues to improve in the eyes of the consumer. A good part of that is because the products used to build a pool, for example, or maintain a pool, those costs have not really gone up with inflation over the past 10, 15 years.

Thank you.

We have a follow up from the line of Mark Allen of SunTrust, Robinson and Humphrey.

I'm going to beat something to death so forgive me. On theory receivables, the doubtful accounts reserve, what you guys are saying is that excluding 12 millionry receivables from Ft. Wayne, your accounts receivable dollars would have been up 16% year over year, which is less than the revenue increase --

In the month of September.

OK. Right. OK. And then so -- so effectively, you're -- your allowance, you increased 11% for doubtful accounts. And the offset was that you had a 5% decline in your 60 days past due. I guess I'm asking, are you putting that together right?

You are. Exactly you are.

Your AR was up 16%, the reserve was up 11% and the off set was the down 5 in 60 days past due?

Exactly.

And then relative to that 12 million in receivables from Ft. Wayne, I guess you're saying that those are basically scrubbedry [inaudible] receivables?

Yes. There is a small reserve against those for past dues, much in the same fashion as we have. Reserves or Past Due's. But yet they are scrubbed.

OK. And then shifting over to inventory, you guys were up 5.5 year over year. You're saying internally you were down 10. But Ft. Wayne added 15.5.

Correct.

That was the difference there?

Uh-huh.

And then your inventory reserves were down 29%. And I guess, if you could help me there, the class 13 that went from 8% to 5%, Craig, is that on the total inventory number or is that your inventory less Ft. Wayne?

It's on our inventory. It does not include Ft. Wayne.

So if we take the inventory figure less the --

The 15 --

15.5, that should all-foot there?

Exactly.

And then one last kind of off wall question, there was some discussion earlier this year about water restrictions in places like New Jersey, etc. Did You Guys feel any tangible impact from water restrictions in parts of the country?

Not this year. There were -- in some municipalities, there was situations where they were not as expedient in issuing permits for the building of new pools. But usually builders work on a two- to 3-month lead time, so therefore by the time they needed to get that pool, the permit had been given. So, it really was not disruptive to business at all. And let me just touch on that, because nobody has asked for what this business looked like in the fourth quarter, although as we all know the fourth quarter is not a big quarter for us. They're still building throughout the country, weather permitting, they will continue to build as long as they can because of demand for pools. And I particularly highlight those builders on our sales and marketing programs. Those guys have, I will say, as much business as they can handle. That's a general statement, but pretty accurate in terms of reflecting what the status is. And to the extent that they can continue to build and they're not snowed in, or rained out, they will continue to build and that is progressing very nicely.

Good luck. I thank you.

Thank you.

Next question is from the line of Seth Sullivan with - Capital [inaudible].

Hey, guys. Great job on the sales this quarter. Just wanted to ask you quickly, on the same-store operating margins, do you have the EEBD or EBITDA for the group of stores on the companies versus outside of the companies?

Not readily available.

As a matter of fact, Seth, why don't you call back Craig so we can pull that out for you.

Will do. Thanks

Next question is from Patrick Kennedy with East Born Capital [ph].

Quick question on the interest expense. Looks like a couple of people expected interest expense to be a little bit higher than it was. Can you help us understand that difference?

Lower rates is primarily the key driver. When you look at our borrowings, our borrowings were probably a little ahead of everybody's plan, given our positive cash flow, you know, then it went back up when we did the Ft. Wayne pack significance and as we continued to buy shares during the quarter.

So that was not modeled into expectations then?

Correct.

Next question is, Craig, prior quarter you had given us the percent reserve on the accounts receivable that is older than 60 days. Can you give us that for the quarter and a year ago? .

Hang on just a minute. OK. If you look at the reserves greater than 60 days, it's 76%. And a year ago it was 64.5.

And the comp for the prior quarters is 96.1?

Yes. As of the second quarter. If you look at it as September 30, in the 30 days or less past due and current, it's 87.9% versus 80.3% fort same quarter last year.

OK, thanks.

Next question comes from the lines of J.D. Padgett of Sounders Fund [ph].

I had a couple of questions. One, just on the work in capital front looking into the December quarter, can you help us figure out what the use or source from working capital, the four primary accounts there might be in the ballpark range.

Sorry. Can you restate the question?

Sure. Looking at the working capital accounts there, what would you expect the source or use from working capital to be in the fourth quarter in aggregate?

Receivables will come down. Sequentially by about 25 million to $30 million between September and December. Inventories and AP will be up marginally, depending on what gets shipped to us by our suppliers in November/December. So net- net, there will be a reduction of working capital and positive cash flow for the your first quarter.

So inventory and AP should pretty much offset.

Pretty much offset, yes.

OK. And then also relative to, you know, the outlook fourth quarter, you touched on, it sounds like we might be off to an encouraging start on contingent new build for pools?

Right.

Fair to think something similar to 5%, same store growth in Q4?

That would be a reasonable number.

Even with a rough compare last year?

That's a reasonable number.

Should we expect to see a snap back in margins given the freight expenses this quarter probably don't recur in the December quarter, or how do you think about margins year offer year at the operating level?

They will be close. We will not have -- they will be close. There are some benefits that we realize in the fourth quarter of last year. But not ultimately material. They should be very close.

And then 2003 is when we start to see the better comparisons year every year?

Yes.

That's when you fold in all of the other numbers so that you don't have the same level of impact as you had this year! OK. Thank you.

Thank you.

Next question comes from Adam [last name inaudible] of In Touch Capital.

Hi. It looks like you're bumping up against that bank line. I'm curious. Do you guys have any plans to increase the bank line or any other sources of potential financing?

When we did that facility, about a year ago, we carved out our ability to do further borrowings on other hundred million dollars on top of that. And, depending on what everything looks like in the next six to nine months, we may, in fact execute on part of that increased capacity. Again, it's tunistic [inaudible] in nature, Adam. We look at it and say what the acquisition opportunities out there. How much do we buy back in stock given the current price and if those things continue to be as they have been in the past few months, we will be wrapping it up another notch.

And that available, they're letting you do another hundred million of bank debt.

Bank debt.

Thanks

Next question is from Cliff [last name inaudible] of H.G. Brow.

Most of my questions have been answered. I was wondering, there are 11 store closings coming in the next quarter?

We will be consummating those during the fourth quarter.

For modeling purposes, could you give me as estimate as to when those will be closings?

December.

So late in the quarter?

Yes.

OK. Can you just address the lack of leverage? I was shocked to see such wonderful revenues but it wasn't -- it didn't afford the bottom line as I expected. I'm sorry. I got zero on late in the call. If you addressed this, could you just give me a few sentences review of that?

A couple of hits on an overall basis, our insurance and specifically the marketing census but generally the whole key is, when you work out the math, it's the impact of new locations as well as the fact that the Ft. Wayne acquisition came into place in the weaker part of the quarter, so therefore it was margin dilutive for us in the quarter.

OK. Thank you

A follow up from Jeff of William Blair.

Will there be any nonrecurring or special charges associated with the Ft. Wayne location closings?

No. We absorbed that. That is expense.

Thank you.

Your next question is from Mike [last name inaudible] of Mathis Capital.

At this stage of the proceedings, I don't really have any questions. Thanks so much.

Thank you, Mike

Final question comes from a follow up from J.D. Padgett of Sounders Fund.

Just one last question. When you do consolidate those stores, how does that affect the number of stores that you have in the same store base? Does that pretty much go unchanged or is that just the acquired store number that will dip by 10 or 11 stores?

You know, I haven't really thought about that.

When we consolidate date the two, the two locations into one, that one location is excluded because otherwise the sales would be inflated and we don't want to inflate our same store numbers that we report. So we back that out at that point. So -- in those cases, where we have those 10 consolidations, we will be consolidate dating with superior locations that currently are included in the base, so therefore, we will be taking those 10 out. And the one that we are closing, that will affect another location and, therefore, to that end, we will also be taking it out -- if we didn't do that, the numbers would be higher than we would like to report.

Any way to quantify the savings associated with consolidate dating those stores?

Had you looked at it on a very simplistic basis, just to give you a 40,000 type feet type of number, a typical branch runs half a million to three-quarter million dollars of expense per year. And when do the consolidation, we should be able to save most of that.

OK.

But we will still have open -- what we will still have open is the fact, and a number of these cases will still have the lease expenses in the facilities so we don't save it entirely but we will save better than half of those salaries.

And the fact you want to consolidate 10 is because They are in sub optimal locations relative to where you need --

In those 10 cases, they were in markets where in one case or the other, superior or Ft. Wayne, one of the two sides was weak in that market, and, therefore, it was little mink mental value to have two superior locations in the same market.

OK. Thank you very much.

Thank you, sir.

At this time there are no further questions.

First of all, thank you all for listening and for participating in the call. I think we established a new record today in terms of number of participants as well as number of questions. Hopefully everybody was satisfied in terms of the results and also we were able to address and answer your questions. To the extent that any of you have any further questions, please call Craig Hubbard or myself and we will be very glad to take care of them. And for right now, we will be signing off and looking to getting back to business in the fourth quarter. Thank you very much for listening

Thank you for your participation in today's third quarter and nine month results for the SCP Pool Corporation. You may all now disconnect.