Pool Corp (POOL) 2002 Q4 法說會逐字稿

Good morning. My name is Mandy (ph) and I'll be your conference facilitator today. At this time I would like to welcome everyone to the fourth quarter earnings results 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 does a question during this time, simply press star and the number one on your telephone key pad. If you would like to withdraw your question, press star and the number two on your telephone key pad. I'll now turn the call over to Rusty Sexton, Chairman of the Board.

Good morning, and thanks again for joining us for our year end and fourth quarter earns report. We have begun the day with Manny Perez and Craig Hubbard who will follow me. I'll make a few brief remarks for perspective. I'd like to start out by saying earnings up 22 percent for the year to $1.62 is a pretty strong accomplishment under the environment under which we're all operating in. Sales increased $129 million and the base business grew 10 percent. Same store sales up 10 percent for the year. I mean how many retail or chain type businesses have even half that number, particularly in this environment we're in, we posted a cash flow of $59 million on $41 million of net income. For distribution business, that sounds like asset management to me. That, in my opinion, is a pretty strong results particularly in the environment that we are, where many people are laying off employees and putting out earning warnings.

Let's look back for some perspective, I think, before we get into the details. In 1999, before this recession that we've been in for the past three years, we earned 81 cents a share. We grew that to $1.05 in 2000 to $1.33 in 2001 and now $1.62 as the year finished. That's doubling our earnings in three years of some of the toughest markets that most of us have seen in our lifetime. That's doubling our net. That says a lot about the predictability, in my opinion, and the resiliency of our industry and our business in particular. I've been around a long time in this business, and I have a lot of confidence in what we're doing and where we're going and I think we have a great future. I'll turn it over to Craig who will give the you specifics and then Manny will tell you about the details of what's going on. Craig?

Thanks a lot, Rusty. Again, I'd like to just kind of go through our safe harbor statement. I want to remind our listeners that our discussion comments and responses to subsequent questions may include forward-looking statements including our outlook for not only 2003 but also for future periods. Information on factors and variables that could cause these results to differ materially from these anticipated results that are discussed today is available in our most recent form 10-K that's on file with the SEC. I'm going to kind of change it up a little bit. Instead of giving you a blow by blow detail as I have in the past, we have presented a lot more information in our earnings release and we think it's a little bit more transparent. I weren't to kind of capitalize on a comment that Rusty made, regarding our base business calculation, this is a new metric, this calculation is more inclusive and is consistent with how other trade distributors measure increase or decreases to sales levels between periods.

We will also continue to furnish a same store sales calculation during a transition period. The same store sales calculation which we have used in previous quarters is probably more appropriate to a retail chain hence our rationale for changing this metric to a base business calculation. If you look at our earnings release, we've included an addendum, which includes an analysis of net sales, gross margin, selling and operating expenses and operating income for both the base business and the our service centers in new market locations for 2002, 2001 and 2000. We hope this information proves helpful to the readers. In the footnotes to the addendum we have defined what's included in the base business calculation and what branches are included in the calculation of acquired service centers and new market locations.

Continuing on down with the P&L, some comparative highlights, SG&A expense remained constant between years as a percent of net sales for the base business. But was negatively impacted on a consolidated basis by the dilutive effect of the Fort Wayne acquisition in August of 2002 for both the fourth quarter and on a year-to-date basis. As Rusty indicated earns for share for the year is $1.62 versus $1.33 last year. Since we are a seasonal business and historically lose money during the fourth quarter, we are required by FAS 128 to report earnings per share using the number of basic shares outstanding and not on a diluted basis, which is how analysts typically calculate fourth quarter earnings per share.

I mention this so the readers of our earnings statement will recognize that fourth quarter earnings per share per our earnings release is not really comparable on a apples to apples basis with the fourth earnings per share numbered issued by the analysts. This will be an ongoing on anomaly during the fourth quarter of each year in which we lose money as we have historically. The Fort Wayne acquisition in August of 2002 was slightly over three cents diluted to earnings during the fourth quarter and Manny will provide some additional color and commentary on the Fort Wayne acquisition later in this call.

Turning our attention to cash flow, cash flow from operations more than doubled from approximately 27 million in 2001 to slightly more than 59 million in 2002. This increase is attributable to both an increase in net income between years and the fact that we did not make as many prepayments on inventory purchases with extended terms during the fourth quarter of 2002 as was the case in 2001. Depreciation was 1.1 million for the quarter and 4.2 million for the year. Amortization expense was approximately 725,000 for the quarter and 2.3 million for the year.

Kind of turning our attention now to the balance sheet, we have provided some additional information in the footnotes to the consolidated balance sheets, in particular, we have included more detailed information on the Fort Wayne AR and inventory balances at year end. We have also included some additional comparative information on the allowance for doubtful accounts including aging statistics on AR between years and a similar analysis for the inventory reserve account and inventory classes between years as well. Finally in December we retired 3.8 million treasury share, these are shares that we have acquired over the previous several years. Approximately 38 and a half million still remains authorized for the additional purchases of our common stock. At this point in time, I would like to turn the call over to Manny Perez.

Good morning -thank you, Craig -for joining us today. With Craig having given you the financial highlights I would like to start by acknowledging my error in the estimated impact from the Fort Wayne acquisition in the stub 2002 period. While I have the information available and Fort Wayne performed as expected in the last four months of 2002, I did not figure the interest expense or the amortization of the non-compete agreements in my estimates for the stub 2002 period. Therefore, I did not account for the two cent loss for the stub period or the corresponding impact in the fourth quarter. Having said that, the integration of Fort Wayne is on track. In the fourth quarter we consolidated 13 Fort Wayne locations with superior locations in the same market, and closed one other location. We also converted all computer systems, data basis, et cetera in the quarter.

Despite all of this activity and logical destruction, our superior Fort Wayne businesses performed as planned. To reiterate my comments from the third quarter conference call, I estimate the contribution in 2003 from the Fort Wayne acquisition at eight to 10 cents per share after interest and amortization of the non-compete expenses. The superior network now extends to 55 locations with over $300 million in annual sales. This network represents the consolidation of three regional distributors, superior acquired in July of 2000, most of the pool division of Hughes acquired in January 2001 and the Fort Wayne acquisition of August of 2002. Together with the SEP network, we now have the two clear leaders in the pool industry with the most comprehensive breath of services and value add programs that have ever existed in the industry.

Going back to systems for a second, in addition to converting the Fort Wayne locations in the fourth quarter, we also converted the three locations in Canada acquired in late 2001, together with the three locations in the UK. We also established our primary data center in Dallas in a protective facility that sits on a communications hub to enhance data reliability and response time while establishing a backup data site in Covington. In the first quarter we just completed converting the superior west locations such that for the 2003 season, 99 percent of our sales will be on the same applications and data base systems supported by the same server infrastructure and be more reliable throughout. In terms of 2002 perspective, weather was certainly more favorable than the unusually adverse weather of 2001. The comps certainly aided our 10 percent base business and same store sales growth.

Geographically the northern markets benefited the most in 2002 with strong growth also realized in California. The weakest major market in 2002 was Texas, although its sales were also up for the year. Our complementary products efforts continue to contribute as sales of these products increased by almost $20 million in 2002. In addition, our sales and marketing programs also were a major factor in our growth with program dealers representing over 40 percent of our total sales growth. Altogether, we believe that we gained market share again in 2002 as our higher levels of service and increasing value added programs translated into more business. Our base business gross and operating margins improved moderately in 2002 while the distractions of acquisitions competitive developments, supplier performance and the outside world can all be assigned some blame, we can and will improve by a greater margin in 2003.

While we are still early in 2003 indications appear positive. For example, we've already heard from pool builders that are fully booked for the year. Of course, for our business, the most significant external factor is the weather. Particularly when it gets hot and stays hot in the northern markets. With our execution and normal weather, we are confident in our ability to generate $1.95 in 2003 earnings per share. In addition, we estimate that our cash flow from operations will approximate our net income as it has on a cumulative basis over the past several years. Looking out strategically investors should appreciate that we will generate over $300 million in cash flow from operations in the next five years. We will also have the ability to borrow at low cost approximately $400 million in five years' time. This collective pool of $700 million of capital will be deployed strictly to enhance long-term shareholder value. With our current modest level of debt that stands at just one-and-a-half times trailing EBITDA the future of SCP is exciting.

We are very fortunate to be in a unique position within the young swimming pool industry. To summarize, the industry will continue to grow at a healthy rate as the install base of pools continues to grow. We will continue to grow at an even greater rate internally our execution will continue to improve translating into margin growth. Our earnings per share and cash flow growth will continue to provide us with more opportunities to enhance shareholder value. We are indeed very fortunate. Thank you for listening and at this time I'd like to open the call for questions.

I would like to remind everyone in order to ask a question, please press star and the number one on your telephone key pad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Mark Allen.

Good morning, Rusty, Manny, Craig.

Good morning.

Congratulations on another outstanding year.

Thank you.

This is a question, by the way, appreciate all the additional disclosure in the press release. I think that's a really great thing. Looking through there, it looks like your base business, the operating margins increased to about, it looks like eight and a half percent against 7.6 percent in the prior year. So question is I'm looking at it, right, looks like about 30 percent of your revenues that are sort of at about 4 percent margin and the question would be relative to those acquired centers and newly opened centers, how long does it take those centers to move out to the average of the base centers?

That's an excellent question, Mark. And as you can see, when you look at the 2001 versus 2000 numbers that you referenced, a lot of that was the Hughes acquisition and in part the superior acquisitions made in second half of 2000 and early part of 2001. It takes several years. You know, there are several disciplines and business practices that take time to incorporate. I will tell you, though, that with the acquisition of Fort Wayne, that integration and those enhancements are being accelerated. And the reason for that is that fortunately for us when you look at the Fort Wayne and the Hughes specifically businesses, the overlap was such that in a number of instance where there were weak Fort Wayne locations, the former Hughes locations were in fact recently strong as well as being vice versa, a number of weak Hughes locations were in markets where Fort Wayne was doing well and that's what precipitated our consolidation of locations and that in effect will accelerate that margin enhancement.

Okay. Same question would be, Manny, you mentioned the new product sales, you had about 20 million in incremental sales in '02. Can you just give us the numbers on that? What was '02 over '01? And I guess also, I'm just interested in some color in terms of which those five or six product categories you introduced, where are you getting the best traction? Are there one or two particular categories.

First let me give you the numbers specific. SCP network, the sales there were a little bit less than $20 million in 2001. Of those products. And that, by the way, was a reference point there, just to give you a complete flavor, the reference points there in '99 was $3 million, in 2000 was $9 million in 2001 was roughly $18 million and that virtually doubled again in 2002. In addition, the superior network also grew by roughly $1 million in 2002. So therefore, the growth was almost $20 million collectively. And now represents just over $40 million of our total sales.

In terms of individual product categories, the biggest opportunities we've seen have come in building materials and one item that we brought into a number of markets last year was spas - spas - stand alone spas. Spas also contributed to that growth in 2002. So business building materials and spas were the two single largest individual categories.

And building materials, Manny is that just, being a little more specific, that would be things used in pool deck?

It's everything that's used in a cement pool, as well as to a lesser degree but also in package pools. That includes everything from the rebar (ph) that reinforces the exterior walls to the blaster, cement, also it includes from our definition, the tile, the coping, as well as the pipe that connects the pool with the pump.

And one final question, quick question. Any indication as to how the spring season is shaping up up north? Are the pool builders getting started earlier than usual or the same as usual?

Well, it's really, they haven't really started to speak of yet. There's still snow on the ground but as I mentioned in my earlier comments, builders in the north are very optimistic about this year as they are throughout the country and in fact, just to reiterate the comment, there are builders that have already indicated they are fully booked, they have contracts for the entirety of 2003 and are now beginning to take orders for pools in 2004.

In many cases consumers look to other builders that are not as tapped. But that is something that is, that is visible to us and it's remarkable that it is that strong. I can attribute that in part perhaps to the low interest rates, but I also see where our programs and the lead generation capabilities of the programs that we've now put in place tour several years are so strong that our builders are basically swamped with leads.

One thing I read recently on that, Manny, is that the mortgage refinancing activity is putting a lot of dollars in consumers' hands and maybe some of that is glowing to you.

Yes, definitely. We still capture as an industry a very, very small share of those discretionary major expenditures on the part of consumers. To the extent they add pools as opposed to remodel their kitchen or instead of remodeling bathrooms that is certainly to our benefit. When we looked that the data in the last several years, we as an industry still capture less than one percent share of those discretionary expenditure, so just moving the needle from left of one to just above one is a big deal.

Good luck, guys. Thanks.

Your next question comes from Jenny Hubbard.

I guess we'll go to the next one.

Thank you. Your next question comes from Anthony Lebiedzinski.

Good morning, guys. I just had a couple of quick questions. The gross margin when I look at the base business versus the acquisitions, it appears that for the year, the gross margin from the acquisitions was slightly higher, 26.2 percent versus 26 percent, I just wanted to get your reasoning for that.

That's due to, in the case of the Fort Wayne acquisition, Fort Wayne also has a many manufacturing component in the company and therefore in consolidation you have the double profit. The you have the profit of the manufacturing business combined with the gross profit from the distribution business.

And in terms of sales, now that you have Fort Wayne already integrated into your business, how much -- what percent of sales is actually attributable to the manufacturing?

Really the way we would capture that is sales to third parties, and sales to third parties represents collectively approximately seven to eight million dollars. The sales, most of those sales on the manufacturing side of the business of internally, approximately 70 percent of their manufacturing output is sold to what is now superior network. So therefore the fact that those sales are in the consolidation.

Also, your inventory just barely increased from a year ago. I know last year, you made some advanced purchases, given that you have more service entries (ph) now, did you feel you have enough inventory for the upcoming pool season?

Yes, when you look at our inventories, base business inventories excluding Fort Wayne those are basically within $2 million of where we wanted them to be at year end. So that's pretty close, given the magnitude of our business. We are continuing to build inventories in the first quarter for the 2003 pool season. And manufacturers didn't have the same level of pressures to ship goods out at the end of the 2001 pool season as the 2001 pool season. But we placed our orders in the fall as we normally do and material continues to come in. Again, they didn't ship as much as at the end of the 2002 as the they did at the end of the 2001.

Okay. Well thank you very much.

Thank you, Anthony.

Your next question is from Jenny Hubbard

Hello, Jenny.

Can you all hear me?

We sure can.

Thanks. I'm sorry I got cut off earlier. My question is going back to your base business and when you look at 2002 over 2001, revenues were up 10 percent, yet SG&A as a percentage of sales was flat. Operating margins were relatively flat. Just curious why you wouldn't get more leverage and then as well if you can comment on your expectations for margins in your base business in 2003.

We continue to invest in our sales and marketing programs. And there are some other items that threw our cost off a little bit, for example, health insurance as well as freight were higher in 2002 than 2001 as a percentage sales. So basically, to the extent that we gained lever amp on the more administrative side of our SG&A, we were, that was lost or given back with our commuted investment and higher level of investment than sales and marketing or really advertising expenses as well as insurance and freight.

Okay. And for 2003, your advertising expenses, do you expect to keep those roughly the same as a percentage of sales increase them and also what do you think about freight expense this we're with fuel costs going up, et cetera?

We are obviously endeavoring to contain the fuel to the extent possible, I think we'll have a little better success this year than we did last year. When you look at overall, when you look at our base business margins, on the surface, you would say well, they're going to be diluted by virtue of the acquisition. But I think that would be a misread. And reason I say it's a misread is because the acquisitions are only largely affected by the worst time of the year, given the timing of the Fort Wayne acquisition, we got them in basically the stub periods were a loss period and we didn't really capture the benefits of the spring and summer, which is when all the money is made in our business. So therefore, I think that there will be greater operating margin improvement in 2003 than there was realized on the base business in 2002. And that also we will benefit by some slightly higher gross margins to make that happen.

And what will be the drivers of the improvement in gross margin?

We continue to focus on ensuring that we have the disciplines in place so as that to the extent we provide greater value to our customers and to help them grow their businesses and profitability. We don't have to be as ties to what other competitors sell at. And the second part of that is the point I referenced earlier, that is we will begin to get the benefit of the manufacturing profit from Fort Wayne on the consolidated sales internally.

Okay. Secondly, given your stock repurchase program and available authorization there, the fact that it doesn't look like you would be doing a major acquisition in 2003, how aggressive do you plan to get on buying back stock?

If the prices remain close to where they are now, we're going to be very aggressive.

Okay. Thanks a lot.

Your next question comes from Doug Col.

Good morning, guys.

Good morning, Doug.

Congratulations on another great year. One thing you mentioned, Manny, was the cash flow over the next five years and your ability to borrow at a real nice rate. How do you rank your opportunities to invest that capital now? I mean in the last few years, there were so many opportunities on the acquisition front, what makes the most sense for the use of that capital over the next two or three years to you?

That's a great strategic question, Doug. We will and are continuing to pursue acquisitions within the swimming pool sector. We believe there are still opportunities there, although not of the magnitude that we are witnessed or had the opportunity to execute in the last several years with the superior, the Hughes and Fort Wayne acquisitions, so that becomes and continues to remain our first priority. Mind you, that's done in a disciplined fashion and doesn't result in our overpaying, but that remains our first priority. As a way to enter or enhance position in markets that we are not in.

Secondly would be obviously the supporting of our core business, whether it be a modest level of cap-ex that we do an ongoing basis or as well as working capital needs for our continued growth internally. That is as complements and those types of things are almost I'll call status quo for us. That should not consume anywhere near what our total capital capacity will be over the course of the next five years. Beyond that, we have really two alternatives that are available. One is buying back shares. And to the extent we can buy back shares at an attractive price like we have in the last several years, we will continue to do that. The other alternative is to have just lowered levels of debt.

So if you look up the next two to three years, that will probably be a vision that will be what we will be doing over the next two to three years. Beyond that, we may have more difficult decisions if we keep on stockpiling cash after exhausting alternatives I gave you and having paid down all the debt. But that's something we'll worry about in 2006.

Okay. And secondly, would you characterize for me as you guys saw it, the level of as an industry in ground pool sales and above ground, what kind of year, I mean weather in '01 I know impact the above ground sales and it characterized the growth you think those two product categories saw for the industry over 2002?

Above grounds recovered to a more normal levels. Above grounds are much more of an impulse sale, much more weather dependent and the ease of putting in above grounds are pretty straight forward. So therefore there's no real issue from a labor or builder standpoint. So that recovered to more normal levels and we're up nicely in 2002 versus 2001, to more along the lines of 2000 levels. In the case of in grounds, in grounds continue to grow at what I'll call a reasonably modest rate, maybe about three to five percent in terms of the an increase in the addition of pools. And the issue that is in effect is that to have more in ground pools add, we need more pool builders.

So most builders and most markets are working pretty close to or at capacity. So therefore the constraint that we have as an industry for significant ramp up of and additional in ground pools from one year to the next is a fact that the builders aren't there. So and as indicated earlier, a number of those builders, pretty well tapped already. That you know, gradually overtime, we believe that will change as it has over the last 20 years, more builders getting into the industry and more capacity being added.

Okay. Just one more thing somebody mentioned fuel prices. The impact that has on some of your vendors, I guess in my mind I think most of the guys producing the chemicals, their production costs, you know, certainly tied to the energy costs to some extent, are those, remind me, are the chemicals prices passed through directly from you guys onto the end user?

Chemical prices up or down are generally speaking passed through at least to our customers. I'm not sure exactly how much of that is retained at retail side versus passed on to the consumer but certainly at the distribution level, they are generally passed. Now the irony here is that given the addition of capacity, particularly on the trichlor (ph) tablets, in the last two to three years that, increase in capacity has put additional pressure on chemical prices in general. So we have not seen any increases and in fact to some degree, we've seen some decreases chemical pricing over the last two to three years.

Okay. That's all for now. Thanks.

Okay, Doug.

Your next question comes from David Mann.

Yes, good morning. Manny, on the comment you made on base business growth for '03, can you quantify what percentage increase your penciling in there to get to the $1.95?

Five percent.

Okay. Great. And then in terms of the first quarter, Fort Wayne, is that likely to have a similar kind of impact in the first quarter than it had in the fourth quarter? And you know, you still expect to make money in the first quarter?

That's a very good analysis, David. Yes. There will be an adverse impact for Fort Wayne from Fort Wayne in the first quarter, not at the same magnitude as the fourth, but probably in the range of one to two cents. When you look at the Fort Wayne business at the operating profit level, that Fort Wayne business loss money from September to March and made money from April to September over the course of the year, they are very nicely profitable, but again the profits are concentrated in the second and third quarters of the year. They did not have the benefit that the SCP (ph) network has, for example, with the strong presence in California, Florida, Texas and Arizona, which have more of a year round businesses. So therefore as you go further north, that's a viewing of sales inconsequentially bottom lines are much greater.

So there will be a small hit in the first quarter. A lot of our first quarter profits, or virtually all of our first quarter profits really come in March and a lot of that is driven by when pools get started in the northern markets which is really when it warms up and the ground is to longer frozen. Oh the biggest caveat to our first quarter earnings is marked weather and the only caveat being there's a maul hit because of the Fort Wayne acquisition. As I said, there's a maul hit in the first quarter, a bigger hit in the fourth quarter, but for the year, Fort Wayne, after factoring into the incremental interest expense as well as the amortization of non-competes will contribute eight to 10 cents per share at accretive UPS for SCP.

When you talk about a that accretion for Fort Wayne, what are the plans behind that on the manufacturing side and can you detail a little bit the expansion you plan there and whether you look to sell in a greater way to third party customers?

The on the Fort Wayne side, about 70 percent of the Fort Wayne manufacturing sales are in fact sold - historically were sold to the Fort Wayne distribution network. With Fort Wayne network being consolidated with superior network, that presents certain opportunities for growth for the Fort Wayne manufacturing business and so therefore that's where the real growth opportunity rests with Fort Wayne. We intend to continue to serve the independent customers of Fort Wayne manufacturing in markets where superior doesn't have distribution and continue to work with them and the investments that we're making in Fort Wayne manufacturing are simply to enhance the quality of the products as well as improve our efficiency.

And so, can you quantify the dollars in terms of the amount that you now are going to be buying internally versus what you previously had been buying from third party supplier?

Well, that won't change. A lot of it comes with the Fort Wayne acquisition. If you look at, if you stripped out the manufacturing business, about 70 percent of that was sold to Fort Wayne branches. We'll sell that amount to the Fort Wayne branches plus another two to three million dollars. And that's basically it. The SCP network has its own sources for products, whether it be polymers or steel pools and associated liners and those relationships are maintained intact. So therefore the real growth which again is two to three million dollars for Fort Wayne manufacturing will be to sell more to the superior network.

One last question, in terms of the competitive landscape, can you just comment on what you're seeing in terms of new openings by other distributors and specifically, what's going on in the market in Florida where Horners (ph) opened up some centers?

We opened up ten locations in 2002, the rest of the industry opened up, I believe, seven or eight locations. For 2003, we are planning to open up seven locations. At this juncture we've heard others in the industry opening up approximately five. So we represent a little better than 50 percent of the new location openings in the industry. When someone opens up a new location, whether it be SCP or anybody else, there is to some degree market disruption in those markets. And the other distributors in those markets are adversely affected to some degree, some more than others.

You asked about Horner (ph), we, in the markets where Horner (ph) has opened up, we have been affected to some degree as have other distributors. But overall in Florida, we still grew nicely in the fourth quarter, we still grew nicely for the year. That represents not only what we've done in the markets where there were no new locations opened, but also our continuing growth opportunities that we're seeing in southeast Florida, which happen to be Horner's (ph) home base, that's the market where we basically just got into in the latter part of 2000 and continued to make in roads as we increase our market presence and market share.

Thank you, Manny.

Thank you.

Your next question comes from Seth Rosen.

Hey guys. I just have two quick house keeping questions. I was a little bit confused on definition of the base business growth. In one part of the release it suggests that it excludes new service centers and another piece maybe I was just and said that it included them. I don't know if you can clarify that.

Base business excludes new service centers in new markets. For example, in the latter part of 2000, we opened up a location at for the Lauderdale, Florida. Before that we had no service whatsoever in that market area. So therefore, that's tantamount to acquiring somebody in an area where you have no business before. So that certainly would be, that would be certainly excluded from our base business. So ...

But you're saying if you open a new center in a market that you're already in, that's included in base business?

Yes, it is.

Got you. Okay. How many stores were that in the fourth quarter? Is that the seventh?

I believe so.

And then my other quick question, I guess how many service centers would have been in the base business count for last year's first quarter? 161 this year's fourth quarter? Do you have that handy?

Let's - we'll look that up and we'll get back to you or we'll make that comment as part of an answer to another question.

Okay. Great. Thanks.

Thank you, Seth.

Your next question comes from Ellen White(ph).

Hi. I was hoping you could give us some sort of idea of how your different regions I know you just talked about Florida, but how are the different regions for you guys? Any particular strengths or weaknesses? What are you doing in the different areas, if anything?

Okay. What we're doing is essentially the same throughout. The execution varies by market and we're also obviously affected by the weather. The northern markets had easy comps in 2002 given the about aberrations in weather of 2001. So from a comp standpoint, they showed the greatest growth year to year. The sunbelt markets, of those sunbelt markets, the strongest one was California and the weakest one was Texas. Texas was plagued with a number of issues, not so much in part weather, but also some disruption in terms of the building of new pools given some of the issues that some major employers have had in that market over the past one to two years.

Okay. Can you guys give us any color on I guess for lack of a better phrase, the credit quality of that end consumer? The customer that's going to build pools? I mean I know you talked about the refinancing and how that's continuing to help. But I'm wondering if maybe that's not even a number you look at, but can you give us any color on that?

Okay, first. If you step back for a second, about 60 percent of our business is products sold for the maintenance, pure maintenance of existing pools.

Right.

Another slightly over 20 percent is sold in terms of equipment replacements or change-outs on pools where the equipment is 10 to 15 years old. Then the last call it 17, 18 percent of our sales come from the building of brand new pools. Or the equipment for brand new pools. In that area, there's a pretty well defined set of builders that operate throughout the country in their local markets. We know who they are. They are customers of ours, and they stay pretty busy everywhere, even in the weakest times. They usually work on a two to three month backlog.

In some cases in markets in the north, they may work on a six to nine month backlog. And those builders that are on our programs and our programs are structured so as that we endeavor to raise awareness at the consumer level and create leads in effect for those builders. Our programs generate very, very strong leads and therefore those builders in our programs do exceptionally well. Independent of what market they're in.

Okay. So basically you're seeing no change in the end consumers' credit situation at all?

No, no, none whatsoever.

Okay. Great. Thanks.

I would like to just take a second here to answer Seth Rosen's previous question. And at the end of 2001 there were 172 service centers in place. Of those, 37 were excluded and 135 were included. Repeat 135 out of 172 were included. Of those 37 excluded, 31 came from the Hughes acquisition. That was done in January of 2001. Three came from the Canadian acquisition done in the fall of 2001. Two came from Portugal that was also in 2001. And the last one was Ft. Lauderdale, that was open in the latter part of 2000.

Your next question comes from Steve Cheng.

Hi, good morning. First, did you give guidance for EPS in Q1?

No, I did not.

And could you give us some idea of what range? Could you give us some guidance there, please?

Steve, Q1 is not a big quarter for us. And it's, I mean our business is obviously, like every business, the key numbers are the annual numbers and most of our profits are made in the second, in fact all of our profits are basically made in the second and third quarter. Q1 is highly dependent on basically when the pool business gets off the ground in March or whether it happens in early March, mid March or end of March.

Last year, we had a good weather first quarter. This year, we'll have a slight hit, one to two cents from the Fort Wayne acquisition, but if weather is like last year, we should be comparable roughly with last year's EPS. And I think that's as far as I can go at this juncture. I will tell you though more importantly for the year we are extremely confident that things are looking very good and reiterate my confidence stated in the press release, stated in my earlier comments that we feel very good about $1.95 per share for 2003.

Could you give us some idea of where we might see inventory levels at the end of Q1 and also at the end of the year, at the end of '03?

At the end of Q1, inventory levels would be, I would anticipate slightly higher than they were at the end of Q1 of last year. At the end of Q1 of last year, we were about if I recall, five to $10 million above where we wanted to be. But with the increase business that we have with Fort Wayne and everything else, I think we'll probably see a number that's slightly higher than last year, probably within five percent or so higher than last year's number.

And then by the end of the year, inventories will begin to, you know, continue to come down as they typically do beginning in April and work themselves down. Our pool season ends at the end of September, October, so therefore that's when they'll be at the lowest and start turning back up in the fall. End of the year numbers, I would anticipate that we will see some minor improvements in terms of better turns, call it, if you want to look at it that way, from an outsiders per respective. So as our inventories will probably be up less than our sales will be up they'll still be up, but not as much as our sales will be up.

Last week - you've talked about the manufacturing side of Fort Wayne and recently announced that you are make further investments into that segment. And also on a previous conference call you talked about sourcing direct, contract manufacturing of white (ph) goods, so it appears that you're increasingly moving to the manufacturing segment of the business. I'm wondering if that has affected your relationships at all with fewer suppliers.

That's two different points. In the case of Fort Wayne, Fort Wayne has been a manufacturer in this industry for many, many years. Our investments in that plant there are really consistent with our investments in everything that's part of pool, which is we try to make it better and raise the quality and at the same time particularly in manufacturing, you can do that and make the products more efficiently. So that's the motivation for some of those investments there.

It is not new products or anything of that nature. It's more, just more of the same just doing it better. What we have done and I think when you say contact manufacturing and white goods, I don't think that's a proper characterization, what we have done is we have an opportunity given our volumes to negotiate with manufacturers of certain products anywhere in the world, particularly low brand equity products. And to the extent that we have the ability to buy better by virtue of our pure volume, we will do that. Again the emphasis there is on low brand equity products where there is a cost benefit opportunity.

Thank you very much.

Thank you, Steve.

Your next question comes from Bill Bearman.

Hi. Actually, I have one real quick question. You guys gave guidance on EPS for the year of $1.95. Any guidance for revenues?

Revenues should be if you take the model out of our base business for this year, we finished at 980 or 982. If you add in five percent for your base business sales growth, you factor in the full year impact of the Fort Wayne acquisition, that should get to you a number that's a little bit north of $1.1 billion.

All right. Thank you.

Thank you.

Your next question comes from Jenny Hubbard.

Thank you. My question has been answered.

Your next question is from Joel Haggard (ph).

Good morning. The first question I had was partially answered earlier, that had to do with organic service center growth. Is that number seven geographically focused isn't is it a matter of backfill in existing markets?

It spans from France to several parts of the U.S. So no, there's no geographic concentration.

Okay. Follow up on that is, is that number, which I guess is only a three or four percent increase, is that a conservative base? And is there room with your attractive capital structure to boost that if you start to see better business trends over the course of the year? Although it sounds like you've already identified a pretty solid backlog of business for your customers.

Yes. Joel, we look at virtually any pool market in the world and there are a number of markets where we don't have a presence. Or a markets where having an enhanced presence would increase our potential for market share. And as part of that process, we come down to five to ten locations that we target for investment in the coming year, coming pool season. Those decisions usually are made in September timeframe by the September time frame of the prior year and we begin to look for locations and build staffing over the course of the off season, the first and first quarters from a calendar standpoint. So really if we were to try to do something from a new location standpoint, additional for 2003, it would be very, very difficult and really would not be worthwhile. So that process is an ongoing part of our annual planning process and five to ten locations per year is I think a reasonable expectation to factor in going forward.

Great. You anticipated my next question. Thank you. Good luck.

Thank you.

Your next question comes from Dan Mendoza (ph).

I just wanted to get a little bit more on some of the cash flow numbers you gave out earlier. What was cap-ex for 2003 and 2002. So we can get a free cash flow number.

The cap-ex in 2002 was reported in the press release and it was 6.4 million. I would look at that number being as a percentage of sales constant in 2003, so it would be about seven to eight million dollars.

Okay. And then if you review the assumptions that you used to get to your approximation of 300 million in cash flow from operations over the next five years?

Several things there. First is you have our net income, and our net income should grow by double digit percentage year period. So that gives you one number.

What about just sort of, are you assuming five percent same store sales growth and a little bit of a margin improvement or higher numbers or lower numbers?

Five percent same store sales growth with modest improvements each year.

Okay. And then ...

And then opening up five or ten new locations which really don't contribute very much, they don't contribute anything in the first year and they're very modest contributors until like the third or fourth year. So that's another component of the equation, but when you shake it all off out then, you can factor in that our cash flow from operations has to be for cap-ex should approximate our net income.

Okay.

And with basically the benefit of depreciation amortization being offset by the increased needs for working capital to support sales growth. So therefore our free cash would be cash flow from operations minus cap-ex and cap-ex would represent about .7 or so percent of sales.

What would that be for over ...

Our cap-ex over the next five years will be probably an aggregate less than $50 million.

all right and if you look at acquisition opportunities that are still out there in the industry, can you obviously a little bit hard to do, but can you throw out a best guess for what sort of acquisition activity you might have over the next five years?

Over the next five years in the industry, the aggregate cost of acquisitions my best guess would be somewhere between 50 and $100 million.

Okay. Very good. Thanks.

Thank you, Dan.

Once again, I would like to remind everyone in order to ask a question, please press star one on your telephone key pad. Your next question comes from Steve Cheng.

Hi, one follow-up. Typically in your K you guys talk about the percent of purchases from Penter (ph), Hayward (ph) and Biolab. Do you have those percentages available yet?

We don't have those just yet. But I will tell you that they wouldn't have changed any significant way from 2001 to 2002.

All right. Thank you.

At this time there are no further questions. Are there any closing remarks?

Thank you for participating in our fourth quarter conference call. I hope that the expanded information provided in our press release and our comments during this call provide value to both our existing as well as our prospective shareholders. We invite all investors to become more educated about SCP as well as all of their investments. Thank you.

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