Pool Corp (POOL) 2003 Q1 法說會逐字稿

Good morning. My name is Jason and I will be your conference facilitator. At this time, I would like to welcome everyone to the SCP Pool Corporation's 2003 1st quarter earnings 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 * and the number 1 on your telephone keypad. If you would like to withdraw your question, press * and the number 2 on your telephone keypad. Thank you and at this time, I would like to introduce Mr. Rusty Sexton, Chairman of the Board. Sir you may begin your conference.

Al right, thank you very much and welcome all to the first quarter SCP Pool conference call. As usual, we have Craig Hubbard our CFO with us today, and Manuel Perez, President and CEO, who will give details. Craig will follow me with the financial information followed by Manny, who will go into some inside as to what is taking place in the quarter in the year for the industry. I like to just open with a couple of comments or remarks.

I was recently reading some comments from Argus Research and the lady CFA, who was doing the analyst made these comments. I will just quote her, because I think it may be appropriate to what we are talking about in the pool business. This was referring to Lowes company, the home improvement saying, "Increased unemployment will certainly hurt discretionary spending. The Iraqi situation and terrorist scares are negatives impacting all retailers, deteriorating consumer confidence as a cause for concern. Mitigating these risks is our belief that home related merchandise is one of the safest sectors of retail today. Demand has continued strong while other category notably apparel, consumer electronics, and books supply lag.

We maintain that the casualization of apparel required ego-driven consumers to flout their good taste and income levels in the home sector. The category has become a vehicle of self-expression. For most Americans their home is the most valuable asset and spending to increase its value is almost a fiduciary responsibility." Well, to that you can add some cold, unusually bad weather in the north, and particularly in the northeast for the first quarter, all but the last two weeks of the quarter across the country was at normally cooler than normal and then you had the SARS scare, you saw all these in the bag, and most all of it does not sound very good, but nonetheless, some of these factors are actually positive as for the pool business as the article comments from the analyst and SCP is off to a good start with the sales increase of 15 percent for quarter and especially when you take a look at the base business growth of 6 percent. I think that says something about the pool business and some of the comments that were made. So with that I would like to have Craig come in and give you the financial details. Craig.

Thank you, very much, Rusty. Before I get into my financial commentary, again I would like to remind our listeners that are discussion today includes comments and responses to subsequent questions and these may include forward-looking statements including management's outlook for the remainder of 2003 and even future periods. Information on risk factors and variables that could cause actual results to differ materially from those anticipated results discussed here today is available in our most recent Form 10-K as filed with the SEC.

Having said that, I am going to give some highlights and its not going to be as much of a blow-by-blow detail. Looking at the TNO and if I can call your attention to the earnings release you will note that in the addendum that we have attached the acquisition-related gross margins and operating expenses as a percent of net sales is higher than the base business and much of this is attributable to the intercompany eliminations we make in connection with the manufacturing side of the business and that was the manufacturing business that was acquired with the Fort Wayne acquisition and therefore, the acquisition-related margins also reflect the benefit of the manufacturing margin or also the normal distribution margin. The 130 basis point increase in our consolidated gross margins is due primarily to improvements in selling margins and a small pick up that is related to our reconciliation of our ongoing vendor rebate programs in the fourth quarter.

Base business SG&A as a presented net sales was up 12 percent from the first quarter last year and this is primarily due to additional payroll and center compensation and other supporting expenses that increased at a rate faster than the increase in the seasonal net sales in the first quarter of '03.

During the quarter, we opened six new service centers compared to three in the first quarter of '02. This is a 9 percent increase in our number of branches. These new branches, which were all included in our base business calculation, incur start up cost way before they actually opened and have sales.

Earnings per share for the quarter decreased by a penny versus the first quarter of last year and this was due primarily to the diluted affect of the Fort Wayne acquisition, as a result of that acquisition's extenuated seasonality of its network, which is predominantly located in northern markets. And this dilution was expected, it's very normal for the northern branches and these acquired service centers particularly lose money in both the fourth and first quarters of the year.

Calling your attention now to the balance sheet, as we noted in the earnings release, the estimated accounts receivable balances from the acquired Fort Wayne operations was approximately $12.8 million in March 31, 2003 and inventory was almost $30 million at the same period of time.

In March, we completed a new account receivable securitization program with a seasonal borrowing capacity of up to $90 million. At March 31, there was approximately $45.6 million outstanding under the receivables facility. We employed this arrangement because it provides us first with a lower cost form of financing, which is evidenced by the average effective interest rate of 1.9% approximately on the receivables facility versus approximately 2.5% on a revolving credit facility, and then also with a receivables facility and increases are overall borrowing capacity. In February and March turning to the repurchase of shares, we purchased approximately 128,000 shares at an average price of approximately $26 per share.

We still have around $35 million authorized by the board for additional purchases of our common stock. Finally, turning our attention to cash flow, we were a net user of cash in the first quarter, which is expected, and this is due to the seasonality of our business, the increase in the use of cash compared to the first quarter of 2002 was primarily due to the change in the increase in accounts receivable, we expect to have positive cash flows by the second quarter, which is normal in our business, our cash flow typically will be at least equal to or greater than our net income. If you look over historically at cumulative cash flow and cumulative net income since 1994, cash flow from operations has averaged a 115% of our cumulative net income over this period. At this juncture, I would like to go ahead and turn the call over to Manuel Perez, who is going to give some additional color and highlights.

Thank you Craig, and good morning to all. Thank you for joining us in the call. Let me just give you a perspective on a number of things, first starting off with the quarter and this may sound a little bit like a weather report and that's really the single largest external factor that affects us in our business.

January is typically a very slow month for us in the year and this year's January was pretty much a typical January and compared capably with prior years, but again was pretty typical being a very slow sales month. February this year was really down verus last year and for everybody's recollection in the prior two years, there had been very very mild winters in the north. Though there are those who have carried over backlog of our pools to build tried to start as early as possible and in the case of a number of markets in 2002 and 2001, they were able to start building those pools as early as February. Well this year, that didn't happen so therefore, our February sales were down year on year, and in fact as Rusty mentioned at the outset of the call it was not really until the middle part of March that things began to warm up a bit and our sales in the month of March finished nicely ahead of last year at a little bit over $90 million for the month and that is, I will call that a decent finish for the quarter.

When you look at the first quarter from a geographic standpoint, the markets that are called more stable weather wise, the California and Florida markets that represent almost half of the pool industry in the US, those states were up nicely for the quarter, and again they are less weather-sensitive overall and then the northern markets were the ones that were adversely affected by the weather the most and their sales overall were flat to slightly down for the quarter. So that is giving you the cut by month and giving you the cut from a geographic standpoint. It is important to appreciate given the seasonal nature of our business and I say it, but it is important to appreciate there are some markets where for example, Florida and California that have the most stable weather patterns. In those markets, we make money; they are almost all year round. Most locations are profitable, Canada 12 months of the year.

As you go further North and the seasons are much more accentuated in terms of our business that profitability spread over time is less and less and in fact in about 10 percent of our locations will be profitable in the May through August period. That is being the furthest North locations being the northern part of our northeast division, Canada and some of those upper-mid west locations. So, that is important for us to appreciate and understand, although that is the case on a month-by-month basis when we look at the business, obviously we are looking at a year-round business and those locations are compared in terms of operating profitability and return assets just the same way as that was in Florida and California, but there are tremendous spikes in sales. In terms of update on this quarter, last year we had a very strong April. It was a carry over from the very mild winter when it got particularly hot and dry in April and our April sales growth in 2002 was exceptionally strong.

We are already tracking ahead of last years April's sales pace and I can only say that is a very positive sign and I am very cautiously optimistic given that sign. The May and June last year comparatively speaking were weaker. There was a cold wave that came through that lasted about six weeks and carried over until the early part of June last year, that with some higher than normal rainfalls make our May and June comparables a lot easier this year than our April counts. So again I am cautiously optimistic given the fact that we are already tracking ahead of last year's April pace and April was far away the strongest month of the second quarter of the last year.

One question that frequently gets asked is what's the backlog in business and really given our customer base, the only one to have any backlog to speak of is the builder segment. In the case of the retailer and service segment that is day today business so we have little visibility beyond the next few days in that environment. But in the builders side we do have visibility and generically I would say that the lion's share of our builder customers have contracts well into the summer. There are a number of builders that as recently as two months ago were basically booked out for the year in terms of the building of pools. At this juncture I would say that very few don't have contracts booked that covers them to at least July and again many of them have contracts going on until August, September, October and I would not be surprised if in the next two months some of them would be writing contracts for 2004, that is our prospective on builder backlog. In terms of new locations, Craig mentioned the fact that we had opened up six locations in the first quarter of this year.

That is part of our objective in terms of increasing our network. We have done that historically through a combination of acquisition and the opening of new locations and that is part of the course. We tried to open these locations in either the fourth quarter of the prior year or the first quarter of the year prior to the pool season and these locations as a matter of note are Demoine, Iowa, Fort Smith, Arkansas, Bradenton, Florida, in France, the woodlands just north of Houston, Texas and West Nyack in New York, southern New York state.

These are markets that we were selling previously on a remote basis from other markets, from other locations and this increased presence should enabled us to increase us market share over time particularly with the service and to a lesser degree retail and builder segments of our customer base, given the increased convenience provided by the new locations. When we look out at 2003, given our first quarter results and for those of you that understand us, you know numbers over time appreciate that our first quarter sales represents somewhere 17-18 percent of our annual sales which means that really we are pretty much on track where we expected to be in every respect, everything was pretty much as expected. So at this juncture there is no change in any estimates for the year and we are again cautiously optimistic given our results through the first three weeks of April regarding the second quarter. With that, I will open the call up for questions.

At this time, I would like to remind everyone in order to ask a question, please press * then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Your first question comes from Mark Allen with SunTrust Robinson Humphrey.

Hey, good morning guys, nice job despite the poor weather.

Thank you.

You guys have put a lot of effort I think behind trying to help your customers market their products, and I think there maybe some anecdotal comments made relative some of your pool builder customers in terms of the impact, those programs are helping them generate business. Do you have builders who would say, we directly got a sale, as a result of your marketing program.

Mark, you bring up an excellent point. We in fact have invested progressively more in providing our customer base, whether it be builder, retailer or service company, tools to help grow and build their businesses.

Obviously in the builder segment, we have a specific interest because given our recurring nature of our business, which has driven off the installed base to the extent that that installed base goes, we have not only the sale of products for that pool but also sale of products to maintain that pool and the associated equipment for basically infinity in terms of time. So, that's something we have invested our time and resources in, and we track their, the gauges that we look at is user session. User sessions being consumers that come in to our websites and go through and learn about merits and benefits of a pool ownership and ultimately leading to dealer contacts.

I will tell you it is pretty remarkable that we have situations today where we have one of two events happening. One is there are markets where that generation of interest is such that we have to scramble to add builders to avoid upsetting the consumer base when they are being told that nobody can get pool for the next six months because of the strong demand being generated.

We also have situations that we do not want any and every builder to be on the program because we are legitimately concerned about the long-term value of the industry and therefore our builders are being professional in any which way and being genuinely interested in addressing those opportunities that come to them, and we have issues where customers that we have chosen not to add to our programs are upset because of the fact that they were not added because they see tremendous value being generated.

There have been , for example from customers where they identify numbers ranging from 25 to 75% of their leads are coming from our programs, and in my mind, we are just doing a small part to help them grow and succeed, and ultimately we benefit by virtue of their purchases from us and whatever we can add into the value to the industry.

A follow up question on that, can you guys putting numbers behind I guess what I will call, marketing, spending, and what will be the budget for this year, say as compared with last year?

We have been building that gradually up over the last few years and overall, when we will incorporate all of our direct advertising marketing support tools and everything else, an aggregate we are trying to target one percent of our sales and that will basically, where we came out or closely came out at last year and that's what we are budgeting for this year.

Okay. I will jump out and get back in queue. Thank you.

Thank you.

Your next question comes from Anthony Lebiedzinski.

I was just wondering, a new pool construction on an annual basis, that is about 20 percent of sales, is that the same for the first quarter or is this slightly less, how would you characterize that? perez: It is significantly less Anthony in the first quarter, as well as in the fourth quarter, because in the northern markets builders cannot build. So, therefore, given that their window of building may range from 40 weeks in some markets in the country to as little as 35 weeks in the market even further north. So, that basically limits their building capacity and building is a bigger number in absolute dollars in the second and third quarters, having said that, so was everything else in the second and third quarters. I have not taken a look at it, the way you just asked the question and that's interesting that is something we will investigate and figure out, is that few changes very much quarter to quarter.

so, given the bad weather in the northern part of the country, you think there is some even greater pent-up demands for sales and the new pool construction.

There is certainly tremendous number of builders in the northern markets that we have wished for a mild winter because to the extent that the winter was a lot more extended and colder and certainly a lot more snow fall in the prior two winters, that inhibits the durability of start getting pools done and when it's all said and done, it depends when we have the onset of winter again in 2003 because they certainly have enough demand out there to take them out, as far as December 21, you can build up that far.

Okay, also I just curious about the gross margin expense, you had mentioned that 90 basis points came from the vendor rebates and the improved selling and purchasing practices, what is the breakdown between those two?

We generally speaking though this closed up right now, but you figure those two items are not too unlike one another in terms of the first quarter impact.

Okay, and also you mentioned that you opened one service center in Europe. Could you just talk about what the opportunities there are in the European market and whether or not you would be more willing to open the service center organically or may be through acquisitions, what will be more likely scenario?

That's great question Anthony. The European market is about one fourth the size of the US market and it is growing in a very rapid rate in terms of the number of new pools being added each year, in fact it is greater we believe than 1/4th of the number of pools being added in the US. So the additional to the inventory or the installed base is happening quickly.

When you look at the European market and you look at who functions as distribution there, you don't have the same dynamics that existed here in the US in the 1990s. It's more like the US industry was in the 70s or 80s. So therefore the number of acquisition opportunities are a) smaller and b) fewer of them. So proportionately, as we build out the network over the next 5-10 years in Europe, it will be more on the organic side than the US was.

If you look at our US network, our US network of 180 locations at present was a little more than half of those came via acquisition and about 40 or so percent came organically. I would suggest that in Europe when our network is completed and that they will look out 10 years from now, it will probably be more 60-70 percent organically and 30-40 percent via acquisition.

So in terms of total number of service centers in Europe, what's the ultimate potential there?

Well certainly if there are about 1/4th of the size of the US market today and will be at least that much 10 years from now. It won't be unreasonable for them to have 1/4th number of service centers. So 10 years may be too far off to look at from a time frame standpoint. But certainly having 40 locations to 50 locations 10 years out is something that is certainly very feasible.

Okay thanks very much.

Thank you Anthony.

Your next question comes from Douglas Col, Morgan Keegan.

Good morning everybody.

Good morning.

Just a few things here. We have already talked a little bit about the in-ground expectations and how that business trend. Refreshing my memory, as I remember, above ground, it's item and is dependent on the guy's paycheck and how the weather looks out the window, I assume May and June are the big months there, if we are going to see anything in above-ground pool sales, what kind of comps do we have versus last year and how much of your business in that quarter or in the second-third quarter is related to above-ground pools?

Okay. I will take the question in two parts. First part is, in terms of above-ground pools. Exactly, you are right, I mean, above-ground pools usually cost $2000 to $3000 installed, and very much of an impulse sale. Buyers typically are young family kids who want water, and that's what drives that behavior there.

The preponderance of above grounds is much more in the northern part of the country than the southern part of the country, and within that context, the primary keys are how hot and dry is it May, June, and July. In terms of sales, up to the consumer, those sales are exceptionally strong, and in fact, May and June probably represent something that you never heard of 60 to maybe 75% of the total season sales at the consumer level. We have really at this juncture seen very little of those sales because we are not in May yet, so therefore we will see that in the next 60 days, or many of them in the next 60 to 75 days.

Turning to the pool business, the sale of above-ground pools, and the pool kits, the pools themselves together with the associated pumps and filter, and stuff like that represents about 2 percent of our annual sales. That's a very small number. But on the other hand, it was important for us like everything else is not necessarily the pools, but adding to installed base because the pools that were sold last year and the year before and the year before that need to be maintained. So therefore, the maintenance, which is obviously not as weather dependent as the actual sales of pools represents probably something in the neighborhood of 15 to maybe 20 percent, all of the products used to maintain existing above-ground pools that is $3 million and change, still well above ground pools that exist elsewhere in the US.

In terms of 2002, 2002's above-ground-pool season was average, and therefore, if we have a strong weather which will be hot-dry weather starting where you are is going north, that will be very positive and certainly be a big kick to above-ground pool sales as well as pool use in general. And that's where the bigger leverage is and that would apply to pool use in general for the pools whether they be in-ground pools or above-ground pools.

And by the way, just as a matter of course I will just mention, 2002 was by our terms an average weather year. The last real good weather year or weather years I will say were 1998 and 1999, and 2002 was average as was 2000, and 2001 was very, very poor weather year for the industry itself. It has been -- if we get good weather this year it will be the first in four years.

Okay. Talk to me a minute if you would, about Florida, and remember when you entered the market in the South and South Florida with an acquisition, it was due to very competitive landscape and very thin margins, not that you guys had not competed before everywhere you went but that was the perception and that was a lot different. If you could give me an update on Florida, I mean, are you growing there, how do you view the margins in Florida versus the rest of the system and what do you think the outlook is?

We had a small presence in Florida, a very small presence in Florida prior to our VLN acquisition in September '96 and that piece of Florida that we acquired from VLN, with VLN, was in fact not making money, and I'm being kind.

There are number of issues before that. First of all, Florida is a very important market, the second largest market in the US and in itself is probably a second largest market, larger than the market in Europe for example, there is larger than the French Market, which would be Europe's largest market. So it is very important that competitive dynamics in Florida are no different and were no different in '96 frankly than the competitor dynamics in California or Texas or any other market, nothing unique about Florida whatsoever. Since '96, we have consistently improved our performance and every year from '96 on we have improved, we became marginally profitable in '97, more profitable in '98, and again progressively slow in 2002, we were more profitable in 2001, and this year I am confident we will be more profitable than we were in 2002. That is just a matter of time in execution and providing value in the channel. There are a number of things that obviously help make that happen.

Given the fact that we have with our opening of Bradenton location in February this year, we now have one more location in Florida than we do in California, which are two more populous states in terms of fresh locations and together represent almost one third of all locations in the whole system. That tells you two things, one that is where the pools are and secondly that we have a commitment to that market and will continue to improve and grow our profitability there as we do everywhere else. So, it is just a matter of time. Our profitability in Florida is not yet as the company average, but it is getting there quickly and I do not doubt whatsoever that whether it be in 2003 or '04, we will probably get those levels up to company averages overall and given where they were when we started in '96, that is a very dramatic improvement over the course of seven year period of time.

Okay, just one more here if I could and may be Rusty want to step in on this one. If you look at a market like Texas, I mean one of your most mature markets, I know may be last year is not a good indicator, I know Texas was infected a lot because of weather it seems like during the season, but if you look at Texas, I always kind of look at the market as maybe a proxy for what the long-term opportunity is in this business, how do you guys view the growth in Texas? I mean what kind of comps do you expect from your most matured 15, 16-year-old centers. What do the margins do after a long period of time in those markets, does the competitive landscape that the manager has, does it change a lot? That is all I have, thanks.

I would say that once you reach a point where you have a high share of market, what you will do is you will grow with the industry plus some more because you are always doing more things for your customers so although your customer base may not grow the fact that you are doing more things with your customers, for your customers it helps them grow at a somewhat faster rate than the overall market may be growing and in addition to that, I haven't touched on it yet is our conformation product initiative. We have so many opportunities to provide more value by becoming a one-stop shop. It is something that as we roll it out through our branch locations our customers really appreciate more and more the value we provide and helps them to enhance their profitability, helps us to raise our value proposition, so all in all that is another component.

In terms of numbers, in this industry it has historically grown at a 4 or 5 percent rate per year that one expected the change into the future given that most of that growth is just driven by the simple adds of - adds to the installed base. So therefore, I would suggest that going forward, a mid to high single digit growth in terms of even the markets where we have a high share is very reasonable well into the future, and there will be year-to-year evaluations given whether in pool use but on a longstanding compounded basis, even when we have the higher share of markets, and we have some high share market in some places, that still has a very very viable long term outlook. With that, obviously you are able to operate much more efficiently in those scenarios and therefore dilute the SG&A expenses to percentage of your sales and your operating margin that would be above average and that's what applies in certain markets today and will continue to apply going forward.

Thanks a lot. Good luck with the next few months.

Thank you.

Your next question from Mark Allen with SunTrust Robinson Humphrey.

Hello? Jason. Go to the next call please.

Okay your next question from comes from Jenny Hubbard with Avondale Partners.

Good morning.

Good morning.

Why don't you just focus on the performance of the Fort Wayne acquisition for a minute and with this case as you saw business pick up in the northeast in the back half of March or your base business, how did the Fort Wayne service centers track relative to that.

Almost a 100%.

Okay.

With other branches in the same market areas or similar market areas.

Okay and secondly given the fact that it does have a large concentration of service as in the northeast, as we get into your seasonally strongest period of the year, what can you look for in terms of operating margin from this component of your business?

When you look at annualized you will see and you will gather that when we report during the course of the year. The average annual operating margins will be very similar to the base business operating margins when it is all said and done in 2003.

Okay, and of the 21 acquisitions for the quarter, how much of that was due to Fort Wayne.

Almost entirely, together with the consolidation of 13 locations that we did from the acquisition in January of '01.

Okay, and then moving to your base business for the quarter, I note that seasonally is not that significant, but I guess with the 6 percent increase in your sales to base business revenues, I would have thought that you might have gotten a little more SG&A leverage. Did your advertising spend go up quarter to quarter?

Not significantly. Basically, there was no leverage at that level. There were number of costs that we have that straight, you know, annual cost divided by 12, your payables, your leases, all of those components are pretty flat during the year, I mean you do add some call it seasonal workers and a number of markets, and you have more overtime and during the peak season, but there is a high percentage of SGNA costs that are pretty flat and a six percent rate of sales growth, particularly given some of the things that we have done from an infrastructure standpoint to employee training, developments, new location and getting those products in going, all of those of types of things are investments that either are encouraged directly in the first quarter and therefore negate any leverage given the six percent sales rate.

Okay, and final question that I had to get on the call a little late, the $45 million short-term , can you just quickly refresh my memory as to what that was for?

That is the receivable that we did. It is a 364-day facility, so given the fact it is a 364-day facility, it is classified on the balance sheet as short term according to and by the way Craig mentioned that in his opening comments the annualized interest rate on those are currently set at 1.9 percent, that's an annual rate by the way and I think contrast to the 2.5 percent that we were paying on the revolver facility.

Right, thank you very much.

Thank you Jenny.

Your next question comes from Eric with Asset Management.

Just a follow up on the last question about the SGNA increase, you cited things such as employee training, development, and the upfront cost in new locales, anything else you are referring your release to the additional payroll, incentive comp and supporting expenses, may anything else increase the figure of percent sales?

There is no, what we cited that was the major category of items, I will tell you this from our perspective standpoint, when you look at it for the year, if our sales growth remains at a 6 percent, not better rate for the year on a base business level, SGNA should be lower and there should some level of leverage, not very much at 6 percent, but certainly if we get in the number to become 7 or 8 percent, there are some benefits from the leverage standpoint on SGNA.

On a four year basis?

Four year basis, yes.

Okay. Second question, just wanted to see if you could apply a little more commentary, you cited in the one of the reasons for the increase in gross margin, the reconciliation is under rebates?

Right.

And, can you just provide a little background, how much did you benefit from this year versus the last year? In other words, what's the normal trend there, is that sort of a seasonal event, I mean how sustainable is that for the rest of the this year and some of those issues.

Okay, in fact that I am glad that you asked that question. That's primarily due to the reconciliation of the 2002 rebates and basically what happens is that we estimate those during the course of the year, there are pretty program so it is pretty easy to estimate and then we basically do a preliminary true-up in January for year-end financial and when we do that true-up to the extent if there are any questions or doubts about anything during that from the side and basically they are finally trued up in the first quarter and there was an additional amount of money that was a slight ping basically based on the fact that as everything were conservative in what we do what we will do. So therefore when we finally reconciled everything with our suppliers we got a little bit of a pick up on 2002 that we just captured in the first quarter of 2003.

okay.

And that applies to anything I mean any accrual that we make, any estimate that we do as in any company you estimate to the best of your ability and then you true it up a month or two months or three months later and the variances tend to be in the neighborhood of 1 to 3 percent and that's what it is.

Okay. So just again contrasting this year with last year's so it takes to see you had a little bit more.

No, no last year we had the same thing.

Okay.

It's the same thing every year.

Right.

We again, when those programs are pretty, but now up there is always call it a small 1 to 3 percent variability and when we cleaned that up in the first quarter, we recognized that benefit and that's been the case forever.

Okay. Thank you.

Thank you.

Your next question comes from Mark Allen with SunTrust Robinson Humphrey.

Hi guys can you hear me now?

Yes.

Okay, a couple of balance sheet questions made for Craig. Craig can you give us the dollar amounts of the slow moving inventory this year versus last year?

It was around $12 million this year and that would encompass both Class 13 and null inventory and I believe we are down about this year about 25 percent from the prior year.

And I am sorry, Craig, the 12 million that would be for this year?

Yes.

Okay. And it looked like your reserve was down an equal amount so we would assume your reserve is presented as Class has stayed the same.

Pretty much so, when we go through and look at inventory, the bulk of the reserve would cover Class 13 and null inventory, again, as we have described in the past, we take a look at inventory, its basically we do like a 5 percent reserve on Classes 12 through 13, and then we will come back and do another 5 percent on, I'm sorry, on Classes 4 through 13, then we'll come back and do another 5 percent on 4 through 12, and then on Class 13 for the excess, it's a 45 percent. So the methodology is consistent from year to year.

Okay, and a question on the past 60 days' due, obviously that's not be growing as fast as your receivables balance, and I guess its a little countering to it, I mean the economy is not good, why are you doing such good job on your bad debt management?

Well, we've got a good corporate credit manager, number one, that has probably been here 13 years, and we've added to his staff in terms of regional credit managers, and we've improved our procedures over the years. Basically, I think that's all reflected in our accrual for bad debts, which is basically a 20 basis points as a percent of net sales, and so, basically we don't write anything off, we may reserve for it specifically, but we don't write anything off until we basically exhausted all methods of collection.

Okay, on the inventory front, you guys are doing a good job there, inventories are up about 10% revenue is up 15, basically it a question for Manny. Manny, how do you balance inventory management versus customer service? And do you run the risk of running it too tight hurting your customer service, how you're going to monitor that?

We have weekly flash reports by location that identify our inventory buy class and also capture stock outs for our high velocity items and that is basically those systems were put in place four years ago now in April '99 exact and those measurements have really helped us together with our moving towards professionalizing the buying function with having regional buyers throughout the country and those buyers receive ongoing training online as well as class room training once a year. There is also a staff of resources we refer to as regional ops managers that also provide them ongoing training and support to help them improve. Frankly, our stock-outs continue to decrease, so therefore that means that, that training and those resources together with our investments and systems and system tools to make that job function even easier. That is paying dividends and we will continue to pay dividends over time.

We are far from profit, but you know if you step back and look at things from a perspective standpoint, then you look at our stock out rates on high velocity items still being the top five to 700 in each one of the locations. Our stock out rates have decreased on an average somewhere between 80 and 90 percent, versus what the stock out rates were four years ago at the same time we had a slight increase in inventory and low returns to improve that in 99 and 2000 but we are coming around the bend there and I believe that our turns this year will probably be bit low, will be better than they were in 1999 and so therefore as the very key, the way you asked the question, because it is key point for us which every distributor really should focus on and that is we made an investment in inventory and then an investment in people and we thought well we can get there to where we want to as fast as we want to without investment in inventory.

We know the investment in people is going to be gradually improving over time. Well we are at a point now with that investment and inventory is virtually going to be entirely eliminated and because of ramp up in the execution of our people in the field as well as support tools in the support people involved in the regional staffs and all the rest as that have happened. We are in fact continuing to raise the bar in customer service and that by the way is also part of the equation. When we talk about improvement in sales and purchasing practices as part of the improvement and purchasing practices in fact translates to higher markets, because inevitably when we had a stock out whether be four years ago or eight years ago or with an acquisition three years ago that stock out cost us money and cost us money and are substituting higher volume product instead, a costless money and margin by having to transfer the product from another location, it costs us money in terms of expediting an order from a supplier. All of those things cost money and cost margin and not only do we get the customer's goodwill by having those lower stock out rates, but also we get to pick up in the gross margin you have seen over the past four to five years.

Final question, if I could, which is to mainly walk us through the service center account changes. I think prior to Fort Wayne you had a 177, you have a 191 today. So could you help me with, how many net new centers did you pick up through Fort Wayne or that's probably not the right answer, how many closings and how many openings. Can you just walk me to that 191?

I got it. 177 our Fort Wayne acquisition was 22 locations. Of those 22 locations, we closed one and we consolidated 13, so therefore, that means of the net from Fort Wayne was 8, so 177 became 185, which is how we finished the year and then we opened up 6 locations in the first quarter, and that takes us to 191.

Okay. And now I have one more question, which is if on a core basis if you take out the Fort Wayne receivables, it looks like your receivables were growing a little faster than the core rate of revenues. Core was up 6 percent, I think your receivables were up 10. And I guess just a general question, what was the explanation on the receivables growth.

My issue of receivables from March sales and ...

I got you. I guess March was a strong month so...

Right, February was really a down month, so if you factored the whole thing in, the 10 percent of normal what the March sales were for.

Yeah, the sales were loaded toward the back end of the quarter and that's why you have not collected.

Exactly.

Perfect. Thanks guys. Good luck

Your next question comes from Tony Forstmann with Forstmann Asset Management.

Thank you. Could you just go through, I thought you changed the definition of how you describe your base business? Could you give us the definition of how you describe base business and when did you make the change and could you sort of help us understand what the apples to apples comparison would be?

Okay, we made the change with the fourth quarter reporting and basically that was the question that was raised at some point during the course of 2002, so we investigated how other distributors measured their sales and they had what we have termed the base business, and basically base business includes all of the core locations. What is excluded from base business would be any acquisitions or any consolidations of locations with an acquisition or any new locations in any new markets.

Okay. How are you defining new and then since that happened in the fourth quarter maybe help us understand what it would have been in this quarter?

We will report the numbers, the base business and same stores sales growth, the differences are very subtle and therefore the numbers in both cases are 6 percent and we reported, it as we have mentioned in prior calls. The numbers are almost always in not exactly the same percentage; they are within plus or minus 1 percent. So it is exactly the same 6 percent in this particular base.

Then what is the age of the store that you don't, that you consider too young to include in the base?

That would be only a new location in a new market. So for example, lets say that we opened up a location in Japan, we don't have a presence. In those cases that would be one that we would exclude and that we would exclude that for 15 months.

Thank you.

Thank you.

Your next question comes from David Mann with Johnson Rice.

It's actually Ron Bookbinder for David Mann. I was wondering if you could talk about the integration of systems at the acquired businesses and the benefits that you have been seeing and going forward.

Thank you Ron. Let me see, I'll give you the snapshot of what we did in the fourth and first quarter systems wise. First, what we did was and bear with me because some of this may be redundant with what I covered in February. We established our principal data center on a splint network protected site in Dallas, Texas and we did that in the early fall. With that did, was A, eliminate the risk of downtime due to the local bell connection, what I call the local whoop connection to a main point as well as having a protected sheltered environment with a high level security on the rest for the principal server upon which all our network is running.

We also had at the same time assuming and establishing that network in that data center we basically have a redundant data center in Cummington and that enables us to do a whole series of modelling and all our tools and trials as well as having a ready backup, so that's part one. Part two was, we converted the Fort Wayne acquisition in two steps. We converted the consolidated locations first and then we secondly converted the rest of the locations in the following months. That was all done in fact by the end of year 2002. Before closing 2002 we also converted the three Canadian locations that we acquired in the fall of 2001, as well as three the locations in the UK.

So with that, in a sense brought those businesses on to the same system. In the first quarter of 2003, we converted the 20 locations that form the Superior west side of the network. That was the acquisition that we had made in July of 2000 and we had initially scheduled that to convert in the fall of 2001 but that was given a lower priority than the huge acquisition that we did in the January of 2001 given the stability of that network and the performance of that network together with the quality of the individual involved being very, very high, that was put onn the back burner and we did other what we viewed as higher priority conversions. But inevitably their day came and that happened in February of this year and they were converted over then. At this juncture with that conversion, 99 percent approximately of our sales are currently in the same software platform, run from the server spaced there at Dallas and with redundancy in Cummington and the only exceptions to that are our now three locations in France and two locations in Portugal.

And, what sort of benefits have you been seeing from having everything on the same platform?

Well, I say the benefits are huge, simply from the fact that you have consistency all the way through in terms of the ability to capture, measure data certainly from a security redundancy standpoint, there are benefits to be had, but I think primarily it is the ability to consistently capture, measure, and manage is probably far away the biggest tool that we realize.

Okay great, thank you.

At this time, I would like to remind everyone, in order to ask a question please press * then the # 1 on your telephone keypad. Your next question comes from Cliff Josephy from HD Prous.

guys, I am sorry that I don't understand this see the $45 and change million dollars you sold, are receivables in the quarter for that amount?

No. It is on... We didn't sell any receivables.

You sold no receivables in the quarter?.

No. What we do is with those receivables, a portion of our receivables are secured.

Okay, you borrowed against them, but they are still on the balance sheet.

Definitely, yes.

Okay great, and than as for the vendor rebates are concerned, I didn't get any numbers, you talk about the . Could you tell us what the dollar amount was of the benefit in the quarter versus this quarter last year if you could?

Benefit this year versus last year was negligible. I would say it does not amount to very much this year versus last year.

Could you give the dollar amount please?

We typically don't give that information.

Okay, will that be at the end, in the 10-Q or not?

No

Okay, Thank you very much.

Thank you.

You have a followup question from Mark Allen.

Hi guys, this is a question regarding the pool service company, you got lot of questions about pool builders but if the economy is poor, are you guys finding any impact on the pool service companies, are more consumers trying to do things on their own, are you specifically seeing any shift in your mix between the revenue to pool service companies and your pool retail companies?

No significant shifts are noticeable in the markets where you have pool service companies that are more pool cleaning companies, like for example they predominate in markets in Florida and California. These are guys that come in once a week and clean your pool, check your water chemistry and move on the .

Those guys what they charge is generally speaking anywhere from $60-$100 a month for that service coming in every week and its hard in my mind and I haven't heard of anything but its hard to my mind to think of a guy that has been using that kind of service in the past, beginning to do work themselves, although a total of 5 or 10 minutes, since I do myself. But its kind of like if you use a lawn guy to mow your lawn, do you go out and buy a lawn mower now when it gets a little more tougher in times?

I don't see a change in behavior, if anything I see people just going more and more towards Pool Service Companies as time goes on.

Thanks a lot.

Thank you.

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

Thank you Jason. First, I thank you all for listening to the call. We are very fortunate, SCP. We are very fortunate in many respects and whatever is meant of that is that we are very fortunate to be in a young industry, a growing industry, one that grows naturally and we are very fortunate to be in the position that we are within the industry and provides us tremendous opportunities to add value to help our customer base well over 45,000 customers, virtually all of those are family-owned businesses and helping those individuals, those families grow and prosper over time as well as are working with over 1000 suppliers, many of whom are privately owned and working with them and helping them grow and build their businesses.

So we are very fortunate to be in this industry and be in a unique position to add value and to help both our customers and our suppliers. Given the industry that we are in and given where we are, I can only be optimistic about not only 2003, but what the future has for us in 2004, 2005, and beyond, and I think, Rusty started the call with a quote about people catering more towards their homes and doing things that add value to their homes. Well, that's good for us, that's good for our industry, whatever part we can play in helping those consumers enjoy their home life more that's good and certainly will benefit, as well as our customers, our suppliers, and will certainly our shareholders. Thank you very much.

Thank you, for participating in today's conference. You may now disconnect.