Pool Corp (POOL) 2003 Q2 法說會逐字稿

My name is Mandy, and I will be your conference facilitator. At this time I would like to welcome everyone to the SCP Pool Corporation Second Quarter Earnings release call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press star, then the number 2 on your telephone keypad. Thank you.

I will now turn the call over the Mr. Sexton, Chairman of the Board. Sir, you may begin.

Okay. Good morning. And again, welcome all, to our Second Quarter Conference Call. This is Rusty Sexton, and we have as usual, Manuel Perez de la Mesa, our CEO, and Craig Hubbard, our CFO.

Forsaking that I may sound a little bit silly, I'm going to say that I think we made some pretty good lemonade out of a bunch of lemons that were thrown to us in the second quarter.

Base business up 7%. Sales up 19%, and earnings per share up 27%, while the weather really was not good anywhere in the country other than the desert southwest.

This quarter resolve reinforces, and again I repeat, many times, that the pool industry in general, and SCP in particular, is a very resilient industry and business in both the economy and, to some degree, the weather.

There is no secret here really. It's really that 80%, up to 80% of our revenue is reoccurring and is reasonably predictable. We've been swimming against the tide,I hope you can appreciate that, for the last couple of years. And I think we fared very well. I wouldn't say the tide has changed, but I believe that the economy and the weather may be at somewhat of a neutral point. We have to wait for the economy to see how that unfolds. But the weather has turned hot almost everywhere. And that's good news for the pool business.

The only problem we have now is this consistent rain in the south and the southeast. But when it's 115 and higher in the desert southwest, that helps a lot. Hot, dry weather drives pool sales. It's just that simple.

Now with those comments I'm going to turn it over to Craig, who is going to give you the numbers, followed by Manny, who is going to give you some insight as to the quarter results. Craig.

Thank you very much, Rusty. As usual, before I get into my financial commentary, I would like to remind our listeners that our discussion comments and responses to subsequent questions may include forward-looking statements, including management's outlook for the remainder of this year and future periods.

Information on factors and variables that could cause actual results to differ materially from those anticipated results that are discussed here today, is available in our most recent Form 10K as filed with the SEC.

Turning our attention first to the P&L, the profit and loss results are fairly straightforward, with base business sales growth of 7% in the second quarter, and 6% for the first half of the year, as Rusty indicated. In order to provide more transparent disclosures, we are currently discussing separately the operating results from our base business and the effective acquisitions. In future periods we may focus more on consolidated results, as acquisitions will have a less material effect on our operating results and the difference between consolidated and base business results will be immaterial.

Earnings per share for the quarter increased 27% to $1.38 in the second quarter, versus $1.09 in the second quarter last year. Net income increased 19% between quarters, and the weighted average shares outstanding decreased to 24.7m in 2003, from 26.3m last year.

Looking at the balance sheet next, as noted in our earnings release, the estimated accounts receivable balance from the acquired Ft. Wayne operations was approximately 19m at June 30, and inventory was approximately 23m for the same period.

Our DSO calculated on a trailing 12-month basis as of June 30 increased by one day compared to the prior period. Our allowance for doubtful accounts was 3.6m at June 30, compared to 3.3m at June 30, 2002. The allowance for doubtful accounts represents 96% of the AR greater than 60 days past due in 2003, versus 101% in 2002.

The inventory reserve was $4m at June 30, 2003, and 3.9m at June 30, 2002. The slowest moving class of inventory, which is our class 13 inventory, decreased by 47% from June 30, 2002, to June 30, 2003. On a trailing twelve-month basis, days and inventory improved 9 days over last year, as we continue to better manage our inventory and improve our turns.

Total debt at June 30 was approximately $160m, with slightly more than $155m related to our revolving line of credit and our asset-backed securitization. Since June 30 we have paid down an additional $31.5m on the revolver, thereby reducing bank debt to approximately 124m as of July 23, 2003. We expect debt at year-end to be less than 100m and our debt-to-cap ratio should be roughly 35% at year-end, assuming no share buybacks in the second half of this year.

We did not make any share repurchases in the second quarter of 2003. And we currently have approximately 35m remaining under the board authorization, for the repurchase of our common stock.

Cash flow provided by operations improved by almost $0.5m or 6% from the prior year, and represents a swing of more than $41m from the 32.7m in net cash used in operating activities through March 31, 2003. This compares to a $27.6m swing last year.

A $5m increase in net income through June 30 was largely offset by changes in operating assets and liabilities. Depreciation and amortization for the second quarter was approximately 1.2m and 0.8m, respectively, and should approximate 4.7m and 3.2m for the year, respectively. CapEx for 2003 is expected to approximate $8m. At this junction I'd like to go ahead and turn the conference call over to Manny Perez.

Thank you, Craig. Well, let me start off with a brief weather report, since that's far and away the single largest factor affecting our business.

We have reasonable weather in the west that partially offset the adverse impact from the delayed warmer weather in the northern part of the country, and the very wet conditions in the east. The impact on our business from that weather is that in the case of the cooler weather in the north and the delayed summer, that adversely impacts pool maintenance and supplies in those markets, where the wet weather affects pool building adversely, as builders can't dig their holes and get the pools filled up. Also given the late start to the summer in the northern markets, that also adversely impacts the above-ground pool sector.

We believe that our 6% growth year-to-date in base business and same-store sales continues to represent an increase in market share for us, as we believe the industry is growing, if anything, a very, very low single-digit percent this year. One complement to our growth is the fact that we focused on complimentary products. And that's contributed a little bit over 1% of that 6% number.

From a market standpoint, our strongest growth was realized in the western markets, California, Arizona specifically, with more modest growth in Texas and Florida.

One element that you will note on our P&L is the improvement in our gross margin. There are several fundamental reasons for that. One is, logically, the benefit of the manufacturing business that we acquired when we had made the Ft. Wayne acquisition last year.

On the base business side, the increase in gross margin is reflective of the increased value that we are providing in the channel, together with better sales and purchasing discipline and less stock-ups. Frankly, when you look at it, we are providing a greater value proposition to the customer, over and above having most of the products most of the time, by having virtually all of the products all of the time. By providing and generating leads for our customers, by providing additional services for our customers, we are able to recover those costs and that's reflected in our gross margin.

Going forward, we are expecting continued improvement, although it probably won't be as significant as you are seeing this year.

The SG&A side is not as pleasant a story. While the SG&A does include the manufacturing side of the business, and obviously there's redundancy there in cost, the base business increase is too high. Now part of that can be explained by sheer timing of certain expenses during the course of the year, but the other side is that we have not been as productive as we should have been. And we have begun to take actions there, so as that when you look at our business, specifically our base business for the year, we are still looking for operating margin expansion base business year on year. That's something that we'll be working on, in the latter part of the year, in the last six months of the year, so that we will realize that very important objective for us that we've been able to realize consistently since 1994.

On the balance sheet side, there are certainly opportunities for further improvement. We continue to make progress on the inventory side. And virtually telling is the improvement that we've made on our slowest moving inventory.

Almost 70% of our inventory today is comprised of, what we refer to as class 1, 2 and 3 inventory. And that inventory is the one that's most pressing for our customers. And that's very important in terms reducing stock-outs. But the fact that that represents such a high percentage of our total inventory, is also reflective of the increased or improved quality of the inventory.

As a point of reference, what is now almost 70% of our inventory was just over 50% of our inventory just four years ago. So we've improved the quality of the inventory, which is resulting in less stock-outs, better customer service and, obviously, better inventory management.

Looking forward, the third quarter, although we're only three weeks into it, is on track. And although the third quarter of 2002 was very strong, since last year we realized 15% base business sales growth, the early start, the hot weather is good. The key important variable here is what the weather will be as we exit the pool season in September, October.

When you incorporate our second quarter results, we believe that $2 in earnings per share for the year is attainable, assuming normal weather in the balance of the year. Our base business model, founded on industry growth, with our own sales growth being modestly greater, and continued expansion of operating margins, remains intact. We also continue to work balance sheet with the third quarter being particularly strong in cash flow, as Craig alluded to with his comments, with over $30m in debt reduction in just the first three weeks of July, and also maintaining our discipline in terms of managing our credit and account receivables and our operating practices to reduce stock-outs while improving inventory turns.

We are very fortunate. We are a part of a young, growing industry. And we have a strong team of very dedicated and talented employees that make result happen every day, every week, every quarter, every year. And again, we are very fortunate to be part of that.

With that, I'm going to turn the call over to our moderator for questions.

At this time I would like to remind everyone, if you would like to ask a question, press star, then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q and A roster. We are still pausing to queue the roster.

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

Hey, morning Rusty, Manny and Craig. Congratulations on an amazing quarter, I think given the weather. First question is, regarding the gross margin improvement. Any way to kind of quantify what the impact of that additional manufacturing operation was that you had picked up in acquisition last year?

I think, Mark, when you look at the financials and you see the improvement on the base business side, that would be net of the manufacturing. And that, I believe, is 70 basis points in the quarter.

Okay. And then the remainder would be that -- it's a pool panel manufacturing operation?

Yes. Ft. Wayne Manufacturing manufactures both steel and polymer panels for in-ground pools. They manufacture steps for in-ground pools, as well as liners for those in-ground pools, as well as for above-ground pools.

And then, on the SG&A side, I had kind of the same impression, that while the gross margin was strong, the SG&A looked a little heavy. And my question is, did you incur, I guess, any additional selling expenses to, you know, achieve that sales growth with the wet weather? I mean, was there, I guess I'm asking, did you shift anything on the marketing side because you knew you were dealing with the wet weather situation?

No. What it basically comes down to there is that several factors contribute to that. One is certainly the fact that we've increased our branches. We opened up six branches in the first half of the year. And that, produces a number of or increases the number a little bit from a perspective, higher SG&A percent of sales overall.

A second factor is that we are providing a higher value, higher cost service to our customers, both in terms of our addition of personnel on the sales counter, outside sales positions, to again beef up that level of service. And some of that has not had short-term results. But long-term, obviously, there'll be the results. If not, we make the necessary adjustments.

That also, in effect, is why our margins are higher. As we raise the value and what we're providing, the services we're providing for our customers, the cost to do that logically increases. It should not increase greater than the -- what we recover from the customer base. So therefore, we actually have to tweak a few things there. But that explains the second part of it.

Okay. And, final question. You mentioned that you'd had, then obviously this bad wet weather on one eastern seaboard. What does that mean in terms of pool construction activity? Have pool builders, you know, are they going to recover that in the second half of the year? Will that be shifted out into backlog for next year? Just maybe some color on what's happened to your pool construction customer.

On the pool building side, the wet weather effectively has delayed completions. And if you look at pool builders in aggregate -- this is maybe not the best analogy, but if you look at them as being a factory, they have a certainly a window upon to build pools. If they're in Georgia they can be building pools virtually year round. If they are in Illinois, that window may be 35 to 40 weeks in the year. They have a certain capacity to the extent that there is rain. That's for the lost production days.

And to the extent that we've had a lot more rain, that's taken away from production days, so then for the year. So therefore, this year my expectation is the building of new pools for the industry will be no greater than last year. And depending how, when the cold weather comes in the northern part of the country in October-November timeframe, they may not even -- they may fall 3-5% short of last year's number in terms of total pool adds in the industry.

That isn't an issue because of demand, the issue is sheer building capacity. This industry is extremely fortunate that we are in a position where market is still largely un-penetrated or significantly under-penetrated. And to the extent that we can create awareness and educate consumers, that demand has been very, very strong and therefore, the issue is sheer capacity.

And I guess where I was going with that means, do you think it might in some sense sort of improve visibility on backlog for builders going into '04?

To the extent that they don't finish pools this year, certainly. In the southern part of the country, generally builders work and continue to work on a two to three-month backlog. And in the northern part of the country that backlog sometimes stretches out to be more than that, because of the winter and the fact that they don't build for two or three months.

I'll tell you, at this juncture, they have backlog to keep them busy for the next two or three months. And I would have said the same thing a year ago. That's no different. The only concerning part, and it's not long-term concern, but it's an intermediate-term concern, is that some people, they may be looking at adding a pool, may be told today you can't get to it for three or four months. And maybe they, you know, remodel a bathroom instead. And maybe not get around to doing a pool for another two or three years. So, that's the only aspect that may impact the business intermediate-term. But there's other compensating demands that I think covers that up.

I appreciate. Good luck in second half. Thanks.

Thank you.

The next question comes from Jeff Germanotta, with William Blair & Company.

Good morning.

Good morning.

Did currency have an impact on boosting of the sales rate growth this quarter?

No.

The higher Euro didn't aid that growth rate?

No. Our European business represents about 2% of our total business. And when you work that through the equations, no.

It's kind of immature?

If it did, it's definitely less than .1% when you factor all, you know, diluted the whole thing out.

Thank you. Can you elaborate a little bit more on some of the specific actions you're taking to reduce SG&A expense?

Sure. I mean, for example, I'll just give you a little more color. Our field headcount increased this year by 8% on a base business level. And some of that was in anticipation of higher growth. Some of that was also to provide higher value services that I mentioned earlier.

To the extent that that growth is not being realized on a market-by-market, case-by-case basis, we have begun to make the necessary adjustments in headcount. That's fundamentally it. If you look at operating expenses, the single largest item, by far, is payroll. So, we address that issue, everything else takes care of itself.

There have been some other infrastructure things that we've done. I mentioned a couple of calls ago about the fact that we, for example, build-in redundancy in our information systems and have done some other things, from an information system standpoint, that it has the tools and network timeliness and everything else, to help us become more efficient and provide better service to our customers. But those things get weighted down. The biggest nut is payroll, and that's a fix that we're addressing right now.

Can you also comment on industry or supply to inventories and while you're making great progress on your own inventories, where you see the rest of the industry.

On our customer side, there's, practically speaking, no inventory. Other than retail, our builder and service customers essentially have certainly less than a week, and market not less than a day's worth of inventory. In the case of retail their inventory is their stores, and that's largely unchanged.

On the supply side, at this juncture there is a little bit more inventory than there would have been a year ago. That's in part due to the slowness of the season. I don't think anybody could have anticipated for the weather to be as bad in the east, from a wet standpoint. And I think everybody generally was a little more optimistic about when it would get warm in the northern part of the country, particularly here in Chicago. But, I would say that they're taking the necessary measures in terms of how they're planning the second half of their year. So, I don't see any big issues generically on this subject.

Has the surplus manufacturer inventory created buying opportunities for you in the first part of this year?

No. No. That usually doesn't come into play because everybody still holds out the hope that a strong third quarter will sweep out whatever didn't get swept out in the second quarter, from a manufacturer standpoint.

And then can, finally, last question. Can you shed a little light on the Canadian acquisition? I know that's early, and your acquisition pipeline for the remainder of the year?

Industries RP, which is the Quebec company that we closed on May 1st, is doing very well. We were very fortunate in the timing of that acquisition in contrast to the Ft. Wayne acquisition. We bought RP kind of at the beginning of the season. So, we are getting the benefit of their summer business. In the overall scheme of things, it's not a significant number, but the timing is good and they already -- we've had a number of meetings with them to integrate their business, in terms of some of it purchasing and business practices with our other Ontario side of our business, as well as with the U.S. And that's something that will really play more of a factor when you look at 2004.

In terms of acquisitions for the balance of the year, you know, we're always talking to people. And I can't, obviously, give you specifics, but we're always talking to people and that process is ongoing. There are a number of markets where our position is either non-existent or not what it should be or could be. And to that end that's why opportunities help to get us there a little faster. So, that's again part of our business, and again, there are a number of markets we're not in yet or not where we want to be in yet. So, we're pursuing those and acquisitions is a good alternative.

Thank you.

Your next question comes from Anthony Lebiedzinski, with Sidoti & Company.

Good morning, gentlemen. I have a few questions. Just to actually follow-up on the last question. You, Manny, you said that you're not in a number of markets. Where would those be that you're targeting for acquisitions or even new service center growth?

If you look at the international market, probably the single largest international market that we are not in is Spain. So, certainly that's a market area that we want to establish or initiate a presence in sooner than later. When you look at the rest of Europe, there are a number of -- you know, we are in France and we are in the UK and we have a base in Portugal. But there is - the European market is one that we can certainly grow into over the course of the next several years - continue to grow into over the course of the next several years.

We have no presence yet in Latin America. That's something that at some point in the future we'd like to do. There is, the opportunity there is not as as significant as Europe, in aggregate. But there are pockets there that do provide opportunities. And the largest market in the world, by far, is the U.S., with about two-thirds of the world's swimming pool market being right here at home.

And when you look at the market here, there are pockets where we are not in. If you take our map and our locations, and you just map that against population, you, generally speaking, will see where those pockets are. We, for example, had no presence in southern New York until we opened up a new location there in March of this year. So that that is an example of a market that we're beginning to address now and just getting our feet wet in it. But there are others in the Midwest and MidAtlantic and the Midwest and Mid-Atlantic are probably the areas, from an acquisition standpoint, where we have some focus.

And the European market, is that also mostly acquisitions that you would pursue?

We would be looking at doing both; acquisitions and opening of new locations. In every case we look at both and if the right acquisition is available, we do that, that saves us about three or four years, versus doing our own location. And, you know, obviously, we have a sense of urgency in getting things done, so therefore acquisitions is the preferred route. But having said that, we've opened up approximately 40 locations in the past five years. So, we do that as well.

Okay. Could you also talk a little bit more about the improved selling and purchasing practices that you're doing? How does that compare now versus, let's say two or three years ago?

In one word?

Yes.

Radically. Basically, the first instances there is to make sure we have our customer's need at the point of sale to provide a higher level of service. If we have that, and a customer asks for 20 items and we have all 20 items, we are providing a greater value to our customers and customers appreciate that and are willing to pay for it. That's first and foremost.

In doing that, we have evolved and are progressively channeling more of our purchases to preferred vendors. And these are vendors that we have progressively more and more communication with in terms of what our anticipated needs are to help them become better suppliers to us, and generally better suppliers to he industry.

Okay.

In doing that we become much more efficient in our purchasing process. And that efficiency translates to having again less stock outs, as well as by channeling purchases to a more limited group, we're able to enjoy certain economies, whether it be freight economies or manufacturing economies, that we are able to participate in.

Hey, Manny, this is Rusty. Let me hitchhike on that just a second. Don't forget the addition of complimentary products. Because we're improving customer service by offering the customer more of what he needs from one source. Also valuable.

Okay. So what would you say your in-stock position on your, let's say top 200 items would be right now? And how does that compare versus, let's say, to two, three years ago?

Our stock-out rates on the top, call it, average five to 700 SKUs per location has improved by about 80% in the past four years.

Okay.

In other words, the rate of stock-outs on the top five to 700 items per location , has been reduced by about 80%.

Okay. Also, is it reasonable to assume that the gross margin in the third quarter would expand at the same rate as the second quarter? And also that the SG&A, given your initiatives there, it would decline somewhat as a percent of sales?

Two things. The base business sideof gross margin will expand at something a little less than, but not quite the same rate as the first six months of the year. But something approaching that.

On the overall business side, Anthony, we acquired Ft. Wayne and began operating it as part of the company August 19th. So, therefore, there is some Ft. Wayne margin benefit that we had in the third quarter of 2002, gross margin benefit in the third quarter of 2002. So therefore, that value is partially offset. But the base business side we should see some continued improvement, perhaps not the 60, 70 basis point that we have now, but something consistently there a little less than that, but not much less.

Okay. And the SG&A?

And the SG&A side, what you will see is that the rate of growth on the base business side will moderate in the second half of the year.

Okay. And the overall business?

The overall business, again you'll have the Ft. Wayne acquisition account, came in for four and a half months last year. You will see that, obviously, reflected in the numbers and the references will be, you know, factor that in.

On a base business on a cleaner, let's just call it a clean apples to apples basis, on base business, again you'll see a rate of growth that's a lot more modest than you saw in the first half of the year.

Okay. All right. Well, thank you.

Thank you.

Your next question comes from Douglas Col, with Morgan Keegan.

Good morning, everyone.

Good morning.

Good morning.

Good morning.

Great quarter. I guess you guys get tired of hearing it.

Oh, we never get tired of it.

I don't get tired of saying it, for sure and I mean it. But, a couple of things. In terms of the service centers at the moment, what's the mix of Superior versus the SCP locations? And the only reason I ask is just I'm wondering what percentage of the pool marketplace you think you guys service directly in each of the brands?

The Superior network has 55 locations, and that would leave then 137 on the SCP side.

And in terms of --

And in the market presence?

Yes. What areas of the country is like, SCP lacking?

SCP is lacking in the northeast parts of the MidAtlantic. The penetration and presence of SCP is a lot less in Florida on the SCP side, as well as Northern California.

So all those are opportunities for organic and/or a tuck-in if you see something?

Exactly.

Is that a priority, to build up the SCP before you go further?

It's not a -- the priority is having presence in a market and then enhancing that presence. If there is already SCP presence in a market then having complimentary STP presence is healthy. If there is no presence at all, that is a higher priority.

Can you talk a little bit, I got on the call late, but I don't think you've spoken yet about complimentary products, the growth of those new categories, and maybe anything you're learning on the margins of some of those products and maybe some that you have ruled out that don't make sense. Could you just give us an update on complimentary products?

Sure. I'm going to start, and this is redundant for many on the call, but we started looking at this in '99. We were doing roughly $3m in what we term complimentary products. That number grew last year, 2002, to be over $40m and we're certainly on track to do more than $50m, and maybe even come close to $60m this year.

When we evaluated this back then, almost five years ago, we looked at approximately 30 product segments. And within those segments we identified a handful that we would start with. And frankly, we're still working with the handful. The rollout throughout our network has been slow, calculating, but you can see the results.

The focus there is we want to make sure we get the pool business done right before we complicate matters a little more with adding more SKUs . And although those SKUs are going to the same customer, it still complicates matters a little bit. So, we get the core stuff done first, right, and then we can work on complimentary products with that additional revenue opportunity and service opportunity for our customers.

At this juncture only about one-third of our locations have really embraced a handful of product segments that we have in our first rollout of this program. The other two-thirds are participating in one or two, maybe three other product segments. But that participation is still very limited.

We continue to evaluate more segments, you know, the other two dozen segments. And we will begin to gradually roll those out, as we believe that they add value, we can do that in a controlled fashion. And provide value to our customers.

The key here, and really the key salient point, when you look at the company, not from a year-to-year standpoint, but when you look at it from a long-term standpoint, is appreciating the fact that in North American complimentary products purchased by our customers represent more volume, more sales dollars, than pure pool products.

So, to the extent that we effectively execute this over the next five to ten years, we will be able to generate continued growth over and above the industry growth. And that's why, you know, we are very confident in our business and in our future.

That's great. And you probably mentioned it on the call, but just again because I was late, the storms in the Gulf states range in early July, was there any disruption there? I'm sorry if that's --

No, no. There's usually a storm or two that happens through the Gulf every year. That's -- there's no real adverse impact, year-to-year from them.

Okay. Thank you.

Thank you, Doug.

Your next question comes from David Mann, with Johnson Rice.

Yes, good morning. Manny, in terms of the decline in operating margin at the base business, can you quantify what the impact was from the new branches?

Let me think about that. Ask another question while I'm --

Well, I guess one of - the follow-up to that would be how are the new branches performing relative to, you know, the historical openings that you've done. And just given you're doing a lot more back-filling now, are you seeing, you know, lower returns or slower ramp-up on the new branches?

The new branches are proceeding as they have in the past; nothing unusual about them. I would say that there's nothing unusual about those or the ones this year verses prior years. They don't all turn out to be success stories the first year. And that's, again, proven-out to be the case this year.

In the six that we opened, they are all building their sales rate on a month-to-month basis, and we'll see that. You know, one of the unusual things about new locations is we'll build from them in the fourth or first quarter, and while it's normal for the sales to build in the first half of the year, as they gain market acceptance and market awareness and everything else, they continue to build their sales in September, October. Which is again, contrast to the base.

If you take out those locations, you're probably, and the negative contribution from those locations, you're probably talking about something in the order of close to $2m of additional expense in the first half of this year. And a negative contribution of those six locations that will probably be approaching $1m of the first six months of this year.

So that would be some portion of , you know - can you quantify it in terms of the drag on operating margin?

Well --

Do you have that?

If you have a -- if you add $1m to operating margin, that probably will represent another 2%.

Okay. And if you look at the base business, Superior versus an SCP, which of the two have the bigger drag on operating margin?

The SCP side is fine, and the SPP side is fine, relatively speaking. I would say that really, it's tough to pin that down, David.

Okay. And then --

I don't have the information right here in front of me. I mean, I've gone through those P&Ls every month, obviously. And it's hard to pinpoint and say SCP versus SPP, it's individual case by case.

Now, I guess earlier you put out that you have a target to have for the year, base business operating margin being positive, year-over-year?

Yes.

It seems to me that you need to have like a 50 basis point improvement in the back half. And obviously that will be weighted towards the third quarter. Correct?

Well, I think we're short 30 basis points, so we have to be at least 30 basis points. We may be jumping the gun to get to 50.

Okay.

So --

To make up for sales in the first half.

Right. But -- yes, you're right. There would have to be improvement and --

Other than the cost adjustments that you talked about, are there any, you know, other marketing initiatives?

No, no, no. No, there's nothing else there. I mean, it was headcount is the key. And we fixed the head count. We fixed everything.

And that's already been done?

That is being done.

Okay. One other housekeeping question. On the balance sheet, the payables leverage seemed to have jumped year-over-year and sequentially, any color on what was going on there?

I'm sorry? Repeat the --

The payables to inventory ratio was up, you know, to like, 79%. Any color on that or was that just timing?

That would be just timing.

So we should expect that to recede year-over-year in the third quarter.

Right, I mean, the payables is what just bought in June. And so, it will be outstanding at month end.

Okay.

So, it is what it is. I mean there's -- we were cleaner in inventory, a little bit cleaner in inventory this year, so we would have had a little bit more June purchases than we would have had last year.

Okay. Thank you.

Thank you, sir.

Your next question comes from Doug Lane, with Avondale Partners.

Yes. Hi, good morning. A couple of questions. One on the Canadian acquisition, do you think that it could have contributed a penny or so share to the quarter as much that?

No.

Not even that much?

No, not even that much.

Okay. And then looking forward, in the back half of the year, you touched on this. Your comparisons are pretty tough on your base business, the growth there being, I think, double digits both in the third quarter and the fourth quarter. So, can you give us a feel for where you see this year, the base business growth or same-store sales growth being in the second half of the year, given the more difficult comparisons?

You bring up a good point and it's kind of like looking at a crystal ball. The key is really what happens September, October. And September, October is largely dependent on weather. I'm looking for positive comps despite the very strong numbers from last year in the second half. Whether those -- that number is lower single digits versus mid single digits, time will tell. And again the key variable will be September, October.

When you look at the core business, builders are behind. So, therefore -- with very strong demand. So they'll be building as much as they can. On the maintenance and service side, and retail side, which is driven by the install base. Again, the key variable is when those pools are closed in northern markets.

Fortunately for us, and fortunately for the industry, given the weighting of the southern markets, which are virtually year-round markets, that kind of has a less of a fluctuation. So, I would think, you know, low single digit to mid single digit type comps would be pretty reasonable expectation. Again, which one of the two it is, is driven by what the weather is like September, October.

Sure, okay. Thank you.

Thank you.

At this time I would like to remind everyone, if you would like to ask a question, please press star, then the number 1 on your telephone keypad.

Your next question comes from Bryan [Delaney] [ph], with INTRUST Capital.

Congratulations. Just a couple of quick questions. When you look at the base business and the 6% growth, can you give a little bit more light on pricing, versus units?

That's almost entirely all, from our standpoint, units. I'd say at least 4 to 5% of the 6% is units, and 1 to 2% would be pricing.

And 4 to 5% insignificant amount of pricing increases then during the quarter?

Yes, 1 to 2% on the pricing side.

And when you look at the gross margins and the operating margins of the businesses that you've acquired, they're higher than the base business. You know, looking forward, how should we expect both those and the base business as of the percent, to be, for example, for gross margin longer-term and for operating margins longer-term?

Well, first of all, you're only looking at a snapshot. And just to give you perspective, the Ft. Wayne business, as obviously our key business in Canada, those businesses are heavily weighted towards the northern part of the country. That business is much more seasonal with sales accentuated in the second and third quarter, much more so than the overall SCP business is.

So therefore, just to provide a little flavor, those businesses are a drag in the fourth and first quarter, and those as we reported previously, and provide proportionately greater contribution in the second and third. When you look at those businesses for the year, their operating margins are comparable to slightly below the overall pool operating margins.

Okay. And looking forward to the back half, and you were just touching upon the difficult comps, what are, when you talk about mid single - low single to mid single digits, what are those expectations, is it all units, is there any pricing involved in that as well?

That would be 1 to 2% in pricing, and the balance will be units.

Okay. Okay. Thank you very much.

Thank you.

Your next question comes from John Ford, from [Seyman] [phonetic] Ford Capital Advisors.

Hi, Rusty, Manny, Craig. Good to hear from you again.

Good to hear from you, John.

And another fantastic quarter. And I don't care if you get tired of hearing it. But do me a favor and don't get tired of having them.

That's what we work on every day. Thank you, sir.

The pleasure's all mine. I'm wondering if you could talk a little about - you know, you're nearly a year into Ft. Wayne now. And just kind of look back on the last year of being a manufacturer.

Good question. Very good question. It's interesting. You know, having a fair amount of background in manufacturing before getting into distribution, it's almost like old shoes of sorts, that didn't take too long to feel comfortable with.

Ft. Wayne is pretty unique in that 70% of their output is purchased by Superior Network. So, therefore, it's almost a self-contained manufacturing business. And it's helpful and that enables us to see things from manufacturer's perspective. There are certain initiatives that we've undertaken on the Ft. Wayne side, that are helpful to us in our relationships and furthering our relationships with the many manufacturers that we deal with in the industry. I think you can see things better if you're living it, and obviously, living it has provided that for us. I think we will become a better distributor by virtue of having an interest in manufacturing.

Strategically, on the packaged poolside, manufacturing is very important. And some of the things, and initiatives that Ft. Wayne has developed with Superior Network certainly proved that out and those are some things that will be further developed over a period of time. And that also helps us again, with all of our other suppliers. So, I think it's healthy and it's good.

Strategically, we will not be looking at expanding that manufacturing business per se, or interest in manufacturing per se. Our preference is to work with manufacturers that are responsible and have long-term interests in mind in terms of making investment decisions, working to enhance the quality of their products, enhance the reliability of their products, as well as continuously invest in new products to further the growth of the pool industry and their own profitability.

So that is all healthy. To the extent that the Ft. Wayne manufacturing business can do a few other things to enhance their quality, their responsiveness and service of them as a supplier, to distribution, as well as coming up with new products that further enhances the industry, those are things that are also welcomed.

We treat them, from a distribution standpoint, very much at arms length. And it's interesting some of the dialogue that takes place internally within the company in meeting with Ft. Wayne as a supplier. Because I sit on the sidelines and kind of learn and listen. So, you know, or listen and learn. So, that perhaps answers your question.

No, that's fantastic. I mean, I suppose I should thank you for telling me exactly what I wanted to hear.

One other question which is just, regarding talking a little bit about opening new branches, and the fact that they, of course, will have to add to SG&A as they ramp up. What are you seeing in terms of the time to profitability and to reaching company average margins for new branches that you open, and is that any different from your experience in the past?

The evolution, John, is very similar. What we look for is for a new location to be self-sustaining by the end of the first year. That means that they're covering their own expenses. And our batting average there is pretty high. It's not 100%, but it's certainly well into the 70, 80% range. As that presence grows over time, by the second year they should be covering the overhead support and the working capital investment. And by the third and fourth year, by the third year beginning to contribute to the overall equation. And the fourth year even more.

Where the difference lies from how they compare to the base business, five years ago, call it, versus today, is that, as a point of reference, our operating margins for the company in 1997 were 4.7%. And our new branch may have gotten to a 4.7% level in four years time.

While, where operating margins for the company are approaching, well overall over 8%, that means that they'll take another couple of years to get to the company average. But the progress rate and everything else is pretty much on par with what's it's always been.

Despite the fact that the company-wide margins are up as significantly as significantly as they are?

Exactly.

Which is really a testament to performance on both sides. And that's great to hear. And thanks again. And let's keep it up.

Thank you, sir.

This concludes today's SCP Pool Corporation Second Quarter Earnings Release call. You may now disconnect.