Pool Corp (POOL) 2003 Q3 法說會逐字稿

Ladies and gentlemen, this is the Operator. Today’s conference is scheduled to begin momentarily. Until that time, your lines will again be placed on music hold. Thank you for your patience.

Good morning. My name is Laura, and I will be your conference facilitator. At this time, I would like to welcome every to the SCP Pool Corporation Third Quarter Earnings Release. All lines have been placed on mute to prevent any background noise.

After the speakers’ remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star and the number two on your telephone keypad.

Thank you. I would now like to turn the call over the Mr. Rusty Sexton, Chairman of the Board.

Yes. Good morning all, and again welcome to the SCP Pool Corporation’s Third Quarter Results Conference Call. As we usually do, today we have Manuel Perez del la Mesa, better known as Manny, who is our CEO, and Craig Hubbard, our CFO, and they will review the essence of the information.

I’ll just make a few comments and turn it over to them, so Craig and then Manny will finish up with his comments.

Again, it was record results for the quarter, earnings up 29%. From what I read, the economy is expected to be up maybe 4% to 6% for the third quarter. Consumer confidence is still on the low level, but I think the expectations will start to improve with earnings driving up the stock market, and people will begin to feel better. I think they’re already doing so. They’re making strong home improvements, and I think that relates to the pool industry. So for the third quarter, my guess is the pool industry fared very well, and SCP fared especially well.

If you take a look at our same-store sales or our base business, business basis, whichever you want to measure it, it was double digits for the quarter and more than twice the overall growth of the economy.

So, you know, with that, I again say, as I have in the past that the pool business is very resilient in down times, but it responds, I think, very well in good or better times. And I think you’re seeing the result of that.

And with that, I’m going to give it to Craig, and you take it from there, Craig.

Thank you very much, Rusty. As usual, before I get into my financial commentary, I would like to remind our listeners that our discussions, comments, and responses to questions may include forward-looking statements, including management’s outlook for the remainder of this year and future periods. Actual results may differ materially from those projected. Information regarding factors and variables that could cause actual results to differ materially from our projected results that are discussed here today is contained in our most recent Form 10Q, Form 10K, and as they are filed with the SEC.

Having said that, the P&L results are fairly straightforward, with base business sales growth of 14% in the third quarter, and 10% for the first nine months of this year. In order to provide more transparent disclosures, we currently discuss separately the operating results from our base business and the effect of acquisitions. Going forward in future periods, we may focus more on consolidated results, as acquisitions will have a less material impact on our operating results, and the difference between consolidated and base business results will be immaterial.

As Rusty indicated, earnings per share for the second quarter increased 29% to 49 cents in the third quarter of 2003 versus 38 cents in the third quarter of 2002. Net income increased 30% between quarters, and weighted average shares outstanding decreased to $37.3m in 2003, from $37.5m in 2002.

Turning to the balance sheet, our DSO, which is calculated on a trailing 12-month basis, as of September 30, ’03 remained unchanged at 34 days. Our allowance for doubtful accounts was approximately $4.3m at September 30, 2003, compared to $4.2 million at September 30, 2002. The allowance for doubtful accounts, or AFDA, represented 79% of the AR greater than 60 days past due in 2003, and 76% in 2002.

The inventory reserve was $4.5m at September 30, compared to $4.1m in September, ’02. The slowest-moving class of inventory, Class 13 inventory, increased by approximately a half a million dollars from September ’02 to September ’03. On a trailing 12-month basis, days in inventory improved seven days over last year as we continue to better manage our inventory and working capital.

Total debt at September 30, 2003 was approximately $109m, with slightly more than $102m related to our revolving line of credit and asset-backed Securitization. Since September 30, we have paid down approximately an additional $12m on our debt, thereby reducing total bank debt to approximately $97m as of October 22. We expect debt at year end to be less than $100m, and out debt-to-cap ratio should be roughly 35% at year end, assuming no share buy-backs during the fourth quarter of this year.

We did not make any share repurchases during the third quarter of ’03, and we currently have approximately $35m remaining under the board authorization for the repurchase of our common stock.

Cash flow provided by operations was very strong. It improved by $18.5m, or 45% from the prior year, and again is primarily due to the increase in net income and improvements in working capital management.

Depreciation and amortization for the third quarter was approximately $1.2m and $800,000 respectively, and should approximate $4.7m and $3.2m for the year respectively.

Cap-ex for this year is expected to be $8m.

Turning to acquisitions, our acquisition of Litehouse Products Distribution Division closed on October 1 of this year. We did not acquire any part of the retail business of that business. The cash used for closing was included in our September 30 cash balance.

In the third quarter, we completed the acquisitions of Mepasa Albercas in Mexico, and Sud Ouest Filtration, or SOFI, in Bordeaux, France. The assets and liabilities related to these two acquisitions are included in our September 30 balance sheet, and the operating results were immaterial to the P&L.

At this point in time, I’d like to go ahead and turn the call over to Manny, who is going to provide some additional highlights.

Manny Perez del la Mesa: Thank you, Craig, and good morning to all on the call.

Well, let’s start with reasonable weather in the more predictable third quarter provided us the platform for solid growth. We estimate that all industry sectors performed well in the quarter. With the normal use of pools complemented with strong demand for new in-ground pools, which in part is due to the carry-over demand from the first half of the year where there were weather delays that impacted new construction during that period.

We believe that 10% base business growth year to date reflects both our continued increase in market share, as well as the expansion of our sales of complementary products, which contributed approximately 2% of that 10% in sales growth.

We estimate that industry year to date growth somewhere of 2% to 4%, given the slow first half of the year, picked up with the more normal third quarter weather.

The strongest growth was realized in the western markets, California, Arizona, with more normal growth throughout the rest of the Sunbelt, and some growth, but more modest levels of growth in the northern markets, since they were the ones that were most adversely affected in the first half of the year with the weather.

As reported in previous quarters, our gross margin increase includes the benefit of manufacturing on the acquired business side. In terms of the base business, the increase in gross margins is reflective of our providing increased value in the channel, better sales and purchasing discipline, and less stock-outs.

Going forward, we anticipate continued improvements in gross margins, albeit at more modest levels.

On the SG&A side, again that also includes the expense of manufacturing and the Ft. Wayne business that we acquired, and that folds into the numbers and raises that as a percentage of sales. But our operating margins increased as expected in the third quarter, and that’s something that, again, we look to do every year as we have since ’94.

Given the relative youth of the industry, and the relative youth of our network, coupled with our ongoing improvements in sales and operational execution, we see continued expansion of operating margins well into the future.

On the balance sheet side, we continue to make improvements. Our accounts receivable and inventory quality are improved over where they were before, like in the P&L. Our focus on managing our business provides us with opportunities for further improvements as well going forward.

In terms of the rest of this year, the fourth quarter is on track, albeit it’s the seasonally low period of the year. It is on track, and we are currently in the midst of planning, training, and beginning the execution of sales to lay the groundwork for a solid 2004.

Our base business model is founded on industry growth in our young industry, supported by our sales growth being somewhat greater than that in part due to continued share growth, as well as complementary products, and expanding our operating margins as we continue to improve our execution.

And we also worked the balance sheet. The discipline in maintaining credits, account receivables, and operating practices, for example the reduction of stock-outs while improving inventory turns are very near and dear to how we do our business.

We are very fortunate to be part of a young, growing industry, and to have a team of really great dedicated employees that really make our results happen.

And with that, I’m going to turn the call back over to Laura to field some questions.

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

Our first question comes from Mark Allen of SunTrust Robinson Humphrey.

Thank you. Good morning, Rusty, Manny, and Craig. Congratulations. I thought it was just an outstanding quarter across the board.

First question would be relative to the inventory management, I was pretty impressed by that. You had a 17% increase in revenue, but only 4% on the inventory line, and you mentioned, Manny, I think that you had actually improved your out-of-stock situation. So that just sounds a little counter-intuitive to me. If you could provide us a little bit more color. How are you keeping the inventory so tight, yet improving your out-of-stocks?

Thank you, Mark. It’s something that we’ve been working on on an ongoing basis for a number of years. We instituted several years ago the concept of having dedicated regional buyers, and these regional buyers progressively every year are provided with more tools from a system standpoint, complemented with more training. And we’ve constantly provided those training and those tools, and that group of regional buyers progressively has done a better job. And what they’re balancing every day is the risk of a stock-out versus the carrying cost of additional inventory. And it’s a discipline, and it’s balancing those two components, and to the extent that they do better, we do better as a company. And they are very well aware of that, and they’ve done a great job.

And also, there was a little bit of a trend reversal. The slow class of inventory ticked up a little bit. It had been trending down over several quarters. Is there anything, you know, behind that, the slow class of inventory ticking up a little bit?

Some of that is due, frankly, to the acquisitions and those numbers being incorporated into the overall numbers in terms of being captured in the measurements. And the other part of that is ourselves focusing on, you know, better identification of that slower-moving inventory and positioning it in that category. So, while the number has increased by half a million dollars in the overall context of things, I think we’re doing a much better job of identifying and flushing it out.

Okay. One follow up, if I may. In shifting gears, on the complementary product side of the business, can you help us just in terms of how you intend to expand that next year. And I guess what I’m looking for is sort of how many centers now carry complementary products, how many, you know, based on their performance, will be allowed to add that next year? And then also, Manny, I guess maybe just take and maybe as an example one of your better centers, you know, what’s been their typical progression, you know, over a multi-year period? How many product lines do they carry initially, and how they are allowed to expand, you know, from say two lines to four lines, etc.

Great question. It’s been a slow, methodical process that we’ve used to roll out complementary products throughout the organization, and frankly, we still are very, very early in that process.

We started in 2000 identifying two product lines, and a number of branches took on two product lines to start. On average for the organization, we will do 6% plus of our sales in complementary products this year. And that’s up from $3m in total sales of complementary products in ’99.

There are some of our locations that have really embraced complementary products, and have good business practices generically. And in some cases, their sales of complementary products are 12% or 13% of their total sales. And that speaks well for the opportunities for all of our locations, particularly given that even in those cases, they are not everywhere they need to be with complementary products. But they’ve embraced it, and they‘ve grown that successfully each year.

The process is one of, you know, creating an awareness, ensuring that the base disciplines are in place, and then bringing the products on board, and that incorporates both the, not only the inventory, but also the sales of training and product knowledge that is necessary to be effective in moving the products out to our customers.

And also, by the way, it also involves a real good understanding of our customers’ businesses, and how they do their business, and what their needs are, and what value we can add to help them make that process better.

When it’s all said and done, for us to continue growing at 1% to 2% of our total sales per year in complementary products, in other words, as a percentage of our total sales, complementary products becomes 1% to 2% greater of that total each year. That’s a very reasonable objective, and that should enable us to continue to exceed the industry growth certainly in terms of future growth going forward.

And that’s very helpful, Manny. And again, congratulations, guys.

Thank you.

Our next question comes from Anthony Lebiedzinski of Sidoti & Company.

Good morning, gentlemen. Manny, if you could just talk a little bit more about the reduction of stock-outs. If you could just possibly quantify that, how, what the rate of, you know, the stock-outs is now versus a year ago maybe, or even a couple of years ago.

That’s been an area of focus on the operational side of our business, and the rate of stock-outs is now running 70% to 75% less than it was four years ago. Each year, we’ve made about 15% to 20% improvements from the prior year in reducing the rate of stock-outs. That is translated to improving our operating margins, excuse me, I mean our operating margins certainly, but also our gross margins. Heretofore, to the extent we didn’t have a product available for a customer, we would substitute either a better product, or expedite a transfer from another location to serve that customer. Having the right products in the right place enables to provide not only a better service to our customers, but also enables us to do that more efficiently from a margin standpoint.

Okay.

That again is an improvement that we have made this year, and it’s something that, by the way, we have still opportunities for improvement going forward.

Good. Could you, I know it’s early, any comments on the acquisitions that you just announced since September.

The, I’ll give you comments on all three acquisitions. I’ll start with the smallest and proceed to the larger.

Mepasa Albercas is a distributor based in Cuernavaca, Mexico. It is about 45 minutes outside of Mexico City, our first location in Latin America. Mexico, as you all well know, is a growing economy. The pool business there is not particularly large on the residential side, but is one that is certainly growing and provides us with a base to build on going forward. And we are very excited about that. That is folded under one of our domestic divisions, much like the Canadian businesses are folded under the management of one of our domestic divisions. And those synergies should help them come up to speed in terms of developing the product line and doing everything else that we do to provide value to our customers in the channel.

The second acquisition was Sud Ouest Filtration in Bordeaux, France. This is our fourth location in France. France is the largest market for pool products in Europe, and in all likelihood, the second-largest market for pool products in the world. With four locations, it furthers our footprint and enables us to provide increased reach. And again, as we go forward, that will be a baseline for again, adding more value in that channel and that marketplace. And that acquisition falls under our European management team, who has really been working very hard to build their business there, and doing a very good job of it.

And our third acquisition is Litehouse, and this is a market in basically the Cleveland and Cleveland metropolis that was being served, a market that we have been looking at for several years, where we had no presence. And frankly, after some deliberation, instead of us starting our own location, a new location, we ended up with an acquisition. And fortunately for us, it was a business base that was very solid, with a retail group that, you know, one of the larger customers, that is a very effective retailer in the marketplace. So, we have a good customer relationship that we can build on and work with to help them grow as retailers, as well as us learn more about the retail business. But also, it’s a market entry into Northern Ohio, the far western extremes of Pennsylvania, and southeastern Michigan that we can, again, establish a presence and do what we’ve done everywhere else.

Okay. Lastly, you said that you’re on track for the fourth quarter. Looking at the consensus, there’s a loss of nine cents per share. Is that what you meant as being on track? Are you comfortable with that?

I haven’t, frankly don’t recall the numbers that are out there on the street. But in terms of where our plans are for sales and gross margins and operating profits, and how we’re tracking through the first three weeks of the quarter, we’re on track with our internal measurements, and are pretty comfortable that will be okay with the street.

Okay, good. Anything you could comment on the 2004?

We are excited. I mean, this is a very young industry. Every year, we enhance the tools and resources that we have, and I think, jumping on the bandwagon of Rusty’s comments that he made earlier, with the positive economy, that just provides a positive outlook. There’s a, the lion’s share of our business is recurring in nature, but whether it be our own customers or employees’ attitudes being more positive given a more positive economic environment, I think that speaks well for all of us. And we’re very optimistic about 2004.

Okay. All right, well, thanks.

Thank you, Anthony.

Our next question comes from David Mann of Johnson Rice.

Good morning, Manny, Rusty.

Good morning.

Couple of questions. On the complementary products, it seems like the volume you did in the third quarter accelerated from the second quarter. Was that just an industry, you know, related issue in terms of the growth there, or were you doing some other things internally?

Complementary products have continued to grow on a successive basis each quarter. And in fact, it becomes proportionally a bigger and bigger piece of our business every quarter. So that’s what you’ve seen there, and that’s consistent in the third quarter.

We continue to incorporate complementary products in more locations, and a greater breadth of complementary products in those locations every single quarter.

And in terms of what you were talking about a moment ago in terms of the growth year over year, it seems like you’d be hoping to do something like $80m or $90m next year in revenues.

I would certainly, $80m to $90m is a very reasonable number.

Okay. In terms of the SG&A leverage that you did, I think last quarter you were talking about the base business SG&A was too high, and you talked about a couple of initiatives, both in head count and IS redundancies. Can you just elaborate a little more on what you were able to achieve, and what more there is to do there?

Fundamentally, just to bring all that are listening on track on this particular point. When we started off the year, we had certain plans in terms of sales growth in each one of our locations and associated staffing with that, to the extent, given the weather that affected us in the first half of the year, but we still did well. Our staffing levels in a number of locations was greater than was really necessary, given the volume of business that we were doing. And beginning in June, and more so in July and August, we took the necessary steps to realign head count with business volumes, particularly in cases where we had added head count, there was support in anticipated business volumes, but this volume didn’t materialize in the peak of the business. And we did that, and those numbers came into line pretty much as expected based on the actions taken back in June and July.

And those reductions were primarily in the field, or was there any corporate reductions?

No, they were in the field.

And then finally, you’d also talked about, you know, systems redundancies. Where are you in terms of that initiative?

From a standpoint other than the Litehouse Distribution acquisition, all of our domestic operations are on the same system. The only ones that are on different systems really are the Canadian acquisition from May, the Mexican acquisition, the Litehouse acquisition, and then our operations in France and Portugal are in the process of being converted now. Everything else is on the same system pretty much comes in together on a continuous basis.

Great. Thank you, Manny.

Thank you, sir.

Our next question comes from John Ford of Semaphore Capital.

Hey, guys, great quarter. Just had one quick question for you, which just kind of gets back to the whole inventory issue. You talked about an improvement in inventory days, and is there a way of breaking that down to figure out how much of that is from base business, and how much of the improvement comes from your implementing the SEP disciplines on top of acquired operations?

That’s a great question, John. I’m certain we can get the number, but I’m almost positive we haven’t pulled it, and don’t have it readily available.

I will tell you I look at that on a branch-by-branch, region-by-region, division-by-division level, and of our eight domestic divisions, seven have made improvements this year in terms of day’s inventory. And therefore, and the one that didn’t make improvements is virtually flat with last year. So that speaks that, and basically the answer is they’ve all improved. Whether they’ve all improved to the same magnitude and whether the acquisitions have improved a little more than the ones that were a part of the base business calculation, I’m not sure. But they’ve all improved, or seven of the eight have improved, and the other one is flat.

But you’re happy with the improvement generally speaking in your acquired businesses?

John, you know that I am not happy.

I’m sorry. That was a very bad choice of words.

I am pleased with the progress. And just like I can certainly improve how I execute every day, I think everybody in the company understand there’s much opportunity for improvement. And so I strive to learn and get better, and hopefully everybody does the same as well.

That’s great. I was as much interested in the qualitative as the quantitative viewpoint on this, looking out over the long term. So, thanks very much, and again, congratulations.

Thank you, John.

Our next question comes from Doug Col of Morgan Keegan.

Good morning, everyone.

Good morning, sir.

Come on, Manny, you’re happy. Congratulations on the quarter, and importantly on crossing the billion dollar mark some time, I guess, in early October. The 12% comp just blows me away. You know, I guess the comp last year was 14%, so, you know, I looked at on the surface as a very tough comparison. What went on in a couple of different areas? Did above-ground come back in the third quarter? I always think of that as an early-season item. The weather wasn’t there in the Northeast. Did that market, you know, surge in the third quarter, which is kind of unusual?

It certainly wasn’t above-grounds. Above-grounds pretty much have no impact at all in the third quarter.

Okay.

It really comes back to the fact that you had strong demand out there. There were some people that didn’t open up their pools until July, and to that end, that pent-up demand carried over, and basically, served us well. Again, it’s, we’re very fortunate to be in the industry we’re in, and as soon as reasonable weather kicked in, the business did very well.

Okay. Your outside sales staff, how does that compare in magnitude to what it was last year? If I recall, the last time we talked, it might have been a couple hundred was it, number of outside sales, people you had. How much has that grown year-over-year?

The growth in people from a relative standpoint is a little bit less than our growth in sales. It’s more modest. It’s only a 2% or 3% growth in terms of the actual number of people in those positions.

What has improved, and just like I was talking earlier about our regional buyers, and they are provided with more tools and more resources, more training to get better, the same can be said about our sales force. The value that our sales force adds on behalf of our customers is greater today than it was a year ago, and a year ago was greater than it was two years ago.

And really, our sales force is there to help our customers grow their businesses and help our customers grow their profitability, providing them with access to the resources that the company has available, as well as their own expertise and their own talents. To help our customers, whether it be a builder, a retailer, or a service company, to help them grow and succeed. And again, as our people tap the resources that are available to them, as our people get better trained, as we also upgrade the quality level of our people, all those translate to greater value for our customers.

Okay. Following up on the sourcing question and the buying practices, tell me a little bit about how that is handled in Europe, and I guess France specifically. How have their buying practices changed in the couple of years that you’ve been in that market, and are they on the same program, getting the training and have their suppliers changed a lot? Or do they still buy locally primarily?

In the case of our European business, the training and communication is consistent with the U.S. The vendor base is different, given the nature of the products. About half the vendors are same vendors we source from in the U.S., and about half the vendors are different. But when it’s all said and done, the training and the practices and the disciplines are very much the same.

Our management team both in France, Portugal, and the UK have dedicated people that very much do the same things as are done in the U.S. And they have come up to speed very quickly. Our leader of our European business, she has done a good job of crystallizing the benefits of what it means to have better service at the point of sale and doing that more efficiently, and also doing that with progressively less inventory. And again, they’re following the same leads as taking place in the U.S.

Okay. And finally, on the seasonality of these things, is the Litehouse effect with the Cleveland market significant enough to, you know, show up in the year-over-year fourth quarter comparisons? I mean, will the greater exposure now of Cleveland in November, is that something to model for you think, or just it’s not big enough to have that impact?

When it’s all said and done, it’s not overly significant in the overall scheme of things in terms of impacting a number in the fourth or first quarter. The accretive benefit of not only the Litehouse acquisition, but also the SOFI and Mepasa acquisitions are primarily going to come into place in the second and third quarters, just like the rest of the business.

Okay. Have you guys started targeting markets for internal openings?

Always, and that’s a process that is really coming to a head now in the next few weeks, and…

And seven or eight is a typical number?

No, this, frankly for the coming year, since we’ve done some acquisitions where we were going to open the new locations, the three acquisitions that we closed and announced in September are three of those cases in point where we were looking to open up. For example, a new location in Cleveland, a new location in Bordeaux, and a new location in Mexico. Well, we’ve made acquisitions instead of opening a new location. So that’s three of the five to ten that we would do every year.

We’re looking at a few other things that whether we do an acquisition or open up a new location will be defined shortly. But we’ll have, from a pool season standpoint, we will have five to ten new locations in 2004 for that pool season versus what we had for 2003.

All right. Congratulations to you three and all your employees.

Thank you, Doug.

Again, if you would like to ask a question, please press star then one on your telephone keypad.

Our next question comes from Marcus Caminis [ph] of Standard and Poor’s.

Good morning, Manny. Congratulations to your entire team there.

Thank you, sir.

My question, first question, relates also to the same-store sales growth, which blew me away also. I’m trying to weed out and figure out what’s sustainable here in the next quarter and through 2004, and what is a weather factor, or other non-core driver of that. So is there a range that you could provide that might incorporate the upsides and downsides?

Sure, Marcus. Industry growth, our long-term pattern is that the industry has grown an average of 4% to 5% per year. And this has been the case for well over 20 years. And it’s been on average very consistent. The biggest liability there on a year-to-year basis has been weather. There have been years that the industry has been virtually flat. And there have been years that the industry has been up in the higher single digits. But on average, 4% to 5% is the growth, and that growth is primarily driven by the growth in the installed base of pools, both in-ground and above-ground.

On top of that 4% to 5% industry growth on average, we should continue to grow our market share by virtue of the increasing levels of value that we provide for our customers, as well as the suppliers in the distribution channel, and also in our industry. And we should also continue to grow on top of that with our complementary products initiative, and I mentioned earlier that that’s up to over 6% of our total sales, and that should grow an additional 1% to 2% over our total sales per year.

And then the third component on top of that 4% to 5% that I mentioned earlier is that we will open up five to ten new locations per year, and that again provides a basis for further growth. When it’s all said and done, the 4% to 5% industry growth, plus those other three components should yield higher single-digit sales growth year-on-year. Again, the biggest liability there on a year-to-year basis is the weather, and the weather is most variable from a year-on-year standpoint in the second quarter. And then the key driver there is when does it get warm in the Northern markets. The Sunbelt is pretty predictable, but the Northern markets have a greater variability in a year-to-year basis.

This year, when it’s all said and done, will be considered a below-average year for the industry. Last year would have been more normal.

Okay, thanks, Manny. That put the pieces together nicely for me.

Also, my second question now is, you talked about bringing the debt-to-capital down to 35%, and I guess at that point you’ll then, unless something comes up sooner, I guess at that point you’ll then use your repurchasing and acquisitions again. What kind of range can you look for the capital to be in, 35% and up through about what?

Well, to be honest, I don’t look at it so much as debt-to-capital. I look at it more as a relationship to EBITDA. And from our standpoint, we would like to stay within a one to two times EBITDA type of debt level, given the ready availability of debt capital, and the relative cost of that debt. So, one to two times EBITDA is our ideal scenario.

Having said that, we have not done anything at the expense of the other. Fortunately for us, our strong cash flow has provided us opportunity to do whatever we needed to as opportunities presented themselves, whether it be acquisitions or share buy-backs. And we’ll continue to do those, but typically given that currently we are basically running at just over one times EBITDA, which is the low end of our ideal range.

As we go forward, and continue to have the cash flow that we have, it will be a situation for us where we have to then find ways to deploy that capital. And given our focus on the pool industry, those alternatives will certainly include share repurchase. Acquisitions have never been an issue, but we may end up having to have a lower debt level than desired. That’s not necessarily bad either.

Okay. That cleared up another question. Thanks for that.

I’m guessing that the French market, already strong, that happened even more with this past summer’s heat wave. I’m wondering, any thoughts on that?

This summer’s heat wave is pretty much normal. It gets hot every summer. So, you know, it’s not bad. I think, what is happening though, which is very positive, is again, this is a varying industry. As people, as the consumers in general get more educated about the benefits and merits of pool ownership, and the profile of pools in the eyes of the consumer is raised, that only speaks well for the industry and for us specifically.

There are already a number of our builders that while they are still building pools this year, already developing a backlog of pool building and pool orders for 2004. And again, that speaks well for our industry. I’ve heard recently, for example, of one builder that has already booked 90 pools for 2004, based on what he anticipates completing the rest of this year.

So again, those kinds of things speak well for our industry.

Okay, great. Let me factor that into my model. It’s hot every summer, okay. Thank you.

Thank you, Marcus.

Our next question comes from Dan Mendoza of OMT Capital.

Hi, guys. I echo the prior sentiments about the quarter. My question was partially just answered, but can you spend a little bit more time talking about the possibility of a dividend at some point, or kind of walk us through the cash flow numbers and what the balance sheet looks like if you go out a couple of years? And what you’ll have to do with the cash, or what your preference is for buy-back versus dividends.

When you look at our objective that on any calendar period, or any 12-month period, our cash from operations be at least equal to net income. And you look at the nature of our business, and you look at where we’re going, one can easily calculate in the not-too-distant future that we’ll have tons of cash. From a Board standpoint, the priorities are investing in the business, which is not overly significant in terms of our cap-ex needs, which is primarily for technology and warehousing.

Secondly has been for acquisitions provided they make sense. And then we’ve done those.

Third has been repurchase of shares, and we haven’t really, and on a temporary basis, the reduction of debt.

While we have had some discussions about the prospects for dividends, there have been no decisions made at this time. From a priority standpoint, in all likelihood the dividends would fall after share buy-back under the price parameters that we’ve bought shares back in the past. So that’s, at this point, that’s my input, but that’s certainly something that when our debt level gets further reduced, will become a more pressing point for the Board.

So you mentioned that the cash from the Litehouse, that’s included in the balance sheet.

Yes, if you looked at the balance sheet, it’s number 30, if you see a lot more than the normal level of cash, and that was that we wired the money the next day.

How much was that?

We didn’t disclose what the amount was for that acquisition.

Okay. So, I mean, because if you look at your, on a net-debt basis, if you look at kind of where the street is for 2004, I mean, if you used all that cash flow to pay off your debt, you’d be almost debt-free by the end of the year.

Correct.

Okay. Very good. Well, I guess we’ll hear more about this later. Thanks.

Thank you, Dan.

Our next question comes from Todd Griesbach of Wanger Asset Management.

Hi. Actually, my question was just asked regarding a dividend, but wonder if you could talk a little bit about you guys have been doing more to promote the benefits of pool ownership, and kind of promote the industry. How is that translating into [inaudible] for you, and have those investments been successful do you think?

Those efforts have led to tremendous levels of interest at the consumer level, which have resulted in leads for our builders/customers, which we tracked by builder. And as they have every year past, the growth in sales to our program dealers have been, grown at a margin that’s at least 10% greater than our sales to non-program dealers. And certainly, without those programs in place, our sales this year would have been, our sales growth this year would have been less than it was, probably by a f actor of 2% to 3%.

So you probably expect more dealers to get on these certain programs going forward.

Every year, the number of dealers on programs have grown. Currently, we are over 1,500 dealers. That’s up approximately 400 dealers from what we were last year. And again, you go back to 2001 where we had approximately 400 to 500 dealers on the program. We’ve been growing that dealer base at a very rapid rate.

Okay. Then how significant has the direct sourcing or private label program become for you?

It is an area that, much like everything else, is growing with importance within our organization, and provides us the opportunity to have at least the same, if not better quality products at a lower cost. And with that, it is still a relatively small part of our total business, but it’s a growing part of our total business. It’s where complementary products were in 2001 as an initiative.

Thank you very much.

Thank you, Todd.

At this time, there are no further questions. I will now turn the call back to   Mr. Perez de la Mesa for closing remarks.

Thank you, Laura, and thank you for the audience for listening.

We again, and I say it over and over again, we are very, very fortunate to be in this young industry. We have many opportunities to add value, and we are working progressively smarter and harder to provide that value on behalf of our customers and our suppliers. To the extent that we do that over time, we will get rewarded, and our shareholders will get rewarded, and our employees will get rewarded. And that’s what we intend to do, and we constantly are striving to learn and get better, and we’ll do that.

I think the results to date have been reasonable. We expect that they will be improved over time.

And with that, I thank you all.

This concludes today’s SCP Pool Corporation’s Third Quarter Earnings Release. You may now disconnect.