Pool Corp (POOL) 2004 Q1 法說會逐字稿

Good morning, my name is Renee, and I will be your conference facilitator. At this time I would like to welcome everyone to the SCP Pool Corp. first quarter earnings release 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 your 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, then the number two. Thank you.

Mr. Sexton, Chairman of the Board, you may begin.

Yes, thank you very much. Again, welcome to all, to the SCP Pool Corporation's first quarter report. I don't know what else to say except we're off to a great start. Sales are up 19 percent, earnings are more than double, and our base business is up a very strong 16 percent. Even though two-thirds of our revenue is reoccurring, we're also influenced, of course, by weather and discretionary income. I think you all know the consumer spending in March was very strong, and low interest rates have helped home improvement activities. And I'm sure that some of this has rubbed off to the pool business and is in our pool results.

The last portion is weather. Now what will weather do is anybody's guess, but as I said in the official release, the first quarter doesn't make the year and we have to see how the weather develops, particularly in the northern climes for the second quarter. And then we'll have a better idea of where the full year to go. Even though we have no concerns, there's no reason to believe the weather won’t be normal, but you know what Mr. Weather does to us from time to time. Anyway, at this time we have with us, as usual, the CEO of the Company, Manny Perez, and the CFO, Craig Hubbard. I'm going to turn it over to Craig, who is going to give you the specific numbers, and then Manny will follow with the color of the activities. So, Craig, take it please.

Thank you, Rusty. Before I get into my financial commentary, I want to remind our listeners that our discussion today includes comments and responses to questions that may include forward-looking statements, including management's outlook for 2004 and future periods. Our actual results may differ materially from those discussed today. Information regarding the factors and variables that would cause actual results to differ materially from projected results, are discussed in our most recent Form 10K, as filed with the SEC.

Turning our attention to the P&L, I think that the results are fairly straightforward. As Rusty indicated, base business sales growth was 16 percent in the first quarter. That's across 192 of our service centers of the total 198. Base business SG&A, as a percent of net sales, is down 60 basis points from the first quarter last year, primarily due to a decrease in payroll expense as a percent of net sales, resulting from a more modest increase in headcount, while enjoying a 19 percent increase in net sales.

To help clarify the quarterly comps, you may recall that in the first quarter of last year, as we discussed on the conference call, the payroll and incentive compensation last year ramped up at a rate faster than the increase in seasonal net sales. Additionally, we only opened one new service center this quarter, compared to six in the first quarter of 2003. These new service centers, which are all included in our base business, incur startup and payroll costs before they actually open and have sales.

Earnings per share for the first quarter of 2004 increased to 11 cents per share, versus 4 cents per share last year. Net income increased to $4.1m, from $1.5m last year, and weighted averaged diluted shares outstanding increased to $37.6m in the first quarter of '04, from $36.9m in the first quarter last year.

Our DSO, calculated on a trailing 12-month basis as of March 31, '04, remained unchanged at 34 days. Our allowance for doubtful accounts was $3.7m at March 31 of ‘04 compared to $3m at March 31 of '03. The allowance as a percent of trade receivables was approximately 3 percent at both March 31 of '04 and '03. Inventory reserves decreased to $3m in March of '04, compared to $3.2m in March of '03. On a trailing 12-month basis, days in inventory improved 7 days over the first quarter of last year, as we continued to better manage our inventory.

Total debt at March 31 of '04 was approximately $152m versus approximately $166m in the first quarter last year, with slightly less than $143m related to borrowings on our revolving line of credit and asset-backed securitization at March 31 of '04. All of the debt related to the revolver and the asset-backed facility is classified as current as of March 31 of ‘04.

Turning your attention to the cash flow statement, you will note that cash used in operations increased $36m, to almost $70m in March of 2004, due to approximately $33m of payments we made in March for early buy purchases payable in April and May in order to take advantage of purchase discounts. Depreciation and amortization for the quarter was approximately $1.6m and $1.1m, respectively.

Looking at our share repurchases in the first quarter, we repurchased 46,300 shares of our common stock in the open market at an average price of $32.20 per share. We also purchased approximately 10,500 shares of common stock related to the withholding of the exercised price and/or taxes required to be withheld upon the exercise of certain employee stock options. The average price of these shares was $36.35. As of today, we have approximately $34m authorized for the repurchase of shares in the open market.

At this time, I would like to go ahead and turn the call over to Manny Perez for some additional color.

Thank you, Craig, and thank all of you for joining us today for our first 2004 results conference call. As is evident by our press release, 2004 is off to a strong start. Decent weather, an additional two sales days in March and progressively better execution all contributed to our first quarter results.

As many of you are aware, our business in the first and fourth quarters is heavily weighted towards the Sun Belt markets. Therefore, the four biggest pool markets -- California, Florida, Texas, and Arizona -- are an even more important factor in these quarters, and they represent the lion's share of our first quarter sales results.

Another factor contributing to our sales growth was the 30 percent growth in complimentary product sales, as we strive to realize our goal of $100m in complimentary product sales this year, one year ahead of the plan established in 2000.

Our gross margins continue to improve, given our constant focus on pricing and purchasing discipline, coupled with our strategic sourcing and private label initiatives. While we are very pleased with our first quarter results, we anticipate that the margin improvement versus 2003 will moderate in the balance of 2004, given the price volatility of certain commodities, like steel, and their near-term impact on gross margins.

Operating expenses were slightly below our budget despite the continued investment in infrastructure, including opening of a new location in Florida, as Craig mentioned, and multiple location expansions, as well as our ongoing investment in programs to help grow the industry and our customer's businesses.

On operating profit, our improvement reflects all of the comments made previously, and were realized despite the seasonally adverse impact from our five 2003 acquisitions, excluded from our base business financials.

This is all very positive, and we are certainly pleased with our results to date. The logical question is, why not raise earnings expectations for 2004? Frankly, with almost 40 percent of our sales and 70 percent of our operating profits realized in the May to July period, I believe it premature to raise expectations at this time.

I also believe that we continue to improve in our execution, and are providing more value to our customers and suppliers more effectively than ever before. We also believe that our opportunities for improvement in this regard are great, and we are only now beginning to realize the full potential of the opportunities available to us in the second decade of our Company's history.

And now I will turn the call over to Renee, so we can open it up for questions.

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

Your first question is from Jeff Germanotta, with William Blair.

Hi, good morning, and congratulations on a great quarter.

Thank you.

Just a couple of questions. Could you give the sales trend sequentially for the first quarter -- January, February, March?

In terms of the actual calendar months, the first two months were in the high single digits, and the corresponding blowout month was March, which was very near 20 percent. Again, part of that was the fact that we had 23 sales days in the month of March versus 21 sales days in March of last year. So, Jeff, if you look at it on a daily sales rate basis, I would say we are very close to -- well, we were high single digits in January and February and low double digits in March.

And can you give a little color on how April is shaping up with three weeks in?

April is shaping up with the same pattern as in the first quarter in terms of a daily sales rate growth basis, which is kind of a high single digits, low double digits.

Okay. And I'm a little curious with your comment about holding your $1.60 guidance for the year. My first inclination was to adjust for the first quarter and leave the second quarter's alone. Are there other factors that you're thinking of that would cause you to want to reduce your second through fourth quarter estimates? And can you elaborate on what those might be?

There are no factors that we see that would change our expectations for the rest of the year, but again, as Rusty mentioned and I mentioned, when you look at our business and you look at the fact that 40 percent of our sales and 70-plus percent of our operating profits are derived in May, June, and July, and we're not there yet, and weather being such a significant impact to us, particularly in the shoulders of the pool season, which in this case would be really the May period -- the latter part of April and May period -- it's tough to get all excited. We have a lot of work to do, and the year is still ahead of us.

So, again, I think it's great that we've had a very good first quarter, a very strong first quarter, and certainly there's nothing that we see that would change our prospectus for the rest of the year, but I'd rather be safe than sorry.

So you just choose to err on the side of conservatism [inaudible]?

Yes.

Can you comment on where industry backlogs are in the north and the south?

On the pool builder side, the backlogs, there are guys that at this juncture are already booked for the year. Most builders are taking orders now for pool completions in August/September in the northern markets. In the southern markets, they continue to work on the usual two to three month backlog.

Jeff, this is Rusty. I think also if you go around the industry you will find that the drumbeat is very positive in this industry for this year, because of the economic situation and a lot of other factors that we talk about. So, we have every reason to be optimistic.

Great. One last question and I'll let somebody else jump in. But I would like to talk about gross margin vis-à-vis vendor price increases and the ability to pass on those price increases, be they plastic, metals, or something else, in the current market.

One of the contributors to our margin pick up in the first quarter is from inventory profits, as we were able to pass on increases while we were still working off old costs. And that's one of the reasons that our expectations are more modest increases in margins for the rest of the year. We are generally able to pass those on, although it's tougher to do so in the middle of the season.

So, that's the only caution that we have. And again, we're erring on the side of caution and making sure that we are in fact able to pass those on, despite whatever may happen in that regard in the next four to six months.

Can you quantify, on an earnings per share basis, those inventory gains this quarter?

No, I cannot. It's very tough to do. I would just say that it certainly contributed to it, but I can't tell you whether it's 20 basis points or 30 basis points.

Okay. Well, thanks much. I'll let somebody else have a turn.

Thank you, Jeff.

The next question is from Mark Allen, SunTrust Robinson Humphrey.

Hi. Good morning, guys. Congratulations on another strong quarter. On the two extra selling days in the quarter, can you quantify what the impact of that was on revenue? And do you have any offsetting calendar effects in the second quarter? In other words, would you lose a day versus second quarter last year?

No. The sales days in both the second and third quarters are constant with last year. If you look at it sequentially, we have the same number of sales days in January, one less sales day in February, two more in March, and basically that's the leap year net benefit.

When you look at -- your first question in terms of trying to give some number to the impact on sales for those two additional sales days, net of the one lost in February is probably somewhere in the $7m range.

Okay. And second question is, it looks like interest rates, from a macro basis, interest rates are going to begin to creep up here. Do you have any sense of - you mentioned the pool construction demand is still robust - but historically what's happened to the industry in rising rate environments? Does that in any way impact the demand?

There are two leading indicators historically. One are interest rates and the other one is consumer confidence. And if you have a negative trend in consumer confidence and escalating interest rates, that would be a negative signal to the marketplace.

On the other hand, if you have rising consumer confidence and rising interest rates, those two factors tend to mitigate one another. Historically, through most of time, those two factors have served, in effect, to mitigate one another.

There was a period in time, when you go back to like the early 70's and even into the early 80's, where both were going into the wrong direction with very high interest rates in the mid to high teens and at the same time lower consumer confidence. But since that time, and most of the time, those two factors, in effect, negate each other.

Gotcha. And another question, Manny. Obviously, employment is picking up, the labor markets are picking up. The last few years, I suspect, you've been one of the few companies hiring a lot of people during the summer. Do you think you're going to have any more difficulty, I guess, this year in terms of hiring your seasonal college kid workers? Are you doing anything different this year to try to hedge against what may be a tighter labor market?

Our expectations are, given the nature of the work done and the nature of the people that we hire for that time, there should not be a major issue.

Okay. Fair enough. Thank you.

Thank you, Mark.

Your next question is from Doug Lane, Avondale Partners.

Hi. Good morning, Manny and Rusty and Craig. The question is -- well, first quick question -- on the complimentary products, Manny, you mentioned $100m this year, can you remind us what they were last year?

Last year, they represented about 6 percent of our sales, or roughly $70m.

Okay. And can you just give us a brief rundown on how the penetration of the complimentary products stacks up in the Sun Belt markets versus in the North and Midwest markets?

Generally speaking, where we've gotten the biggest leverage from complimentary products has been, in fact, in the Sun Belt markets, particularly Florida, and to a lesser degree, Texas and California. But, in terms of our rollout, we believe that we are still scratching the surface of what we have there to do. And, as mentioned in previous communications, we view that as a significant opportunity for the company, as we leverage the infrastructure to drive more value, provide more value to the customer base. It helps them to become a lot more efficient and it helps them address their biggest costs, particularly in the pool construction side, which is labor.

So, we're still scratching the surface of that potential. And there are still many of our service centers that frankly, don't sell complimentary products yet. And part of that reason is that they're still getting their arms on pool stuff in terms of providing that kind of service level that we look to have to provide to our customers.

There's no real - I mean, if you crack the code in Florida, let's say, on complimentary products, there's no reason that that experience couldn't be translated to the Northern markets or Midwest markets or California or anywhere else, right?

No reason whatsoever. In fact, some of the more progressive service centers in the Northern and Midwest markets have begun to incorporate, in the last three or four years, complimentary products in their offering and have been very successful with it. But it's just not as widespread as it is in other markets where there has been more emphasis placed on it.

Okay. Switching to the pricing and costs, we're seeing a lot of, I guess particularly the metals, but I would imagine even the petrochemical-based products are going up. Is there any way to quantify what percentage of your portfolio this entails? Is it a fifth, a half, two-thirds? Just want to get our arms around how much of the portfolio is affected by these commodity cost increases.

The commodity cost increases that you would have seen, and steel being obviously one that has a very high profile in the last few months, but also any of the plastic type products -- to date, it represents a minority of our products. And the reason for that is that some of that is just beginning now to flow through. For example, given the competitive nature of some of those products, manufacturers have not been able to pass on any increases, particularly on items that are -- plastic, for example, is just one of many components.

The overseas sourcing pressure has neutralized the ability of manufacturers to pass those on. In the case of certain other products, steel again, I'll come back to that, there have been increases there that we've taken in and largely passed on. Those, though, represent a very small portion of the total equation, certainly less than 10 percent of our total sales.

Okay. So, it sounds like if there's a margin squeeze it's right now more likely going to impact the manufacturer, than you as a distributor. My other question is --

That is correct.

Okay. And my other question on that front is, you've managed through these cycles before, what has been the track record on your ability to pass through pricing, should that come down the pike in a bigger fashion?

With adequate lead time, the industry has been able to pass those on all the way through to the consumer with really no adverse impact. The issue happens if there is -- a mid-season type price increase is the one that either the distributor or our customer has to absorb. And that's really where kind of like the line is drawn. What I would expect though, given the higher cost for commodities, is that for 2005, manufacturers will look to pass those on, and that will probably happen in the fall.

Good. And that gives you adequate lead-time in the off season to set the table for price increases to your customers?

Exactly. So, for example, for pool builders selling and quoting pools in the fall for 2005 installation, they'll have those higher costs built into their quotes.

So the message from where we stand today is 100 basis points in the first quarter is probably too much to expect for the rest of the year, but we should see gross margins at least hold if not improve modestly.

From last year, yes.

From last year. Correct. And lastly, Craig, of the $152m in debt, can you give us about how much of that is exposed to variable interest rates?

We have locked in a portion of that, albeit it's a small portion. Probably $30m to $40m of that is locked in. The rest is variable.

And then what do you expect that number to be by the end of the year, because you've got some seasonality in your debt, right, because of the working capital?

It would probably be approximately $40m of outstanding debt at year end.

Okay. Thank you all.

The next question is from David Mann, Johnson Rice.

Yes, good morning. Just to follow up on some of these questions on cost. Does the pressure you're seeing in commodity cost -- does that accelerate your thought process on overseas product sourcing?

No. Raw materials costing basis are pretty much worldwide. So, therefore, they would not, one way or the other, motivate that kind of behavior.

Okay. And then in terms of your discussion of passing through these costs, are you able to pass them through and maintain your gross margin, or do you just pass through the raw cost?

If it's done with enough lead time and everybody is able to do that and pass it on and maintain margins all the way through the channel on to the consumer. If it's a mid-season, then we and our customer base have to absorb that increase.

Okay. In terms of Fort Wayne, can you just give us a sense on their manufacturing operation, how they did in the quarter and what kind of impact that might have had on your performance?

In the overall scheme of things, the Fort Wayne manufacturing unit had, I'll say, a fine performance in the first quarter. Their business is the manufacture of products for packaged pools, which are more heavily weighted in the central and northern parts of the country. So therefore, they're not as driven by California, Florida, Texas, and Arizona, as the overall Company is, and certainly as the first quarter is. So therefore, in many cases, a lot of the stuff that they ship, internally as well as to third party customers, are really to get ready for the season, basically building stock at the point of sale.

Okay. In terms of the number of centers you plan to add in '04, will there be any more than the one you've added thus far?

Not for the 2004 pool season, unless something comes from acquisition. But there is nothing imminent in that regard. So, for 2004 season, 198 is the number.

Okay. And then just one last question. On the complimentary products and the benefit to base business growth, does the math work out that it's like a 2 or 3 percent increase in that business growth overall for the quarter?

For the quarter, it may be closer to 3. On an annualized basis it would be closer to 2.

Okay, great. Thanks a lot, Manny. Congratulations.

Thank you.

Our next question is from John Wood, Morgan Keegan.

Good morning.

Good morning, John.

Manny, can you provide a program sales figure for Q1? I know you gave it last quarter. I found it helpful.

To be honest, it's a great question, and I honestly forgot to pull it for the quarter. I didn't anticipate the question, but it's a great question. I will say that it's something that is a major strategic initiative of ours and one that, as evidenced by the success we've had to date, it's something that is certainly contributing to our results and helps us provide more value, particularly to our customers, in that they're able to help grow their own sales and their own profitability by utilizing the tools and resources that we provide.

Great. What about the Service Technician Program? I know it's really early in the year, but I know you have a new program in place and I was hoping you would give an update on that.

That has, frankly, been one that has caught fire very quickly. Typically when we launch a new program it takes a while for that to be understood and appreciated internally as well as with our customer base. Usually there are a few leaders that take it on out of the box, and that group becomes bigger and usually it's well spread out by the third year. In the case of our service program, which we refer to as a flat rate program, that has really hit home with many service companies nationwide. And it is frankly, probably -- and many companies have already told us this -- this is the best item or idea or concept that they've seen introduced into the industry in many years.

Would you say it's more in the Sun Belt thus far? How many service centers have really --?

All service centers are actively providing this program tool to customers. We've had -- I'm not sure how many -- but certainly 50 or 60 different sessions where we have anywhere from 20 to 50 service companies present to learn about the program. And many of them are beginning the process now of adopting that program to help them in their business practices.

Great. Thanks. Manny, last year, you gave us an example about an exclusive distribution relationship you won from one of your suppliers. Have you seen any more of that? Are you aggressively targeting that?

We have selectively done that in the past, and will continue to pursue those in the future where we believe that exclusivity, whether it be with a brand or with a manufacturer altogether, provides the value for both of us. We certainly don't want to do it -- or I don't believe a manufacturer would want to do it if it benefited exclusivity for us. It has to be something that works well for both parties.

And there are a number of opportunities for that that will take place over time. And yes, we are pursuing that in a number of cases and a number of product lines, and the key to the whole thing is making sure that both of us benefit from that exclusive relationship.

Great. Craig, if you have this, of the $13.2m in acquisition sales, how much of that was Lighthouse?

Hang on one minute. Slightly less than $5m.

Okay. And then one last quick one. Manny, would you say that the package pool market is growing faster in the Sun Belt states than the in-ground installed base currently?

Repeat that. Are you saying the package pool, or the new pool market?

The new package pools being installed in -- like the Florida, California, Texas geographies, is that growing faster currently than the -- ?

Gunite pools?

Yes.

Percentage-wise, probably so, but that's because there are very, very few of them done. The reality is that in those markets the cost of a gunite, or concrete pool, is very comparable with a packaged pool. And because of the investment made on the tools used for building concrete pools, as well as the flexibility inherent in that process from a builder's standpoint, it's tough for packaged pools to break in.

There is a place for them, and it's particularly where the rate of pool adds is more modest, and particularly in markets, again, where the cost of a concrete pool goes up, because the investment made on the equipment and tools needed to build a concrete pool are amortized over a smaller base of units.

Thanks, and congratulations.

Thank you, John.

Again, in order to ask a question, please press star, then the number one. At this time, there are no further questions. I will now turn it back over to Mr. Perez for closing remarks.

Thank you very much, Renee, and thank you all for your questions. We always learn a little bit from your questions and certainly that provides an opportunity to continue to get better.

This has been our briefest conference call in a while. So, I thank you all again for participating in our first quarter 2004 results conference call, and we look forward to providing you another update on July 22, when we will discuss our second quarter results. Thank you again.

This concludes today's conference. You may disconnect.