Pool Corp (POOL) 2004 Q2 法說會逐字稿

All right. Thank you very much and again welcome to the SCP 2nd quarter and half year earnings report. As they sometimes say in Britain, it has been a rather good quarter indeed. Revenues up 17%, gross margins up 20% and earnings per share up 26%.

As many of you know, many retailers are reporting somewhat soft consumer buying, especially in June, as their same store sales have been a little bit on the soft side in the low end of the range. However, pool owners and pool buyers seem to like their pools, as base business at Pool is up 12% for the quarter. June is sort of a cornerstone month for Pool and it was certainly a good month as was May and April. But June was certainly the key month.

Even though weather has been better than the last couple years it still would be considered an average year and certainly not outstanding. The results really are results of the hard work of the management and the employees of SCP, constantly striving to provide a better service to our customers and our vendors. And the results speak for that effort.

With that in mind I'm going to turn it over to Craig Hubbard who is the CFO who is going to give you the financial information, and then followed by Manny Perez, President and CEO with the remarks so Craig take it from here.

Thank you very much Rusty. Before I get into my financial commentary as usual, I would like to remind our listeners that our discussions, comments and responses to questions today 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 could cause actual results to differ materially from projected results are discussed in our most recent Form 10K, which is on file with the SEC.

Having said that, turning initially to the P&L, we believe that the P&L results are fairly straightforward, with our base business sales growth of 12% in the 2nd quarter of this year and 13% on a year-to-date basis. Earnings per share for the 2nd quarter of 2004 increased to $1.16 versus $0.92 last year, and is consistent with out pre-announcement on June 22nd of this year. Net income increased to $43.6m from $34m last year. And weighted average diluted shares outstanding increased to $37.6m in the 2nd quarter of 2004 versus $37m in the 2nd quarter of 03.

Turning our attention to the balance sheet, our day sales outstanding or DSO, calculated on a trailing 12-month basis, improved to 34 days at June 30, 2004 from 35 days for the same time period last year. Our allowance for [inaudible] accounts was $3.7m at June 30 of 04 compared to $3.6m at June 30 of 03. The allowance as a percentage of trade receivables was 98% in June of 04 compared to 96% at June of 03.

Our inventory reserve decreased to $3.6m at June of 04, compared to $4m at June of 03. On a trailing 12-month basis, days in inventory improved 8 days over June of last year as we continue to better manage our inventory. Inventory turns improved from 4.1 turns to June 30, 2003 versus 4.5 turns at June 30 of 04.

Total debt at June 30 of 04 was approximately $162m versus $160m in June 30 of 03, with approximately $153m related to borrowings on our revolving credit facility and our asset backed securitization. All of the debt related to the revolver and the asset backed securitization is classified as current as of June 30, 2004.

Turning our attention to the cash flow statement, you will note that cash used in operations was $41.2m in the first 6 months of 04 compared to cash provided by operations of approximately $8m in the same period of 03. The use of cash is primarily due to the accelerated payment of inventory purchases as days payable outstanding decreased 15 days, allowing us to capture a 35% increase in term discounts between periods.

The balance of cash used in operations is due to the 13% increase in accounts receivable and an 11% increase in inventory between periods, both of which are consistent with the 18% increase in net sales.

Depreciation and amortization for the quarter was approximately $1.5m and $1.1m, respectively, for the respective periods. For the 6 months ended June 30, 04, depreciation and amortization was approximately $3m and $2.3m.

Treasury shares in the 2nd quarter - we repurchased 409,000 shares of our common stock in the open market, at an average price of $39.32 per share. We also purchased approximately 6,500 shares of common stock related to the withholding of taxes required to be held upon exercise of certain employee stock options. The average price of these shares was approximately $41.15. We retired all treasury shares purchased during the 2nd quarter. As of today we have $17.6m authorized and remaining for the repurchase of our shares in the open market.

At this point and time I'd like to go ahead and turn the conference call over to Manny Perez so that he can give you some additional highlights.

Thank you for joining us today for our 2nd 2004 results conference call. As indicated in our June 22 earnings pre-release, and our press release earlier today, we continue to make progress on many fronts.

Despite not having the benefit of particularly good pool weather, we continued to increase our base business sales by double-digit percent. With the industry realizing more modest mid-single digit growth, our performance is a reflection of the value that our team of dedicated employees provides to our customers and suppliers daily. Especially notable is the increasing contribution of complimentary products, which are up 34% year to date to our results, as we progressively provide more value by becoming an efficient one stop distributor for our customers.

Our ongoing expansion of gross profits and gross margin is an area of great focus for us, as that is how we are compensated by our customers and suppliers. To repeatedly gain market share and increase margins as a distributor is very difficult. Yet our dedicated team continues to do that by better utilizing the full breadth of tools and resources available to them -- which tools and resources are progressively enhanced each year as we strive to add more value in the channels.

Of course the favorable industry dynamics and our unique position in the industry provide us both significant opportunities as well as a responsibility to continuously strive to add more value.

Our core operating expenses remain under good control and under budget overall, except for results-based compensation as our dedicated team share in the financial results that they make happen. The expansion of operation margin is consistent with past years albeit not watered down as significantly from an outsider's perspective with acquisitions and the opening of new locations. Essentially our bottom line for the quarter was as estimated and communicated June 22nd.

For the balance of 2004, we are working through manufacturer price increases and some product shortages, but believe that our ongoing improvements in execution should enable us to realize the estimated results for the 2nd half of 2004. Simultaneously, we've continued to invest in talents and their development, programs and tools to help both our customers and suppliers succeed, and the systems and controls to progressively manage our business better.

Now I'll turn the call over to Amanda so we can open it up for questions.

(Caller instructions.) Your first question comes from Anthony Lebiedzinski of Sidoti & Company.

You mentioned the complimentary products being up 34% year to date. What was the figure for the 2nd quarter?

It was 35% -- that's in the 2nd quarter; 34% year to date.

Okay so pretty consistent. Okay. If I heard correctly, you just mentioned that you have some product shortages? Well, if you could just discuss that a little bit further.

There are some supply constraints during the course of the pool season given, for example in the case of steel, some shipments being delayed. There's also cement shortages. That's widely been reported, and affecting many industries. And that's kind of the nature of the beast that we're wrestling with. But, given our supplier network and supplier relationships, we're working through those to make sure that our customers get what they need when they need it.

Okay. And as far as steel and cement and then you have the other products that you feel that you have some shortages or potential shortages, I mean what percent of your sales would that be in the second half of the year?

Well we are not expecting any impact on sales. We just have to work harder to get supplies to our distribution points, to make sure our customers are taken care.

So you're not worried that your customers will be affected in other words?

I'm worried, and we're working through that worry.

Okay. All right. So as far as the outlook so far, I know it's a little bit early here in the third quarter, if you could just comment on what you're seeing out there as far as you know base business sales growth. And then -also, how do you feel about the current estimates out there for the rest of the year?

As indicated in my closing, the latter part of my comments, we believe that we'll basically be at the estimates for the latter part of the year so we come in consistent with the guidance we provided in the June 22nd press release where we estimated, I believe, a 170 to 175 range for the year as our estimate in terms of EPS.

Okay and then as far as so far the third quarter, if you could, do you have any comments as far as how business is going?

It's progressing pretty much along the lines that would yield that kind of number.

Okay and if you look at -- looking at the base business growth last year in the third quarter is up 14%. So the comps are somewhat more difficult than they were in the first half of the year.

That's correct Anthony. In fact, last year was a very strong second half of year-over-year sales growth. And that was, by the way, on top of strong second half growth in 2002 as well. So, therefore, from a comp store sales standpoint, the numbers will be more modest in the second half of the year, more in the mid to high single digit range, which is what most of the estimates out there have.

Okay. Well thanks for - thanks very much.

Thank you Anthony.

Your next question comes from Jeff Germanotta with William Blair.

Congratulations on a terrific quarter gentleman.

Thank you.

Can you give us a little color on -- there's a lot of concern over construction trends, new housing starts, consumer spending. Can you give us a little color on how you see that perhaps influencing your business the next couple quarters to a year out?

Well the dynamic for the pool industry fortunately for us is very favorable. While there is some expectation that there may be a slow down coming in the construction of new homes given the rate at which those have been added the last two or three years, in the case of the pool side frankly we are fortunate to be in a position where our constraint is in fact builder capacity. And to that end, we really have not witnessed any significant slow down in the activity of builders to stay busy building pools.

Now there may come a time, probably not in 2004, but maybe in 2005 or -2006, where they may actually have to advertise, and not just base everything on the leads that we provide to them or our referrals from past experience for the building of new pools. But I don't see that slowing down for many, many years into the future given the relatively unpacked nature of swimming pools in U.S. households.

Of course, as you know Jeff very well, a big part of our business is not necessarily driven by that -- the new building of new pools, but more so by the install base. So that remains a fairly steady component. And that's a big part of our business. And in fact, where we have been very successful in terms of gaining share, in fact we're providing progressively more value to our customers.

So you haven't seen that 70 to 80 percent of sales, which is repair or replacement or maintenance, change materially of late?

If anything it's gone up -- continues to go up.

And you still don't sell materially to new home builders? It's all existing homeowners for the most part?

Exactly, although we do have an initiative to cultivate and educate the home builder sector to the opportunity provided by offering a home with a pool. There are a number of markets today where home builders are selling pools with the homes automatically . It's not an option.

In some other markets it's becoming an option. And what we are striving to do, as builders become more educated about the up-sell characteristics and the value provided of selling a home with a pool, that provides an opportunity for the industry to participate to a greater degree than before. And it also -- what it also serves to do is to add basically another wave of builder capacity.

And last question. Can you comment a little bit about on some of your program business whether it's direct marketing, internet or other, and the success you're seeing there vis a vis the industry and the Company as a whole?

Well, in fact, that's an excellent point because it's something that I didn't capture in my opening comments. When we gain market share, as we continually have over many, many years now, despite having higher gross margins, we've gained that market share in part by the programs that we have in place, because our program customers are growing faster than the industry.

And therefore as they grow faster than the industry, we in turn grow our market share, which is an interesting dynamic. A lot of our emphasis is not so much to go after new customers, but to work closer and provide more support and more services to existing customers to help them grow. So therefore our growth in share is in fact largely driven to the success of our customers and their growth.

I thought of one more question if I might. And then I'll turn it over to somebody else. Cash flow from operations - it looked like you used your strong balance sheet to take discounts, which hurt your cash flow performance this quarter -- probably helped your gross profit margin. But for the year are we still expecting to be substantially cash flow positive?

Yeah. Our expectations for the year are that, in fact it's one of our key measurements for cash flow from operations, to be equal to or greater than net income. And then that certainly turns around very quickly, given that we've -- as season unwinds, the accounts payable component of the equation begins to decrease, and receivables become cash, and inventory becomes receivables, and in turn cash. So the estimates for the year are unchanged.

Thank you.

Thank you.

Your next question comes from David Mann with Johnson Rice.

Good morning gentleman.

Good morning.

Good morning sir.

Just to follow up on that last question about the repair business you do. I guess I'm -- and I've been around the stock long enough. It seems like the building cycle really started to pick up about 7 to 10 years ago. And if I've learned one thing from you Manny, I guess it's that some of these products, equipment, have that kind of life cycle. So I guess the question is, are you starting to see a replenishment cycle really pick up from that building boom that maybe started in the mid to late 90s?

Let me give you the abbreviated answer. Yes.

And how are you seeing that, and what does that bode for the next few quarters to a couple of years?

I will tell you, I can't be specific about the next couple of quarters . But we are very, very fortunate to be in this industry. The dynamics that apply here are fantastic. Starting with, relatively speaking, a small install base, given the potential, to the fact that that install base yields a recurring revenue stream, which naturally increases each year. And you're correct. As that wave of pool construction comes into the equation, you get the first series of repairs and replacements.

But as you go downstream and going beyond the next couple of quarters to go out 5 to 7 years out, then you'll have pools go into their second wave. And while you have others that go into their first wave. And then after that you'll have pools go into their third and their fourth wave.

In my mind the potential of this industry is only limited by those in the industry and their openness to pursue growth and pursue initiatives, to make pools more consumer friendly, and educate consumers on the merits of pool ownership. And we are just very, very fortunate to be in a position that we can help in that endeavor and making that happen, and participate in the success of the industry.

In terms of the cash flow that you're generating, I guess I was a little surprised at the increase in aggressiveness in the buy back this quarter, given how it had been a little more dormant over the last few quarters. Can you just sort of update us on your view of uses of cash? And should we really start expecting you to be buying more aggressively, maybe regardless of the price, because that's still a good use of cash, and also because you may have fewer acquisitions out there?

From use of proceed or use of cash standpoint, the priorities have remained fairly constant over time, and that first priority being what I'll call our CapEx needs, which are usually modest in the overall scheme of things, by either improving our infrastructure from a technology or distribution network standpoint.

Secondly acquisitions, provided they meet our criteria of being a base to either establish or enhance our physical presence in markets, provided they have the value characteristics that make them worthwhile for us both in the near and long-term. That remains second.

Third has been and will continue to be the buying back of our stock with parameters similar to the parameters we use with acquisitions, obviously with the same valuation criteria, albeit the valuations are greater, given who we are and what our track record is.

And then fourth has been the retainment of debt. We introduced earlier this year - the Board authorized initiating a dividend as paid on a quarterly basis. And that's now, in fact, a component of our use of cash going forward.

Those -- that ranking and that prioritization remains the same. Logically, acquisitions will remain a part of our trajectory going forward but acquisitions will be, both from a relative and absolute standpoint, less significant in the future than they have been in the past, largely because the primary motivation for the acquisitions was to establish presence in a market, or to enhance our presence in a market. And where we have already established a presence, and that presence has progressed to the point where we have a decent share of market, the incremental contribution from other acquisitions in the same markets is less and less.

So, therefore, that means that acquisitions prospectively will be less than in the past. And therefore when we look out 3 to 5 years, and given our strong cash flow generation, the buying back of shares becomes, I'll call that a more ready alternative, although the generic parameters that we've used to buy back shares are largely unchanged. And that's something that the Board reviews, usually on two or three occasions during the year, and then provides the management team an authorization level that they believe is appropriate, given valuations of companies like ours.

Okay. One last question on the early buys that you did. Have we seen the bulk of the benefit of them in the -- flow through into the P&L? Or should we see some gross margin benefit continue in the third quarter?

You will continue to see gross margin benefit. The early buy benefits, per say, are more dated terms and free freight. And those are more normal on a year-to-year basis. So therefore, this year versus last year, there wouldn't have been any significant differences in that area on a year-to-year basis. That benefit is kind of realized every year.

Okay. Great. Thank you.

Thank you.

Next question comes from Doug Lane with Avondale Partners.

Hi. Good morning everybody.

Good morning.

Manny, on the gross margins in the third quarter just overall with supply constraints, price increases - it sounds like you're going to have to go the extra mile to get product out to the market place logistically. Is it reasonable to model in gross margin expansion in the third quarter with all these kind of pressure points here?

I think it's reasonable to model it in. I will concur that it's not easy. But a lot of things aren't easy. It isn't easy to realize the kind of sales growth that our team is able to realize, while simultaneously realizing gross profit margin improvement consistently for many years. So it's what we get paid to do. And as we've said in the past, we intend to continue doing in the future.

Can you give us the logistics of these price increases, because I know sometimes that there's a lag in getting pricing passed through to your customer once it comes down the pipe from you supplier. How is that playing out this time around?

A lot of the price increases have not yet hit us. But they've been announced and will start hitting in -- well, the lion's share will start hitting in August and September. So there have been a few that have dribbled in to date. But our intention is to pass them on. And as a reflection of the cost of the raw materials, whether it be steel or oil-based products, those are inherent raw material cost increases that our manufacturers have incurred and are passing on to us.

And given the dynamics of this business, and given what they represent in terms of the total cost of whether it be a new pool or replacement equipment or whatever, it's relatively insignificant at the consumer level and should not in any way impact demands. So that's something that certainly our customers can sell and pass on as well.

Okay. And what -- so that process, it makes it easier too as you're heading into the off season. Am I right?

Yes it is.

Okay.

There is more timing involved in terms of communication and making sure that we don't have any inventory hit.

Okay. And are there any counter balances to this, where costs are going down?

Not this year.

Yeah.

This industry has had virtually no inflation for a number of years. There's some products that were going up and other products were going down. So net/net was pretty much a wash. This is pretty -- a pretty unique dynamic, in that there is a net price increase overall. But again you look at the consumer level, and at a consumer level they're getting a bargain. And materials in and of themselves are a small component of the cost of new pool, and a small cost of the ongoing maintenance or use of a pool.

Okay. Let's turn for a second to the pool industry, because last year we had a very wet, cold year. And I don't know that I've seen what the pool industry, the install base number was for 2003. And now this year it's also rainy, and you've got the material shortages, particularly cement, which will impact new pool construction. What was the number for 03? And what do you think for 04? Are we due for another below trend year in install pool base growth?

Well despite all the weather and everything else -- the addition of new pools still -- in ground still was approximately 200,000 pools last year and we expect that -- a similar number this year. You make an excellent point Doug. Our last good pool weather year was 1999. Since then, it's been anything from average to well below average. And this year is certainly no better than average, and maybe not even that.

So again I think when you turn around and look at our results and look at the perspective of where we -- how we operate and everything else, we're doing okay. We kind of beat ourselves up sometimes for our progress or lack thereof. But in perspective in the world, we're doing okay.

What about above ground pools? I mean the in ground pools, so the point is that you'd think the in ground pool metric will be the same this year? It's kind of every year it grows 20,000, rain or shine, hot or not, materials, whatever.

200,000 yes.

Okay, 200,000?

200,000.

Sorry.

In the case of above ground, this year every indication is very similar to last year, which was a below average year.

So when you combine the two, we're probably at the lower end --- maybe a 3% growth of install base?

Yeah. In the 3 -- yeah -- low 3% range.

For both 03 and 04 you're kind of thinking?

Yes.

Okay.

Stay between 3 and 4.

Okay. Thank you.

Thank you sir.

Your next question comes from Catherine Thompson with C V & T Capital Markets.

Thanks. I want to focus a little bit on margins. You continue to post gross margin gains. Could you quantify for us the factors that contributed to the improvement, specifically touching on inventory size? And also, kind of looking forward, to what extent do you think that certain steel and cement cost pressures will affect margins going forward?

Okay. I'll take the latter part first. I don't believe that the stock shortages and issues will really impact margins per se. They'll just -- we just have to work harder to get the product in and pass on the -- whatever the cost may be.

In terms of overall growth margins, there are a number of initiatives that we've had for a number of years, and with certain ones being accentuated more in the last couple of years.

First we have a program which we refer to as a preferred vendor program, which is now in it's 6th year. And that program strives to channel our purchases to a select group of vendors that provide not only better products from a quality and cost standpoint but also are more geared towards developing and being innovative in their product designs, to enhance the pool industry long term. And therefore, progressively each year more and more of our purchases are channeled to these preferred vendors, where we inherently make a slightly higher margin.

A second component is our initiative on strategic sourcing. That initiative -- strategic sourcing -- is still early on in it's evolution. But what it serves to do is evaluate products that have little to no brand equity, and identify what opportunities we have to convert those products to secure better products at lower cost. And that's a process that's now in its 3rd year, but still very early in the process, given how many products we handle and what the opportunities are there from a sourcing standpoint.

I would say that a third component here involves organizationally we have a group that is -- was formed several years ago where we have regional buyers. And their focus is dedicated to basically inventory management of each of our distribution points. And to the extent that they do a better job working hand in hand with our field management -- line management -- we have reduced the rate of stock outs, and also obsolescence. To the extent that we have reduced both stock outs and obsolescence, we enjoy higher margins.

In the case of stock outs - the usual solution for a stock out is to substitute a higher value product. To the extent you don't have a stock out you don't have that margin hit. And on the obsolescence side, by better managing inventories and making sure that we have what we need when we need it, and not necessarily that much more than that, we are able to reduce the cost of obsolescence in the overall system. And that's reflected in the percentage of our inventory represented by our Class I, II and III inventory and that continues to grow as a percent of our total inventory every year.

Oh okay. That's great. But is there a way you can quantify in the current quarter -- I mean in the second quarter, to what extent each of these programs and also the early buys of inventory affect the gross the margins? Is it about evenly spread out?

I would say the early buys, relatively speaking, they'll have a significant impact on a year-to-year basis, because that's been done every year.

Yeah.

The one component of the early buys, which are the -- I'll call it the payment ahead of time, where we captured an increase in terms discounts, that's the only component that's really greater than prior years. And that represents a small component of the overall improvement year into year.

I would say that the ones that I just listed, the professionalizing of our buying and inventory management, the strategic sourcing initiative, coupled with our preferred vendor initiative -- those two initiatives, in a relative sense, each have contributed approximately equivalent weights to the improvement in margins.

Okay. And just to clarify on the first part about the steel and cement shortages and costs pressures - in other words, you aren't willing to necessarily pay a higher price for products, those products?

We are willing to pay a higher price.

So you're just passing those on to customer?

But yes, on the basis that we can pass to that on in the market place.

And you're not seeing a lag in the increase in prices?

No.

Okay. I guess my final question is could you elaborate on just the update on the penetration of the complimentary products program in key markets across the U.S.?

That has a long ways to go. As I mentioned earlier we're tracking 34% ahead of last year. We're on track to do over $100m worth of complimentary product sales this year and that's from a small base of $3m in 1989 so we've made a fair amount of progress in the past five years.

We see though that in the just the core product areas that we're working with now we see the potential to have sales of $500m in just those product areas. We are also, beginning with the 2005 season, we'll begin to add to our complimentary products offering again more products that our customers are currently buying. There are approximately 30 product segments. And we've focused on 6 initially. We're looking to get that up to 8 or 9 for those that are more leaders of the pack in terms of getting to complimentary products within the organization, to have them able to participate to a greater degree and provide more service to the customers.

But I will tell you, there will come a time -- and it'll take a while -- but they'll come a time where complimentary products could very well be as big as pure pool products in terms of our sales. Now that will take a while. Aand it's a -- I mean right now we're up to -- we will be up to approximately 8% of our total sales coming from complimentary products.

So 8 versus 92, it kind of seems lop sided. Bbut that is growing at a rapid rate and should continue to grow at a much faster rate than our overall business for many, many years in the future and we feel comfortable that at least the next several years -- that being the next 5 or so years -- we believe that complimentary products as a percentage of our total sales should increment by 2% per year.

So that 8% of our total business this year should translate to 10% of our total business in 2005, 12% in 2006, etcetera, etcetera. So it's still a long ways from being 50/50) But I think it's a huge potential for the company.

Great. And my last question is could you comment on industry backlogs in the north and the southeast, kind of keeping in mind some weather trends we've seen for the past couple months?

Given the poor weather relatively speaking in the last 30 to 45 days?

Yes.

The backlogs have only gotten worse. If you're a builder in the north, a typical builder in the north would have been fully booked for the year sometime in May. Obviously while he's made some inroads on that backlog, he probably will have to have some pools that he committed to finishing this year actually be finished next year. In the southeast or in the south, given the fact that they are able to build pools year round, that should not be an issue. They'll just get done a little bit later.

Can you quantify the backlogs or put -- just kind of give us a sense of the scale?

Basically in the south, typical builders are working in a 2 or 3 month backlog, as they have for a number of years. And that makes it about a week or two given the weather in the last 30 - 45 days. And in the north generally speaking they're working on a longer backlog of 3 to 4 months. So out of that - usually by May or June at the latest, they're booked out for their building season which usually ends October or early November.

Okay. Great. Thank you very much.

Thank you.

(Caller instructions.) Your next question comes from [Michael Chesnick], [B.C.] Capital.

Oh yes. Thanks a lot for taking a call. I just wanted to ask you a question. I noticed in your filings here you have -- while you're primarily a distribution company, you do have three small manufacturing plants, I believe in Indiana, someplace in Canada and France. And if you could just comment a little bit about how those operations are going. And more importantly, since this is kind of different from your distribution business is this something you see as a future growth opportunity? Or do you see these as just minor operations? I just want to get a sense of where you see that in your overall scheme of business?

That's a great question. These three operations became part of Pool Corp as part of our acquiring businesses that were distribution businesses, primarily that had a manufacturing component. In all three cases the output of these manufacturing companies is basically us, or largely us. In fact in aggregate its 75 -- 80% of their total output is to our distribution network so we are in a sense those three entities largest customers.

Their sales to third parties in aggregate represent less than 1% of our total sales, comfortably less than 1% of our total sales. So therefore for us they're important -- an important part of the business, in the fact that we have a supplier that is integral with distribution in the certain product lines in certain markets.

Having said that, we did not go out seeking necessarily to acquire the manufacturing -- these three manufacturing businesses. So therefore, from a growth standpoint, we don't see this as a vehicle for growth for us, in the same way as we see expanding our distribution network by having and establishing physical presence in new markets.

We go -- having said that again -- we will have made investments in these three entities to make sure that they are best of three or best in their area, and make sure that their return on capital and all the parameters that we have our commensurate with what we have on the distribution side. And they will in turn grow as part of feeding our infrastructure. So therefore, so while we will not be looking to acquire other manufacturing companies, we will continue to work and invest in these three entities, to make sure they are a good supplier to us internally and continue to grow as we grow.

Well thank you very much. Just to follow up just a little bit on that though, is it -- to the extent that obviously you're buying from other manufacturing companies, does this, the fact that you're vertically integrated to a very minor extent, provide any source of any channel conflict with your other suppliers? Or is it too small of a matter?

In a relative sense, given the narrow aspects of the product lines we're talking about, and the overall scheme of our business, it's not a major issue. Obviously it poses some challenges to other manufacturers of like products that we buy from. But that's only a very small subset of our total sourcing position.

Okay. And it's - but it's safe to say, just to make sure I understand, that unless there was another acquisition of a distribution company that happened to have a manufacturing component, you're not out looking for manufacturing businesses?

Correct.

Okay. Thank you.

Thank you.

Your next question comes from Doug Col with Morgan Keegan.

How are you?

Good.

Good. I got on the call a little late. But I got a couple things. I'll just jump around here. To follow up on the complimentary products question, that $100m or so that you're likely to put up in complimentary products this year, how many centers is that being generated out of?

Doug, to -- if you look at it in the absolute sense, probably 90% of our service centers will sell some complimentary products this year. I will tell you though that about 30% of them probably represents -- 30% of our centers represents about 90% of the dollars. So really we have about 30% of our centers that are really engaged in it. And then the other 70% are dabbling in it at this juncture.

Okay. And when you said that you wanted to get the 6 segments that you're focusing on up to 8 or 9, is that in 05 that will be the initiative there to add - ?

That's part of the initiative for 05, because it's these 30% of our centers that have really embraced our complimentary products and are providing enhanced value to their customers, that they're looking -- they see this as a golden opportunity to further grow their business, and therefore, to that end, are looking for new products they can add to their portfolio.

And the emphasis with these 30% then would be to have them begin to stock and sell some of the new products that we're going to be bringing on board. The other 70% while they may address or some of the opportunities of these two or three new segments, they have plenty of opportunities still to be had on just the core 6.

Okay. Also just a general question, it seems like the last 6 months or so every time we pick up any industry news pieces or anything we're reading about an acquisition -- Polaris buying somebody, and Pentair bought the pump company. Does that present any particular challenge? We were talking about supplier price increases -- or opportunity for you? How - ? I'm sure you're the biggest customer for a lot of these companies. And when they put two of them together, how does that affect you?

We become more important to them.

So it's more of an opportunity than a challenge?

No what it does is the following. We, in most of these transactions, are involved beforehand, because of the importance that we are to these companies as a customer. And therefore we, in most cases, have been supportive where we believe that the acquirer will make the necessary investments in people and in tools to further grow the capacity, the direct product, quality of product of the acquired entities. And to the extent that's the case, it's good for the industry and therefore good for us.

Okay. And just one final thing. In the press release when you talked about the cash you used in the quarter and the improvement in days payable, you said you captured a 35% increase in terms discounts between periods.

Yes.

Is that similar terms across a number of suppliers? Or are there a couple of key suppliers in there where it - ?

That's across a major group of suppliers, obviously with preferred vendors being the biggest component of that.

Okay. Okay. Thanks.

Thank you sir.

Appreciate it.

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

Mr. Perez de la Mesa: Thank you all again for participating in our second quarter 2004 results conference call. I say it again and again - we're in a very young industry and we're very fortunate to be where we are in the industry and having said that we look forward to providing you another update on October 21st when we will discuss our 3rd quarter results. Thank you again.

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