Pool Corp (POOL) 2005 Q2 法說會逐字稿

Good morning, my name is Meredith and I will be your conference facilitator today. At this time, I would like to welcome everyone to the SCP second-quarter 2005 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (Operator Instructions). Thank you. Mr. Joslin, you may begin your conference.

Thank you Meredith. Good morning everyone and welcome to SCP's second-quarter conference call. I need to remind you that our discussions, comments and responses to questions today may include forward-looking statements, including management's outlook for 2005 and future periods. Please be aware that our actual results may differ materially from those discussed today.

The factors and variables that could cause actual results to differ materially from projected results are discussed in our most recent Form 10-K as filed with the SEC.

At this point, I'll turn the call over to our Chairman, Rusty Sexton, who will get us started. I was on.

Alright, thank you Mark and again welcome to Pool Corp's second quarter review. With such strong results for this quarter. it reminded me that this is almost the 10th anniversary that the Company had an IPO, which was actually October, 1995, and the progress we have made since that particular time. The IPO came out at $10.50, and if you calculate that, reduce it by the six (ph) splits, that equates to about $0.92.

Yesterday, stock closed almost at $37 and that is almost 40 times growth factor. It would say that's extraordinary, outstanding results for the shareholders. Now how is that possible? Well, a lot is involved, including the ever-increasing confidence of our shareholders, but the formula is pretty simple and I would like to review with you.

We participate in a very unique industry. It's resilient to economic downturns and it's not cyclical and it's growing at a very strong, consistent rate. We have made consistent market share gains since becoming a public company. Frankly, we are better than the competition.

Third, we have always -- we're always improving our execution of our game plan and four, we have an outstanding management team that is success-driven, much the same goals as the shareholders. And finally, all of this is overseen by a very astute, independent Board.

So I think those are sometimes nice to remind ourselves of how we got to where we are and how we're going to continue. With that, I would turn it over to our President and CEO, Manny Perez, who are (ph) going to give you the details. Manny?

Thank you, Rusty, and thank you all for joining us today for our second quarter 2005 conference call. As evidenced by our press release earlier today, we're on track for another solid year with 20% earnings per share growth. As usual, our first-half performance speaks volumes about the strength of the swimming pool industry that Rusty just referenced and the caliber of our employees, but it wasn't without its challenges.

Probably the most unique significant challenge was a transition of price increases in an industry with a limited history of price increases. Generally, this challenge was addressed successfully with good communications between the many factories who supply us and our communications with the customers that we serve. Given the nature of our industry, manufacturers were able to recover their genuine cost increases which increases were passed through the supply chain without adversely impacting consumer demands.

The one exemption to this dynamic was in chemicals. With a short-term desire to rent business by one manufacturer/distributor and shifting reactions by another manufacturer simply caused market disruption without impact on consumer demand; just supply chain inefficiencies and lost profits primarily felt by the manufacturers themselves.

For Pool Corp, these challenges were addressed albeit at the cost of some time and energy that could have been better invested in the growing industry and helping our customers.

A few management perspectives on the financial statements. Notwithstanding the turbulence related to price increases, our gross margin improved by over 40 basis points in the quarter and 20 basis points year-to-date compared to 2004 when you exclude the prior year’s benefit from our ownership of manufacturing operations in North America.

At the operating margin level, we also improved by 80 basis points and 50 basis points in the quarter and year-to-date, respectively, on a pro forma basis when including the pretax benefit of our equity interest in Latham (ph). Translated, this means that we're continuing to add progressively more value in the supply chain and are recovering that value in the marketplace while simultaneously operating our business in a more disciplined and effective fashion.

Regarding our balance sheet, the quality of our receivables and inventory are better than ever before with our highest seasonal percentage of current receivables and high-velocity inventories ever. This is all very good, but we have a lot still to do. Through June, our investments to grow the pool industry have generated over 47,000 hot leads from the build-a-pool section of swimmingpool.com. This is just scratching the surface of our industry's potential as consumers become educated about swimming pool ownership. Now and for the long-term, it is a great opportunity for pool builders, remodelers, service technicians, pool maintenance companies and specialty retail firms to grow in the young swimming pool industry.

The same can be said about our opportunities to add value to the supply chain as the enabler for our customers to have more successful and profitable businesses and as the partner for our manufacturers to grow sales and manufacturing efficiencies. We're in the middle of a chain and we understand fully our opportunities and responsibilities.

With those comments, I will turn the call over to Mark for more financial commentary.

Thank you, Manny. I would like to address two income statement items, make a couple of comments about our balance sheet and working capital management and wrap up with a comment on cash flow.

Between the press release and Manny's comments, I think we've given you a pretty good idea of what's going on in our P&L down to the pretax income line. You will notice that on the TAC (ph) line, we have lowered our effective tax rate slightly to 38.6% for the quarter and year-to-date, which is down from 39% previously. This rate reflects the benefits from tax advantaged business development initiatives adopted by the Company. And although we evaluate and adjust our tax position routinely, we expect at this time to maintain this rate for the balance of 2005. As with all aspects of our business, we will strive to continuously improve our tax position in future periods beyond 2005.

The next line down on our P&L, equity earnings and unconsolidated interest, is where we record our share of earnings from Latham, which was 1.9 million for the quarter. Latham's second quarter was impacted by two factors -- some pre-buying by their customers in the first quarter (indiscernible) second quarter price increases and an extended cold and wet season in northern markets which lasted through May.

As a reminder, Latham manufactures packaged pool components and liners and given the geographical nature of this business, it is more exposed to northern market weather trends. In addition to this, because Pool Corp us a significant customer of Latham's, we must defer some of the profit they recognized on their sales which will have the effect of pushing some of their Q2 profits into our Q3 reporting period.

The bottom line is that, although Latham contributed less to our performance in Q2 than we had expected, they will contribute a bit more in Q3, which should now be on par with actual Q2 results. Expectations for the Q4 results are unchanged of breakeven to small profitability for the quarter. With the exception of the impact from weather, Latham is operating to expectations in 2005.

Moving on to our balance sheet and specifically our working capital, our product inventories at the end of the quarter were 247 million, up 12.5% over 2004 which is in-line with our sales increase. Our inventory turns as calculated on a trailing 12-month basis remained at 4.5 times in 2005, consistent with 2004's second quarter.

Our total accounts receivable at the end of the quarter of $232 million were up 17% over 2004 and reflected stronger year-over-year sales month in June relative to other months in the second quarter. This was reinforced by the fact that 87% of our receivables were current at the end of the quarter, which was up from 83% current last year and we have improved on percent of receivables in all aging categories.

Our DSO as calculated on a trailing 12 basis improved to 33 days this year from 34 days at the end of June last year. Given the increase in our receivable balance due to the timing of sales as noted, we used 10.5 million more this year than last and cash for the quarter, or 51.6 million total, to fund operations in 2005 through June.

In the third quarter, we expect to see the normal seasonal turnaround in our cash and debt position in targets generating cash from operations at our level of net earnings for the year.

Now I will turn the call back over to the operator, Meredith, to begin our Q&A process.

(Operator Instructions). Kathryn Thompson, BB&T Capital Markets.

Great, thanks, great quarter. First question -- how much of the top line was driven by pricing in the current quarter and what can we expect going forward?

Kathryn, good morning. That's a little hard to discern because we don't have the specific given the multitude of products and the multitude of markets and how that impacts -- the impact varies. But in the previous quarter, we estimated that the impact from price increases this year would be in the low- to mid-single digit range and we believe that the overall impact is still valid.

As far as digging a little bit deeper with the chemicals in particular, as seen in the previous quarter, you had said that you had hoped to remain margin-neutral when passing on the price increases for chemicals. Was that in fact end up (ph) being the case in the second quarter?

In terms of passing on price increases, overall we have been at least pricing neutral. In the case specifically of chemicals, we have had a margin loss in terms of margin percent, although from our GP dollar standpoint on units, they have been able to maintain the GP dollars on those units sold.

Okay. Also, I guess you saw I guess the Great Lakes and Compton merger that was announced in early July. Do you have any comments on the impact to SCP Pool specifically as related to that merger?

We don't anticipate any significant changes. The buyout of that subsidiary (ph) of Great Lakes is a significant supplier of us on the chemical side of our business, which is for prospective in 2004 was 14% of our total business was chemicals. And they represented in aggregate of all of the chemicals that we sell, approximately half of that 14% in sales, maybe a little bit less than half of the 14% in sales. So they are a significant supplier in the overall scheme of things, but on the other side the equation, we're also the largest customer in the swimming pool arena.

So the relationship is one that we are eagerly anticipating Compton's management and what initiatives they have to further the relationship with us going forward.

And finally, do you have any comments on -- I know it's early to say, but any comments on the early hurricane activity and how it has affected business, particularly I guess in the Texas regions more recently?

The two hurricanes and tropical storms that have hit have really had no significant impact. The one that hit a couple of weeks ago, Dennis, did cost us about two days worth of work in two of our locations in Pensacola. But overall, there has been really negligible impact if any so far.

Okay, great. Thank you very much.

Jeff Germanotta, William Blair.

Good morning and great job in a tough environment. Can you begin by elaborating on what monthly sales trends were April through June and give an indication of how July starting out?

In terms of on a daily sales rate basis, the strongest of the three months was June, particularly as it warms up in the second and third week of June in northern markets. The Sunbelt was consistently strong throughout the quarter in a low double-digit percentage growth year-on-year. The north was single-digit growth -- the northern markets were single-digit growth in April and May and then came through with double-digit growth in the month of June.

So overall, Jeff, what you would see is something hovering around 10% in each of April and May, and then the strongest month as mentioned by Mark in his comments regarding AR being June.

And July, is that off to a strong start as well?

July is I would say it's really two-thirds of the way through. One of the ironies that we have, Jeff, and all on the call is that in this business, sales build on a daily basis for the first six months of the year and then begin to slow down. So anything that we're looking at now in July through today or through yesterday really is a little bit better than we probably will finish for the month because the daily rate continues to decrease a little bit each day.

So I would say that probably July will be a little bit softer, but not much softer than what we witnessed in the second quarter. Maybe 1 or 2% softer.

Thank you. In looks like you bought back some shares in the quarter. Can you talk about how many, the average price and where the ending fully diluted share count what?

Mark, you want to take that?

Jeff, let me get back to you on that. We bought back very few shares just for option exercises -- I don't have it right in front of me. But there were very few shares bought back, and only for only option exercise coverage.

I would like to then come back to this idea about chemical selling prices and margins. Very tough competitive situations seemed to have emerged in the first quarter with some (indiscernible) selling product below replacement cost. Has that dissipated, and is this more of a just passing through raw material price increases, or is that intense competition lingering?

The level of flux and turbulence that existed in the February-March timeframe as price increases were announced and put through the channel were unique to that period. There has been some lingering impact in part because of just -- some competitive mentality of working on a GP dollar margin as opposed to a gross profit -- percent margin.

So therefore to that end, that as adversely impacted margins generically particularly through the second quarter. The first quarter was a lot more turbulence, but the second with was more stable. And again, the fundamental issue there is, it's percentage versus obsolete dollars per unit. And apparently in chemicals, this migrated more towards our dollars per unit type of margin as opposed to percentage margin.

Complementary products for several quarters now have been growing rather rapidly -- 27% in the first, 33% in the second. How were those -- first of all, that's terrific. Secondly, how is that influencing gross profit margins either for the Company as a whole either positively or negatively?

Overall, the influences -- at the gross profit margin level, the influence is negligible. On average, the margins are very, very close overall to the pure pool products margin. Now obviously, Jeff as you well know from your knowledge of distribution, when you look at the leverage that more dollars through the pipeline bring to the bottom line, that contribution is very significant.

Did you open or acquire any new locations in the quarter?

We opened up one location in the Temecula area in California in the middle of June, and that was it.

And lastly, and I will let somebody else ask some questions. Could you talk about how program sales did in the second quarter?

Program sales continued to grow at a rate much faster than the overall rate. And in fact, the pace of program customers growth continues to be about double what it is from non-program customers. The lead generation that we're doing through swimmingpool.com and the education of consumers are prompting them to request quotes for more fully loaded pools has been a real success story in this industry. I reference the fact that there were 47,000 such leads created through the end of June. That is overwhelming in some cases for some of our builder or remodeler customers. So that speaks volumes about what we have with an opportunity for the industry.

Thank you very much and keep up the good work.

Jeff, just to answer your question, we bought back 1400 shares during the quarter.

And the average price?

The average price was $34.50.

Thank you very much.

David Mann, Johnson Rice.

Yes, good morning. Manny or Mark, if you could talk a little bit on the SG&A line in terms of the leverage you had in the quarter, it looks like your sales growth was not that different from the first quarter, yet you did not have as much leverage in this quarter. Can you just give us some sense on what might have affected that?

Well David, I believe you know in terms of our structure how we compensate our people. Labor is far and away from an operating expense standpoint our number one cost. Once we reach certain profit growth objectives, there is a profit-sharing formula that applies at the location level, regional level, division ,level which is also applied to the support functions in the organization.

Have so to the extent that we exceeded certain internal hurdles, that profit-sharing or bonus incentive program begins to kick in. And there is some of that that played into it in terms of increasing our SG&A. Other than that, basically all of the other items are at or below budget.

In terms of the third quarter, could that also -- if you have a very strong top line, could that also restrain some leverage on the SG&A line?

That would mitigate the leverage. There's still leverage that's being had because Is all based on profit realization, bottom-line profit realization above a certain threshold. So, there -- and there's implied in that a certain mammal minimum level of improvement on a year-to-year basis. But it does -- what it does do is that there is, again, a profit sharing above a certain level with the management team and all of the employees since all of our employees are incented.

Okay. In terms of gross margin, others have asked in the chemical issue, it sounds the bulk of the impact on your chemical margins has now been run through, and that we should not expect that to have pact in the back half of the year, in terms of what your competitors have done?

What you have seen and what you see in the second quarter where our overall margins are flat, which is really a little bit misleading obviously as I mentioned in my comments, because if you take out the roughly 50 basis points impact from North American manufacturing operations that are no longer part of the Company, when you look at it from that perspective, we have really improved our gross margins overall by about half a point in the quarter. And that is huge, given first of all where we are in the industry and that's also is reflective of the value they provide.

Having said that, there are some pockets where that is not the case. Specifically in chemicals, we are recovering the price increases in terms of passing those on in dollars, but not necessarily keeping our percentage intact. So therefore, there is some impact which is watered down significantly by virtue of what percentage of chemicals and specifically certain chemicals are the ones that the issue applied to, or as part of our overall product mix. So that still shows up on my radar screen on a weekly basis. Having said all of that, I think we're on track and I think what you're seeing on a year-to-date basis and more so in the quarter to date is what you should expect to see for the balance of the year.

And in terms of the impact you feel you might have seen in the second quarter, are we talking about something like 10 or 20 basis points impact on gross margin?

From the --.

From the chemical issue.

We've not calculated the number, but I would be very surprised if it's as high as 20. If anything, it may be closer to 10.

Okay. And then one last question about third quarter. With all of the heat that is going on, it sounds like you're not necessarily suggesting that the whether is incrementally adding to your business in a major way. Is that correct?

Interestingly enough, the impact of temperatures, whether they be 95 or 100 or 90 versus 95, is not a significant. The figures variable to our business is really from a whether standpoint in the shoulders of the season, and that is primarily again in the northern markets. When does it get warm and when does it start getting cold. In the southern markets, it's extremely predictable. And again, whether it's 90 or 95, it does not make that much of a difference in our overall business.

And last year, the real impact of weather was more in August, September with the hurricanes, right?

Yes, and some of the disruption where you had an early closing of the season in the northern markets.

Great, thank you for much.

Brent Rakers, Morgan-Keegan.

Good morning. Most of the questions have pretty much been asked and answered, but I did want to follow up a little bit more if you would on kind of where you are in terms of rolling out product classes and really getting the branches to kind of grasp full acceptance of all of the complementary products business.

Brent, that is a great question. When you look at where we are in complementary products, and our objective this year is to grow complementary products to 10% of our total sells from 8% of our sales last year. And with the rate of growth year-to-date of 31%, we are on track to do that. On the other hand, we're still scratching the surface of the potential we have there.

One thing that we did to and really came to light in the first part of this year (indiscernible) really the project last year was opening up two facilities; one in Phoenix and another one in Riverside, California, both of which were catering to better stock and enhanced our service level as well as our purchasing of construction materials, specifically to the pool industry. That has spurred greater coverage overall in those markets and it's something that we will be looking to do in other markets in 2006 and the years to come. So what that does, Brent, is facilitate the process by which we're able to add complementary products.

One of the constraints that we have simply stated is space. In many facilities, we usually lease for three to five-year terms and to the extent our natural business grows, that is the most profitable from a return on capital standpoint.

What we do do is in anticipating the addition of complementary products, when we lease new facilities, we lease them with more yard space and also with more coverage space in order to be able to bring those products online. We have not in any way approached full capacity in terms of stocking and selling our complementary products in all of our locations. In fact, we're just barely -- over half of our locations are really with the space capacity at this juncture to do that. And that is something that, again, as those leases expire for the next two or three years, we will begin to continue to add capacity to be able to handle complementary products more efficiently, together with the regional construction warehouses that we call them to better serve the customer base.

That's very helpful. Could you just remind me also how many product classes you really rolled out now in total?

Our focus on a program support basis is for six product categories, the major one of which is construction materials, followed by plumbing products unique to the pool industry, which is mainly pipe and fittings and certain type sizes and fittings and then electrical, which is conduit junction boxes and those types of products.

Okay, thanks a lot. Good quarter.

Doug Lane, Avondale Partners.

Good morning, everybody. Question on CapEx. I noticed it was up a little bit and obviously you had those construction service centers you were building. What is your CapEx outlook this year, Mark?

I will take that. When you look out, it's 1/2 to 3/4 of 1% of our sales is the normal expectation. We do front load, and it wasn't really so much for the construction service warehouses as it was for IT. Half to better than half of our CapEx spend is really on systems infrastructure, and a lot of that expenditure is front-loaded in the year given that try to do everything in anticipation of the pool season. So a lot of the projects that are being worked on now behind the scenes we begin to roll on and implement and implement in the fourth quarter and consummate those in the first quarter. So that is when those items come through and they are capitalized.

So the volume share of the CapEx is probably already in the six-month number?

I would say better than half, certainly and there will be some of those new projects being (indiscernible) for 2006 that will get started in the fourth quarter or late third quarter, early fourth quarter, and they will hit some as well as then. But we're more than halfway through it at this juncture.

So just to put some sort of number around it, something around 7 or 8 million this year, if you're at 5.6 year-to-date, and then --.

I would say more like 8 to 10.

8 to 10?

8 to 10. When you look at half to three-quarters of 1% is the range that we would fall under, it would be somewhere in the 8 to 10 range.

And then next year, just sort of move that up along with sales?

Yes, three-quarters of 1%.

Okay, so there is nothing special either that goes away or comes online next year that takes it off that kind of trajectory?

No. It's like everything else does; you have to keep on building infrastructure if you want to enhance the support systems and the controls and everything else.

Are you going to build more construction service centers next year?

Yes.

Have you picked out how many and where yet or?

That's something that we're working on now and we will hopefully have that all pinned down by the end of August.

So it sounds like you're happy with the first two?

Excellent. Excellent, particularly the management team there and the branch buy-in to the processes as a tool to help them grow their business has been very, very positive, and that's spurred on -- are looking at it to a number of other markets as well.

At your meeting last year, you mentioned your construction business was -- it's tiny. It's $16 million. Do you have any idea what kind of number to put on that for this year?

That's embedded in our 31% growth in overall complementary products. And I would tell you that overall, when you look at construction materials, that's growing at an accelerated rate given, again, those additional facilities being put in place.

Right, and the small base too?

Yes.

Okay. And what about your other initiative with the home builders? Any update there?

Continuing to make a lot of progress. We have now several home builders that before were not offering pools with homes, are now offering pools with homes as an upsale opportunity and obviously increased profit opportunity for them. There are others that were working and beginning to offer pools with homes before we initiated the relationship, and now in their sales process, they're selling and offering a more fully-loaded pool to really better serve the consumer and their desires.

So in both respects, it's working progressively well. That is more of a pioneering effort. Our objective is for every home to have a pool much like they have -- or every new home to have a pool just like they have an attached garage and central air-conditioning. That obviously is not necessarily a 2006 agenda item, but we measure progress sometimes in small ways. When we get the major builders to incorporate that as a standard offering, be it in Florida, Texas, Arizona, California, which are the easiest markets for them to do that in; once we start doing that on a national basis, then we will be really successful.

How is this going to play out, Manny? Will there be in announcement, or it's just the kind of thing where in some regions, they will test the idea and then let it build kind of gradually? How are we going to get a feel for the progress of how the big home builders are doing with pools with new homes?

Virtually all of the home builders that we've worked with so far, the way they approach it is that they have a very decentralized decision-making process in terms of specific add-ons that are done on a market-by-market basis. So although we get -- in a few cases, we have what I will call corporate support, we still have to work and sell that to the local division president and work with that local division president or region president to help them incorporate that into their sales offering.

We measure that internally based on the sales that we are realizing to those customers and the numbers are frankly to date are modest; modest being not quite 1% of our total sales in terms of the new businesses that has been generated. But on the other hand, it's really more of a pioneering after, and that's why I describe it as more of a long-term as changing the complete mindset. And that is something that will happen over time.

As we believe as individual regions that tested and are effective and increased their sales of pools with homes from 10% to 20% to 30%, increase their profits from those homes based on the addition of having a more fully loaded home; in this case, with a pool. As that happens, that will begin to spread not only throughout that organization as a builder, but also throughout the industry. And then when you look out, fast forward 10 to 15 years out, then it will be a radically different landscape. We're now in the pioneering stages of that effort.

That's good perspective. One last thing, and just I am curious because looking at weather in Florida and Texas, it just seems that Florida was unusually rainy in the second quarter and Texas was unusually dry in the second quarter. And I know the second quarter, the swing factor is going to be more of the northern and eastern markets. But I was wondering what the impact is from having an unusually dry or unusually wet season in markets like Florida or Texas. Is there an impact, or us it just does not matter?

Hot and dry is best of all. So that certainly had a positive impact on Texas. And wet is not necessarily that bad. It does certainly adversely impact pool construction and remodeling. On the other hand, it does help pool maintenance and repair. Probably the overall impact from the excessive rains is a net negative to our business, but again not a dramatic negative.

So you are very perceptive there in terms of, when you look at the individual markets, although we did very well across the Sunbelt consistently throughout the second quarter, the Texas market specifically was a little stronger than either one of California or Florida.

Was Florida unusually weak?

No -- it's just varying, not significant.

Thank you.

Anthony Lebiedzinski, Sidoti & Company.

Good morning. Just a couple of questions. Were the base business sales growth, was that consistent with total sales growth, or was there any variation there?

It was 11% in contrast to the overall 12. The additional 1% net is the difference between adding the acquisition that we made in December of 2004 -- Pool Tech (ph) -- less the elimination or not factoring in the manufacturing sales to third-party customers. So the net impact of that was 1%.

And you guys also opened a couple of the construction service centers as well?

Well, the construction service centers are really behind the scenes. They in fact are like extended warehouses. If you can visualize it this way, let's say in Phoenix, we have six locations between Superior and SAP (ph). They are serving their customers. Instead of them each adding 10,000 square feet, call it, in yard space to support stocking and selling of certain construction materials unique to our customer base, what we did was we had one facility that does not have to have quite 10 times 6000, or 6 times 10,000 square feet, so we can have some efficiencies there, and they provide the back-end support for those six locations.

That's helpful. In terms of the -- you mentioned your focus on supply chain management. What are you doing differently now versus last year, and what do you think the opportunities there are to improve that?

(indiscernible) the end of the question. The opportunities are huge. When you look at supply chain management from our standpoint, it's every facet of everything that we do from, first of all, defining what we stock to defining where we source that product to defining how we buy it, in terms of frequency, in terms of where -- how we bring it into our warehouses, how we put it away. And when you look at every facet of our business and it's something that it's fundamental to us, the distributor. So we have to as well as extending it through how we sell it and who we sell it to.

So there's well over 80 steps along the way and 80 individual processes. And each one of those is very diligently reviewed. Individuals within the organization have responsibilities for working to continuously evaluate and see how they can enhance each individual step in order to provide greater value more efficiently.

If you look over time, we have made a fair amount of progress in that endeavor, but every time we look at something, incredibly we find many more opportunities for improvement. So to that end, I go back and we are very fortunate to be in a young industry with a very unique position within the industry. But furthermore in terms of internal execution, we have many, many opportunities for improvement for many years into the future.

Okay, thank you.

(Operator Instructions). Keith Hughes, Suntrust Robinson Humphrey.

Good morning, this is Howard Kelly for Keith. Can you please provide an update on your private-label initiatives and sourcing initiatives?

Sure, great question, Howard. In terms of that process, that's evolutionary and in fact, it's integral to our supply chain management. In answering Anthony's question a minute ago, one of the caveats is -- how do we sell that product, and also how do we source that product? And private label is certainly a tool in both areas.

It serves us in two respects. It serves us first in enabling us to sell like or similar product at prices modestly higher than our competition by virtue of the fact that they don't offer the same exact product with the same exact label. It also helps us from a sourcing standpoint in certain cases where certain product lines have little to no brand equity at the trade level, much less at the consumer local. If we can realize a significant sourcing benefit, and private label is a way to also use that as a means to create awareness and distribute to other channels. So we have a long ways to go.

In terms of our overall sales, we are increasing our private-label component of our overall sales by something in the neighborhood of 1% per year, but we're still less than 20% of our products being sold via private-label. So given the nature of our industry, we could continue to be doing that in a very disciplined and diligent fashion for the next 10 to 20 years and continue to see some of that improvement passing through through our gross margin and certainly operating profit.

Great, thank you.

Kathryn Thompson, BB&T Capital Markets.

Thank you. Just a quick follow-up question I meant to ask when I was up earlier. And not to beat a dead horse on chemicals, but do you have any idea when the tariffs will be imposed?

My understanding is the tariff was made effective in June.

So, it was made effective in June, okay. And also just to clarify, do those companies' manufacturers that did not go ahead and make (indiscernible) prices, this is retroactive back to December? Correct?

That is correct.

Okay, thanks.

At this time, there are no further questions.

Thank you, Meredith, and thank you all for listening to our second quarter results conference call. As I like to say, we are very fortunate, we are very fortunate to have a great team of employees that are constantly working to improve their performance and their execution in order to fulfill our responsibilities as well as realize the opportunities we have within this young and growing industry. Thank you again.

Thank you. This concludes today's SCP second-quarter 2005 earnings release conference call. You may now disconnect.