Pool Corp (POOL) 2006 Q1 法說會逐字稿

Good morning. My name is Malika and I will be your conference operator today. At this time I would like to welcome everyone to the SCP Pool earnings 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 session. (OPERATOR INSTRUCTIONS). At this time I would like to turn the call over to Mark Joslin, CFO of SCP Pool. Please go ahead, sir.

Thank you, Malika, and good morning, everyone. Welcome to Pool Corp.'s first-quarter 2006 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 2006 and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and variables that could cause actual results to differ materially from the projected results are discussed in our most recent Form 10-K as filed with the SEC. I'll turn the call over now to our Chairman, Rusty Sexton.

Good morning and thank you, Mark. Welcome all. In a few weeks we will have our 10th annual shareholders meeting, that's 40 quarters of continuous growth both in sales and in earnings and resulting shareholder value. The first-quarter 2006 was certainly no exception, quite the contrary. It was a very strong quarter, one of the better relative quarters we've experienced. With sales being up 31% and base business up 15% with complementary products up 36% and operating income up 46% and earnings per share at $0.12 and significant increase in shareholder value from the beginning of the quarter.

In 2006 weather certainly was a positive factor for us and that has been somewhat long time coming, as we haven't experienced a lot of real good weather in the recent several years, as well as our strong presence in the economically strong Sunbelt area that we have presence in. So those combinations and a lot of other things that Manny will tell you about, I'm going to turn the call over to Mr. Manuel Perez, our President and CEO, to give you the details. Manny?

Thank you, Rusty. And thank you all for joining us for our first 2006 results conference call. As evidenced by our press release, we continue to make progress on many fronts. Our base business, as Rusty mentioned, increased by 15% and the Horizon business, which we acquired and closed on 1st of October of 2005, those sales increased by 23% versus their first quarter of last year and their base business sales increased by 18%. So certainly Horizon is integrating very well as part of the Pool Corporation organization.

Our gross profit margins increased by 100 basis points as better price discipline and the fourth-quarter inventory investment yielded the desired results. As a footnote there, our chemical margins were up slightly versus last year's first quarter as this market segment has begun to behave more rationally, although we still have some issues in certain pockets of the country and there is still some irrational behavior.

Our base business SG&A increased by 10 basis points as we invested in the opening of nine new service centers in the first quarter; and that by the way included three new Horizon service centers. These new service centers adversely impacted our first-quarter earnings per share by a penny. By the way, just talking about Horizon, Horizon also added three new service centers in the latter part of 2005, so therefore its network has increased from the 37 service centers in the 2005 season to the current 43 centers for the 2006 season.

Overall our base business operating margins increased by 100 basis points from 4.2% to 5.2% this year as we improved our overall effectiveness while still continuing to invest in our future growth. In terms of strategic initiatives, our consumer advertising and educational programs to promote the growth of the industry continue to blossom. Specifically this year we have generated 13,000 hard leads for our builder and remodel customers with the major wave of advertising still ahead. Our efforts to promote the growth of our customers' businesses continued to generate the desired results as program accounts growth again was greater than the Company average.

From a productline standpoint complementary products, which, by the way, for this reference point do not include Horizon, continued their strong performance increasing by 36% versus last year's first quarter. To support these efforts on complementary products we opened our third stand-alone construction products facility in Houston and also have expanded the warehouse capacity in several of our service centers to better address and more fully address complementary products in those opportunities.

All in all we continue to make progress, but we have a long way to go. At this point in the year the emphasis is on execution on the 2006 season upon us. But we are also evaluating and determining what growth opportunities we will be investing in to make our business better in 2007 and beyond. Fortunately we're in the situation of having plenty of opportunities with the key being the establishment of priorities and then investing the resources necessary to convert those opportunities into results. We are confident that our ongoing investment in people, systems and technology will continue to generate the strong results that we've had historically.

Now I'll turn the call over to Mark for more financial commentary.

Thank you, Manny. First I'd like to comment on our balance sheet and cash flow. Our trade receivables at quarter end were at $212 million, up 29% over prior year. This is consistent with our 31% growth in revenue year-over-year. Our days sales outstanding increased by half a day due to the inclusion of Horizon's receivables in this calculation in 2006.

Our inventories at the end of the quarter of $406 million were up 45% over last year. This is consistent with both our increased level of business and the heavy inventory buy in of product on favorable terms that we discussed in our last conference call. Although we are carrying higher debt levels and consequently interest expense to fund this, we will benefit from improved margins throughout the first half of the year.

Looking at our inventory management statistics, our inventory turns have slowed to 4 times this year from 4.4 times last year reflecting the fourth-quarter buy in. However, our inventory quality remains high as measured by the percent of inventory in our fastest turning inventory classes.

Looking at our cash flow, you can see that as usual at this time of year we've used cash to build working capital ahead of the peak Q2 season. In addition, we continue to benefit from the deferral provisions of hurricane tax relief offered by the IRS. All of our required tax payments from Q3 in 2005 through Q2 2006 are deferred until August 2006.

Now let me take a moment to comment on stock option expensing, a subject that has long been discussed and whose time has finally arrived. As a reminder, we had two choices on how to adopt option expensing -- going forward only or also adjusting history. We chose to adjust history as we felt this provides a cleaner comparison to our results going forward. As you saw from our release last night, we now anticipate the impact of option expensing to be $0.08 a share in 2006 which is greater than we previously projected and greater than in prior years.

The biggest change from our pro forma disclosures in the past is the requirement under the new accounting guidelines to accelerate expensing of stock options to employees who are retirement eligible under our stock option plan. Retirement eligible refers to employees with at least ten years of service who are age 55 or older. For individuals who have already met these requirements, their options are fully expensed when issued. For employees who will become retirement eligible before their options vest, their options are now expensed over the time until their retirement eligibility date. The net result is an acceleration of option and expense for these employees.

Going forward we would expect our expense for options to grow marginally each year as our employee base ages. At this point I'll turn the call back over to our operator who can begin the question-and-answer session.

(OPERATOR INSTRUCTIONS). Kathryn Thompson, Avondale Partners.

Thanks, great quarter. Just wanted to know as far as your sales growth, how much was that -- or price increases contribute to sales growth? And also related to that, how much of the base business growth was a direct result of price increases in the quarter?

Kathryn, thank you. Of the 15% increase in base business approximately I would say the low to mid single digits percentagewise -- I'd say about 4% or so is an estimate. We don't have a hard number because of the mix of products, but somewhere around 4% of the number would be due to inflation. I would also apply all the way across, but basically 4% is inflation.

David Mann.

Thank you very much. Manny or Mark, when you look at the second-quarter gross margin opportunity, based on how much you've already sold of the early buys, should we expect to see similar kind of gross margin improvement in the quarter or are there some other issues that might either restrain it or help to improve it?

That's a great question, David. If you look at the inventory that we had at year-end '05, approximately or close to 80% of that inventory, since they were in the high velocity items, was in fact sold in the first quarter of '06. So a big chunk of the benefit has already flowed through.

If you look at where we're sitting now on inventory at the end of the first quarter, we have perhaps about $40 million or so, $40 million to $50 million -- a little bit more than we would ideally have from an inventory management standpoint, but again, that's the carry over benefit.

When you look at our total cost of sales in the second quarter, which would approach $500 million, that order of magnitude is significantly less than it was in the first quarter. So while we will still see some benefit in the second quarter, the order of magnitude will be a lot more modest than it was in the first quarter.

And in terms of Horizon, can you just comment on how that affected your gross margin in the first quarter and how you see it affecting the second quarter?

The impact on a gross margin line is pretty modest. If you look at the addendum to the press release, which indicates the base business as distinguished from acquired businesses, and you can see that the gross margins for the acquired businesses, which is primarily -- 90% of it is Horizon, it is very close to 27.6 versus 28.2.

And then one last question on complementary products. It looks like in the first quarter the growth rate accelerated a little bit. Should we expect that to be a sign of things to come? Anything unusual you think that helped drive that acceleration?

I think that when you look at the overall first quarter, part of the reason for the number being 15% year-on-year was certainly helped by the mild winter and the positive impact that that had in January and February on our business. So complementary products, while it will still be very strong and should be at or around 30% for the year, I think the same benefit that took place in the first quarter to our overall business, being 15% growth which is obviously -- not obviously, but realistically not a number to project for the year and that same thought process would apply to complementary products with some level of moderation in the next nine months of the year.

Very good, thank you.

Nate Brochmann, William Blair.

Hello, This is Jeff Germanotta for Nate Brochmann. A couple questions. Can you comment a little bit on how Latham is performing and what the outlook is for that business this year? And secondly, the data for program sales?

Good morning, Jeff. Latham is performing well. The Latham business is primarily geared towards the packaged pool markets investor -- the core products, although they are now in the fiberglass business with the acquisition that they made in the third quarter of last year, but they're still heavily weighted towards packaged pool markets which are by and large weighted towards the northern part of the country. The fact that there was a mild winter is certainly a very positive sign overall and they are operationally tracking ahead of plan through the first quarter much like we are given the mild January and February. So Latham is coming along well in that regard.

In terms of program accounts that, continues to be a real strength for us. And frankly, one of the things that we're having from a measurement standpoint, Jeff, is at a certain point our customers on programs are operating at full capacity and that's really where we are. Given the mild weather overall, obviously our sales were very strong as reported, so the differential in terms of program accounts that we typically would have, which is about 10 points more than the customers not on programs, that kind of differential shrank a bit because everybody was very busy. Certainly program accounts are growing at about a 50% rate faster than the non program accounts and they're basically operating at full capacity.

Thank you.

Thank you.

Anthony Lebiedzinski, Sidoti & Co.

Good morning, a couple of questions. First, could you give us a comment as far as base business sales by region in the first quarter? And any comment also about the current trends so far into the second quarter?

Okay. By region on a percentage basis, if you take the 15% out of the Company average obviously, you would have a slightly higher percent than that in the northern markets and a slightly lower percent than that across the board in the first quarter from California through Texas and Florida. So without giving you specifics, I would say that from California to Florida it was all in the 12 to 15% type of range and then the northern markets would be somewhat higher than that percentagewise, although it's a smaller number, to creep the average up to the 15% number.

In terms of how that played out, I'm going to give you a little bit more information than you asked for, Anthony. The way that played out during the quarter is that the first two months of January and February had year-on-year very high-levels of growth, let's say at or around 20%, with the March month being more reasonable, more call it in line with expectations -- in the low double-digit percent type number. And when you look at April to date, April to date is tracking on a daily sales rate basis almost at the March level.

And the caveat there is -- as I think most of you on the call know, and I know, Anthony, you know very well -- our daily sales rate creeps up during the first half of the year and then kind of unwinds in the second half of the year. And therefore, when we look at our sales through yesterday, our daily sales rate is below the -- above the April average of last year, but below that 10 to 12% type growth rate, but it's increasing every day. So by the time the month ends I expect that our daily sales rate will be very close to that rate for the month.

Okay, that's helpful. And any comments as far as how Europe is and also can you give us maybe how that was in the first quarter?

Europe -- Europe did not have the same weather benefit that the northern half of the U.S. had. And as you know, most of Europe is heavily weighted towards northern-like markets with northern-like seasonality. So they did not have the same level of mild weather. Our sales growth rate there given our small base on a percentage basis was still strong and still comparable to the U.S. market, but that's not so much because of weather. It's really driven more driven by the fact that we have a very small base.

Okay. And lastly, as far as the complementary products are concerned, can you tell us whether or not all of your service centers carry complementary products? And if so, what are the opportunities to expand the productline up and maybe you could give us some specific examples what types of products you carry in some service centers that you plan to add to other service centers?

That's a great question and that's something that we've been gradually rolling out through our network. When you look at complementary products the number one category as a group are building materials. And one of the issues that we've had, frankly, is warehouse capacity. Given the growth of our core business in the markets that we're in we run out of space in some cases before our leases run out and we try to work with this confined to the existing space.

We continue to expand our facility sizes as those leases come up, and in fact in some cases we have stepped up in a number of markets and are in fact paying double rent in certain facilities because of the growth of our business, especially when you factor in complementary products and the space needs that are required.

So to answer your question in a roundabout way, I can't give you specific numbers, but I know that a majority at this juncture of our -- a strong majority of our SCP and Superior locations are stocking complementary products to some degree. In markets where we have the building materials or construction warehouses -- construction materials warehouses as we do in Riverside, California; Phoenix, Arizona and now in Houston, Texas -- that serves to mitigate the issue, the constraints that we have in our core locations of not having enough space.

And we're continuing to expand that as we take on new facilities, factoring more of that space -- those space requirements in. But all in all, we're still not fully rolled out on a national basis with the right capacities. Again, that's a transitionary period. It's going to take us the better part of the next two to three years to completely role that out given the leases that we have currently outstanding.

Okay, thank you.

Keith Hughes, SunTrust Robinson.

In the addendum where you discuss the acquired companies, the SG&A as a percentage of sales is a good bit higher than the base business. Will that nominal number stay the same and thus as a percentage of sales go down as we head into the season or what's going to be happening there?

That's a great observation. There are two factors that affect that. One is certainly the seasonality of the business and the acquired business -- the seasonality for irrigation, which is the lion's share of that, is very similar to the pool seasonality. So much like the pool number will come down in absolute terms as a percentage of sales, so will the acquired business component come down as a percentage of sales.

That number will still be modestly higher and that's simply driven by scale. If you look at the base business on an annual basis, the sales per location average is for 2006 just over $8 million per location. On the other hand, for the acquired business the sales per location average is a shade under $5 million. So therefore, that differential leads to a proportionately higher SG&A.

Once you've had this in the mix for 12 months from now, are there things you can do to get the SG&A down in the off-season?

There are certain things that one can do on a short-term basis. On a long-term basis, which is in my mind the better solution, is to continue to build the sales and TV dollar growth per location, per person and that happens gradually over time.

Thank you.

Curt Woodworth, JPMorgan.

Good morning; it's Alex Johnson for Curt. Can you layout any expenses that were associated with opening these new Horizon locations?

Sure. And I'll tell you, it's very similar to opening up an SCP or Superior location. And when you look at the adverse impact from the nine locations opened in the quarter net of the contributions to sales and gross profit contributions that weren't realized, that's approximately $1 million or about a penny a share adverse impact that we had in the quarter.

Thank you.

(OPERATOR INSTRUCTIONS). Kathryn Thompson, Avondale Partners.

Sorry, I was cut off over here, we had a little bit of a storm. But I was just trying to ask a question on Horizon and if You've already covered the subject I apologize. A couple different questions with that. First, how's the progress of that acquisition going and rolling in? Two, what type of sales should we see in '06? And are you still looking for about a $0.05 to $0.06 accretion? And then finally, on Horizon too, how much of the acquired business revenue in Q1 was attributable to Horizon? Thank you.

Let me take those one at a time. Of the reported $46 million of acquired business revenue in the quarter, about 90% of that was directly related to Horizon. In terms of the Horizon business, the Horizon sales growth for the quarter was 23% versus the first quarter of last year and if you do a base business calculation for them, much like we do for the overall base business, their base business sales increased by 18% year-on-year. So they're tracking along fine.

On an annual basis, their annual sales finished at approximately $180 million in 2005 and our expectations are much like they would be for the overall pool side is growth of low double-digits -- very low double-digit growth year-on-year. So approximately $200 million would be their projected sales for 2006. Did I not cover the full question there, Kathryn? Is there anything I missed?

The $0.05 to $0.06 accretion.

On the accretion question, there are a couple of components here.

Okay.

On the accretion question there's a couple of components here that also fall and directly impact it. One is the amortization of certain components of the transactions such as noncompetes and other things like that that take away about a penny a share for the year. Secondly, there is obviously the incremental interest expense incurred as part of the transaction which overall is about a $0.04 to $0.05 impact adversely from an annualized basis.

So you take those two components, so from an operational standpoint you have the base business of Horizon, but from a pure accretion standpoint you have these factors that together add up to $0.05 or $0.06. And therefore, the bottom line in terms of accretion after all those adjustments are factored in is still the same nickel that we communicated when we did the transaction back in October.

Okay. Just finally, just looking into -- Q1 is obviously not as big a quarter for you all and going into Q2 and Q3, bigger quarters. How are sales looking going into the second quarter, particularly in the northern markets? Are you seeing continued strength trickle into Q2?

You did miss part of that communication. Anthony Lebiedzinski asked that question and specifically I'll just summarize it real quick. In the quarter, because of the mild winter, January and February were the standout months with March more closer to the 10 to 12% range in terms of year-on-year sales growth. And when April is done it will be very similar to what March is. So I would expect that will be more the norm for the year.

Okay, great. Thank you very much.

David Mann, Johnson Rice.

Thank you. Manny, I had a macro question I wanted to ask you. I think you guys have shown over the years that you've been able to do pretty well in different kind of economic environments, interest rate environments, what have you. I'm just curious, as you're starting or as we're starting to see perhaps housing prices come in in some of your markets and just perhaps the housing bubble issue that's out there -- how are you seeing any positive or negative trend in how that shows up in your business?

That's a good question and by and large, when all is said and done, there's really I would say no direct impact on our business. Let me give you the components of that just to give you complete color. Something somewhat less than 20% of the new pools go in with new homes, that number is somewhere in the -- really 10 to 15% of new pools are going in with new homes.

In the case of a slowdown in the construction of new homes where those news homes would have gone in with new pools, that obviously adversely impacts that component of the new pools. On the other side of the equation, one of the major issues that those in the construction trade have -- whether it be building of new homes, whether it be the building of new pools, even the remodeling of existing pools. One of the major issues that the construction trades have is access and availability of labor.

And one thought is that given that limitation that is basically limited our pool builder and full remodeler customers that are basically operating at capacity -- one thought that we have is that if in fact the construction of new homes slows down that should free up labor that becomes then available and enables our pool builder and remodel customers to add to their capacity.

So while there could be a small adverse impact on the portion of our business related to new pools for new homes, which again is a very small part of the new pool part of our business, the over riding positive of having more labor available should help the overall market for the building of new pools which, as you know, are primarily for existing homes as well as the remodeling of existing pools.

Very good, thanks for the insight.

Thank you.

Todd Griesbach, Columbia Wanger.

My question is in regard to there's been some reports out there that John Deere landscapes may possibly be up for sale. I was just wondering if you might comment on whether that might be an opportunity for you guys or potentially a threat if it were to fall into somebody else's hands.

We have not heard anything specifically about John Deere making a strategic decision with the investment they made back in 2001 to get into irrigation and landscape products distribution. And it's probably a little premature from my own perspective, given the fact that I know nothing about it. I can comment freely. Given the fact that they've made an acquisition in that same business segment in 2005.

Now speculating, as I think all of you would be in this case, of what would be the cases if that were to happen. I would view it as a net positive for us, independent of who the acquirer was. John Deere is a very good company, an excellent company, an excellent manufacturer and Deere landscapes is a good competitor, a very strong competitor of ours. But I think that if they were to decide to exit this area, this simple transaction and transition type issues that any company would incur, particularly if it's not somebody like a Deere would probably provide us with some tactical opportunities.

Thanks.

At this time there are no further questions. At this time I would like to turn the call over to the Company or closing commentaries.

Thank you, Malika, and thank you all again for participating in our first 2006 results conference call. We understand the opportunities available to us and we are committed to converting those opportunities into results. Thank you again.

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