Pool Corp (POOL) 2006 Q2 法說會逐字稿

Good morning. My name is Christel and I will be your conference operator today. At this time I would like to welcome everyone to the Pool Corp. second-quarter 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). I would now like to turn the call over to Mr. Mark Joslin, Pool Corporation's Chief Financial Officer. Please go ahead, sir.

Good morning, everyone. Welcome to Pool Corporation's second-quarter 2006 earnings conference call. I need to remind you that our discussion, 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 is discussed in our most recent Form 10-K as filed with the SEC. At this point I'll turn the call over to our CEO, Manny Perez de la Mesa.

Manny Perez de la Mesa: Thank you, Mark, and thank you all for joining us for our second 2006 results conference call. As evidenced by our press release, we generated solid results again in the very important for us second-quarter. Base business sales increased by 13% on top of last year's 11% growth and the Horizon business increased sales by 20% versus the prior year. Our base business gross profit margin increased by 70 basis points with better supply chain management including buy/sell discipline, product mix and forward buys yielding the desired results.

Our base business SG&A increased slightly as we invested in the opening of nine new Pool sales centers this year. These new sales centers adversely impacted our second-quarter earnings per share by a penny. With these additions we now have 258 sales centers including 44 Horizon centers which, by the way, are up from 37 at this same time last year. Our base business operating margin increased to 15% versus 14.4% last year as we continue to improve our operating effectiveness while still investing in our future growth.

In terms of strategic initiatives, our investment to promote the growth of the industry has generated over 32,000 hard leads for our builder and remodel customers year-to-date through swimmingpool.com. Our efforts to promote the growth of our customers' businesses continues to generate the desired results as evidenced by our base business sales growth and we have continued to operate more effectively as demonstrated by our expanded base business operating margin.

From a productline standpoint complementary products, excluding Horizon, continue their strong performance increasing by 23% versus last year's second quarter despite sourcing limitations of spas. Fundamentally we outgrew the capacity of our spa suppliers and have recently added more suppliers on the spa side to satisfy the market opportunity available to us. All of this is being realized in what I'll refer to as average weather in the quarter. Overall business conditions continue to be positive with July off to a good start. Given year-to-date results we now believe that approximately $1.80 in diluted earnings per share for 2006 is reasonable.

Now I'm going to stop to talk about the fundamentals of our business and the impact or potential impact of the economy. The foundation of our long-term growth is premised on our industry capturing a progressively greater share of major household discretionary expenditures of the growing base of middle to upper income households. Our long-term outlook in this regard is very positive supported by an aging population, rising income demographics, southern migration, etc.

In the short-term the most significant external factor for us is weather, as weather influences both pool use as well as new pool construction and remodeling. In every one of my eight years in this industry we have had markets that have had increases and decreases in the number of new pools added. Nothing helps sell more pools than hot dry weather and, likewise, nothing hurts new pools sales more than cool wet weather.

Regarding the economy -- today's strong economy that includes virtual full employment and a high rate of economic growth coupled with low long-term interest rates results in our industry being effectively at capacity in terms of the rate at which our customers can serve the consuming public. In fact, at an industry leadership conference that I attended last week, builder/remodeler at capacity was identified as the number one issue limiting industry growth by the builders and remodelers present.

For our business the stronger the economy the more middle and upper income households that are added to the base of potential pool owners the better it is for us in the long-term. Yet with only a 12% share of today's potential pool owners, the pool industry and our company are just scratching the surface of our potential.

All in all we continue to make progress, but we have a long way to go. We are finalizing now the growth opportunities that we will be investing in to make our business better in 2007 and beyond. Fortunately, we have plenty of opportunities to continue generating strong organic growth for many years into the future. Now I'll turn the call over to Mark for more financial commentary.

Thank you, Manny. First let me comment on our sales and operating expenses which increased 30% in Q2 compared to last year. If you look at our base business addendum to the press release you'll see that the acquired business, which is primarily Horizon, carries a higher expense load than the pool business reflecting the regional scope and leverage of that business. Excluding this, our sales and operating expenses as a percent of sales still ticked up slightly versus 2005 for both the quarter and year-to-date periods with the addition of nine new pool centers as mentioned by Manny.

Another line on the P&L I'd like to call your attention to is the equity earnings line which is where we record our interest and Latham. Our equity earnings from this investment are down $900,000 from last year to $1 million for the quarter primarily due to additional taxes we've been accruing since the fourth quarter of last year as discussed on previous conference calls. Overall this business is doing well having completed their second acquisition in the last nine months. Latham purchased Viking Pools, the leading manufacturer of fiberglass pools, in September of 2005 and just completed the purchase of Coverstar in June, the largest manufacturer of automatic pool coverers. Both of these are rapidly growing segments of the pool industry.

Now I'll comment on our balance sheet. Working capital management has been and continues to be a focus for us. However, that objectives is balanced with our desire to use our financial strength to take advantage of attractive inventory purchase opportunities. As we've discussed on various occasions, we've had more opportunity to do this over the last year due to the inflationary environment in the industry as manufacturers have pushed through commodity price increases.

Looking first at receivables, our trade receivables at quarter end were $296 million, up 28% over prior year which is consistent with our 25% growth in revenue for the quarter. Our days sales outstanding, DSO, calculated on a trailing 12-month basis increased 70 basis points due to the inclusion of Horizon's receivables in this calculation in 2006 given the slightly longer nature of the collection cycle in the irrigation and landscape business. Excluding Horizon, DSO actually improved for the Company by half a day year-over-year.

Our inventories at the end of the quarter of $367 million were up 48% over last year. This reflects both our increased level of business activity, buy in of product on favorable terms discussed earlier, and some stocking increases in higher margin product categories to improve customer service in these categories. To repeat a comment I made on our first-quarter call related to inventory buy ins, although we are carrying higher debt levels and consequently interest expense to fund this, we have benefited and should continue to benefit from improved margins from these investments.

One statistic that I can share with you that gives you an indication of the quality of this inventory is how our inventories on hand break down by class. We group inventory into 13 product classes based on sales value with classes one through five accounting for the vast majority of total sales. Excluding inventory added through the Horizon acquisition, 98% of the increase in our inventory value from last year is in these high velocity classes. We expect to work this down in the third quarter to be closer to normalized inventory levels.

Looking at our cash flow and specifically cash flow from operations, you can see that we used most of the increase in our net income to fund our working capital investment. You will see significant improvement in cash flow from operations in the third quarter with one exception. As I mentioned previously, we've been deferring much of our 2005 and 2006 tax payments until the third quarter and expect to make a combined payment of approximately $60 million before the end of the quarter. For the year, assuming no significant fourth-quarter buy in of inventories, we expect cash flow from operations to be consistent with net income.

Now I'll comment on our share repurchase activity. During the quarter we repurchased 1,033,000 shares of our stock in the open market at an average price of $42.41 for a total of $43,826,000. We also purchased an additional 97,000 shares in July for $4 million. Of our $50 million Board authorization for share repurchases we have $2.2 million remaining which our Board will address at its next meeting in early August.

One additional topic I'd like to cover is the impact of weather on our business which, as Manny said, is the single most important short-term impact to our business. We get the weather question regularly even from some of our longest shareholders, most likely because of some of the extreme regional weather conditions of late. I want to remind our listeners that the impact of weather on our business throughout the season is disclosed in a table in our 10-Qs and 10-K and I'd ask you to refer to this if you need to become reacquainted with it.

At this point I'll turn the call back over to our operator, Christel, to begin the question-and-answer session.

(OPERATOR INSTRUCTIONS). Kathryn Thompson, Avondale Partners.

Nice quarter. I just have a couple questions; the first just to reconfirm. Are you still looking for about 5% accretion with Horizon for fiscal '06 or are you having better expectations given the current quarter?

Manny Perez de la Mesa: For the year it would be modestly higher than $0.05 given the results of the second quarter and year-to-date, Kathryn.

Okay. And not trying to quantify, modest like a penny or two?

Manny Perez de la Mesa: Exactly.

Okay. Also, in terms of just -- I know that obviously weather is a bigger factor for you and your earnings on an annual basis, but how much visibility do you have in terms of pool builds on any given annual basis? And how does that affect your -- just broadly your business making decision as you plan each year?

Manny Perez de la Mesa: Good question. Let me give you a couple of perspectives there. First of all, there is pool building by the overall market and then there's pool building that our customers do themselves. We have been able to grow our share of market consistently every year and that's because our customers by and large are growing at a rate faster than the industry. So to that end -- and that includes every customer segment. So therefore to that end our builders and their growth is a little bit faster than the industry's growth and they again made share.

Our visibility, frankly, is limited in that builders have been virtually at capacity and continue to be at capacity today. There are vagaries from market to market depending primarily on weather in terms of demand month to month, sometimes even quarter to quarter, and that results in permit information that kind of jumps around all the time. But when you look at it, our builders are consistently busy because they're operating at capacity. In fact, that's, as I mentioned in my opening comments, that's the number one underlying issue that the leading larger builders in this industry have and that is their own capacity to do more work. A good many of them are basically tapped and have been tapped for a number of years.

Okay, great. Could you also elaborate a little bit more on your spa comments or your opening comments with constraints with that segment?

Manny Perez de la Mesa: Sure. We started complementary products initiative, one of the areas that we identified as an opportunity was spas and we really began the spa initiative in 2001. At that point we lined up one primary supplier. When we approached the capacity of that supplier's ability to supply us we lined up a second supplier. Because of our growth and some other issues that many manufacturers have had in terms of their own capacity constraints, we did not react fast enough to add additional capacity and therefore when we got to the March/April period of this year we were basically capped in terms of our ability to grow that segment of our business.

We have since added two new additional suppliers and we believe that with those suppliers coming on board in the third quarter we'll be able to renew the growth in the sales of spas third quarter and on. But there was a -- in the second quarter effectively our sales were flat.

Okay. So flat for Q2?

Manny Perez de la Mesa: Yes, and that obviously waters down the increased and complementary sales in total.

And I would assume that with the addition of a couple of new suppliers you would see an increase in the back half?

Manny Perez de la Mesa: Exactly. We'll go back to our regular rate of increasing spa sales commensurate with all complementary products approaching 30%?

How much of an impact was that on the quarter?

Manny Perez de la Mesa: That would have impacted us probably to the tune of -- if you look at earnings per share it probably cost us a good penny to perhaps two.

All right. And finally, just to reiterate, with your inventories -- it's obviously a significant increase year-over-year, but is this the second quarter where you all have been focusing on pre buying?

Manny Perez de la Mesa: What happened there, Kathryn, was that our three primary and largest vendors -- Pentair, Hayward and Waterpik, all announced price increases mid to late May. And what we did was we bought into basically our August requirements in order to take advantage of deferring the impact to us of those price increases.

And I think in terms of how long have we been doing that -- certainly we did in the fourth quarter and again here in the second quarter the most significant. We did some of that in the first quarter but not to the same extent.

Okay. Great, thank you very much.

Jeff Germanotta, William Blair.

Good morning, gentlemen, and nice quarter. First three questions are just some housekeeping items. Can you talk about inflation both in the cost of your products and average selling prices?

Manny Perez de la Mesa: Overall industry wide it's going to be about 3 to 4% for the year.

And it was about that for the quarter too?

Manny Perez de la Mesa: Year on your, yes.

Okay. And you just had a round of price increases, you've tried to buy in advance of that --

Manny Perez de la Mesa: On equipment, yes.

Do you think we're done with that or is there rumor of further price increases as the year progresses?

Manny Perez de la Mesa: I would suspect that some of the key manufacturers will relook at their cost positions in the fall and revisit that for 2007 pricing. And it's probably too early to tell. We would have visibility of that in September/October.

It's rather unusual to do a midyear price increase.

Manny Perez de la Mesa: Very unusual. But what happens here, Jeff, is that the strong demand across the board in the industry enables the key manufacturers to pass on their cost increases.

The price pressure we saw several quarters ago in chemicals, has that abated?

Manny Perez de la Mesa: Yes. That market and the turbulence there, that was primarily driven by tariffs on imported product caused tremendous turn in 2005. Some of that spilled over -- a little bit spilled over into early 2006, but by and large that turbulence has settled down tremendously.

And can you frame for us how complementary product sales growth was vis-à-vis total sales growth or how much it contributed to total sales growth in the quarter.

Manny Perez de la Mesa: Well the total -- the complementary products sales growth per se was 23% which, by the way, construction products were pushing 30%. It was spas that watered it down by being basically flat year on year. If you bear with me I'll come back with that comment.

Okay. I'm sorry. My next question would be program sales, can you talk about how that increased year-over-year?

Manny Perez de la Mesa: Program sales continue to grow at a much faster rate than the overall market and the year-to-date program customers are approaching 20% year-on-year growth in contrast to non program customers at about -- are closer to 10%.

And a little color on the quarter, how the April, May and June sales shaped up if possible.

Manny Perez de la Mesa: In terms of daily sales rates it was very similar, they were all in the 12 to 14% type of range on a daily sales rate basis. We had one more day, one month and one less day, another month versus last year sales days, but on a daily sales rate basis they were all very close to within a point or so of a 13% average for the quarter.

Okay. Option expensing in the quarter, how did that -- what was that expense this year versus last year same time?

Manny Perez de la Mesa: Options expense in the quarter was approximately $0.02 per share and last year was more like 1.5 pennies. There was about a $400,000 delta year-to-year.

And I know you've commented on the working capital side that you expect working capital to approximate net income when the year is finished. Do you think we're done with the pre buying activity for a time or if we get threat of another price increase in the fall we'll be buying in the third quarter in advance of that as well?

Manny Perez de la Mesa: Just to clarify, the cash from operations would be approximately equal to net income.

Oh, I'm sorry.

Manny Perez de la Mesa: In terms of net working capital, the main -- receivables are basically very seasonal and in fact we're doing exceptionally well there having reduced that by half a day versus last year on the pool side, and also making progress on the Horizon side. On the inventory buy ins, that was basically driven by the three main vendors that I referenced earlier. And that inventory was basically received in the latter part of May and early June. And we purposely bought through our August requirement. So by September that will all be back in balance.

I would say that to the extent that -- and there's two components here, Jeff. One is actual inventory purchases, generally speaking we will do our regular early buys in the September or early buy orders in the September/October time frame. From a -- and back to cash flow, the real difference there is when we pay for those purchases, those purchases normally come with dated terms. So unless a vendor is -- aggressively provides us some real sweetheart deal in terms of free paying any of those dated terms purchases, you would expect to see that our cash flow operations for the year and net income levels are higher.

And then last question and I'll give somebody else a chance. Can you comment on the acquisition pipeline first as it relates to the pool business and then second as it relates to the irrigation and landscaping business?

Manny Perez de la Mesa: As a matter of policy we don't preannounce acquisitions, but it's safe to say that there's always dialogue going on. Acquisitions have historically served us well as a means to expand our network, but also as evidenced by our opening of 13 new sales centers in the first half of this year. We're not dependent on acquisitions to expand our footprint and we will look at both as viable vehicles with the same metrics in terms of return on capital requirements and impact contrast one versus the other as means to expand our network.

Thank you very much. Keep up the good work.

David Mann, Johnson Rice.

Good morning. First, Mark, could you comment a little bit on the issue with Latham and do you still expect Latham to contribute about $2 million this year?

Yes, in terms of the issue with Latham, you're talking I guess about the earnings being down versus last year. I think you may recall, David, on the fourth-quarter call we talked extensively about that, where we are required by accounting rules to double tax essentially Latham's income. They tax their income and then when we bring it into our earnings we tax it again. And we started doing that in the fourth quarter, so when you look at the year-over-year impact we didn't have that taxed in last year's results. So if you tax that as we're doing this year then really Latham's earnings were consistent year-over-year. And for the year $2 million is about right in terms of our earnings from them in total.

And in terms of the rest of the year, should we see more of an acceleration in the contribution than in the third quarter sizably over last year?

From Latham?

For Latham, yes.

Manny Perez de la Mesa: Remember, Mark just mentioned the fact that we accounted for the -- captured the accrual in the fourth quarter. So, on a year-on-year basis that will still not reflect itself as positively until you get to the fourth quarter.

Okay. But the fundamentals within their business are still pretty good?

Yes, fundamentals are good. They're performing well, their acquisitions they've made are in really key parts of the industry that are doing very well. They've just gone through a refinancing which will lower their effective interest costs. And as a business we think that they are performing well and we're happy with that investment.

Are there any signs, whether it be in Latham's business or any of your other segments of your business where you're seeing somewhat of a slower spend from the consumer on a discretionary item whether it be above ground pools, pools, the amount of accessories or that folks add on to their pools? Or folks are starting to go towards cheaper complementary products, anything along those lines?

Manny Perez de la Mesa: Generally speaking not. Above ground pools are up nicely this year as are a number of those items that you just referenced. The only product category that is not performing what I'll say up to speed other than the spas which is a slight issue, not really a demand issue or a sales issue -- that I mentioned earlier, is on heaters and heater sales are pretty flat year on year.

And the only point of reference that I have there are the fact that one is the higher cost of oil and gas, people perhaps deferring the addition or replacement of a heater. And secondly, the fact that we had in the shoulder of the season a reasonably warm April. That probably prompted some reduced demand for replacement units in that segment as well.

Okay. And then in terms of the spa issue, kind of surprised that the industry -- or I'm surprised that the industry was somewhat caught by surprise. Can you talk a little more -- you're saying it wasn't a demand issue per se, was there something in terms of a specific supplier not having manufacturing problems? Can you just elaborate a little more on how this came to a head?

Manny Perez de la Mesa: Basically it came to a head because, as we continue to impose increasing demands on two suppliers that we have for spas, they basically reached their capacity and we were not proactive enough in identifying that with enough visibility to develop alternative plans with either other suppliers -- well, basically with other suppliers to serve our needs and we dropped the ball basically there.

Okay. And how fast -- prior to this quarter, how fast was the spa business growing and what percentage of your business did it represent?

Manny Perez de la Mesa: It falls into complementary products and we were growing -- spas were growing at roughly 30% commensurate with all complementary products for the last several years.

Okay. Okay. And how quickly do you expect that to return to 30% or so? You think in the third quarter?

Manny Perez de la Mesa: We should be able to regain the traction lost by virtue of the addition of two additional suppliers. Supply should not be an issue for us in the third quarter. Obviously we lost a little bit of ground in terms of our ability to grow the business by virtue of the fact that we had a supply issue. But we should recover that pretty quickly.

Okay. Well, thanks for the candor on that, Manny.

Manny Perez de la Mesa: Thank you.

Michael Cox, Piper Jaffray.

My first question is on the direct sourcing programs you have in place. I was wondering if you could give us an update on that and whether the spa program falls within that and if this is something we should expect going forward as you move more into direct sourcing seeing some of the hurdles associated with that move?

Manny Perez de la Mesa: No, let me take two different -- answer the question two different ways. In the case of spas, spas falls under the umbrella of new product categories where our growth is usually much greater than the industry's growth or in some cases the manufacturer's ability to keep up with our growth. In those particular cases our sensitivity is in fact to ensure that the manufacturers that we buy from have that capacity to grow with us.

In most cases, given our scale and size and how we execute, individual manufacturers usually don't have that capacity. So therefore we have to add a second, third, fourth different suppliers over the course of time to be able to serve us and maintain our service level to our customers enabling us to fulfill our growth opportunities. And so that falls under that umbrella as more of a new product category.

The direct sourcing side is really where we take existing products and look at how can we reduce the cost of those existing products that we're selling by either finding a domestic or international manufacturer to do that product equal to or better than we're currently doing -- the quality attributes of the product at a lower cost or alternatively consolidating the sourcing of those product categories into a reduced set of vendors to again reduce cost.

And some of that we also incorporate under a private-label as well. That initiative continues to progress. Frankly, we are still very early in that process, although we've done a fair amount from an absolute standpoint in terms of improvement from where we started. The fact is that we as a distributor are first and foremost key on providing good customer service to our customers and therefore we're very reluctant to make wholesale changes even with significant cost reduction opportunities available to us until we have a lot of confidence in that we're able to have those products with the right quality at the right service level so that we don't impair our relationship with our customers overall by trying to bring those on to fast.

Okay, great. You mentioned that weather in the quarter was -- you characterized it as being average. I was wondering if you could talk about some of the regional differences or what type of drag the rain and inclement weather in the Northeast might have had on your business this quarter?

Manny Perez de la Mesa: Sure. If you look at the weather from a geography standpoint, the heavy rainfall in the West, particularly in April, coupled with the heavy rainfall in the northern part of the country in the month of June adversely impacted our business in those areas. On the other hand, the relatively peaking dry weather in the Southeast, Southwest through Texas, Oklahoma were beneficial. So you look at it -- part of the country was a little bit better than average, part of the country was worse, and all in all pretty much average.

All right, great. And my last question is on the Horizon business. You mentioned that Horizon grew 20%. Was that a base business calculation or was that the total business?

Manny Perez de la Mesa: That would be a base business type or same-store sales type of calculation.

Okay, great. Thanks.

Anthony Lebiedzinski, Sidoti.

Good morning. A couple of questions. Manny, you mentioned earlier that July is off to a good start. Is that sort of similar to what you saw in the second quarter?

Manny Perez de la Mesa: Similar to what we've seen second quarter and year-to-date, yes.

Okay. I was wondering if you could comment as to how much of your complementary product is tied to construction materials?

Manny Perez de la Mesa: Construction materials overall is far and away our largest category of products falling under complementary products representing approximately 75, 80% of our total sales dollars in complementary products today. It was more like 70%, but with spas being flat it increased year-on-year a little bit.

And I think you mentioned that construction material sales were up 30%, right?

Manny Perez de la Mesa: Close to 30%, yes.

Okay. In the previous calls you had mentioned that one of the issues with the pool builder capacity has been because a lot of the labor out there is really -- was tied to new home construction. Now that the housing market is slowing down do you think that perhaps the pool builder capacity could be improved or what's your comment regarding that?

Manny Perez de la Mesa: I think that that's certainly an opportunity and, in fact, part of the discussion of the meeting that we were having last week was in fact ways to attract those trades over and that labor over to our industry by providing them a means to accelerate their training and therefore enable them to help us accelerate the growth in this industry.

Okay, thank you.

Kathryn Thompson, Avondale Partners.

Just a follow-up -- I missed it on the call. Did you have any thoughts on reiteration of guidance or changing guidance for the current fiscal year?

I mentioned that in my opening comments, Kathryn, and the fact that at this juncture, given what the results have been year-to-date, we feel comfortable with $1.80 -- approximately $1.80 in diluted earnings per share for the year which is essentially the year-to-date earnings plus analyst consensus for the second half of the year.

Perfect. Thank you very much.

[Harry Vickery], Morgan Keegan.

I was wondering -- first of all, a housekeeping question. What was the interest rate on the borrowings for the share repurchase?

Manny Perez de la Mesa: The highest borrowing cost that we had in the quarter was 5.6%.

Okay. On the last call you had mentioned that the chemicals market had sort of straightened itself out but there were still some pockets of irrational behavior. I was wondering how that market is and what were the chlorine prices like during the quarter?

Manny Perez de la Mesa: As the quarter progressed those pockets kind of cleared themselves up as 2005 cost references were replaced by 2006 cost. And basically things stabilized a fair amount. There's always going to be some segment of irrational pricing whether it be pricing ignorance on the part of a competitor or supplier in terms of what the markets are selling at. But by and large chemicals have become more stable and sequentially as we progress during the quarter and year-to-date.

All right, great. Thanks a lot, guys.

Keith Hughes, SunTrust.

Actually this is Judy for Keith Hughes. You mentioned a $0.01 impact for the increase in SG&A for your investment in the new pool centers. Would you look for that to continue either in the core business or in the Horizon centers? Or should we look for the SG&A to improve for the Horizon business going forward?

Manny Perez de la Mesa: Let me answer that in two ways; I'll take one piece at a time. In the case of the what I'll call pool sales centers, in the pool sales centers we had an impact of a penny this year -- in the second quarter on top of the penny that we had as an adverse impact in the first quarter. That's in part driven by the fact that we've increased significantly the rate and the addition of new sales centers this year in contrast to the last two or three years.

That rate of increase in new sales centers should moderate over the course of time and that adverse 2 pennies year-to-date we should be able to recover in part in future years with a more moderate rate of increase. That is analogous to goodwill in an acquisition from an investment standpoint and that's how we view one in contrast to the other.

The Horizon side of the equation, when we've expanded and opened up seven new locations from 37 at this time last year to a current 44, also has an adverse impact. That adverse impact is in part captured in the results reflected to date. And in fact, to an earlier question which asked how Horizon was doing vis-à-vis our expectations of a nickel of accretion for the year -- and I referenced that it was tracking modestly ahead of that, it would be tracking even better than modestly ahead were it not for the, again, adverse impact from the opening of seven new locations.

But as we look at these things, Judy, we're looking at these not for 2006 -- or 2007 for that matter -- but we're looking at it long-term and we'll take those penny hits here and there all the time given that we envision that these are valid long-term opportunities.

Okay, great. Thanks for clearing that up.

Jeff Germanotta, William Blair.

Just a couple housekeeping questions on service center growth. Year-to-date how many have you opened up in the Pool and the Horizon business?

Manny Perez de la Mesa: Nine on the Pool side, four on the Horizon side.

And have your plans changed materially for 2006 in terms of continuing service center openings?

Manny Perez de la Mesa: We have a few more on both sides that will be on track for really 2007 season. They'll be opened up in the latter part of this year and early part of next year.

So about three for each business or --?

Manny Perez de la Mesa: No, it will be closer to 10 between the two.

Okay. Thank you.

Eric Elbell, Fenimore Asset Management.

Good morning, guys. A quick question -- would you be able to provide the timing of when you did your buyback during the quarter? I'm just looking -- it looks like the share base didn't really change, so I'm assuming it was towards the end of the quarter.

Manny Perez de la Mesa: That is correct; it started in the latter part of May and in through the better part of June.

Okay. And any commentary on how you evaluate what price is an appropriate price to pay and how you weigh that use of cash versus other options that might be available? Thanks.

Manny Perez de la Mesa: That's a great question. I'll take the latter part of that question first. As referenced in our Qs and Ks in terms of use of cash flow as a company the priorities are, first, what I'll refer to as maintenance CapEx to put in -- enhance our computer systems, leasehold improvements to the facilities whether that be new facilities or expansion into existing facilities. And altogether that represents about one half to three quarters of 1% of our sales.

Our second priority is for acquisitions which are strategic in nature where we're looking to either enter a new market or enhance our position in a market. And those are executed -- those transactions are executed opportunistically during the course of time in order to make sure that we have the disciplines in place and the management in place to improve those operations and fold them in effectively into our business.

Third, given the nature of the commitment, is dividends. Fourth is stock repurchase and fifth would be debt repayment. That's the priority. In terms of the fourth item which is stock repurchase, we look at that in two ways. One is, as disclosed when we had our annual shareholders' meeting in May and the press release that followed that shareholders' meeting, we at that point disclosed that the Board specifically authorized our repurchase of 600,000 shares in the following 12-month period. And that's primarily driven by an objective of minimizing and perhaps even further than minimizing the potential dilution of the issuance of stock options.

Part two is the opportunistic repurchase when we believe, from a long-term standpoint, our stock is trading at a very good valuation. And basically the last two factors played into our decisions to have bought back 1.1 million shares in basically the last two months or so.

Okay. Any other commentary you can provide in terms of when you talk about when you believe the stock is trading at a very good valuation in terms of how you view that or how you measure that?

Manny Perez de la Mesa: Sure. I'll give you the generic perspective. The generic perspective is that we have a fairly high level of confidence in what I'll call a base case scenario of earnings growth and enterprise value creation over time. And when we believe that the market is irrational and our stock is trading at those levels, that is when those opportunities are created.

Okay, thank you.

David Mann, Johnson Rice.

Thank you. I just wanted to go back over the base business SG&A increase you saw in the quarter. How many of the new centers that you've opened are included in that base business calculation?

Manny Perez de la Mesa: Nine.

They all are? Okay. And then should we then expect the base business to continue to delever SG&A over the rest of the year because of that?

Manny Perez de la Mesa: I would say that there will be some moderation as they work through. What happens there, David, too is that in the two or three months prior to the opening of the location we're incurring expenses to get those started with no sales, that is largely behind us. So there's a double drag that's also reflected in the numbers. Once they get opened then, although there is still a drag, the drag becomes mitigated. As they gain more and more traction in the marketplace that will turnover and become progressively more positive.

Okay, thank you.

[Justin] Thomas, Citibank.

I was hoping maybe you could break out the inventory related to Horizon or, more specifically, what amount of the inventory increase is related to the base business?

Manny Perez de la Mesa: Horizon had a little bit over $35 million of the inventory at quarter end.

And in the prior year second quarter, can you tell us that?

Manny Perez de la Mesa: For Horizon?

Yes.

Manny Perez de la Mesa: Horizon was not in our numbers last year second quarter.

But the increase year-over-year some is because of the acquisition, correct? So I'm just trying to get a normalized level of inventory.

Manny Perez de la Mesa: Oh, if you take Horizon -- and by the way, there were two smaller acquisitions, Italy -- Busatta in Italy as well as Direct Replacements in Georgia. But altogether it's approximately close to $37 million in inventory between the Horizon locations and those two other acquisitions which would not have been in our June 2005 numbers. So as a matter of course, if you want to know just an apples-to-apples comparison, you would take $37 million away from the $367 million and on a base business level you're looking at $330 million versus $247 million.

Thank you.

Paul [Strawke], Harvey Investment Management.

Thanks for taking the call. The question is, Manny, you suggested that the program customers growing at about the twice the rate of non program and I just wondered what kind of things they're up to to have that result?

Manny Perez de la Mesa: Sure. I'm not sure if you're familiar with whole program initiative that we launched in 2000 and have been building on every since, but essentially this industry and our customer base was, generally speaking, lacking in terms of tools to help them more effectively communicate with the consumer base as well as a means to have leads generated for them. So what we provide them is a full suite of resources. It begins with -- if we start from the lead generation side -- with major investment in advertising, both TV and Internet advertising, to drive consumers to our primary consumer website which is swimmingpool.com.

On that website not only do they get educated on pool ownership in general and are able to do everything from design a pool to look at a number of pool examples on a nationwide basis, but they also learn about pool maintenance and pool safety and things of that nature as well. In that process there is a built-in education process that also educates them on not wholly what I'll call a vanilla pool, but having a more fully loaded complete pool. So that initiative provides and then directly generates leads for our program customer base.

And again, those are consumers that are more educated on terms of pool ownership. And secondly, they have also been brought up to speed on how a fully loaded pool will look like and how that experience can be for them. So that generally speaking results in more sales.

Part two of that equation, we provide those program dealers professionally developed brochures and sales presentation material that conveys to that consumer a more professional image and, again, more soft sell in terms of more fully loaded products, much like you would if you were to look at a Lexus brochure or a BMW brochure.

Third, we develop websites and we have over 2,000 websites that we've developed and maintain for our customers that also help them convey a much more professional image as well as help them individually capture more business by virtue of having an Internet presence.

Fourth, we provide those program customers extensive sales training and other sales tools to help them be more effective in the wholesale process. And fifth, and not to be dismissed, is we have individual what we refer to as business development representatives that are assigned to these program accounts that work with these accounts to help them become more effective in every facet of how they manage their business.

Now the program participants, you say dealers, does that mean limited to construction or are those retailers as well?

Manny Perez de la Mesa: Those are retailers as well. They're builder -- remodel retailers are all program type customers.

And have you had any luck getting the retailers to open on Sunday?

Manny Perez de la Mesa: Not as much luck as we'd like to have. And in fact, we'd be very pleased if they'd just open on Saturdays all day. So not as much progress as we'd like to have.

Thank you very much.

Bill Gilcrest, the Hartford.

I'm all set; thanks a lot, guys.

[Tracy Levery], [Somerset] Capital Advisor.

I was trying to get your views on the organic growth model that you put forth in presentations. It looks to me in recent presentations over the last month or two there may have been a slight downgrading in terms of revenue growth across the board, sort of both market growth, the market share you plan to capture and complementary products.

And basically in a presentation a month or two ago your sort of targeted revenue growth, and this excludes acquisitions and things, was around 8 to 11% and now it looks like it's 7 to 9 -- not a huge difference but down. Yet the earnings per share growth target in the model remains at 15%. I wonder if you could just comment on that. Is there anything you're seeing in the marketplace that accounts for this?

Manny Perez de la Mesa: No, the different and the distinction there, Tracy, is that the 7 to 9% number is unit growth, whereas the number that would be an 11 to 12% type of number would reflect dollar growth. And the difference there is price inflation.

Okay. Again, the presentation is very useful especially for a relative newcomer to the Company, but I didn't see any annotation of that. But if that's the difference that's all (multiple speakers).

Manny Perez de la Mesa: That is the difference and it should be referenced in the presentation. But also specifically, just to give you a little bit further background, this industry prior to the last two years or so had very negligible if any price inflation. So therefore our long-term model that we've been conveying for the better part of our history as a company reflected a high single digit unit growth number on the long-term. And that has remained intact for at least the past eight years if not 12 years.

But with the impact of price inflation the last couple years, that in fact was understated in dollar terms. So therefore we reflect that on a more current basis while in the long-term, if the industry reverts back to a virtual zero price inflation scenario, the actual dollars also revert back to the high single digits as a long-term growth number. From an earnings per share long-term standpoint, independent of price inflation, the numbers then still end up being the same because that price inflation is largely neutral for us.

Okay, so the 15% EPS growth is still a good number. (multiple speakers) have some higher margin expansion obviously going forward, but you're still comfortable with the 15?

Manny Perez de la Mesa: Very much so.

Okay, thank you.

(OPERATOR INSTRUCTIONS).

I think we'll go ahead and wrap up at this point.

Manny Perez de la Mesa: Thank you again for participating. I think we've had more questions on this call than any other call, which is good. The more informed the investor base is the better it is for us as a company. Thank you all for participating in the second 2006 results conference call. We understand the opportunities -- the many opportunities available to us and we are committed to making those opportunities a reality. Thank you again.

Thank you. This concludes today's Pool Corporation second-quarter conference call. You may now disconnect.