Pool Corp (POOL) 2007 Q2 法說會逐字稿

I would like to welcome everyone to the POOLCORP second-quarter earnings results 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) Thank you. I would now like to turn the call over to Mr. Mark Joslin, Chief Financial Officer. Please go ahead.

Good morning and welcome, everyone. To start things off this morning, I would like to remind our listeners that our discussion, comments, and responses to questions today may include forward-looking statements, including management's outlook for 2007 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 projected results is discussed in our most recent Form 10-K as filed with the SEC.

Now, I will turn the call over to our President and CEO, Manny Perez de la Mesa. Manny?

Thank you, Mark. As there are no major differences from what we reported earlier in the month, I would like to take this opportunity to elaborate further on both the quarter and year-to-date results, as well as providing my perspective for the balance of 2007.

First, the results by channel. The pool or the blue side of our business was up 1% in the quarter and year-to-date, while the irrigation or green side was down 2% in the quarter and up 4% year-to-date. These results are not substantially different, providing evidence of the similarities of the businesses.

Next, I will go into more depth on the blue side by major market. Florida is clearly the market where new pool construction is down the most, due to a combination of factors including a record high inventory of unsold homes; reduced housing turnover; a major decrease in new home construction,; and modest real estate evaluations. Our sales in Florida were down 12% in the quarter and 13% year-to-date.

It is also in Florida where we have witnessed the greatest pricing pressure, adversely impacting our gross margins. In addition, our execution could certainly have been better in several markets which we, of course, have been addressing.

With the predicted increase of roughly 500,000 residents per year over the next 20 years, and Florida being a year-round pool market, we're confident that our Florida results -- both in terms of profit growth and return on capital -- will be a significant contributor to our overall results over time.

Arizona is where pool construction is most affected, after Florida. While some of the factors that affect Florida likewise affect Arizona, the market is simply not as vast. Here, our sales were down 3% in the quarter and down 1% year-to-date. The main reason, other than the market conditions, for the comparably better results is that we have a very strong team top to bottom in Arizona.

California is the overall largest market, with over 1 million in-ground pools. While certainly new pool construction is down, the large installed base helps mitigate that impact more so than in Florida or Arizona. Here, our sales were up 3% in the quarter and up 7% year-to-date.

Texas has been affected across all customer types as everything from ice storms to extreme rainfall have hampered our customers' ability to work. Our sales in Texas were down 3% in the quarter and up 1% year-to-date. The main issue in Texas, as in most markets this year, is weather.

These four states represent over half of our total business and are very important to us in the long term. Over 70% of the country's population growth in the next 20 years is projected to be in these four states. Swimming pools, irrigation, and simply the outdoor home life is a major component of consumers' lives in these four states. It is in these four states where the greatest proportion of single-family homes have pools and irrigation systems, and where these amenities are more of a standard in middle-income homes.

So while a combination of events are adversely affecting us in the short term, we are very confident about our long-term growth and return on capital opportunities in these states.

The rest of the blue or pool side of our business was up 4% in the quarter and year-to-date. Without the same external factors affecting them, the results here are more reflective of the late start to the pool season, especially when 2007 is compared to be very mild 2005-2006 winter.

Third, as additional information, new locations opened in the past 18 months cost us $0.03 a share in the quarter and almost $0.07 a share year-to-date.

Fourth, I will cover our principal assumptions that we have incorporated into our estimate for the balance of the year. On sales, we're looking at mid single digit growth, based on a combination of easier comps and normal weather.

On gross margin, we anticipate continued pressure on selling margins as we have experienced year-to-date, without the comparable drag on the net versus gross cost of sales reflected in the year-to-date results. Essentially, we anticipate a decrease in gross margins of 30 to 50 basis points in the second half.

Expenses will remain under tight control as we grow into our investments made in the past 18 months. The bottom line is modest earnings per share improvement versus the second half of 2006 to result in modest overall year-on-year growth in earnings per share.

Before closing, I would like to provide a little perspective. We are going through what for us is a very difficult time. It seems that the external market environment, weather, and the timing of our expansion could not have been worse. Yet, in this situation, our earnings per share are holding up fine. It is a credit to our industry dynamics, market position, and our team performance that our results are what they are.

Our track record over the past 13 years is clear. Once the external market turns neutral, weather reverts to normal, and we grow into our expansion, we will provide the kind of earnings growth that we all have come to expect.

With that, I will turn the call back over to Mark for his financial commentary.

Thank you, Manny. I will walk us through a few items on our balance sheet and cash flow, and update you on our share repurchase activity. On the balance sheet you can see that our main asset category is -- inventory and receivables reflect both the midyear peak seasonality of our business as well as the modest business growth that we have realized this year.

Our inventory balance at the end of June of $389 million includes $10 million for our Wickham acquisition. Excluding this, our inventory growth over 2006 is in line with our sales growth. Inventory turns, as calculated on a trailing 12-month basis, were essentially flat at 3.9 times this year compared to 4 times last.

Our net receivables balance at the end of June of $388 million includes $9 million for Wickham. Excluding this, our receivables declined slightly from June 2006, in line with the decrease in our June 2007 results. While overall, our receivables are in very good shape, we have seen some slowdown in customer payments in some of the more competitive markets and have increased our bad debt reserves accordingly. Our bad debt reserve at the end of June 2007 was $6.4 million, an increase of $2.2 million from 2006.

Looking at our cash flow statement, you will see that our net cash used in operating -- used in operations in the first half of 2007 was $54 million, $5 million more than 2006 due to the $9 million decline in net income year-over-year. Given our lowered earnings expectations for the year, we now expect to generate 70 to $80 million in operating cash flow in the year, down $10 million from our estimate earlier in the year.

Now let me summarize our share repurchase activity. For the second quarter, we repurchased 171,300 shares at an average price of $35.56 per share totaling $6.2 million. Since June 30, we have repurchased an additional 448,000 shares for an additional $16 million. With our first-quarter purchases, this gives us 2.3 million shares totaling $84 million repurchased this year. This leaves us with $9 million available under our current $100 million Board authorization. We have a Board meeting in early August, and this topic will be on the agenda.

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

(OPERATOR INSTRUCTIONS) Anthony Lebiedzinski.

Yes, good morning. Regarding your earnings guidance for this year, are you still looking at the $1.75 to $1.85, including your comments today?

Yes, good morning, Anthony. Yes, there is nothing -- nothing has changed in the past two and a half weeks of any significance to have us change the expectation for the balance of the year and therefore the entire year of 2007.

Okay, and I know it is still early in the third quarter, but can you comment on current trends that you're seeing?

Again, in the past two and a half weeks or so since our last call, there is nothing significant one way or the other that would have us change our perspective.

Got it, okay. Also, I know that you got into fencing and some other product areas to expand your complementary product business. Now are you looking to expand that further into any new products either late this year or next year?

Yes, and no. Most of the growth that we will continue to realize in complementary products will be not so much from new products as it will be from the continuous rollout of what we have been selling -- in some cases for two, three, four years, in some cases six, seven years -- to more locations as we build out space capacity, as well as adding the resources to create the customer awareness.

Also, a few months ago you announced a new swimming pool financing business. Can you give us an update on that?

Let me turn that over to Mark, since he is in charge of that program.

Anthony, I am glad you asked. The business, obviously, I enjoy working with. We have opened our financing operations in three states, Florida, Louisiana, Mississippi; and that is moving along well. We are expanding further into Texas over the next quarter. Again, our plan is to roll that out nationally over the next couple of years, and we are on target to do that.

From a financial standpoint, it is not going to have a material significant impact on our business in the short term. But it is certainly a value-added service that our customers appreciate and helps get more pool contracts signed sooner.

Okay, thank you.

Jeff Germanotta.

Good morning. Can you comment a little bit on Latham, how that is coming, and your thoughts on that longer-term?

Sure. The Latham business is coming along relatively fine. Obviously, they have been impacted this year much like the whole industry has been impacted by a later start, in contrast to last year, which started very, very early.

Other than that certainly the initiatives they have underway, they have made two acquisitions. One was made in -- of note, one was made in 2005 when they got into the fiberglass business. Then another one made in 2006 when they got into the automatic pool cover business, broadening their lines in both regards.

So that business is progressing fine. Obviously, again, year-on-year comparison -- the later start this year to the pool construction business has affected them adversely. But outside of that, they are fine.

From our equity interest standpoint, we are relatively speaking passive as an equity holder in that business. We are very active as a customer, but more passive as an investor. The one to take the lead on that from driving that are the -- there's a private equity firm that has a light interest in the company, as we do. We are really listening to their direction and their guidance in terms of how that business evolves over time, obviously together with management.

Thank you. Next question. When you look at income statement spending, whether it is new service centers, The Backyard Place, other growth initiatives, if we look at the first six months of 2006 versus the first six months of 2007, can you kind of quantitatively compare how much we spent last year during that time period versus we spent this year during that time period?

I can't give you a complete answer on that or call it a clean answer on that. But I will tell you -- I will give you some components of it, if I may.

Sure.

For example, the expenditures, incremental expenditures over and above what we had last year, this year, in terms of SG&A for new locations is north of $4 million dollars, almost $5 million just in SG&A over what we would have spent otherwise. That is one perspective.

Another perspective is when you look at Backyard Place this year, that will be a little bit north of $1 million when the year is said and done. So it is not quite that level year-to-date.

When you look at some of the other projects underway, whether it be POOLCORP Financial, whether it be fencing and some of the other new products that we are kind of getting up to speed on and getting that information out throughout the enterprise, all those are another 1 to $2 million.

So when you look at an aggregate on a year-to-date basis, it is somewhere in the 7 to $8 million range of expenses.

7 to $8 million year-to-date for all those initiatives?

Yes, over and above -- yes, over and above the base. Now when you extract that out from the '07 expenditures, you will find that our overall expenditures are almost flat year-on-year, or certainly up a very, very modest percent.

Then, examining the cost of goods for a minute or gross profit, it would appear that part of the challenge there is competitive selling environment. But secondarily, are there materially less vendor incentives of all sorts that are contributing to that gross margin compression as well? Could you shed some color on that?

It is primarily, from an annualized standpoint, it is primarily on the selling side. Selling margin side. The difference on the vendor incentives component is really based on our accruing, accrual rate this year, based on our experience for all of last year. Last year if you recall, we were accruing at a slightly higher rate. We also had the benefit last year in the first half of the very strong early buy early pay incentive that we did in the latter part of 2005.

So if you take those things -- I will call it that noise -- out of the equation from an annualized standpoint, the adverse impact on gross margin for the year will be primarily, if not entirely, driven by selling margin differences.

Thank you very much.

David Mann.

Yes, thank you, Johnson Rice. Manny, you mentioned earlier about execution issues in Florida. Can you just talk a little bit about what you're referring to; what you have done to correct it; and how it showed up in terms of some of the things that were not done the way you wanted them to be done?

Sure. When you have 280-plus locations, it is logical that there are a good many that are not operating -- or better said, they're lagging the majority. Sometimes, actual performance is in part camouflaged by a very strong market environment. In the case of a few locations in Florida, clearly, the strong market environment of '03, '04, '05, helped camouflage issues where our service levels at the point-of-sale, perhaps a certain level of complacency with the customer, would have been evident in a more normal environment.

Obviously, those have become evident in the past two years, or call it 12 to 24 months. As they have become evident, we have addressed it as necessary and appropriate on a case-by-case basis.

It is not -- having laggards in performance is not unique to Florida; it just again, it exacerbates the issue when you have a negative market environment and a lagging performance. But that is ongoing management. We address that on a regular basis, and not only in markets where we have lagging performance. I mean not only in markets like Florida where we have adverse market conditions. Wherever we have lagging performance, we address that, whether it be Northern markets, Western markets, Florida, wherever that may be.

In terms of Florida and your expectations, what would those expectations be for how long the competitive pressure will last?

You know, my batting record looking at a crystal ball has not been particularly good the past couple years.

Well, we take a longer-term view on your batting record. The first eight years was pretty good.

Thank you. I would say that the Florida real estate market, by every indication, will remain tough for at least another year. Having said that, I believe that our own results should begin to improve for two reasons.

One is, from a comparable standpoint the hit has already been felt, (inaudible). Second, I think that with the changes we have made in the organization and down to local management, local salespeople, local ops managers, that will in itself trigger also improved performance.

In terms of the comments you all made about some of the slowing payments you're seeing from customers, can you just clarify or elaborate a little more about what types of customers? What markets? What gives you confidence that you've got your arms around that, it's not a bigger problem?

Sure. First of all, let me just give you a little perspective. Our over 60 days receivable represents just over 2% of our total aging. So when you look at the numbers, it is -- obviously we try to fine-tune it and keep good track of it. But it is not a significant number in the overall scheme of things, particularly with respect to our overall aging.

We, our credit management team, together with line management, work very closely to make sure that our exposure on a customer-by-customer basis is appropriate and, again, unique to that customer.

Overall, there has been a little slippage; although ironically our DSOs are modestly improved overall. There are still a few that have slipped over a bit. A number of those are in the pool building business, some of those that have the larger overheads that have seen some pressure on their own pricing as well as some reduced volume in their own activity.

But the flip side of that is that we maintain and manage our exposures very tightly. I will tell you -- and Florida is one example of this, but it's not unique to Florida; it also applies to a number of other markets. We have effectively walked away from sales in a number of cases where we believed the risks are not work the prospective return from an AR standpoint. Some of our competitors have received that benefit from the sales standpoint; and time will only tell if they also get paid on it.

On the earlier question on marketing, it sounds like you have not changed your strategy on spending there. Can you just clarify why that perhaps is not an area that would be cut back in this time period?

Sure. Specifically, our marketing programs overall are a key value-add component that we provide to our customers, be they retailer, service company, builder, remodeler. When there is any slack in demand, particularly on the building side, is where that value is greatest for our customers. The fact that we can do things that they can't -- from an efficiency standpoint, from a soft cost standpoint as well -- enables us to provide significant value.

Overall, those kinds of tools and providing those kind of support resources to our customers have enabled us to continue to grow market share. In a year like this, that market share gain may be our best in several years, given -- and one of the reasons is not only our service level at the point-of-sale, but also some of these value-added components that we provide and tools we provide for our customers.

Great, thanks, Manny.

Joan Storms.

Hi, good morning. Mark, I was wondering if you could go over the center openings for the quarter and year-to-date by pool and irrigation.

The question is regarding store locations or service center locations opened during the course of the year?

New center openings in the most recent quarter and year-to-date.

Sure. On the pool side of the equation, we have opened up -- well, there are three locations that have been opened up at least a month during the course of the --. I'm sorry, let me go back here a step.

We have seven locations on the pool side of the business; and then we have two locations on the Horizon side of the business.

Okay, and is that for the quarter or for the year-to-date?

That is in the quarter. And of those, we were -- we had opened up seven in the first quarter. So an additional two opened up really early part of the second quarter.

Okay, and how many of those are new market locations?

They are all existing market.

Okay. Then also on the complementary products, you saw a nice improvement and the comparisons were a little bit easier. But were there particular categories that did better than others?

Sure. Certain of the construction products that are used as much in remodeling as they are in new pool construction -- for example, plaster and some of the aggregates that provide a cleaner finish to the pool, a more aesthetically pleasing finish; decking products; logically fencing. These are some of the items that realized the greatest growth year-on-year, whereas complementary products on the construction side that are almost uniquely tied to new pool construction -- for example, rebar or pipe -- those were in fact down year-on-year.

Great, thank you.

Kathryn Thompson.

Hi, thanks. Just digging a little bit further, you talked a little bit earlier about your Florida market and how it is lagging; but also noted that Arizona has kind of the same type of dynamics but is doing relatively better.

What are you -- I mean, what is Arizona doing that that is that much better? Are you systematically essentially trying to replicate those type of best practices into Florida?

Good morning, Kathryn. Two things. One is the market is nowhere near as bad in Arizona as it is in Florida. Basically, the other item is that there haven't been any real laggards from a performance standpoint in the Arizona market.

The practices that are deployed on a day-to-day basis, week-to-week basis in Arizona are the same as are deployed in most of Florida and have been deployed in most of Florida throughout the course of this year and last year. Again, the only issue is they don't have a couple of the weaknesses that drag the number down for Florida. That is the unique component.

The only issues being it is a weaker market; but you did indicate it is just -- there's just some service components that are just not as strong in spot areas in Florida?

Some of our -- yes, we have had some performance issues we have addressed in the past year. And that -- we haven't had any of those kind of issues in Arizona.

Just out of curiosity, is the -- do you happen to know the percentage of aged stores in Florida versus Arizona? I assume Florida is a more mature market for you relative to Arizona in your overall Company growth.

No, in fact, the big part of our presence in Florida as well as in Arizona came with a transaction that we did in 1996, which was when we did what we refer to as BLN. That gave us the real entree into both those markets. We have done a fair amount of new location openings over the course of the past 10-plus years in both markets, as well as filled in with other relatively speaking smaller acquisitions.

Okay, so you can't blame it on newer aged stores relative?

No, no.

(inaudible) Just kind of stepping back a little bit, this has been a tough year. Do you think the worst is behind you?

Yes, and I will give you the reasons for that. First of all, weather has been certainly adverse this year. The fact that we are just now growing into our expansions and new locations that we have done over the past 18 months, we will continue to grow into those locations. So in both those regards, reverting to neutral or normal weather and just natural growing into our expansion will in both cases benefit us in 2008, 2009, et cetera.

The other component here is the adverse real estate market, which is accentuated and a much bigger issue in Florida than anywhere else. That is from a national standpoint beginning to right itself. Having said that, Florida might take a little longer to work itself out. But my perspective is that as we get into 2009 and more so into 2010 -- 2008 and then more so 2009, I'm sorry, these things will take care of themselves.

In fact, what I would anticipate is that as these things begin to firm themselves up, the external market conditions, then we will have a kick of sorts to our earnings growth. Whether that is in '09 or 2010, I'm not sure; but I would say certainly overall the worst would be behind us.

Okay, so we are hearing in different industries that we cover there is not a recovery by any means in Arizona and California, but the bleeding is starting to somewhat stop for certain versus certain portions of the housing market. Would you agree or disagree with that statement?

I have heard, seen, read the same things.

Okay, and you are seeing a similar effect on the pool market?

Yes, although that is a smaller component of our total business as compared to other industries. The only market where we haven't seen that or heard that yet is in Florida.

Okay, and no expectations there. Just to clarify, what did you repurchase since the end of June? I missed that number.

Mark?

Since the end of June, let me see. We have repurchased 448,000 shares, Kathryn; $16 million.

$16 million?

$16 million, yes.

Okay. Finally, I was just seeing if you could -- I heard the scuttlebutt that you may be canceling your going to the national pool show just to save some money. Is this true or not?

No, we are going to be at the national pool show. What we have debated over the past five, six years is the value of having a booth at the pool show versus having our own independent gathering. This year, we are just having our own independent gathering without necessarily having a booth.

What was the driver for that, just out of curiosity?

The driver for that was the value of having the booth and the traffic generated versus not having the booth.

I just know that your booth size had been contracting over the past few years I have gone. But I just want to make sure there wasn't anything else driving that.

We, by the way, just as a matter of course, we look at that pool show from multiple perspectives. The real value add is what dealers come to the booth, and who those dealers are, what kind of contact do we have with those dealers on an ongoing basis.

The lion's share of the dealer activity that we see at our booth each year are more social calls, although the great majority of them are more social calls as opposed to real business calls for customers that we don't have an ongoing communication or relationship with.

Therefore, when you look at the marginal benefit of those that are prospectively new customers, versus the cost of that booth, we like to deploy our dollars efficiently. After several years of kind of winding down, we finally decided to pull the plug.

Okay. Any cost savings, just out of curiosity from this?

Nothing significant (inaudible) .

Okay, great. Thank you very much.

Keith Hughes.

Thank you. Manny, you have given us some good detail on state information. Both the pool market as well as irrigation together; or was that just pool?

That was just pool.

Okay, was the irrigation market anything dramatically different than what you gave us in the pool?

No. I mean there is no irrigation in the Florida side of the equation, and Texas is relatively speaking new as well. But when you look at California and Arizona, the numbers are not significantly different.

Within the Texas market, has the weather broke in your favor there? Is that sort of picking up a little bit?

I think after the first week and a half or so of July, they actually had two or three days with no rain.

For the first time in several months, right?

Yes.

Okay, all right. Thank you very much.

Dan Leben.

Great, thank you. Good morning, Manny. Could you just give us an update in terms of what you're seeing on the acquisition front? With things slowing down here, have private companies gotten a little bit looser on the valuations, and maybe you can find some opportunities for you to do some more deals here?

Good question. Just to step back and provide everybody a little perspective, our primary motivation in acquisitions was -- very similar to our opening of new locations -- is to either establish a presence in a market where we had no presence or to enhance a presence in a market where we have a very small presence.

Given where we are on the blue or pool side of our business, there are only a few pockets of opportunity like that available to us domestically, and a few other pockets internationally. But not in the overall scheme of things anything significant. Certainly not in a relative sense.

On the irrigation side, with our only having coverage for about half the US market and no presence outside the United States, obviously the opportunities there are greater.

Certainly, an environment like we're currently going through on the pool side and also to a degree the irrigation side kind of shakes people up. But where we have a 40 share of market, the value-add for us to acquire somebody that has maybe a 5 share of market or 6 share of market is not particularly enticing. In some of those cases, it would be more convenient -- and I don't mean to be harsh -- but if some of those guys just went away. And some of that may very well happen. So it depends on to what degree the manufacturers carry them. But that is really the more practical evolution in those cases.

Then I guess specifically I was thinking about the irrigation side as you continue to move east. Are those guys seeing the kinds of impacts and moving more into those discussions? What does the pipeline look there?

Sure, when you look at Florida, everybody involved in the irrigation businesses speak of as taking a real hit over the past 12 months or so. You know, there's always discussions. But again, until there is something hard, we defer from making any public commentary.

Okay, great. Could you just give us an update on the Backyard Place move; and how many of those locations you have gotten up; and what the pipeline looks like there?

We have just over 60 new stores or stores under contract. Not all of those stores have yet opened or been remodeled. But that is a program that is working exceptionally well. We are still targeting to have 100 stores under contract by year-end and somewhere close to that number actually being opened for business in the new remodel or new location setup that we have arranged with the principals.

So that is going very, very well. The sales growth or the new sales generated from those locations, although they get lost in the rounding from an overall Company standpoint, certainly are significant when you look at it from a local standpoint.

Okay, great. Thanks, guys.

(OPERATOR INSTRUCTIONS) Jon Christensen.

Talking earlier about your pool supply business acquisitions, and you gave an example of where you had share it really didn't make sense to acquire. Could you talk about what your share is, overall? Where you don't have your desired share? How much opportunity there is there? Does it make sense where you do have the share you want to acquire and just keep the customer base and not take those facilities?

Okay. I'm going to try to take that in pieces. On the blue side of our business domestically of pure pool products that go through distribution, we have a little bit over a 30% share. That share, in fact, is closer to mid to high 30% in the Sunbelt; and more in the low to mid 20% type numbers in the Snowbelt.

What happens here is -- and I will just use, assume a Sunbelt location where we have a high 30s share. If in that same market there is a distributor that has an 8 to 10 share, and we acquire that distributor and consolidate or eliminate their location, what would end up happening is we would keep maybe half of that business. Then that other half of that business will gravitate to other distributors that are serving their market. There are no [contracturing] per se that would hold those customers to us for an extended period of time.

If we were to make that acquisition and keep that separate location open, though, the one that has been acquired, we would still have some fallout. There are a number of reasons for that. One reason may be because we choose not to sell certain customers, because of either their payment habits or because of their work on the consumer side. There may be issues where we, for example, don't stock or have rights to certain products, private labels that they have, that they may be getting from other distributors or able to get from other distributors.

There may be issues where we perhaps have not handled the customer appropriately in the past, whether it be SCP or Superior. Maybe we put that customer on COD because of their payment habits in the past; and they remember that for 10 years into the future.

So all of those factors play into how much of that acquired business we in fact keep, where we already have been there for a while and have a very strong share. Another factor may be that our pricing may be higher than that competitor that we have acquired. That pricing algorithm that we use in that marketplace, it would not make sense for us to drop our pricing for those acquired customers, per se, versus the existing base of customers if the value provided is very much the same.

So all of that leads to some fallout. Again, it is a situation where, in our experience, where we have a very high share of market in a certain market and acquire some local player that there is a certain amount of fallout.

Again, if we eliminate the location you can almost count on half of the business going away. If we don't eliminate the location, you still have usually anywhere from 20 to 30% fallout. Obviously when you play that into the equation, then the return on capital may not make as much sense as you would have on a pro forma basis, given the acquired business's historical results.

Prices have not come down on acquisitions enough to make either of those attractive in areas where you have sufficient share?

No.

Could you update us on overseas?

The overseas business is doing well. In fact internationally we have made a fair amount of progress. Our operations in France are the shining light or shining star of our European business. We are up to five locations there. We have largely internally grown that to become now the second-largest distributor, we believe, in Europe and a very significant player within France.

So that is progressing very nicely and certainly one of the bright spots overall in 2007 for the Company.

I believe that one of the reasons that you got into the irrigation business is you felt it would have a different cycle from the pool business. Has that proven true?

Well, no; that was not the motivation. The motivation for the irrigation business was multiple. One, was the fact that we see the same long-term organic growth characteristics in irrigation as we see in pool, which is much better than most industries.

We also see the same opportunities for return on capital as a value-added distributor in the channel from many manufacturers that serve that business. There is a contractor base that actually deals with the consumer. So those are the primary factors.

The fact that there was a migration in a number of markets, and like many things they begin in California and begin to move East. You see more and more customers on the irrigation side crossing over to the pool side and vice versa. So those are the reasons that really motivated us to get into that business.

The fact that over the next 20 years, the lion's share of growth in the irrigation landscape business will be in the very same states and markets where the lion's share of the growth will take place for the pool side as well. So again, it is all those reasons combined that we saw an opportunity there; not necessarily anything to do with being countercyclical or anything along those lines.

Thank you.

David Mann.

Hi, yes. Thank you, again. Can you clarify what the amount of the lower incentive compensation was in Q2?

Year-to-date, David, it is about $4 million less than last year or about $0.04 a share.

How much of that was Q2?

I think a little bit more then the $4 million.

For the rest of the year, how much lower should we expect it to be?

It will be another 2, $2.5 million. We have accrued about 60, 65% of the expectations for the year.

Okay, great. Thank you.

At this time, there are no further questions. I would like to turn the conference call back over to Manuel Perez de la Mesa.

Thank you. First, thank all of you for listening and participating on the call. Our third-quarter earnings release and conference call is scheduled for Tuesday, October 23. Again, thank you all for joining us today.

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