Pool Corp (POOL) 2011 Q2 法說會逐字稿

A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

This conference is being recorded. It is my pleasure pro introduce Mark Joslin, Pool Corporation's Chief Financial Officer. Thank you Mr. Joslin, you may begin.

Thank you Everett. Good morning everyone and welcome to our second quarter 2011 conference call. I would like to once again remind our listeners that our discussion; comments and responses to questions today may include forward-looking statements including management's outlook for 2011 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 10-K. Now I will turn the call over to our President and CEO, Manny Perez de la Mesa.

Thank you Mark and you thank you all for joining us today on our second quarter 2011 results conference call. Well, our second quarter and year-to-date results speak for themselves with our diluted earnings per share up 13% in the quarter, and 26% year-to-date. By all indications earnings per share should be up 20% to 26% for all of 2011. Our second consecutive year of 20% or better earnings per share growth; despite the still challenging external environment, including depressed discretionary spending and very low new construction levels.

Our second quarter base business sales were modestly better than expected increasing by 8.1%, including 1% from favorable year-on-year exchange rates. It's important to note that we had $12 million of sales excluded from base business in the quarter, as these sales came from acquisitions and new locations. Which sales generated essentially no profit in the quarter, as we are in the early phases of investment in these markets.

Year-to-date; our base business sales were up 10.1%, with $15 million in sales excluded from the base business calculation. In comparing sales performance, our blue business sales were up 8.4% in the quarter, and 10.3% year-to-date. While our green business was up 4.4% in the quarter and 7.4% year-to-date.

As mentioned in my comments last quarter, we had easy comps in the first quarter but the comps get more difficult as we progress during the year with more modest year on year growth comparisons expected.

Within the blue business; by major market, Texas continued to lead the way with 12.5% sales growth in the quarter, followed by Arizona, at 11.5%, California at 7.8%, and Florida at 4.4%. All other blue markets were collectively up 8.1%, including the benefits of the favorable exchange rates.

The principle drivers for our sales increase are market share gains and the aging of the install base stimulating replacement remodel activity. While the overall increase of the install base, inflation and a very modest change in consumer discretionary behavior although being positive contributing factors.

Our two principle organic market share growth drivers for the next several years are with building materials in the replacement remodel customer segment, and the retail customer segment. Year to date, our growth profit dollars are up 14%, to $21.1 million; in the building materials segments, and up 12%, to $73.1 million, in the retail segments. Far ahead of the markets low- to mid-single digit growth this year.

For the balance of 2011, we believe that mid-single digit sales growth is reasonable given the progressively tougher comps with modestly higher inflation offset by less favorable exchange rate.

Turning to gross margin, 12 BPS of 50 BPS improvement in the quarter came from increased delivery charges as we sought to recover the higher freight out expense from higher fuel costs. The balance of improvement is primarily the result of our improving sales, pricing and purchasing disciplines. Especially with our focus on migrating sales to prefer vendor and pool core branded products.

Mark will cover the review of our expenses but it's important to highlight that on a year-to-date basis, we realized an $18.5 million or 20% increase in operating income, on base business sales growth of $92 million, excluding acquisitions, new locations and the credit adjustment to our bad debt reserve that we had in the second quarter of 2010. Let me repeat that; on a year -to-date basis, we realized an $18.5 million increase in operating income -- or 20% increase in operating income, on base business sales growth of $92 million.

In terms of acquisitions and new locations, our results include the turf equipment supply or TES, and pool boat acquisitions consummated late last year, in the Las Vegas and Belgium markets respectively, plus our May 2011 acquisition of certain assets from the assignee of JL Kilpatrick in South Florida. This last transaction enabled us to enter the South Florida green market, the second largest market in the country.

Combined, these acquisitions added eight locations to our network. In addition, we have opened three centers in 2011; two in Florida, one in Puerto Rico.

Turning to cash flow and working capital. Our increased sales growth has logically resulted in increased receivables; which increase will moderate significantly by year-end given the seasonality of our business. As many of you know the lions share of our receivable balance at any quarter-end is comprised of credit sales in the last month of the quarter, with June being the highest sales month and December the lowest sales month of the year.

Approximately half of our inventory increase represents our buying-in ahead of mid season price increases, and the balance of the increase coming from acquisitions, new locations and base business sales increases. I expect that by year-end our inventory net of vendor payables will be up modestly as we sell through the pre-price increases purchases. Overall, our free cash flow should approximate net income for the year.

The bottom line is that we have had solid quarter and to year-to-date 2011 results, with market share gains, improved disciplines and effective execution. All of this is only possible because of the engagement and commitment of our teams in every sales center and support office.

Now I will turn the call over to Mark for his financial commentary.

Thank you Manny. I'll begin my comments by providing a little more color on our SG&A costs as a 10% growth in base business SG&A costs for the quarter doesn't reflect what is happening in our core SG&A costs. Of the $10 million increase here for the quarter, about half of this is from higher management incentives, which I discussed in some detail on our last call. Given the seasonality of our business, we book our incentive expenses in the months we are profitable, so excluding year-end adjustments, about three-fourths of our incentive costs are recorded by the end of Q2 and the remainder are recorded in Q3.

As a Company, we have much more of a performance based cost structure than most, which helps cushion the impact of market downturns on our performance but hits earnings a bit harder on the up-turn. After this year, we will have gotten annual incentive expenses to a normalized level after the lows of 2008 and 2009. So year-over-year changes going forward should be modest than what we experienced in 2010 and 2011.

As mentioned in our release, other items impacting our SG&A growth which I would categorize as non-core increases included $1.4 million in higher delivery costs; which were offset by delivery surcharges included in sales, about $1 million impact from foreign currency translation in the quarter and $900,000 in bad debt expense due to reserve reductions we took last year, which resulted in income on this line in the second quarter of 2010. Excluding these items, leaves us with very nominal increase in the remainder of our SG&A costs, with ups and downs in different categories, which given our sales growth we believe was an excellent result.

I would like to reiterate here that both the incentive accrual rate and exchange impact will adversely effect our Q3 SG&A results, resulting in our own forecast here being $3 million to $4 million higher in SG&A than what most sell side analysts appear to have baked in to their Q3 models for us.

Moving onto the balance sheet and starting with receivables we continue to have excellent results here. Our receivables balance grew 11% year-over-year; but backing out acquisitions and vendor receivables the growth in receivables was below our sales growth due to continued improvement in collections. Reflecting this, our greater than 30 day past due balances improved from 7.1%, at Q2, 2010, to just 3.5%, at Q2, 2011.

Our Days Sales Outstanding or DSO has also continued to improve and with 30.7 days outstanding at Q2, 2011, from 33.0 days a year ago. As a result; despite the year-over-year increase in bad debt expense mentioned earlier, our actual Q2 bad debt expense was very modest. In summary although we are at the best time of year from a customer cash flow standpoint; our collection results point to excellent management on the part of our personnel and to the relative financial help at this point in time of our customer base.

Moving on to inventories. Our inventory balances increased 18%, for $58 million, including $6 million or 2% in acquired inventories, to $390 million at the end of Q2. As we stated there were some mid-year price increases announced by vendors this year, which prompted us to use our financial strength to buy inventory ahead of these increases. While the negatively impacted our Q2 cash flow, we expect this to largely reverse in Q3 as we sell more stock and work our inventory balances down.

Additional insight I can give you into the year-over-year increase in inventory levels; is sharing with you the inventory increase by inventory class. We categorize inventory into 13 classes based on turnover value with a top selling product being in classes one through four.

Looking at our domestic blue business inventories, which make up approximately 80% of our total inventories, they increased $48 million year-over-year, with $45 million of that increase coming from increases in class one to four items and the remaining $3 million coming from increases in new items which aren't classed. Again our expectation here is to work all of this down in the coming months.

Manny covered the main topics on cash flow, so let me update you on our share repurchase activity. On our last call, I had provided repurchase activity through that date and we've done a nominal amount of share repurchases since then. In total, we acquired an additional 125,000 shares, at an average price of $25.50 for a total cost of $3.2 million. 25,000 of these shares purchased under our new $100 million repurchase program authorized by our board in May.

Lastly I will comment on our expectations for a second half of the year; and where we see disconnect between our expected results, and what some of you might be expecting. We've gone through great lengths to point out on this call and previous call this year that we have more difficult comps in the back half of the year and expect more modest expectations for growth than in the first half of the year. In addition to the general comments, there are two areas that stand-out as more significant disconnects between expectations and street views of our results. One, as I had already mentioned is the higher SG&A growth we expect to see in Q3, related primarily to additional incentive costs. The other is in Q4 gross margins.

As we detailed in our 2010 10k, our Q4 2010 gross margins increased 150 basis points over Q4 2009, due in large part to year-end adjustments to vendor incentives earned. This is something we don't expect to re-occur this year, it's likely our Q4 margins will be lower in Q4 2011, than in Q4 2010.

That concludes my prepared remarks. I'll turn our call over to operator to begin our question-and-answer period.

Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (Operator Instructions) First question is from Dan Garofalo with Piper Jaffray.

Mark, you provided some additional color and clarity on the compensation incentive expense that was reflected in 2Q SG&A; it looks like there is typically a sequential drop off, that seems to be the cadence historically. Is it reasonable to expect SG&A to come in around the $100 million quarterly level for the remainder of the year or is that not a reasonable expectation?

Well, I don't want to comment on the specific dollar amount, but you are right in terms of the drop-off incentive being one of the bigger variable costs; also labor is a significant variable cost for us. Our northern branches, staff up during the peak summer months and then reduce their staffing costs as we get in to the latter part of the season. I would say that you are right in your general expectation for reduced expenses quarterly as we move forward here.

From the looks of it we had a very warm start to the season in markets like Florida and Texas; we are certainly enduring quite a stretch of warmer than typical weather in the Midwest as we speak. I'm just wondering if you can give us a sense for what the relatively warm summer and spring has meant to results in your view.

In terms of weather; two things, a), you got to have a comparison to norm and a comparison to last year. In terms of the northeast and Midwest; last year the weather was very favorable and in contrast, this year, in fact, it is worse than last year's weather, again, in the northeast and the Midwest. It's hot every July, and every July there are incidences of record temperatures set in one market or another.

I will tell you that in our largest market California; the weather has not been particularly favorable at all during the course of both last year and this year compared to normal years. In fact, this year I think June was one of the worst in terms of wettest on record.

So from a weather standpoint, I would think that overall the second quarter was pretty much normal and if anything, a little worse than last year's second quarter. In terms of the third quarter, we are only 20 days into it. If the weather man can't predict the weather, I'm not going to try.

Early read on what if any effect the dust storm down in Arizona might have on equipment repair and replacement in that market?

Storms are ironically beneficial for us. In that they cause some damage and that prompts repairs and replacement activity; but again, you got to look at it in context and given the breadth of our network and how we do business and everything else, those year on year comparisons are largely muted.

Thank you, ladies and gentlemen, our next question comes from the line of Luke Junk, Robert W. Baird, please proceed with your question.

First question is on pricing, you mentioned buying for the mid year increase, could you maybe talk in terms of magnitude of what you're seeing on the increases and then is it fair to say that you saw partial impact this quarter and full impact on next quarter going forward?

Typically vendors in this industry announce price increases in the fall and those become effective typically early in the next year. In the case of 2011, there were some price increases and our expectations were that effectively for 2011, inflation -- net inflation would be 1% to 2% for the year.

When you look at that you got to also put in context that for example, chemical prices in the first part of the year, net-net were lower than chemical prices last year and chemicals are our number one part of category.

You got to take, it's a net number when I'm talking about inflation. A few vendors; not a majority by any means, but a few vendors did announce in the late spring, early summer, price increases. Some of those price increases became effective as early as June 1st, others become effective July 1st.

The impact on that overall to us, net-net, will be maybe a 1% increase to our inflation for the back half of the year compared to the first half of the year. In terms of margin, that provided a little bit of benefit to us in June to the extent that we bought into those increases and were able to implement the price increases on a timely basis from a sales and pricing institution standpoint.

There will be potentially a little bit more of a benefit in the back half of the year, but again, I don't want to get carried away here.

For example, our number one vendor has not announced a price increase, a lot of product categories are flat, so it's a minority of vendors and that did make a little bit of a contribution, but it's fairly muted.

Then second, I know you don't necessarily look at a business like this but maybe if you could give a little color as you look across just basic maintenance trends versus replacement and construction. And maybe if you could put some percentages around growth in the buckets.

I will give you the industry perspective; and then I'll give your ours. Industry is that maintenance and repair activity is in units up 1% to 2% and in dollars, basically flat because of the deflation in chemicals.

In terms of remodel replace activity and new construction activity both of those are from an industry standpoint up in the mid single digits. And therefore when you weigh the entirety of everything from an industry standpoint, it's probably up 2% to 4% on a year to date basis.

I highlighted in my comments earlier, we have a number of initiatives in place to grow share and two of the areas through the primaries of focus in that regard are building materials within the context of replacement or remodeling activity.

And we have double digit sales in GP dollar growth there in building materials and that's by taking share and remodel and replacement activity primarily. And then in the case of the retail customer segment an area we view as an opportunity for us to provide value to our independently owned retail stores and working with them to help them in their business and growing their effectiveness from a marketing and sales execution standpoint our growth there is also far in excess of the market growth.

Clearly we are growing share again this year as we do every year. Again, the external environment is not particularly great, but despite that we are gaining share and because of our execution, converting that to over 20% earnings per share growth.

Our next question comes from the line of Mark Rupe with Longbow Research.

On a topic of the market share gains was it limited to those two areas you called out or was it much more broader than that, if it was broader than that, was it in a particular region of the country?

It's clearly broader than. To the extent that those -- those customer segments were able to provide more value to help them in their execution and sales and providing ongoing better service, that carries over, across all areas. I would say that its tough to give in a public forum what our market share gains are by market.

I would say like in most years we are gaining share in a majority of the markets whether this year it will be 80%, last year 70% of the markets we participate in. But it's pretty widespread. That includes both domestically and internationally.

On the comp, I guess being more challenging in the back half, and I realize on paper, yes, it definitely is, but is there anything over and above what is on what the comp was last year that's inherent that we should keep in mind of why it's stronger, obviously there is years of negatives and it surprised me that it's being called out so much as hard comp. Is there anything that's not on paper that's inherent in the difficult comp in the back half?

No, the market began to recover during the course of 2010. That was reflected in our comps from an external market standpoint, it hasn't recovered any further. It's been flattish over the course of the past whatever, I say, 9 to 12 months. Therefore, nothing specific, just want to make sure that both the sales side as well as investor community has the information that we have and therefore don't get carried away by the call it first half results.

Another comment to add to that was in 2010, the first half, we had a little bit of margin compression there, there was really no inlfation taking place in the inventory -- in the industry. If you look at our margins in the first half they were down and then they flattened out and improved by the end of the year.

That was one area and then the other was just our first quarter results this year, were very, very strong and part of that was driven by specific things taking place in the first quarter this year.

Okay. Perfect. Then on the kind of incremental margin leverage, thanks for pulling out the acquisition, new locations to get to that 20%. The nonbase sales of $12 million, which you called out as having no profit during the period, what sort of expectation should we have on getting some of the nonbase sales up to a more appropriate margin level?

I guess the point I'm trying to make is you called out that the incentive level by the end of this year will be at an appropriate normal level so there wouldn't be necessarily a drag on the incremental leverage in '12. Curious to see if the nonbase business sales will be a drag into '12 as well, will continue to be dragging.

We talk about the operating margin leverage that we have, we are talking about that on base business. Those that are new to the business or those new locations to the business in 2011, they become part of the base in 2012.

But when we were opening a new location, say Puerto Rico, Puerto Rico, is a viable market, we have been looking at it for a number of years, we're shipping into Puerto Rico from one of our Miami locations for I will call it the past 10 years, and we decided to make an investment and enabling us to capture share in the Puerto Rico market.

That comes with making an investment in facilities and people. We are not going to get that back in capturing market share the day we open up. People are not going to leave their existing sources and come to us overnight. We have to earn that business, and we are.

As we earn that business, the first few months of the year there is some cost that we have to absorb that we front loaded. Therefore that creates a drag. In terms of acquisitions, the lion's share of our competitors, depending on whether they're blue side or green side in a good many cases are losing money.

When we make an acquisition, and we integrate them into our business, there are certain things that we do to improve results, but we can't work miracles as much as we try sometimes. Therefore those are naturally a drag in the short-term.

Again, they form part of the base and as we improve execution and rationalize things overtime, then they provide the same opportunities for operating leverage going forward.

Our next question comes from the line of Keith Hughes with SunTrust.

Thank you, had a couple of questions and clarifications. You had talked about mid single digit sales growth implied in the guidance, was that for the full year or just the second half of the year.

That would be for the second half of the year.

You referred earlier to a mid single digit number for the replacement market for the industry in the quarter. That stands out as very positive versus other big ticket renovations. It's really two questions. One, do you think that's sustainable heading in the second half of the year, two, why would the pool business or what is going on in the pool business that it's standing out so well at this point.

That's, Keith, an excellent observation. When you look at what drives replacement remodel activity, generally speaking, it involves the pools that are more than 7 years old.

If you look at the installed base that is more than 7 years old, you will note that, that installed base is growing by mid single digits given the rate of new pool construction that was taking place in the 2003-2004 time frame.

Therefore, what is really driving that is the aging of the installed base. I try to bring that out in my comments and I appreciate the opportunity to bring it out again, it's that aging of the installed base in terms of units not so much a significant change in consumer behavior that is driving that mid single digit growth in replacement volume from a industry standpoint.

Do you think this is going to continue the next several quarters.

That should continue if you will just reflect for a minute new pool construction peaked in 2005. So therefore, and then it began to taper off. So the growth of the installed base more than 7 years olds, this year, next year, will be mid single digits. It will be close to that again in 2013 and it will taper off a little bit in 2014, through 2018, as the current build rates of the last several years come into the equation.

Final question you referred to, or Mark had referred to some inventory, the 45 million increase in class one through four inventory, what is class one through four? What does that mean?

What happens here is in our inventory system, we have 13 classes of inventory, they are ranked in dollar sales, basically, at the individual location level, 13 has had essentially no activity in the past year.

So classes 1 through 12, represents the first 12. In terms of dollar sales in the past trailing 12 months, class, the second class two is the next 12th. The dollar sales. So basically what happens is classes one through four represent over 80% of our cost of goods sold on a trailing 12 month basis for each individual, by -- measured at an individual location level.

When Mark highlights the fact that of our inventory increase, all but $3 million is comprised of class one through four items, those are the highest velocity biggest ticket items so therefore, those are obviously the ones that turn the fastest from inventory of velocity standpoint.

I assume that would be stuff like chemicals, pumps, things like that.

And even in the context of pumps, the more popular pumps. And the more popular chemicals.

Next question comes from the line of Ryan Merkel with William Blair.

I want to ask about core sales by month if I can. I believe core sales in April were up about 5% and then certainly May and June were better and I'm wondering if June had a strong finish given all the hot weather that we had.

Well, Ryan, let me correct you. Core sales on a daily sales rate basis were pretty consistent, give or take 1%, in terms, year on year, for the entire quarter. No significant difference April versus June.

Okay.

When you look at sales factoring out billing days. We have, I can't remember exactly, but I think in one month we had one less billing day and the other month we gained it right back, so we look at it on a daily sales rate basis year on year and essentially they were all between 7% to 9% every month of the quarter. Pretty consistent across the quarter.

Secondly, I had a similar question on incremental margin, just so I'm clear are you planning to be hitting 20% incremental margins on an organic basis during the second half of question and could you comment -- 2011 and could you comment on 2012.

The answer is yes, and 2012, that's the expectation as well. And what if we back out from that our acquisitions new locations, and I also back out the approximately $1 million credit adjustment we had in the second quarter of 2010, because that's not a fair basis of comparison, taking those out of the equation, yes, organic, 20%, not an issue.

Let me ask one more quick one then, can you take about why you opened some locations you did in those regions and why you did it now?

Well, we look at markets all over the country. I used to make the statement that didn't matter if it was Paris, Texas or Paris, France, if there were pools we were looking at the market, and we pretty much are largely indifferent in terms of location in terms of, we look at what the opportunity, what is our share and how can we increase the share.

In certain markets that we didn't have a physical presence in, we were shipping or serving from a remote basis, that enables us to only generate or capture a limited share of that market. We can capture a greater share by having physical presence.

And when we have the resources in place from a management standpoint, when we have the resources in place from a -- cultivating the customer base standpoint from a sales prep that we do for one or two years before, when all of those things are in place, then we make the investment and really we've done that consistently over the course of time and if it's the right time, and we are ready, we do it. That's in essence the story behind these three.

Thank you, next question comes from the line of Anthony Lebiedzinski with Sidoti & Company.

You mentioned that you hesitate to talk about the market share gains by each individual market. Overall, when you look at the North America pool supplies market, what do you think is your current mark share now versus a year ago.

Overall North America, what goes through distribution, it would be close to 40%.

How does that compare versus a year ago?

Versus a year ago, we probably are up in the neighborhood of 1 to 1.5%.

Also, your CapEx has increased first half of this year versus the first half of last year, even for the full year, so with that in mind, what would be a good assumption for CapEx for this year and you have any thoughts about 2012 that would be also helpful as well.

That was driven by some significant investment that we made prior to the season, from a I.T. hardware standpoint. In fact, those investments were reviewed and approved by me in December.

And were executed largely in the first quarter, in anticipation of the season, we go through those types of significant hardware updates every several years, so two things, one is the level of CapEx in the back half of the year would be relatively speaking, modest, less in the first half and secondly in terms of 2012, I think building in approximately 0.5% of sales for next year is reasonable. 0.5% of sales. This year is probably closer to 0.75% of sales.

Also, I just wanted to know what your share count assumptions are embedded in your EPS guidance for the year.

Essentially, they are unchanged in terms of third quarter versus second quarter. With the basic number basically unchanged for the fourth quarter.

I had given some share count estimates on the last call or year end call for this year. They are still pretty accurate, maybe just a few hundred thousand less so if you take the difference I gave then for Q2, to what we reported, and just keep that difference for the third and fourth quarter, you would be pretty close.

Our next question comes prom the line of David Mann with Johnson Rice. Please proceed with your question.

Yes, thank you, I just want to clarify a few things, in terms of the trend in July, can you just give us a sense on how that is going versus your mid single digit guidance for the rest of the year?

We are doing fine in terms of the July month, as I think David since you've been following us for I think 16 years now--.

I appreciate that. A good reminder.

Our daily sales rate increases through some point in June, and then begins to decline so we are now in a declining sales rate so when we look at the numbers through yesterday for example, we know full well that by month end our year on year -- our year on year sales growth will be more modest than what is currently reflected.

I'm still looking for approximately mid single digit sales growth for the month and for the quarter. I guess one question I have, when you are talking about tougher sales comparisons, if we look at the base business growth that you've reported in the second half for the last several years, that's been very similar to the kind of growth you've had in the second quarter.

What -- am I missing something in terms of the more difficult comparison that you are talking about or have some sales been pulled forward in some way.

Two things, one is, we don't expect the same level of currency impact in the back half. So therefore, our 8 8.1% becomes 7%. And then, again, second half of last year was better and we improved gradually during -- the market improved gradually during the course of the year.

I'm not saying that 7% is out of the question in the back half of the year. I think it's more reasonable to expect 5%.

In terms of the green business, can you give us a sense on the overall profitability there. Do you still expect some improvement year-over-year on profit.

Yes, just to highlight that business, lost money last year as it did in 2009. We are expecting it to be break even to very, very nominal profits.

The acquisition you made in May, does that signal probably a more aggressive activity by you in terms of expanding the green business through acquisition and also maybe is there a more friendly environment than it's been the last couple of years?

Yes, in the former and in terms of the latter, we are having ongoing discussions. Our commitment to the green business has remained steady. We don't -- as you know us very well, we are not so much focused on quarter to quarter or year to year, we are focused on the longer term.

When we studied the green business back in '99, 2000, we saw an opportunity from a supply chain dynamic standpoint and long-term growth from an installed base standpoint and everything else, probably the industry that was closest to the pool sector in terms of long-term attractiveness in terms of industry organic growth as well as providing us the opportunity for having -- making investment and earning -- realizing returns on invested capital that were far in excess market as we do on the pool side. That perspective remains. And I think to your point or your question, we made a transaction in Vegas, probably one of the hardest hit markets in late last year, that was TES, we brought on three locations on the green business there, Kilpatrick, a very respectable distributor, and that's four locations in south Florida. Yes, we are ongoing looking at opportunities to make investments and very committed long-term to the opportunities there.

One last question, gross margin, on the last call you talked about 20 to 30 basis points of improvement, I guess you are seeing slightly more inflation perhaps you did from the pre buys which might help, you still believe 20, 30 basis points is the right number for the full year?

Yes. We had again 12 basis points from freight out surcharges and those 12 basis points will wind down a bit as the season goes on. We expect I would say that to Mark's commentary earlier, we were able to do some deals in the back half of last year, which helped our fourth quarter margins, I wouldn't put those in the bank for 2011. In the third quarter, I think, 20, 30 basis points are reasonable.

(Operator Instructions) Our next question comes from Dan Garafalo with Piper Jaffray.

One quick follow on if I could. When your publicly traded suppliers mentioned kind of a product cycle with some of the variable speed pumps and called out support with 25 or utility funded rebate programs across the country, just based on the higher efficiency of those pumps. I'm wondering if you can maybe give us a sense for if you are seeing any of that in your -- reflected in your business.

Most definitely. What happened here is one of the areas that helped us, not just in 2011 but really over the course of the past 3 years, is the evolution towards pumps, that provide significant efficiencies of the consumer. To that end, when a single speed pump is being replaced by a variable speed pump, that consumer benefits in terms of like in California, realizing the difference in energy savings usually inside of one year, most other markets inside of two years, that variable speed bump goes at a price point that's 2.5, 3 times what our regular pump goes for. That's a positive now, not just in '11 but for the past several years and gradually our mix of pump sales has migrated more and more although it's still a minority, but more and more towards variable speed pumps.

The installed base, it's almost completely one or two speed pumps, right? Going forward, that's an opportunity.

Yes. For example, if you look at in-ground pools, there are upwards of 6 million pumps installed on those in-ground pools. I would venture to say currently 90% plus of those pumps are single speed pumps. Not two speed. Single speed pumps. So therefore, the opportunity to change those out and replace them with a variable speed pump is certainly a very significant opportunity for the industry.

Brent Rakers with Morgan Keegan.

Apology if these questions have already been answered I got on late. I guess first on the green tread, this is now two deals in the last 7 or 8 months, they are small in terms of purchase price, are these profitable companies or should we look at these as neutral to EPS and do we have a sense for back 3, 4, 5 years ago at the cyclical peak maybe what the revenue basis of the businesses were?

Assume that they were net zero in terms of in year one. Contributions to online. That's based on us -- some back office consolidation and things we do to take costs out. Get them to net zero.

You can also assume that these businesses are down approximately 60% off their peak levels of 2006, 2007.

Can you talk a little bit about the change, is there a change in mindset to being more aggressive now again on this green side of the business?

Is there a sense of because your core has turned comp positive, is that the reasoning behind the acquisition here?

I think there is two elements. Really it's not so much us. It's the local, regional distributors you might say.

The industry much like the pool industry, did very well for many years and then even more so on the green side benefited by the inflated levels of new construction that was taking place from 2003 to 2007.

Therefore when you are talking to a distributor, we are talking to a distributor in 2008, 2009, they were still looking back at '05, '06 and '07 and thinking that that world was going to stay that way forever.

Certainly that's not, that was not anywhere near what our valuations were. What is the new reality that's really beginning to register in the last 12 months or so is that A) '03 to '07, were not real and not sustainable.

And secondly, there is a correction that is not going to be easy to go through. It's going to be depressed for a few more years. There will be a gradual recovery, and that gradual recovery will be more towards volume levels and the late 1990s or 2000, 2001, before the so called boom.

So therefore, given that new reality, that is beginning is register, people that before were saying well my business should be valued at X, now are saying you know what, do I want to work for the next five or ten years, and tread water if I am able to survive in the first place or do I want to just call it a day?

Therefore as they become progressively more enlightened I'm sure there will be more transactions.

Wanted to get a sense of what the actual bad debt expense number was in the quarter? I'm guessing around $0.5 million. Second, wanted to see if you could provide perspective on where your currency exposure actually lies, whether Canadian dollar, euro, British pounds and such.

First, the bad debt expense for the quarter was $250,000. Which is a negligible amount related to our sales dollars of $700 million plus. In terms of currency, the number one currency play or impact for us is the euro. Last year through the second quarter the euro was or there was about $1.20 per euro and been consistent $1.40, $1.44, through most of the second quarter of this year. That's the biggest currency adjustment. Year on year.

Thank you. Ladies and gentlemen, at this time, we have no further questions. I would like to turn the floor back to management for closing remarks.

Thank you Everett. Thank you all again for listening to our second quarter results conference call. Our next call is scheduled for October 20. Mark your calendars. October 20. Again, 11.00 AM Eastern, 10.00 AM Central. When we will discuss our third quarter 2011 results, thank you again. Ladies and gentlemen, this concludes today's teleconference, you may disconnect your lines at this time, and thank you for your participation.