Pool Corp (POOL) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Pool Corporation Second Quarter 2017 Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Mark Joslin, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you. Good morning, everyone, and welcome to our second quarter 2017 earnings call. 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 2017 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. In addition, we may make references to non-GAAP financial measures in our comments, a description and reconciliation of our non-GAAP financial measures is posted to our corporate website in our Investor Relations section.

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

Thank you, Mark, and good morning to everyone on the call. As reported, we had a solid second quarter with 7% base business sales growth, which was on top of last year's 6% base business growth in the quarter. Year-to-date, our base business sales increased 6% on top of last year's 9% base business sales increase that benefited from the favorable weather. This level of growth is a reflection of the resilience and favorable characteristics inherent to our business, together with our team's ability to provide exceptional value and are being rewarded with an ever increasing share of our customers' business. Our gross margins were solid, especially when you factor in the 30 bps increase realized in last year's second quarter. Year-to-date, our gross margins were flat compared to last year's 30 bps increase, which, again, benefited from a favorable weather.

Expenses were seasonally a bit higher, but largely as planned, as we continue our ongoing investments in our business. Altogether, a solid second quarter as we further solidify our foundation as a value-added distributor.

Our base business sales growth in our largest 4 markets, California, Florida, Texas, Arizona, and in the rest of the markets, was 7% in both cases.

Within the quarter, the cold and wet weeks before and after Memorial Day adversely impacted seasonal markets as did the heavier than normal rain in June in the east. The first part of the quarter had more favorable weather, which largely offset the adverse weather impact later in the quarter. Also, our base business sales results include our green business, which had a 5% base business sales increase in the quarter, despite the exit of a product line, which adversely impacted it sales by 5% in the quarter.

On the product side of sales, building materials and related outdoor living products continued its strong performance with 12% growth, while commercial also had 12% growth, excluding the Lincoln acquisition that we closed in the quarter.

Pool equipment growth was 9%. The growth on these product categories reflect both the ongoing recovery and the remodel and replacement sectors of our business as well as our consistent market share gains.

The retail product side of our business grew by 4% in the quarter, as the installed base of pools grew by 1%, with virtually no inflation and our performance, again, reflecting market share gains.

Our base business gross margins were down just 15 bps after being up 30 bps in last year's second quarter and 30 bps also in the first quarter of this year. All of which was due to the minor product and customer mix differences with the modest shift of early buy shipments to the second quarter of this year in comparison to last year.

Our base business contribution margin was 18% in the quarter and 14% year-to-date despite our continued investments in our business. We expect to get to a 15% plus contribution margin on base business for the year as we have an easier comp in the second half.

Our diluted earnings per share increased 12% in the quarter and 16% year-to-date, which is consistent with our expectations as is our ROIC increasing by 160 bps to 24.2% on a trailing 4-quarter basis, which reflects the ongoing effectiveness and discipline on our execution and allocation of capital.

One subject that has gathered increasing interest in the investment community is the potential impact of the online channel on the wholesale distribution industry. To spare those on the call, what has transpired over the past 20 years in the swimming pool industry, allow me to summarize by saying that: a, the online channel represents approximately 5% of industry activity, as only a limited portion of the industry's products are conducive to online trade; b, the online share of the swimming pool industry have been relatively stable for the past few years; c, Amazon has participated in the industry for over 10 years; d, online retailers represent 3% to 4% of our business as we are more selective with this channel than what we do in the trade and storefront retail channels; and e, our sales to the online retail channel are essentially flat year-to-date.

The principal impact of the online channel in the swimming pool industry has been increased price transparency, which has increased margin pressure on storefront retailers, especially in seasonal and smaller markets. We saw this impact years ago, with progressive storefront retailers migrating their offering since then to professional grade and other differentiated products.

For additional perspective, the greater popularity of so-called south pools has been a more significant factor on storefront retail than the Internet. Fortunately, favorable industry characteristics provide progressive storefront retailers the opportunity to succeed as evidenced by our 4% growth in retail product sales in the quarter and year-to-date and the over 8% growth realized by storefront retailers that attended our retail summit in January.

Of course, our results are only possible because of the commitment of our people throughout the company to our customers, our suppliers and each other. We are extremely fortunate to be involved in a business, where every day, we help people realize their dreams of a better home life while simultaneously assisting over 100,000 customers realize success.

We look forward to making 2017 another successful year as we continue to create exceptional value for our customers and suppliers.

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

Thank you, Manny. I'll start my commentary with operating expenses where I believe we've gained some traction compared to Q1, so we have a bit more work to do here to reach our objectives for the year.

For the quarter, our base business operating expenses grew 4.7% over last year compared to our 6.5% growth in gross profit.

This resulted in 20 basis points of operating leverage as base business operating income was 15.7% of net sales to the quarter compared to 15.5% last year. Year-to-date, our base business operating leverage is 10 basis points.

As mentioned in our press release, we have some growth-driven expenses -- expense increases in areas like labor and delivery costs. In addition, investments in information technology systems and hardware as well as the timing of recognition of employee health costs added to our expense growth in the quarter.

I expect these costs to moderate -- I expect the cost increases to moderate as we move into the back half of the year. Our goal here on expenses is as always to grow less than gross profit growth in order to gain 20 to 40 basis points of operating leverage in the year. This means, we have a bit more work to do here to get there this year, which I think is achievable.

Our income tax rate in the quarter was 37% compared -- compares favorably to our 38.4% rate last year. The majority of these rate improvement was driven by our adoption of ASU 2016-09, which also increased our share count by 550 basis points in the quarter. The net result of this was that our Q2 EPS was $0.02 better than it would have been without the tax accounting change. At this point, I believe unchanged the impact from this accounting change for the rest of the year that I provided on a previous call.

Since many of you will be building out your 2018 models and 2019 models over the next few months, it might be useful to mention that we believe the annual reduction in tax expense from the adoption of this new tax gap will be approximately $13 million in both years, which is about $2 million less than our expected impact in 2017.

Putting this into perspective from a tax rate standpoint, we expect our annual effective tax rate in 2017 to be 32.7%, 34.1% in 2018 and 34.6% in 2019. Given the variability and the assumptions that impact this calculation, including our expected share price and the timing of employee option exercises, I'd expect these estimates to be directionally correct, but certainly subjective adjustment as we move forward.

Moving on to the balance sheet and cash flow. You can see that our total net receivables grew 5% year-over-year, which was in line with our sales growth in the quarter. Our inventories grew 10% year-over-year, reflecting the impact of growth and mid-season opportunity buy, new products and inventories from the acquisition we completed in April in the commercial retail space.

This inventory increase net of the associated accounts payable increase as well as the impact of last year's federal income tax payment deferral of $15 million accounts for the increase in our cash use in operations of $28 million from last year. This gap in operating cash flow from last year should close in Q3 and Q4 as we work down inventory and last year's tax deferral.

I expect to be on track to reach our annual goal of cash flow from operations that meets or exceeds net income for the year.

One more comment on our statement of cash flow relates to our capital spending, which was $34 million year-to-date and $9 million more than we spent this time last year. As I stated on our Q1 call, our capital spending this year is largely front-end loaded as we expect our total capital spending for the year to be in the low $40 million range. This stems from early year investments we've made in delivery trucks and facility upgrades that help us achieve the capacity expansions needed for future growth.

I'll update you now on our share repurchases, which we have dipped our toe into in Q2 after staying out of the water in Q1. During the quarter, we repurchased 50,000 shares on the open market at $119 a share for the use of cash of $5.9 million. In addition, we repurchased another 39,000 shares after quarter-end at an average price of $118. With the remaining $186 million board authorization and quarter-ending leverage, a modest 1.54% -- modest 1.54, you can expect to see greater share repurchase activity moving forward.

Finally, one modeling item which I need to make you aware of is that we'll have 1 less billing day in the third quarter this year compared to last, which we did not get back this year. So 1 less day for the year overall.

In a quarter, which had 64 billing day of last year, 1 less day is 1.6% of the total days, and this roughly translates into the same amount of sales, which is notable for the quarter and should be dialed into your modeling of 3Q sales estimates.

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

(Operator Instructions) The first question comes from Ryan Merkel with William Blair.

So, first question is on gross margin. And I understand that mix in the tough comp was the reason that gross margin was down year-over-year this quarter. But in the second half of the year, Manny, should we expect it to continue? And then secondly, I think your goal was flat gross margin for the year. So just update us on this as to the goal.

Right. First of all, yes, the expectation is essentially flat for the year and flat for the back half of the year as it is flat for the first half of the year. So that's all consistent. Last year, we had a favorable weather as you recall in the seasonal markets, and that helped us a bit all the way around more impulse items being sold with the longer pool season and that helped our margins obviously as well as our sales and resulted in the strong first half and as well as second quarter gross margins that we had last year. And the fact that they're flat year-on-year, I think is, again, a very favorable statement given that being a very tough comp.

Yes. I agree. Okay. And then, secondly, Manny, you have a pretty good idea at this point in the year about where EPS will end up. So I'm wondering would you put us more to the midpoint of EPS guidance at this point? Or is there a real shot at the high end if weather cooperates?

Well, typically, when we provide the guidance, the midpoint is the fair number to use. And if you've got to factor in Mark's comments toward the end there about the fact that we have 1 less sales day in the third quarter and -- but I think everything is on track as we expected to be 3 months ago.

Okay. And then just lastly, if I could, many of the distributors I cover are investing in technology in a big way trying to stay ahead of the competition. And you've always been a leader in this regard. But any update on what you're working on now? And how -- and marry that up with how the customer expectation for service has changed.

Great question. We have been ahead of most, not ahead of all, but ahead of most in terms of using technology to enhance the customer experience, our own operations as well as how we manage the business and that continues. Mark, in fact, highlighted part of the expense increase year-on-year is our ongoing investments in technology. And that's something that we're not going to compromise a quarter or a year because we may spend a little more than anybody else would have thought on that because we're looking at the long-term plan. And now mind you, given all that we do and how we carry it out, it doesn't rise to be a significant number in the big picture, but we continue to invest. And in terms of translating that to the customer experience, there has been a number of initiatives that we continue to rollout both operationally leverage technology as well as using it from data and -- data mining and marketing standpoint. So yes, we continue to invest. Items are constantly being rolled out to further enhance the customer experience and it is part and parcel with business today. I mean, every company today is really technologically enabled business. It has to be. If you don't use technology, you are behind the curve, so...

The next question comes from David Manthey with Baird.

I'm interested in the growth algorithm from this point in the cycle forward. You said that your guidance for 2017 implies a 15% contribution margin. I'm just wondering if there's anything materially different in 2018? And then just generally, Manny, I know, in the past, you've kind of outlined your -- how you build up to the -- to your growth expectations. Can you give us an idea or remind us how you hope to achieve double-digit earnings growth from this point forward?

Sure. So you start, a foundational point there is the installed base of pools. That's what drives the industry. And the increase in that installed base of pools, which has been relatively modest. There is a little bit modest inflation on top of that. You have a recovery of remodel then replace to get the growth of an ongoing recovery of construction of new pools. And all of that together leads to a fourish-type number from an industry standpoint. We then go beyond that with market share gains. And again, this year, even though we had a very tough comp from last year given the favorable weather, we're still looking at 6%, 7% growth in terms of top line for the year. And then you take that and if you take on base business, a 15% to 18% contribution margin. And contribution margin, by the way for those on the call, is the difference in base business operating profit divided by base business sales. You take the contribution margin of 15% to 18%, that leads you to double-digit operating profit growth, which is what Mark mentioned in terms of 20 to 40 bps increase in base business operating margin. And then you take on top of that share repurchases, that adds usually another 2% to 3% and you get to 15% to 20% EPS growth, which -- again that formula, which we communicated back, I believe it was in the fall of 2009, we're basically stuck to since then. Frankly, we're at the high end of the 15% to 20% range in terms of EPS growth since that time. And this year will be no different. Obviously, to the extent that we have a tax benefit on the accounting for taxes. I'll take that out of the equation from all these metrics that's an EPS benefit on the side, but that is what it is. And the fundamental thing is 15% to 20% EPS growth, no different, nothing substantially different, no changes. And I don't envision anything significant in the next -- certainly not the next 3 to 5 years.

Right. Okay. And then Mark, you mentioned health care insurance expenses. Could you talk to us a little bit about the magnitude of that in the second quarter? And then, how does that peel off in the third quarter?

Yes, you bet, David. Really what happens there is, we accrue health care expenses while we have actual and then we accrue at the end of the quarter, which is usually a percentage based on some actuarial estimates we get, and that estimate increased in the fourth quarter of last year from 12% to 14% over the last 12 months. All of that is to say that as we move through the year, the accrual rate will lapse when we get to the fourth quarter. And so that's one component of it. The other is the fact that we have had some high individual claims this year, which hopefully will not continue, although we certainly don't have any insights there. And so those are why I think the increase will moderate as we move through the year. The magnitude in the second quarter is about $1 million and cost increase year-over-year.

The next question comes from David Mann with Johnson Rice.

Manny, on the last call, you talked about, you started to see change or an acceleration in underlying demand. Can you just talk a little bit more about, are you still seeing that in the channel? And how that perhaps might continue into the back half and into next year?

Sure. Yes. From a contractor standpoint, a demand is not an issue at all. And in fact, since you live in Atlanta, you were witnessed to the heavier rains that happen throughout the southeast especially, vis-à-vis most years in terms of June. And that really just pushed back some of the work. So yes, demand is a nonissue. Contractors in the space whether they are building pools, remodeling pools, replacing equipment on pools, their backlog is whatever they wanted to be because the demand is there, and we don't see that changing. Now I'll also go to the other side, which I talked to a couple of times, I think, in previous calls, which is that the capacity to serve that demand is constrained. And it's not unique to the swimming pool space. I think it applies to all trade sectors and other sectors as well. There is frankly a labor talent/labor shortage in the contractor space. And we're not exempted from that. So the point here is, if the demand was there and I think it very well be there for the industry to grow faster than it's growing. The constraint is just capacity. But again, it provides us with the confidence that we're going to be on track and not just a 2017 phenomena, but for the next X number of years given the fact that certainly the demographics, the demand characteristics, all these factors are there.

In terms of the commercial business, the Lincoln Aquatics acquisition, can you talk a little bit about that opportunity? Seems like from our checks that company was albeit not that large, was fairly well regarded in that segment?

Very much so. It's interesting. I met the principal of that owned and ran Lincoln back in the fall of 1999 as I was exploring the commercial space and trying to prioritize growth opportunities for the company. And as you, I think, witnessed, I believe, about 8 years ago, that moved up enough on the radar screen to become a priority opportunity for us. And over the course of the past 7 to 8 years, we've quintupled our commercial business to last year just shy of $100 million and certainly just over $100 million this year, excluding the Lincoln acquisition. The focus of Lincoln is very complementary to what we're doing. Our strength was in the commercial space, was in the HMAC sector. We play in the larger pools as well as water parks, but our strength was more in the HMAC sector. Lincoln's strength is more on the larger pools, whether it be municipal pools, YMCA pools, competitive pools as well as water parks. And that just is a nice compliment to us. It will further our business in the commercial space by the fact that we can leverage each other's strengths. Our ability to serve our network, our relationships throughout North America coupled with their technical expertise of the team there as well as their existing customer base.

That sounds great. On the green business, last couple of quarters, you've struggled a little bit. It sounds like you tried to address some execution issues. Would you say that's all been fixed now with the performance this quarter? Or you still feel like you have some room to go there?

We are certainly moving in the right direction in the green business. I mean, the fact that we entered a product line and we take that out of the equation, our base business sales were up 10% in the quarter, I think, is a reflection of the fact that we're certainly moving in the right direction in the green business. Are we where we want to be? And the answer is no. It's also no in the blue business domestically, it's also no internationally. We're never going to be where we want to be because we're always going to look to be up better than we are. And that opportunity exists throughout the organization. And as part of our culture that we have to get better every year in everything we do. So -- and the green business applies, but the fact that, again, taking out the business we exited, the fact that we're up 10% year-on-year in sales in the quarter, is certainly a reflection of our moving forward in a very positive way.

Great. And then one housekeeping question for Mark. As it relates to the ASU benefit, it sounds like you didn't change your expected impact for the full year from the prior quarter. And it sounds like that was based on the price at the beginning of the day where it got a $11 lower right now. Can you give us sense on if the price, let's say, was at this level for the rest of the year? What would that do to the ASU impact? And what would your pro forma guidance look like?

Dave, that's a good question. That's a difficult question to answer though. There is a couple of factors there. One is the ASU. The other is our stock expense. The stock expense is, I would say, would have a favorable impact on the ASU side. What does lower stock price might do is, encourage less people to exercise options or push the exercise out. So I really can't tell you at this point. And we'll have to take a look at it and where the stock price is now or whether it ends up with could certainly change. So I don't have a good answer for you. We'll have to kind of play that by ear. And hopefully, all understand that the complications in estimating what that ASU impact is and I guess, the bottom line for me is it's an accounting change. It has nothing to do with our business. That's why we call it out and try to make transparent what the impact is. So whether it's positive or negative from our projections, I don't view as being material to our business.

The next question comes from Matt Duncan with Stephens, Inc.

So Manny, I appreciate all the comments around the online model and sort of the impact on the industry. Obviously, it's front of mind for lot of people right now. One other question that we all get a lot, I suspect, at least, I know I do, is around pricing and sort of the directionality of pricing and all these various distribution verticals. Can you just address, are you seeing any kind of change in competitive price? Is it business as usual? And may be sort of walk through your key product categories. What you've experienced from a price perspective over the last few years? I think that would be very helpful.

Sure. Well, the -- just to provide a little bit of insight. When I joined the company 8.5 years ago, 1 of the top 2 or 3 items that was then an issue was the Internet and how the Internet was going to affect business and going back to 2000, 2001, they were close to 1,000 storefront retailers largely that were selling products online and it was primarily an arbitrage play between the larger yield around markets and the smaller and seasonal markets in terms of what the pricing -- retail prices were and guys in Florida and California selling to consumers in New York and Ohio. The -- I'll say the greatest pressure there happened in the '05, '06, '07 time frame. That was the greatest stress period because there were so many guys playing, and then at the same time, there were a few guys that were, I'll call it special, focused on the online channel supposed to being storefront retailers that were arbitraging prices between markets. And then Amazon came into it about 10 years ago. That drove the cost to get traction on Page 1 for these guys that were specialists in the space, made it a little bit harder for them, so there was a little bit of shakeout that happened. And the last few years has been pretty stable. Manufactures have cognizant of the sectors, and customers have been come out with professional grade or trade series products. They have been more -- improved their communication and their packaging to make sure that their products are installed by professionals. They've -- most of them have differentiated the warranties to require a professional installation because, god forbid, you'd have a regular pool owner trying to put in a pool heater and blowing up his home in the process. It's kind of naïve or foolish to think that pool owners are going to install these products themselves. The great majority, as I mentioned, are not conducive, I mean, whether it's freight, whether it's the bulkiness of the products, whether the fact that they require a professional to install them, I mean, it's only a very small set of the product offering that has any -- that's conducive to online trade. So those are all things that have been there. And again, we see this as something that was historically more a factor and not to say, it's not a factor today. It's 5% of the industry sales. About 3%, 4% of our business is selling to online retailers, a few of them are still the same guys that started almost 20 years ago, that are playing a price arbitrage, a little bit of price arbitrage given their volumes and their storefronts.

And also there are guys that are specialists in the space like an Amazon. So -- again, I don't see that as being a factor for us much in the last few years, and the shares stabilized the growth of the channel as -- vis-à-vis other channels has been pretty stable if anything maybe declined in the last year or 2.

Manny, maybe to tie a bell around this and to be perfectly clear, your stock seems to be very confused about what's happening with pricing and gross margin for you, specifically, it's a "shoot first, ask questions later world" around gross margins right now. Price had no impact on your gross margin this quarter, right? But -- it's simply just...

No, no, the online channel had no impact. It was -- I mean, that's all product mix. As I mentioned, I think last quarter about $10 million of business that we did that -- and shipped on early buy in the first quarter of '16, got shipped in the second quarter of '17. And early buy shipments are a little lower margin than regular day-to-day shipments. And so therefore, it's a not -- that's not the factor. Frankly, the factor is the fact that equipment sales, which are, generally speaking, a little lower margin than the rest of our products, grew up a little faster than the overall sales growth. I mean, 7% base business sales growth. Equipment was 9%. So the fact that equipment was a little higher, that's in essence hidden.

Okay. Yes, I just want to make that clear for anybody that didn't quite catch that yet. So last thing real quickly on 3Q revenue growth and then the impact from Lincoln. So market, it sounds like the 1 less day is the 1.6% drag. You were at 7.5% revenue growth this quarter. So should we extrapolate that to, I mean, something closer to 6% is more likely in the 3Q? And what are Lincoln's annual revenues?

Well, to answer your first part of your question, yes, I think that's a reasonable adjustment to make. In terms of Lincoln, Manny, you want to address that?

Lincoln did about $20 million for the year, a little shy of $20 million. So you divide it by 4. That business is not that seasonal. So it will be, call it, $5 million in the third quarter.

(Operator Instructions) Our next question comes from Garik Shmois with Longbow Research.

Just want a little bit more color on how to think about the improved operating leverage expectations in the second half of the year? Also just given the context of the 1 fewer shipping days in Q3, should we assume that Q3 is still a, call it, transitional quarter as you get up to speed with the freight and with the labor or should the operating leverage improvement be the balance spread across the second half?

Well, the main reason really, Garik, is that in the first quarter, we had a super tough comp. In last few years, 2016's first quarter was extraordinary. And therefore, the fact that we had positive year-on-year sales growth against last year's first quarter and were flat on operating margins versus last year's extraordinary first quarter, I think, was an accomplishment in itself. So you take that off the table, right, and you begin to come back to more normalized levels. Again, our contribution margin was 18% in the second quarter. I expect it to be comfortably north of 15% in the back half of the year where we have more reasonable year-on-year comparables. So it's nothing. We don't have -- the back half of the year was solid last year, good in every respect. But it was an extraordinary. We would have the -- we didn't have the weather lift that we had in the first quarter of last year.

Okay. That's helpful. And I might have missed it, but I was wondering if you could touch on 2 areas that have been double-digit growers for you, underlying growth within the commercial sector excluding the Lincoln acquisition as well as building products. How did that perform in the quarter? Don't necessarily expect any change in trend, but would love to get any color around how...

Sure. building materials, as I mentioned, was up 12% in the quarter. Building materials continues to be a category for us that: a, we're gaining share; b, we have a little bit of a breeze behind us with the ongoing recovery of remodeling and the favorable macroeconomic environment; and the third reason, the third which we should never dismiss is that because of our efforts and investments in marketing and education on -- of our customer base as we roll out new products within the building materials sector, we're helping expand the market whether it's new tiles or new pool finishes, new decking products. We are helping grow the market overall. And I think all 3 factors have been integral part of why our growth has been very strong in that sector for the past 8, 9 years and why it should continue to grow at double-digit rate on a go forward basis. When you turn to commercial, commercial is an area -- as I touched on when I mentioned Lincoln, commercial is an area that again we focused on more completely as an organization about 8 years ago. And since that time, we've made a number of investments in stocking locations. We've made a number of investments in talent, in the fields to provide expertise to help our customers. And as a result of that -- of those investments, we've gotten a return and increased share. And again, our share in that space, while it's grown significantly over the past 8 years, is still less than our share with the residential sector. And I think that bodes well in terms of continued growth for the following X number of years.

The next question comes from Ken Zener with KeyBanc.

So referring Manny, you talked clearly about how the percent of the channel related to online and this is all about Amazon today, I apologize but it was that way. As well, you're not alone today. Where these appliances are going online apparently too vis-à-vis that maybe is another announcement Amazon made today. So if you could -- if I could just make this personally and I just think it's really important because this is a conversation I've had far more in the last quarter than I had in all the time that I've covered you. You talked about why it's 5% online in the market, freight cost, bulkiness, need to have a professional installation. And my pool servicer, who does a lot of pools upward of 1,000, agrees with you. However, this is less about today versus tomorrow. So if I were to -- and I want give you an example so you could respond it with granularity. If I'm one of the 70% of pool owners that self-services my own pool and then my pump or my filter breaks. I go online, I see a pump for $420 on Amazon. I call up a pool person who I don't use since I'm self-servicing and he gives me a quote for labor and the pump for $480. What keeps me from buying that pump online and then having it shipped to my house, thinking that the price is lower by $70, which it is. And why wouldn't I just override the fact that pool person is going to say look, you're going to lose some warranties if you buy it through that channel versus me. Since I'm already a price sensitive buyer since I'm servicing the pool myself. That's kind of the dynamic that I think people are trying to discern here as it relates to price transparency.

Sure. The fundamentals and this has been -- this is not a new event. The fundamental is twofold. One is, the individual pool owner is a higher-end demographic and that higher-end demographic, to say, whether it's $60 or $70, typically is not going to invest the time to figure out first of all what they need. And if that pump is 8 or 10 years old, it may not be the same pump that he has already. So it's going to be a likelihood of a new and different pump. So that's factor number one. Factor number two, the time it takes to wait and get it, in the meantime, the pool will not be circulating water, which means it's going to turn green. And so I mean, I put it this way.

Look if the guy has to install it too...

And then the guys who install it as well. I mean, the whole likelihood here is, there are people that will drive 10 miles out on the way to save a nickel on a gallon in gas. Okay. And those people appreciate or have certainly no appreciation for: a, the cost to drive back and forth 10 miles, right? They have no appreciation of their time and the value of their time. So there is always going to be that very small minority that are going to do that. And that's been that way for years and years and years. So that's not going to be any different. I would also make another comment. Amazon has been in the space for over 10 years, right? If you go back on their website 10 years ago, they had thousands upon thousands, right, of SKUs from swimming pool industry on their website, right, as there are number of other online retailers, right? So that availability, the example that you just highlighted, right, was there 18 years ago. And it continues to be there. And again, there are those pool owners, small or minority, right, that will go out of their way to drive 10 miles to save a nickel on a gallon in gas, and those same guys will buy on the Internet and say $40 or $50 whatever it is, right? But it's a very small minority because it makes no sense whatsoever.

Yes. Mark, I hear him, Manny, but I'd pay the extra 50 bucks just because I viewed it as a retainer to my service person. Mark, can you talk the other element within this backdrop is that your EBIT leverage, 1Q is an outstanding quarter given the comp, but your EBIT contribution is running a bit lighter in the first half, implying a bit of strength, which you talked about easy comps. I think Manny, you highlighted that the equipment sales would explain some of that. But in general, you've talked about how steady your business is. Usually, the first half is about 68% of your earnings would put. If you apply that to the first half earnings, kind of it actually outside of $4.12 plus range. Could you be specific as to why the operating leverage is going to be greater and essentially your second half earnings is going to greater because I know in the past, you've talked about once the pool is open, you know how much money its making. Why is it so pronounced this year in terms of just the acceleration and leverage in the second half?

Well, Ken, I look at the factors that have impacted us in terms of expense growth and the things that we pointed out there, first of all, are volume-driven labor and freight. And on the labor side, a lot of the cost increase there is in variable labor, particularly overtime and temporary health. And I think Manny mentioned, the deceleration that we saw in the quarter because of weather in the northern -- central and northern markets. So that is a controllable expense that our field is going to begin the clampdown on as we move through the third quarter and into the first -- fourth quarter. So that's one. Two, I mentioned on the health care cost, the increase there was driven by a couple of factors. One, change in accrual rate, which we lapped in the fourth quarter. And the other by unusually higher expenses. I will say, there was a $1 million impact on the quarter, but a 20% increase year-over-year, which is very unusual for us. I go back 3 or 4 years in time and our health care cost increases have been growing, but very modestly in the 3% to 5% range. So 20% range is just very unusual. It doesn't mean it won't continue, but I'd be surprised if it did. And then I mentioned, technology spending being another factor less than the employee benefits, but also a factor in the quarter. And some of that was driven by some software implementation costs that we had in the first half of the year and then we won't have in the second half of the year. So I just look at all those things. Those, again, are higher growth categories in terms of expenses year-to-date. And we don't anticipate that we'll have that same level of spending in the second half of year and therefore, have greater operating leverage.

Okay. Fair. And then just these are micro housekeeping questions. Your expected share count for the year, repeat it if I missed it, I apologize, and then explicit Q3 and 4Q tax rate. I know you gave that full year when I just didn't know if it was going to swing around between 3 and 4Q.

Yes, and Ken, I'm going to have to make you do a little work because I don't have the share count forecast with me. I did give that on, I believe, the year-end call because share repurchases have been modest in the first half year-to-date, I would use those -- that share count forecast that I gave them for the rest of the year. I gave it by quarter. On the rates, the 2017 rate that I gave was the annual rate and that varies typically with the third quarter being a little bit better in normal years. This year, because of the significant impact from this tax accounting change, we expected a much greater fourth quarter benefit. And again, I gave that benefit on an earlier call. I don't have the number with me.

$2.5 million.

Yes, so that has a big impact and I haven't got another rate specifically, but the fourth quarter would be much lower than the third quarter because of that share count or share tax change.

And just a point. The share count is approximately $43 million, and I don't, from a big picture standpoint, other than our repurchasing shares, as we know, at this point, we don't assume, right? You would assume. You would look at that being relatively flat the back half of the year.

This concludes our question-and-answer session. I would turn the conference back over to Mark Joslin for any closing remarks.

Well, thank you. I will turn it over to Manny for his closing remarks.

Thank you, Bill, and thank you all for listening. Our next conference call is scheduled for October 19, mark it on your calendars, Thursday, October 19, 11 a.m. Eastern, 10 Central, 8 Pacific, when we'll discuss our third quarter 2017 results. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.