Pool (POOL) Q3 2011 Earnings Call October 20, 2011 11:00 am ET Executives Manuel Perez De La Mesa - Chief Executive Officer, President and Director Mark W. Joslin - Chief Financial Officer, Vice President and Treasurer Analysts Mark Rupe - Longbow Research LLC Anthony C. Lebiedzinski - Sidoti & Company, LLC Leah Villalobos - Longbow Research LLC David M. Mann - Johnson Rice & Company, L.L.C., Research Division Ryan Merkel - William Blair & Company L.L.C., Research Division David J. Manthey - Robert W. Baird & Co. Incorporated, Research Division Brent D. Rakers - Morgan Keegan & Company, Inc., Research Division Thomas L. Hayes - Piper Jaffray Companies, Research Division Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division Presentation Operator
Manuel Perez De La MesaThank you, Mark, and good morning to everyone on the call. With our 2011 season ending in September, I'd like to start my prepared comments by thanking our teams throughout the company for their execution and commitment to continuous improvement. Our results in a very challenging economic environment are a credit to them. Well, our third quarter results speak for themselves, especially as the industry is still operating at very depressed levels, with new construction down over 70% from peak levels and replacement remodel activity down 30% from normalized levels. Fortunately, we have continued to gain share, coupled with very modest improvement in consumer discretionary behavior and increases in the installed base. These increases in share are the result of both our ongoing improvement in service level, as well as our ongoing development of new tools and programs to help our customers' businesses. The execution of both service levels and customer tools and programs are a credit to our teams that make it a reality everyday. Organic sales growth of 9.4% in the quarter and 9.9% year-to-date are exemplary in this environment, especially if these sales gains were realized without compromising gross margins as these also increase by 61 bps and 63 bps in the quarter and year-to-date, respectively. It is because of this exemplary performance that our incentive expense in 2011 will be the highest ever. It is important for investors to note that we have a very tight pay-for-performance structure with performance principles based on continuous improvement and considering both absolute and relative performance in context with the industry and the general economic environment. In the third quarter, our green base business sales increased 8.9%, while our blue base business sales increased by 9.4%, yielding the combined weighted 9.4% increase mentioned earlier. As noticed, noted in the base business schedule included in our release, sales from acquisitions and new locations were $6 million in the quarter.
Within the blue business' major markets, Texas and Arizona have the strongest sales growth at 16% and 19%, respectively, while Florida came in at 9% growth and California realized 5% growth. All other markets were up 8% collectively.Overall, weather was neutral in the quarter versus both last year and the long-term norm, with the benefits in the Southwest offset by worse-than-normal weather in the West. Year-to-date, our green base business sales increased 7.9% while our blue base business increased 10%, yielding the combined 9.9% increase for the year-to-date. Acquisitions and new locations contributed $21 million of sales, but did not contribute any operating income as these are investments for the future. Our 2 principal organic sales growth focus areas are the retail customer segment which increased 11% year-to-date and the building materials product segment which increased 17% year-to-date. Together, these focus growth areas accounted for approximately 45% of our sales margin dollar growth year-to-date. We expect to finish 2011 with mid to high single-digit sales growth in the fourth quarter but on lower gross margin as we realized certain nonrecurring vendor incentives in last year's fourth quarter. Talking about gross margins, 12 bps of our 61 bps increase in the quarter is due to our recovery of higher freight expense, with the balance primarily due to improved sales and purchasing execution. As mentioned last quarter, some vendors have unusual in-season price increases that we bought into. But given the timing and competitive behavior, we were not able to realize significant benefit from those buy-ins. The additional buy-in amounts from the second quarter have largely since been sold through while some other vendors have increased prices in the last -- past 30 to 60 days which we've also bought into. Overall, our working capital is very sound, with DSOs down and over 90% of the year-on-year inventory increase being the fastest velocity classes. Our management here should result in operating cash flow approximating net income for the year. Now I'll turn the call over to Mark for his financial commentary. Read the rest of this transcript for free on seekingalpha.com