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Pool (NASDAQ:POOL)

Q2 2011 Earnings Call

July 21, 2011 11:00 am ET

Executives

Mark Joslin - Chief Financial Officer, Vice President and Treasurer

Manuel De La Mesa - Chief Executive Officer, President and Director

Analysts

Daniel Garofalo

David Mann - Johnson Rice & Company, L.L.C.

Mark Rupe - Longbow Research LLC

Ryan Merkel - William Blair & Company L.L.C.

Anthony Lebiedzinski - Sidoti & Company, LLC

Luke Junk

Keith Hughes - SunTrust Robinson Humphrey, Inc.

Brent Rakers - Morgan Keegan & Company, Inc.

Operator

Greetings, and welcome to the Pool Corporation Second Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Mark Joslin, Pool Corporation's Chief Financial Officer. Thank you. Mr. Joslin, you may begin.

Mark Joslin

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'll turn the call over to our President and CEO, Manny Perez De La Mesa. Manny?

Manuel De La Mesa

Thank you, Mark, and 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, our 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're still 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 comparison perspective.

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 favorable exchange rates.

The principal 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 had a very modest change in consumer discretionary behavior, also being positive contributing factors.

Our 2 principal 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 gross profit dollars are up 14% to $21.1 million in the Building Materials segment and up 12% to $73.1 million in the Retail segment, 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 rates.

Turning to gross margin. 12 bps of our 50 bps improvement in the quarter came from increased delivery charges as we sought to recover the higher periodic expense from higher fuel costs. The balance of improvement primarily the result of our improving sales, pricing and purchasing disciplines, especially with our focus on migrating sales to preferred vendor and POOLCORP 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 our year-to-date basis, we realized an $18.5 million increase in operating income or a 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 Equipment Supply 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 J.L. 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 acquisition added 8 locations to our network. In addition, we have also opened 3 centers in 2011, 2 in Florida and 1 in Puerto Rico.

Turning to cash flow and working capital. Our increased sales growth has logically resulted in increased receivables, which increase were moderated significantly by year end given the seasonality of our business. As many of you know, the lion's share of our receivable balance at any quarter end is comprised of credit sales in the last month of the quarter, with June being our highest sales month and December our 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 only be up modestly as we sell through the pre-price increase purchases. Overall, our free cash flow should approximate net income for the year.

The bottom line is that we have had solid quarter and 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'll turn the call over to Mark for his financial commentary.

Mark Joslin

Thank you, Manny. I'll begin my comments by providing a little more color on our SG&A cost and the 10% growth in base business. SG&A cost for the quarter doesn't reflect what is happening in our core SG&A cost.

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 booked our incentive expenses in the months we are profitable, so excluding any year-end adjustments, about 3/4 of our incentive costs were recorded by the end of Q2 and the remainder are recorded in Q3. As a company, we are much more of a performance based cost structure than most, which helps cushion the impact of any market downturns on our performance, but hits our earnings a bit harder on the upturn.

After this year, we will have gotten our annual incentive expenses up to more normalized level after the lows of 2008 and 2009. So year-over-year, changes going forward should generally be more modest than what was 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 at 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 decline into second quarter of 2010.

Excluding these items, it leaves us with a very nominal increase in the remainder of our SG&A costs with some ups and downs in different categories, which given our sales growth, we believe, was an excellent result.

I'd like to reiterate here that both the incentive accrual rate and exchange impact will adversely affect 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 into their Q3 models for us.

Moving on to 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 well below our sales growth due to continued improvement in collections. Reflecting this, our greater than 30-day past due balances have 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 the 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 health at this point in time of our customer base.

Moving on to inventories. Our inventory balances increased 18% or $58 million, including $6 million or 2% in acquired inventories to $390 million at the end of Q2. As we stated, there were some midyear price increases announced by vendors this year, which prompted us to use our financial strength to buy inventory ahead of these increases. While this 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 our inventory levels is sharing with you the inventory increase by inventory class. We categorize inventory into 13 classes based on turnover value with the top selling product being in classes 1 through 4. 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 1 to 4 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 covers the main topics on cash flow, so let me update you on our share repurchase activity. On our last call, I have 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 were purchased under our new $100 million repurchase program authorized by our board in early May.

Lastly, I'll comment on our expectations for the second half of the year and where we see some disconnect between our expected results and what some of you might be expecting. We've gone through pretty great lengths to point out both in this call and our previous call this year that we have more difficult comps in the back half of the year, and have more modest expectations for growth than in the first half of the year. In addition to those general comments, there are 2 areas that stand out as more significant disconnects between our expectations and street views of our results. One, as I had already mentioned, is the high SG&A growth we expect to see in Q3 related primarily to additional incentive costs. The other is in our Q4 gross margins.

As we detailed in our 2010 10-K, 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 reoccur this year, so it is likely that our Q4 margins will be lower in Q4 2011 than in Q4 2010.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today comes from the line of Dan Garofalo with Piper Jaffray.

Daniel Garofalo

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

Mark Joslin

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

Daniel Garofalo

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

Manuel De La Mesa

Well, in terms of weather, 2 things. A is that I have a comparison to -- 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's worse than last year's weather again in the northeast and midwest. It's hot every July and every July there are incidences of record temperatures as 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. And 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're only 20 days into it. So if the weatherman can't predict the weather, I'm not going to try.

Daniel Garofalo

Sure. And if I could, just a really quick follow-up. Early read on what, if any, effect of the dust storm down here in Arizona might have on equipment repair and replacement in that market?

Manuel De La Mesa

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.

Operator

Our next question comes from the line of Luke Junk with Robert W. Baird.

Luke Junk

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

Manuel De La Mesa

Sure. Typically, vendors in this industry announce price increases in the fall and those become effective typically early in next year. In the case of 2011, there were some price increases and expectations were -- our expectations were that effectively for 2011, inflation -- net inflation will be about 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 #1 product category. So you got to take 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 1, others became effective July 1. The impact on that overall to us, net-net, will be a maybe a 1% increase to our inflation for the back half of the year compared to the first half of the year. And 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 we're able to implement the price increases on a timely basis from a sales and pricing execution 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 #1 vendor has not announced a price increase, a lot of product categories are in fact flat. So it's a minority of the vendors and that did make a little bit of a contribution, but it's fairly muted.

Luke Junk

Okay, that's helpful. And then second, I know you don't necessarily look at the business like this. But maybe if you could give a little color if you look across just basic maintenance trends versus replacement and construction and maybe if you could try to put some percentages around growth in those buckets?

Manuel De La Mesa

Sure. I'll give you the industry perspective and then I'll give you 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 remodeling activity, 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. As highlighted in my comments earlier, we have a number of initiatives in place to grow share. And 2 of the areas -- 2 of the primary areas of focus in that regard are building materials within the context of replacement and remodeling activity. And we have double-digit sales and GP dollar growth there in building materials, and that's by taking share in remodel and replacement activity primarily. And then in the case of the retail customer segment, an area that we feel is an opportunity for us to provide value to our independently owned retail stores and working with them to help them and 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. So clearly, we are growing share again this year. We do every year. And 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% to earnings share growth.

Operator

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

Mark Rupe - Longbow Research LLC

Just on the topic of the market share gains. Was it limited to those 2 areas you called out or was it much more broader than that? And if it was broader than that, was it in a particular region of the country?

Manuel De La Mesa

It's clearly broader than that. But to the extent that those -- with those customer segments, we're able to provide more value to help them in their execution in sales and providing ongoing better service. That carries over. It has spilled over effect across all areas. I would say that it's tough to give in a public forum what our market share gains are by market. But I would say that like in most years, we're gaining share in a majority of the markets whether this year it will be 80%, maybe last year it was 70% of the market that we participated in. But it's pretty widespread. And that includes both domestically and internationally.

Mark Rupe - Longbow Research LLC

Okay, perfect. And then on the comps, I guess being more challenged in the back half, I realize on paper, yes, it definitely is. But is there anything over and above what's on -- kind of what the complex last year that's inherent that we should keep it in mind of maybe why it's stronger than maybe what -- I mean obviously, there's years of negatives. And it surprised me that it's being called out so much as being on the hard comp. Is there anything that's not on paper that's inherent in the kind of the difficult comp in the back half?

Manuel De La Mesa

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

Mark Joslin

Yes. But I would say 2 other comments that add to that was in 2010, the first half we had a little bit of margin compression there. There's really no inflation taking place in the inventory -- in the industry. So if you got our margins in the first half, they were down and then they kind of flattened out and improved by the end of the year. So 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 of this year.

Mark Rupe - Longbow Research LLC

Okay, perfect. And then on the kind of incremental margin leverage, thanks for at least pulling out the acquisitions and new locations to get that 20%. But the non-base sales of $12 million, which you called out as having no profit during the period, what sort of expectations should we kind of have on getting some of the non-base sales up to a more appropriate kind of margin level. I guess the point I'm trying to make, 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. But just curious to see if the kind of the non-base business sales will be a drag into 12 as well. I guess, will continue to be a drive in -- drag in.

Manuel De La Mesa

When we talked about the operating margin leverage that we have, we're talking about that on base business. And 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're opening a new location, let's say Puerto Rico. Puerto Rico is a viable market. We've been looking at it for a number of years. We were shipping into Puerto Rico from one of our Miami locations for at least the past 10 years. And we decided to make an investment, enabling us to capture more share in the Puerto Rico market. That comes with making an investment in facilities and people. We're not going to get that back in capturing market share the day we open up. People are not going to leave their existing source and come to us overnight. We have to earn that business, and we are. But as we earn that business, the first few months or year, there is some cost that we have to absorb so -- that we front loaded. So therefore, that creates drag. In terms of acquisitions, the lion's share of our competitors depending on whether the 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, meaning there are certain things that we do to improve results but we can't work miracles as much as we try sometimes. So therefore, those are naturally a drag in the short term. But again, they form part of the base and as we improve execution and rationalize things over time, then they provide the same opportunities for operating leverage going forward.

Operator

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

Keith Hughes - SunTrust Robinson Humphrey, Inc.

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

Manuel De La Mesa

That would be for the second half of the year.

Keith Hughes - SunTrust Robinson Humphrey, Inc.

And you -- you'd refer 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 kind of big ticket renovations. So actually 2 questions. One, do you think that's sustainable heading in the second half of the year? And two, why would the pool business -- or what's going on in the pool business that it's standing out so well at this point?

Manuel De La Mesa

Well, that's a -- Keith, excellent observation. When you look at what drives replacement and remodel activity, generally speaking, it involves the pools that are more than 7 years old. And if you look at the install base that is more than 7 years old, you'll note that, that install base is growing by mid single-digits given the rate of new pool construction that was taking place in the 2003, 2004 time frame. So therefore, what's really driving that is the aging of the install base. And 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 install base in terms of units, not so much a significant change in consumer behavior that is driving that mid single-digit growth in replacement and remodeling activity from an industry standpoint.

Keith Hughes - SunTrust Robinson Humphrey, Inc.

Do think this is going to continue in the next several quarters?

Manuel De La Mesa

That should continue. If you'll 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 install base more than 7 years old, this year and 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 permit build rates for the last several years come into the equation.

Keith Hughes - SunTrust Robinson Humphrey, Inc.

Okay. And final question. You referred to -- or Mark referred some inventory, the $45 million increase in class 1 through 4 inventory. What is class 1 through 4, what does that mean?

Manuel De La Mesa

Okay. What happens here is in our inventory system, we have 13 classes of inventory. They're ranked in dollar sales, and 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 trailing 12 months. The second class 2 is the next 12th in the dollar sales. So basically what happens is classes 1 through 4 represent over 80% of our cost of goods sold, on a trailing 12-month basis for each -- measured at an individual location level. So when Mark highlights the fact that of our inventory increase, all the $3 million is comprised of class 1 through 4 items. Those are the highest velocity, biggest ticket items so therefore -- and those are obviously the ones that turn the fastest from inventory velocity standpoint.

Keith Hughes - SunTrust Robinson Humphrey, Inc.

I assume that will be stuff like chemicals, pumps, things like that?

Manuel De La Mesa

Yes. And even within the context of pumps, it's the more popular pumps and the more popular chemicals.

Operator

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

Ryan Merkel - William Blair & Company L.L.C.

So when asked 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 then I'm wondering if June had a strong finish given all the hot weather that we've had.

Manuel De La Mesa

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.

Ryan Merkel - William Blair & Company L.L.C.

Okay.

Mark Joslin

Yes. When you look at sales, factoring out billing days.

Manuel De La Mesa

Because we have -- I think -- I can't remember exactly. But I think in one month, we have one less billing day and the other month, we gained it back. So we look at it on a daily sales rate basis year-on-year and essentially, they were all between 7% and 9% every month of the quarter.

Ryan Merkel - William Blair & Company L.L.C.

Okay, so pretty consistent across the quarter.

Manuel De La Mesa

Yes.

Ryan Merkel - William Blair & Company L.L.C.

Okay. And then 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 2011? And then could you also comment on 2012?

Manuel De La Mesa

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 backed out the approximately $1 million credit adjustment that we had in the second quarter of 2010 because that's not a fair basis of comparison. So taking those out those out of the equation, yes. Organic 20%, not an issue.

Ryan Merkel - William Blair & Company L.L.C.

And let me ask just one more quick one then. Can you talk about why you opened some locations you did in those regions and why you did it now?

Manuel De La Mesa

Well, we look at markets all over the country. I used to make a statement that it didn't matter if there 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 -- but we look at what's the opportunity, what's our share and how we can increase the share. In certain markets that we didn't have physical presence in, that we were shipping or serving from a remote basis, that enables us to only generate or capture a very limited share of that market. And 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 place -- customer base standpoint from a sales prep that we do for 1 or 2 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're ready, we do it. And that's, in essence, the story behind these 3.

Operator

Your next question comes from the line of Anthony Lebiedzinski from Sidoti & Company.

Anthony Lebiedzinski - Sidoti & Company, LLC

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

Manuel De La Mesa

Overall, North America -- what goes through distribution? It would be close to 40%.

Anthony Lebiedzinski - Sidoti & Company, LLC

And how does that compare versus a year ago?

Manuel De La Mesa

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

Anthony Lebiedzinski - Sidoti & Company, LLC

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

Manuel De La Mesa

Sure. That was driven by some significant investment that we made prior to the season from a IT hardware standpoint. And in fact, those investments were reviewed and approved by me in December and were executed largely in the first quarter in anticipation of this season. We go through those types of significant hardware updates every several years. So 2 things: One is the level of CapEx in the back half of the year will be, relatively speaking, modest, certainly a lot less than 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. And this year, it's probably going to end up closer to 0.75% of sales.

Anthony Lebiedzinski - Sidoti & Company, LLC

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

Manuel De La Mesa

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

Mark Joslin

Anthony, I had given some share count estimates on this last call or maybe it was the year-end call for this year. And they're still pretty accurate, maybe just a few hundred thousand less. So if you could take the difference I gave then for Q2 to what we reported and just keep that difference for the third and fourth quarter, you'd be pretty close.

Operator

Our next question comes from the line of David Mann with Johnson Rice.

David Mann - Johnson Rice & Company, L.L.C.

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's going versus your mid single-digit kind of guidance for the rest of the year?

Manuel De La Mesa

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. 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 sales growth will be more modest than what's currently reflected. So I'm still looking for approximately mid single-digit sales growth for the month end and for the quarter.

David Mann - Johnson Rice & Company, L.L.C.

I guess one question I have when you're 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. So what -- am I missing something in terms of the more difficult comparison that you're talking about or have some sales been pulled forward in some way?

Manuel De La Mesa

Well, two things. One is we don't expect the same level of currency impact in the second -- in the back half, so therefore, our 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. So I mean, I'm not saying that 7% is out of the question in the back half of the year, but I think it's more reasonable to expect 5%.

David Mann - Johnson Rice & Company, L.L.C.

Okay. 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 in profit?

Manuel De La Mesa

Yes. In fact, just to highlight, that business lost money last year as it did in 2009 and we're expecting it to be breakeven to very, very nominal profit.

David Mann - Johnson Rice & Company, L.L.C.

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?

Manuel De La Mesa

Yes, in the former. And in terms of the latter, we're having ongoing discussions. Our commitment to the Green business has remained steady. We don't -- as know us very well, we're not so much focused on quarter-to-quarter or year-over-year. We're more focus on the longer term. And when we studied the Green business back in '99, 2000, we saw an opportunity from a slight chain dynamic standpoint and long-term growth, from an install 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 investments and earning -- realizing returns on invested capital that were far in excess of market as we do in the poolside. So 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 3 locations on the Green business there. Kilpatrick, a very respectable regional distributor, and that's 4 locations in South Florida. So yes, we're ongoing, looking at opportunities to make investments and very committed long term for the opportunities there.

David Mann - Johnson Rice & Company, L.L.C.

And then one last questions on gross margin. On the last call you talked about 20 to 30 basis points of improvement. I guess you're seeing you said slightly more inflation perhaps you did some of these prebuys, which might help. Do you still believe 20 to 30 basis points is the right number for the full year?

Manuel De La Mesa

Yes. We had, again, 12 bps from freight out surcharges and those 12 bps 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. So in the third quarter, I think 20 or 30 bps is very reasonable.

Operator

[Operator Instructions] Our next question comes from the line of Dan Garofalo with Piper Jaffray.

Daniel Garofalo

Just one quick follow on if I could. When your publicly traded supplier just mentioned kind of a product cycle with some of the variable speed pumps and called out support with, I think, 25 or so or 2 dozen utility funded rebate programs across the country is based on the higher efficiency of those pumps, I'm wondering if you can maybe give us a sense if you're seeing any of that reflected in your business?

Manuel De La Mesa

Most definitely. What happened here is one of the areas that have helped us not just in 2011, but really over the course of the past, I would say, 3 years is the evolution towards pumps that provide significant efficiencies to the consumer. And to that end, when a single speed pump is being replaced by a variable speed pump and the consumer benefits in terms of, like in California, realizing the difference in energy savings hugely inside of 1 year and in most and other markets inside of 2 years, that variable speed pump though goes at our price point that's 2.5x, 3x of what our regular pump goes for. So I think that's been 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 the minority, but more and more towards variable speed pumps.

Daniel Garofalo

So just real quickly. So essentially, the installed base, you were talking about your installed base is almost completely 1 or 2 speed pumps, right? So going forward, I mean, that's an opportunity.

Manuel De La Mesa

Yes. For example, if you look at in-ground pools, they are upwards of 6 million pumps installed on those in-ground pools. I would venture to say that currently, 90% plus of those pumps are single speed pumps, not even 2 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.

Operator

Our next question comes from the line of Brent Rakers with Morgan Keegan.

Brent Rakers - Morgan Keegan & Company, Inc.

I guess first, apology if these questions already been answered. I got on late. But I guess first, on the Green side, this is now 2 deals in the last 7 or 8 months and I know they're small in terms of purchase price. But are these profitable companies or should we look 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 these businesses were?

Manuel De La Mesa

Sure. Assume that they were net 0 in terms of -- in year 1 contributions. And that's based on us -- some back office consolidation and certain things that we do to take cost out. So that get them to net 0. You can also assume that these businesses are down approximately 60% off their peak levels of 2006, 2007.

Brent Rakers - Morgan Keegan & Company, Inc.

Okay, great. And then -- and again, I apologize again if this has been asked. But Manny, could 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?

Manuel De La Mesa

Well, I think there's 2 elements. And really, it's not so much us, but it's the local and regional distributors' mindset. 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 reconstruction that was taking place from 2003 to 2007. And therefore, when you're talking to a distributor in -- we're talking to a distributor in 2008, 2009, they were still looking back at '05, '06, '07 and thinking that, that world was going to stay that way forever. And certainly, that was not anywhere near what our valuations were. What's -- the new reality that's really beginning to register in the last, I'd say, 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, and there will be a gradual recovery and that gradual recovery will be more towards volume levels in the late 1990s or 2007, before the so-called boom. So therefore, given that new reality that is beginning to 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 5 or 10 years and tread water if I'm able to survive in the first place, or do I want to just call it a day. And therefore, as they become progressively more enlightened, I'm sure there will be more transactions.

Brent Rakers - Morgan Keegan & Company, Inc.

And maybe just 2 quick housekeeping questions. I wanted to get a sense of what the actual bad debt expense number was in the quarter. I'm guessing around $500,000. And then second, I wanted to see if can maybe provide some perspective on where your currencies exposure actually lies, whether Canadian dollars, euro, British pound or such?

Manuel De La Mesa

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

Operator

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

Manuel De La Mesa

Thank you, Everett, and 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 A.M. Eastern, 10:00 A.M. Central, when we will discuss our third quarter 2011 results. Thank you again.

Operator

Ladies and gentlemen, this concludes today's teleconference, you may disconnect your lines at this time and thank you for your participation.

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