Millions of swimming-pool owners around the world have probably never heard of SCP Pool Corp. (POOL ). But in all likelihood, it has played a key role in either the building, maintenance, or repair of their pools. That's because Covington (La.)-based SCP is the world's largest wholesale supplier of swimming-pool products, everything from chemicals and cleaners to pumps and heaters to fountains and toys.
Ten-year-old SCP hawks some 91,000 products via a network of 198 service centers in North America and Europe to nearly 48,000 customers, including pool builders and remodelers, independent retailers, and repair and service companies. No. 39 on this year's Hot Growth list, SCP controls about 23% of the $5 billion pool-distribution market. BusinessWeek Dallas Correspondent Stephanie Anderson Forest recently spoke to SCP CEO Manuel J. "Manny" Perez de la Mesa and Chairman Wilson B. "Rusty" Sexton. Here are edited excerpts from their conversation:
Q: How big is the swimming-pool industry, and what are its growth prospects?
Sexton:There are about 7 million pools in existence in this country, 4 million in-ground pools and 3 million aboveground pools. But you have 69 million households that the industry has calculated that have enough physical space and income to afford a pool. So, you have huge potential [to sell to] those who don't have pools but could have pools. Now, not everybody is going to have a pool, but the market could be a lot bigger.
Perez: Roughly 200,000 inground pools are added each year. The biggest issue in the industry is builder capacity. There's more demand for new pools than there are builders to build them. The industry is growing about 4% to 5% a year, but I think it could safely build 50% more if it had more builders.
Q: If nearly 70 million households have the financial wherewithal and yard space to have pools, why don't more people have them?
Perez:A pool provides relaxation and creates atmosphere, but the public perception is it must be expensive and difficult to maintain a pool. Nothing could be further from the truth. A pool costs less and is easier to maintain than a lawn. Pools are safer and cleaner than natural bodies of water.
And, it doesn't cost one cent extra [in insurance] to have a pool, as long as you have it fenced and it has locked gates. In my mind, you have to have a pool. If you don't have a pool, you're shortchanging yourself.
Q: Besides a strong housing market, low interest rates have also helped consumers to more readily afford a swimming pool. How might rising interest rates affect the pool industry?
Perez:Interest rates and consumer confidence together are the two considerations for new pools. But generally speaking, they offset one another. When consumer confidence is going up, interest rates are going up. So, they mitigate one another. In addition, during the economic downturn, builders kept on building pools. The pace didn't slow down at all. You've seen what our results have been like the last three to four years. We really weren't adversely impacted by the recession.
Q: It also helps to have a built-in revenue stream, right?
Perez:Yes. About 80% of our business comes from the existing installed base of pools. So, it's not just the stuff we sell for building the pool. We have a recurring revenue stream. Once you have a pool, it needs to be maintained. Over time, more and more of the sales of this business come from that installed base of pools.
Sexton: Once you put that pool in the ground, it's essentially there forever. The only way to get rid of it is to fill it up with dirt and make a flower garden out of it. Other than that you have to maintain it. The more pools we build every year, the bigger the installed base becomes. The bigger the installed base becomes, the greater the revenue stream.
Q: And how is SCP helping the industry expand its installed base of swimming pools?
Perez:When I joined the company [in 1999], one of the first things I realized is that nobody in the industry had invested in educating the consumer about swimming-pool ownership. Most of the education was by word of mouth. We don't want to just rely on word of mouth. We want people to be educated. The more people you educate, the more people who will want pools.
We began a process [in 2001] of investing in the raising of awareness among consumers of pool ownership. It includes a Web site called Backyardescape.com, consumer-oriented brochures [that builders can use to take on sales calls], and more. In addition, we'll run more than 60,000 TV ads this year promoting pool ownership. You won't see our name on the ads. The [industry] message is to get a pool.
Q: Tell me a bit about your history. How did SCP Pool get started?
Perez:The predecessor of SCP Pool was a company called South Central Pool Supply, which was started in 1980 by Frank St. Romain. He was the principal shareholder. He had worked for Rusty for a number of years, and when he decided to start his own company he asked Rusty to join him. South Central Pool Supply began operations in 1981 and ended in 1993.
SCP Pool was formed specifically to buy South Central Pool Supply. SCP Pool was owned primarily by a private equity firm out of Chicago, Code Hennessy & Simmons, together with management [including Romain and Sexton]. Code Hennessy paid $33 million for South Central Pool. The objective of SCP Pool was to buy South Central as the platform acquisition and then from there to do other acquisitions at an accelerated rate.
Q: How many acquisitions have been made since then?
Sexton:I personally was involved in at least 20 acquisitions. It was basically my job to go out and acquire companies because of my history in the industry. I knew most of the players, many of which had been originally formed in the '50s and '60s. Code Hennessy had the money, bankers, and expertise to get the legal work done, and they had the ability to move fast.
We offered cash for all these acquisitions, and it wasn't long before we got the reputation as a company that would do what it says. And so people began calling us who wanted to exit the business. We made a lot of acquisitions.
Perez: From 1994 to 1998, the first five years of SCP's history, the company grew from $60-plus million in sales to $456 million in sales, and that was a lot of acquisitions and a lot of opening of new [distribution] locations. The intent was to build an international network, starting with a national network, through both acquisitions and openings of new locations.
The company went public with an IPO in 1995, which raised $22 million. With the money that was raised, we were not only able to reduce the debt but also provide capital for continuing to do acquisitions. The IPO price was $10.50. But after five 3-for-2 stock splits, that adjusted price is now $1.38.
Q: What were the early challenges?
Sexton:The biggest challenge as a public company was building credibility in the investment world. We had to prove to them that the market was real, that it was a growing market, and that we had all the systems and management in order to capitalize on the growth of that market. That was the original challenge.
Q: Why was that such a challenge?
Sexton:At the time, there was a public semi-national retailer of pool supplies. It had disappointed shareholders several times with earnings announcements. We were somewhat judged by their performance. We had a difficult time convincing the investment world that we were two different animals. They were retail -- we were wholesale. But still they wanted to compare us.
Q: How did you gain the Street's credibility?
Sexton:That came by our earnings. As they grew consistently, quarter after quarter after quarter, we built confidence. And we did a good job of integrating the acquisitions. Otherwise, we couldn't have grown the earnings as we have.
Q: What role will acquisitions play in SCP's future growth?
Perez:What's the first reason for acquisitions? To gain market entry. The second reason is to enhance market position. Those are the two primary reasons for an acquisition. To the extent that we are already in the market and to the extent more so that we have a strong position in that market, then acquisitions are less effective.... And we don't need acquisitions to grow. Our earnings are primarily internally driven, not from acquisitions.
Generally speaking, when you look at the cost or financing of our acquisitions, the net profitability after tax and interest is fairly nominal. What happens is as that acquired company keeps growing its business, its profitability grows, too, and that's what provides the increase in profitability for the company.
Most of our profit growth in the history of this company -- 90% of our earnings-per-share growth -- has come internally. In a relative and absolute sense, acquisitions will be a less significant part of our business in the future.
Q: So, what will drive growth?
Perez:One area is complementary [swimming pool] products, like patio furniture, spas, water fountains, toys, and games. In 2005, we will be adding [patio] grills and stone. Complementary products are a big initiative for us. We will do more than $100 million in complementary products this year vs. $3 million in 1999.
Q: What are your sales and earnings growth targets?
Perez:We have a base model indefinitely in the future that will allow us to have top-line growth in the high single digits. That's comprised of the industry growing 4% to 5% a year, complementary products growing 2%, market share of 1% to 2%, and new locations of 0% to 1% annually. If we have that kind of top-line growth, that should translate into 12% to 15% operating profit growth.
So, with just internal blocking and tackling and doing what we do a little bit better each year, we can grow our earnings per share 15% a year with zero acquisitions.