Pool Corp (POOL) 2003 Q4 法說會逐字稿

Good morning, my name is Trameka and I will be your conference facilitator today. At this time I would like to welcome everyone to the 2003 earnings release conference call. (Operator instructions) I would now like to turn the call over to Manny Perez DeLaMesa, you may begin, sir.

Good morning, and thank you for joining us today for fourth quarter and final 2003 results conference call. SCP Pool Corp celebrated 10 years of business in 2003 and it was another strong year. Sales broke through the billion dollar mark in October, and finished at $1.156m, a 31 percent compounded annual growth rate from our first year of business in 1994.

Operating margins expanded and operating profits grew to $88m, a 33 percent compounded annual growth rate, again from our first year in 1994. EPS were $1.37, a 39 percent compounded annual growth rate from 1996, Pool Corp’s first full year as a public company. And cash flow from operations were $78m and a cumulative $254m in our 10-year history, or 123 percent of net income over the same time period.

All in all, strong results. To provide you with more of the financial highlights, I’ll now turn the call over to Craig Hubbard.

Thank you, Manny. Before I get into my financial commentary 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 2004 and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and variables that can cause actual results to differ materially from projected results are discussed in our most recent form 10-K and subsequent form 10-Qs as filed with the SEC. In order to provide more transparent disclosures, we currently discuss separately the operating results from our base business and the effect of acquisitions. In future periods, we will focus more on consolidated results as acquisitions will have a less material effect on our operating results and the difference between consolidated and base business results will be immaterial. This quarter is also the last time that we will be disclosing any same-store comparative information.

The P&L results for 2003 reflect base business sales growth of 18 percent in the fourth quarter, and 11 percent for the year. EPS for 2003 increased to 27 percent to $1.37 from a $1.08 last year. Net income increased 23 percent and weighted average diluted shares outstanding decreased to $37.2m in 2003, from $38.3m a year ago.

Turning to the balance sheet, our DSO calculated on a trailing 12 month basis as of December 31, 2003 remained unchanged at 34 days. Our allowance for doubtful accounts was $3.8m at December 31, 2003 compared to $3.3m at December 31, 2002. The allowance for doubtful accounts represented 54 percent of the AR greater than 60 days past due in 2003 versus 48 percent in 2002. The inventory reserve was $3.1m at December 31, 2003 and is unchanged from December 31, 2002. Our slowest moving class of inventory, which is our class 3, 13 inventory decreased by approximately a half a million dollars between December ’02 and December ’03.

On a trailing 12-month basis, days in inventory improved five days over the prior year as we continue to better manage our inventory. [Inaudible] at December 31, 2003 was approximately $91m versus approximately $130m in 2002, with slightly more than $81m related to our revolving line of credit and our asset-backed securitization. All of the debt related to the revolver and the asset-backed securitization is classified as current at December 31, 2003.

Our trailing 12 month debt to EBITDA ratio was 0.9 as of December, 2003 compared to 1.6 as of December, 2002 reflecting lower debt and a 22 percent increase in EBITDA year-over-year. Cash provided by operations improved 34 percent from the prior year to $78.1m, and is primarily due to the increase in net income and improvements in our working capital management. Depreciation and amortization for the year was approximately $5m, and $3.1m respectively. Capex for 2003 was approximately $8.4m.

Turning to acquisitions, in November 2003 we purchased the distribution assets of [Hayward Iberica], an indirect, wholly-owned subsidiary of Hayward Pool Products Inc. Iberica distributed primarily Hayward equipment from two service centers in Madrid and Valencia, Spain. These two acquired service centers are our first locations in Spain and allow us to further expand our presence in the European market. The assets and liabilities are included in our December 31 balance sheet, and the results, the operating results are immaterial to the P&L for 2003. At this point in time, I’d like to go ahead and turn the call back over to Manny Perez.

Thank you, Craig. While we’ve been busy the last few months preparing for the 2004 pool season, beginning with our 2004 sales kick-off meetings last August, we’ve been working to build on our historical results by increasing the breadth and depth of resources in order to further our value to the customers and suppliers that we serve. On the sales and marketing fronts, we’ve enhanced the depth of our programs to extend their reach and penetration. On the operations side, we’ve again added to the tools available to better serve our customers more efficiently. In the sourcing and systems areas, we’ve expanded our supply chain and strategic sourcing initiatives, adding value to our suppliers businesses and built on the utility of our systems to operate more effectively.

Collectively, we believe that pools opportunities in the future are greater than the results of the past. Ours is a very young industry. We believe the swimming pool, in ground or above ground should be a staple in single-family homes, yet the industry only has an 11 percent share of those potential homes in the United States. It’s the ideal waterfront property. We believe that we can genuinely help our customers and suppliers grow their businesses and their profits. Our depth and breadth of resources are unique in the swimming pool industry. By pooling these resources effectively can provide growth for all.

We are also very fortunate to have an outstanding team of hard-working and dedicated employees that made the 2003 results happen, despite mediocre weather conditions. With that, I am going to turn the call over to Trameka so we can open it up for questions.

(Operator instructions) Your first question is from Doug Col with Morgan Keegan.

Good morning, guys.

Good morning, Doug.

Congratulations on ’03. A couple of things. First of all, just to clarify. Craig, you mentioned when you were going over the comps you mentioned that I think you said that the fourth quarter ’03 would be the last quarter you broke out same-store sales. Was that just base business, or what was that statement again?

Basically we will no longer be measuring business on a same-stores comparative basis. Instead, we will be using a base business calculation.

Okay, you are just going to provide one, not both?

Correct.

Okay, that’s fine. A couple of things, Manny. Number one, can you give us an update on your continued rollout of your private label products? I don’t know if you can maybe give us an idea in terms of number of skews or percentage of the different category segments that are private label and how quickly we are going to continue to do that, I know you are having some success there.

Second question, Doug?

The second one?

Yes.

I just wanted to know, similarly, about the number of your customers that are using some of your programs. I mean, out of your builder customers, what percentage of them are involved in your programs every year, or of your retail customers, how many of them are using SCP programs, just to understand, I think that’s an important number. You continue to have customers use you as a primary source, I mean, that will continue to fuel share gains for years, I would think.

Definitely. First, let me come back to the private label question. We have been doing private label for a number of years, but given the nature of the industry with very few of the products having any consumer brand equity and very limited dealer brand equity, what we have been doing is in fact opportunistically working with manufacturers to develop products that are distinguishable and also provide higher quality end solutions to the customer base. We have been focusing primarily there on products that again have little to no brand equity. At present, an estimated 15 percent to 20 percent of our sales come from products that have or carry one of our brands. The single largest category where we use our own brands are in the chemical arena, where more than half of our chemical sales come from private label products. Some of those private labels, together with other private labels, are utilized in other maintenance lines, accessory lines, as well as toys and games, above-ground pools, et cetera. So that is one aspect of our business that is growing, and probably the rate of growth is 1 percent to 2 percent of the product offering is being converted to private label.

That is not an end all be all. There are a number of companies, manufacturers in the industry that do have brand equity with a dealer base. To that end, we work cooperatively with them to further their brands as well in the marketplace.

To the question of programs, we finished 2003 with over 1,700 program dealers. This is a program initiative that was launched in the fall of 1999 and has been built on ever since. The growth rate of those customers that are in our programs is significantly greater and continues to be significantly greater than our overall average growth.

Several reasons for this. One is the fact that these programs, and one of the primary reasons for the programs is they are a means to generate leads for our customers as well as to enhance their ability to close the sale and sell a more complete pool to their builder or sell more products to their retailer in terms of that store traffic being created.

At present, that 1,700 total program dealers is a very small fraction of our total dealer base. Frankly, there are two reasons for that. One reason is that there are many builders and many retailers in our industry that are very comfortable with the status quo. We are, as I have mentioned many, many times before, we are an industry where demand exceeds the capacity and to that end there are a good many dealers in the industry that are comfortable with the status quo. Our programs are not really geared for those that settle for the status quo, it is geared for those that want to grow and build their businesses beyond where they are today. To that end, those are the kinds of guys that we are attracting to the programs.

The level of participation continues to increase moderately over time, but I think that we are pretty well along in terms of getting that penetration where we want it to be.

Great, thanks. Just one last thing. Over the past couple of years or so, I mean you’ve discussed with all of us I guess some of the distributors that are out there, primarily industrial distributors that are out there that you respect and you think have premium distribution systems and a premium distribution model, and some of those operating margins are, you know, 11 percent to 14.5 percent on a couple of the ones that everyone has heard of, and those companies traded at much higher valuations in terms of a PE or EBITDA multiple. Are there any particular limitations in the pool business or the supply chain that would prohibit you from, over time, seeing margins similar to those carriers and possibly multiples on the pools valuation that would approach those? I mean, that last part is my speculation. I want to know from you if there is anything unique to the pool industry and the supply chain that would prevent you from, over time, duplicating those types of margins?

That’s a great point. We have a long ways to go. When we look at the landscape that we’re in and an industry that is naturally growing at a rate much faster than GNP where the recurring revenue stream driven by the installed base of pools, where we have the opportunity to provide significant value to both the fragmented supply base as well as the fragmented dealer base. With our breadth and depth of resources, leveraging those resources to provide value to both, again suppliers and customers, you know, we impose our own limits and frankly we see tremendous opportunities for improved execution.

What is interesting when you look at our operations in our business and as many of you know, everything in the company is ranked and sorted and we have all sorts of metrics, one interesting metric is that of the bottom 50 performers in terms of service centers, 13 of those 50 have been with the company for more than three years, and 37 have become part of the company within the past three years. I think that again speaks for the volume, the opportunity ahead and the value that is created over time as our initiatives take hold in the markets and that value is created for our customers and suppliers.

I don’t know if 11 to 14 is a limit. It is certainly visible. It’s just a matter of time and our continuing to improve our execution to make it there.

Fair enough, congratulations.

Thank you.

Your next question comes from Jeff Germinata; William Blair & Co.

Good morning. I actually have several questions. Could you start with a little more insight into what drove the 18 percent same-store sales growth? That’s a phenomenal number.

In what sense, Jeff? Part of the reason is it’s very low phase, the fourth quarter is obviously our weakest quarter so it doesn’t take a hell of a lot to affect that number.

Well I’ll give you that, but 18 percent would be historically high relative to SCP’s history.

One thing that we did do and we did do it unique in 2003, we typically have our launch, our sales program and initiatives for the coming year in the fourth quarter, in the first part, beginning in early October. This past year what we did was we moved that up six weeks, and in fact launched that with two meetings at the end of August. People had not yet begun to wind down from the 2003 season and we were hitting them with 2004 programs and initiatives and what that did do was that created more enthusiasm with our sales force, with our service centers, and with our customers in the fourth quarter than historically would have been the case.

I think the other part of that component as well, Jeff, is that particularly since you are in Chicago you can perhaps remember that April, May and June were not particularly attractive weather months for you, with pretty cool weather pretty much until the later part of June. The nature of that was that builders in the north did not do as many pools in the first part of the year as they normally would have wanted to do, and there was some catch up and more pools finished in October and November in northern climates than there would have been in prior years because again, they were behind the eight ball given the slow start at the beginning of the year.

Do you think the early promotion, part of that answer may have stole sales from the first part of 2004?

No, given the nature of the fact that our customers have very little to no inventory. I don’t believe so.

And then could you just break down the sales from October to January, same-store sales or internal growth, whichever you prefer, from October to January on a monthly basis?

Hold on one second. On base business the growth rates were consistent sales-wise all those months. Mid-double digits, in the mid-teens in October and basically right at 20 percent in both November and December.

And any indication on January thus far?

Nothing significant, definitely not as strong as the fourth quarter, it was more normalized growth in January.

And then I noticed operating margins for 2002 versus 2003, the year as a whole, were flat at about 8 percent, and that is a little unusual in that SCP has a history of increasing not only acquired business margins but base business margins as well. Was 2003 an unusual year in that regard, and what should we expect with respect to the future?

If you recall back in the second quarter, we were behind the eight ball there a little bit because we had staffed up in part anticipating a stronger season than in fact started. We began to address that during the course of June, July, August timeframe and by the end of the year got back to where we wanted to get to. I think the key point there is, again, given the nature of the industry we anticipate, based on certain expectations particularly in the northern half of the country, which is affected much more by weather than the south, and we were perhaps a little bit more ambitious or optimistic about what the second quarter would bring in those markets than actually took place. So it took us a while to get that reigned in and back under control.

So we should consider that a temporary weather and staffing-related anomaly that –

An anomaly that really affected us in the first half of the year, and it is not definitely going to affect us going forward. I would expect that margins, operating margins on a base business level and an overall company level will expand in 2004 and should expand every year here on.

Did the addition of the manufacturing business in the last year have much of an influence on margins?

The manufacturing business contributed to the gross margin expansion because we have the double profit, which is reflected in the consolidation and also impacts SG&A because again, double SG&A. If you take the base business measurements and the improvements in both gross margin with that being given back in part with SG&A, and that’s related primarily to payroll in the first half and sales and marketing. Those are the things that are more, in my mind, pertinent. It did add to both gross margin and SG&A by virtue of the fact that the double profit and double expense netted out in consolidation.

So maybe just to simplify that a little bit, if we look at operating margin on a consolidated basis, how does the manufacturing business compare to the overall business?

The manufacturing business would be reflected into the acquisition component, because that’s part of the number that came in with the Fort Wayne acquisition. So therefore when you look in the tables that depict base business as distinguished from acquisitions, and that table includes the manufacturing business as well as the distribution business as acquired last year.

I understand that, maybe I am not asking the question right. If looking at that table, the acquired businesses had an operating margin of 5.4 percent last year?

Yes.

Is manufacturing as a business above that average or below that average?

Oh, manufacturing discreetly would be above that average.

And would it be above the 8 percent typically done in the base business as well?

Discreetly, yes.

Thank you. I am getting down to the last two. Capital expenditures for 2004, can you talk about where that budget is and any major initiatives?

Capital expenditure budgets, we will end up 2004 with actual expenditures between $6m and $8m. The initiatives will be as they have been historically primarily geared towards improving our computer systems, our technology in terms of all the [inaudible] equipment that’s rolled out to our locations, as well as the modernization and improvements that we are making on our service centers to improve the efficiencies of the pick and pull scenarios and how we operate there.

There is some component of capex that also applies to manufacturing. In 2003 that component was a little higher than would be normal because there was some catch up, capital invested in manufacturing, that was a one-time event.

And last question, can you shed some color on the performance of complementary product sales in this past year?

Awesome.

Thank you. A little more color would be appreciated.

Complementary products grew to represent more than 6 percent of our total sales in 2003. That is an area that has tremendous legs. What we have to do is continue the roll out. There are still many service centers in our network that don’t stop and sell complementary products to date, but as they do that and the ones that have those in stock and are selling them are realizing fantastic results. We grew complementary product sales by another $20m in 2003 and we believe that that rate of growth in terms of dollar sales should continue for many, many years to go. It’s really just a wide open opportunity that enhances the value that we provide to our customers. Significantly it reduces their labor costs, it helps them become much more efficient in their businesses, whether they be a builder or a retailer or a service company, and obviously to the extent that we leverage our infrastructure, that rolls through very nicely.

The gross margins on complementary products are very much like the gross margins on our core swimming pool products, and therefore there is tremendous bottom-line benefit that we gain from it.

Great, thanks very much. I’ll give somebody else a turn now.

Thank you, Jeff.

Your next question comes from Mark Allen with Sun Trust Robinson.

Good morning guys and congratulations, another outstanding year.

Thank you, Mark.

Manny, maybe just looking out to this year’s second quarter, actually that’s your big seasonal quarter. What kind of comparison are you up against with last year? Can you just kind of remind us what the major weather factors were last year in the second quarter, and does this make for an easy or tough relative comparison?

Well the second quarter of last year should be what I’ll call a modest reference point. You’re living in Atlanta, if I recall correctly you had record rainfalls in the spring of last year and that certainly impacted pool building during that same time period. Despite that we were able to generate 7 percent base business growth in the second quarter of last year despite the fact that again, the north didn’t really come alive until the latter part of June and the whole southeast was trying to flush out all the rain. But again, that’s a scenario where markets, in that case California, Arizona, Texas and Florida which is the majority of our total business hold up well and that’s a moderating factor on the weather on an overall perspective.

The other factor was the continued success we’ve been having with complementary products. I would say that if there was any quarter that was a relatively modest point of reference, that would be the second quarter.

Just to kind of stick with that a second Manny, my recollection is above-ground pools tend to be an item that kind of goes with the weather there in the second quarter and they are fairly high margin. Can you just kind of remind us, in the last couple of years, what’s been the trend in the above-ground pool sales for you?

Above-ground pool sales, I’ll use the industry numbers as opposed to our numbers, our numbers are not quite the industry levels, and I’ll give you that as well, but I’ll focus on the industry. Above-ground pools are very much an impulse item given their cost, two to three thousand installed. And the impulse nature of the items is driven by how hot it gets and when it gets hot, particularly in the northern half of the country. In 2001 and 2003 the industry had two of its worst years in the above-ground sector. 2001, frankly, put several manufacturers out of business and in 2003 put several others under additional pressure.

We didn’t do that badly, in fact our sales in those categories, while they were down slightly they were not down anywhere near as low as or as impacted by as the industry was. I think when you look at 2004 that is certainly an opportunity for us if we have decent weather, particularly in the northern markets if it begins to get, if it warms up in May we can be up for a banner year in that product category. Just to balance everything, it is important to also appreciate the fact that above-ground pool sales represent all of 2 percent of our total business, so its not as though it is going to change our landscape that significantly, but certainly we have a good reference point in terms of a very low base reference point in terms of 2003.

And then Manny, a question about pool builder backlogs. You had mentioned, for example, ,mainly in some of the northeast markets the pool builders were working a little later into the year to try to catch up. Again, kind of sticking with the southeast, the really adverse weather last year, do you have any sense about where the pool builder backlogs are this time of year? Are they normal or a little heavy coming into the season?

In the southern markets, California to Florida, in those markets in which they are building pools year round, they maintain a two to three month backlog and that is pretty steady. Now if you go to the northern part of the country, I have already heard reports and this is incredible, but I’ve heard reports as recently as two weeks ago that guys are booked for the year, with contracts and deposits.

So you know, pool builders, this is an industry that demand is far greater than capacity, frankly, in terms of pool building and there are markets where guys are booked for the year. I would say the normal would be that they are booked at least four months out, and most good builders are booked well into the summer.

Sorry for jumping around, Manny. On the complementary product categories, you guys have had a few years now with this under your belt. What are the one or two best-selling categories, where was the low hanging fruit as you guys have gotten into it?

The low hanging fruit was clearly products for the builder. Building materials, plumbing supplies, connection supplies, things that are core components of the building of a pool. A typical builder, his number one cost far and away is labor, and previously they would have to source those products from three to five different distributors, they would source typically their core pool products from the pool distributor, they would source building materials from building distributor, plumbing supplies from a plumbing distributor, electrical supplies from an electrical distributor, et cetera, and that inherently, coordinating all those deliveries to a job site, not only was that a coordination nightmare but also significantly impacted labor efficiency and labor cost because their labor couldn’t work as well because of the dependency of all these suppliers to coordinate to get these things at the right time to the right place.

Working with one supplier, in this case us, makes that a lot more efficient, particularly our standards of performance in terms of service level are much higher than most of those other distributors are able to provide.

Final question, Manny, pun intended, you guys continue to put your toe into the water in Europe. As you had experience there and recently you went to another market, Spain, but just Manny kind of give me a summary of what your experience has been in those European markets, what percentage of your revenue is it now, what type of opportunity does it present, and I guess related to that Manny, how does the sort of central South America opportunities compare with Europe opportunities?

Europe collectively, including the U.K. is far and away the second-largest market area for swimming pool products in the world, with it being one-fourth collectively the size of the U.S. market. If you take it in pieces, in that market France is the largest market, representing a little bit more than a third of the total market. Spain is second-largest representing almost a third of the total market, and then the rest of the countries collectively represent the last third of that market.

We currently with the recent transaction in Spain have now a distribution network of 11 locations and we are definitely becoming progressively more of a force in that marketplace. Given the size of the market though, it is still very much fractured and it is similar to what the U.S. market was 15 or 20 years ago, with very much of the same opportunities as existed in the U.S. 15 or 20 years ago, and therefore we are rolling out our network through a combination of both acquisitions and opening up new locations. In the case of the Spain transaction, in fact, it was in lieu of a new location that we took over these two facilities.

All in all though in 2003 it represented 3 percent of our total sales and it represents approximately 4 percent to 4.5 percent of our total sales in 2004. That should grow at 1 percent or so of our total business per year for the next five years as we continue to build out the network, two or three locations at a time through a combination of a number of small acquisitions and opening of new locations.

Switching over to the latter part of your question regarding Latin America, Latin America is collectively a much smaller market. When we look out in the Caribbean, Central American and including Mexico we believe that by far and away the largest opportunity there is Mexico which is why we began with that small transaction we did last year in [Porta Rica]. That is a small footprint. If you look out five years from now, it will be reasonable to extrapolate that we will have somewhere in the neighborhood of five to six locations in that Latin America sphere, and that is really the next version of growth internationally, not in addition to Europe, but simultaneously with Europe.

Going to South America, the major largest market there is Brazil. The dynamics there are a little bit different in that there are more unique manufacturers, there are some other attributes that are unique to the Brazilian market, and that is something that we don’t see on the landscape in the next two to three years, but probably will begin exploring in the next five to seven years.

Manny, thank you and good luck this year.

Thank you, Mark.

Your next question comes from David Mann of Johnson Rice.

Good morning, Manny and Craig.

Good morning, David.

A question on the guidance you’ve given for ’04, can you give us the underlying assumption behind the $1.60 in terms of base business growth and whether or not you would expect to lever SG&A?

The basis of that expectation is similar to the generic guidance calculation that we communication, and that being that we would have high single-digit top line growth overall, with leveraging of our value for us to expand the operating margins resulting in 12 to 15 percent operating profit growth, and then taking the cash flow, in worst case paying down debt to generate 15 percent EPS growth, and then on top of that we have the accretive benefit of the acquisitions that we transacted in 2003 as they impact 2004, the most significant one of those being the distribution part of Lighthouse Inc. that we acquired at the end of the third quarter of last year.

Should we expect that SG&A will be levered at any point in the near term, in the next couple of years, or is that something where you are going to continue to invest in your marketing program and sourcing and such?

We will continue to invest, but what’s buried behind the scenes is the fact that we have rolling into the base every year we have the recent acquisitions, and again it is very telling when you look at the bottom 50 performers of service centers, and of those 50, 37 were new to the organization in the past three years, be it from acquisition or from new location openings, and only 13 have been part of the company for more than three years. That’s an important metric, because that just jumps out as the longer that those service centers are part of the organization and the more the managers and the sales people and the operations manager are able to utilize the resources available to provide value to their customers and suppliers, the greater the consequential results are in terms of operating performance, including operating margin.

Again, I [inaudible] that operating margins will expand in ’04, given where we are and that being part of the normal platform.

Okay. In terms of the cash flow from operations, it looks like there was a jump in accounts payable in the fourth quarter. Is that a timing issue, or can you explain a little bit more about that?

That’s primarily driven by early buy programs where, given the nature of how we purchased and improved our inventory management during the course of the year, instead of buying under the regular terms that we would be typically buying in August, September, October we were able to channel more of those buys proportionately toward the latter part of the year and secure early buy terms with the manufacturers, and those terms basically are for deferred payments.

Would that be similar to what you did back in 2000?

I think you may be referring to 2001, and the answer would be not to the same degree, a more modest level given the fact that our inventories were flat year on year if you take out acquisitions.

Okay, and then one last question. Earlier there was a question about the participation program dealers. Can you quantify the percentage of your revenues that are coming from dealers that are participating in your marketing?

Great question, I am just wondering where I have that data and I can pull it quickly. David, maybe you can call back on that and I will give you that information? Obviously it is a growing percent, but I can’t place my hands on it right now.

Very well. Nice job, guys.

Thank you, David.

Your next question comes from Marcus Caminis with Standard and Poor’s.

Manny, congratulations to you and your management team again. What a great job.

Thank you, Marcus.

So many great questions already answered, and mine have pretty much been depleted, but on the complementary product you talked about reaching $20m in sales this year?

Increasing by $20m, that’s what we did last year and we anticipate that number to be sustainable for many years into the future.

Okay, and what was the total sales in complementary product?

It represented over 6 percent of our total sales, so approximately $70m.

Okay. So you think you can continue that growth rate for how long?

At least five years, in terms of absolute dollars, at least five years.

Okay, that’s great. And through the current complementary offerings, how much have they penetrated your system so far?

About one-third. One-third with the current offering being fully stocked, roughly another third where there are parts of the current offering in stock and selling, and about one-third that they are just experimenting.

Okay. Having any success with any new products?

The focus to-date, Marcus, has been really rolling out what we’ve got. We do test new opportunities in certain markets every year, and we are doing some of that again this year, and we will augment those that are at the leading edge of that roll out by giving them more products to sell as we go into 2005 and 2006 and 2007. But at this juncture, even the leading ones are still not fully saturating what they’ve got in hand.

Okay, great. Thanks again. Sorry I didn’t send a Valentine’s card, I’ll do it next year.

Thank you, sir.

Keep up the great job. Bye.

Thank you.

Your next question comes from Dan Mendoza with OMT Capital.

Hi, guys, most of them have been asked and answered. Just a couple more. Can you talk a little bit about kind of long-term goals for the cash flow? I mean, do you guys aspire to be debt-free or when might you opt to pay a dividend or be a little bit more aggressive with the stock buyback.

Great question, Dan. Our intention is not to be debt-free, although if we don’t do acquisitions or significant amounts of stock buy back or a dividend we will be in that position in 2005. So it is a situation that the board is very cognizant of. It is not something that is new to us, given that we were in a like position looking forward, this is back in 2001 when we looked out a couple years we were in a very similar position. We had the good fortune of the stock price not appreciating as much as our earnings and the strength of our company in 2002, so we bought optimistically a fair amount of stock in that year. We also had the good fortune of doing several transactions that also were able to postpone the inevitable. So we are looking at those alternatives.

I will tell you that obviously anything in our space is something that we take a very hard look at. Our discipline and our standards remain constant, though, because we certainly don’t want to do anything that would dilute our own targets and measurements of return on invested capital. But it gets tougher.

I will tell you that we review that every quarter, and that gets more scrutiny as we get closer to the date that we have no debt. Really, frankly, being at 0.9 times trailing EBITDA is not where I’d like to be, from a shareholder standpoint. So therefore we will do something before long.

Okay. And is doing an acquisition out of the immediate space being considered, or not being considered?

We have looked at that, but frankly we have not found anything yet that really enhances shareholder value. And the reason for that Dan is not so much that, could we do a transaction that’s accretive? And the answer is of course, that’s not a big deal. That’s a very low hurdle. What we’ve got to look at is an opportunity that has very many of the same if not all of the same dynamics, one of which is the natural inherent growth rate of 15 percent per year that we feel we can do without any acquisitions.

When you look at industries today and you look at those dynamics, very few can do that on a sustained basis over a long period of time. When you look at the supply chain landscape that we’re in where we can add significant value given the fragmented nature of both supply and the customer side of the equation, those are dynamics that are very unique and frankly put us in a very good position.

And then the last component is the recurring revenue nature of our business and the fact that it is largely predictable, particularly in the larger markets because of the weather being what it is, so those dynamics are pretty unique, and frankly while friendly bankers come in on a regular basis presenting ideas, there is yet anything to match up and meet those three hurdles that I just described, and anything less than that reduces shareholder return, so it would not be conducive for us as the management or as shareholders to do anything along those lines.

Great. Thank you very much.

Thank you, Dan.

Take care.

Your next question comes from Don Carol with Royal Capital.

Hi guys, just a couple of quick questions around the acquisition that you did in Spain. Could you give out any information on the annual sales or the price that you paid for that?

The transaction was done at book value, we acquired the inventory and assumed the receivables. The sales were in the neighborhood of €3m to €4m.

Okay, and secondly, your manufacturing sales, I stepped away for a minute so I don’t know whether you gave this out. Do you break out what percentage of your total sales are manufacturing?

Manufacturing sales to third parties represents less than 1 percent of our total sales. Most manufacturing output is to our own distribution network.

Do you break that out as an entity with internal transfer costs?

We don’t break it out, but it represents about 2 percent of our total sales.

Thank you very much.

Thank you.

We have a follow up question from Doug Col with Morgan Keegan.

Hey, Manny. I think it was 2002 either there was a disruption in South Florida, I think, you lost I think one of your suppliers down there, maybe the manufacturer of heaters, pool heaters or something, as I recall. I wanted to know how ’03 went down there in that area, and was that product, did you successfully source that from somewhere else, was there a disruption in 2003?

That’s a great question, Doug, and I appreciate your memory and/or notes.

Yes. And/or assistants, right?

In 2002 far and away our primary supplier of heat pumps, heat pumps are a key product and with chemicals are the two top products in the state of Florida in terms of dollar sales. Far and away our primary supplier of heat pumps in the State of Florida decided to open up his own locations and basically augment distribution that way and go to market through that channel as opposed to going through us, opening six locations in the marketplace. In addition, there were a couple of other distributors that also opened up locations in Florida.

In terms of heat pump business per sae, obviously given the importance of the product line we responded and worked very closely with several very important suppliers to us in promoting their product lines and selling their product lines. When it is all said and done I will close my story quickly for all that are online, our heat pump sales in 2003 actually increased. We switched over approximately 70 percent of our heat pumps that were being sourced from our previous supplier to other suppliers and in fact realized again, as I said, a net increase in unit sales and dollar sales as well. So that’s I think a reflection of the team in Florida and how well they executed.

Overall, despite the fact that the industry opened up eight locations in Florida, I believe eight locations in Florida in 2003, we were still able to grow our sales by 9 percent in the year 2003 in Florida, which I believe increased our market share overall, and we increased our profitability in Florida.

So while we have to perhaps work a little harder to get to where we got to, we still got to a pretty good place in that tough year.

Thanks for the update.

Thank you, Doug.

At this time there are no further questions, I would now like to turn the call over to Mr. Perez DeLaMesa.

Thank you, Trameka, and thank you all again for participating in our fourth quarter 2003 conference call. We look forward to providing you another update on our business with first quarter results on April 22. We are again, very, very fortunate to be part of a great industry with a great landscape, as I described in my response to Dan Mendoza, it’s pretty tough when we map other industries and other companies against the opportunities that we have internally, and it is just a matter of our team here continuing to execute and provide the shareholder returns that you guys have been receiving for the past few years and look forward to many years to come. Thank you again.

Thank you for participating in today’s conference call. You may now disconnect.