Pool Corp (POOL) 2005 Q4 法說會逐字稿

My name is Heather and I will be your conference operator. At this time, I would like to welcome everyone to the SCP Pool Corporation 2005 results earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Mr. Mark Joslin, you may begin your conference.

Thank you, Heather, and good morning, everyone. Welcome to our conference call. As usual, I need to remind you that our discussion, comments, and responses to questions today may include forward-looking statements including management's outlook for 2006 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 the projected results are discussed in our most recent form 10-K, which by the way will be updated shortly, as filed with the SEC. At this point, I'll turn the call over to our CEO, Manny Perez de la Mesa.

Manny Perez de la Mesa: Thank you, Mark, and thank you all for joining us for our fourth quarter and final 2005 results conference call. Well, Pool Corp completed another successful year as we withstood the challenges of mother nature and generated results best illustrated by the financial information reported earlier. Let me provide some highlights. We increased our base business gross profits by 13%. This excludes both the Horizon acquisition as well as our divestiture in December 2004 of our North American manufacturing operations. This is a better barometer of our market results than sales in 2005 given the unprecedented levels of price increases in the industry.

Again, we believe 13% gross profit growth for the year is very strong. We reduced our big business loss in the fourth quarter. That coupled with a modest contribution from Horizon resulted in our first-ever breakeven fourth quarter. The fourth quarter's generally mild weather contributed to our results and compensated for the adverse weather impact from the first part of 2005. Overall 2005 was an average weather year by our standards.

Complementary product sales increased 32% to over $140 million excluding Horizon, so represents approximately 10% of our sales, up from 8% of our total sales in 2004. Base business operating income increased 22% as we leveraged our gross profit growth, operating more efficiently. Our base business earnings per share increased 26% to further accentuate our internal earnings growth result and opportunity going forward.

In summary, a solid year with progress realized in many areas. We though view our future as providing more opportunities for growth than the results that we have generated to date. To start, our young industry is just beginning to grasp its potential as industry participants begin to understand the place that swimming pools, irrigation, and landscape products can have in enhancing the quality of consumers' outdoor lifestyles. We believe these products sell themselves once consumers are aware of the value provided, become educated on their merits, and have a responsible contractor, retailer, or service space to go to.

Add in the macroeconomic and demographic dynamics for the next 20 years, and it's hard not to get excited about our industry and about our opportunities. From a product standpoint, complementary products including irrigation and landscape products presents us with additional opportunities to add value as we invest to create demand and then work to fill the demand created, working in conjunction with both our customers and our suppliers.

One testament to the character of our people and the strength of our team was how we handled the 2005 hurricane season. Both in our service centers and in our Covington, Louisiana support center, our people did what they had to do to keep serving their customers. Add in that our business continuity planning and disaster recovery execution worked as designed, and tested, meant that our service centers continued to operate seamlessly throughout and after Katrina devastated the U.S. Gulf South.

We look forward to 2006 in many respects. First, we hope that mother nature's challenges of 2005 are behind us although they served to make us a better and stronger company. Second, we are excited about the addition of Horizon and the complementary products growth opportunities available in the irrigation and landscape business. Third, our constant evolution has continued to generate greater opportunities for profit growth and expanding of shareholder value.

Now I will turn the call over to Mark Joslin for more financial commentary.

Thank you, Manny. I will start by commenting on the equity earnings line on our P&L. Then move onto the balance sheet and cash flow and close with a couple of comments on Horizon. You'll note that our equity earnings line which primarily reflects our investment in Latham shows a loss of $900,000 for the quarter and earnings of 1.5 million year-to-date. Included in these numbers is a fourth quarter charge also of $900,000 which is the year-to-date catch-up of non-cash tax accruals on our already taxed earnings of Latham. In other words Latham's results are taxed in their P&L. We pick up our equity, pro rata equity share of that and then we are taxing them again in our equity earnings line.

According to FAS 109 we are required to accrue for future taxes on a potential future fully taxed disposition of our investment. Going forward this will lower our reported equity earnings on this investment and we now expect to earn approximately $2 million for 2006 year in equity earnings, which is included in our full year guidance.

Moving onto the balance sheet, you'll see that based on our major working capital areas, receivables and inventory, we continue to show good discipline in managing our working capital. On the receivables side, our year-end DSO of 33.6 days is consistent with year-end 2004 of 33.4 days and the 27% increase in our receivables balance reflects the 42% increase in fourth quarter sales over 2004.

Our year-end inventory of $334 million is 68% higher than 2004. This reflects the addition of Horizon's inventory of approximately $29 million plus our aggressive participation in early buy inventory programs normally offered by our vendors at this time of year. Looking at our inventory turns, this calculated on a trailing 12 basis, it dropped slightly to 4.3 times at year-end 2005 from 4.5 times in 2004. This drop reflects the more aggressive buy in of inventories in 2005.

Turning to the cash flow statements, our cash flow from operations dropped to 38 million for 2005, compared to 56 million in 2004. You may recall that in our Q3 2005 conference call we discussed our intentions of participating in early paid vendor programs that would impact our fourth quarter cash flow. This was the case and we received and paid for approximately $53 million in inventories where normally those payments would have been deferred. We expect to benefit from these favorable payment terms in the first half of 2006 as these inventories are sold.

Our open market purchases of stock in the quarter were all executed prior to our Q3 conference call and as discussed at the time, used $23 million in cash in the fourth quarter. Also as you know, we funded the Horizon, Busatta and Direct Replacement acquisitions, which combined used approximately $90 million in cash. Compared to the inventory purchases which will be converted to cash in the first half of 2006, these are longer-term uses of cash which prompted us to expand our revolver facility to include a five-year term loan which was completed announced in December.

Let me take a moment now to comment on our Horizon transaction, which was completed in October and included in our Q4 results. Because of this, we have added back a schedule to our earnings release which has been missing for a year, showing separately the performance of our base business and new and acquired service centers, including Horizon. We will continue to provide this schedule over the next year. Most of the increase in sales and profits for the quarter were attributable to the Horizon acquisition, which was slightly accretive to our results in the fourth quarter.

At this point I will turn the call back over to our operator. Heather, begin the question-and-answer please.

(OPERATOR INSTRUCTIONS) Curt Woodworth.

Mark, could you provide a little bit more color on the gross margin performance for the company this morning being up 90 basis points? And talk what the drivers of that were and looking out to 2006, can you comment on (indiscernible) the raw material inflation that you're going to pass-through could hurt gross margin performance, not on a unit basis, and help us think about the benefit of the pre-buy programs where you are going to get ahead of maybe some of these increases which I would think would help that.

Curt, I'm going to let Manny address that.

Manny Perez de la Mesa: Two things. First of all was captured in the fourth quarter and the improvement over 2004 it begins to reflect some of our more aggressive buy in of inventory pre-price increase, while obviously it serves to inflate our inventories in part at year-end '05 to what it would normally have gone to any way in March of '06. And to the extent that we paid for those inventories in the fourth quarter of '05, we began to see some of the benefit reflected in the gross margins. I think when you go into 2006, what you'll see is where we are using our financial strength as we talked about in the third quarter conference call to aggressively address price increases and take advantage of those opportunities in a way and a fashion that at the end of the day we benefit from those. So I think what you'll see is you'll see us having a recapturing of or more than recapturing of some of the gross margin erosion that we had in 2005 in 2006.

Okay. In terms of the '06 guidance, what does that assume for topline growth organically? Are you still looking for 2 to 3% of price benefits for the year?

Manny Perez de la Mesa: Yes, what we're looking at is low double-digit percent topline growth. As I mentioned just a minute ago, some modest gross margin improvements, and then continuing to leverage our baseline. Really one other factor that I want to highlight is the fact that in 2006 we will have options expensing as part of our P&L. That is $0.06 per share hit, so therefore our baseline if you want to use that baseline for '05 is really not $1.50 but on a retrospective basis it will be reflected as being $1.44, so therefore our guidance incorporates that $0.06 hit from options expense.

Right, okay. All right, thank you very much.

Jeff Germanotta.

Congratulations on a very nice quarter. I have four questions and let me list them and then I will let you respond to them. I'm still little confused about Latham and so if you could go into the fourth quarter a little bit and the implications of 2006, I would appreciate it. That is question 1. Question 2, can you comment on the program business in the fourth quarter and 2005? Third, can we talk about what you saw in terms of inflation for the fourth quarter, both on a total basis and then for chemicals? Fourth, can you comment a little bit on Horizon, you talked about it being less seasonal. And can you contrast that a little bit to the core pool business?

Manny Perez de la Mesa: Let me take that one at a time in the order you gave them. First, Latham. Latham is doing fine and progressing very nicely. What Mark addressed here was the accounting literature on how you account on an after tax basis for equity earnings into an entity that you have no control of is not particularly clear. And although the actual tax proceeds will be such whenever cash proceeds are expected from it, will be structured in such a way to minimize the tax hit, the accounting gods if I may call them that, although there are other terms -- have defined that and directed us in effect to capture that fully accruing tax potentially double taxing fully the earnings. Now from a practical standpoint that's not going to happen, but that is why Mark specifically mentioned the fact that there was a non-cash tax reserve. And therefore it's like a double hit on the tax side.

Just to put it real simply, Jeff, Latham's earnings pretax are what they are. They tax them at let's say a 40% rate, and so on their P&L they have after-tax earnings. We pick up our pro rata share, which is about 36% of that. Then we tax it again, which is what we did in the fourth quarter. We did that on a year-to-date basis. That is the 900,000. So we are left net at the end of the day with about 10, 11% of Latham's earnings in our P&L, so it is a little bit less from a final results standpoint than what we were anticipating before we picked up this additional 40% tax in our earnings in the fourth quarter and going forward.

So how should we think about this on a go forward basis?

Manny Perez de la Mesa: On a go forward basis, basically the double tax from an accounting standpoint, which is non-cash by the way, it basically reduces the earnings expectations that we would have had by 40% from an accounting standpoint.

Second point you had was the program business. Our program accounts continue to grow in '06 very nicely. In fact we are well over 2000 pro forma accounts at year-end, primarily driven by the build or remodeler sector. What is impressive there is not so much the number of program accounts and the fact that they continue to grow at a rate much faster than the overall business growth. And obviously that translates to program accounts growing at a better than 20% growth in 2005 overall. Also the fact that more of those customers are being able to fully grasp the power of the programs, specifically by the fact that they are more likely now to embrace selling a more fully loaded pool, given that the consumers that are being directed to them from lead generation systems are more educated and part of their design of pool -- using design of pool function of opening swimmingpool.com -- are able to then basically ask for stuff that otherwise they might not have been asking for. And I know our builders and remodelers are embracing that much more. So that is a double compounded benefit and overall their growth is well in excess of 20% in terms of year-on-year sales as well as gross profits.

The third question with respect to inflation, overall based on the price increases that were put forth in the latter part of 2005 and early in 2006, we expect overall industry to have weighted average price increases of somewhere around the 4% range. That number is at the high-end affected by chemicals, which are probably averaging somewhere in the 20% range. Then there's obviously some products at the opposite end of the spectrum that are in fact going down in cost. But the weighted average overall will be about 4% inflation in 2006.

And the last question was with respect to Horizon. Horizon is doing very, very well. Horizon's seasonality is very similar to Pool's in that most of their profits are generated in the second and third quarters of the year. There are some modest differences. For example their fourth quarter is a little stronger than their first, whereas our first is usually a little stronger than our fourth, albeit both are relatively speaking weak quarters and their third is more like the second, whereas obviously our second quarter is much bigger quarter than the third. Overall when you look at the entire picture including Horizon on a go forward basis, we make a little bit of money in the fourth quarter. We will be approaching breakeven or about breakeven in the fourth, and make the majority of our profits in the second and third quarters, overwhelming majority of our profits in the second and third quarters with the second quarter being almost twice as big as the third quarter from a distribution of earnings standpoint.

Horizon's business by the way -- let me just tell you a little more about that -- that team has come on board very well. The cultures are very much the same. The opportunities on a longer-term basis are very much the same. We will be working closely over the next several years so as the Horizon team has full and is able to fully deploy all of the tools and resources and programs that we have to help our customers grow their businesses and in much the same way the opportunity exists over there. So it is a very exciting period for the team at Horizon and it was interesting. I was at a meeting with their store managers three weeks ago and one of the guys, one of the store managers came up to me and said are you guys as excited about this as we are? That was great to hear. Great team, great culture, very proactive. Their results in the fourth quarter and first quarter under the Pool umbrella was very favorable. They beat both their internal and external targets for the quarter and were a contributor, a modest contributor to our having a breakeven fourth quarter. So solid job by them and a lot of potential going forward.

Thank you. Congratulations to you and the team.

David Mann.

Manny, can I go back to your comment on the gross margin improvement that you're expecting next year? Can you clarify was that including Horizon or was that just the base business?

Manny Perez de la Mesa: That would be base business.

How should we expect Horizon to impact the gross margin for the year?

Manny Perez de la Mesa: Modestly overall. Their gross margins are very similar to Pool Corp's and the 28 or so, 29 type of range, so when you factor in there about 10 of the total, it will be a very modest differences if any.

What was Horizon's final full year revenue total? How might you expect to grow that next year?

Manny Perez de la Mesa: Their final revenue total was just over $180 million and their growth expectations would be in line with Pool Corp's, so modestly over double digits.

If I could change for a second if you could talk a little bit on the marketing efforts that you were talking about a moment ago, the lead generating efforts. Can you just give us an update on how some of the cable TV advertising, the swimmingpool.com, sort of a look back to the last year and review how you thought that worked and how you expect to expand on that in '06.

Manny Perez de la Mesa: The overall is that it worked a little better planned, specifically we for the first time ran on a trial basis and doing some network, running some ads on network and TV or network channels in markets in the fall. That enabled in those markets for builders and remodelers to continue to get leads and build their backlogs for 2006. So that is something that we will expand more into in 2006. Also Internet advertising, also was a very efficient means of driving consumers to our website to get educated and design a pool. So overall both of those are areas that we're going to be channeling more funds to in 2006, although staying within our overall parameters on a percentage of sales basis.

Any quantification in terms of the number of leads, the increase that you had last year and how that may have translated into business?

Manny Perez de la Mesa: Sure. In 2005 there were over 80,000 leads generated to builders and that is a lead is when somebody has gone through the process, gone through the website and then they actually contact a dealer for a quote. That is when we (indiscernible) the big contacts. Three dealers is referred to as one lead because its one consumer. So we had over 80,000 of those for the year. That is very strong growth over the prior year and basically reflects several things. One is the increased education and the functionality and everything else that is incorporated into our website, as well as further leveraging our swimmingpool.com as an easy URL to refer to. The fact that design a pool becomes a better and better tool progressively each year, and then further the fact that we have the overriding wind at our back scenario with an aging population with more restructuring funds available for home improvements. That bodes well for us for many years in the future.

Are you able to measure yet how many of those leads turned into actual business for your customers?

Manny Perez de la Mesa: Not directly, but indirectly, yes. The capture there is that our program accounts, the ones that we're referring all these leads to, they continue to grow overall their sales and obviously their purchases from us at a much faster rate than our overall sales growth.

Okay, great. Thanks and a great year for you guys.

Brent Rakers.

Just wanted to maybe clarify a little bit more on the inflation and the price increase side. Manny, I know you mentioned for 2006 an average increase of about 4%. I was hoping you could give us a sense for maybe what that contribution was in the fourth quarter and then maybe also touch upon the pool business versus the irrigation landscape business. Is the irrigation and landscape seeing similar inflationary pressures?

Manny Perez de la Mesa: The number for the fourth quarter would be very similar to that. And in terms of irrigation and landscape, the number would also be very similar. Their product area that has realized the greatest increases in pricing are pipes and fittings, which obviously are very important to the irrigation landscape world. So that product category has been the one that has been analogous to chemicals on the SCP superior side of the business in terms of being much higher than a single digit and in some cases a double-digit kind of number. But again there are other products that prices have stayed the same and in fact in some cases our product prices have come down just like in SCP and Superior, so therefore a 4% type of number is a reasonable number for them as well.

Okay. Maybe if you could give us some scale. Obviously with the size you are relative to most of your competitors and your ability to pre buy chlorine and other chemicals, could you give us a sense for where maybe the price points were or at least how much they've escalated right now into the spot market versus maybe where they were in the fourth quarter within chemicals?

Manny Perez de la Mesa: In terms of the spot market, where they were let's say in September as opposed where they are now, the spot market is up about 20% plus on chemicals.

Maybe somewhat related to that and it seems with all the volatility that has been created by the chemicals markets during 2005, I look at kind of Q3 to Q4. Is there any kind of rebalancing back in Q4 of market share maybe? I'm not going to say you lost any but maybe you didn't gain as much market share in Q3 and maybe you are catching some of that up back in Q4. Would that be a correct observation?

No. The perspective there and we see it in a couple of areas, Brent. One area is in terms of talking about chemicals specifically, what our sales growth is in this category versus what public companies that function either as distributors or manufacturers in the category and what their sales growth is in these chemicals categories and our growth is greater than their growth. I also look at in sales and equipment I look and we have information in terms of what our share of various manufacturers total sales are and universally our sales as a percentage of their total sales have increased or increased during the course of 2005 on an across-the-board basis. That is not every market necessarily but on an across-the-board basis our share of their sales has grown and our growth overall has grown at a rate faster than their growth. So therefore that tells you that we continue to gain share both in chemicals and in equipment.

Great. Just two more questions and one is still kind of I guess on the chemicals issue; you talked about the prebuying and all that. I was hoping you could give us a flavor for maybe other initiatives that you may be addressing to address this still volatile chemicals market. The last question just I know it is obviously real early in the year, but we came off I guess a record January across the country. I did not know if that changed the complexion of the grounds freezing in the North or maybe some of these Sunbelt markets may be seeing an uptick in activity earlier on in the season.

Manny Perez de la Mesa: Okay, tactically and we are very fortunate in many respects. We are very fortunate in terms of sourcing product. I'm talking about to the first part of your question. Tactically not only do we have the financial wherewithal to buy into a price increase and have the storage capacity to do more of that and pay for it than anybody else in the industry, but also from a sourcing standpoint on certain items that we saw on the private-label we are able to source that anywhere in the world. And to that end that also further enhances our position. Given both of those components, we are able to bottomline contribute more than others and mitigate any impact.

You reference a turbulence in the marketplace. And certainly there is that. I anticipate that that will settle down in the next 30 to 60 days as all of the old product that some of our competitors still have or are still using as a the basis for pricing is flushed out. And it's been in the nose or in the face the fact that their replacing costs are higher and they should be pricing to replacement costs. And if everybody did that it would be very healthy.

The second question, can your repeat that again?

Again I know it's early in the year, but just regarding the weather in January was a record month nationally, very warm Northern markets, maybe less ground freeze if you will or maybe some traction at all in some of these Sunbelt markets at all in January.

Manuel Perez de la Mesa: As contributed to our fourth quarter results the mild weather did, the mild weather extended into January and other than the big snowfall that took place in the Atlantic in the Northeast this past weekend, generally speaking things are progressing nicely. In fact in the Northeast today you are seeing 50 degree weather and as you did yesterday, so that is very good. If this weather holds, and we don't have any big operations, we could be have a gangbuster kick start to the season. Again it's a little premature to say that, but we are waiting for another 30 to 60 days before we can actually see some of those results.

I will tell you that the backlogs are very strong countrywide. I would also tell you that builders in the southern part of the Northern markets, I'll call it the Tennessee's of the world or even as far north as New Jersey, builders are beginning to build. In New Jersey they were kind of held back and will be held back now for a couple weeks because of the snow that came down last weekend, but they are raring to go. And again the next 30 to 60 days will be very important in terms of how fast the season gets started. The backlog is very strong across the board, so that is very positive.

Thanks a lot, Manny. That's very helpful.

Anthony Lebiedzinski.

A couple of questions. First I wanted to know what is the vendor overlap that you have between Horizon, SCP Pool, and also what are the opportunities there to get better margins?

Manny Perez de la Mesa: Good question, Anthony. Approximately one-third, a little over one-third of the purchase dollars of Horizon are vendors that were also supplying SCP and Superior. Therefore there's certainly some leverage opportunities there and that is actively being worked. It began, that work began in October and continues todate. So that is the order of magnitude that we are talking about. In terms of how that plays out from an overall standpoint, unfortunately Horizon is, will be diluted because Horizon is roughly 10% of our total business. And further the level of improvement will be -- the overall scheme of things relatively speaking modest, so it will get to a degree lost in the rounding, but still it is significant in an absolute sense.

In terms of private-label, where are you now as far as percentage of your purchase dollars? What are the opportunities to expand that side of the business?

Manny Perez de la Mesa: That is pretty well on target and that's growing at about 1 to 2% of our total sales per year. That private-label initiative also extends to Horizon, so that is progressing nicely. Again there is the dynamics there and just to give everybody on the call a perspective, what we started to do with private-label is do several things. First is have products that are comparable to if not better than the competitive products. We try to do that in a form and fashion that enables us to handle those products more logistically efficient so instead of handling products or buying and reselling products from 15 or 20 different manufacturers, essentially very similar products, we try to channel that to one or two sources and have one of those sources be a private-label auction. The next leverage obviously is cost by consolidation of volumes, by taking that out so on a worldwide sourcing perspective we are able to in many cases, come up and have better products for lower cost. But that whole process does not happen overnight.

That process is a very diligent process that we try to incorporate and there is no testing as the new manufacturer or maybe an existing manufacturer starts to build up their volumes to support us, they have to have add capacity, add people, improve their internal disciplines, so all those things take a while to get fully implemented. And sometimes we may be working on a project for three or four years from inception to making that the prevailing product in our offering or the prevailing sourcing are offering. And so therefore given all of that, it is a gradual process, 1 to 2% more of our purchases being migrated there per year. And again the biggest factors are improved quality and delivery and logistics with some cost improvement as well.

So where was private-label as a percent of your purchase dollars in 2005?

It was modestly over 15%.

Okay. As far as the base business sales growth in the quarter, was there any variation by regions or was that more or less consistent?

There is no real significant variation by region versus prior year. Because if you look at the numbers, first of all, obviously its weighted toward the southern half of the country, the numbers are in the fourth and first quarters. But even saying that on a percentage basis we have a number of very strong relatively speaking growth rates in the North as well as the South.

How are international sales in 2005? What percentage of your sales came from outside the U.S. and where do you think they will be in 2006?

Manny Perez de la Mesa: The international side of our business, first question international, great. I was just on the phone with Rich Polizzotto this morning, who is our -- heads up our international business and we were going through our country by country review. But he just got back from the UK over the weekend. Overall the growth rate in our international business is faster than our domestic business. That is driven by our significantly lower market share that we have internationally versus the U.S. business. And the fact that for example you have to add in the Busatta acquisition we did in the fourth quarter, our first entree into Italy, and also the fact that we anticipate opening a new location in southeast France on March 21st. In 2005, our growth rate overall in internationally was again a little higher than the U.S. growth. Overall I don't recall exactly the percentages because everything is -- my denominator is changing because I've got to factor in Horizon in the numbers and factoring in for the whole year, not just the quarter or so. They are approximately 6, 7% of our business will be about 7% of our business in 2006 and probably closer to 6% of our business in [2005].

As far as the guidance that you have for 2005, do you factor in any share buybacks into that guidance?

Manny Perez de la Mesa: No. We don't factor in any acquisitions. We don't factor in any share buybacks. It's base business and the only change on a year-to-year basis is the fact that obviously we include Horizon for the full year and also we include options expense, which is $0.06 a share.

And how much left do you have on your share buyback authorization program?

We have the whole 50 million, Anthony.

Last question just regarding Latham. How should we think about the seasonality breakdown of that 2 million contribution they expect for the full year in terms of buy by quarter?

Manny Perez de la Mesa: I would expect again their business is very similar to same business as our business. I would expect (indiscernible) in the second and third quarter and while it may not be exactly the same you can almost assume that the number being what it is practically speaking 50 50.

Okay, thank you.

Keith Hughes.

I just have one question. In the process of digesting Horizon, when do you think you would be in the market for the right acquisition if it does come along? Is that something we could see this year or would it take more time than that?

Manny Perez de la Mesa: Well, the right acquisition we are ready for today.

That answers my question. Thank you.

William Mack.

Notwithstanding the comments you guys have made on gaining market share and I wanted to get some idea of the price increases you got in the fourth quarter and how that impacted your 20% base business and how price increases now that we're heading into the spring selling season, how those are going? On the products that you sell rather than the costs -- your cost of the products.

Manny Perez de la Mesa: Overall price increases in the fourth quarter were about the same, 4% now. Some of the products you take chemicals the pricing is over 20% higher. In other products the prices are the same. Chemicals represents approximately well, before Horizon, 14% of our business. After Horizon, it is between 12 and 13% of our total business, so therefore that significantly dilutes the impact of chemicals of the overall the equation. If you take chemicals out of the equation, the overall price increases are closer to 3%.

Okay, so about in line with your costs. You had mentioned the builder's segment, can you discuss trends going on in your other two segments?

I'll take the pieces and I'll even be more precise. Because there is a builder segment. There is a progressively more distinctive remodeling segment. Obviously the retail segment is a service segment and a maintenance segment. If I take those five segments now, builder segment very strong backlog, everything is going well. In terms of the remodeling segment, that is an area that over the course of the next ten years and then on forever, but particularly over the next ten years, that is going to grow significantly and that is really driven by two factors. First of all its the aging of the installed base of pools. As existing pools get to be 10, 15 years old, consumers, particularly consumers with progressively more discretionary funds available, will look to not only change out their pump and filter but in many cases resurface their pool with a higher end, better looking aggregate and pool finish. They will also be looking at adding higher end lighting. They will look at for example adding heating, adding controls, they may throw in some landscape lighting. Those kinds of upgrades will be progressively more pervasive and we are beginning to see that now, but that will grow at a much faster rate and that is why the remodeling segment is becoming more and more distinctive component of our customer base. And growing I would say at a rate even higher than the builder segment because of the fact that the time to execute all of that is less and more efficient from a contractor standpoint than building a new pool.

The retail segment is probably the weakest overall and that is in large part driven by the comfort level on the part of many of our retailer customers that are not open on weekends. And basically are not open in the hours that are best for serving the pool owners and that is unfortunate, but if they were open all day Saturday and most of the day Sunday, that business segment would be booming. But their complacency didn't get them there yet. We try to educate them on that opportunity and as that happens over time, that could very well be an opportunity for growth. But currently that is more treading water.

Both the service and maintenance sections are largely driven by the installed base and as that installed base grows, that continues to grow at a nice, very predictable clip. So overall plenty of opportunities all the way around, again longer-term very exciting, probably our weakest customer segment is the retail segment and the primary issue there is them and our helping them to understand the benefits of being open when the consumers are looking to buy the products. As well as having stores, specialty retail stores that fully embrace the concept of being a specialty retailer in terms of look, finish, and everything else.

That's very helpful. My assumption was that the remodeling was part of the retail segment. Is that -- if we were just to look at it in three main segments, builder service and retail, is that not the case?

Manny Perez de la Mesa: That is generally speaking not the case. In the larger markets of California, Florida, Texas and Arizona, that is becoming much more of a distinctive customer segment. We still have the smaller markets primarily in the northern part of the country where the same dealer is involved in all sized facets of the business. But again when you go to the larger markets, we call them the larger southern markets, those five become progressively more distinctive.

Thank you very much.

Jeff Germanotta.

Could you do me a favor and both qualitatively and quantitatively summarize sort of the monthly sales dynamics, October, November, December, January?

Manny Perez de la Mesa: You are doing a four month there, Jeff.

If you want to add February you can too.

Manny Perez de la Mesa: But I can't tell you March. In the case of the fourth quarter versus the prior year, those numbers -- one second -- year-on-year were pretty similar, November being a little stronger than the average and December percentagewise being a little weaker than the average. Pretty much all in the same order of magnitude.

And January?

Manny Perez de la Mesa: And January, since that number was known on February 1st I will tell you is since we are all on the call is pretty much in line with -- a little bit more modest -- but pretty much in line with the fourth quarter numbers.

Thank you.

[Joe Gagan.]

I had a question around the operating cash flow. It says I guess it was 38 million for the year and if I go back, say back to 2000, the only year before this one where you had negative operating cash flow in the fourth quarter was in '01. So I'm just wondering, well two questions around this. Why was the operating cash flow so low this year in its entirety compared to last year? Why was the operating cash flow negative for the fourth quarter when it usually isn't? Then I have another question after that.

Manny Perez de la Mesa: Pretty easy answer, Joe. Two things. One is in the fall of each year typically in the industry given the seasonality of the industry manufacturers provide early buy incentives. And part of the components to mitigate the impact to distribution is that those early buy programs encompass extended payment terms usually due in the spring of the following year, April, May, and June. What we did was we did two things. First of all in some cases prior to the early buy programs coming out, which by the way in many cases had 2006 pricing as part of those programs, we bought in at I referred to at 2005 pricing and those were net 30 day purchases. So basically we put orders in December and October before those programs were basically official. And we keep that product in the fourth quarter and pay for it in the fourth quarter. That's part one of the equation.

Part two of the equation with a couple of manufacturers that have provided dated terms, what we did was we negotiated a discount based on the product that we received in the fourth quarter where they shipped a little bit faster than they normally would ship. And that particular case we negotiated a rate, a discount by paying in the fourth quarter that is to our benefit given our cost of money and beneficial to the buyer as well given their cost of money and other dynamics. So we prepaid those terms, in effect.

Here's my question. My question would be, you had 38 million in operating cash flow and I think 130, 140 million in earnings. Right? That is a significant -- that is a low percentage of operating cash flow as a percentage of earnings. It's dramatic. So you're saying that this year that you changed your buying patterns so much compared to the previous year that that will answer this question of why the operating cash flow was so dramatically different than the earnings, because.

Manny Perez de la Mesa: Exactly. In fact the [mark] mentioned that we paid for approximately $53 million in the fourth quarter that normally we would pay, would have made those payments in the first half of 2006 in a typical scenario, so that's the difference.

I'm saying that this dramatic difference in cash flow is completely because of this change in purchasing?

Manny Perez de la Mesa: 100%.

The other question I had was I think that you get approximately 30% of your business from construction, the actual building of the pools. And I guess 30% from selling to small pool distributors, and I guess 40% from selling to maintenance companies. Is that right?

Manny Perez de la Mesa: The breakdown is not quite that, but go to your question.

My question is that as far as you are saying that because of the weather things are better, I would think people still are not using pools when its 50 degrees. That doesn't make people jump in their pool, right? So I'm trying to -- obviously the maintenance guys, their business isn't really improving year-over-year because it is 50 instead of 20, because people sit around the pools. So can you, I mean given that overall the construction of pools is I think around one-third, can we really say that this warmer weather dramatically changes your business given the situation?

Manny Perez de la Mesa: Well, yes, it does. The reason for that, Joe, is that most of the pools are in the southern half of the country. And the difference is not so much 20 versus 50, its 70 versus 80. And if you are in Florida or in California or in Texas or Arizona, the fact that on average the temperatures in the fourth quarter were 10 degrees or so different to January, 10 degrees or so different than normal, that makes a big impact. 70 to 80 makes a very big difference. Again, 20 to 50 doesn't but 70 to 80 does. It's not so much -- it's using pools, but that is certainly a driver but it's also the fact that the warmer water temperature also burns more of the chemicals.

Now have you guys been hurt at all by the slowing down of the housing market? Has that affected you at all or that doesn't matter?

Manny Perez de la Mesa: That really has no connection to us whatsoever. In fact the housing market, I mean very, very few pools, new pools go in with existing homes now. We're trying to change that. We see that as a big opportunity, but less than 10% or about 10% of new pools go in at the same time as a new house, so therefore it is not a --.

So 10% of new homes come with a pool, right?

Manny Perez de la Mesa: I'm talking about new homes coming with a pool, yes.

Yes, but I am trying to get it straight. In other words if you looked at every new home sold in America, 10% of those new homes comes with a pool, right?

Manny Perez de la Mesa: No, no, no, 10%, is a lot less than that. I wish it were that, Joe. 10% of new pools are going in with (multiple speakers). If it were the number that you referenced, the ante would be almost double.

Okay, great. Thank you.

Just to clarify one comment I think I heard you make was that our earnings were 140 million. That was our operating earnings. Our after-tax were $83 million. So $83 million going down to 38, which is closer to that 53 million in early buy inventory that we were talking about.

At this time, we have further questions.

Manny Perez de la Mesa: Thank you, Heather, and thank you all again for participating in our final 2005 results conference call. We are fortunate to be in the industry that we are in and to have such a unique position within the industry. We appreciate your confidence in us as management and you have our commitment that we will honor your trust. Thank you very much.