Pool Corp (POOL) 2007 Q3 法說會逐字稿

Good morning. My name is Vonda and I will be your conference operator today. At this time, I would like to welcome everyone to the Pool Corp. third-quarter earnings results 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). I would now like to turn the call over to Mr. Mark Joslin, Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning and welcome, everyone. To start things off this morning, I'd like to remind our listeners that our discussion, comments and responses to questions today may include forward-looking statements, including management's outlook for 2007 and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and variables that could cause actual results to differ materially from projected results is discussed in our most recent Form 10-K as filed with the SEC. Now I will turn the call over to our President and CEO, Manny Perez de la Mesa. Manny?

Thank you, Mark. Some of you may find this ironic, but I feel better about our Company and our opportunities for long-term growth today than at any other time in my almost nine years with Pool. Frankly, I am very excited about our future despite all of the short-term external factors that have affected our financial results this year.

Here are some of the highlights that feed my enthusiasm. One, our ability to significantly outperform the market. As evidenced by the three largest equipment manufacturers in the industry, we have outperformed the rest of the industry by more than 10% over the past 12 months.

These results include our being progressively more selective about our terms of sale to minimize bad debts. Basically, we have passed up on millions in so-called lost sales where the collection risks were beyond our normal risk threshold. The bottom line is that our sales execution this year is our best ever.

Two, stock-outs, slower moving inventory, freight, purchasing and sourcing are being better managed today than ever before as evidenced by all of our internal metrics on operational execution with information provided daily to enable our ongoing improvement in every facet of our business.

Three, growing evidence that while our earnings are down modestly, the impact on our competitors is proportionately much greater. Even though I don't have any ill feelings toward any of them, it is apparent that their ability to invest in their businesses is already affected, which only serves to increase the separation between us. We are gaining strength, enhancing our competitive position for the future.

Four, our self-assessment this year revealed both more opportunities for execution improvement and more opportunities for long-term growth. Basically, the adverse market environment brought to light more opportunities for improvement as results weren't masked by positive external factors. Separately, as entrepreneurs throughout our Company sought to compensate for the adverse market conditions, we identified new and better ways to grow the profitability of our business, which will pay dividends to us for many years into the future.

Five, and most important, our people. They are cognizant of the unprecedented market environment, certainly the most difficult in the history of our young industry, but they also understand that this is short term and that the market will revert to normal. Whether that happens in 2008 or 2009 is not consequential.

Their enthusiasm is contagious as they witness the tools and resources that we have at our disposal to provide progressively more value to our customers and suppliers. Their understanding that we have a unique position in our industry and that many families, including employees' families, customers' families and vendors' families, will benefit from our contributions to our Company's and the industry's long-term growth and success. It's frankly awesome.

Now, for some more color on this year's results in our larger markets. I will start with the pool side of our business. In Florida, clearly the market most affected with new pool construction down by 40% or more, coupled with competitive pricing pressure and extended receivables, this is the market where our competitors' financial position is stretched the most.

Here, we are addressing our own execution issues with progress on many fronts. Our sales were down 12% in the quarter and year to date. While we don't know if we are at the bottom yet market-wise, another year like 2007 and 2008 will only help us long term as competitors are forced to rationalize their business.

Arizona. With new pool construction almost as bad as Florida, we continue to hold our own as sales were down 7% in the quarter and down 3% year to date. Our strong teams in the state continue to significantly outperform the marketplace.

California. The older and very large installed base of pools has helped mitigate the impact of less new pool construction with our sales down 6% in the quarter and up 2% year to date. Certain markets here are more affected by the interest rate revision and adjustable rate mortgages than in Florida or Arizona, which are more affected by the housing supply bubble created by speculative construction.

Texas. Despite record rainfall affecting both new construction, as well as replacement repair activity, our sales were still up 3% in the quarter and up 2% year to date. Essentially, top to bottom, outstanding sales and operational execution by our teams in Texas.

The rest of our pool business had sales up 2% in the quarter and up 4% year to date. Like in the big four states, external factors have affected new pool construction, especially over the past few months, yet we continue to perform with strong sales growth in a number of markets demonstrating once again that superior execution, utilizing the tools and resources uniquely available to our teams en able our customer partners to grow through adverse market conditions.

Turning to the irrigation landscape portion of our business. Our base business sales in the West were down 10% in the quarter and down 2% year to date. More tied to construction than the pool side, the results are reflective of [a like] difficult market conditions.

In Texas, weather and poor external market factors resulted in sales being down 22% in the quarter and 24% year to date in this new market for us on the irrigation and landscape side. In addition, it is in Texas where we have had the greatest slippage in receivables as customers adjusted too slowly to the market realities. As rainfall reverts to normal levels in Texas, we expect our customers' cash flows and consequentially our receivables to improve in that market.

On the SG&A side, our base business expenses were flat quarter on quarter, excluding bad debt reserves as we've moved to right-size the organization without compromising our ability to address opportunities. More specifically, our headcount was below 2006 levels each of the past three months and expenses in September were below those in September of 2006.

Overall, as mentioned earlier, our execution is better than ever before and we are very excited about opportunities in the future. Now I will turn the call back over to Mark for his financial commentary.

Thank you, Manny. At this point, let me turn your attention to our balance sheet and cash flow, then I will update you on our share repurchase activity. I will start with a few comments on our receivables. As mentioned in our press release, we have seen some slowdown in payments from our customers most directly affected by the soft construction market and have responded to this by increasing our reserves for potential write-offs.

I want to stress that at this point the issues have been primarily slowing of payments without a significant uptick in customer defaults or bankruptcies. While these more severe events are certainly a possibility and in some cases likely, the variable cost nature of most of our customers' businesses should allow them to manage through the construction downturn better than other more highly leveraged businesses.

If we look at our greater than 60 day pass-through receivables as a percentage of total accounts receivable, it was 6.7% at the end of this quarter, up from 3.4% last September and we have increased our reserve accordingly. While this is an area of some concern given the nature of our customer group, this remains a relatively modest issue and I believe we are well-positioned to manage this exposure with our experienced and capable credit and collections group working closely with our field management.

Our inventory balance at the end of the quarter of $317 million was up 12% from last September and we listed the reasons for that in our release. Just to give you a bit more color on the quality of our inventory, I can tell you that the percentage of inventory in our top four out of a total of 13 product classes, which represent the highest velocity SKUs, was 71% of our total inventory this year, up from 68% last year.

While we will be working down our on-hand inventory in the fourth quarter, we will also be participating in vendor early buy programs. Given the nature of these programs where we place orders in the fall and vendors ship to us at their discretion anytime until spring, we may have more early buy product or inventory in our inventory at year-end than last year. The terms on these early buy purchases generally include extended payment terms and therefore should not impact 2007 cash flow significantly.

I'll also comment on our debt level, which at $406 million of combined short and long-term debt, is up $148 million over last year primarily due to share repurchases over this time. Our leverage ratio is measured by our average trailing debt divided by trailing EBITDA is 2.12 at the end of the quarter. This relatively low leverage level provides us with substantial flexibility in managing our capital structure.

Looking at our cash flow statement, you will see that our net cash provided by operations so far this year is $33 million compared to $81 million last year. The decrease reflects the decline in net income year over year and a large estimated tax payment made in the third quarter this year whereas the comparable payment last year was made in the fourth quarter.

Let me summarize our share repurchase activity. For the third quarter, we have repurchased 1,777,000 shares at an average price of $33.31 per share totaling $59.2 million. This September 30, we have purchased, this is through last Friday, we repurchased an additional 435,000 shares for an additional $10.9 million. With our previous purchases, this gives us 4.1 million shares totaling 138 million repurchased this year at an average price of $33.50. This leaves us with $55 million available under our current $100 million Board authorization.

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

(OPERATOR INSTRUCTIONS). Curt Woodworth, JPMorgan.

Hi, good morning. In the press release, you commented that you saw about a $0.09 dilutive impact from the opening of the 27 new sales center since the beginning of '06 and I am wondering do you have that number on what it would look like in 2006 if you kind of did the same math from the beginning of '05 to 2006 and if you can comment on how you see the impact of that dilution playing out in 2008? I assume that the delta should not be much more negative and do you think that you would get that back next year?

Okay. Let me take the question in parts. I don't have the number here for the impact in 2006, but I believe we may have reported it last year and it certainly was a lot more modest than it was this year.

I believe it was $0.04, Manny.

$0.04? Good memory. Then the -- in terms of the other part, in terms of the impact on 2008. For 2008, our network will essentially be approximately the same size as it is this year and therefore we expect the impact to be less in 2008 certainly as we continue to grow our business and grow into that increased capacity over the course of the next year.

In addition to that, we have also rationalized to some degree our staffing and everything else in those new locations, so the bottom line is that the impact in '08 will be more modest than it is in '07.

Okay. So would it be right to think that these new sales centers, which obviously were dilutive this year, would be -- would they still be dilutive next year? What is kind of the timeframe to get -- (multiple speakers)?

Yes, in an absolute sense, yes, they will be dilutive next year.

Okay.

But more modestly so.

Right. Okay. Got you. And then in terms of the complementary products, and it seems like from the numbers you laid out on the irrigation side that that has been the negative -- the big negative drag on that side of the portfolio. I guess I am wondering do you think that looking out next year -- I know it is hard to say, but it seems like the deltas on the residential side on a percentage basis -- hopefully we're hitting a bottom there. Obviously it is probably going to be down next year, but how do we think about the sensitivity of this business?

I mean you have a fairly large cross-selling opportunity in the irrigation side. You still have -- you are growing off a relatively small base on the construction supplies. So you have kind of secular growth there offset by this market issue, which is why you were down, but would it be fair to assume that under more reasonable market conditions that those products would kind of be able to get back to mid to high single digit growth next year?

Let me give you a little separation there. If you look at the Horizon business that we acquired in October of 2005, that business had embraced since 2001 the opportunity to sell a broader range of products and to that end, that part of the business having that broader range of products was able to mitigate the impact specifically on new construction more so than the Texas business that we acquired last year, which was almost entirely focused on irrigation products. So therefore you can see the contrast where our sales are down modestly in what we refer to as the West part of the business whereas they are down more significantly in Texas.

Mind you, the weather there plays into that as well, but nonetheless, there is a huge delta and part of that delta is because of the product mix. We are in the process of broadening that product mix in Texas as we speak and therefore to that end, that will, over the course of time, provide a more recurring nature to the revenue stream, which will mitigate future cyclical impacts from slowdowns and housing turnover and all the rest.

Okay, great. Thank you.

Anthony Lebiedzinski, Sidoti & Co.

Good morning, just a couple of questions. What was base business sales in the quarter?

Base business sales were I believe down 3% in the quarter.

Okay. And looking at the complementary product area, are there any new categories that you are looking to get into possibly next year?

We are looking at every day -- or not every day -- but on a regular basis, we are looking at new product categories, but nothing that really registers in a significant way. One caveat is, as you know, Anthony, we have yet to completely roll out the initial product categories that we launched back in really 2000 after some trials in 1999 and therefore that opportunity is ahead of us. So before we complicate matters with a lot of new products, although we constantly look at them and test them out in certain markets, the greatest opportunity rests with doing more with what we have.

And is the biggest obstacle to rolling out those products to additional sales centers is it just lack of physical space or is there something else there?

The first limitation is our capacity to do so from a human resource standpoint. One of the caveats that we have is we try to operate in a fashion that yields good service to our customers and do that in an operationally sound manner. And therefore before we complicate our business on a local basis by adding more SKUs, we try to make sure that our service levels are very high with what I will call the legacy Pool products and therefore as we get that under control and operating to a level of our satisfaction then we begin to add new products that then enables us to provide more value to our customers, but doing that in a way that we don't compromise the service levels from legacy products.

The second limitation then becomes space after that.

Okay. And you mentioned before that you have done some headcount reductions. Are there any other cost control initiatives underway?

Sure. One of the things that we have done is, besides headcount, which is far and away our largest SG&A expense, we are looking at every other expenditure line and in that aspect, we have been able to develop new programs to control things as mundane from an outsider's perspective as pallet wrapping and other materials that are used in the warehouse, office supplies and a whole array of other costs. When you add them up in aggregate amount to millions of dollars in opportunities for cost reduction.

And in terms of payroll and freight, those are the two other biggest categories, that is obviously one that we have been scrutinizing forever, but, again, more aggressively now given a readjusted perspective on what the market looks like.

And lastly, do you have an expectation for cash from operations for 2007?

I think we have indicated in the past that, assuming a normal environment for the year, it will be in the neighborhood of 80% to 90% of net income.

Okay. All right. Thank you.

Thank you.

David Mann, Johnson Rice.

Thank you, good morning. Manny, can you give a sense from your conversations with some of your customers on the building side what their backlogs look like?

Good morning, David. In terms of builder backlogs, builder backlogs at this time are -- this is almost like the tail end of the season, so this is, at this juncture, very light in terms of backlog and that is not unusual. I think the key for us is what happens over the next three to six months as backlogs begin to build for next year and next spring.

How would they be looking in some of the all-weather, all-season markets?

The all-season markets are I would say by and large a little lighter, a little softer than they were at this time last year.

Okay. And then Mark, you made a comment on the, sorry, your credit quality commentary about risk of bankruptcies. I guess there has been some bankruptcies on the builder side. Can you just talk or maybe elaborate a little more on what you think your risk is there and also perhaps you can drill down and give us what percentage of the delinquencies are probably from the builder/remodeler side?

Yes, David, I guess my comment was really not that there won't be bankruptcies, we have seen some, but they are relatively few in comparison to the market conditions when you see the Florida construction market being down 40% plus. In any business, you'd think that would have a significant impact on the customer base and while we see them slowing down payments, they are relatively low-capitalized businesses.

So in many cases, we are dealing with medium and smaller builders, which don't have high payrolls that they have to maintain, offices and so forth. Some of them work out of their homes, some do have offices, but they can cut back on a lot of their expenditures and survive a downturn if they manage their business well. So that was primarily what I was getting at. We may see and I certainly expect to see some increase in bankruptcies over what we have seen. There are some defaults, but not to the extent that you might see in other businesses.

I guess with -- it looks like the third quarter deteriorated in Arizona and California and obviously Florida wasn't any better. Do you have concern that credit quality maybe has not bottomed out yet?

Manny Perez de la Mesa. By the way, one other caveat that I want to throw in there is there have been a few bankruptcies earlier this year in the last couple of months or so in the builder side, but our exposure to those customers was frankly negligible if at all and part of that is, as I think we have commented before, our business model on the builder side is primarily centered on medium and smaller builders and the ones that have been most exposed are those that have been more closely aligned with new home construction in certain markets and therefore those are the ones that have been much more adversely affected. So that is another point of reference there that has been relatively speaking positive for us. That's helpful.

As to whether we have seen the bottom yet from a customer's ability to maintain payments and stay in business, I don't think we have yet. I mean if the market conditions continue for an extended period, obviously we don't know, but that will put more pressure on customers as time passes, so we will just have to wait and see how things progress. And really it is the kind of spring when they start getting into business next year, the cash flow starts looking good for them and we see at that time maybe which ones didn't survive the off-season.

Okay. One last question. On the other side of your business, your competition, have you seen any bankruptcies there or any data from your suppliers to suggest that there is a lot of struggling going on on that side and have you seen any potential to maybe pick off some of your competition in some low-cost acquisitions?

In that vein, we have anecdotal information about some of the ones that are struggling from a cash flow standpoint and we see that in some of the actions being taken in the marketplace. And whether they carry or are able to carry themselves through the winter is still to be defined.

In terms of our opportunities to acquire some of them, generally in those conditions, we would look to doing an asset purchase, taking on their inventory and, in a very risk-reduced way, their receivables, but frankly I think that will bear out in the next three to six months as their first winter plays out, particularly those that have been stretched over the last year or two and the realities set in.

Okay. Thank you very much.

Jeff Germanotta, William Blair.

Good morning. I would like to explore a little bit more the competitive environment and pricing environment. Do you think you have hit bottom or will this linger over the winter and into the spring of next year?

In terms of margin deterioration on the sell side or selling margin side, generally speaking, the deterioration that we saw in the late spring of this year has been maintained. This year, we did not have the pickup that we had last year in the third quarter when, if you will recall, the three largest equipment manufacturers announced pricing increases effectively in May of last year. We bought into those price increases and raised our prices in July enabling us to make a higher margin on the sale of their products in July and August.

This year, we didn't have that benefit and therefore comparatively speaking that adversely resulted in adverse comparison, but the actual margin deterioration really has been maintained not any worse or any better but maintained since late spring, since May timeframe when some of our competitors were most stretched financially.

In terms of next year, what we anticipate is that there will be ongoing pressure on a number of our competitors, but the opportunity to readdress margins really takes place at the beginning of the year and when manufacturers' price increases are put through and pricing is corrected. So we will be looking to do that and anticipate having some level of margin recovery during the course of 2008.

And just as a follow-up, did you have any price inflation in your selling price this quarter?

Effectively very little if at all.

Last question, in the second quarter, you commented that some of your variable compensation expense had been reduced due to lower profitability. Can you quantify what that is in the third quarter or what is embedded in your guidance for the year?

There was no further adjustment made in the third quarter. Effectively, our third-quarter accrual for bonuses was basically right on top of last year's third-quarter accrual and for the year, the decrease from year on year is approximately $4 million and that basically was captured in the second quarter.

Thank you.

Kathryn Thompson, Avondale Partners.

Actually, no, this is David actually in for Kathryn. Just a couple of quick questions. If you could give a little bit more color about just some of the pricing trends in the competitive market that you are seeing in terms of how you are managing your business around this.

Sure. First, let me just give you a perspective. Generally speaking, distributors come out with their pricing to the marketplace at the beginning of the year. During the course of the year, to the extent there are any manufacturer price increases, those are generally passed on. This year, there haven't been any to speak of, so therefore, in many respects, the pricing from the beginning of the year would stay in place.

The exception to that is when certain distributors are in a stressed position, they will reduce pricing in the marketplace and that reduction in pricing is intended really to, in many cases, just make their payroll from the standpoint of converting inventory to cash.

That pressure existed in the greatest stress point working capital-wise for distributors, which is in the April/May timeframe and then we had to react accordingly. Since then, other than weekly promotions and things of that nature that everybody does throughout the marketplace, there has been no unusual dynamic on pricing over the last several months.

All right. Excellent. Great. Thank you. And then secondly, if you could provide an update on your swimming pool finance business.

Sure. I will turn it over to Mark.

Yes, David. I talked a bit about that at the investor day that we had in September and really nothing has changed. We are progressing very well with that business. We have opened our shop if you will in the state of Texas, which is the healthiest of the large pool markets, and have gotten very good acceptance from our customer base there.

If you look at the loan volume in the third quarter compared to the second quarter, it is very comparable and we are looking to expand further as we move over the next couple of quarters. In the off-season, we will be ramping up in a number of additional states, including hopefully in California by early next year.

The market of course is changing and we see that as a significant opportunity. As homeowners have more difficulty finding financing, we want to be there to help link them up with the best financing available for their pool purchase. And so from a service to our customer standpoint, that's a very valuable service and they are very interested in working with us on. So all things are good at this point and we will give you continued updates as the business continues to progress next year.

All right. Thanks. And then finally just in terms of the number of center openings in the quarter and year to date?

Let me see. Year to date, I believe we captured that in our commentary earlier. We have opened up 27 since January of 2006. That is a little bit more -- (technical difficulty) of those were opened last year. I know that we have opened up 12 in the past 12 months. So it would have been 15 call it in the first part of 2006 and 12 from October of 2006 to September of 2007. There are three that are scheduled to open fourth quarter of '07 and one of them may drag into January, February of next year, but basically three are in the finishing-up process. And then we will have a couple more for '08.

But on the other hand, we are also doing some consolidations of existing locations where having two locations and that redundant capacity does not benefit us. So really for '08, we are looking for essentially a like number of selling locations as we had this year.

All right. Thank you.

Michael Cox, Piper Jaffray.

Good morning, Manny. Good morning, Mark.

Good morning.

Good morning.

My question is on the swimmingpool.com website and I was wondering if you could comment on the bid or lead request that you have been getting on that website, if that is commensurate with the change in new pool construction starts that you are seeing out there or if there is a conversion issue that is taking place in the marketplace?

Well, that is a great question. Two things. One is we track both activity, Web activity overall for Pool and that is certainly down this year. On the other hand, we track specifically Web activity and leads generated through swimmingpool.com in contrast to other websites out there and in terms of swimmingpool.com, our Web activity is up year on year and our leads generated are also up year on year.

What that basically translates to is that our builder customers on our programs have been able to very well weather the overall downturn. Now they may not be getting as many word-of-mouth leads as they were before, but certainly the value that we provide through our programs and more specifically through swimmingpool.com and our lead generation capability, has mitigated and in some cases more than compensated for the other lead generation vehicles that they have. So our customers, particularly our builder customers, are really outperforming the marketplace.

That's great. That's very interesting and I was wondering if you could also comment on either the relative size of pools or the amenities that are going on to pools? Do you find that it is more the marginal pool buyer that is not in the marketplace today?

In that vein, we don't have any specific hard data in terms of the size of the pools. There is certainly anecdotal information based on the size of the outside space with homes today, but in terms of amenities, I will tell you that progressively there are more amenities coming on stream. Those amenities range from, for example, more efficient variable speed pumps that reduce the energy consumption of the pump, which is second only to air-conditioning in terms of energy consumption in homes for example in California, as well as new control systems that are there that make the ability to manage the pool a lot more easier, a lot easier and certainly higher end lighting and other features.

I mean those are all growth categories that, although still relatively speaking small from a share standpoint, are definitely growing at a rate faster than the overall market. And by the way, those are products particularly for example and I just want to throw in a couple of things here, there are a number of things that are very positive for us as an industry.

One is the more recent introduction of technology over the last several years, which is finally beginning to catch on with our customer base in terms of their comfort in installing -- selling and installing that to the consumers, which enhances the whole pool experience and that also applies by the way on the irrigation side where the number of water management products that enable consumers to maintain their lawns at a certain moisture level with sensors that drive the use of water there and water much like energy are all limited resources so we have to be very cognizant of those and technology on both sides is going to help us short term and long term, but those products are just beginning to catch on now with our customers and over time will be a very significant component of our growth.

Okay, that's very helpful. And my last question is I was wondering if you could just discuss the decision process between weighing acquisitions in this type of environment versus buying back your own stock in this environment. Thanks again for your time.

Well, thank you. Acquisitions represent a higher priority and obviously the acquisitions have to make sense first of all in that it will serve to either enable us to enter a market or enhance our position in a market. Certainly we are not driven to do acquisitions from a short-term standpoint; it is all really market-driven and that is first and foremost as an opportunity again provided they follow the same discipline that we have had historically market-wise and then return on capital over time-wise.

From a share repurchase standpoint, when you look at our relatively speaking modest level of debt and our long-term cash flow characteristics of our business, share repurchases is very opportunistic and at levels that we have been buying at over the past 15 months, extremely attractive for long-term shareholders.

Dan Whang, Lehman Brothers.

Yes, good morning. My first question was regarding your commentary in the release that gross margin was somewhat impacted as some of the pricing trends -- sounds like some of your competitors selling off some excess inventory. How would you characterize the inventory levels right now in the channel and is that -- when do you expect that to be worked off?

From an overall channel standpoint, the inventories are a little higher than they normally would be and that would be similar to our case. And if I just regress for a second, when we are buying inventory, we are anticipating a certain sales rate into the future. For example, when we are placing purchase orders in July, we are looking at sales trends from April through June and based on those sales trends, forecasting out our requirements into the future.

So to the extent that our August and September sales fall below our expectations, that drives our inventory levels to be higher at the end of September than ideally they would be. And that is a self-correcting process because as we look at September to order, we are looking at sales trends -- as we looked at September to order products, we were looking at sales trends for June, July and August and anticipating that going into October, November, December and therefore our orders in September obviously factor all that in.

And the same thing applies, albeit perhaps not as sophisticated as we may do it for the lion's share of our competitors in the market place. So to that end, their inventory levels will be, in all likelihood, modestly higher than ideal, but not significantly so.

I would also want to regress back to the point earlier, most of that incentive or pressure to reduce pricing came in the late spring timeframe, but there was no correction since. So when one of our competitors may have been motivated to convert inventory to cash back in May, they kind of reset the margin levels on certain products that they used to accelerate activity and therefore that resets the bar for everybody in that market. So it really won't change until first part of next year.

Got it. Okay. And I think you had commented about your plans for the pre-buys you had into the end of the year and that you expect a little bit higher level of activity this year versus last year. But could you drive into a little bit more detail how much of a pre-buy program did you have last year and what are the anticipated terms such as the extended payment terms driving you to take possession like end of this year?

Let me give you that in two parts. Typically, manufacturers come out with their programs in the September/October timeframe in terms of how to balance out their production for the year moving more volume from the natural demand of the spring/summer to the fall/winter and that was no different this year than last year. In most cases, we have already placed, or in the next week or two, will have placed our orders under those programs.

Our order volumes this year are very similar overall to what they were last year, adjusting for recent sales trends and the fact that we were at higher inventories. So adjusted for everything, it will be pretty much in the same line as last year.

There are two components of that from a rational standpoint -- rationalization standpoint. One is one of the factors that play into that are the fact that there are dated terms. So most of the payments on those orders don't really happen until the spring of next year, spring/early summer of next year. So that is component number one. From a cash flow standpoint, it really doesn't affect us one way or the other in the fourth quarter.

The second component is that the manufacturers in order to compensate for the price concessions, which are modest, by 2% or 3% price concessions that are provided under these types of programs in addition to stated terms, they try to be efficient in their process. And to that end, they ship at their convenience. So we may place orders with a certain manufacturer call it for $10 million worth of product. They have the discretion of shipping that at any time from when we place the order to February, March of next year and it is up to them as to when they decide to ship. And that is no different this year versus any other year.

So the point here and the point that Mark mentioned earlier is that we are going to go through our programs. We have largely gone through it already. We are almost all the way through. We will certainly be all the way through the next week or two of our early buy orders and then it's all dependent on when the manufacturers decide to ship in terms of how much of that inventory is received in the fourth quarter of this year versus the first quarter of next year.

Right. Okay. And what was that aggregate amount that you saw in the fourth quarter of last year?

I'm sorry.

The aggregate amount of the pre-buy related shipments -- (multiple speakers)?

Of early buy orders? Our total early buy orders in aggregate for all vendors is somewhere in the neighborhood of $170 million to $200 million.

Great. Thank you. And finally --

Which, by the way, roughly 60 -- on a typical year, 60% to 70% of that is shipped in the, call it, the calendar year and the other 30% to 40% typically carries over to the following year.

Okay. And for this year, could you just qualify the unfavorable impact from weather on your EPS? I think that has been happening.

That is primarily a factor -- well, there are two factors there. One is certainly Texas, Oklahoma where, and up to Kansas, very, very high levels of precipitation this year slowed down every facet of the business despite natural demand being there. That is one factor.

The other factor is that this year the winter and the start of the season in Northern markets was about a month later than it was last year. Those two factors I believe we quantified as being about $20 million when we reported our results through June. I believe that number is probably closer to $30 million at this juncture.

Okay. Great. Thank you very much.

Keith Hughes, SunTrust.

Thank you. I just had one question on the SG&A. Given some of the work you have been doing, if we continue to see revenue quarters like you just reported, will there be a chance to see SG&A nominally down in fourth quarter or first quarter of next year?

Yes. In fact, in September, our expenses were lower this September than last September and if you take out our increases in bad debt reserve for the entire -- in the third quarter, our expenses, not counting the impact from Wickham, were in fact flat year on year.

Was September the first --?

We have been looking at every aspect of our expense base and to that end, we anticipate that expenses next year overall will be very similar to what they are this year.

Was September the first month that that was the case?

Yes.

(inaudible). All right. Thank you.

Thank you.

Dan Leben, Robert W. Baird.

Great, thanks. Good morning, guys. Just following up on one of the questions earlier, asking about some of the slowdown we saw incrementally this quarter versus last quarter in Arizona and California and some of the other markets. Just wanted to get your sense of how you are incorporating that into your planning process as we go into the fourth quarter and into next year as you are thinking about some of these early buys and so forth, how is kind of that incremental slowing, how are you thinking about that in terms of what to expect or are you taking any different approaches towards your early buy this year?

No, fundamentally, we use sales trends, historical sales trends to incorporate that into anticipated requirements on an SKU level by location on a forward basis to develop what our needs are. So therefore as an example, if our sales trends are on a particular SKU up 10% over the past several months in a particular location, we extrapolate that on a forward basis to develop the requirements for that individual SKU at that location. If the sales trends are down 10% for the last several months, then we again extrapolate that same logic on a go-forward basis.

The computer does that automatically and triggers a recommendation based on that logic, then the individual buyer in conjunction with line management and the salesforce adjusts that to the extent there is any knowledge of any differences whether it be that a particular customer has changed from manufacturer A to manufacturer B's products or perhaps where a manufacturer is introducing a new product to replace an existing product and therefore we begin anticipating the requirements of that new product and some migration over of usage. But essentially that is the logic incorporated in and frankly it is no different than we have ever done in the past.

In terms of how far out do we go, we factor into the algorithm in terms of early buys what the individual manufacturer incentives are independent of data terms and in that vein, we look at any, for example, price increases that are avoided on particular products. We look at any kind of freight provisions or any kind of other discounts that the manufacturer may have out there and then based on that and based on the cube nature of the items, we apply various factors to them to find whether we go out one month, two months, three months, four months, whatever in our requirements.

Okay, great. And could you also, Manny, talk kind of at a high level about some of the level of either incentives you are seeing this year or pricing levels as we are going into this early buy season relative to last year? Are prices kind of flat or are they down? What are you seeing?

In terms of manufacturers' prices?

Yes, exactly.

Manufacturers have looked at raising prices to the extent possible. Now certain product categories, for example, chemicals, are essentially flat year on year with only modest increases in some liquids and blends. Maintenance items are essentially flat year on year with some modest decreases in certain product categories. And then in terms of equipment, there are some modest priced increases that are being put through. So it is kind of a mixed bag overall. Overall, the net net is very marginal price inflation.

Great. And then, Mark, just going into the fourth quarter when we are looking at trying to model gross margins, I know last year we had the big drag with the catch-up and we had a larger than normal drop in the fourth quarter. How should we think about the seasonality of margins going into the fourth quarter and how that would compare to kind of third-quarter levels?

Yes, I think you are talking about our rebate adjustment that we made last year in the fourth quarter and did not expect to make a similar adjustment this year. So in terms of our estimation process for our rebates, I think we have been a little closer this year in estimating how that is going to shake out when we get to year-end. So I don't expect that kind of adjustment this year, similar normal kind of seasonal margin trends taking place.

Okay. Great. Thanks, guys.

[Dan Mendoza], Agincourt Capital.

Hi, Manny and Mark. I think you have kind of touched on a lot of these, but can you try to just give us a sense based on what you know today where you think inventories might be exiting Q1 of next year?

Okay, given what we know today, if vendors ship our early buy orders along the same schedules as they shipped early buy orders last year, we would probably finish the year with inventories marginally higher than we finished last year. So I would say somewhere in the neighborhood of 5% to 8% higher than we finished last year.

And the reason that it is 5% to 8% higher are, one, the fact that we have net net a few more locations than at the end of this year than we had at the end of last year, as well as our continuing to bring complementary products into more locations during the course of the year. So those are the two primary drivers for the 5% to 8% increase in inventories year on year. Again, that assumes that manufacturers ship early buys at the same levels as they shipped last year.

My question was actually exiting Q1, so kind of going into the selling season.

In Q1, I would expect them to be very similar because again 5% to 8% is the range that I would expect Q1 on Q1.

Okay. So still higher?

Yes, a little higher because of a few more locations and again continuing to roll out complementary products to more locations.

Okay. And then last question just to kind of circle back on the competitive pricing. I think you made a comment in your response to someone else that it wouldn't be until the beginning of next year to see those prices kind of return to more normalized levels. Can you explain that in a little bit more detail?

Generally speaking, the norm in the industry is that prices go out at the beginning of the year and therefore that is the norm and our customer base has those prices and that is what they use in turn to develop pricing for consumers in the course of doing business.

The exception to that is -- one major exception to that is manufacturers have price increases during the year, which is not that often, but when they do, those are then adjusted and passed on usually and the second is the fact that we and others do usually week-to-week type of promotional activity to just bring visibility to certain products in a certain market, but outside of those two factors, prices are pretty stable during the year.

Now this year, the variable to that was that, in some cases, guys were pressed so they dropped their pricing a bit and that is what happened.

And of course once people do that they can't turn around and raise their prices in the same --.

No, no, no. They kind of reset the bar unfortunately lower and it takes a little while for that behavior to change because there is no -- there is nothing to trigger a change. And everybody is kind of hesitant to be the first one out particularly in a tough market environment to adjust upwards again without everybody -- not everybody else follows, so then you have a lot of egg on your face.

(Multiple speakers). So how do you think that plays out next year? Is that an area where, as the market leader, kind of falls on you to be the first one out there with the return to normal prices or will you wait?

We tend to do that almost to a fault and again, we have to be very deliberate in that process because we don't want to put ourselves at a competitive disadvantage by increasing the normal spread that we have, vis-a-vis most of our competitors. Too much particularly in a tough market.

Okay. So is January or February the time when we would be seeing this or --

Yes, yes.

-- is it more like March or April?

Yes. No, January, February.

Okay. Great. Thanks.

Thank you.

Manny, are there any closing remarks?

Yes, Vonda, thank you very much for being the operator for us today. Thank you, all of us -- all of you, for joining us. We are fortunate to be in a very unique position within our young industry. We have a dedicated team that works very hard to provide value, constantly striving to work smarter and better. I am privileged to have the opportunity to lead them and I am honored by your confidence in us. Our next and last conference call for 2007 results will be scheduled for Thursday, February 21 of 2008. Thank you again for joining us today.

Thank you. This concludes today's Pool Corp. third-quarter earnings results conference call. You may now disconnect.