Pool Corp (POOL) 2007 Q4 法說會逐字稿

Good morning. My name is Monica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pool Corporation 2007 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)

Thank you. I will now turn the call over to Mr. Mark Joslin, Chief Financial Officer. Please go ahead, sir.

Thank you, Monica. Good morning and welcome, everyone. To start things off this morning as usual, I would like to remind our listeners that our discussion, comments, and responses to questions today may include forward-looking statements including management's outlook for 2008 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 discussed in our most recent Form 10-K filed with the SEC, which by the way will be updated in a couple of weeks here.

At this point, I will turn the call over to our President and CEO, Manny Perez de la Mesa.

Thank you, Mark. 2007 and the present environment represent a unique time in the history of our young industry and our Company. Prior to 2006-2007, the industry never had recorded back-to-back annual decreases in new pool construction. The real estate market meltdown and the virtual collapse of the credit markets both served to aggravate an already difficult situation. Finally, record rainfall in Texas and drought in Georgia only made a bad situation worse.

The bottom line from all of this is that our earnings per share decreased for the first time in our 14-year history. While this result was certainly disappointing, it doesn't capture our achievements during the course of the year.

First, we increased market share at an unprecedented rate. Second, we further expanded our networks and increased capacity to address the many growth opportunities available to us in the future.

Third, we continued investing in initiatives that further our market presence and increase the foundation for future growth. And fourth, we reassessed our organization and have made the necessary changes to strengthen our team for the present environment.

On the pool or blue side of our business, we were able to have flat sales despite US new pool construction being down an estimated 25% or 50,000 less new in-ground pools built in 2007 versus 2006. Essentially, the decrease in new pool construction reduced our potential market by $250 million to $300 million.

Further, this decrease was on top of a modest 5% decrease in 2006. Again, to have flat sales in this environment is quite an achievement.

In terms of our larger markets, the biggest impact was felt in Florida, where our sales declined 13% in 2007. This was the market most adversely affected by the decrease in new pool construction. Specifically, after growing from 37,000 new pools in the year 2000 to a peak of 48,000 new pools in 2005, new pools built in Florida decreased to 43,000 in 2006, and then to 23,000 in 2007, a level not seen in a generation.

This headwind from 20,000 less pools built reduced the size of the Florida market by over $100 million. In Florida, we weathered the downturn better than most and have made a number of changes to strengthen our position for 2008.

While we don't expect 2008 new pool installations to decline by another 20,000 units, we are also not looking for a recovery in the near term.

The largest pool market, California, witnessed an estimated 30%-plus decline in new pool construction. Fortunately, the large installed base, coupled with our strong execution, enabled us to be up 1% in sales for the year.

Texas was affected primarily by adverse weather, as new pool permits were not down as they were in several of the other larger markets. Our strong team in Texas fought through the external environment with record rainfalls and still posted a 3% increase in sales.

Arizona as the fourth-largest market suffered much like the Florida market, with new pools built down to less than half the 2005 level. Despite this, our sales were only down 4% for the year in Arizona.

Outside of the four largest markets, the new construction decrease was more modest. We were able to increase sales by 3%.

Overall, the bottom line is that our blue business sales were flat in 2007 versus the overall industry being down almost 10%.

This market environment logically put pressure on margins, but we believe that our decrease was more modest than the decrease realized by our competitors.

On the expense front, despite the opening of 29 centers in the past two years and expanding the capacity of many others, we arrested expense growth during the course of the year.

The Horizon or green side of our business, which is approximately 13% of our total business, was affected more than the blue side as our product and customer mix is weighted proportionally more to new construction. Here, overall base business sales declined by 6% versus 2006, with California and Arizona -- our two largest markets -- down 9% and 10%, respectively. As on the blue side, the same pressures on gross margins and the same actions were undertaken to arrest expense growth.

While we don't have the same hard measurements that we have on the blue side, we believe that we also gained market share on the green side of our business.

As we look forward to 2008, we are a much stronger Company and better positioned to grow our business than ever before in our short history. The tools and resources in our arsenal to help our customers grow their businesses are more important now than ever.

We believe that the challenging external environment will again impact our competitors proportionately more than they will impact us. We also believe that as the year progresses our comps will get easier, and the growth initiatives that we have undertaken will become more and more visible.

In addition, the steps that we have taken to right-size our organization, without compromising our long-term growth -- such as the consolidation of seven centers and the elimination of certain positions -- are part of the reason why we are a stronger Company today.

Shifting gears, our just-announced acquisition of National Pool Tile is an example of how we continue to invest in opportunities for long-term growth. As the leader in the distribution of pool tile and component pool finishes, NPT provides us with the depth and breadth in product offering, the sales and operations infrastructure, and the talent base that we can use to leverage our existing SCP and Superior networks' infrastructure and customer relationships to grow the business even in the current environment.

We currently participate in this base with a more limited offering, with modest results, and look forward to realizing the many synergies that are now available to us.

It goes without saying that we have the most talented and dedicated team of employees in the industry. It is humbling to me to see and hear about the many successes that they realize, as well as their commitment to the Company and to their customers.

We are very fortunate to be in a great niche industry and in a unique position to add exceptional value. Despite the adverse short-term external environment, our team continues to succeed; and I am very proud of what we have accomplished.

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

Thank you, Manny. At this time, I will address our balance sheet and cash flow, and then provide a little color on our expense management activities.

Starting with receivables, our net total receivables at the end of 2007 was $141 million, which were down 9% from the end of 2006, which is in line with our sales decrease at the end of the year.

Included in this balance is an allowance for doubtful accounts of $9.9 million, which is up $5 million from December 2006, and up $1.2 million from the end of the third quarter. As is usually the case, the bulk of our collection issues occur at the tail end of the season, and then we see improvement in collections as we enter the new season.

I believe the same will play out this year. Despite the ongoing soft construction market, we should see some improved collection performance as we enter the 2008 season.

Some of the more significant customer collection issues we had earlier in the year 2007 have improved by the end of the year, as some of these customers were able to adapt to their harsher business conditions.

Also, I should point out that even though our allowance is up by $5 million year-over-year, our actual write-off of accounts net of recoveries was up only slightly to $2.6 million in 2007 from $2.2 million in 2006, reflecting our successful collection efforts.

Moving on to inventories, you'll see that we ended the year with $380 million in inventories, which was up 14% form 2006. Of this, approximately 85% relates to our North American pool operations, where 99% of the increase in our inventory value from 2006 was in classes 1 through 5 of our 15 inventory classes, which are the highest velocity items. These inventories should be a source of competitive strength for us in 2008, as we believe our less well-capitalized competitors have scaled back on their stocking levels, providing us with the opportunity to capture market share and margin improvement opportunities.

Now let me address our selling and administrative expenses and highlight some of the things that are happening there. Overall, we have been slowing the rate of expense growth throughout the year, cutting discretionary expenses and redirecting resources to targeted initiatives that will benefit us over time.

While reported selling and administrative expenses for the quarter of $92.2 million grew 6% over 2006, if we exclude changes in our management incentive and AR reserves and charges related to branch consolidations, our underlying expense growth rate for the quarter -- much of which was driven by new sales center openings -- was less than half of the reported number compared to the 6.5% rate of growth for the year.

By continuing to reduce our discretionary expenditures, we believe we can further improve this line of the P&L as we head into 2008.

Another sign of how we are doing here is in our headcount, which at the end of January 2008 was down 5% from January 2007 as a result of attrition and selective staff reductions. Payroll-related costs account for more than 50% of our total SG&A; and so by tightly controlling this we will see a positive impact.

At this point, I will turn the call back over to our operator, Monica, if you could begin the question-and-answer session, please.

(OPERATOR INSTRUCTIONS) July Johnson, Piper Jaffray.

My first question would be relating to the competitive pricing environment. What do you see? What are your expectations heading into the '08 pool sales season?

That is a great question and in fact my own perceptions -- that is the biggest variable that we have for 2008. When you look at the impact that the margin hit had on 2007 results, that in and of itself was the most significant impact.

Sure.

During the course of 2007, particularly in the latter part of the year, we have taken a number of initiatives to enhance our selling margins as well as our cost on the purchase cost side. We believe that that will help us certainly in 2008.

On the other hand, we have already begun to see cases where competitors in their desperation to pay bills, essentially, and survive from one week or one month to the next, significantly discounting certain products.

While certainly we are trying to maintain a certain modicum of discipline in our pricing, we are also cognizant of this variable. That is the wild-card that really is the primary element that causes me to pause in terms of providing guidance for 2008.

Again, in a normalized environment, you would see some level of recovery in terms of the adverse margins that we realized and the gross margin side in 2007. But I'm cautious, given what, again, others are doing to survive month to month, week to week.

Okay, that's helpful. Thank you. The other thing that we have heard a little bit about is that there have been some manufacturer price increases. Is this something that you have seen? Is this something that you expect to see passed through? It sounds like there is probably some pressure there.

Sure. There have been in certain product categories manufacturer price increases. As a normal course, those are passed on through the channel. They are not significant in the overall context of the cost of a pool or the cost of maintaining a pool, since the lion's share of those costs are really labor driven. So, that is not a major issue.

That is, from a practical standpoint, really a nonevent. The main issue is again when a competitor needs to make payroll to survive, they will dump inventory. And again, that is the wild-card.

Okay, thank you. Then my last question, and I will hop back in queue. Can you talk a little bit about the complementary product sales and how that business performed in the fourth quarter?

Sure. Complementary product sales for the year I believe were down 3%, which in the context of how the industry did is excellent. Complementary product sales, for those on the call, are weighted more towards the construction side than the overall business mix that we have as a Company overall.

So, therefore, to have in the face of a decrease of 25% in new pool construction, with a majority of the complementary products being tied to new pool construction, to have only a modest decrease of 3% is quite an achievement.

We during the course of 2007 expanded our offering of complementary products by expanding the stocking levels in a number of locations. We also expanded our customer base in markets where we had been stocking complementary products for one, two, three years.

So overall, we believe we gained very positive share growth in complementary products during 2007.

All right, thank you.

Anthony Lebiedzinski with Sidoti Company.

Good morning. I was wondering if you guys could quantify the sales performance by product segment. Things like chemicals, and I know you touched on complementary products, but maybe you could just give us more color on sales performance by products.

Sure. If I look at the largest product categories, as an example -- and this is on the blue side, Anthony. Chemicals were up over 7% for the year, with selling margin on chemicals essentially flat. So that is again evidence of two things. It is evidence of the fact that the maintenance type products are very resilient to any kind of economic or construction type environment.

It also demonstrates the fact that we were able to grow share in that part of the business, as well as obviously in the equipment side.

Other categories for us that grew sales nicely were parts. Parts represent a very large category overall for the Company. Obviously parts are used on existing equipment for repairs. Our sales there overall grew by approximately 10% year on year and with margins not quite flat, but no major deterioration to speak of.

On the flip side, to give you the other side of the equation, plumbing. Plumbing products, which is largely for us pipe that is used to connect the pump with the pool, as well as the fittings that go with all the pipe as the water moves around, pipes and fittings represent the lion's share of our plumbing category. That, sales there were down 16% year on year. Again, the evidence of that is a representation of what happened with the new pool construction.

Other categories, equipment overall -- equipment overall being pumps, filters, heaters, lights, cleaners, etc., those types of products -- the sales in those products overall were essentially flat year on year. Which is again a reflection of the fact that well over 60%, 65% of the equipment sales are tied to the replacement side as opposed to new construction; and also the fact that obviously we gained significant share during the course of the year.

If you -- on the Horizon side of our business or the green side of our business, the area that was primarily affected was again the areas tied or weighted heaviest by new construction. So for example, pipe, wire, and fittings was the category that was down the most year-on-year, with product categories like power equipment more resilient and up marginally year-on-year.

Okay. I know you're not providing guidance for 2008. I mean is it safe to assume that the trends that you saw in the fourth quarter have continued into the first quarter? Have they -- any comment you can give us that would help?

Sure. In terms of six weeks into the year, the weak market environment on the sales side specifically relates to new construction. The other side of the business is fine and doing well. But the new construction side of our business continues to be very weak. The overall sales are down modestly year-on-year for the first six weeks of the year.

This is, frankly, the toughest part of the year that we have, because the first five months of last year were overall reasonable. It began to really taper off in June and didn't really get any better as the year progressed. So the first five months are the toughest from a comp standpoint. Year-on-year, there is a modest -- our sales are modestly down.

Having said that, I will tell you that our margins are up modestly in the first six weeks of the year. And our expenses are below what they were last year in the first six weeks of the year.

So what you have got is a dynamic that if it holds true as we get to the easier comps beginning in June, we should begin then to realize positive year-on-year sales results. And then the biggest wild-card is pricing.

If the margin recoveries that we're seeing at the beginning of the year, if those hold, then we should be very -- do quite well.

On the other hand, again the wild-card I referred to with the previous answer, with pricing, if -- when people are desperate, then that is the wild-card that we have to play with.

Okay. Regarding your share buyback program, how much do you have left? Are you still looking to be buying stock at the current prices here?

Sure. We have, I believe, it is $50 million or so available on our -- the authorization that was done, I believe, in August of last year. That continues to be an attractive alternative.

On the other hand, as we mentioned repeatedly, opportunities to expand our business that are beneficial to us and provide a greater return on capital three to five years out -- such as the NPT acquisition -- are a higher priority and provide higher shareholder return. We will continue to pursue that.

In fact, there were several other transactions that we were in heavy discussions in the past 30, 60 days. At this point nothing significant is looming; but 30, 60 days ago I could not have said that.

So, we continue to pursue these for long-term growth and maximizing shareholder return, and certainly the opportunistic repurchase of shares is always an alternative for us.

Lastly, can you touch on the international market? How much was that as a percentage of your sales in 2007? What are you seeing there?

Sure. The international market, which for us is seven countries, with the largest components of that being in France and in Canada, represented approximately 7% of our total sales. That business overall grew modestly year-on-year both in terms of sales as well as profitability.

Okay, thanks.

David Mann with Johnson Rice.

Manny, on previous calls you have talked about sort of the view of the future from the dealer backlog in terms of new pool leads and new pool construction. Can you give us a view of what you're seeing right now from some of your customers and some of the lead generation off the Internet?

Sure. Again, it's six weeks into the season so it's a little early. But in the markets like California, Arizona, and Florida, there is no recovery from the depressed levels. Again in California, California was down over 30% in 2007; and it is just over half in 2007 what they did in 2005.

Arizona and Florida were both at less than half the 2005 rate. So currently, it would be -- my projection would be that those will be down again in 2008. They will be modestly down in units.

Obviously, as you have a smaller base, the percentages weigh differently versus the units. So they will be down more modestly in 2008 in terms of units than they were in 2007. So the impact on the overall market will be proportionately less. But my expectation is they will still be down.

Outside of those three states, it is really not bad. Texas, there are some markets down and some markets up. You go throughout the rest of the country you have some markets down, some markets up.

It is builders in some cases have much stronger backlog than contracts signed than they did at this time last year. While there are other pockets and markets where it may be a little softer than it was last year.

I would say that outside of Florida, Arizona, and California, new pool construction will be very similar to what it was in '07.

So if we look at the whole market and let's say it was down 10% to 20% this year, would you still believe, as you said at the analysts meeting, that your revenues could be flat this year?

Yes, with new pool construction down 10% to 20%, our revenues should be flat.

Okay. Then on the bad debt commentary you gave, can you elaborate a little bit more on which aspects of the market or customers you are seeing the bad debt? Smaller, bigger pool builder? Is it more retailer now?

Also I think on the last call, Mark, you gave us what the percentage that was delinquent over 60 days. Can you update on that for this last quarter and the previous quarter? Previous year?

I will give you the overall commentary. In terms of customer segment, logically the ones that are most affected are the ones that are more tied to new construction. They have in a number of cases reduced the number of crews and reduced their cost of doing business or their overhead in this market environment.

The service, repair, refurbish type customers are doing just fine. They are not really impacted to any significant degree in the current market environment.

When you get to snowbelt markets, you tend to have dealers that are involved in every facet of the business, whether it be building pools or doing repairs, replace, etc. But those markets are by and large not as adversely affected by any means like the Florida, California, and Arizona have been.

David, on the past dues, I don't have the specific numbers in front of me. But I will tell you that our reserve as a percent of past dues is up about 6% or 7%. I think it is around 27% of the greater than 30 days past due, compared to around 20% last year.

So even though the past dues are up, we have reserved as a higher percentage of past dues in 2007 than we did in 2006.

Okay. Then on the store rationalization, what is the potential that you want to rationalize or consolidate more centers? What was the charge, the exact amount of the charge in the quarter?

Sure, we did seven consolidations, basically between November and the first week of January. Essentially that is it for the pool season.

We will reevaluate in the May-June time frame and revisit that. There may be several more that we do at the end or after the pool season if the progress is not made as we expect it to be.

But, it is not in the overall scheme of things overly significant, given the fact that we still have 281 locations.

From a charge standpoint --?

Yes, in terms of charges, David, there is about $0.5 million in the fourth quarter which relates to severance costs and some lease acceleration.

As Manny said, in the seven locations, five of those are actually in the fourth quarter and two were in early January. So we will have a little bit of carry through into the first quarter on that.

Okay, great. Thank you.

Brent Rakers with Morgan Keegan.

Good morning. Just a couple quick housekeeping questions. Manny, you talked a lot earlier about complementary products. But I didn't catch the growth rate number for Q4.

I believe the growth in Q4 was like up 2% or something along those lines.

Okay. You also talked earlier a great bit about the --what Wickham and Horizon did for 2007 as a whole. Could you talk a little bit more specifically about how those operations did in Q4?

Q4, they were adversely affected, primarily Arizona and California. That is when we saw the biggest fallout in the new construction side. So, as a matter of course, and I will just give you the perspective, where California was down 9% for the year in the fourth -- this is in the green side of the business. The fourth quarter California was down 22%. Where Arizona was down 10% for the year, in the fourth quarter Arizona was down 20%.

So you can see that they bore the brunt of the hit as the year progressed. Just to make it a perspective, all the other markets on the green side were up marginally for the year, up 5%; and in the fourth quarter were down 4%.

So you can see there is some of the same impact but nowhere near as severe as California, Arizona. The one good thing I can say about this is that we're very fortunate that we didn't get into the Florida irrigation market a year or two years ago.

Fair enough, Manny. I guess a couple more questions. We talk a lot about the headwinds from the costs from opening up all the new locations over the last two years.

Could you maybe give us a rough estimate of the revenue contribution from the, I guess, 27 or 29 new branches opened the last two years?

Yes. The 29 locations opened over the last two years, on an incremental standpoint the margin or revenue contribution was -- I can't say nil, but close to nil.

It was relatively speaking insignificant. Certainly less than a couple million dollars.

Okay, and that is obviously just your Q4 impact, is that correct, Manny?

No, the $0.16 is for the year.

Okay. But again, that $0.16 -- you're saying that 29 new branches added $2 million to revenue throughout the entire 2007 year?

Yes. Let me just give you a little flavor for then, and I think it is important (technical difficulty) appreciate how that process works. I have covered it, I believe, in previous calls.

But when we are approaching capacity in an existing location that is serving a certain market radius, we evaluate several alternatives. One of the alternatives that we look at is opening up a second location half an hour or 45 minutes away, to provide better service for the pickup trade on that part of the market. That is half an -- the contractors, service guys that work let's say half an hour or 45 minutes away.

With 70% of our sales being delivered, the builders, [buying share], the remodelers, and the retailers are largely indifferent provided we can provide same-day or next-day service whether we are half an hour away or not, because that is our burden.

So, what ends up happening is when we do open up a second location half an hour or 45 minutes away and we add approximately on average $0.5 million in costs, the premise is that the market is growing and that our share is growing; and therefore that we will effectively utilize that additional investment and be better off by an accelerated level of market share growth than we otherwise would be by keeping and just having one larger location, where the marginal cost, marginally greater cost, is a lot more modest.

So that is the logic that we go through. What has happened here is in the last two years with the contraction in the market, what has happened is that essentially while we have gained share overall from a capacity standpoint, in the lion's share of the cases we could have served that same market area just as well from our legacy location.

Therefore, the marginal contribution from the new location is in fact very, very marginal. Because we are only talking about increasing our share with the pickup trade, not necessarily with the delivery business. So -- and again, 70% of our sales are delivered.

So therefore, what ends up happening is that the marginal contribution is relatively negligible. From a long-term standpoint, it is fine. Because the aberrations and the extremes of the current market are just that -- extremes. As the market reverts to normal and the installed base continues to grow, the logic is that we will bump up against capacity in the old locations. And we could not have made it to what our sales would be in 2009, 2010 without having those, opening up those locations.

Thanks, Manny. Then just last question I think to circle back with some of Mark's comments earlier about the SG&A increase year-over-year. Mark, if you could just maybe go through some of those, the three categories that affected about half of that growth rate year-over-year, and I think maybe put some numbers to some of these.

I know you have already talked about the branch closures being about $0.5 million in costs there. But maybe if you could hit the bad debt expense and the bonus accrual items as well.

Sure. I think I mentioned on the bad debt expense how much of the increase was from third quarter to fourth quarter. I am looking for the number, but it was just over $1 million.

So the actual recorded bad debt expense year-over-year was up $1 million?

Yes, yes, between -- yes, for the fourth-quarter '07 versus fourth-quarter '08.

Okay.

I believe it was in that range. Then the bonus accrual, bonuses in 2007 were last full year versus 2006. But the way that was accounted for is we pulled back on our bonus accruals in the fourth quarter of 2006, compared to having some expense in the fourth quarter of 2007.

So, I don't have the specific number in front of me, but it was in the range of a $2 million delta fourth quarter to fourth quarter.

Okay, great. Okay, thanks guys.

Just to follow up on that question, I think it is important for those on the call to get a perspective of what our expense growth was during the course of '06 versus '07.

If you look at the numbers over all, compensation expense, salaries, and overtime, and benefits, all the people-related expenses were up $9 million net from '06 to '07. Building rental was up $6.3 million year-on-year. This included not only the opening of new locations but also the fact that during the course of '06 into the early part of '07 we also moved into larger facilities in many cases.

Then, freight out expense was up $3.2 million year-on-year. Again, that is primarily driven by the increase in fuel costs. The last item of note is -- we have talked about it before -- is year-on-year overall our provision for loss on doubtful accounts was up $4.2 million for the year. So those are in a nutshell the lion's share of the delta from '06 to '07 in our expenses.

Thanks.

Kathryn Thompson with Avondale Partners.

How much did pricing have an impact on margins? If you could quantify that for '07, I would appreciate it.

I'm sorry, could you repeat the question?

Yes, how much did pricing pressure margins in fiscal '07 on a basis points?

Sure, well, I will tell you that you can see on our financials that our gross margins went down by approximately 80 basis points year-on-year. In a more neutral environment, our margins would have been up modestly year-on-year.

So I would say that the impact from the competitive environment was probably equivalent to roughly 1% of sales or close to $20 million year-on-year from that environment.

Although we did have a little higher margin growth in 2006 due to some of the things going on with price increases from vendors. So it was maybe a little bit less than that.

Yes.

Sure. Also, could you remind us what percentage of your sales are from Florida, California, and Arizona, respectively?

That is a great question. I don't have those numbers with me. I will tell you just in terms of overall order of magnitude including both the green and the blue side that California is overall our largest market. Overall, California represents somewhere in the neighborhood of, I believe, 16%, 17% of our total sales.

The next largest market is Florida. Florida in terms of our overall sales is in the neighborhood of 12% or so.

Then after that would be Texas. Texas overall is close to 10% of our overall sales.

Then Arizona would be fourth. Then collectively, those four states represent 54% of our total business.

Okay, great. Thank you very much.

Dan Whang with Lehman Brothers.

Yes, good morning. Just to review, as I understood your comments. Obviously in the second half of '07, the market dynamics particularly around the construction of new pools slowed down. So as we move forward, are you assuming that that level of slowdown would hold for '08?

In terms of new pool construction, our expectation is that new pool construction will in fact be down again in '08 versus '07. If you look at the domestic business, domestic pool construction was approximately 210,000, 212,000 pools in 2005. That number decreased to approximately 200,000 pools in 2006; and down to approximately 150,000 pools in 2007. That is quite a reduction, 50,000 pools.

When you look at the markets that make up that reduction, Florida was impacted the most, going down from 43,000 to 23,000 pools, or 20,000 out of the nation's 50,000 pool decreased.

Now, I don't expect Florida to go from 23 to 3, so therefore -- and that being the second largest market in the country. What will happen is that I expect that overall new pool construction will be down. But the order of magnitude in terms of headwind -- and that then I look at as being what is being taken out of the market by the reduced level of new pool construction?

On average, we sell $5,000 to $6,000 worth of product. That includes not only the legacy pool products but also our complementary products. We average $5000 to $6000 per pool.

So therefore, that being said, a 50,000 unit reduction in new pool construction, which is what took place in '07, reduced the market by $250 million to $300 million.

In 2008 I don't expect, frankly, for it to be down another 50,000 units. Because again I look at the components, and I look at the fact that already Florida is at a pool build rate that goes back -- you got to go back a good 25, 30 years before we were at that level of pool build. I don't see another 20,000 unit reduction.

When I look at Arizona and Vegas, and California, collectively the West, those three states, they are basically at half the 2005 rate. I don't expect that to go up. In fact I expect it to go down. I don't expect it to go down and virtually disappear in '08.

So you know, net-net a 10% to 20% reduction from the already very low levels of '07 is our range of expectation in terms of new pool construction for 2008.

Thank you for that detailed review there. Just moving over to this year's pre-buy program, could you provide a little bit more detail around that? Perhaps in terms of the pricing, payment terms, and what you expect the net impact on margins to be in '08.

Sure. From a buy standpoint, we participated in the vendors' early-buy programs in a normal way. Vendor shipments were a little higher at the end of this year than they were at the end of last year, but not significantly so.

So, from an overall standpoint, we are well positioned for the year. In the normal scheme of things I would expect, as I mentioned earlier, the usual margin creep we have had historically; plus some level of recovery from the loss that we had last year in terms of margin.

Having said that, as I mentioned earlier a couple of times, the wild-card is the competitive environment. That is a wild-card that causes me to pause and (technical difficulty) get better clarity particularly over the next three or so months.

Once our cash flows turn positive in the May-June time frame, then there will be less pressure on competitors to dump inventory to make payroll. But in the next three months or so, it will be a little testy.

Finally, I was just wondering if you have seen any interesting patterns from your pool financing the brokerage business. If you are seeing any trends of whether homeowners -- there is demand for new pools, but are they finding financing more difficult? Is that one of the pullbacks? Any interesting trends that you're seeing from that business would be great.

Yes, I'm sorry, Daniel, the very last part of your question cut out. Could you repeat that part of it?

I was just hoping to learn from any financing industry trends that you see out there.

Sure, let me talk about the financing market generally. As you have seen in much of the overall credit markets, the financing as it affects the pool market has gotten much more difficult in the last four or five months.

Most of the pools that have been financed -- and generally we think that more than 50% of new pools constructed are financed or have been historically. Most of that financing comes from second mortgages, and the second mortgage market has become very difficult for lenders who found that they were not really able to foreclose and didn't have the control over those second mortgages that they might have thought.

So many have exited the market, including a couple of the more specific pool-focused lenders. So on the one hand, that has made it more difficult for our customers and others in the industry who have relied on some of those lenders to provide financing to homeowners at the same time that housing values have declined.

Those two factors have made it more difficult for people to get pool loans generally to finance new pools. We are finding in our own kind of business effort there to connect the homeowners with the pool lenders that we are of even more value than we have been in the past, even though we have some of the same difficulties with getting some of the loans paid. Our customers need us more than ever to help them find the best financing that is available to meet the consumers' demand for pool construction.

So the demand is still there, by and large, but it is a more difficult situation to get that financed today than it was six months ago or certainly a year ago.

Okay, thank you.

Keith Hughes with SunTrust.

You told us a lot about cost on the call, but even if you see demand roughly what you saw in the fourth quarter, would SG&A year-over-year start coming down early in 2007, given some of the cost work you are doing?

Yes, in fact, I believe I touched on it. But through the first six weeks, our actual SG&A expense is down lower than last year.

Just to give you a little flavor here, I gave you some of the numbers earlier in terms of '06 versus '07 increases in expenses and where they were. But when we started the year last year, we were not anticipating a 50,000 unit decrease in new pool construction. We, frankly, were not expecting -- we were expecting a tough year, but tough being that maybe it would be down another 10,000 units, from dropping 10,000, 12,000 units in '06.

That in the context of the industry was historically considered a very tough year. So therefore, with the opening of new locations, we were running -- and I will just use headcount as a relative barometer. Our headcount in the early part of the year was up vis-a-vis the prior year. As we turned the corner in the season, that began to go down on a year-on-year basis.

As Mark mentioned in his opening comments, our headcount in January, January on January, is down 5% despite the fact that we have opened and have more locations open today than we did at this time last year; and despite some of the initiatives that we have underway to further grow our business.

Okay, thank you, Manny.

Kyle O'Meara with Robert W. Baird.

Good morning. Just to follow-up on inventory and pre-buy in 4Q. Were most of the vendors' shipments in the fourth quarter? Or do you -- could you give us a sense of where you see inventories going sequentially to the end of first quarter?

Can you repeat the question? I missed the last part of it.

Essentially trying to get a sense of how much of inventory, pre-buy for the season, was shipped in 4Q versus 1Q. And if you -- where you see inventories going in the first quarter.

Sure. Typically, of the early buys that are ordered in September-October, vendors ship 60% to 70% in the fourth quarter and 30% to 40% in the first.

I would say that at the end of '06 that number was closer to 60%; and at the end of '07 it was closer to 70%. We are still building inventories in the first quarter.

But when it is all said and done, when you look at it, where we do and focus the lion's share of the investment in inventory is on the highest velocity items. So therefore, as Mark mentioned in his opening comments, basically that is what constitutes the year-on-year growth in inventory.

Our slow-moving inventory, in fact, is essentially flat, if not marginally down year-on-year. So, overall, we feel very good about where we are in inventory. In fact as I believe Mark mentioned in his opening comments, I believe that furthers our competitive advantage given that we're able to continue operating in what I will call normal mode, whereas logically a number of competitors are constrained.

Thank you very much.

We have reached the allotted time frame for the Q&A session. Mr. Joslin, do you have any closing remarks?

Yes, thank you, Monica. Thank you all, again, for listening to our 2007 results conference call.

Just as information, our next call is scheduled for Thursday, April 24, when we will review our first-quarter 2008 results.

I will also give you a minor editorial closing comment. That is that I feel good -- I feel very good -- about what is going on. I will tell you that this has been a great wakeup call for the industry. It has also been very good for us as an organization.

The willingness for our people and our customers to embrace opportunities for growth has logically a much greater sense of urgency in the current environment than in years past. I anticipate that when things revert to normal -- and they ultimately will; I can't say when, but they ultimately will -- our position in this niche industry is going to be stronger than it was. We in every facet of our business will be operating more effectively and providing more value.

So, while I understand the current environment, it doesn't take one a long time to get depressed if one reads the paper or listens to the news, I will tell you that I am very optimistic about our Company and about our business. I really am enjoying what we're going through right now, because it is very healthy and very good long-term. Thank you.

This concludes today's conference call. You may now disconnect.